Happy Sunday,
Kashkari expects one more hike. Higher rates starting to bite for borrowers. Consumer confidence hits four-month low. Despite hopes of a soft landing, creditors need to keep an eye on rising losses. System-wide deposits drop year over year. Brokered deposit use surges. Curve extends Series C by £58Mn. Debt management startup Bright Money raises $12Mn in equity. Fed analyst report highlights positives for consumers of BNPL. Lenders capitalize on SBA’s 7(a) program.
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“Higher For Longer” Not Welcome News for Consumers, Fintechs
Minneapolis Fed President Neal Kashkari said he expects one more rate hike this year. Kashkari pointed to a more resilient than expected economy in suggesting that rates would need to go “a little bit higher” and be held there for longer. Higher-for-longer isn’t welcome news for some fintechs. In addition to raising borrowing costs for non-bank lenders, the rate hikes also are intended to slow the overall economy, which may reduce interchange income, a key source of revenue for many fintechs.
Every day Americans are increasingly feeling the pinch from higher rates. Consumers who need to borrow, especially to finance a vehicle purchase or home, are realizing that higher rates mean monthly payments that may be hundreds of dollars more than they would have been a year or two ago. Meanwhile, consumers’ “excess” savings socked away during the pandemic are dwindling and consumer confidence dropped to a four-month low.
Image: Bloomberg
Despite Soft Landing, Lenders Should Remain Vigilant
While everyone is certainly hoping the Fed sticks a “soft landing,” banks would be wise to keep an eye out for the risk of rising consumer delinquencies. Though employment has remained strong, household budgets continued to be stretched. Inflation has cooled, but major drivers of household spending, like shelter, healthcare, and education, remain elevated compared to historical norms and show few signs of becoming more affordable in the near future.
U.S. consumer credit card debt hit record levels this summer, and, with interest rates likely to stay elevated for some time, that is likely to translate into higher delinquencies and charge-offs than lenders have seen for quite some time. Credit card losses are already up by 1.5% points from their low and currently stand at 3.63%. Goldman Sachs recently released a forecast that anticipates losses to continue climbing into 2024 and early 2025. Goldman expects losses to increase another 1.5% points to peak at 4.93%, according to its forecast.
Industry-Wide Bank Deposits Drop
For the first time in data going back to 1994, bank deposits dropped year over year. In the year through the end of June 2023, bank deposits dropped by 4.8% to around $17.3Tr, S&P Global said in a report published last week. With higher-yielding risk-free alternatives, like money market funds and T-bills, depositors have increasingly shifted funds elsewhere. This “cash sorting” has been particularly pronounced at some banks with an affiliated brokerage, given the ease of moving the funds. For instance, Schwab saw its deposits fall by a whopping 31.1% to just over $300Bn as clients shifted funds from the bank to higher-yielding investment products.
Regulators Wary of Growing Brokered Deposit Usage
In the wake of this spring’s bank failures, banks’ use of brokered deposits has ballooned. Brokered deposits allow banks to quickly raise funding but are typically more expensive than direct deposits and are viewed as “less sticky.” Total brokered deposits across the banking system have more than doubled year over year, to a total of $1.205T. The dramatic increase has caught the attention of bank regulators. FDIC Chair Gruenberg recently commented on the spike at a press briefing, saying, “There has been a significant increase in brokered deposits in the banking system over the past year, and they can present liquidity risk.” Some of the growth in brokered deposits has come from increasing use of reciprocal deposits. Reciprocals allow a bank to place some or all of individual customers’ deposits that exceed the $250,000 deposit insurance cap at other institutions, thereby increasing the total maximum deposit insurance coverage. In theory, this should boost deposit stability in the banking system, by alleviating depositors’ potential concern about uninsured deposit exposure should a bank fail.
Curve Extends Series C
Curve, a financial “super app,” announced it has extended its Series C by an additional £58Mn, bringing the round total to over £133Mn. The extension round included participation from IDC Ventures, Britannia, Cercano Management, Outward VC, and Cohen Circle. Curve, which is based in the U.K. and operates in the U.K. and U.S., enables users to link multiple existing credit or debit cards to their Curve card. Curve then provides additional features on top of the existing cards, like allowing users to “go back in time” to switch a payment from one card to another, BNPL-style financing via Curve Flex, and crypto rewards.
Bright Money Raises $12Mn in Equity & $50Mn Debt Facility
Bright Money, a debt consolidation and credit building startup, announced it has raised an additional $12Mn in equity funding and $50Mn. The company charges a $10 per month membership fee, and, in return, offers an “AI-powered” debt repayment plan, including a credit line to consolidate existing, higher-rate debt. The company also offers Bright Builder, a 0% APR credit-builder product that reports to the three major bureaus. The company plans to use the additional funding to expand its team across technology, analytics, product development, customer service, and compliance.
Fed Analysts Highlight BNPL’s Positives
Buy now, pay later’s existence in a gray area, of clearly being a form of financing, but falling outside the bounds of certain consumer protection regulation, has made it a target of critics, some of whom argue it bears resemblance to predatory payday loans. But a new report from Fed economic researchers argues that use of the products spans a wide set of socioeconomic and demographic groups. For some consumers, BNPL-style products can help smooth income/expense mismatches at lower costs than traditional financing mechanisms, like loans or credit cards. Other countries have seen regulators press for reforms to BNPL providers’ business practices, including additional disclosures and stronger consumer protections. In the U.S., companies have been bracing for some type of action from the CFPB. The most likely proposals could include ability to pay requirements, additional disclosures, or requiring BNPL companies to furnish data to credit bureaus.
Banks Capitalize on SBA 7(a) Lending Program
A handful of banks are capitalizing on growth in the SBA’s flagship 7(a) loan program. The 7(a) loan program guarantees between 50-85% of loans originated by participating lenders. While about 1,500 lenders made loans through the program, just three reached $1Bn in originations in fiscal 2023. Huntington, Live Oak, and Newtek One reached that threshold. Bank of America has seen sizable growth in its 7(a) activity for fiscal 2023, originating nearly $400Mn. Program-wide, the SBA originated $25.4Bn in 7(a) loans through September 21.
In the News:
Dimon Warns 7% Fed Rate Still Possible, Times of India Says (Bloomberg, 9/26/2023) JPMC chief Jamie Dimon warns rates could still hit 7%.
U.S. House Lawmakers Push SEC’s Gensler to Approve Spot Bitcoin ETF ‘Immediately’ (Coindesk, 9/27/2023) Bipartisan letter from House Financial Services Committee urged Gensler to move forward with the applications.
Mercedes and Mastercard Debut Fingerprint Payment Offering in Germany (PYMNTS, 9/25/2023) Mastercard and Mercedes partner to let drivers pay with a fingerprint at select service stations.
Mass A2A Payment Adoption in The U.S. Contingent on Compelling USP (PaymentsJournal, 9/25/2023) To get U.S. consumers to use account-to-account payments, there must be some benefit for end users.
The World’s Biggest Crypto Firm Is Melting Down (Wall Street Journal, 9/26/2023) Binance, the world’s largest crypto firm, is in turmoil, amidst layoffs and exec departures.
What to expect from Early Warning’s digital-wallet pilot next month (American Banker, 9/25/2023) Bank consortium-owned EWS is preparing to roll out its Paze digital wallet pilot.
Square’s Canadian cannabis deal plants seeds for U.S. growth (American Banker, 9/26/2023) Square is positioning itself to power U.S. cannabis sales, if and when regulatory clarity is achieved.
Lighter Fare:
An annular solar eclipse is coming to parts of the U.S. in October (NPR, 9/26/2023) Some in the U.S. will be able to see the moon at the furthest point in its orbit as it passes in front of the sun.