Happy Sunday,
Inflation came in unexpectedly low, at 3%. Growth in consumer debt slows. Bank of America enforcement action. Capital One exits consent order. Clair and Jirav announce fundraises. “Durbin 2.0” could have unintended consequences. Banks collaborate on regulator-friendly blockchain test. More neobank consolidation? Banks kick off earnings.
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Inflation Down to 3%
Is inflation taking the summer off? Not quite, but it is moving in the right direction. The CPI print showed a lower-than-expected 3% jump in prices year over year. That was a decline from May’s 4% and the slowest rate of inflation since March 2021. Smaller hikes in food and rent and declining prices for used cars and airfares contributed to the overall better inflation reading for June. Still, analysts expect Fed officials are likely to raise rates when they meet later this month.
Image: Wall Street Journal
Meanwhile, new consumer borrowing slowed in May. Total credit rose by $7.2Bn month over month, per Fed data. Non-revolving credit, like auto and education loans, declined by $1.3Bn. That’s the first decline in non-revolving credit since April 2020.
New analysis from TransUnion shows that while consumers credit scores were boosted by loan pauses and stimulus payments during the pandemic, the higher scores may distort borrowers’ actual riskiness. The study suggested delinquencies for card and personal loans originated in mid-2021 have performed worse than their numerical scores would have suggested.
Bank of America to Pay $250Mn in Junk Fees, Fake Accounts Case
Bank of America will pay a total of $250Mn to settle an enforcement action related to withholding promised credit card rewards, charging consumers multiple NSF fees for the same transactions, and misusing customer data to open accounts in their names without their permission. Approximately $100Mn will go towards consumer redress for the NSF fees, and Bank of America will pay $90Mn in penalties to the CFPB and a further $60Mn to the OCC. The CFPB characterized the NSF charges as “junk fees,” something officials in the Biden administration have railed against in banking business and beyond, including airlines and event ticketing.
Much like the Wells Fargo fake accounts scandal, the enforcement action alleges Bank of America employees, motivated by aggressive sales targets and commissions, misused consumers’ data to open accounts in their names. These actions resulted in consumers incurring fees for the accounts and negative effects on their credit reports, which consumers had to spend time correcting.
Finally, the bureau’s statement on the actions reiterates that Bank of America is a “repeat offender.” This order makes the fourth settlement for the bank since 2014, including paying $727Mn to redress illegal credit card practices and a $225Mn fine for mishandling disbursement of unemployment benefits during the COVID-19 pandemic.
Capital One Exits Fed Consent Order
In other regulatory news, the Federal Reserve has released Capital One from a 2020 consent order stemming from a 2019 data breach at the bank. The incident impacted nearly 100Mn Capital One customers. Following the incident, the Fed order required the bank to take enhanced governance and risk-mitigation steps to ensure data security. The incident stemmed from a misconfigured cloud firewall configuration, which allowed an Amazon Web Services employee to gain access to the data.
EWA Startup Clair Raises $25Mn
Clair, which offers a no-cost earned wage access product, announced it has raised $25Mn in new equity funding. The company concurrently announced its bank partner, Pathward (formerly MetaBank) committed $150Mn towards a new consumer lending program that Clair facilitates. The $25Mn equity round was led by Thrive Capital with participation from Upfront Ventures and Kairos. Clair currently works with more than 10,000 employers through their payroll or workforce management solutions. Clair is evaluating additional offerings, including a health savings account and ‘dynamic’ 401(k) retirement account.
Jirav Announces $20Mn Series B
Jirav, a financial planning and analysis platform, announced it has raised a $20Mn Series B. The round was led by Cota Capital. Jirav’s accounting and FP&A platform connect financial and operational data with workflow expenses and cash flow data to enable users to more accurately forecast revenue and expenses. The company plans to use the additional funding to continue to develop its product, including new “AI-powered” capabilities, and to expand its customer base.
“Durbin 2.0” Could Have Unintended Consequences
The intended goal of the Credit Card Competition Act, sometimes referred to as “Durbin 2.0,” is to save consumers money by promoting competition. But, industry analyst Ron Shevlin argues, that isn’t likely to be the outcome (not that the bill has much of a chance to pass, in a split Congress.) Shevlin points out that, when the Durbin amendment was passed, we heard a similar story. Merchants would pay less to process debit cards, and those savings would be passed along to consumers in the form of lower prices.
But, several studies show that isn’t really what happened. Merchants did pay less to process debit cards, but they pocketed most of those savings. Shevlin argues such unintended consequences are likely to repeat if “Durbin 2.0” or a similar measure were to become law. Credit card issuers would lose an important revenue stream and could respond by adding or increasing fees or reducing benefits, like rewards schemes.
Revolut Loses $20Mn to Fraud In Fledgling U.S. Business
U.K.-based Revolut is in the headlines again, this time, regarding its U.S. operations. Reporting in the FT revealed the neobank lost about $20Mn to fraud due to differences in payment processing in the U.S. vs. in Europe. Per the FT, when certain transactions were declined, Revolut would erroneously issue refunds, using the company’s own funds. Revolut itself failed to detect the problem. Instead, it was notified by a partner bank, when funds in Revolut’s account didn’t match expectations.
SoFi Could See Limited Gains from Resumed Student Loan Payments
While SoFi has considerably diversified its product offerings, the company still does brisk business with its original product: refinancing student loans. But that business line came to a screeching halt at the beginning of the pandemic, when then-president Trump put a pause of federal student loan payments. The Biden administration has repeatedly extended that pause, while also attempting to move forward policies to cancel portions of student loan debt and provide more generous income-based repayment options. For borrowers’ whose loans were on pause or who were hoping to see them wiped out altogether, why would they refinance? SoFi went so far as to sue the federal government in an attempt to block the continued student loan payment pause. SoFi ultimately dropped the suit.
But now, even with student loan payments looking like they will finally resume, the benefit to SoFi may be limited. This time, it’s rates that are to blame. Rising interest rates mean a rising cost of funds for SoFi. That may make SoFi’s refinance options less attractive to borrowers vs. their federal loan rates. It may also crimp SoFi’s returns on the loans, meaning a lower return on equity for the business.
Banks Collaborate on Regulator-Friendly Blockchain Test
The world does business 24/7/365, but American banks don’t. This can particularly be a challenge as many international transactions are priced and settled in dollars, directly or indirectly through American banks. That’s one of the use cases the Regulated Liability Network hopes to solve. The project proposes to operate a shared ledger between commercial banks, emoney institutions, and the central bank. Such a blockchain could enable instantaneous, 24/7 clearing and settlement. Major banks and institutions participating in designing and testing the concept include Bank of New York Mellon, Citibank, HSBC, Swift, Mastercard, and the Federal Reserve Bank of New York.
More Neobank Consolidation?
U.K. neobank Monzo is reportedly considering combining with Nordic neobank Lunar. The two companies are discussing the shape of a potential transaction, according to Bloomberg. Monzo operates as a fully licensed bank in the U.K. and through a bank partnership in the U.S.. Lunar is a fully licensed bank as well and operates in Denmark, Sweden, and Norway. While a combination would bring increased scale, it’s not immediately clear what potential synergies exist between the two. The news is, however, a sign of the continued pressure on consumer fintech and of continuing potential for M&A activity.
Big Banks Kick Off Earnings Season
Source: PeerIQ
Big banks kicked off earnings season, with top- and bottom-line beats across the board. Average consumer deposits were down from the year prior (Wells Fargo (8)%, Citi (3)%, JPMorgan (2)% – JPMorgan excl. First Republic “FR” (6)%) as consumers continued to spend down savings and chase yield on their deposits. On a QoQ basis, JPMorgan’s consumer deposits rose 4% (excluding FR deposits were down (0)%), Citi’s consumer deposits rose 2% and Wells Fargo’s consumer deposits fell (2)%.
The YoY decline in consumer deposits tracks, given Fed data that shows U.S. consumer savings (as a % of GDP) below prepandemic levels.
Source: Federal Reserve Data
Consumer NCOs continued to normalize, with Citi – retail services +38bps, Citi – branded cards +29bps, Wells Fargo +3 bps QoQ, and JPMorgan +2bps QoQ.
Consumer loan book growth was mixed. JPMorgan posted 15% QoQ growth, largely fueled by an increase in home loans from its FR acquisition (ex. FR posted a more modest 2% increase). Citi – branded card loans were up 3% QoQ while its retail services loans were flat. And Wells Fargo loans fell (1)% QoQ, despite credit card and personal loan growth.
Citi’s installment lending business continues to grow, reporting $6Bn of installment loans for the quarter, a 4% QoQ and 41% YoY increase. Despite pullbacks in the BNPL and personal loan spaces, Citi has continued to generate consumer demand for its installment loans. However, sequential growth has slowed as the business has expanded (+7% in Q1, +8% in Q4).
Source: Citi Earnings Presentation
Persistent inflation and a strong labor market has helped fuel continued growth in consumer spending. JPMorgan’s consumer card spend volumes rose 6.8% YoY, Wells Fargo’s rose 2.3% YoY and Citi’s credit card spend volumes rose 2.5% YoY. Citi reported that its interest-earning card balances grew 17% for branded cards and 12% for retail services, indicating that consumers are not only spending more, but are taking on more revolving debt.
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In the News:
Biden administration will probe high-cost medical financial products (American Banker, 7/7/2023) The CFPB, Treasury Department, and Department of Health and Human Services are probing healthcare financing products.
FDIC examiners may need higher pay, freer voice to bolster supervision (American Banker, 7/7/2023) One learning from hearings on recent bank failures is that the FDIC has struggled with staffing shortages.
Banks are frustrated with the Fed’s stress testing, but it’s not getting easier (American Banker, 7/7/2023) Some banks are pushing back on stress test results, and the Bank Policy Institute has called for greater transparency of the exams.
Banks’ Newest Fed Headache: Nonstop Instant Payments (Wall Street Journal, 7/9/2023) Some bankers and analysts fear that round-the-clock availability of instant payments may introduce new liquidity risks.
How Goldman Sachs’ deal with Apple went sour (American Banker, 7/10/2023) Goldman may have been too willing to agree to Apple’s demands, ultimately dooming the partnership.
Payoneer to Reduce Headcount 9% to ‘Enhance Productivity and Efficiency’ (PYMNTS, 7/10/2023) Publicly traded Payoneer will layoff 9% of its 2,000-strong staff, a recent SEC filing shows.
Lighter Fare:
NASA Rover Discovers ‘Promising Hint’ of Habitability on Mars (Vice, 7/12/2023) Organic matter has been detected on Mars, indicating a more complex chemical history on the red planet than previously thought.