Is FinTech Getting Overcrowded? Square, Klarna, and Walmart Ramp Up Banking Capabilities

by | Mar 7, 2021 | Blog | 0 comments

Greetings,

This week, we look at US GDP’s strong recovery, TransUnion’s LendIt webinar takeaways, and the continued focus on banking services by Square, Klarna, and Walmart.

Let’s get to it.

US GDP Growth at 10%?

The US economy has roared back to life, with the Fed estimating that the GDP growth could hit 10% for the quarter. “With strong federal fiscal support and continued progress on vaccination, GDP growth this year could be the strongest we’ve seen in decades,” said NY Fed President John Williams.

Fed’s Eye on Inflation, Bond Market Turmoil

Fed Chairman Jerome Powell said that inflation is likely to rise as the economy recovers, but he believes it will be temporary. A selloff in equities still ensued as benchmark 10-year Treasury yields jumped another 7 basis points to 1.55%, the highest since mid-February of last year.

Although the Fed is unlikely to raise rates, it can implement some policy tweaks to address the recent turmoil in bond markets.

  • One possible tweak is the third iteration of Operation Twist, in which the Fed sells short-term bills and buys longer-duration bonds to flatten the yield curve
  • Another could be an increase in the IOER (Interest on Excess Reserves) from 0.10% to 0.15%. IOER serves as a guardrail for some short-term rates, which is important to money market funds that have had to buy bills at negative real rates

BNPL surges, while originations in personal loans slow

LendIt hosted a webinar with Transunion on “Risk Strategy Considerations for a Post-COVID-19 Environment”. Key takeaways were:

  • Concern around consumers’ future behavior as stimulus payments dry up, hardship programs are wound down, and rent moratoriums expire
  • Many consumers took the hardship protection to protect themselves against further potential economic fallout rather than having an immediate need. They kept making payments, and by December 2020, 78% of consumers who had taken forbearance had already emerged from those programs, which is consistent with PeerIQ’s previous analysis
  • Although originations in the personal loan space declined, BNPL saw double-digit monthly growth

Source: TransUnion, PeerIQ

Square Begins Banking Operations

Square, Inc. has announced the launch of its Utah based industrial bank, Square Financial Services. Now that it is FDIC approved, the company will start underwriting and originating business loans for Square Capital’s existing lending product.

Note that Square Financial Services will continue to sell loans to third-party investors and limit balance sheet exposure. In their press release, Square stated, “we do not expect the bank to have a material impact on Square’s consolidated balance sheet, total net revenue, gross profit, or Adjusted EBITDA in 2021.”

The move signals Square CEO Jack Dorsey’s broader ambition of making the tech company a one-stop shop for finance. Square also has a track record of building fast-growing products internally. Cash App, which started as a smaller internal project, now makes up roughly half of Square’s gross profit.

Klarna Valuation at $31 Bn

Led by CEO Sebastian Siemiatkowski, Klarna has secured $1 Bn in funding at a post-money valuation of $31 Bn, making Klarna Europe’s most valued private fintech.

With the new funding, Klarna wants to build a stronger financial relationship with its customers by ultimately becoming a challenger bank. It has a range of licensed banking products, such as  savings and current accounts in Sweden and Germany, with more countries to follow.

In BNPL, Klarna is active in more than 17 countries and has over 250,000 retail partners, including Macys, H&M, Ikea, Expedia Group, Samsung, ASOS, Peloton, Abercrombie & Fitch, Nike, and AliExpress.

In the US, Klarna’s main competitor Affirm currently has a market cap of $18.7 Bn.

Walmart FinTech Startup Scores Key GS Talent

Walmart’s fintech startup has attracted some of Goldman’s key talent. The head of Goldman’s Marcus unit, Omer Ismail, has decided to leave the bank to join Walmart’s new fintech venture. He is a 20-year veteran with Goldman and was one of the executives that developed its strategy for digital banking offerings back in 2014.

Joining him at Walmart is David Stark, who helped land and build Goldman’s credit-card offerings with Apple and General Motors.

Walmart said in January that it was creating a majority-owned fintech subsidiary in a partnership with venture-capital firm Ribbit Capital. See our initial coverage here.

 

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