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.
In the News:
- U.S. Job Growth Surges Past Estimates; Unemployment Dips to 6.2% (Bloomberg, 3/5/2021) According to the Labor Department, payrolls increased by 379,000 for the month of February, which beat analysts’ projections of a 200,000 gain.
- Biden’s CFPB Nominee Puts Loan Servicers, Credit Bureaus on Notice (American Banker, 3/3/2021) The head of the CFPB, Rohit Chopra, stated that he would do more to prevent veterans from facing foreclosures and would encourage consumers to dispute data on their credit reports.
- Interagency Breakthrough on CRA Looks to be n Reach (American Banker, 3/1/2021) Both of President Biden’s candidates for comptroller, may put a stop to the CRA rule that the OCC created during the Trump era.
- Can Banks Win in the Booming Buy-Now-Pay-Later Space? (Banking Dive, 3/2/2021) Consumers have participated in ~$25 Bn in buy now, pay later transactions in 2020, which is a trend that traditional banks should take note of.
- Fintech Blend Explains how its Digital Lending Platform Supports Data Connectivity so Borrowers can Connect to Asset, Payroll, Tax Accounts (Crowdfund Insider, 2/27/2021) Mortgage lending application platform, Blend, explains how they have streamlined the consumer experience.
- How Square’s Bank can use Bitcoin Profits to Promote Financial Inclusion (American Banker, 3/2/2021) With the launch of Square Financial Services, the fintech firm does not want to compete with traditional banks, but instead wants to bring banking to undeserved markets.
- OnDeck Secures Partnership with HomeAdvisor (Fin Ledger, 3/4/2021) OnDeck has partnered with HomeAdvisor to offer more financing solutions to home improvement, maintenance, and repair professionals.
- Plaid unveils Income to Aid Customer Finance (HousingWire, 3/4/2021) Plaid has announced the launch of its new beta product Income, which is an income verification tool for consumers to secure loans, qualify for mortgages, vehicle leases, and more.
- Apple Bank Launches Personal Loans Powered by Upstart (BusinessWire, 3/3/2021) Apple Bank will now offer unsecured personal loans, which will be powered by Upstart’s state of the art AI model and origination platform.
- Citi Marks a Quiet Transition as Fraser Takes the Reins (Banking Dive, 3/2/2021) Citi’s new CEO, Jane Fraser, places risk management as the highest priority on her to-do list.
- PayPal in Talks to Acquire Cryptocurrency Security Company Curv in a Nine-Digit Deal (Calcalist, 3/2/2021) PayPal is in negotiations to acquire crypto asset custodian, Curv, led by CEO Itay Malinger.
- A Cephalopod has Passed a Cognitive Test Designed for Human Children (Science Alert, 3/2/2021) Cuttlefish have passed the Stanford marshmallow experiment, which is a test designed for children.