Happy Labor Day Weekend,
Job growth slows, but wage growth is elevated. Rates likely to stay higher for longer. FedNow is (finally) getting ready to roll out. Auto lending slows. Klarna losses quadruple. Banks’ tech spending finally paying off? Average overdraft fee drops significantly.
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Job Growth Slows
Economists were expecting 225,000 jobs to be added in August’s employment report. But the private sector added just 132,000 new roles. With extremely low unemployment, this could be a sign the economy is moderating towards a more normal pace of job growth.
Data from payroll processor ADP found annual pay jumped by 7.6%, inclusive of wages, commissions and tips. The report also found job switchers saw pay increases of 16.1%, a sign that inflation is pushing wages up.
Buckle up. The Fed is signaling that rates may stay higher for longer, even if that means “some pain” for the economy and households. NY Fed President Williams said that market expectations of rate cuts as soon as next year were incorrect. And Fed Chair Powell indicated he expects rates to approach 4% by the end of next year – a level not seen since early 2008.
Are You (Finally) Ready for Faster Payments?
The development of the Fed’s new, real-time payment system has been anything but “fast.”
The system, dubbed FedNow, will enter a pilot phase this September. It is expected to be fully operational sometime between May and July 2023. How quickly benefits of the rollout show up in consumer-facing products and services depends on the speed with which banks update their systems to take advantage of FedNow’s new capabilities.
FedNow isn’t the only game in town, however. It will be competing with The Clearing House’s Real Time Payments network, known as RTP. While RTP went live in 2017, adoption among banks has been uneven, which has limited its reach. Smaller banks, in particular, advocated for a Fed-operated real-time payment network that would compete with RTP.
Faster payments, which have been common in countries from the U.K. to India and Brazil for years now, could enable a number of use cases, such as “account-to-account” payments. Cash-constrained consumers could benefit from quicker clearing and settlement of funds, which would help them better manage their accounts to avoid service fees.
Despite the promises of both RTP and FedNow, don’t expect good-old ACH to go anywhere. The workhorse of electronic payments in the U.S. facilitates trillions of dollars in transactions, making it unlikely to be displaced very quickly.
Elevated Prices and Interest Rates Drive Slowdown in Auto Lending
Supply constraints have kept new and used car prices elevated. Interest rates are up. And buyers’ pocketbooks are taking a beating from inflation.
All of the above has translated to weakness in auto lending. While, overall, credit grew at a brisk clip in Q2, growth in auto lending decelerated on concerns about customers ability to repay.
Some credit unions have chosen to ramp up efforts to capture share in auto lending by offering below-market interest rates. This competition has pushed stalwart auto lenders, like Capital One and Ally, to pull back on growth.
While credit quality remains strong for now, some lenders are concerned the value of vehicles will fall as supply chain disruptions resolve and supply and demand normalize. Declining vehicle prices could expose lenders to additional risk, should borrowers default and lenders need to repossess and re-sell the vehicle.
Klarna Losses Quadruple as BNPL Provider Emphasizes Focus on Profits
Klarna is arguably the largest BNPL provider. But that seems to be making recalibrating to the current environment more difficult than smaller, more nimble peers.
The company was the target of endless speculation as it sought to raise additional funding. It eventually did secure a fresh $800Mn in funding at a valuation 85% lower than its previous round. At the time, Klarna emphasized how significantly the operating environment had changed, and that it was re-orienting to profits over growth.
But that change of focus hasn’t shown up in the numbers as of yet. Klarna’s first half earnings showed a nice 24% jump in revenue to $950Mn. The increase was primarily powered by the company’s expansion in the U.S. But that revenue growth has come at a cost. Market expansion and rising defaults helped drive a first half loss of $581Mn, compared to $141Mn the year prior.
Banks Have Spent Big on Tech. Is It Working?
“Digital transformation” has been the buzzword seemingly forever at this point.
Banks undertaking “digital transformation” strategies often spend big on technology projects in the hopes of improving customer experience, automation, and efficiency.
There are some signs that these investments may be paying off. Banks’ average efficiency ratio, which measures non-interest expense as a percent of net revenue, should improve from 62% in 2021 to 56% this year and 55% next year, according to analysis from Wells Fargo Securities. Wells Fargo analyst Mike Mayo said, “Technology is allowing banks to add on more revenues without the same level of bankers, paperwork, manual intervention and management layers. You’re likely to see the acceleration of revenues in the third, fourth and following quarters without much increase in headcount.”
What’s driving the savings? Reductions in branch footprint, improvements in customer service automation, and streamlined back-office functions are all contributing to improved efficiency. Larger banks with sophisticated IT operations are likely to benefit the most from these types of digitally-driven efficiencies.
Average Overdraft Fee Drops Dramatically
All those announcements of banks updating their fee policies are showing up in the numbers.
According to survey data from Bankrate, the average overdraft fee dropped 11% from a year ago to $29.80. This marks a stark reversal from more than 20 years of increasing overdraft fees, which grew from an average of about $22 in 1998 to over $33.
Image: American Banker
Besides overdraft-related fees, service fees did not change significantly from 2021 to 2022. The average cost of an out-of-network ATM withdrawal edged up by $0.07. But the average monthly cost of a checking account dropped by $0.16, according to the study.
The ultimate impact of reduced and eliminated overdraft and NSF fees may yet to be fully realized. Banks that have chosen to reduce or eliminate those fees may seek to replace the lost revenue elsewhere. For instance, banks could tighten criteria for qualifying for no-cost checking or raise fees on other services, like using a human teller or making a wire transfer.
In the News:
CFPB Sets its Sights on Digital Marketers (Fintech Nexus, 8/29/2022) The CFPB’s interpretive rule may open up personal finance companies, loan platforms and financial product comparison sites to CFPB oversight and enforcement actions related to UDAAP.
DOJ Backs Democrats in FDIC Board Struggle (American Banker, 8/30/2022) The DOJ released an opinion stating that the chairperson cannot prevent a majority of the FDIC board from presenting items for a vote and decision.
Rising Numbers of Stressed Consumers Seek Alternatives to Credit Cards (The Financial Brand, 8/29/2022) Primary credit cards’ share of consumer spending fell from 50% in 2019 to 42% in 2022.
Would You Take Out a Loan to Buy This Week’s Groceries? (New York Times, 8/29/2022) In the shifting landscape of BNPL usage, consumers are using the product for an increased number of repeat, everyday expenses.
Why Neobanks and Fintechs Have Made ‘Underbanked’ an Obsolete Term (The Financial Brand, 8/31/2022) More consumers are turning to nonbanks and fintechs for financial services, due to preference, rather than necessity.
FinTech Financing Options Ease Healthcare Practices’ Payer Pains (PYMNTS, 8/29/2022) Fintechs are bringing BNPL and other consumer credit products to the healthcare space.
Visa Says US Payments Volume Climbed 11% Y/Y in August (PYMNTS, 8/30/2022) Credit payments volume was up 17% and debit up 7%.
Klarna, Affirm Show How Expensive Fintech Growth Can Be (Tech Crunch, 8/31/2022) Some of the most valuable BNPL players have recently reported earnings.
Fundraising Changes For Fintech And Blockchain Companies In The Next Year (Forbes, 8/31/2022) Fintech funding has become more concentrated as of late.
New Study Could Unearth the Secret to How ‘Immortal Jellyfish’ Reverses Aging (CNN, 8/31/2022) This jellyfish can repeatedly revert itself into a juvenile state.