The global economic picture remains gloomy. Inflation remains elevated. Fed officials expect rates could reach at least 4.5% over time. The OCC wants more data on banks’ crypto activities. “Durbin 2.0” bill down but not out. Kids’ debit card startup Step raises $300Mn in debt. JPMorgan and Visa team up on private blockchains. BNY Mellon launches crypto custody platform. In-store BNPL remains a rarity. Earnings season kicks off.
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Economic Picture Remains Gloomy
The global economic picture seems to be darkening. The IMF has revised downward its global growth forecast for 2023 by 0.2 percentage points. It is now expecting worldwide economic output to expand by just 2.7% next year, a stark slowdown from 3.2% in 2022 and 6% in 2021.
Image: Wall Street Journal
Meanwhile, U.S. supplier prices increased in September, showing continued pressure on inflation. Minutes of last month’s Fed meeting show officials expressed concern over the persistence of inflation. Most Fed officials are now expecting a cumulative 1.25 percentage point increase to rates this year. The Fed’s John Williams said rates could reach as high as 4.5% over time.
Still, some Fed officials, including vice chair Lael Brainard, are making a case for a more cautious approach. Brainard argued that previous and anticipated rate increases are likely to slow the economy in ways that cannot yet be observed and are difficult to predict.
OCC Wants More Data on Banks’ Crypto Activities
OCC-regulated banks must already seek non-objection from the regulator before engaging in crypto-related activities. That notwithstanding, the OCC wants to gather more information regarding banks’ exposure to crypto-related activities, Comptroller Hsu said during a speech at last week’s D.C. Fintech Week.
Hsu favors the idea of collecting this data directly from crypto firms themselves. Hsu acknowledged this task would fall outside the remit of the OCC. Instead, he suggested the Office of Financial Research could monitor such activity.
“Durbin 2.0” Cut From Defense Bill
A bipartisan effort to attach the so-called “Durbin 2.0” bill to a must-pass defense spending bill was unsuccessful. Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS) were pushing to have the measure, officially known as the Credit Card Competition Act of 2022, added as an amendment to the National Defense Authorization Act. The bill would require larger credit card issuers to enable transactions to be processed on at least two unaffiliated networks, including one outside of Visa or Mastercard.
The stated purpose of the bill is to increase competition and thereby lower costs for accepting card payments, which merchants have long been pushing for.
But bank and credit union lobbies came out strongly against the measure. Industry advocates argued that any savings would likely be pocketed by merchants rather than passed on to consumers. Instead, bank lobbies argued, consumers would be harmed as credit card loyalty schemes, funded by interchange income, would be undermined by the change.
While the bill won’t be added to the defense spending measure, it remains active as a standalone bill before the Senate banking committee.
Step Secures $300Mn in Debt
Neobank for teens Step announced it has raised $300Mn in debt funding. The company raised $100Mn in equity in a Series C funding round last year. The company is one of the first to offer crypto trading to teens (with parental consent). It also has built a six-course financial education program, dubbed Money 101.
According to Step co-founder CJ MacDonald, the company has helped “more than 3 million customers establish a strong financial foundation and begin to think about their long-term goals.”
Still, once high-flying consumer fintech sectors like neobanking and crypto have gotten a reality check over the past year. As the funding environment has abruptly slowed, emphasis has shifted to unit economics and profitability instead of growth. Step’s viability is likely to depend on its ability to retain and grow with a fickle audience: American teenagers.
JPMorgan and Visa Team Up On Blockchain
JPMorgan and Visa have teamed up. The two finance behemoths have reached an agreement to link their private blockchain networks, Liink and B2B Connect. Under the agreement, Visa’s B2B Connect will leverage Confirm, a capability of JPMorgan’s Liink for validating account information prior to sending a payment. Use of Liink should help mitigate fraud risk and reduce returned payments caused by incorrect or missing account information.
While JPMC’s Confirm remains in pilot mode, it has signed Deutsche Bank as a founding member in Europe and is looking to recruit more partners, with a goal of covering two billion accounts across 35,000 banks around the world.
BNY Mellon Launches Crypto Custody Platform
Bank of New York Mellon, the world’s largest custodian, has gone live with its own crypto custody platform. BNY Mellon’s platform will enable it to hold customers’ ether and bitcoin alongside traditional financial assets.
BNY Mellon worked with digital asset industry leaders, including Fireblocks and Chainalysis, on the platform. The bank believes there’s a huge opportunity in custodying digital assets. According to a survey sponsored by the bank, 91% of institutional investors said they were “interested” in investing in tokenized products.
BNPL Providers Remain Rare In Store
BNPL providers are struggling to gain a foothold IRL. As the short-term financing options exploded in popularity, they became nearly ubiquitous on ecommerce checkout screens. But standalone BNPL providers have seen an incredibly favorable economic climate shift incredibly rapidly. Valuations have plummeted amidst a rising rate environment and a challenging fundraising climate. The changing circumstances have spurred consolidations and a continued quest for growth, including at bricks and mortar retailers.
But while 43% of retailers have added at least one BNPL provider to their website, merchants have proved more reluctant to add third-party options to their in-store checkout experiences. Instead, Forrester research shows merchants have favored their own in-house financing options, including revolving credit plans and layaway.
Still, BNPL providers are working on rolling out services that aren’t dependent on merchants. Many already offer virtual cards that let users shop at any merchant. Klarna and Affirm are rolling out physical card offerings that link to a user’s existing bank account or debit card to provide split pay functionality.
Large Banks Kick off Earnings Season
We begin earnings season with earnings beats sending Wells Fargo +1.9%, JPMorgan +1.7%, and Citi +0.7% higher. PNC fell (1.2)% despite beating expectations, as it increased its provisions for credit losses.
Installment lender valuations have taken a hit due to rising interest rates, but Citi’s installment lending business has continued to report strong growth. Citi’s U.S. installment lending grew to $5Bn, an 18% increase from the second quarter.
Source: Citi Earnings Presentation
Wells Fargo moved forward with implementing an extra day grace period to cure negative balances and avoid overdraft fees. Additionally, they began to roll out early payday, providing consumers who receive direct deposits access to funds up to two days earlier than scheduled.
Banks continued to grow their consumer loan books from the second quarter, with Citi – Branded Cards +4%, Citi – Retail +3%, PNC +3%, JPMorgan +1%, and Wells Fargo +1% all reporting higher average consumer loan balances.
Rising interest rates dampened home lending originations for JPMorgan (45)% and Wells Fargo (37)%, but Citi +2% grew originations slightly from Q2. Auto loan originations were less impacted, with Wells Fargo reporting flat originations and JPMorgan reporting a 7% uptick in originations from the second quarter.
Deposits have begun to decline (PNC (2)%, Citi (1)%, JPMorgan (1)%, Wells Fargo (1)%), as inflation outpacing wage growth has led to consumers spending more and saving less. JPMorgan CFO Jeremy Barnum noted, “However, with spending growing faster than income, we are seeing a continued decrease in median deposits year on year, particularly in the lower-income segment.”
Charge-offs have risen across the board, but still remain below pre-pandemic levels. Management has explained that the uptick in charge-off ratios is due to credit normalization.
In the News:
The Hidden Dangers in the Fed’s Balance-Sheet Reduction (American Banker, 10/11/2022) The Fed ramps up efforts to reduce its holdings, which currently amount to over $8.7T.
BankThink: Don’t Regulate Buy Now/Pay Later Companies Like Traditional Lenders (American Banker, 10/10/2022) Industry participants caution against conflating the innovative, interest-free BNPL industry with the likes of traditional high-cost forms of credit.
Big Banks, Nonbanks Largely Absent From FHFA’s Home Loan Bank Inquiry (American Banker, 10/10/2022) Community bankers flocked to D.C. to discuss the relevance of the Federal Home Loan Bank System.
Payable Raises $6.1m to Modernise Business Payments (Finextra, 10/12/2022) CRV and Earlybird led the funding round into the payments operations platform.
Under Pressure, Goldman CEO Ditches Dream of Consumer Domination (Bloomberg, 10/9/2022) Goldman is restructuring and reorienting its consumer banking operations, following cost overruns and missed profitability goals.
Block Takes Over the Conversation for Square Merchants (American Banker, 10/10/2022) Block’s merchant services unit debuted new features on the Square Messages app, using updated AI to tailor responses based on context and data accrual.
Deutsche Bank and Fiserv Launch Combined Payments and Banking Joint Venture (Finextra, 10/12/2022) The companies launched Vert, a payment acceptance and banking services provider to small and medium-sized enterprises.
Former Google Ads Boss Launches ‘Web3’ Search Startup with Backing From Coinbase, Top VCs (CNBC, 10/12/2022) Raised $40Mn in a funding round led by crypto-focused venture fund Paradigm.
Scientists Find New Evidence of Habitability on Saturn’s Moon Enceladus (MSN, 10/9/2022) Enceladus’ ocean may be rich in dissolved phosphorus, an important life element.