Happy Sunday,
Inflation comes in hot. Hopes for rate cuts dim. CFPB drops video game report. Banks begin trimming deposit rates. Klarna launches Wikipink. Santander to expand digital banking brand Openbank. Empower acquires Petal. Banks kick off earnings season.
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Hopes for Rate Cuts Dims Somewhat
March’s inflation numbers came in hot, with prices rising 3.5% year over year, slightly higher than estimates. Stubborn inflation numbers are dashing hopes for a rate cut sooner than later. Interest rate swaps suggest traders are now expecting just two rate cuts this year, beginning in September. But former Federal Reserve Bank of St. Louis President James Bullard said he still believes the Fed will cut rates three times before the end of the year.
Image: Bloomberg
CFPB Flags Risks in Video Games
The Consumer Financial Protection Bureau dropped a new report last week about… video games? The gaming business, including hardware, software, and in-game purchases is a $57Bn industry. In a press release accompanying the report, CFPB Director Chopra said the Bureau is focused on potential harms from gaming for vulnerable populations, including children, and emphasized that virtual worlds have become a “haven” for fraud and scams.
The report also highlights the potential for money laundering, noting that some platforms, such as Linden Labs’ Second Life, allow users to buy in-game currency with fiat U.S. dollars and to convert in-game currency back to real money. Consumer protection laws and regulations, like the Electronic Funds Transfer Act and Dodd-Frank’s prohibition on UDAAP, apply to payment systems that facilitate storing and transferring valuable assets, the report argues.
Banks Begin Trimming Deposit Rates
The Fed hasn’t started cutting rates yet, but some banks have. Banks, including Goldman Sachs’ Marcus, Ally, and Discover have trimmed rates slightly, as the battle for deposits cools somewhat. Brick and mortar banks are preparing for a lower rate environment too. Branches are lowering the rates on offer for CDs and shortening the terms on offer. Still, overall, rates for online high-yield savings have declined from 4.49% earlier this year to 4.43% this month.
Klarna Launches “Wikipink”
BNPL provider Klarna launched a new initiative, Wikipink, to promote transparency around how consumers use its product. Klarna leverages the data to argue that users of BNPL have better financial outcomes than traditional financing instruments like credit cards. Per the company’s release, 96% of Klarna’s BNPL plans are paid early or on time, compared with 41% of credit card users who revolve a balance. The company is seeing declining rates of late payments on its pay-in-four product, with just 4.3% of users incurring such fees in Q3 2023. The company’s selective release of data paints it positively in comparison with traditional credit cards, though the picture of how BNPL impacts users’ overall financial health is incomplete.
Santander to Expand Openbank to Mexico, U.S.
Spanish-based Santander is gearing up to expand its digital banking brand, Openbank, to the U.S. and Mexico later this year. Openbank currently operates in Spain, Portugal, Germany, and the Netherlands and holds a total of €18Bn or about $19.5Bn. Openbank operates on a technology platform built in-house at Santander. In the U.S., deposits raised through Openbank will be used to fund Santander’s auto lending business.
Empower Acquires Petal
Cash advance provider Empower is acquiring cashflow-underwritten credit card startup Petal, the companies announced last week. Like Petal, Empower leverages cash flow data and other “non-traditional” data in machine learning models to offer small loans in the U.S. and Mexico. Empower has 2Mn active subscribers and reached profitability in 2022, according to the release. With its acquisition of Petal, Empower will gain some 400,000 users who have been approved for Petal cards, despite having thin or no credit files at the time of application. Petal’s acquisition is the latest in an ongoing consolidation in the consumer fintech space, a trend that is likely to continue.
Banks Kick Off Earnings Season
Source: Yahoo Finance
Big banks kicked off earnings season, with average consumer loan books up +27.0% YoY at JPM (+6.0% YoY ex-First Republic Bank “FRB”), +18.4% YoY for Citi – Retail Banking, +11.1% YoY for Citi – Branded Cards, +5.9% YoY for Citi – Retail Services, and down (2.5)% YoY for Wells Fargo. Much of the increase can be attributed to increases in credit card loans, as balances have grown over the past year. Installment loans stayed hot, with Citi growing the product 19% YoY to $6Bn.
Credit card balances have grown as consumers have continued to spend, bolstered by a strong labor market. JPMorgan’s combined debit and credit sales volume grew +8.6% YoY, Wells Fargo’s combined credit and debit spend volume grew +6.0% YoY (with credit +14% and debit +4%), and Citi’s total credit card spend volume (branded cards + retail services) grew 3.1% YoY.
As seen in data from both the NY Fed and Philadelphia Fed, card delinquencies are on the rise, and have breached pre-pandemic levels. Likewise, we saw consumer NCOs rise +224bps YoY at Citi – Retail Services, +147bps YoY at Citi – Branded Cards, +37bps at JPMorgan, +36bps at Wells Fargo, and +3bps at Citi – Retail Banking.
Average deposits fell (4.8)% QoQ at Citi, (1.2)% QoQ at JPMorgan, and (0.8)% QoQ at Wells Fargo, in part driven by consumers seeking higher-yielding alternatives.
Despite high interest rates, home lending originations were up +15.8% YoY at JPMorgan (+10.5% YoY ex-FRB), while Citi (6)% YoY and Wells Fargo (38)% YoY reported declines. Wells Fargo’s sharp decline was part of its strategic decision to step back from the housing market.
Auto originations were (18)% lower YoY at Wells Fargo and (3)% lower YoY at JPMorgan, with Wells Fargo attributing the decline to credit tightening actions. High interest rates and used car prices have impacted overall auto industry origination volumes.
Wrapping things up, Wells Fargo CEO Charles Scharf reported that, “Earlier this year, the OCC terminated a consent order issued in 2016 regarding sales practices misconduct. The closure of this order was an important milestone as it is confirmation that we operate much differently today around sales practices.”
In the News:
Doubts Creep In About a Fed Rate Cut This Year (Wall Street Journal, 4/8/2024) Stubborn inflation is reducing the likelihood of rate cuts this year.
Descending from the Summit (Bank Reg Blog, 4/6/2024) Mode Eleven is the latest BaaS/fintech bank to receive a consent order.
SBA forges ahead with Funding Circle license despite pushback (American Banker, 4/4/2024) The SBA gave final approval for Funding Circle to join the agency’s flagship 7(a) loan guarantee program.
Fintech funding shows signs of stalling in latest CB Insights report (Fintech Futures, 4/8/2024) Fintech funding dipped to a four-year low, according to CB Insights data.
NYCB asks shareholders to finalize $1 billion lifeline (American Banker, 4/5/2024) NYCB, now helmed by former Comptroller Joseph Otting, is looking to finalize its $1Bn capital raise.
Pinwheel’s Power of Primacy report exposes myths (Fintech Nexus, 4/8/2024) Direct deposit adoption remains a key indicator of account primacy.
‘Pay-by-bank’ beats BNPL in consumer and merchant preference (The Banker, 4/9/2024) Open banking is spurring pay-by-bank adoption in the U.K.
NYCB’s latest challenge: Losing bankers to competitors (American Banker, 4/9/2024) As it struggles, the bank is having a hard time retaining talent.
Why Amex is still expanding its pandemic-era restaurant-rescue program (American Banker, 4/8/2024) Amex is handing out $2.5Mn in grants to restaurants.
Varo’s new CFO aims for ‘path to profitability’ (Banking Dive, 4/9/2024) The new exec comes from a stint at real-estate website Zillow.
Lighter Fare:
How medieval people described solar eclipses (Medievalists, 4/2024) How ancient civilizations described witnessing a solar eclipse.