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Market Jitters; Robinhood “Democratizes” the IPO; Durbin Wants 36% Cap

By Cole Gottlieb

July 25, 2021


While there were some market jitters early in the week, the macroeconomic picture remains promising. Key banking regulators begin an overhaul of the Community Reinvestment Act. Crypto continues to draw scrutiny. Senators want to cap loans at 36% APR. Robinhood will offer up to a third of its shares to its users. Square adds SMB banking.

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Markets Turbulent, Growth Expected to Continue

The fastest pace of growth is likely behind us, economists surveyed by the Wall Street Journal said. They estimate the US economy expanded at a 9.1% seasonally adjusted annualized rate during Q2. Expectations are for GDP growth to drift downward to a more normal 3.3% by Q2 2022.

Meanwhile, markets were turbulent last week, with stocks, bond yields, and oil declining early in the week on delta variant fears, inflation, and risks to growth from continuing US/China tensions. The market largely made up the lost ground over the course of the week.

Thursday’s initial unemployment claims came in higher than expected, at 419,000 vs. a forecast of 350,000, though July is still expected to show strong job growth. A study out last week argues that states that cut unemployment benefits haven’t actually seen increasing employment. 

The road to recovery is an uneven one, but the economy is headed in the right direction. Consumers’ balance sheets are in good shape and, despite the risks from the delta variant, we expect a continued normalization in employment and consumption trends. 

Regulators Begin CRA Overhaul

Is it time for CRA 2.0? Key federal banking regulators said on Tuesday they would begin a process to modernize the Community Reinvestment Act, a key set of rules that govern how banks lend billions of dollars annually in lower-income communities. As part of the move, acting OCC head Hsu said the agency would rescind a Trump-era update to the rule that the FDIC and Federal Reserve had opposed, creating potential inconsistencies in how different entities were expected to comply with the same set of regulations. A proposal on the updated rules isn’t expected until 2022 at the earliest.

All Eyes On Stablecoins, Interest Accounts

Regulatory and legislative attention on the crypto economy continued to increase this week. Treasury Secretary Janet Yellen and heads of the Fed, SEC, and CFTC met this week to discuss potential risks of stablecoins to capital markets. The market value of the three largest stablecoins, USD Coin, Binance USD, and tether, currently totals about $100Bn, up 10x from just a year ago.

Meanwhile in Congress, Sen. Elizabeth Warren called for the CFPB to take a closer look at crypto from a consumer protection standpoint, highlighting the growth of financial scams in the sector. 

State regulators ‘interest’-ed in BlockFi. Crypto trading and lending platform BlockFi is under scrutiny by state securities regulators in New Jersey and Alabama. Both allege the platform of selling unregistered securities in connection with its crypto interest account.

Growing regulatory interest shouldn’t be a surprise. Any entities that are engaged in banking functions should be regulated appropriately. Ultimately, smart and appropriate regulation where existing regulations are deficient should be a good thing for the crypto industry, by promoting prudent risk management and ensuring adequate investor and consumer protections.

36% APR or Bust

Sen. Dick Durbin re-introduced a bill that would cap interest and fees on consumer loans at a maximum APR of 36%. The bill is co-sponsored by Democratic Senators Jeff Merkley, Richard Blumenthal, and Sheldon Whitehouse. The bill sponsors argue it would bring the protections afforded to military families under the Military Lending Act, passed in 2006, to all Americans.

Such an APR cap would help protect consumers, provide greater clarity to financial services providers, and encourage responsible lending.

Earnings Reiterate Strength of Consumer Balance Sheet 

In this week’s earnings, we continued to see some of the key trends we covered last week: deposits continued to grow QoQ (Live Oak Bancshares +3.2%, Citizens +2.5%, Capital One +1.2%, Ally +0.6%) and spending surged QoQ (Capital One +22.5%, Synchrony +21.3%, Discover +20.4%, AmEx +17.4%).

AmEx Chairman & CEO Stephen Squeri commented on the growth “We saw Card Member spending accelerate from the prior quarter and exceed pre-pandemic levels in June, with the largest portion of this spending growth coming from Millennial, Gen Z, and small business customers.”

Digital banks and non-bank originators reporting this week have enjoyed a stronger rebound in loan originations QoQ than banks (OneMain 68%, Live Oak 66%, Ally 42%) while maintaining a strong credit performance.

OneMain’s net charge-offs were down for the quarter, at 4.41%, compared to 4.67% in 1Q21 and 6.33% in 2Q20. Chairman & CEO Doug Shulman commented “Our credit performance remains very strong and continues to benefit from the proactive credit tightening actions that we implemented at the start of the pandemic, the unprecedented levels of government support over the past 15 months and our robust underwriting capabilities.”

AmEx also enjoyed strong loan growth of 7.5% QoQ, while loan net write-off rates fell to 1.0% from 1.4% in the first quarter. 

Share price performance on companies reporting this week was mixed. Live Oak jumped 7.4% on its best quarter on record, reporting $1.41 EPS, compared to $0.88 in 1Q and $0.09 in 2Q20. Ally was up as well, with its highest level of consumer auto originations in 15 years ($12.9Bn) and strong net revenue growth of 7.6% QoQ. 

Source: Google Finance, PeerIQ

Looking for the latest on fintech lending originations volume and performance? Reach out to to learn about the data and analytics we have on the sector.

Robinhood to Offer One Third of IPO Shares to Its Customers

Robinhood can’t help but stay in the headlines, it seems. The stock trading and crypto app is on track to IPO imminently. In an unusual move aligned with its philosophy of “democratizing” finance, Robinhood plans to make available as much as a third of its shares, potentially worth around $770Mn, to users of its app.

Robinhood won’t be the first to make IPO shares available to its own customers, but firms typically reserve just 1-2% of shares for this purpose. The high allocation to its retail customers doesn’t come without risks. There is technical complexity in filling a larger quantity of smaller orders. While retail traders are warned against “flipping” shares, there’s nothing to stop them from doing so, which could drive elevated volatility when the shares begin trading.

Expanded access for retail consumers is an admirable goal, so long as they are adequately protected and understand the risks of the investment they’re making.

Square Launches SMB Bank Accounts

In its latest product launch building out its SMB capabilities, Square announced Square Banking last week. The offering joins Square’s existing POS payment processing and lending product, which has been renamed Square Loans. The banking offering will include checking and savings accounts with no account minimum, no overdraft or recurring fees, and will offer 0.5% APY on savings.

The deposits from the accounts will be held at the company’s recently launched industrial bank, Square Financial Services. Over time, the industrial bank could grow to form a lynchpin across Square’s various business and consumer offerings, allowing it to launch new products, reduce payment processing costs, and boost margins.

Blend Makes NYSE Debut

Digital lending platform Blend, which we profiled a couple weeks ago, made its debut on the NYSE this week. It ended trading Thursday at $17.26 per share for a market cap of about $3.8Bn. Congrats again to the entire Blend team!

In the News:

Americans’ Medical Debts Are Bigger Than Was Known, Totaling $140 Billion (New York Times, 07/21/2021) Researchers found that 18% of Americans hold medical debt in collections, and between 2009 and 2020, unpaid medical bills became the largest source of debt that Americans owe collections agencies.

Should You Worry About Inflation? Experts Weigh In. (New York Times, 07/19/2021) Economists have mixed inflation outlooks, as consumer prices increase at the fastest pace since 2008.

Trends in Reported Assistance on Consumers’ Credit Records (CFPB, 07/13/2021) Research finds most consumers have exited the payment assistance they received early in the pandemic.

Warren: CFPB Should Take a Closer Look at Overdraft Fees, Crypto (American Banker, 07/19/2021) The Massachusetts Senator pushes for greater oversight of “predatory behavior” related to overdraft fees and financial scams within crypto markets.

Revolut, Europe’s $33 Billion Fintech Giant, Launches a Travel Booking Feature (CNBC, 07/20/2021) The fintech firm launches Stays, a feature that lets users book hotels and other accommodations, offering customers 10% cashbook on bookings made through its app.

Opportunity Financial (“OppFi”) and FG New America Acquisition Corp. Complete Business Combination (Business Wire, 07/20/21) The leading fintech platform that serves consumers turned away by traditional providers begins trading on NYSE under “OPFI”.

Fintech, Crypto Firms Boost NBA Marketing Spending as Banks Cut Back (American Banker, 07/19/2021) Fintechs spend on NBA marketing, with Chime paying for its logo on the Mavericks’ jerseys and LendingTree on Hornets jerseys.

With Open Banking on the Horizon, the Fintech-SME Love Story is Just Beginning (Tech Crunch, 07/16/2021) Open banking would allow fintechs access to valuable consumer data, which may help them design customized solutions for SMEs.

Lighter Fare:

Job-Hunters, Have You Posted Your Résumé on TikTok? (New York Times, 07/19/2021) Gen Z turns to TikTok for job search.