Interest rates continue to climb, and home price increases slow. CFPB pushes banks on Zelle fraud. X1 card raises $25Mn. WebBank commits $250Mn to Avant facility. Mastercard expands startup programs. Affirm partners with SeatGeek. Lenders deploy “fairness-as-a-service.”
Industry participant outlook in Vegas this week at SFVegas 2022 was tempered at best. Investors continue to be very cautious and are continuing to participate, but some believe the worst is still ahead of us. Originators put forward a more balanced narrative on credit, especially stressing that most still do not see a material deterioration in asset performance. While recent spreads across most consumer securitization pricings have increased by 100s of basis points, platforms continue to anticipate stable origination volume.
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Climbing Interest Rates, Cooling Home Prices
Climbing interest rates are causing home price growth to cool around the world. In the U.S., foreign purchases of homes dropped for the fifth straight year. A strengthening dollar and pandemic travel restrictions have contributed to the decline. Despite the declining number of foreign purchases, the dollar value of transactions increased by 8.5%.
Image: Wall Street Journal
Despite declining sales, U.S. home prices still hit a record $416,000 in June.
CFPB Pushes Banks to Cover More Zelle Fraud Losses
As use of instant payment services has exploded, so too has fraud. While customers may be used to the idea of “zero fraud liability” commonly associated with payment cards, many popular scams leave consumers holding the bill.
Banks typically only reimburse fraud losses from instant peer-to-peer payment service Zelle when the transaction was unauthorized. But in many scams, including “romance” scams and “me-to-me” fraud, consumers are tricked into approving transactions.
Now, the CFPB is preparing to release new guidance that could increase requirements on banks. Such guidance could substantially increase banks’ cost of investigating customer fraud cases and compensation expenses. While the guidance is reported to primarily target Zelle, offered by many banks, it may also impact popular non-bank services like Venmo and Cash App.
Industry trade groups are pushing back on an increase in banks’ liability. They argue it may force banks to curtail who is able to use such services or pass along increased costs to consumers.
X1 “Smart” Credit Card Raises $25Mn
Despite a cooling VC appetite for fintech, some deals are still getting done.
X1, a “smart” credit card, announced it has raised a $25Mn Series B. The round was led by FPV Capital, with participation from existing investors Craft Ventures, Spark Capital, Harrison Metal, and SV Angel. Users can leverage virtual cards to easily manage and cancel subscription payments, free trials, and ensure their privacy. X1’s underwriting evaluates current and future income, rather than solely relying on credit score, to set applicants’ credit limits.
Still, it is a challenging environment to launch a new, untested consumer credit product. High inflation and rising rates are taking a bite out of consumers’ budgets, potentially impacting their ability to pay, and the threat of a recession looms on the horizon.
WebBank Commits $250Mn to Avant Securitization
Utah-based WebBank has committed to invest $250Mn in a securitization backed by Avant’s credit card receivables over a three-year revolving term. WebBank is also the issuer of Avant’s Mastercard-affiliated credit card products. Chicago-based Avant also partners with WebBank on its installment loan products.
Mastercard Expands Engage, Start Path
Mastercard is expanding two programs aimed at startups.
Its “Engage” program is designed to help startups offer their services to Mastercard clients. The new crop of Engage companies include a focus on “open banking.” Those joining include Dwolla, fintech Automation, i2c, Link Financial Technology, LoanPro, Nova Credit, Provenir, Synctera, Tern, and Usio. The new joiners bring the total to nearly 100 companies that participate in Engage.
“Start Path” is Mastercard’s own startup incubator. Participants receive support and mentorship from Mastercard and access to its customers. New companies joining the program include Carbon Neutral Club, Guava, oneKIN, Palla, and more.
In other Mastercard news, the company announced it has inked a multi-year strategic partnership with quantum computing specialist D-Wave. Together, the companies will focus on applying quantum-hybrid applications to areas like cross-border settlement, rewards, and fraud management.
Affirm to Power SeatGeek BNPL
Tickets for that baseball game or Beyonce concert too expensive?
Yep, now you can use buy now, pay later to finance tickets for live entertainment at ticket seller SeatGeek. The “ticket search engine” has partnered with Affirm to offer “split pay” and longer-term monthly financing. The partnership is but the latest example of BNPL popping up seemingly everywhere. Despite lackluster share prices, there’s still pressure to continue growing, and competition for incremental merchant reach remains fierce.
Lenders Deploy “Fairness-as-a-Service”
As regulatory scrutiny of automated and AI-based credit underwriting has intensified, lenders have been looking for new ways to ensure their approaches don’t run afoul of fair lending rules.
Enter “fairness-as-a-service” startup FairPlay. FairPlay’s software looks for bias in credit models and takes a “second look” at declined applicants with additional data points that may help show that they are actually creditworthy, despite a thin-file or low credit score.
Credit bureau data, though on its face neutral, may not adequately represent minority borrowers, who are historically more likely to have thin- or no file. FairPlay augments lenders with additional data on Black applicants, female applicants, people of color, and other historically disadvantaged groups.
The supplemental data can help lenders better underwrite applicants. One FairPlay customer boosted approval rates of Black applicants by 16% and overall applicants by 10%.
FairPlay last week also announced it has raised a $10Mn Series A. The round was led by Nyca Partners, with participation from Cross River Digital Ventures, Third Prime, Fin Capital, TTV, and others.
Earnings Season: Loan Growth Continues Despite Economic Worries
This week, we continue our earnings coverage with more banks reporting. Goldman, Citizens, Synchrony, and Bank of America ended their days in the green, while Ally, Capital One and Discover fell after missing earnings estimates.
Citizens completed its acquisition of Investors Bancorp during the quarter, adding 1,600 employees to its headcount. Additionally, the company launched a new product, Citizens Paid Early, that allows users to receive direct deposits up to two days early.
Synchrony expanded its partnership with AdventHealth to offer CareCredit as a primary patient financing solution across its nationwide footprint. With millions of Americans burdened by medical debt, this product may provide a much needed solution for patients to pay down their obligations.
Synchrony also announced that it had partnered with Fiserv to launch its SetPay BNPL solution via the Clover POS business management system. The move enables merchants to offer short-term no-interest installment options, expanding financing options available to hundreds of thousands of small businesses.
As we covered last week, while BNPL company valuations have taken a dive, large bank installment lender programs have continued to flourish. Goldman continued the trend growing its installment loans to $5Bn from $4Bn in the first quarter.
Source: Goldman Sachs Earnings Presentation
For the most part, companies continued to grow their loan books from the first quarter (Citizen +12%, Goldman +6%, Capital One – Credit Card +4%, Capital One – Consumer Banking +3%, Discover +3%, Bank of America +2%). At the same time, there has been no slowdown in consumer spending, with Synchrony +17%, Discover +16%, Capital One +11%, and Bank of America +11% reporting double digit growth in purchase volumes from the first quarter.
Ally reported another quarter of record auto originations, increasing originations by 3% from Q1 to $13.3Bn. Robust demand and continued supply chain issues have resulted in low levels of new car inventory, and therefore support used auto values. In contrast, Capital One’s auto originations fell (12)% from Q1, as they, “Pulled back on growth in auto in response to competitive pricing dynamics.” While Ally reported a strong quarter for auto originations, its mortgage DTC origination volumes nearly fell by half, due to a contraction in the overall mortgage market.
In the News:
Barr Gets Senate Nod as Fed’s Top Wall Street Cop (Reuters, 7/13/2022) Barr wins Senate confirmation, and is anticipated to bolster some rules related to stress testing that were loosened during the Trump administration.
Treasury’s Liang Says Reining in Stablecoins is Harder Without a Federal Payments Regulator (American Banker, 7/18/2022) Liang said that “Digital assets have the potential to really fundamentally reform payments.”
So. Many. New. Venture. Funds. (Tech Crunch, 7/19/2022) A flurry of VC fund close announcements.
What Klarna’s Cratering Valuation Means for BNPL’s Future (The Financial Brand, 7/18/2022) Cratering valuations come as consumer spending has shifted more toward services.
The Bright Side of Fintech Funding Results (Tech Crunch, 7/17/2022) Flow into fintech startups was down in Q2, but the fintech sector still accounts for a significant portion of global funding.
Don’t Spend Your Crypto With A Coinbase Debit Card (Forbes, 7/18/2022) Spending crypto carries tax implications, due to the IRS’ classification of crypto as “property” for tax purposes.
Klarna Opens Pop-Up Shop in the U.S. to Support Mission-Driven Brands (The Paypers, 7/19/2022) The pop-up will be open July 23-24 in L.A.
French Banking Giant BNP Paribas Enters Crypto Custody Space: Sources (CoinDesk, 7/19/2022) BNP Paribas is a major global custodian, with almost $13T in assets under custody.
100 Million-Year-Old Dinosaur Footprints Found at Restaurant in China (CNN, 7/19/2022) Stone pits contained the footprints of two sauropods.