Happy Mother’s Day!
Inflation eased in April but remains elevated. Concerns about commercial real estate grow. PacWest cuts its dividend. EBA Fund wants to scale microloans. Revolut execs trash U.K. regulators. Fed survey shows credit tightening. Slash emerges from stealth. Capital One fires back at Walmart. Lots of fintech earnings coverage.
This week was the Fintech Nexus conference, and we got to hear from many great voices in the fintech space. Most notably, we got to hear from CFPB Director Rohit Chopra, interviewed by Phil Goldfeder, CEO of the American Fintech Council.
Speaking about open banking and BNPL, Chopra made clear that the CFPB would focus on how consumer data is used by financial services companies. To do so, the CFPB would consider setting limits on secondary uses of consumer data outside of financial services (such as for advertising), limits on what parties can access the data, and guidelines for how regulators could track who would receive such data.
In creating a competitive financial landscape, Chopra stressed that consumers should be able to easily switch, or at least threaten to switch financial service providers. The thinking is that if consumers can easily switch providers, it should translate into better consumer products.
Find more on the talk with Director Chopra here.
Inflation Eases, But Remains Stubborn
Although inflation in April eased, it remains stubbornly high. CPI rose at an annualized 4.9% in April, down slightly from 5% in March. Core CPI rose 5.5%, down slightly from March’s 5.6%. April did at least mark the 10th straight month of cooling inflation.
Image: Wall Street Journal
Meanwhile, concern is growing about banks’ exposure to commercial real estate. New York Fed President Williams said last week the health of the office sector is a “real issue” for banks. Bank supervisors don’t believe CRE is a threat to financial stability but are monitoring what falling property valuations may mean for banks’ loan books.
PacWest Slashes Dividend
Turmoil in the regional banking sector continued last week, with elevated price volatility. Short interest in PacWest, Western Alliance, and Zions has increased in recent weeks, driving down share prices and causing depositors to flee, creating something of a self-reinforcing cycle. PacWest, which says its business remains “sound,” slashed its quarterly dividend to $0.01 last week, in a bid to accelerate its plans to rebuild capital.
EBA Fund Looks to Scale Microloans
The “Entrepreneur Backed Asset” Fund, or EBA Fund, is looking to grow its program that facilitates the sale of the microloans to banks. While CDFI-originated microloans can be as large as $100,000, most are under $50,000. The small size can make it cumbersome for banks to acquire individual loans. Instead, many banks that acquire the loans prefer to do so in multiple, which necessitates an intermediary. That’s the role the EBA Fund plays. The fund has sold $18.5Mn of the loans in the past 30 months, which, it says, demonstrates the viability of the model. In 2023, the fund expects to facilitate $27-30Mn in volume and hopes to scale to $100Mn in coming years.
Revolut Execs Says U.K. Is Holding Them Back
In the latest twist in the saga of Revolut’s attempt to acquire a U.K. banking license, the company’s co-founder and CEO, Nik Storonsky, and co-founder and CTO, Vlad Yatsenko, have blasted the country’s regulators. Storonsky said, “You wait for emails or letters for months. This is not the business environment to operate in the modern world.” He also indicated that, should Revolut pursue a public offering, it would do so in the U.S. rather than the U.K. The pair’s remarks are the latest drama for the neobank, which has seen its investors mark down the value of their stakes and had a public spat with its auditors over its most recently filed annual accounts.
Fed Survey Shows Credit Tightening
A recent Fed survey of loan officers indicates banks are tightening underwriting for commercial credit. Midsize banks, in particular, are more worried about funding costs and liquidity vs. larger banks. According to the survey, which was conducted in late March through early April, the net share of domestic banks that tightened lending standards for commercial and industrial loans was 46%. The share reporting tightening increased from 44.8% in Q4 2022. Industry analysts expect continued tightening through at least the end of 2023 across all loan types.
Slash Emerges from Stealth
Slash, a banking startup that wants to bridge the gap between personal and business banking, has emerged from stealth with $19Mn in fresh funding, led by NEA. Participation in the Series A and seed rounds included Menlo Ventures, Y Combinator, Connect Ventures, and Global Founders Capital. While the company originally intended its virtual card feature to be used for things like splitting expenses, like Netflix or Spotify, it found its offering resonated with a different group: young entrepreneurs pursuing side hustles. The account lets users easily manage personal and business finances in a single place.
Capital One Fires Back at Walmart in Cobrand Fight
Capital One clapped back at cobrand card partner Walmart in what is becoming an increasingly hostile dispute. Walmart alleges that Capital One has failed to live up to its contractual commitments, including in meeting customer service requirements. Now, Capital One is arguing that Walmart didn’t fulfill its marketing obligations under the partnership. In a new filing, Capital One says that Walmart is looking for a way out of its deal with Capital One because it wants to move the credit card business to its new fintech joint venture, ONE. A Walmart spokesperson responded to the filing, describing Capital One’s claims as “false,” and saying the retailer would address them in court.
Fintechs Report Earnings
In case you missed last week’s earnings coverage, catch up here.
This week in earnings, we got data on several fintech originators. Looking at origination volume, MoneyLion was the only company to grow originations sequentially (up +2%, albeit at a slower sequential rate than the 11% in Q4). Dave – ExtraCash (0)%, OppFi (14)%, Oportun (33)%, and Upstart (35)%, all saw sequential declines in originations due to credit tightening measures. Lenders also focused on existing customers over new customers. Oportun explained that the move to focus on existing and returning customers was to improve credit outcomes. OppFi CFO Pam Johnson reported, “New customer originations for the quarter decreased by 17.9% year-over-year, while existing customer originations increased by 15.9%.”
Affirm’s GMV declined (18)% QoQ, largely due to seasonality, but was up 18% YoY. Like other fintech lenders, Affirm has focused on repeat customers, with CEO Max Levchin saying, “What we want is consumer frequency. Eighty-eight percent of our transactions are coming from repeat consumers, that’s not an accident.”
While Affirm’s GMV was down QoQ, its average order value increased 5%, to $323 for the quarter, from $307 in Q4. Affirm got some 30% APR caps “out of the way”, allowing the company to charge up to 36% APR on loans. By increasing the flexibility of its pricing, the company was able to expand its potential customer base.
Most recently, Affirm closed a $400Mn expansion of its 2023-A ABS offering. Due to strong investor demand, they were able to upsize the deal from the original size of $250Mn. Investor demand for this type of paper has returned, with the offering more than 3x oversubscribed at pricing with $1.3Bn in total orders.
Affirm continues to roll out its Debit+ card, with early signs of success. The company observed that Debit+ users completed 7x the transactions that a regular Affirm user did over the course of 90 days of activity.
Despite lower origination volumes, measures taken to tighten credit have begun to pay off. Since last summer’s credit tightening, Oportun has seen first payment defaults fall to 2019 levels. Additionally, Oportun saw 30+ day delinquencies improve by 10 bps QoQ, to 5.5%, and NCOs improve 70 bps QoQ, to 12.1%.
In the latest of many fintech/tech layoffs, Oportun announced it would be reducing staff by 19%. The layoffs, combined with earlier announced cuts to staff, will result in a 28% total reduction in staff for the year.
Source: Oportun Earnings Presentation
Dave’s ExtraCash 28-day delinquency rate of 2.6% represented a 98 bps improvement from a quarter prior. Dave attributed the improvement in its delinquency rate to underwriting enhancements and seasonal strength from tax refunds.
Despite reporting a flat quarter for ExtraCash originations, due to seasonally lower demand, Dave was able increase the average revenue per origination to $9.01, from just $8.60 a quarter prior. At the same time, Dave improved its customer acquisition cost (“CAC”) to $16, from $17 a quarter prior. Dave’s monthly transacting members (“MTMs”) grew 5% QoQ, to 2.0Mn and were more active, with transactions per MTM up to 5.4, from 5.2 in Q4. The increase in member activity helped to drive a 12% QoQ increase in Dave Debit card spend, to $295Mn.
Source: Dave Earnings Presentation
Upstart stock jumped on earnings, after announcing it had secured $2Bn in long-term funding over the next 12 months and disclosing that loans held on its balance sheet declined. Locking in long-term funding was crucial for Upstart, who had relied largely on investors to buy loans on a month-to-month basis. The (3)% decline in its loans held on balance sheet was big news, reversing a trend of sequential increases. Notably, 41% of loans held on its balance sheet were auto loans, despite just 5% of transactions dollars and 2% of number of loans coming from auto loans. However, as these are held in the “Testing and Evaluation” section, our best guess would be that these loans are being monitored as Upstart ramps up its auto lending business.
Upstart also reported an increase in its contribution margin, to 58%, from 53% a quarter prior, while guiding to a 60% contribution margin in Q2. At the same time, conversion rates have declined to 8%, from 11% a quarter prior and 21% a year prior. Upstart CFO Sanjay Datta explained this trend, “[Our Upstart Macro Index] basically reflects the fact that, apples-to-apples, the same consumer is defaulting at a rate that is maybe sort of 2 to 3 times higher than they were in mid-2021…We’re including much higher default premiums in the loans. And then compounding that, of course, there’s the higher base interest rates, which are requiring investors to demand higher sort of returns.”
While vintages have continued to underperform target cash flows, the underperformance has significantly improved in each quarter since 4Q21.
In other news, Upstart announced plans to enter the HELOC market. CEO Dave Girouard announced, “I’m also pleased to let you know that we expect to launch a home equity product later this year… First, 95% of HELOCs are financed by banks and credit unions, so it’s an asset our lending partners know and value. Kick in, HELOCs naturally serve a very prime consumer, namely homeowners. We expect Upstart’s HELOCs to have annual loss rates less than 1%. And third home equity products tend to be countercyclical to refinance products.”
Source: Upstart Earnings Presentation
Curo also secured funding, finalizing a $150Mn term loan and a C$110Mn non-recourse revolving warehouse facility just last Tuesday. CEO Doug Clark elaborated on details, stating, “Amidst a challenging liquidity environment, we entered into new debt arrangements for over 230 million of gross capital following quarter-end. Of this amount, 150 million was in the form of commitments for our First Lien Senior Secured Term Loan and C$110 million or approximately USD83 million in commitments for our Canadian SPV facility.”
MoneyLion’s strategic shift to focus on third-parties led to a decline in average revenue per user (“ARPU”) to $50, from $62 a quarter prior. At the same time, CAC rose sharply to “<$15”, from $8 in Q4. CFO Richard Correia explained that, “As we have discussed in the past, this is a strategic move. That is the result of focusing on a mass market user segment where we are driving sustainable growth, while also realizing profitable unit economics.” The shift to focus on third parties has changed MoneyLion’s product mix. Management reported that third-party products made up 73% of total products for the quarter, compared to just 10% two years prior.
OppFi NCOs as % of average receivables improved by 900 bps QoQ to 62%. In addition, OppFi reported that the average yield on its loans rose to 126%, from 119% a quarter prior. The company explained that the increase was due to a decrease in delinquent loans in the portfolio, lower enrollment in hardship and assistance programs, and a relative shift away from originating in states with lower interest rates. Ending receivables of $370.2Mn represented an (8)% sequential decline, due to credit adjustments that led to a decline in originations.
PayPal reported TPV (total payments volume) of $354.5Bn for the quarter, up 10% YoY, and down (1)% QoQ. P2P TPV (made up of PayPal, Venmo and Xoom) increased just 2% YoY, but made up 26% of total TPV. Venmo’s TPV increased 9% YoY and was up 0.3% QoQ. While the average payment volume of $61 declined (3)% YoY, it was up 3% sequentially. Transactions per average account of 53.1 were up 13% YoY and 3% QoQ, driven primarily by Braintree transaction growth.
Management looks to focus more on monthly active users over new user growth, with CEO Dan Schulman conveying, “Our monthly active users, we’ve got about 190 million of them. They average approximately 70 to 90 transactions per year versus other active accounts [that average] single digits. Monthly active users are 20 to 30 times more valuable to us and we’re clearly focused on driving that.”
With PPCP [PayPal Complete Payments] adding new features in April, the company looks to grow their presence in the SMB space. PPCP targets the $750Bn TAM SMB market, and complements Braintree, PayPal’s unbranded solution for large enterprises.
Marqeta reported $50.0Bn in TPV for the quarter, a 37% YoY and 7% QoQ increase. Marqeta, like Oportun and many others in the fintech/tech space, announced layoffs. The company will cut about 15% of its staff to reduce opex by $40-45Mn on an annualized basis. CEO Simon Khalaf reported that management is seeing, “Demand for commercial credit cards, especially in a high interest rate environment that has made access to working capital difficult for small businesses.”
Additionally, the company has seen growth in the accelerated wage access space, with Khalaf noting, “Not only has the number of active users quadrupled from the end of Q3 2022 to [the] end of Q1, but TPV growth from the fourth quarter of 2022 doubled into the first quarter on a sequential basis.”
Robinhood’s big announcement out of earnings was the launch of their 24/5 trading. Starting this week, users will be able to trade 24 hours, 5 days a week. With the launch, Robinhood will become the first U.S. retail brokerage to offer 24/5 trading of single-name stocks.
Traders may have even more options on Robinhood. In March the platform applied for a Futures Commission Merchant license. Management expects to roll out futures trading by the end of 2023, if the license is approved “on a typical timeline”.
Robinhood’s Gold cash sweep program (4.65% APY) has yielded early success, with 90,000 new Gold members (now 1.2Mn total) joining since the September 2022 launch of the program. Cash sweep balances have risen to $8Bn.
Finally, Robinhood has seen improvement in key user metrics. Notably, monthly active users increased by ~400,000 to 11.8Mn (the first sequential increase since 2Q21). Average revenue per user increased to $77 (from $66 in Q4, the highest since 2Q21). The improvement in user metrics has translated to increased transaction-based revenues, with equities revenue up 29% QoQ and options revenue up 7% QoQ outweighing the slight decline in crypto revenue (1)% QoQ.
How to Define a User? (A breakdown within this week’s earnings section)
Fintech companies have varying degrees of what they consider to be members and/or products. While no one definition is “right”, these metrics often do not make for great “apples-to-apples” comparisons across companies. Here, we look at different definitions used by Affirm, Dave, MoneyLion, and Oportun, so you can best understand the headline “user” metrics reported.
First off, Affirm reports active consumers, instead of a total or cumulative count. To be counted, the user must engage in at least one transaction in the trailing 12 months. Similarly, active merchants must engage in at least one transaction in the trailing 12 months.
Source: Affirm Shareholder Letter
Next up, Dave’s members definition. Dave reports total members as members who have connected or opened a bank account with the neobank and subtracts out accounts deleted or closed. So, a broader definition than Affirm, as it could include members who have not been active in the past 12 months.
Source: Dave Earnings Presentation
Moving on to MoneyLion, the company has narrowed its definitions on what constitutes a customer and product (previously counted non-monetized clicks from customers as a customer, now only counts monetized clicks). In its Enterprise business, as MoneyLion earns revenue on its Consumer Marketplace from “customers’ clicks, impressions, completed transactions or a share of revenue generated”, this means that customers could include someone who merely clicked on a link to a partner site (for which they would be paid a fee for), rather than someone who used a MoneyLion-specific product. Customers and Products are cumulative counts, regardless of if the user still is registered for a particular product.
Source: MoneyLion Earnings Report
Wrapping things up with Oportun, the company uses cumulative numbers rather than active users, which is important to note when looking at topline member/product growth.
The members definition counts users who use an Oportun offering (or whose debt Oportun services). However, members also may include borrowers with a successfully paid off loan (meaning the company counts users who are not active borrowers but have used Oportun in the past). Products is also an aggregate running count, to-date.
Source: Oportun Earnings Presentation
With many different definitions of a fintech “user”, it is important to look into each company’s definitions. As stated, there is no “right” or “wrong” way to define a user, but attempting to compare across companies can be difficult due to the different definitions used. Knowing how companies define these metrics can make it easier to conceptualize user growth and performance.
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