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Pagaya Earnings; Dems Defend CFPB; BAML Launches Fintech Accelerator

By Cole Gottlieb

May 21, 2023

Happy Sunday,

Fed officials warn a long way to go on inflation. Consumer debt rises, with signs of stress emerging. Senators blame ‘fatal’ mismanagement for SVB, Signature failures. Fed’s Barr pushes for capital reforms. Dems urge Supreme Court to preserve CFPB funding mechanism. Zip raises $100Mn Series C. Regional bank stocks rally. Citi doubles down on POS lending. BAML launches fintech accelerator. Pagaya reports earnings.

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Still A Long Way to Go on Inflation, Fed Officials Warn

Various Fed officials indicated that there’s still a long way to go on getting inflation under control. But, given the aggressive hiking cycle to date and knock-on impacts on credit availability from recent bank failures, some members are ready to take a “pause” and see how the rate hikes play out. Fed officials see little likelihood of lowering rates until well into 2024, at the earliest.

Meanwhile, signs of stress are emerging in household balance sheets. Overall credit card balances posted the steepest one-year jump on record, rising 17% YoY, to $986Bn. Outstanding balances increased across the income spectrum. Total consumer debt now totals over $17T, which is nearly $3T more than pre-pandemic levels. While overall delinquency rates remain low by historical standards, delinquencies on auto and credit card debt are trending up.

Image: Bloomberg

Senators Blame SVB, Signature Management for Bank Failures

Federal and state regulators and bank execs had a busy week on Capitol Hill, with numerous hearings taking place in the Senate Banking Committee and the House Financial Services Committee. Greg Becker, former CEO of SVB, and two former execs from Signature appeared before the Senate committee, where they got an earful. Sen. Sherrod Brown (D-OH), who chairs the committee, described the banks as “fatally mismanaged.” Brown argued the banks grew too quickly and ignored repeated warnings from state and federal regulators.

SVB’s Becker apologized, but argued that no bank could have survived the size of the “unprecedented” bank run SVB experienced. Depositors withdrew about $42Bn in funds the day before the bank collapsed, with another $100Bn ready to head out the door, had SVB remained open.

For their part, the former Signature Bank execs argued regulators were too quick to seize the bank, and that it was well-positioned to weather the storm.

Fed’s Barr Pushes for Reforms

Fed Vice Chair for Supervision Michael Barr appeared before the House Financial Services Committee. Barr argued in favor of strengthening bank capital requirements, in the wake of the failures of SVB and Signature. Not everyone agrees with Barr’s point of view. Some Republican lawmakers have argued that, given the size of the recent bank runs, increasing capital requirements wouldn’t have made a difference. For their part, Democrats largely avoided discussing capital requirements, instead focusing on what they argue is a lack of accountability for bank leadership. Some Democratic committee members argued in favor of compensation limits and bonus clawback provisions.

Dems Urge Supreme Court to Reverse 5th Circuit CFPB Ruling

More than 140 current and former Democratic lawmakers filed an amicus brief arguing in favor of defending the CFPB’s current funding mechanism. The brief was led by Senate Banking Committee chairman Sherrod Brown (D-OH) and House Financial Services Committee ranking member Maxine Waters (D-CA). The 5th Circuit ruling found that, because the CFPB’s funding comes from the Federal Reserve rather than being appropriated by Congress, it violates the principles of separation of powers.

However, in March, the 2nd Circuit affirmed the constitutionality of the mechanism. The Supreme Court agreed to hear the CFPB’s appeal to the 5th Circuit’s decision. The Democrat’s amicus brief argues that the funding structure has been used “since the early days of the Republic,” and that voiding it would place other agencies at risk, including the OCC and the Federal Reserve.

Zip Raises $100Mn Series C

Zip, a procurement platform, announced its $100Mn Series C, which values the company at $1.5Bn. Investors in the round include Tiger Global, CRV, and Y Combinator. Zip’s “intake-to-procure” platform is designed to simplify B2B purchasing and give companies better visibility over their spending. Zip intends to use the funding to open a new Dallas office, continue hiring, accelerate product development, and integrate AI-powered features into its platform.

Regional Bank Stocks Rally on Deposit News

Regional bank stocks rallied last week as Western Alliance, one of several mid-sized banks experiencing share price volatility, said its deposits had grown by more than $2Bn since the end of Q1. Western Alliance saw its share price jump by 10%, while PacWest, facing similar issues, saw its price jump by 22%. Still, both banks and the broader KBW Regional Banking Index are still down significantly since the start of the year.

Citi Continues to Develop POS Lending Options

Despite some of the shine wearing off BNPL, Citi is doubling down. Through its Citi Retail Services division, the bank is adding multiple financing options designed to appeal to merchants. Offered under its Citi Pay brand, Citi Pay Credit, a digital credit card and line of credit, enables merchants to offer promotional financing to customers. Shoppers can apply at the point of sale for a purchase payment plan, based on what a retailer has opted to offer. Citi plans to add an installment loan option, offering financing for 6-60 months, in the near future. Notably, Citi reported that its installment lending business had grown 64% YoY and 7% QoQ in its latest earnings report.

Bank of America Launches Fintech Accelerator

Bank of America announced the launch of its first fintech accelerator, dubbed the Bank of America Breakthrough Lab. BAML joins other major banks that have such programs, like Barcalys, BNY Mellon, and BMO. BAML’s program will focus on founders from underrepresented communities, including Black, Hispanic, and Native American founders. BAML will not require an equity stake as a condition of joining the accelerator program.

Pagaya Reports Earnings

We wrap up this quarter’s earnings season coverage with results from Pagaya. The AI network reported network volume of $1,850Mn, a 4% sequential increase that exceeded guidance of $1,700-$1,800Mn. The sequential increase in network volume reverses a trend (2Q22 thru 4Q22) of declining network volume. Partners and channels added in 2022 accounted for 20% of total network volume in Q1.

Not only did network volume increase, but integration fees increased, with CEO Gal Krubiner reporting, “As our network grows, we see increased monetization opportunities, with AI integration fees growing by 230 basis points from 5.5% to 7.8% of network volume.”

While network volume increased, production costs continued to outpace revenue, with fee revenue less production costs (“FRLPC”) as a % of network volume falling to 2.7%, from 4.0% a year prior and 3.0% a quarter prior. Looking ahead, management expects FRLPC margins to increase to 3-4% for 2023.

CFO Michael Kurlander explained, “After factoring in production costs, our FRLPC margin declined to 2.7% in Q1. While this is below our target of 3% to 4% of network volume, we view this as a transitory period, where capital markets fees are pressured by current market conditions and AI integration fees are on the rise. We expect our FRLPC margin to increase above 3% in the second quarter, and on a full year basis in 2023, as we realize the full quarter’s impact of improving economics.

Source: Pagaya Earnings Presentation

Gal Krubiner, CEO, “We continue to consistently raise funding and grow our investor base as the number one issuer of personal loan ABS transactions in the U.S.”

Pagaya has found demand in the ABS market for its notes, with $800Mn in new personal loan issue volume in Q1, representing a 30%+ share of U.S. personal loan and POS ABS issuance for Q1. Additionally, an upsized $585Mn ABS deal closed in April. Long-term investor GIC, extended its funding agreement with Pagaya through 2028 (from prev. 2025).

Finally, Pagaya announced it was partnering with Angelo Gordon, Värde Partners and ATLAS “to provide funding for a multibillion dollar credit union.”

Source: Pagaya Earnings Presentation

Keep an eye out, as we plan to release our quarterly consumer lending wrap in the coming weeks. If you missed last quarter’s, find it here.

Hi all, Cole here. If you’ve made it this far, thank you for being a loyal subscriber to the PeerIQ newsletter. Looking for real-time updates on the companies covered during earnings season? Join my newly formed Discord server for exclusive access to live updates, including bullet notes on important info from earnings releases, key quotes from earnings calls, and relevant slides from decks.

In the News:

Quarles Issues Stark Warnings to Fed in Wake of Bank Failures (American Banker, 5/12/2023) The Former Fed Vice Chair for Supervision said that the Fed must be sure any changes are clear, consistent and measured, or else they will be stricken down in court.

Fed Nominees Include First Latina Pick and Jefferson for Vice Chair (American Banker, 5/12/2023) Biden nominates Jefferson, Cook and Kugler for positions at the Fed.

Coinbase Request for Clarity on Crypto Rules ‘Should Be Denied’, Says SEC (Yahoo Finance, 5/16/2023) SEC lawyers → "Coinbase’s preference for faster or different regulatory action by the commission does not entitle it to extraordinary relief from this court."

Castlelake Reaches Purchase Agreement for up to $4 Billion of Consumer Installment Loans Originated on Upstart's Platform (Castlelake, 5/15/2023) Castlelake and Upstart reach a purchase agreement that consists of the acquisition of a back book of loans and a forward flow arrangement.

Microsoft, Goldman Sachs, and Other Big Firms Back Launch of Financial Blockchain (Decrypt, 5/14/2023) The Canton Network is a blockchain designed to streamline financial markets with Web3 tech, aiming to provide companies with decentralized infrastructure.

Cross River Bank Says Card Solutions Drive Fintech Innovation, Enable Financial Inclusion (Crowdfund Insider, 5/13/2023) Cross River says fintech companies drive digital transformation and competition in traditional financial services “by expanding the marketplace and creating new product opportunities and efficiencies.”

Experian Launches US Fintech Data Network to Fight Fraud (The Paypers, 5/15/2023) - Experian announces launch of the fintech-focused version of its fraud prevention data network, Hunter, to the U.S.

Ram Ahluwalia Predicts MORE Bank Failures (Bankless, 5/10/2023) Great podcast episode covering regional bank failures and the factors that led to the failures.

Lighter Fare:

How to See the "Da Vinci Glow" Illuminate the Crescent Moon this Week (CBS, 5/16/2023) The best days to see the faint, ghostly glow after sunset are Sunday, May 21; Monday, May 22; and Tuesday, May 23.