Initial unemployment claims hit a new low, despite more than 10.9Mn jobs remaining open. Several pandemic-related unemployment programs ended last week. Consumer spending decelerates amid Delta. Opinions on a second term for Fed Chair Powell vary. CFPB makes cases against an ISA provider and small-dollar lender. BNPL for rent startup raises $23Mn. Varo’s charter pays off. PayPal buys a Japanese BNPL, while Revolut plans its own. Amazon POS for SMBs in the works.
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New Unemployment Low; 10.9Mn Open Jobs; “Benefits Cliff”
Initial unemployment claims hit a fresh low of 310,000 last week. Despite renewed COVID concerns, employers seem to be choosing to hold on to employees, as hiring continues to prove difficult. The challenges in filling open roles was highlighted in the most recent jobs report, showing a record 10.9Mn open position at the end of July.
Will the “benefits cliff” change workers’ calculus?
September 6th marked the end of several pandemic-related benefits, including an extra $300 in weekly unemployment checks and coverage for gig and self-employed workers not historically included in state unemployment programs.
States that chose to end portions of expanded unemployment benefits early have seen the same rate of job growth as those that didn’t. If that trend holds, the latest reduction in benefits may not have much impact on spurring workers back into employment.
Image and Data: U.S. Bureau of Labor Statistics
It’s clear that the Delta variant has proven a significant speed bump in what we all hoped would be a smooth and fast economic recovery. That said, 18 months into the pandemic, it is easier to foresee that the disruption from the current spike should be temporary, with policy makers, employers, and workers responding accordingly.
Consumer Spending Slowdown Amid Surging Delta
There are signs the rebound in consumer spending may be decelerating amid growing case counts caused by the Delta variant and government support programs winding down. This may pose a challenge to banks, which have also seen consumers deleverage over the last 18 months amidst extra income from stimulus measures and fewer opportunities to spend. Indicators from hotel occupancy to OpenTable bookings and people passing through TSA checkpoints point to a slowdown in economic activity.
Consumers’ slower spending makes sense, given drops in consumer confidence and greater fear or fewer opportunities to get out of the house. When the current spike in cases passes, expect these measures to reverse course as well.
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Mixed Opinions on a 2nd Term for Powell
With Jerome Powell’s current term as Fed Chair ending in 2022, opinions on his record and whether or not he should get a second term as Chairman are mixed. Some progressive lawmakers have zeroed in on actions they perceive to have weakened regulatory and capital requirements on the banking sector to argue Biden should nominate a more progressive candidate. Other Democrats point to Powell’s careful shepherding of monetary policy and its positive impact on the economy and unemployment to argue his record warrants a second term as Chair.
No matter who is appointed as Fed Chair for the next term, they will have their work cut out for themself, navigating unprecedented challenges from economic fallout from the pandemic to what course to chart on crypto and a potential US “digital dollar.”
Non-Profit Hit for “falsely representing” That ISAs Are Not Loans
The CFPB has ordered a non-profit provider of income share agreements to comply with consumer protection laws, including the Truth in Lending Act, Reg Z, and the Consumer Financial Protection Act. The move is notable as many companies that offer ISAs, which are used to finance tuition, argue that the product is not a loan and shouldn’t be subject to all of the same consumer protections as typical student loans.
Students looking to finance education expenses may benefit from having additional choices, like ISAs, but the CFPB action makes clear it is key that those options are offered in a responsible way that is consistent with consumer protection law.
CFPB Sues LendUp for Violating Consent Order
The CFPB is suing small-dollar lender LendUp, alleging the fintech has violated the terms of a 2016 consent order. The CFPB argues that LendUp’s core offering, the “LendUp Ladder,” promised users access to larger loans and lower interest rates that the company failed to deliver on. The complaint also alleges LendUp failed to deliver timely notices of adverse action and issued notices that failed to accurately describe the primary reason for denying the credit application.
This is the latest example of the increased scrutiny the high APR, small-dollar lending space has drawn from regulators and legislators since the change of administration.
Jetty Raises $23Mn for Rent Flexibility
Jetty, a sort of buy now, pay later offering for rent payments, announced it has raised $23Mn, bringing its total financing to date to $78Mn. The round was co-led by Citi and Flourish Ventures with participation from Credit Ease and K5.
The product works like this: Jetty pays the renter’s landlord on the normal due date. The renter has until the 24th of the month to pay Jetty back plus a $15-$25 fee, depending on the renter’s risk profile. Renters can make multiple payments over that timeframe or repay Jetty in a lump sum. CEO Mike Rudy argues the product gives users a way to meet their biggest recurring financial obligation in a more flexible way without facing penalties or late fees. Congrats to Mike and the entire Jetty team on the raise!
Varo Bank Raises $510Mn at $2.5Bn Valuation
Varo Bank announced it has raised a $510Mn Series E at a $2.5Bn valuation. Varo is notably the first fintech to gain a national banking charter, a process it completed about 13 months ago.
Varo has pursued a markedly different regulatory strategy than fellow challenger bank Chime, recently valued at $25Bn. While Varo spent around $100Mn and over three years to secure its charter, Chime has described itself as more of a tech company than a bank. Varo argues the legitimacy, technical flexibility, and cost advantages of having its own banking license will be worth it.
Since securing its license, Varo has reportedly doubled its customer count to 4 million and tripled its revenue. The $2.5Bn valuation is a more than three-fold increase from its prior $700Mn valuation.
The large raises, valuations, and customer counts from both Varo and competitor Chime demonstrate a sector and product offerings that are moving from ‘challenger’ to maturity.
PayPal Buys Its Way into Japanese BNPL Market
Paypal, a late but forceful entrant to the BNPL battle, announced last week it would spend about $2.7Bn in a mostly cash deal to acquire Japanese BNPL firm Paidy.
Paidy allows customers to finance purchases online and make monthly payments via bank transfer or at local convenience stores. The Japanese market has a lot of upside potential for PayPal. Ecommerce volume has more than tripled in the last decade to about $200Bn, but around ⅔ of these transactions are settled in cash.
Revolut Teases Its Own BNPL Offering to Take On Klarna
As Revolut positions its offering as a one-stop financial “super app,” it has been looking to beef up its functionality. Now, it wants to add — what else? — buy now, pay later to that list.
In an interview last week, Revolut CEO Nik Storonsky revealed the startup plans to roll out BNPL in the UK and Europe, putting it head-to-head with Europe-focused Klarna. Storonksy described the potential offering as enabling customers to use their Revolut card, in person or online, to spread the cost of their purchases over several weeks.
The battle for consumer and merchant market share in BNPL definitely seems to be heating up in recent months, with numerous established products adding BNPL-style features and accelerating M&A activity in the sector. As more options for short-term financing become available, expect competition on pricing, especially for merchants, and potential compression on margins for BNPL providers.
Amazon SMB POS Offering in the works
Amazon is reportedly working on a point-of-sale system for third-party sellers on its platform. The platform would handle both online and offline transactions and integrate with other services, like Amazon Prime and Flex.
Such an offering would capitalize on Amazon’s large third-party seller ecosystem by extending the platform to include sales happening outside of Amazon. The move escalates competition for SMBs’ point-of-sale, payment processing, and lending between industry giants Amazon, PayPal, and Square, as well as ecommerce players like Shopify.
Affirm Jumps on GMV Growth, New Partnership Success
Affirm reported FY4Q earnings, (for the quarter ending June 30) its share price surging 34.37% on a 71% YoY increase in revenue, to $261.8Mn for the quarter, and strong guidance for FY2022. Management explained the increase in revenue as, “driven by increases in network revenue and interest income, related to growth in GMV and loans held for investment, respectively, as well as gains on loan sales.”
GMV soared 106% YoY, to $2,484Mn for the quarter. Excluding Peloton, which accounts for longer-duration financings, GMV would have been up 178% YoY. Management expects GMV to grow faster than revenue as the company’s GMV mix shifts to shorter duration Split Pay volume, and the volume from Peloton financing de-concentrates. Management provided guidance of YoY GMV growth of at least 50% for 2022, and a decline in merchant concentration.
Source: Affirm FY 4Q21 Earnings Presentation
Purchases originating from Affirm’s merchant marketplace amounted to nearly one-third of transactions in FY2021. CEO Max Levchin explains the importance of this with, “In this use case, Affirm is both the provider of purchasing power to the consumer and the demand generation platform for merchants.”
The positive quarterly earnings release comes on the heels of Affirm’s partnership with Amazon to bring its installment loan product to Amazon’s website. The increased partnerships and consolidation in the space, from Goldman and Apple’s partnership to Square’s acquisition of Afterpay, may continue to push BNPL into becoming a product offering, rather than a standalone company. We see more fintech players looking to become the “financial super app” where consumers can fulfill all their financial needs in one place.
June’s announcement to make Shop Pay Installments available to all eligible Shopify merchants has already yielded benefits. Active merchants grew 412% YoY to nearly 29,000, with the company attributing several thousand of the 29,000 to newly integrated Shopify merchants.
Consumers continue to adopt Affirm’s product, with active consumers growing 97% YoY to 7.1Mn and transactions per active consumer growing 8% YoY to 2.3. Affirm has increased its presence in the BNPL space, with CEO Max Levchin noting, “Brand awareness increased approximately 70% in fiscal year 2021, and was particularly strong among Gen Z and millennial consumers with awareness increased 94% and 60%, respectively.”
While Affirm reported a net loss of $(128.2)Mn, losses were impacted by a $105.2Mn increase in stock-based compensation following their January IPO. We do not see the net loss as particularly concerning, as other competitors, like Klarna, have opted to focus on GMV and market share growth over short-term profits.
Looking ahead, management indicates excitement over the Affirm Debit+ card, which allows consumers to turn any eligible transaction into an Affirm pay-over-time product.
As we have been covering week after week, competition is heating up in BNPL, with new entrants, like this week’s Revolut, and some margin pressure in the space, as in PayPal’s plan to scrap its late fees on BNPL products. A great race to follow lies ahead.
In The News:
Job Postings Level Off as Delta Variant Cools Demand for In-Person Workers (Wall Street Journal, 09/08/2021) According to Indeed, job openings may be plateauing, but demand for remote, white-collar workers remained strong.
The SEC Has Told Us It Wants to Sue Us Over Lend. We Don’t Know Why. (The Coinbase Blog, 09/07/2021) The SEC intends to sue Coinbase over its Lend program, saying the program that allows customers to earn interest on assets held on Coinbase involves a security.
Stripe Takes a Giant Step in China with UnionPay Deal (American Banker, 09/07/2021) Stripe breaks into the difficult to navigate Chinese market with UnionPay partnership.
JPMorgan to Take Majority Stake in Volkswagen Payments Platform (American Banker, 09/08/2021) JPMorgan acquires close to 75% of Volkswagen’s payments platform, which offers customers the option to use digital payments for car payments, fuel, parking, and other services.
Apple is Rolling Out Digital ID. Will Banks Use It? (American Banker, 09/01/2021) Apple’s digital ID could transform bank’s KYC processes but may come with a fee Apple is unwilling to negotiate.
Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales (Forbes, 09/07/2021) BNPL has taken the Millennial and Gen-Z generations by storm and will likely continue to merge or partner with companies, leaving few “standalone” BNPL providers.
In Global First, El Salvador Adopts Bitcoin as Currency (New York Times, 09/07/2021) The government launched a digital wallet called “Chivo” and will pay a $30 bitcoin bonus to citizens who download it.
Marqeta, Zip Team on BNPL Payments (PYMNTS.com, 09/09/2021) Marqeta and Zip continue their partnership, in which Marqeta’s card issuing platform enables Zip to get payments products more quickly onto the market.
Visa to Accept Crypto as Payment in Brazil (PYMNTS.com, 09/09/2021) The VP of new business at Visa is bullish on crypto, wants to integrate bitcoin and other digital coins as methods of payment and as a way to store value.
Digital Currencies Pave Way for Deeply Negative Interest Rates (Wall Street Journal, 09/08/2021) If people can’t hoard physical money, it makes it easier to cut interest rates far below zero, making monetary policy more powerful and a stronger counter to deflation.
Dyson Could Be Designing a Robot That Can Climb Stairs (Bloomberg, 09/03/2021) Dyson patents reveal it may be working on a robot that can open drawers and clean stairs.