US first quarter GDP growth was revised lower to 3.1%. There is fear that the economy is slowing due to the ongoing trade war and the length of this economic expansion. The 3 month-10 year yield curve fell to its most inverted since 2007 to -12.3 bps. Recessions have usually followed within 18 months of this curve inverting. The market is looking to the Fed to bolster economic growth with the odds of a rate cut at the September meeting now at 54%.
The incoming data is consistent with PeerIQ’s data, shared by CEO Ram Ahluwalia, that a slowdown is growth is in the cards (despite the robust GDP print at the time).
Source: CME, PeerIQ
In this week’s newsletter, we will look at comments from executives at banks and credit card issuers on how technology is driving earnings growth.
In fintech financing news, SoFi has raised $500 Mn in a funding round led by Qatar Investment Authority, valuing company at $4.3 Bn, about the same as the last round. SoFi plans to use the cash for growth and to bolster its $2.3 Bn balance sheet. Overall, the appetite for FinTech venture investing remains strong – although the emphasis is shifting towards point-of-sale, infrastructure, and capital light.
Frank Rotman (QED) has a blog post on “relationship banking” that is making the rounds. We recommend a read and summarize it here. We summarize the three-prong test that banks should ask themselves to see if they are truly delivering banking in a relationship model:
- Streamlining / Value-added. If you have enough information about your existing customers such that if they were to apply for any of your products and services the process would be streamlined relative to a new customer and/or you’d say yes to them when other providers would say no and/or the resulting product or service would cost them less than it would for a new customer then you’re engaging in Relationship Banking.
- Customer Need Targetting.If you’ve collected information that allows you to proactively surface well targeted opportunities for your customers and these offers solve their emerging needs then you’re engaging in relationship Banking
- ProActive Customer Management. If you’re monitoring your customers and proactively moving them into the best products and services they qualify for then you’re engaging in relationship Banking.
Growth in Small Business Lending
PayPal has emerged as the largest FinTech small business lender of 2018. deBanked estimated that the company originated $4 Bn in small business loans in 2018 and has now lent over $10 Bn, heating up the competition in the small business lending space. Biz2Credit, a small business lender, has launched Biz2X, a software-as-a-service version of its loan management, servicing and risk analytics platform. Biz2Credit currently offers its white-label Biz2X platform to HSBC and Popular Bank.
Technology Driving Earnings Growth
Banks and lenders are reaping the benefits of their technology investments now. Banks like Citi have been able to offer new products and grow their deposit base, while Capital One has improved its efficiency ratio by 400 bps. Banks and lenders continue to make large technology investments for faster growth at lower cost.
Brian Moynihan, CEO
“We are driving the company hard to continue to reengineer on a constant consistent basis. So, the digitization that you saw in the consumer business which we talked a lot about is swinging through the commercial businesses fairly consistently. And the cash pro product the cash pro mobile product and things like that are growing. […] but the activity between us and the customer, the paper to electronic, any one form of electronic to another form of electronic frankly, saves us expenses but also put some pressure on revenues […] So, expect that we’re going to do everything we can on expenses, we’re going to make the investments of $3 billion in technology.”
Michael Corbat, CEO
“We continue to drive transaction volumes for lower cost channels, and digital engagement remains strong with 12% growth in mobile users year-over-year. […] During the quarter, we continue to enhance our digital capabilities and launch new products to lay the foundation for a more integrated multi product relationship model. We simplified our deposit account opening process for both new customers, and existing cardholders, and at the same time successfully launched a new digital savings product, targeted to cut to customers outside our core retail markets. […] we have already seen digital deposit sales in the first quarter of 2019 that are roughly equal to all of last year. More than two thirds of the new accounts from digital channels are new to our retail banks and more than half or outside of our branch footprint.”
Rich Fairbanks, CEO
“I’d like to pull up and provide some context on our digital transformation and the impact we expected to have on key aspects of our longer term financial performance. When we try to envision the future of banking, we don’t start with how banking works or what other banks are doing. We look at how technology is changing our lives. Just look at the technology and applications you use every day.
What is common to all of them is they provide you with instant solutions customized for you. What powers that? Tech companies that are built on a modern technology stack, leveraging the power of big data and machine learning in real time. Banking is headed to the same destination. Consumers will demand it. Technology competition will necessitate it. The challenge is banks aren’t built to deliver those capabilities.
What we’re doing at Capital One is building a technology company that does banking, instead of the bank that just uses technology. […] We are now six years into this latest technology transformation. […] Our technology transformation is motivated by many things beyond cost. Faster the market, better products, better customer experience, better risk management, more effective operations, more growth. We are already seeing significant benefits across the Company.
But an important beneficiary will be the economics of our business. Digital productivity gains are driving operating leverage. Since our journey began, operating efficiency ratio has improved by 400 basis points, even as we have continued to invest in our transformation.”
Marianne Lake, CFO
“We’ve been growing our technology spend, and in particular we’ve been growing the portion of it that is invested in changing the bank. And that runs the gamut from platform modernization and cloud to controls and security and customer experience and digital, R&D and the whole lot. […] So, in the past the way the technology was delivered was very different, and the more that we’re in, our modern virtualized cloud-ready way with new technology, each dollar of technology is more productive.”
David Solomon, CEO
“[…] they represent the same drivers and underscore a range of major strategic growth initiatives underway at the firm. These elements include re-imagined products that address pain-points for corporations, institutions and consumers; new technology unburdened by legacy systems that often slowdown innovation; digital delivery mechanisms that produce scale and efficiency and access to large customer population. These elements are critical to our key growth platforms, including Marcus and mass affluent wealth where we will pursue partnerships to access large numbers of consumers; Marquee, our digital institutional platform where the ability to innovate can help us engage at scale with our institutional client base; and corporate cash management, where we can serve existing clients to the firm and offer differentiated products on a digital platform.”
PeerIQ’s Modeling Archive
PeerIQ’s Modeling Archive allows users to build their own prepayment and default models to drive investment decisions. The Modeling Archive is derived from TransUnion data going back to 2000.
Do reach out to learn more about our Modeling Archive!
- Marketplace Lending ABS Moves Closer to Mainstream (Lexology, 5/29/19)
- First-Quarter Growth Revised Down to 3.1% Pace From 3.2% (Bloomberg, 5/30/19) Below headline number, underlying demand suggests weakness.
- Key Slice of U.S. Yield Curve Becomes Most Inverted Since 2007 (Bloomberg, 5/28/19) Dimmed outlook for U.S.-China trade deal triggers haven buying.
- Morgan Stanley says economy is on ‘recession watch’ as bond market flashes warning (CNBC, 5/28/19) Renewed trade tensions and a slump in economic data put U.S. profits and economic growth at risk.
- But We Have a Relationship… (fintechjunkie.com, 5/16/19) Frank Rotman lays out how banks can engage in relationship banking and the growth of a new banking model.
- Lending start-up SoFi closes $500 million funding round, led by Qatar (CNBC, 5/29/19) SoFi closed a $500 Mn funding round led by Qatar Investment Authority.
- Has PayPal Eclipsed OnDeck in Small Business Loans? (deBanked, 4/26/19) PayPal is estimated to have originated $4 Bn in small business loans in 2018.
- Small-business fintech launches lending platform for banks (American Banker, 5/21/19) Biz2Credit has unveiled a software-as-a-service version of its loan management, servicing and risk analytics product.
- Kabbage And Azlo Collaborate To Make Small Business Lending Easier (esellercafe.com, 5/28/19) Online banking platform Azlo users will get access to loans up to $250 k from Kabbage.
- Prosper Performance Update: April 2019 (Prosper, 5/31/19) 65% of originations were rated AA-B and the dollar weighted average FICO was 717.
- Morningstar to Accelerate Credit Ratings Business with DBRS Acquisition (MorningStar, 5/29/19) MorningStar is acquiring DBRS to expand its asset coverage to fixed income products.
- BofA’s ROI on AI: 7 million Erica users, and counting (American Banker, 5/29/19) The AI platform now has 7 Mn users who use its automated advice on day-to-day finances.
- Sharing a plate of food leads to more successful negotiations (The Economist, 3/14/19) A meal taken “family-style” from a central platter can greatly improve the outcome of subsequent negotiations.