Happy early Thanksgiving!
This year we are thankful for our readers. We hope you are able to spend some quality time with family and friends over the next few days.
To get your Fintech fix over the holidays, we summarized the key consumer lending trends for the quarter: fintechs maintain their lead in consumer lending, everyone wants in on BNPL and to HODL crypto.
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Fintechs Maintain Their Lead in Consumer Lending
Fintech origination rally continues
Public fintech lenders again posted strong growth in consumer origination volumes QoQ, but growth rates are generally slowing down from previous quarters as the post-pandemic rebound starts to normalize. Most lenders are now at or above pre-pandemic quarterly origination volumes.
Source: Company Filings, PeerIQ
Student lending originations remained challenging, with total debt in the category growing just $14Bn QoQ. Student lending has been affected by the CARES Act’s moratorium on federal student loan payments until the end of January. Navient was particularly impacted and SoFi’s student loan refinancings remained at 50% of pre-CARES levels.
Fintech alternative lender NCOs started to normalize from artificially low pandemic numbers, with enhanced unemployment benefits ending and consumers returning to spend as the economy continued to reopen.
(1) Elevate reports NCOs as a % of revenues
Source: Company Filings, PeerIQ
NCOs continue however to remain artificially low, with management expecting a full normalization to take several quarters.
OneMain CFO Micah Conrad spoke to the normalization, stating, “We’re certainly not underwriting to an expectation of 4% losses…it’s very hard to pinpoint exactly when credit performance will normalize on the charge-off line. My guess sitting here today would be likely sometime in the back half of 2022.”
Elevate CEO Jason Harvison also spoke on charge-offs, saying, “While it’s difficult to speak to a new normal on credit, we do expect loan loss reserves and charge-offs to return to similar levels to 2019.”
MPL securitization at record high
The MPL securitization market remained competitive across the entire capital stack, from investment grade seniors down to residual certificates. Deals were oversubscribed, and yields at historic lows. 18 deals totaling $5.9B closed in the quarter, the highest number and volume ever. Upstart ($1,393Mn), SoFi ($943Mn), LendingPoint ($942Mn), Pagaya ($675Mn), Affirm ($500Mn), Theorem ($462Mn) and Marlette ($252Mn), were within the most active players during the quarter.
While we see signs of deal pricing beginning to normalize, the market remains hot. New lenders are coming to market and achieving competitive pricing for their first deals, while investor appetite is enough to support growing sizes for more seasoned issuers.
Source: Finsight, PeerIQ
Banks continue to see deposit growth and stagnant loan books
Traditional banks have lagged in the recovery. In aggregate, total credit card and auto loans barely budged, increasing just $17Bn and $28Bn QoQ, respectively, despite banks beginning to loosen lending standards in Q2.
Source: Company Filings, PeerIQ
We expect banks to reverse their trend of muted consumer loan growth, due to loosened underwriting criteria and healthy consumer balance sheets.
Large bank NCOs have continued to fall to record lows, following tight credit policies during the pandemic period.
(1) Total NCOs, no consumer breakdown provided
Source: Company Filings, PeerIQ
Consumer spending continued to increase slightly QoQ (JPMorgan +1.6%, Citi +1.1%, Bank of America +0.1%, Wells Fargo (1.6)%), and double-digit growth from 3Q20 (JPMorgan +25.8%, Bank of America +20.8%, Citi +20.1%, Wells Fargo 16.8%). Not surprisingly, consumers spent more on travel, entertainment and services in Q3, as pent-up demand for activities was unleashed as COVID restrictions were dropped.
Consumer balance sheets continue to be strong, as they have benefitted from rising wages amidst a hot job market, particularly those at the lower end of the income spectrum. Consumers are taking their paychecks to the bank, with average consumer deposits rising from the second quarter (Live Oak +4.5%, Morgan Stanley +3.0%, JPMorgan +2.6%, Bank of America +2.2%, Wells Fargo +1.5%, Citi +0.1%, Citizens +0.0%, Capital One (0.5)%), though the rate of deposit growth has slowed.
Growing deposits and shrinking loan books have been a constant for U.S. Banks throughout the pandemic. Seven quarters into it, the loan to deposit ratio continues to drop to historic lows.
Source: S&P Global
At the same time, NIMs are also at an historical lows, putting unprecedented pressure on large and small banks alike to determine their best approach to utilizing the excess liquidity on their balance sheets.
Source: S&P Global
If you’re facing an excess of deposits and looking to deploy them, we’d love to talk. PeerIQ’s platform is designed to enable banks to buy unsecured consumer loans with confidence, manage portfolios with ease, and stay compliant. With our partner Cross River Bank we are helping banks diversify their portfolio and increase ROA.
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Bank and Fintech Lender Earnings Summary
Source: Company Filings, Google Finance, PeerIQ
Source: Company Filings, Google Finance, PeerIQ
Everyone Wants in on BNPL
Consumer (and investor) appetite for BNPL remained robust in Q3. With no signs of interest waning, players across the financial services spectrum are figuring out how to participate. If “BNPL 1.0” was typified by non-bank fintech players like Affirm and Klarna inking deals directly with merchants, “BNPL 2.0” is seeing companies create a variety of new approaches to BNPL, based on where they sit in the financial services stack.
Networks like Visa and Mastercard want in on the action, by offering installment payments from networks of lenders directly at check out. Card issuers are trying to defend their book by offering customers the ability to convert transactions into installments after the fact. Banks are also getting in on BNPL, indirectly, with white label solutions, and directly through offerings like Citizens Pay or the yet-to-launch BNPL from Apple and Goldman Sachs. Even neobanks are trying to carve out a piece of the market for themselves, with UK-focused challengers Monzo and Revolut announcing BNPL financing linked to their debit accounts.
Broadly, five distribution models are emerging for BNPL.
Source: Company filings, PeerIQ
The merchant land grab continues
Affirm made waves with its partnership with Amazon that will enable consumers to use its installment product on purchases over $50. Affirm expanded the partnership and will serve as Amazon’s sole third-party, non-credit card, BNPL option in the U.S. until at least January 2023. The news sent its shares 13.7% higher, as the company now has “integrated relationships with partners representing approximately 60% of U.S. e-commerce.”
Klarna increased its customer reach through multiple moves, including a new partnership with Stripe. Klarna continued its evolution from the checkout screen to a shopping destination, as it re-launched its app to focus on shopping, completed a number of acquisitions and entered partnerships focused on ecommerce (PriceRunner, Stripe, FreedomPay, Simon Property Group). Most recently, the expansion of its BNPL product in the U.S. includes subscription services,the first company in the country to offer this feature.
Payment provider Square made headlines entering the BNPL space with the mega acquisition of Afterpay for $29Bn. PayPal announced the expansion of its pay later portfolio to include longer-term installment plans, aimed at bigger ticket consumer items. Integrating BNPL helps both these companies offer a full-suite of financial services to customers, in their bids to become “one stop financial shops.”
Networks enable traditional players to compete on checkout screen
Mastercard reinvented their new Mastercard Installments program, which will allow consumers to access BNPL offers through their bank’s mobile app at the point of purchase. CEO Michael Miebach explained that, “With little or no integration for merchants, our solution avoids the need for the investor to engage merchants one-by-one to roll this out, enabling them to deliver more payment options to more consumers faster.”
Visa’s network-based solution allows financial institutions to add BNPL as a customized feature, and acquirers on the network can activate the ability to enable installments for any of their retailers that accept Visa. Visa calls the need to sign individual deals with each merchant BNPL 1.0, expecting, “the business model will evolve to BNPL 2.0, where fintech partners issue Visa credentials to leverage our acceptance and platforms to overcome the difficulty of scaling acceptance globally, merchant by merchant.”
Card issuers respond to the competition
Many of the large card issuers have launched their own BNPL options over the last years. For instance, AmEx’s Pay It Plan It and Chase’s My Chase Plan allow credit card customers to pay for qualified purchases in installments. One advantage of these programs is of course being merchant-agnostic, but the customer experience remains a two-step process.
JPMorgan’s Jamie Dimon recently commented on BNPL that Chase “will spend whatever we have to spend to compete with all these folks in our space.” Talking about fintech competitors, Dimon has said he expects “tough, brutal competition,” but that he expects to win.
Discover’s earnings call had a different tone to BNPL, with CEO Roger Hochschild stating, “I would say, the market is not yet mature. And I think market clearing economics have yet to be established… we are not seeing any noticeable impact on revolving loans and believe that we are well positioned to respond if it does emerge.”
Card-based solutions bypass need for the merchant integration
Upgrade’s card allows the user to make purchases like a typical credit card. Any charges are then converted to fixed rate installment loans. Essentially this allows users to make any purchase a BNPL purchase, eliminating the need for merchant partnerships, as the balance on their card automatically converts to an installment loan that is payable over 24, 36, or 60 months. It has been long-rumoured that Affirm will launch a similar style credit card.
More white label infrastructure is being built
Synchrony has moved to provide infrastructure for companies to issue white label credit cards that offer customers BNPL solutions. Adding BNPL to its credit card and financing program offerings diversifies what retail partners can provide their customers. Synchrony also expanded its strategic partnership with Fiserv’s Clover POS terminal. The partnership enables SMBs to accept private label cards issued by Synchrony.
Where are we heading?
Margin pressure. The increased competition is likely to result in pricing pressure on standalone BNPL providers, driving margin compression over time. It’s unclear what the growth in merchant-agnostic BNPL would mean for the merchant discount rate BNPL providers in the long term. In the ‘direct to merchant’ model, MDRs can reach 7%. Presumably, for a card- or bank account-linked product without a direct agreement with a merchant (or payment processor), MDRs may revert to a more typical 1-3%, which would put pressure on standalone BNPL providers’ economics.
Regulatory scrutiny. The rise of BNPL has led to regulatory scrutiny, with the House Financial Services Committee convening on a hearing entitled “Buy Now, Pay More Later?” With Committee Chair Maxine Waters (D-CA) urging the CFPB to “look deeply” at BNPL lenders, expect increased scrutiny into the industry and the potential for enforcement actions in the sector.
Competition across models. The turf is not unlimited, and BNPL providers across distribution models are starting to clash more directly. For instance, Affirm announced its partnership to become the exclusive financing option for travelers booking flights through American Airlines’ website. While this type of deal puts the BNPL head-to-head with co-brand credit cards, booking via BNPL lacks (for now?) the robust rewards system and travel protections that many of the credit cards offer. Credit card “installment-ization” features already exist on many major card networks, potentially dampening the impact of the Affirm/AA partnership. For now, it may come down to customer segments. Those choosing to finance travel with a standalone BNPL provider vs. a co-brand or rewards credit card may do so because they lack access to those options, likely skewing higher risk (and being priced accordingly). How long will this last?
Account-to-account payments. It will be interesting to follow if emerging infrastructure from account-to-account (“A2A”) payments may pose a threat to card networks’ role in BNPL in the future. A2A payments, which companies like Plaid are working to develop the infrastructure for, could enable payments directly from consumers’ bank accounts to BNPL providers — potentially cutting card networks out of the loop altogether.
Subscribe to our weekly newsletter for our takes on the latest BNPL moves in the industry.
Everyone Wants to HODL
If there’s one theme around crypto we’re focused on, it’s the speed with which it’s gaining mainstream adoption. What was, until fairly recently, a fringe asset is rapidly showing up alongside traditional finance (“TradFi”) products and services in popular consumer fintech apps — and driving spikes in their revenue growth.
In Q3, Robinhood saw $51Mn in revenue from crypto trading — a sharp decline from previous quarters, driven by waning interest in Dogecoin. Crypto fans have been pushing the platform to add Shiba Inu, the latest meme-coin to capture crypto-traders’ imagination.
Meanwhile, Square’s Cash App saw $1.82Bn in crypto-related revenue vs. $2.72Bn in the previous quarter. To date, Cash App only offers bitcoin, which may explain the lower volatility vs. Robinhood and other crypto exchanges.
As PayPal has pivoted to its “superapp” strategy, it’s also added support to buy and sell cryptocurrencies, including bitcoin, bitcoin cash, Ethereum, and Litecoin, though its (so far) steered clear of the volatile, trend-driven coins that have generated huge revenue swings for other exchanges.
As the sugar rush of quick revenue boosts from speculative trading fades, companies in the crypto space are looking to what’s next.
Two key themes are emerging: savings and lending. On the savings side, there have been multiple false starts as crypto companies have sought to offer customers yields on crypto ‘deposits.’ BlockFi’s Interest Account has attracted regulatory scrutiny, with state securities regulators arguing it is an unregistered security. Coinbase’s attempt to add a similar product didn’t make it out of the starting gate before being shot down by the SEC. Given the negative attention crypto-driven “high yield” products have received, they’re not likely to show up in “TradFi” fintech apps (yet).
On the lending side, as consumer adoption of the asset class grows, so will interest in unlocking liquidity. BlockFi already offers USD lending secured by cryptoassets. Coinbase will let you borrow up to $1,000,000 against bitcoin with no credit check — at 8% APR. With crypto now embedded in apps like PayPal, Cash App, and Robinhood, adding crypto-secured lending is a logical expansion as they search for additional revenue drivers.
For a quick look at the future, Square just released a whitepaper that describes their plan to build a semi-decentralized peer-to-peer token swap exchange. While too early to say, the exchange aims at combining the decentralization of the transaction with the benefits of the centralization for identity verification, chargebacks management, and fiat on/off ramp.
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