Fed comments on rate policy. EWA provider Rain’s debt deal. Citi picks ChargeAfter for POS lending. Affirm and Afterpay tweak loyalty programs. LendingClub exits its OCC operating agreement. EY and MoneyLion partner. Aeroplan partners with Cross River. Pay by bank’s potential and challenges. Affirm and OneMain report earnings.
Fed Officials Want More Data Before Cutting Rates
If you were hoping for a rate cut in March, looks like you may need to hold your horses. Fed Chair Powell suggested the central bank is wary of cutting rates before seeing further data that indicate inflation is heading towards its 2% target. Powell told 60 Minutes’ Scott Pelley that the Fed doesn’t expect to “dramatically” change rate forecasts for 2024.
Plenty of other Fed officials have commented on rate policy recently. Minneapolis Fed President Kashkari speculated that the neutral rate may have risen, giving the Fed time to assess incoming data with less risk of over-tightening. Chicago Fed President Goolsbee didn’t explicitly rule out voting for a March rate cut but echoed calls for additional data. And Cleveland Fed President Meester doesn’t see any rush to cut rates, but sees rates coming down later in the year if the economy evolves as expected. Finally, the U.S. services sector posted its strongest rate of growth in four months in January, boosted by strong orders and employment.
EWA Provider Rain Lands $300Mn Credit Facility
Earned wage access provider Rain announced it has inked a deal for a new $300Mn credit facility. The financing will come from Clear Haven Capital Management and will enable Rain to continue scaling its EWA offering. Like other EWA services, Rain enables employees to access earned but not yet paid wages in return for a small fee. Rain integrates with employer payroll and time and attendance systems in order to determine how much workers are eligible to draw.
BNPL: Citi Selects ChargeAfter; Affirm and Afterpay Tweak Loyalty Programs
Citigroup’s Citi Retail Services division has selected ChargeAfter to power its point-of-sale installment loan product. The offering enables merchants to seamlessly offer shoppers financing at the point of sale. Elsewhere in BNPL, Affirm and AfterPay are making changes to their rewards as they continue to experiment with loyalty programs. Affirm shut down its rewards program, which gave users points they could apply towards $5 or $10 discounts at select merchants. Afterpay, part of Block, shut down its Pulse rewards program at the end of January. The company has said it will launch a new rewards initiative later in the year. Meanwhile Klarna, which says it’s gearing up for an IPO, recently announced it would offer users of its subscription product ($7.99/mo) double rewards points on their purchases through the platform.
LendingClub Exits OCC Agreement
LendingClub announced it has exited the OCC agreement it entered into as part of its acquisition of Radius Bank. Such operating agreements are common in bank acquisitions. The OCC agreement imposed elevated capital constraints on LendingClub, which have had the impact of tempering its loan growth. With the operating agreement behind it, LendingClub expects to grow more quickly and achieve an improved return on equity. The lender posted a tier 1 leverage ratio of 12.9% in Q4 and a common equity tier 1 ratio of 17.9%. Analysts suggest that, with the expiration of the agreement, LendingClub has about $400Mn in excess capital.
EY and MoneyLion Partner
MoneyLion, most commonly known as a neobank and cash advance lender, has partnered with consulting firm EY to help banks modernize their infrastructure, including by enabling them to offer embedded finance capabilities. MoneyLion’s tech will be offered as part of EY’s existing Nexus for Banking platform. Capabilities include lending, investing, crypto, insurance, and cash management. MoneyLion’s Engine offering, built on top of its acquisition of financial products marketplace Even, could enable banks to earn a commission by offering a marketplace of third-party products and services.
Aeropay Partners with Cross River
Payments solution provider Aeropay has partnered with embedded financial solutions provider Cross River to offer instant payout access to players in the gaming industry, even on the weekends. Payments will be routed over The Clearing House’s RTP network and FedNow. The partnership comes at a favorable time, as nearly one in four American adults plan to bet on the Super Bowl (a 35% increase from the year prior). Additionally, Americans are expected to wager $23.1Bn, which would represent a 44% YoY increase.
Will 2024 be the Year of “Pay By Bank”?
With 1033 open banking rule making progressing and adoption of real-time payments networks, like FedNow and TCH RTP, continuing, some envision a future in which consumers increasingly pay directly from their bank account, rather than via credit or debit rails. Such “account-to-account” or pay-by-bank payment methods are already commonplace in some countries, especially for online purchases.
In the U.S., there are numerous barriers to adoption, including, of course, Americans’ love of card-based rewards.
Achieving adoption will depend on merchants and other billers identifying the right use cases and, perhaps, figuring out the right carrots and sticks to incentivize adoption. Recurring bills, like utility payments and rent, are low-hanging fruit, especially if pay-by-bank is displacing existing check payments or card payments that carry a surcharge. Mega-bank JPMorgan Chase has shown an interest, partnering with Mastercard to pilot a pay-by-bank solution. And open banking stalwart Plaid is making noise in the space, viewing enabling such payments as a key use case for its infrastructure.
Affirm and OneMain Report Earnings
Source: Yahoo Finance
This week in earnings, we got results from Affirm and OneMain Financial. Affirm’s GMV (Gross Merchandise Volume) grew 32% YoY and 33% QoQ, with QoQ performance helped in part by the seasonally stronger December quarter. Leading the growth was the travel and ticketing segment, which grew 56% YoY. At the same time, Affirm’s users are transacting more frequently, and for lower-ticket items (transactions per active customer up to 4.4, average order value down to $299), in-line with its strategy. As CEO Max Levchin said last year, “We’ve more or less conquered the bicycle and couch space, and we’re trying to take our unfair share of doughnuts and coffee.”
OneMain saw declines in its originations (13)% YoY and (8)% QoQ due to continued credit box tightening and pricing actions. As a reminder, OneMain significantly tightened credit standard starting August 2022 (in line with many other lenders in the space) and reported that post-tightening origination vintages comprised 65% of its portfolio (up from 59% the quarter prior).
Despite the credit tightening, OneMain’s NCO ratio rose to 7.70%, up +82 bps YoY and +102 bps QoQ. These levels remain above the pre-pandemic (4Q19) NCO ratio of 5.71%. However, management expects NCOs to peak in the first half of 2024. With 30+ DPDs at 6.16%, it may support management’s explanation that “front book” (or post-tightening) originations have been performing better.
Turning to Affirm, the Monthly Installment Loan 30+ Day DQ Rate (Ex-Pay-in-4) for the FY 2024 vintage was flat both YoY and QoQ at 2.4%. To note, this represents a rise from the FY 2022 – 1.6% and FY 2021 – 0.8% vintages.
OneMain grew its number of active BrightWay credit cards to ~431k, up from ~340k a quarter prior. BrightWay card receivables of $330Mn represented a 42% increase QoQ.
Affirm continued to roll out its Affirm Card, reporting that over 700k cards were active at the end of December, up from 400k at the end of September. Consumers are spending on the card, with Card GMV rising to $397Mn, up from $224Mn the quarter prior. Of that GMV, about 30% occurred in-store and 90% was interest-bearing.
Despite an increase in funding costs, CFO Michael Linford noted that Affirm priced a recent ABS deal at an all-in cost of capital 100bps lower than a deal from in December.
Additionally, Affirm reported a slight uptick in merchant fee rates for its core 0% long loans. Merchant fee rates have largely remained flat the past few years, despite rising interest rates.
Source: Affirm Earnings Presentation
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