Happy Sunday,

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.

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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

Hi all, Cole here. If you’ve made it this far, thank you for being a loyal subscriber to the newsletter. Looking for more updates on the companies covered during earnings season? Follow/connect with me on LinkedIn and join my Discord server for exclusive access to earnings updates (and archives), including bullet notes on important info from earnings releases, key quotes from earnings calls, and relevant slides from decks.

In the News:

CFPB contract negotiations come at uncertain time for agency funding (American Banker, 2/5/2024) Union contract negotiations at the CFPB are getting heated.

Banking groups sue regulators to block CRA revamp (American Banker, 2/5/2024) Trade groups including the ABA, ICBA, and two Texas associations are moving to block changes to the Community Reinvestment Act.

Charitable giving fintech Overflow raises $20m (Finextra, 2/7/2024) Overflow, which aims to make charitable giving frictionless, announced its Series B.

Confirmed: Entrust is buying AI-based ID verification startup Onfido, sources say for more than $400M (Techcrunch, 2/6/2024) Digital KYC startup Onfido is being acquired for an amount as high as $650Mn.

How PayPal’s small investment in a fintech is a big bet on its stablecoin (American Banker, 2/2/2024) PayPal made a strategic investment in Mesh, a digital assets and account aggregation platform.

A startup’s plan to disrupt the fuel card industry (American Banker, 2/5/2024) AtoB is looking to disrupt the stodgy fleet payments industry.

B2B finance automation platform Ramp acquires Venue to revamp procurement product (Fintech Futures, 2/5/2024) Ramp looks to augment its procurement capabilities with Venue acquisition

Credit Cards Could Swipe Department Stores’ Profits (Wall Street Journal, 2/7/2024) Regulatory pressure on late fees could hit retailers’ bottom lines

A painful year looms for issuers of middle-market consumer credit cards (American Banker, 2/6/2024) Rising defaults for mid-market borrowers are eating into issuers’ profits.

Why auto lenders are cautiously optimistic even as late payments rise (American Banker, 2/6/2024) Despite rising rates and delinquencies, auto lenders are optimistic

Lighter Fare:

How will the 2024 total solar eclipse differ from the 2017 total solar eclipse? (Space, 2/6/2024) The path of this year’s solar eclipse differs substantially from 2017’s.