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Rate Cuts; Digital Banks; Peer IQ's Modeling Archive

By Vy Phan

July 14, 2019


This week headlines were dominated by rate cut talk with dovish comments from Fed Chair Jerome Powell. Also this week, moves from “digital banks” – increasingly the new center of gravity for the FinTech market.

First – on rates. While the prospect of rate cuts have stirred animal spirits, history tells a much more sobering story. With the exception of 1967 and 1996, every 50 bps easing of monetary policy by the Federal Reserve has been associated with an oncoming or ongoing recession.

Source: PeerIQ, WSJ

The slowdown in activity that presages a rate cut is confirmed by looking at recent data as well.

Source: PeerIQ, Hussmann

Policy makers are responding to the velocity and breadth of de-acceleration from the post-stimulus high (Q3 2018). Still no recession is imminent, although policymakers would like to take out an insurance policy with easing.

Digital Banks – The Future of FinTech Lending?
Digital banks including N26, Revolut, and Chime appear to represent the latest wave of FinTech disrupting the consumer banking sector.

European fintech N26 launched in the US, further thickening competition in mobile banking. The mobile bank is focusing on allowing anyone the power to instantly sign up for an account, also providing an interface that allows consumers to monitor their spending through categorization and spending limits. N26 now finds itself as a neobank in the US market, along with veteran UK banks like Barclays, MUFG, and HSBC that seek to scale up lending operations.

The lines between FinTechs and the neo-banks are blurring. UK digital lender Zopa, for instance, has for most of its life originated prime unsecured consumer loans. Now Zopa has a license to open a bank and expand its range of consumer banking services. Reports indicate that SoFi, Square and other US-based FinTech lenders may be pursuing a special purpose national bank charter from the OCC. (However, An OCC charter would not by itself grant deposit-taking privileges.).

Nevertheless, the destination of more established FinTechs and newcomer digital banks appear to be the same. The digital banks have access to deposit funding to fund loans and therefore do not rely on capital markets in the ordinary course of business. The digital banks aspire to have a range of checking, savings, cash management, lending and wealth management services.

FinTechs lenders meanwhile are white-labelling banking services to complete the customer product roadmap while awaiting a charter. SoFi Money, WSFS, Radius Bank and its deposit partnerships with FinTechs are great examples of this.

This week, Boston-based Radius Bank is looking to adopt the user-friendly style set forth by the aforementioned European banks. The bank has added onto its massive redesign and partnered with Lemonade to provide a marketplace where consumers can interact directly with insurers. This comes after establishing partnerships with Billshark for bill negotiation and Huddl for investment opportunities.

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!

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