Greetings,
U.S. rate hikes may exacerbate global debt burden. Fed discusses CDBCs, but they’re still a long way off. Robinhood readies its crypto wallet. Walmart’s fintech goes shopping. Zelle-competitor goes live. Affirm joins “super app” arms race. Experian lets users create their own credit reports.
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QE Set to End with Interest Rate Hikes As Soon As March
Discussions around when and how the Fed should shrink its balance sheet continued last week. One thing is clear: the Fed will stop increasing the size of its holding, as it approved the final tranche of bond purchases at last week’s meetings. The move paves the way for a rate increase in March, which seems like a near-certainty at this point. Rates seem likely to increase more quickly than in previous tightening cycles.
While an interest rate increase is intended to address persistent inflation in the American economy, it is likely to have knock-on impacts on the developing world. Developing economies have seen their debt burdens rise by 120% over the past decade. Increases in U.S. interest rates may come with an appreciation in the dollar, making debt service more expensive for countries with dollar-denominated bonds.
Fed Paper Discusses CBDC, But Looks to Congress for Specific Authorization
The Fed’s policy paper on central bank digital currencies (CBDCs), released last week, went out of its way to specify it was not making policy suggestions.
What did the paper say? It acknowledged the opportunity of CBDCs to give Americans more, faster, and potentially less expensive payment options. It also noted potential risks to financial stability and privacy.
A “direct” CBDC model, where consumers and businesses have accounts or wallets directly with the Fed is not seen as the preferred option, though the Fed isn’t ruling anything out quite yet. Rather, the paper stated, the “best route” is seen as an intermediated CBDC, relying heavily on the existing financial system. There is concern a ‘direct’ model, particularly one where CBDCs bear interest, could cannibalize banks’ deposits, as direct wallets/accounts would have the full backing of the U.S. government and could be seen as safer than commercial bank deposits.
Still, no action is imminent. The paper passed the buck to legislators and the executive branch, saying the Fed would not proceed “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”
Robinhood Readies Crypto Wallet
Robinhood, which has seen its share price battered in recent months, is nearly ready to launch its next act: a crypto wallet. While the no-fee brokerage has long boasted (and profited from) offering trading of cryptocurrencies, users have been limited to buying, selling, or holding the digital assets. Robinhood is looking to change that. It beta-launched its crypto wallet to 1,000 lucky users last week.
Robinhood’s crypto wallet will enable users to custody, send and receive crypto, in addition to trading it. It also paves the way for Robinhood to expand the currencies it supports from seven well-known cryptos to more esoteric or emerging altcoins. Longer term, one can imagine Robinhood expanding its wallet to support buying and trading in the burgeoning NFT space or as a gateway for users to participate in the rapidly evolving web3 or so-called metaverse ecosystems.
Walmart’s Fintech to Acquire ONE, Even
Walmart’s fintech ambitions are beginning to take shape.
The business, technically independent of Walmart, though the retailer is its controlling shareholder, made not one but two acquisitions last week. It acquired ONE, a neobank aimed at middle-income Americans, and Even, an on-demand pay platform. The venture, which was rumored to be planning on the name “Hazel by Walmart,” will retain the ONE brand name.
The dual acquisitions speak to two distinct prongs of Walmart’s strategy. The neobank, which is built on top of banking-as-a-service provider Synctera and backed by Coastal Community Bank’s license, is likely to be aimed at your typical Walmart consumer: living paycheck-to-paycheck and looking for sensible tools for saving, budgeting, and borrowing.
Even, the on-demand pay platform, speaks to the second prong: Walmart’s own employees. Walmart employs about 1.6 million people in the US, the majority in a retail setting and who are paid hourly. On-demand pay becomes a competitive differentiator in acquiring and retaining employees and a reason for those employees to use Walmart’s fintech app.
Zelle-Competitor Chuck Goes Live
Chuck, community banks’ answer to Zelle, is starting to roll out. Smaller banks perceived Zelle, which is owned and operated by big bank consortium Early Warning Systems, to be too expensive and inflexible for their needs. Chuck is expected to cost about half as much on a per transaction basis as Zelle.
Reading Cooperative Bank, a community bank in Reading, Massachusetts, has been testing Chuck for weeks and rolled it out last week. Additional banks will roll out the functionality in the coming weeks and months. Achieving a critical mass of adoption, both among banks but also banks’ customers, will be critical to Chuck’s success.
Affirm’s “SuperApp” Rebrand
Affirm is the latest BNPL to rebrand as a “super app.”
Last week, the company announced the debut of its super app and Chrome browser extension. The app combines Affirm’s financing, payment, savings, and shopping functionality into a single “destination.” The move mimics similar efforts from competitors like Klarna to diversify beyond a “split pay” offering in order to own more the customer journey. Moving up funnel – from payments to discovery – is critical, as merchant discount rates have already begun to compress. By owning the shopping experience, Affirm has something else to offer merchants in its network: traffic.
The browser extension – something also offered by competitors like Klarna and Zip – enables consumers to use Affirm’s BNPL at nearly any online merchant, even if the merchant itself doesn’t offer Affirm as a payment option.
Experian to Let Users “Create” Own Credit Report
Experian made news this week with the announcement that it would let users “create” their own credit reports. The new capability applies to “no file” users – those with no record, either positive or negative, on the credit bureau. Previously, these users might need to rely on products like a secured credit card or credit building loan to begin building a credit history.
Experian’s new product, dubbed Experian Go, will enable users who don’t already have a report to begin creating one from scratch. The program will let users like recurring non-debt obligations to their credit report. The goal is to transform a “credit invisible” user to one a lender is able to underwrite. Experian has piloted the program with about 15,000 users and found that, on average, users went from being unscorable to having a 665 FICO.
Spending Surges and Fintechs Stumble into our Third Week of Earnings Coverage
Payment companies were the bright spot in this week of earnings (Visa +10.6%, Amex +8.9%, Mastercard +1.8%) as we saw record levels of payments volume in the fourth quarter. Robinhood fell double-digits on its earnings release, but finished the trading day up 9.7%. Meanwhile, amidst broader market volatility, paired with disappointing earnings and guidance, fintechs and the last few banks to report took major hits (LendingClub (29.2)%, Navient (12.7)%, Synchrony (6.8)%, Live Oak Bank (5.7)%, Capital One (4.9)%).
Source: PeerIQ
Companies reported significant increases in payments volumes (Amex +28.8%, Capital One +28.0%, Mastercard +20.0%, Visa +19.8% YoY) during the fourth quarter, reflecting the increase in card spending we covered in last week’s newsletter.
Although payments companies all experienced strong growth in their respective network volumes, their installment lending and crypto strategies differed. Amex CEO Stephen Squeri is not worried about buy now pay later or crypto, stating “I’m not at all concerned with buy now pay later”, “I do not believe [BNPL] is targeted at our customers”, and “I don’t see it [crypto] as an immediate or medium-term threat to our business.”
While Amex has a Pay It Plan It option, where consumers can break purchases into monthly payments, this differs from traditional BNPL in that it does not occur at the point of sale; rather, once a customer charges their Amex card, they can go into their app and choose to convert the charge.
In contrast, competitors Visa and Mastercard have embraced BNPL solutions, working on rolling out their installment products. Visa Installments is available on a limited basis at select retailers, but they are working to expand this, and Mastercard Installments’ U.S. launch is expected to come in the first quarter.
Amex announced that although it works with NFT marketplace NBA Top Shot, it would probably not offer a crypto card.
Visa and Mastercard have gone the opposite direction, embracing crypto cards and the broader crypto ecosystem to a greater extent.
Visa has partnered with players such as Coinbase, Crypto.com, Wirex, and BlockFi to offer crypto-linked cards. Visa recently launched a crypto advisory practice and partnered with blockchain tech company ConsenSys to develop CBDC payment APIs, enabling central banks, “to connect their Ethereum-based CBDCs with Visa rails through a wallet with digital issue capabilities, enabling consumers to spend CBDCs at any Visa merchant.”
Mastercard has partnered with Gemini, Amber, CoinJar, and Bitkub to offer crypto-linked cards. Mastercard has also partnered with ConsenSys to “make it easier for software developers to increase the scale, efficiency and speed of transactions on Ethereum and commission blockchains”. Mastercard launched a CBDC sandbox test platform in 2020.
LendingClub had a rough week, slumping on lower earnings guidance than analysts expected for 2022. Management projects a profit of $130Mn-150Mn for the year, while the average analyst expectation was close to $185Mn.
Even though LendingClub’s guidance was far from positive, the company did report a 237% increase in originations and 10% increase in deposits on a year-over-year basis. Management announced its intention to retain a larger portion of its loans, as CFO Tom Casey reminded analysts, “we earned about 3x more income on loans we retained versus selling them.”
Going forwards, LendingClub CEO Scott Sanborn announced that the company has devoted $25Mn to tech investments, for the purpose of, “modernizing our technology stack, bringing some of the banking systems to the cloud and really engaging our customers with mobile application design and engaging the banking and lending products.”
Robinhood fell double-digits in after-hours trading on the news that it is losing users, with monthly active users falling over 8% from the third to fourth quarter, to 17.3Mn accounts. However, Robinhood made a comeback once the markets opened, ending the day up 9.7%. Shares of the stock are still down over 60% from IPO price. Management will bank on 2022 initiatives of its crypto wallet rollout, instant debit card deposits and withdrawals, and fully-paid securities lending program in 2022 to help reverse the negative trend.
Synchrony, through its partnership with PayPal, announced that it would be launching PayPal Savings in the first quarter. The savings account would be functional inside PayPal’s super app and would offer instant fund movement between PayPal balances, no withdrawal limits, and a savings goal feature.
In The News:
White House Is Set to Put Itself at Center of U.S. Crypto Policy (Bloomberg Quint, 1/21/2022) The Biden admin will release a government-wide strategy for digital assets as soon as next month.
SEC May Make Private Firms Disclose Finances. Would Fintechs Suffer? (American Banker, 1/24/2022) SEC Commissioner Allison Lee has made the case to require more disclosure for private unicorns.
Congressman Patrick McHenry Sends Public Letter to Congresswoman Maxine Waters Requesting they Work Together on Digital Assets (Crowdfund Insider, 1/24/2022) Both reps have issued public statements on CBDCs, indicating an openness for digital asset innovation.
Brazilian Fintech Creditas Hits $4.8bn Valuation after Funding Round (Financial Times, 1/25/2022) The lending start-up provides insurance alongside secured consumer loans and runs an online used-car sales platform.
Plaid Buys ID Verification Firm Cognito (Finextra, 1/20/2022) The $250Mn deal will help Plaid offer a complete onboarding experience of verification, account connection, and account funding.
Alternative Payment Firms Capitalize on Amazon-Visa Tensions (American Banker, 1/21/2022) Amazon and Visa’s U.K. squabble over interchange fees gives an opening to alternative payment provider firms like Clik2pay, Affirm, and Curve.
Ally’s Lending to Inventory-Challenged Auto Dealers Shows Signs of Life (American Banker, 1/21/2022) Ally’s floor plan loans increased in Q4 after a long stretch of declines due to the pandemic and the semiconductor shortage.
Chime Calls in Goldman Sachs for Possible IPO (Finextra, 1/21/2022) The IPO could value Chime at $40Bn, after it raised $750Mn at a $25Bn valuation last August.
The Problem With Google Pay (Forbes, 1/25/2022) Google Pay’s strategy has led to their struggle to gain a foothold in the U.S. market.
JPMorgan Agrees to Acquire 49% Stake in Greek Fintech Viva Wallet (Reuters, 1/25/2022) With a rumored valuation north of $2Bn, JPMorgan takes a sizable stake in Viva Wallet..
Santander Launches a Buy Now, Pay Later Service to Take on Fintech Rivals (CNBC, 1/26/2022) Santander is launching a BNPL app called Zinia across Europe, banking on its security and prestige to be a differentiator from popular fintech BNPL apps.
Lighter Fare:
Physicists Detect Mysterious X Particles in ‘Primordial Soup’ For The First Time (Science Alert, 1/24/2022) Scientists detect particles that may have existed briefly just after the Big Bang.