Happy 4th of July! 

The US employment picture continues to improve as consumers, flush with cash, spend spend spend. 

Fintech lenders are looking for guidance on using AI credit models, and Upgrade is looking to raise some cash. 

Robinhood paid a $70Mn fine and released its S-1 in advance of its pending IPO.

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Employment Picture

Headline unemployment numbers were down sharply this week, with initial claims dropping a larger than expected 51,000 vs the prior week. Friday’s non-farm payrolls report showed a gain of 850,000 jobs, compared to 559,000 in May, and an unexpected increase in the unemployment rate to 5.9%.

Analysis is showing that the number of unemployment-benefit recipients is falling more quickly in states ending supplementary federal unemployment benefits ahead of the program’s scheduled September end date. Reduced or eliminated benefits may spur those on the sidelines back to work sooner rather than later.

With strong demand from employers and all supplementary benefits scheduled to end by September, we expect the improving employment picture to gain steam.

Americans’ Wealth Increased During COVID, Now It’s Driving the Global Recovery

US households saw their wealth increase by an astonishing $13.53 trillion during 2020. The jump is all the more surprising, as the economy was in recession. During the 2008 recession, Americans lost just over $8 trillion in wealth.

Source: Wall Street Journal, Federal Reserve

Wealth gains across the income spectrum were driven by government stimulus that was orders of magnitude larger than during the ‘08 recession. Expanded unemployment and stimulus payments helped drive checking account balances of the bottom 25% of earners up by as much as 50% during 2020, according to data from the JPMorgan Chase Institute. Higher earners spent less and saved more while working from home. And stock market gains accounted for nearly half of the country’s increase in wealth, with the S&P 500 up 29% one year on from the beginning of the COVID-induced recession.

Now, that increased savings and wealth is driving a rebound felt around the globe. American demand for everything from electronics to new homes is expected to lift GDP by 0.5% in Japan, China, and the Eurozone and 1.0% in Canada and Mexico in the next 12 months.

Signs are pointing to a quick and robust recovery in the US, but that doesn’t come without knock-on impacts. Spiking demand and still-disrupted supply chains mean inflation remains a concern.

Fintechs Look for Guidance on AI Credit Models

The use of artificial intelligence- and machine learning-based credit models has become a cornerstone of fintech lenders. The new approaches to assess borrower creditworthiness have the opportunity to improve inclusion and access to credit. The new modeling approaches aren’t without risk, however. Specifically, how they will be assessed for compliance with fair lending laws.

Six lenders — Affirm, LendingClub, Oportun, Paypal, Square, and Varo — have authored a letter with the National Community Reinvestment Coalition to the CFPB asking for clarification on how to use AI in lending without flouting fair lending obligations. The letter is in response to an interagency request for information on the use of AI in financial services.

Innovative approaches to underwriting like AI and ML can help pave the way for increased competition and consumer choice when it comes to borrowing. Guidance from regulators on the topic will benefit lenders and their borrowers by providing increased clarity on how these types of models can be used. 

Looking for the latest on fintech lending originations volume and performance? Reach out to to learn about the data and analytics we have on the sector.

Upgrade Seeks to Raise $200Mn at $3Bn+ Valuation

According to Bloomberg, Upgrade, led by CEO Renaud Laplanche, is seeking to raise as much as $200Mn in fresh funding at a $3Bn valuation. 

In its previous funding round last June, the lender was valued at just over $1Bn. Upgrade offers credit lines and personal loans up to $50,000. 

To date, Upgrade has lent over $5Bn in personal loans and is generating an average of $1Bn a year in new credit lines. This January, it extended its offerings by adding “rewards checking,” an industry first product innovation which offers cash back on debit purchases.

Robinhood to the Moon? 

Robinhood Markets filed its S-1 Thursday afternoon. To start, we want to wish Robinhood, and CEO Vladimir Tenev congratulations and success in their upcoming IPO!

For decades, the trend has steadily shifted to passive, index-style investing. Beating the market was out – investing in index funds and delegating to Vanguard and others was in.

RobinHood is benefitting from a surge in active trading that typically accompanies bull market peaks. What’s not clear – is Robinhood riding a secular pendulum swing towards active trading? Or are they limited to monetizing a narrow group of 20 MMish active trader types?

The high-profile trading app, which helped to drive down industry-wide trading commissions, has faced scrutiny from both regulators and customers in the past year.

Some highlights are below:

  • 2020 revenue up 245% YoY, driven by elevated consumer interest during pandemic lockdowns and, to some extent, stimulus payments. 
  • The company was profitable in 2020, reporting a net income of $7.45Mn,up from a $107Mn loss in 2019.
  • Top line growth continued to accelerate, with 1Q21 revenue up 309% YoY to $522Mn
  • Robinhood earned 81% of its revenue from processing its users’ trades in 1Q21. Robinhood relies heavily on Citadel, generating 27% of total revenue from their PFOF partnership. 
  • Robinhood’s bottom line took a hit in 1Q21, with a loss of $1.4Bn related to emergency fundraising caused by the meme stock trading frenzy

Funded accounts (those with a bank account linked) grew 151% to 18Mn from the

end of 2020 to March 2021, with monthly active users of about 17.7Mn.

What we wanted to see? What are the customer profitability and engagement stats by vintage? Active trading is generally a money losing proposition for retail traders. Is Robinhood churning thru customers or deepening customer quality over time?

SEC chair Gary Gensler has said the agency will review a wide range of market rules, including around payment for order flow, which could potentially reduce the profitability of the practice.

Release the DOGE? Robinhood disclosed that 34% of its crypto trading revenue was

attributable to Dogecoin transactions in 1Q21. We expect crypto to continue moving towards the mainstream. However, that also means Robinhood will face competition on multiple fronts: i) from PayPal, Square and other retail aggregators, ii) Crypto exchanges such as Coinbase, and iii) traditional FIs getting into Crypto (e.g., ETFs, Interactive Brokers, Fideliy, etc.)

Notably, leverage-related net interest revenues (securities lending + margin

interest) accounted for another 12% of total revenue.

Source: PeerIQ, Robinhood S-1 Filing

This past week, the company received the largest-ever FINRA penalty ($70Mn) for

misleading customers on margin trading, system outages, and a lack of due

diligence before approving customers to trade options. 

With its heavy reliance on options trading for revenue, if Robinhood has to make changes to its options trading policies, this may affect top-line growth. We note that options trading was by far the largest contributor to revenue in 1Q21, accounting for 47.1% of transaction-based revenue and 38% of total revenue.

In the wake of the meme stock trading mania, the company faces at least 49 class

action lawsuits from its decision to enact trading restrictions and an ongoing suit from the Massachusetts securities regulator.

Robinhood will have to lean on its legal team to navigate the class action lawsuits

and recent FINRA penalty. At least it looks like its Chief Legal Officer will be well

compensated, with the company disclosing it paid former SEC head Dan Gallagher

$30Mn in 2020, mostly in stock. Not too shabby for a May hire.

In the News:

House Passes Bill to Repeal OCC ‘True Lender’ Rule (The Hill, 06/24/2021) The rule that governs partnerships between banks and third-party lenders is expected to be repealed, as it passed the Senate in May and now heads to Biden’s desk.

A Government-Run Credit Bureau? Lawmakers Sharply Divided Over Idea (American Banker, 06/29/2021) Controversy over the proposed bureau includes concerns over the government’s ability to protect consumers’ data, even though the 2017 Equifax breach led to 148Mn consumers’ data being compromised.

U.K. Financial Regulator Bars Crypto Exchange Binance Markets (Bloomberg, 06/27/2021) Binance Markets, an affiliate and separate legal entity from Binance, was restricted from conducting business in the U.K. over concerns around money laundering and fraud.

A Top Fed Official Says Digital Currency May be the Money Equivalent of Parachute Pants (New York Times, 06/28/2021) Ahead of the Fed’s release of a paper on the potential for a digital currency, the Fed’s vice chair for supervision voices extreme skepticism.

Bill Pay—Even When Digital—Proves Bumpy, Survey Finds (American Banker, 06/28/2021) More consumers were found to skip bill payments due to a lack of organization than a lack of funds.

Payoneer Begins Trading on Nasdaq (American Banker, 06/28/2021) Payoneer seeks to rebrand itself from a payments provider to a digital commerce expert.

China Crushed Jack Ma, and His Fintech Rivals Are Next (Bloomberg, 06/29/2021) Chinese regulators apply strict oversight to fintech companies that grow too big, ordering many to restructure.

Lighter Fare

SpaceX’s Starship Could Launch to Orbit for 1st Time as Soon as July (, 06/29/2021) Next stop Mars? SpaceX’s Starship to launch to orbit this summer.

Is Reality a Game of Quantum Mirrors? A New Theory Suggests It Might Be (SingularityHub, 06/30/2021) Dive into scientists’ new theory about reality, which involves looking at a relational worldview over a mechanistic worldview.