This week, we look at signs of a steady – if still slow and fragile – recovery, with new jobless claims falling to the lowest level since March; improving consumer credit scores shine a light on a system that needs an upgrade; PayPal’s embrace of Bitcoin; and, on the earnings front, continued improvement to lenders’ loss reserves even as SYF announced a new partnership with Venmo.
Let’s get to it.
Jobless Claims Drop, Purchasing Managers Index Up
Two encouraging data points on the U.S. economy were released this week.
On the employment front, the latest unemployment claims of 787,000, and a revision down for the week of 10/3, to 767,000, brought numbers down to the lowest rate since March. The number of people claiming state unemployment benefits also fell, to 8.4MM.
Source: WSJ, PeerIQ
Turning from the employees to the employers, new survey data from IHS Markit points to an ongoing recovery among U.S. businesses. The Purchasing Managers Index, which measures whether business activity is growing or shrinking, rose to 55.5 in October – the highest level in 20 months – while overall confidence levels rose to the highest point since May 2018.
Credit Scores Shot Up, Even as the Economy Melted Down
As unemployment rolls slowly tick down, the WSJ looks back this week at the impact waves of stimulus have had on the American consumer. Even as the economy collapsed in the spring and summer, as we’ve highlighted here before, stimulus payments helped individual consumers stay current or even pay down debt – even as many took advantage of COVID support programs.
Together, the stimulus packages helped average consumers actually improve their credit scores, which rose to 711 in July – the highest since FICO began tracking this in 2005.
But that just highlights the backward-looking nature of the traditional credit score, which doesn’t really capture real-time consumer behavior…and needs a modern upgrade.
VantageScore and alternative data providers (e.g., rent, utility, etc.) others are developing solutions to address some of these deficiencies.
Week Two of Earnings: Improving Economy Benefits SYF, COF, DFS and AXP
3Q earnings season continued this week, with SYF joining COF, DFS, and AXP in reporting results.
Highlights from SYF: Launches Venmo Credit Card with QR Code Innovation
It seems like many of the POS lenders are doing well – public and private (Affirm, Klarna, Wisetack, etc.). It’s a great sign for the sector and suggests the shift to digital is bouying the category through Covid.
Synchrony continued execution this quarter, signing with another partner (Venmo), following their deal with Verizon last quarter. Synchrony appears focused on the furniture and healthcare POS verticals.
- Top-level performance:
- Net earnings $313MM, revenue $3.5Bn, decreased by 21% from the same period last year
- Provision for credit losses up 19% to account for COVID-19 impact, allowance for loan losses $10.15Bn
- Venmo partnership and new customer acquisition
- Deepened their long-standing relationship with PayPal and Venmo with the launch of the first ever Venmo card
- “Share split purchases and earn cashback everywhere VISA credit cards are accepted, together with Venmo, our open banking API’s offer a seamless payment experience for users. Venmo customers can easily apply, buy, and manage their account right inside the Venmo app”
- Expanded CareCredit network and launched 3 new health systems this quarter, bringing the total to 9
- Focus on digital innovation
- Pandemic has accelerated the digital transformation that was already underway, particularly as it relates to the digital integration at the point-of-sale and contactless payment.
- Emphasis on providing fast and simple integration for partners, through next gen software development kit (SDK), also leveraging QR code technology
- Forbearance Excerpts
- Granted forbearance to a cumulative total of approximately 2MM accounts or $3.8Bn in account balances at the time of forbearance
- Nearly 94% of accounts enrolled in a hardship program have left forbearance through September 30; only ~119,000 accounts or $227MM in account balances remain in forbearance
- Intend to cease the forbearance program at the end of October, but ready to provide other forms of assistance to impacted cardholders
Source: Synchrony Financial, PeerIQ
Source: Synchrony Financial, PeerIQ
A few highlights to call out among the other credit card lenders reporting this week:
Capital One [COF] reduced provisions significantly from the prior quarter, setting aside $450MM for the Credit Card segment (down from $2.9Bn in 2Q) and releasing $43MM (versus a $876MM provision) from the Consumer segment. Charge-offs for both business lines fell to 3.6% (vs 4.5% in 2Q) for the Credit Card business and 0.3% (vs 1.2% in 2Q) for the consumer segment.
COVID-19 assistance enrollment for Auto loans continued to decline – though with so many enrollees being re-enrollments, it’s a core area to watch.
Source: CapitalOne, PeerIQ
Discover [DFS] reported new provisions of $710MM in the quarter, mostly offset by charge-offs; total ACL increased only $42MM, holding at $8.2Bn overall, versus a nearly $1.3Bn increase in the prior quarter.
NCO rates for Credit Card and Personal Loans improved versus the prior quarter, to 3.45% and 2.69% respectively. Reserve rates did increase slightly, to 9.3% for Credit Card and 11.9% for personal loans, from the prior quarter.
Source: Discover Financial Services, PeerIQ
American Express [AXP] set aside $665MM for credit losses, a significant drop from the $1.6Bn provision in the second quarter. Although write-offs fell slightly ($927MM to $781MM), most of the drop was driven by a reserve release (-$116MM) versus last quarter’s build (+$628MM). Overall, loan reserve ratios ticked up slightly to 8.3%, while reserves as a share of credit receivables fell to 1.0%.
American Express, PeerIQ
Finally, student loan provider Sallie Mae [SLM] sold its Personal Loan portfolio in the quarter. The move reduces provisions by $43MM, takes $609MM in balances (at 2Q) off the books, and most importantly helps focus the firm on its core student loan business.
PayPal follows Square into Crypto
Finally, this week payments giant PayPal announced that it would partner with Paxos, a regulated cryptocurrency services provider, to offer its account holders access to select crypto inside the PayPal digital wallet.
While the tool allows customers to buy, hold and sell crypto within the PayPal ecosystem, it’s not completely fungible just yet – there’s no ability to transfer those holdings directly from PayPal to another wallet.
The service will be available to U.S. clients in the coming weeks, with expectations of expanding the service to Venmo and international clients in the first half of 2021.
In the News:
- The Fed’s $4 Trillion Lifeline Never Materialized. Here’s Why. (NY Times, 10/21/2020) The Fed was meant to take $454Bn and drastically expand it, but so far, it has lent $20Bn.
- An Attempt to Make Point-of-Sale Payment Devices Obsolete (American Banker, 10/19/2020) FinTech startup, MagicCube, has created an equipment-free alternative to expensive card terminals. Maybe software is eating the world?
- Coronavirus Tanked the Economy. Then Credit Scores Went Up. (WSJ, 10/18/2020) The average consumer credit score hit 711 in July, which is the highest level on record, even after millions of Americans lost their jobs and skipped debt payments.
- FinTech Startups Broke Apart Financial Services. Now The Sector Is Rebundling (Crunchbase, 10/21/2020) Venture investors and leaders in the FinTech industry can visualize a future where certain startups will move toward again rebundling services.
- Insights from 9 Global Banking and Fintech Innovation Leaders (The Financial Brand, 10/18/2020) Excerpts from FinTech innovative leaders on Jim Marous’ Banking Transformed podcast.
- Varo Bank Launches Small-Dollar Loan Product (Banking Dive, 10/16/2020) Varo Advance allows qualified Varo account holders an advance of up to $20 free of charge, with a maximum charge of $5 for a $100 advance.
- PayPal Finally Welcomes Cryptocurrencies, Including Bitcoin, Ethereum (Forbes, 10/21/2020) PayPal has decided to embrace crypto currencies and will soon offer its U.S. customers the ability to buy, hold, sell, and use various digital currencies.
- Afterpay becomes first fintech to join Westpac’s banking-as-a-service platform (FinExtra, 10/21/2020) Westpac has introduced AfterPay as the first third party FinTech to use its new banking-as-a-service platform.
- 10 Ways Dating in NYC is Different than it Was a Year Ago (Time Out, 10/8/2020). The bright side? You don’t have to awkwardly hug if the date didn’t work out.