We haven’t beat inflation (yet), and a soft landing is still possible. Revolving debt hits a record as delinquencies increase. FTC takes action against Brigit. CFPB seeks to supervise digital wallets. Goldman looks to dump GM card. Klarna returns to profitability, eyes IPO. Affirm expands B2B BNPL. Earnings season continues.
Too Early to Declare Victory Over Inflation
Minneapolis Fed President Kashkari says it’s too soon to declare victory over inflation. Despite significant progress on getting pricing pressure under control, Kashakri said more data is needed to conclude we’ve solved the problem. Kashkari also suggested the risk of over-tightening is preferable to doing too little and allowing inflation to fester. Meanwhile, Chicago Fed President Goolsbee argued a soft landing is still possible. Pointing out that we’ve seen the fastest drop in inflation since 1982, Goolsbee says the Fed can tame inflation without significantly harming the economy.
Despite higher rates, Americans keep racking up more credit card debt. Per the latest Fed report, outstanding balances grew to a record of $1.08T. But as balances grow, more U.S. households are struggling to keep up with their payments. Card delinquencies continue to rise, particularly for borrowers who also hold student loan and/or auto loan debt.
FTC Takes Action Against Brigit
The FTC and small-dollar lending startup Brigit have reached a settlement over allegations the company deceived consumers and made it difficult or impossible to cancel their subscriptions. According to the FTC complaint, Brigit advertised “instant” cash advances of “up to” $250. In order to access the advances, users had to sign up for a $9.99 per month subscription to Brigit Plus.
But, the FTC says, very few consumers actually qualified for the advertised $250, and many didn’t qualify for any advance at all. And, despite advertising “free instant transfers” and “no hidden fees,” Brigit began charging a $0.99 instant transfer fee, the complaint says. As a subscription product, Brigit Plus is also covered by the Restore Online Shoppers’ Confidence Act.
The complaint alleges that Brigit made it overly burdensome for users to cancel their subscriptions by deploying UX tactics designed to discourage cancellation, sometimes referred to as “dark patterns.” Borrowers who had an outstanding advance were blocked from canceling altogether, despite advertisements promising they could cancel at any time. Brigit will pay $18Mn in refunds to customers as part of the settlement.
CFPB Wants to Supervise Digital Wallets
The CFPB has released a new proposed rule that would require “Big Tech” companies that operate digital wallets to be supervised by the Bureau. While the CFPB has enforcement authority over wallets like those offered by Apple, Cash App, and Venmo, it doesn’t currently have supervision authority over those services. The proposed rule would apply to nonbank companies that process at least 5 million transactions per year. That would equate to 17 companies that hold 88% market share, per comments from CFPB officials. The CFPB argues the rule is necessary to ensure similar regulatory treatment and consumer protection for similar activities. Companies that would be covered by the rule are likely to pushback, arguing their services are already regulated by state and federal law.
Goldman Looking to Sell GM Card Program
Goldman’s retreat from consumer lending continues. The Wall Street stalwart shuttered lending under its Marcus brand, sold off GreenSky, and was rumored to be trying to find a buy for its once-vaunted Apple Card partnership. Now, its GM credit card business, which it acquired in 2020 from Capital One, is on the block. According to reporting in WSJ, the bank told employees in its Platform Solutions division that it was beginning the process to find a new issuer for the card. GM is expected to drive the process to find a new bank issuer. In the meantime, Goldman will continue managing the program.
Klarna Returns to Profitability, Could Be a “Trillion Dollar” Company
Could Klarna be worth a trillion dollars some day? Doubtful, but CEO Sebastian Siemiatkowski argues the company has the potential to be a “trillion-dollar company.” If that’s the goal, a return to profitability after years of losses as it aggressively expanded is a good start. The company reported its first quarterly operating profit in four years as consumers continue to borrow and as the company’s cost-cutting measures take effect. The BNPL lender is also eyeing an IPO. Klarna has begun work to set up a holding company entity in the U.K., should it choose to list in the country. A New York-based listing is also still on the table. While Klarna’s valuation plunged from its high of $46Bn in 2021 to $6.7Bn in a funding round last year, reports indicate an IPO could value it at as much as $15Bn.
Affirm Expands into BNPL For B2B
Affirm and Amazon have expanded an existing partnership to include B2B purchases. Eligible small businesses and sole proprietors who make purchases on Amazon Business will have the option to split purchases over $100 into 3-48 monthly payments. The financing plans won’t be free, however. Based on Affirm’s underwriting, it will charge between 10% and 36% APR. The news comes during what has been a tough time for Affirm. Despite growing revenue, Affirm continues to post significant losses. Toward the end of 2022, the company laid off approximately 20% of its staff. While consumer demand for credit remains robust, deteriorating credit quality and rising rates are likely to continue to pose challenges for Affirm.
Volatile Week of Results as Fintechs Report Earnings
Source: Yahoo Finance
We wrap up our weekly earnings coverage with a host of fintech lender results (keep an eye out in the coming weeks for our Q3 Consumer Lending Review – ICYMI, catch up with our Q2 Consumer Lending Review here).
With inflation squeezing household budgets, consumers increasingly have turned to small dollar cash advance products, to bridge the gap between paychecks. As a result, we saw MoneyLion report a +26% increase in originations from a year prior and Dave’s ExtraCash product report a +23% increase in originations from a year prior. MoneyLion’s CEO Dee Choubey explained that “Most of these originations came from our liquidity product, Instacash.”
In contrast, we saw Upstart’s (34)% YoY and Oportun’s (24)% YoY personal loan originations decline due to continued credit tightening efforts. OppFi reported an +8% increase in originations YoY, with CFO Pam Johnson noting, “New customer originations for the quarter decreased by 5% year-over-year while existing customer originations increased by 20.2%.”
Affirm reported a 28% increase in GMV from the year prior, with CEO Max Levchin stating, “Our GMV growth was over 3x that of US e-commerce overall. Travel and ticketing once again outperformed.” Average order value declined to $299, from $331 a year prior and $317 a quarter prior, and 74% of loans were interest-bearing, up from 64% a year prior and 72% a quarter prior.
While Affirm’s GMV rose, DQ rates did not suffer, with monthly installment loans 30+ day DQ rates (Ex-Pay-in-4) declined by 30bps from the year prior. Dave – ExtraCash’s 28-day DQ rate improved by 41bps sequentially, to 2.42%, the lowest in company history.
OppFi’s NCOs as a % of average receivables increased to 55% from 47% the quarter prior but remained below the 66% from a year prior. OppFi attributed its lower YoY NCO rate to that fact that lower quality loans originated prior to credit adjustments midway through 2022 were mostly charged off by the start of the quarter.
Oportun’s NCO rate fell 70bps sequentially to 11.7%, but management revised Q4 NCO guidance higher to 12.3%. While Oportun’s 4Q22 and 1Q23 post-tightening (July 2022 and December 2022) vintages have performed near or better than 2019 vintages, its 3Q22 vintage saw NCO rates 60bps higher than the 3Q19 vintage.
Affirm continued to roll out its Affirm Card, with over 400k cards active by the end of September. The company has reported early positive results, with Card GMV increasing to $224Mn for Q3, up from $129Mn the quarter prior. CEO Max Levchin said, “We continue to see Card usage grow in new categories, most importantly groceries, fuel, and home supplies, and offline Card usage remains nearly an order of magnitude better than the non-Card average.” The flexibility to “BNPL anywhere” is a trend that we have seen growing across the industry, with Apple launching Pay Later, Klarna launching its Klarna Card and Sezzle launching its Sezzle Anywhere virtual card offering.
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