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SBA Progresses 7(a) Expansion; FedNow Discounts; Twitter Files with FinCEN

By Cole Gottlieb

November 13, 2022

Happy Sunday,

Some investors are now betting rates hit 6%. October CPI rises less than expected. SBA slowly takes steps to expand 7(a). The Fed has been busy: financial stability report, master accounts, FedNow discounts, NBFI’s debt levels. FTX files for bankruptcy. SplitIt partners with Goldman pursuing card tech acquisitions. Twitter files with FinCEN.

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Could Rates Hit 6%?

With inflation likely to remain stubbornly elevated, some investors are making bets that interest rates will reach as high as 6% before the Fed stops hiking. Still, for now, that isn’t the consensus view in the market. Rather, traders are expecting rates to reach 5% or 5.25% sometime next year.

Image: Wall Street Journal

However, the likelihood of 6% rates decreased a bit, with October CPI coming in at 7.7%, lower than expected and down from 8.2% in September. While still high, the CPI print could put the Fed on a path to raise rates by 50 bps in December, rather than a more aggressive 75 bps.

Despite aggressive rate hikes, the economy isn’t showing signs of slowing. The jobs report earlier this month showed 261,000 new roles in October. This far exceeded analysts expectations that the economy would add 200,000 jobs. Still, layoffs and hiring freezes throughout the tech sector may be a sign of things to come for the rest of the economy.

Economic turmoil isn’t slowing down subprime lending. Overall card balances surged in Q3, with originations to subprime borrowers climbing 12% vs. the previous quarter.

SBA Slowly Readies 7(a) for Fintechs

After being teased in a speech by Vice President Harris about a month ago, the Small Business Administration is now taking its first steps to expand access to its marquee 7(a) program. Since the 1980s, the number of “small business lending companies” (non-depository lenders) has been capped at 14.

Now, the SBA is beginning to take steps that would grant authority to lend under the 7(a) program to new non-bank lenders. But don’t expect it to be fast. The SBA has signaled any increase in the number of entities authorized to lend will be linked to the agency having adequate staffing and funding to oversee the new program participants.

Fed Roundup

Perhaps unsurprisingly, it’s been a busy time at the Fed lately. At the macro level, the central bank recently released its latest financial stability report. Persistent inflation and monetary tightening were top concerns. 62% of broker-dealers, investment funds, research and advisory organizations, and academics surveyed cited the factors as key areas of economic concern. Worries about potential impacts to liquidity and rates from the Fed shrinking its balance sheet were also frequently cited.

Master accounts have also been top of mind. The topic has been a sore spot for some, as the Fed has repeatedly delayed making a decision on granting master accounts to some crypto-related firms. The Fed’s perceived slowwalking of the applications resulted in Custodia suing the Fed to try to force a decision. As scrutiny has increased, some in Congress have weighed in, suggesting the Fed should provide greater transparency into the master account application process.

Now, the Fed is considering publishing a list of the institutions that have master accounts at its 12 regional banks. It is also considering publishing the names of entities that have applied for such accounts and the application status. The Fed is currently seeking public comment on the proposal.

In Fed payments news, as it readies the roll out of FedNow, the central bank said it is planning on waiving customer credit transfer fees and participation fees when it launches next year. The Fed also confirmed what the pricing will be once it begins charging: customer credit transfer and customer credit transfer return fees of $0.045 per-item and a participation fee of $25 per routing transit number per month.

Lastly, the Fed is seeking additional data about nonbank borrowers’ debt levels. The financial stability report mentioned above noted bank lending to non-bank financial institutions (NBFIs), like mortgage originators and private equity firms, could constitute “hidden” pockets of leverage in the financial system. Fed Vice Chair Lael Brainard said, given the current economic climate, it’s important that regulators be aware of all possible threats to the financial system.

Crypto Chaos as FTX Files for Bankruptcy

Unless you’ve been living under a rock, you’ve probably seen an endless stream of coverage of FTX’s abrupt fall from grace. While the story is continuing to develop, the gist is that the leak of the purported balance sheet of Alameda Research, a crypto trading firm affiliated with FTX, showed a potentially significant gap in assets vs. liabilities. This drove competitor Binance to dump FTX’s “native token,” FTT, leading to a bank-run like dynamic and liquidity crunch. It looked liked Binance would step in to rescue the company, but it ultimately declined to do so.

Now, there’s ongoing fear of contagion, with BlockFi, which FTX bailed out earlier in the year, freezing withdrawals, and stablecoin Tether breaking its peg. FTX and some 130 affiliated entities have now filed for bankruptcy, in what is sure to be an extremely complex (and contentious) proceeding.

SplitIt Partners with

BNPL provider SplitIt has teamed up with payments provider, the two announced last week. The partnership will enable customers to offer SplitIt’s installment financing as a payment option. The move comes amid continued stress on the BNPL sector, with valuations of major players like Affirm and Klarna down substantially from pandemic-era highs.

Goldman Pursuing Card Tech Acquisitions

Goldman Sachs has been shopping for card tech platforms to augment its current offerings, the Wall Street Journal reported. According to the reporting, Goldman has considered acquiring Deserve, CoreCard, or Cardless. Goldman already licenses CoreCard’s technology as part of its credit card stack.

The news comes on the heels of Goldman’s reorg, which saw its own “Marcus” brand de-emphasized and co-brand card programs shuttled into a new operating segment, dubbed “Platform Solutions.” Acquiring issuing-processing technology could help Goldman to rollout credit card programs more quickly while improving its margins.

Twitter “Everything App”

Last week, in a Twitter Spaces audio chat, newly installed “Chief Twit” Elon Musk revealed a variety of plans for the app, including incorporating payments capabilities and, eventually, adding “debit cards, checks and whatnot.” In line with this vision, the company filed relevant paperwork with FinCEN to obtain the necessary registrations to offer payments-related capabilities.

The payments and banking features could be part of a wider “everything app” modeled on WeChat, Musk has mused. Still, given the company just laid off about half its workforce, low user penetration vs. other social media platforms, Musk’s polarizing persona, and advertisers fleeing, it seems he’ll have an uphill battle in realizing that vision.

Originations Impacted by Rising Rates, Weaker Economic Outlook

On the back of strong earnings and raised revenue guidance, Oportun popped +26.8% on earnings. OppFi rose +5.7%, as management reported that adjustments to its credit models have decreased first payment default rates. Elevate fell (7.3)% on rising NCOs and MoneyLion fell (9.6)% after downwardly revising adjusted revenue and EBITDA. Upstart (10.4)% and Affirm (22.6)% also fell after providing weaker-than-expected guidance.

Source: PeerIQ

Upstart’s transaction volume (originations from Bank Partners) slipped (43)% sequentially, impacted by higher interest rates and elevated risk in the economy. CEO Dave Girouard reported that this has resulted in 40% fewer approvals and loans offered at 800 bps higher than they would have been a year ago.

Additionally, Upstart has increased the amount of core personal loans retained on its balance sheet to $249Mn, from just $140Mn a quarter prior. Higher interest rates have impacted demand for loans, with CFO Sanjay Datta noting that, “Loan funding in general remains challenging. Overall financing costs for our securitization investors are up about 500 basis points since last year.” Upstart management noted that it is pricing its loans expecting a “Further degradation in the environment and in our macro index.”

Despite the disappointing earnings results (revenue of $157Mn vs. $169Mn expected, loss per share of $0.24 vs. $(0.08) expected), Upstart did manage to grow its dealership footprint by 10% sequentially, and added 12 new personal unsecured lending bank and credit union partners.

Affirm’s GMV was essentially flat sequentially, with volume greatly impacted by a slowdown in Peloton sales (Affirm’s largest client). Affirm reported that its approval rate has stayed relatively flat throughout the year, with a weighted-average loan life of 4.6 months. Management noted that recent Pay-in-4 loans cohorts have improved charge-off rates, with the most recent “tracking to less than 2%.” Despite a volatile funding market, CFO Michael Linford reported that the company was able to increase its Funding Capacity by $470Mn during Q3, by means of newly committed capital across forward flow, warehouse, and asset-backed securitization (“ABS”).

Like many other subprime lenders in the space, Oportun has tightened its credit underwriting standards. The tightening of underwriting standards and focus on lending to existing and returning members has slowed origination growth, with aggregate originations slipping (28)% sequentially.

However, management has maintained that the credit tightening has driven down early-stage delinquencies and first payment defaults. We wait to see if this impact will show up in future NCO rates, as the company reported annualized NCOs increased to 9.8%, from 8.6% a quarter prior.

Oportun was able to increase the number of Lending-as-a-Service partner locations by 54, to 348, and announced that its Sezzle partnership is on track to launch in 4Q22.

Similarly, OppFi saw its originations impacted (down (19)% sequentially), as credit adjustments decelerated origination growth. After making major adjustments to its credit models in mid-July, CEO Todd Schwartz reported that, “The first payment default rate for new customers ended the third quarter, 26% lower than at the end of the second quarter. Also, the first payment default rate for refinance loans to existing customers ended the third quarter 9% lower than at the end of the second quarter.”

While OppFi expects its NCO rate to continue to worsen in the fourth quarter (as it lags new vintage performance), it is happy that the portfolio quality is becoming stronger.

Elevate and MoneyLion did not see originations slip, with Elevate reporting a 5% and MoneyLion reporting a 2% increase sequentially. At the same time, Elevate also saw its NCO as a % of revenues increase to 59%, from 55% a quarter prior. MoneyLion saw its ARPU (average revenue per user) fall from $79 in Q2 to $68 in Q3, but also reported that its CAC (customer acquisition cost) declined to from $11 in Q2 to $8 in Q3.

In the News:

Rising Rates Help Some Banks More Than Others (Wall Street Journal, 11/7/2022) Large banks holding near-record deposits helped by rising rates, while niche banks have been hurt by declining deposits, slowdowns in venture investing.

As Shopify Battles E-Commerce Slowdown, Lending Emerges as a Bright Spot (The Information, 11/7/2022) The company’s lending business topped half a billion in new loans for the first time in Q3.

‘Pay By Bank’ Trend Is Next Front In Merchants vs. Banks Payments War (The Financial Brand, 11/7/2022) A growing number of retailers have been encouraging shoppers to use account-to-account payments, in order to avoid “swipe” fees from card use.

SVB Financial Squeezed by Tech Economy Downturn (American Banker, 11/7/2022) SVB's cost of deposits is expected to rise as it brings higher-cost funding back onto its balance sheet.

Revolut Launches Direct Messaging, Says it's Becoming a 'Super App' (American Banker, 11/8/2022) The latest feature announcement in Revolut’s bid to build a “global financial super app".

Oportun Pumps Brakes on New Borrower Loans Amid Record Inflation (American Banker, 11/8/2022) Oportun continues to tighten its credit standards and shift its focus to returning borrowers.

Lighter Fare:

An Interview With the Guy Who Ate a Rotisserie Chicken Every Day for 40 Days (Vice, 11/8/2022) “Rotisserie Chicken Guy” became an overnight internet sensation, drawing hundreds to watch him complete his mission.