Could rates go above 6%? Mortgage apps hit 28-year low. Bond yield inversion widens. Banks fight for deposits. Senators push regulators on Zelle fraud. SoFi sues to stop student loan payment pause. Varo raising $50Mn downround. Droit’s $23Mn Series B. “SoFi for trade students” raises $36Mn in equity and debt. Silvergate, Silicon Valley Bank to shut down. Amount layoffs.
How High Will Rates Go?
Jerome Powell indicated the Fed is prepared to quicken its pace of rate hikes, if need be. He said a 50 bps hike is on the table, pointing to continuing inflation and a job market that remains robust. Investors are now taking seriously the prospect that rates will go above 6%. The next Fed meeting takes place March 21-22.
Rate hikes have already substantially cooled the U.S. housing market, though mortgages dropped from a high of over 7% last November to about 6.10% in February before rebounding to 6.65% in early March. Mortgage applications have hit a 28-year low as we approach the key spring homebuying season.
Bond yields are showing their largest inversion since Volcker suggested we may be in for a hard landing, with the 2/10 spread widening to over a percentage point for the first time since 1981.
Meanwhile, banks are finally being forced to fight for deposits as liquidity is drained from the banking system. Over a dozen banks are now offering CDs with rates of 5% APY.
Sen. Democrats Urge Action on Zelle Fraud
Senate Democrats, including Elizabeth Warren and Sherrod Brown, are continuing their call for bank regulators to take action on Zelle fraud. In a letter sent to the Fed, FDIC, NCUA, and OCC, the Senators encouraged regulators to “closely review and examine” AML, BSA, and EFTA practices and compliance at depository institutions that offer Zelle.
Early Warning Services, which operates Zelle, responded by saying it is overseen and regularly examined by both the OCC and CFPB. EWS pointed out that 99.9% of Zelle payments are sent without a report of fraud or scams.
SoFi Sues to Block Student Loan Payment Pause Extension
In a controversial move, SoFi is suing in an attempt to block the Biden administration’s continuation of a pause on federal student loan payments. SoFi, best known for its student loan refinance product, argues the pause has no basis in law, the continued extensions violate the Administrative Procedures Act, and it is costing SoFi millions in profits. The pause means borrowers who owe on federal student loans don’t need to make payments and their debts aren’t accruing interest. This gives borrowers little reason to refinance, decimating demand for SoFi’s refinance offering.
Varo Raising $50Mn Downround
Varo, the first U.S. neobank to get a de novo charter, is raising $50Mn at a substantially reduced valuation. The company signed a term sheet with private equity fund Warburg Pincus for a $25Mn anchor commitment that would value the bank at $1.8Bn. That’s a 28% drop from its last $510Mn fundraise, which valued the company at $2.5Bn.
But even with a 28% drop, Varo looks expensive. Public fintechs like SoFi (-52%), MoneyLion (-91%), and Dave (-97%) have seen their valuations drop significantly since Varo’s last fundraise. Even Stripe has reportedly seen its valuation fall by nearly half, from $95Bn to around $50Bn.
Regtech Droit Raises $23Mn Series B
Droit, which offers a regtech solution for pre- and post-trade decision making, announced it has raised a $23Mn Series B. The company, founded in 2012, says its Adept platform can evaluate “the full regulatory implications of any given interaction within their transactional infrastructure” instantly. The round was led by Pivot Investment Partners and UBS with participation from existing investor Goldman Sachs.
Fynn Raises $36Mn
Fynn, a “SoFi for trade students,” announced it has raised an $11Mn seed round and $25Mn debt facility. The company offers financing for students pursuing vocation education programs, like HVAC technicians, automotive mechanics, welding, and medical technicians. As these programs are not typically classified as educational institutions, those wanting to attend usually cannot access federal or state loan programs. Fynn is currently partnered with about 150 technical colleges and has originated some $4Mn of loans to date. The seed equity includes participation from Y Combinator and Susa Ventures.
Silvergate To Shut Down
In a sign of continued uncertainty for the crypto ecosystem, Silvergate, which provided banking services to crypto firms, announced it would shut down. All deposits will be fully repaid, per a liquidation plan shared last week. The announcement of the plan to liquidate comes less than a week after the bank shut down its Silvergate Exchange Network, which facilitated 24/7 transfers between investors and crypto exchanges. It’s unclear how Silvergate will resolve any claims against the business.
Silicon Valley Bank Closed by CA Department of Financial Protection and Innovation
On Friday, the FDIC put out a press release announcing that Silicon Valley Bank (“SVB”) would close. This marks the largest bank failure since Washington Mutual in 2008. Shares of the bank had tumbled after it announced it had lost nearly $2Bn selling assets following a larger-than-expected decline in deposits.
S&P credit analysts wrote, “[Deposits] fell 13% during the final three quarters of 2022 and continued dropping in January and February ‘in part because of its concentration in investor-funded technology company deposits and the slowdown in public and private investments over the past year.’”
Source: Wall Street Journal
Thursday, the bank announced a $2.25Bn balance sheet-bolstering plan, which was later scrapped. Also Thursday, Peter Thiel’s Founders Fund advised companies to pull their money from SVB due to concerns over its financial health. Tech and venture clients panicked and rushed to pull deposits, prompting a bank run. SVB was searching for a buyer when regulators stepped in to close the bank. The FDIC was appointed receiver.
Per the Wall Street Journal, here’s what happens next for SVB customer deposits:
Source: Wall Street Journal
Amount Laid Off 25% of Staff in January
Amount, a bank tech company spun off from near-prime lender Avant, announced it had laid off 25% of its staff, or about 130 people, in January. It was the second round of layoffs at the company in less than a year. Last June, it cut about 18% of workers. The firm, which counts banks like TD and Barclays as partners, said now was the right time to adjust its cost structure and accelerate its path to profitability.
In the News:
Why the Recession Is Always Six Months Away (Wall Street Journal, 3/6/2023) Many are anticipating a recession, but strong economic data is pushing the date off.
Lawmakers Question SBA’s Plan to Open up 7(a) Program to Nonbanks (American Banker, 3/7/2023) A bipartisan warning sent by Small Business Committee warns updating 7(a) rules could weaken underwriting standards and open the program to fintechs that approved too many fraudulent PPP loans.
Open Banking Startup Abound Nabs $601M to Supercharge its AI-based Consumer Lending Platform (Tech Crunch, 3/6/2023) The U.K.-based consumer lending service raised funds to fuel its open banking-based business.
British Fintech SteadyPay Closes $3 Million Seed Round (Finextra, 3/6/2023) The progressive lending platform is targeted to people with unstable incomes, such as freelancers and gig workers.
Texts From Crypto Giant Binance Reveal Plan to Elude U.S. Authorities (Wall Street Journal, 3/5/2023) Binance’s strategy relied on building a American platform, Binance.US, which has been much more intertwined with Binance than the companies have disclosed, mixing staff and finances.
Silvergate Is in Talks With FDIC Officials on Ways to Salvage Bank (Bloomberg, 3/7/2023) The bank was hit hard by FTX’s implosion, reporting a $1Bn loss in Q4 and announcing it was discontinuing its flagship crypto payments network (Silvergate Exchange Network – SEN).
Banking As A Service: What Are The Risks And Who Owns The Customer? (Forbes, 3/6/2023) The risk of fintechs changing BaaS providers is real, as consumers have brand loyalty to the fintech, not the bank behind its services.
Wix and Stripe Bring Tap-to-Pay on iPhones to US Merchants (Finextra, 3/6/2023) Merchants can accept and process contactless payments using just the Wix Owner app and an iPhone.
Stripe Faces $3.5 Billion Tax Bill as Employees’ Shares Expire (American Banker, 3/6/2023) Stripe plans to use the money from its latest round of fundraising to cover tax bill, exercise some employees’ options.
A Tangled Tale of Gun Parts, Identity Theft and the Ease of Buy Now, Pay Later (New York Times, 3/5/2023) Seung Song’s identity was stolen to buy $5,000 worth of gun parts from an online dealer using a BNPL service.
Amazon & Venmo: What this Means for Card Issuers and Banks (Fintech Nexus, 3/7/2023) Amazon’s October 2022 move marked the first time a major retailer embraced a P2P app as a form of tender.
Spreedly Announces New Integration with PayPal Products (PYMNTS, 3/7/2023) The new integrations will let users make payments with Venmo, Pay Later, Credit and ACH tools.
BNPL Platform Affirm Quits Australia (Finextra, 3/8/2023) Affirm made the decision to begin an orderly wind-down of its operations, coming just a month after local BNPL player Openpay fell into receivership.
The Best Dishes Eater Editors Ate This Week (Eater, 3/6/2023) For our NYC readers, some recs from to check out from the Eater team. Enjoyed this week’s newsletter?