The war in Ukraine enters its second week and sanctions start to bite. U.S. still set to raise rates. More states mull 36% rate caps. Zip buys Sezzle. TD expands in the U.S. Klarna’s volume (and losses) grow. Citi eliminates overdraft fees. Cross River partners on solar financing. JPMC’s new initiative caters to startups. SoFi surges on strong guidance.

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SWIFT Sanctions. U.S. Rates Set to Rise by 0.25%.

The war in Ukraine is intensifying as it enters its second week. And so have the sanctions, with major Russian banks cut off from SWIFT. Governments around the world have sanctioned Russia’s central bank, causing the ruble to plunge. The unprecedented sanctions pose heightened economic and compliance risks to U.S. banks.

Despite the increased uncertainty, Fed Chair Powell said it is still appropriate to raise rates in two weeks’ time. Powell pointed to still-high inflation, which is likely to be aggravated by Russian sanctions, continuing strong economic demand in the US, and a tight labor market.

More States Look to Cap Rates

Efforts to cap interest rates on consumer credit are playing out in multiple venues. While enacting an outright ban on lending above 36% at the federal level has stalled, consumer advocates continue to press the FDIC and other federal regulators to block bank-fintech partnerships used to originate high APR loans.

At the state level, recent years have seen large states like California and Illinois implement various reforms. Illinois implemented a 36% APR rate cap that applies to all consumer loans. California capped APRs at 36% on loans between $2,500 and $9,999, though it still allows smaller single payment loans at triple digit APRs.

Most recently, New Mexico’s legislature passed a bill capping APRs at 36%, which is awaiting the governor’s signature. Lawmakers in Rhode Island and Minnesota are considering similar measures, and efforts are underway for a ballot initiative capping rates in Michigan.

All of this adds up to bad news for lenders offering credit at rates above 36% APR, which includes companies like OppFi, Enova, CURO, and Elevate.

Australia BNPL Zip Buys U.S. Firm Sezzle

The great BNPL consolidation is underway. Goldman acquired Green Sky. Square acquired Afterpay. And now, in the latest sign of consolidation, Australian BNPL company Zip is acquiring American BNPL Sezzle. Zip will pay about $350 Mn to acquire Sezzle. 

While the deal gives Zip a foothold in the U.S. market, we’re skeptical the deal is sizable enough to make Zip a serious competitor in the U.S., particularly compared to homegrown BNPLs like Affirm and well-financed foreign entrants like Klarna.

TD to Acquire First Horizon

TD, Canada’s second largest bank by market cap, is expanding its U.S. presence. It announced plans to acquire First Horizon in a $13.4Bn all-cash deal. The acquisition will give TD a foothold in the U.S. southeast. TD pointed to opportunities for as much as $610Mn in cost savings, revenue synergies, and the rapidly growing population in the region in justifying the deal.

The proposed acquisition is likely to get a close look from American regulators, given statements from numerous regulators regarding banking consolidation’s perceived impact on competition. The deal structure accounts for this risk, with an additional payment to First Horizon shareholders should the deal be delayed beyond November. 

Klarna’s Volume Jumps 42%

Two million transactions a day. That’s about how many purchases Klarna now facilitates, between growth in existing markets, expansion into new geographies, and acquisitions. 

The U.S. has been a key market powering Klarna’s growth. The company reported 71% annual growth in its U.S. user numbers to 25Mn. Klarna said it now partners with 25 of the top 100 retail brands in the U.S.

But as user and transaction numbers have grown, so have credit losses. They doubled year over year to about $487Mn. Still, according to Klarna, the increase in the absolute amount is due to its expansion and growth in users, rather than a deterioration in credit quality of its portfolio.

Interestingly, about 40% of Klarna’s transactions are via its “Pay Now” options, rather than the deferred payments it’s known for. This is significant, as it marks Klarna’s progress in establishing itself as a payment method, in addition to a financing method.

Citi Eliminates Overdraft Fees

Citibank is the largest bank yet to eliminate overdraft and NSF fees. The megabank is the third largest U.S. bank by assets. However, its retail footprint is considerably smaller than peers like Chase, Wells Fargo, and Bank of America. Citi has gone considerably further than those three by eliminating fees entirely but gives up less in doing so. Only about 1% of Citi’s non-interest income comes from overdraft fees, vs as much as 5% at Bank of America and Wells Fargo.

Cross River and Sunstone Partner to Deliver Solar Financing

Cross River Bank has teamed up with Sunstone Credit to offer financing for green energy projects. Sunstone provides financing for SMB customers looking to go solar via developers of the projects. Cross River will work with Sunstone to originate the loans and will provide API connectivity to Sunstone’s platform.

JPMC Initiative Focuses on Private Companies

Jamie Dimon has made clear that he’s taking the threat of fintech seriously. JPMorgan Chase’s technology spending has grown to a gargantuan $12Bn. Some of that money has gone to quietly build out a new initiative, internally known as Project Bloom.

The idea behind the venture is to build a platform of products and services designed to cater to earlier stage private companies and investors. One feature that’s been mentioned is a network for matching investors and companies seeking funding. Other potential functionality could include helping companies sell shares in tender offers, creating a market for secondary share trading, helping venture firms raise new funds, or offering loans against private shares. Such capabilities would potentially put JPMC in competition with startup-focused niche providers like Carta and AngelList.

SoFi Surges on Strong Guidance

SoFi released earnings this week, jumping over 20% in after-hours trading before ending the day up 3.4% on better than expected results and a strong 2022 outlook. 

The fintech reported $3.8Bn of originations for the quarter, a 67% increase YoY and 11% increase from the third quarter. Personal loans outperformed due to enhancements to technology and credit models, and through SoFi’s lending-as-a-service partnership with Pagaya, the company was able to add nearly 7,700 referred loans. 

As we covered in our newsletter last week, SoFi is acquiring Technisys, a core banking software provider that will enhance its ability to offer a “one-stop shop” for financial services. 

In its earnings release, SoFi also reiterated its optimism with its new bank charter, stating that it, “will be a game changer for us in differentiating our SoFi Checking and Savings offering in the marketplace, and improving our pricing and selection across Lending”. SoFi management noted that SoFi Bank would begin to contribute more meaningfully to earnings in the second quarter, as the bank was just launched during Q1. It is expected to contribute to earnings through a lower cost of capital once SoFi can originate and fund loans through the bank.

SoFi continues to add to its consumer product offerings, adding 25 new cryptocurrencies to its platform, while offering two regular-way IPOs (Rivian and Nubank) to retail investors during the fourth quarter.

In The News:

CFPB Proposal Aims to Curb Bias in Automated Appraisals (American Banker, 2/25/2022) The proposal would require all banks and mortgage lenders to ensure automated appraisals are complying with nondiscrimination laws.

How to Prepare for Buy-Now-Pay-Later Purchases Showing Up on Credit Reports (Wall Street Journal, 2/28/2022) Consumers will have to use BNPL diligently, as missing payments could soon lead to a ding to their credit scores.

How Fintech Consolidation Could Alter the Banking Landscape (American Banker, 2/25/2022) There were 1,167 acquisitions in the fintech space with undisclosed prices in 2021, up from 772 in 2020.

Look for More Unbundling and Trad/Non-Trad Partnerships this Year (Lendit Fintech, 2/28/2022) Trad/Non-Trad partnerships may help financial institutions update their banking infrastructure, as transitioning from legacy infrastructure in-house can be a slow and costly process.

How a New Payment Tech Lab is Approaching the Cyberwar Threat (American Banker, 2/28/2022) Synechron, a payment consultancy and tech company, hopes to use machine learning and data risk techniques to enable more proactive responses to fraud and cybersecurity problems.

Peter Thiel-backed Digital Bank N26 Plans to be Ready for IPO by End of 2022 (CNBC, 3/1/2022) While N26 may be “structurally IPO-ready” by the end of the year, it is in no rush to list, having recently raised $900Mn at a $9Bn valuation.

Payments Platform Cheddar Expands into Open Banking with Acquisition of Upside (Finextra, 3/1/2022) The U.K. banking platform to acquire Upside, who has developed an open banking-enabled marketing platform that connects retail brands with customers by offering personalized cashback.

Car Dealerships Don’t Want Your Cash—They Want to Give You a Loan (Wall Street Journal, 3/1/2022) Dealerships are pushing auto buyers to finance their purchases, because they make more money arranging the financing than selling the auto for cash.

Visa and Mastercard Block Russian Financial Institutions (The Paypers, 3/1/2022) Both companies will also contribute $2Mn for humanitarian aid to Ukraine.

​​FinDock Integrates with GoCardless (Finextra, 2/28/2022) The partnership will allow users to switch on GoCardless as a payment processor directly in their Salesforce environment.

Goldman Sachs Advances Further into Embedded Finance with GM Partnership (American Banker, 3/1/2022) Goldman took over the My GM Rewards card from Capital One, converting 3Mn cardholders to Marcus by late February.

Lighter Fare:

Thermacell Releases its First Smart Mosquito Repellent System (engadget, 3/1/2022) For those – like me – who get relentlessly attacked by mosquitos, the system called Liv, which can be controlled via Alexa or Google Assistant, may provide some much needed relief this summer.