U.S. inflation came in down slightly at 8.3%. Brazil moves towards creating a crypto framework as Argentina institutes a ban. TerraUSD, a stablecoin, collapses. Regulators push for federal stablecoin framework before end of year. Deserve raises $250Mn debt facility. Visa Ready adds BNPL. Rising rates exclude riskiest borrowers.
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Inflation Eases, Slightly
U.S. inflation eased slightly to an annualized 8.3% last month. That’s below March’s 8.5% rate but ahead of the consensus forecast of 8.1%. John Williams, President of the New York Fed, said last week that lowering inflation is the central bank’s “main mission.” Williams said he believes the neutral rate is around 2% to 2.5%, though the Fed may need to raise rates above that to cool inflation. Williams believes it is possible to engineer a “soft landing,” where the Fed cools inflation without causing a recession.
Brazil Moves Towards Crypto Regulation
Neighboring South American countries are taking starkly different approaches towards crypto. Argentina’s central bank is moving to ban cryptocurrency in the country. Many users in the country sought to use cryptocurrencies to shield their savings from continuing high rates of inflation in the country.
Meanwhile, Brazil’s Senate is moving closer to passing a bill creating a framework for crypto in the country. The move could help the country capitalize on burgeoning VC interest in LatAm and record funding flowing to crypto startups.
Renewed Push for Stablecoin Regulation as Terra Collapses
Mayhem in crypto markets. TerraUSD, an “algorithmic” stablecoin, has broken its peg to the USD and appears to be in a “death spiral.” The stablecoin, with a market cap of over $18Bn recently, plunged as low as $0.23 in trading this week. Losses spread to other popular crypto assets, with bitcoin dropping as low as $26,000.
The chaos led to renewed calls for regulation of stablecoins. Treasury Secretary Yellen, testifying at a previously scheduled Congressional hearing, used the opportunity to call for a “consistent federal framework” on stablecoins. Yellen pointed to last year’s President’s Working Group report and said the situation with Terra illustrates that “there are risks to financial stability” from the rapidly growing sector.
We expect greater regulatory scrutiny of stablecoins, especially those that are not backed by U.S. dollar reserves.
Credit Card Startup Deserve Secures $250Mn Debt Facility
Deserve, which offers consumer credit cards and operates a “credit card as a service” platform, announced it has raised a $250Mn lending facility. Goldman Sachs led the facility, with participation from Cross River and Waterfall Asset Management. Deserve has partnered with companies like BlockFi, M1 Finance, and OppFi to launch credit card programs.
Congrats to CEO Kalpesh Kapadia and the entire Deserve team on the news!
Visa Ready to Serve as BNPL Matchmaker
Visa is working to make it easier for banks to get into the BNPL game. The card network has expanded the capabilities of its “Visa Ready” program, which operates to connect fintechs and issuers, to include BNPL. So far, Visa has vetted some 20 BNPL companies. The platform aims to encourage more banks to enter the BNPL space by streamlining the technical requirements to do so. Companies in the partner directory include ACI PayAfter, ChargeAfter, i2c, Marqeta, and Cross River.
Rising Rates Put Pressure on Subprime Lenders
Interest rates are rising, but APR ceilings are not. Lenders catering to non-prime borrowers, including Upstart and Oportun, have pledged not to charge rates above 36% APR. The result? Some higher-risk borrowers will no longer qualify. The CEOs of both companies acknowledged as much during earnings calls last week.
Despite the tighter underwriting, Oportun is still expecting significant loan growth. It’s forecasting origination volumes will grow by 93% in the second quarter vs. the same period last year.
For its part, Upstart, which facilitates loans for banks and credit unions, is working on a small-dollar product at APRs below 36%. The company has begun publicly testing the product.
Conclusion of Quarterly Earnings Coverage Yields Eventful Week
We wrap up our weekly earnings coverage with an extremely volatile week for nonbank lenders and markets as a whole. Moneylion (+35.5%), Affirm (+31.4%) and Oportun (+9.7%) jumped on strong earnings while Upstart ((56.4)%), Coinbase ((26.4)%), SoFi ((12.1)%) and Rocket Companies ((5.3)%) slid on weakened guidance amidst a challenging macro environment.
During the first quarter, Moneylion completed its acquisition of Even Financial, the embedded finance marketplace. Even with the backdrop of rising rates, management reaffirmed its 2022 guidance, which investors took positively. The fintech’s originations grew 116% YoY and 6% QoQ to $408Mn. At the same time, it was able to increase its ARPU to $74 and decrease its CAC to $16, helping margins. While Moneylion has not disclosed specific FICO and income details of its customers, management reiterated its focus on consumers with $40k-$150k of household income.
Affirm dropped earnings with the announcement of a multi-year extension of its partnership with Shopify. The partnership cements Affirm as the exclusive provider of Shop Pay Installments in the U.S. Additionally, Affirm entered into a strategic partnership with Stripe to make Affirm’s Adaptive Checkout available to all Stripe users in the U.S. Affirm’s GMV increased 73% YoY, but declined (12)% QoQ, to $3,916Mn, mostly on seasonality.
Oportun touted its ability to cross-sell into multiple products, with CEO Raul Vazquez stating that their, “second strategic priority is to increase multi-product relationships with our members. As a proof-point of our ability to do so, in the first quarter products grew at an annualized rate of 58%, faster than our member growth of 48%.” Oportun expanded its Lending-as-a-Service partner locations to 284, up 10x from a year prior. This comes as the company plans to launch its fully-digital LaaS partnership with Sezzle in the second half of the year. Oportun also expanded geographically, beginning to offer secured personal loans in Arizona in April.
While Upstart reported a solid first quarter, the lowering of 2022 guidance led investors to sell off its stock. Upstart reported $4,535Mn in transaction volume for the quarter, a 162% increase YoY and 11% increase QoQ. While the number of loans increased from a year prior, it declined from the end of Q4. Management explained that due to rising rates, a hawkish Fed, and increased risk in the economy, “average loan pricing on our platform has increased more than 300 basis points since October.” Increased loan pricing means that Upstart, who serves consumers with lower credit profiles, may have to lower approval rates and charge higher APRs, which could dissuade potential customers from using their services.
Coinbase reported lower trading volume and monthly transacting users from the end of last year, as crypto markets have sunk along with broader risk assets. It didn’t help the crypto exchange that the week it released earnings coincided with the implosion of TerraUSD. Coinbase continued to expand its business, launching Coinbase Pay, which enables any crypto wallet or dapp to connect to fiat rails. The company released Coinbase NFT, its NFT marketplace in April.
In the first quarter, SoFi reported early success with its newly launched Checking and Savings account, and began to offer margin lending for SoFi Invest members. Similar to moves of competitors, SoFi began to offer free crypto transactions for members with direct deposits accounts. Its personal loan business remained strong, up 151% YoY, while home loans dropped (58)% as rates rose and the housing/refinancing market cooled off.
As seen with SoFi, Rocket Companies also were impacted by rising rates, with closed loan origination volume (representing purchase loan + refinancings) falling (48)% YoY and (29)% QoQ. Looking ahead, Rocket hopes its Fast 15 program will help drive more demand. The program guarantees that eligible purchase loans close in just 15 days.
In the News:
Fed, Biden Administration Float New Lending Rules for Lower-Income Areas (Wall Street Journal, 5/5/2022) Under the proposal, large banks would face expanded scrutiny of their auto lending activities if such loans comprise a significant portion of their business, in addition to mortgages and small-business loans.
Credit Card Fees in the Crosshairs as Sen. Durbin Revisits Interchange (American Banker, 5/6/2022) With Visa and Mastercard increasing interchange rates after a two-year delay, government intervention is becoming increasingly likely.
Fed Rate Hikes Are Good for Banks—Unless They End in a Recession (Wall Street Journal, 5/9/2022) Higher rates have not helped bank stocks, although they can boost revenue by charging more on loans.
More than 30 Buy Now, Pay Later Trends & Statistics for Banks in 2022 (The Financial Brand, 5/9/2022) BNPL has exploded in popularity, and is expected to grow further, as customers value flexibility and low interest rates.
Compound Treasury Nabs Credit Rating from S&P (The Block, 5/9/2022) Compound Treasury received a B- rating, becoming one of the first DeFi offerings to receive a score from a major rating agency.
TD Bank Latest to Offer Embedded Banking to Business Clients (American Banker, 5/9/2022) TD’s fintech partner, Fispan, is building APIs to connect TD’s systems with third-party software.
New Innovations—Including Crypto Cards—Energizing The ‘Dying’ Credit Card Market (Forbes, 5/10/2022) Curve, Tandym and crypto cards represent new offerings in the card space.
Wirex, Visa Team on Crypto-Backed Visa Card (PYMNTS, 5/10/2022) Wirex previously launched one of the world’s first crypto-enabled debit cards in 2015 through its partnership with Visa.
Hero Dog Who Helped Cleared Hundreds of Mines Honoured by Ukraine’s President (Vice, 5/9/2022) Cheers to the good boy, Patron.