News over the past week centered on the health of the U.S. consumer. Also, a recent op-ed from Gilles Gade, CEO of Cross River Bank, sparked a debate over alternative data and regulatory sandbox.
The Economic Cycle Research Institute has penned a contrarian piece, “The Strength of Consumers is Overstated” in Bloomberg this week. Highlights:
- The consensus from bank earnings reports is that the U.S. consumer is strong enough to drive the economy forward, but hard economic data shows consumer weakness.
- In particular, growth in industrial production on a YOY basis remains in a decisive downturn, sliding deeper into negative territory.
- Manufacturing remains in recession.
- Retail spending – yes, there was a big rebound in December. This was mostly due to a highly favorable comparison to the disastrous December 2018 plunge in retail sales. More relevant is the less noisy November retail sales growth since falling to a six-month low of 1.25% on a year-over-year basis, dropping from 3.75% two years earlier.
- The lifeblood of the average consumer is job growth.
- Growth in nonfarm payrolls has dropped to its lowest level in 2.25 years.
- Growth in total hours worked is the weakest since 2010 (90 bps vs. 2% a year earlier).
- Growth in total pay has fallen faster over the past year or so than growth in hours worked, slowing to a 3.8% pace from almost 5.5%.
Said another way, “the second derivative is negative” – there is growth, but the rate of growth is slowing down.
Retail sales data from the holiday season is painting a mixed picture. Here are the highlights:
- Q4 retail spent per Mastercard SpendPulse data is up 3.4% YOY. However, December 2018 is a weak comparison point.
- Consumers continue to shift their spending online and to specialty retailers, and away from department stores.
- Losers: Macy’s, JC Penney, and similar stores experienced contractions.
- Winners: specialty retailers (think Lululemon, Abercrombie, etc.), and niche e-commerce companies selling everything from gravity blankets to footwear.
- This was the most promotional season in recent years. Consumers remain price sensitive.
What does it mean to FinTech? POS lenders (Affirm, Bread, Klarna, Alchemy, etc.) and platform companies such as Shopify are natural beneficiaries of the trend. Private label credit card issuers such as Synchrony are on defense.
Cross River and Upstart – A Case Study in Alternative Data and Regulatory Sandboxing
Gilles Gade, CEO of Cross River Bank, has an op-ed in American Banker titled, “Alternative Data is Not the Enemy of Underwriting.” Overall, the piece makes the case that FinTech’s are successfully using alternative data to drive financial inclusion – evidenced by greater acceptance, lower rates, and diversity in gender and ethnic segments.
Specifically, data from the CFPB study on Cross River/Upstart lending shows that “the model approves 27% more applicants than the traditional credit scoring model; and yields 16% lower average APRs for approved loans.” The article also argues that regulatory sandbox is an effective tool to test for introducing innovation and creating competition.
FICO Updates Credit Score – Adding Alternative Data and “Flagging” Personal Loans
FICO this week announced changes to credit score calculations – the first major change since 2014. The goal is to incorporate more alternative data (such as rent/utility, etc.).
The move is in response to claims of “grade inflation” as credit scores, used to rank-order credit risk, march inexorably higher. PeerIQ has had a critical take on FICO scores – see this analysis for instance.
Until we see a “swap-in/swap-out” analysis, it’s too early to tell what the impact would be for lender approval rates at securitization markets, although swings of ~20 points in credit scores are expected.
The new score will show greater separation between high and low credit risk borrowers. It appears that borrowers that take out a personal loan are “flagged” (e.g., have a lower credit score than under the current model).
Take a look at LendingClub President Steve Allocca’s comments here for more industry reactions.
The Startup to Keep on Your Radar: Is Ocrolus the Next Plaid?
Visa bought Plaid because of its “network of networks” strategy. Ocrolus is building a network and data footprint across dozens of consumers, small businesses, and mortgage lenders and its growing at a meteoric pace.
We recommend this podcast interview with Ocrolus CEO Sam Bobley to learn more. (Full disclosure: PeerIQ CEO is an investor/advisor in Ocrolus).
PeerIQ New Hire:
PeerIQ is pleased to announce a talented class of new hires which we will introduce now and over the coming weeks.
Michael Chuprin joins PeerIQ as a Data Engineer. Prior to PeerIQ, Michael was a quantitative software developer at a hedge fund run by Victor Neiderhoffer where he led the development and deployment of automated systems for trading international securities. Michael completed a pre-med curriculum from Stony Brook University, where he received a degree in psychology and philosophy. In his free time, he enjoys reading about technology and finance, taking online courses, and journaling.
PeeIQ is hiring for backend and data engineers – let us know if you have referrals!
PeerIQ at SFIG 2020:
PeerIQ will be attending SFIG Vegas 2020 from February 23rd to February 26th.
PeerIQ will be featuring its benchmark application. The application automatically identifies pockets of over and under-performance for lenders and asset managers enabling risk managers to refine their lending and investment strategies.
Reach out if you’d like to connect!
- The Strength of Consumers is Overstated (Bloomberg, 01/22/2020) ECRI view is that the hard economic data shows the US consumer is weakening.
- FICO Changes Could Lower Your Credit Score (WSJ, 01/23/2020) Changes that will be implemented in FICO scoring could make it harder for many Americans to get loans.
- Bridgewater Co-CIO Bob Prince Says Boom-Bust Cycle Is Over (01/22/2020) Co-CIO of Bridgewater, echoing Irving Fisher, says that the boom-bust cycle has come to an end.
- Alternative Data is Not the Enemy of Underwriting (American Banker, 01/14/2020) FinTech companies have extended access to credit by revolutionizing the process.
- Banks That Shun Risky Borrowers Offer Rosy View of U.S. Consumer (American Banker, 01/17/2020) Banks that avoid subprime borrowers provide a different perspective of the American consumer.
- The Cards are in Capital One’s Favor (WSJ, 01/22/2020) Capital One reported that Q4 2019 earnings increased by 17% and revenue increased by 7%, compared to the prior year’s period.
- Citigroup CEO Says Many Branch Jobs are Still Safe from Machines (American Banker, 01/21/2020) Citigroup CEO, Michael Corbat, said that modernizing the bank app and digital-banking experience does not mean that bank retail jobs will be affected.
- The Backstory of Goldman Sachs’ Marcus App, Three Years in the Making (American Banker, 01/19/2020) According to the Head of Product at Marcus, Goldman took its time building the Marcus App because it wanted to get the app right.
- What’s Visa Going To Do With Plaid? (Forbes, 01/20/2020) Plaid enables Visa to execute its “network of networks” strategy.
- Why 2020 is the Year for FinTech (Forbes, 01/21/2020) Visa’s acquisition of Plaid is a good sign for FinTech in 2020.
- How Upstart and Cross River Bank are automating credit card payments (Bank Innovation, 01/16/2020) Upstart and Cross River Bank launched a direct credit card payoff feature.
- Episode 281 (podcast) Sam Bobley from Ocrolus (Medium, 01/14/2020) Podcast featuring Ocrolus CEO, Sam Bobley.
- Cash, Plastic or Hand? Amazon Envisions Paying With a Wave (WSJ, 01/19/2020) Amazon envisions using biometrics as a checkout payment option.
- There is no Dark Matter. Instead, Information has Mass? (Bigthink.com, 01/20/2020) Physicist believes that “information” has an equivalence to energy and mass – a USB stick with loan tape may weigh more than an empty USB stick