Happy Sunday,
Inflation finally shows signs of cooling. But, some analysts warn it could stay higher for longer than the markets are predicting. Some on the Fed agree. CFPB’s 2023 agenda: fees. Butter raises a $22Mn Series A. Crypto on-ramp Wyre is back from the dead. Tech and banking layoffs continue. Stripe cuts its “internal” valuation. JPMorgan sues founders of a financial aid startup it acquired. Earnings season kicks off.
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Inflation Finally Cooling
In a promising sign, inflation cooled in December. Month over month, prices actually dropped 0.1%, though compared to the year prior, headline inflation was up by 6.5%. Gas prices were the biggest driver of the drop. In another positive development, a new survey shows consumers’ inflation expectations dropped by 0.2% to 5% in December, which is the lowest reading since July, 2021.
Image: Bloomberg
But, some analysts are warning that the market is underestimating the potential for higher inflation to stick around. Inflation swaps indicate investors believe that inflation will drop towards the Fed’s 2% target within a year. But asset managers like Fidelity, BlackRock, and Carmignac argue we’re entering a 1970s-style macroeconomic cycle that will see persistently higher inflation. The Fed’s Bostic expects interest rates will need to reach above 5% in Q2 and warns they may need to stay that high for “a long time.”
CFPB Agenda: Fees
An updated rulemaking agenda shows the CFPB plans to continue its focus on fees this year. Items on the docket include rules on overdraft fees, NSF fees, and credit card penalty fees, all of which have already been the target of criticism from CFPB Director Chopra. Chopra has taken issue with the approximately $12Bn credit card companies earn each year in late fees. The bureau is also looking to unwind a Fed rule that predates the creation of the CFPB, which allows card companies to raise late fees each year in line with inflation. Expect industry trade groups to push back on the measures, particularly overdraft and NSF fees, given the significant, voluntary moves made by many banks last year to reduce or eliminate these fees.
Butter Raises $22Mn For Preventing Subscription Churn
Startup Butter announced it has raised a $22Mn Series A last week. The round was led by Norwest Venture Partners with participation from Atomic, Transpose Platform, and Spring Tide Capital. Butter argues that “accidental” churn, caused by things like unintended card authorization declines, is one of the leading drivers of churn for subscription businesses. The company has built what it dubs a “Recovery Engine” to help identify and remediate these kinds of unintended churned accounts.
Wyre Back From The (Near) Dead
Rumors of Wyre’s death may be greatly exaggerated. The crypto “on-ramp” company laid off 75 employees earlier this month. It also took the worrying step of limiting customers’ ability to withdraw funds to a maximum of 90% of the value of their accounts. But now the company has removed that cap, after reportedly raising new funding from an unnamed strategic investor.
Tech and Banking Layoffs Continue
While the overall employment picture remains exceptionally strong, the same can’t be said for workers in tech and banking. The wave of layoffs that began last year is showing no signs of slowing so far, with numerous major tech and financial companies announcing layoffs last week.
Big names in tech announcing cuts included stalwarts like Amazon and Salesforce. Amazon announced reductions of 18,000 workers, primarily in retail, recruiting, and devices. Salesforce revealed plans to cut as much as 10% of its staff. Coinbase, facing what looks to be a prolonged downturn in crypto markets, announced an additional round of cuts. The company eliminated 18% of its staff last year, and last week it made a further 20% cut to its workforce.
Finally, news broke of Goldman Sachs’ plans to make significant headcount reductions. Goldman saw its number of employees swell to nearly 50,000 during the pandemic, as it continued hiring to meet demand from a frenzy of dealmaking but didn’t eliminate employees during regular annual review cycles. Now, with a decidedly slower pace of investing and after making the decision to curtail its retail banking ambitions, Goldman is planning to eliminate some 6.5% of employees, reports indicate. Other investment banks are taking a more “wait and see” approach on staffing levels.
Stripe Cuts “Internal” Valuation Again
Stripe has again reduced its “internal” valuation. The cut reduced its share price by 11%, which implies a valuation of $63Bn. Combined with prior reductions last year, Stripe’s valuation has declined by about 40% since its peak. The “internal” number is likely the result of 409A valuations, which are used to set employee stock option strike prices, rather than being determined by an external fundraising event. Because a significant portion of startup employees’ compensation can be in the form of options, companies have an incentive to re-price when justified by company or market conditions.
JPMorgan Sues Founders of Financial Aid Startup, Alleging Fraud
This story was pretty hard to miss last week. JPMorgan Chase filed suit against a financial aid startup named Frank. JPMorgan paid $175Mn for the company in 2021. At the time, Frank claimed it had about 4.25Mn users. But now, JPMorgan alleges the startup had only about 300,000 real users, and that the company created fake accounts to inflate its numbers. The bank seems to have only discovered this when it began trying to market to those users and realized many of the email addresses weren’t real. As of last Thursday, it appears that JPMorgan has deactivated Frank’s website.
Big Banks Kick Off Earnings Season
This week, earnings season began with Bank of America, Citi and JPMorgan shares rising on earnings beats. Wells Fargo shares also rose despite missing earnings expectations.
Source: PeerIQ
The first numbers out of earnings season show that average consumer loan books continued to increase on a sequential basis (Citi +4%, Bank of America +2%, JPMorgan +1%, Wells Fargo +1%). Additionally, deposits continued to ease off of record levels seen earlier in 2022 (Citi (3)%, JPMorgan (3)%, Wells Fargo (3)% Bank of America (2)%, sequentially).
At the same time, net charge-offs have continued to trend up sequentially (Citi +59bps, JPMorgan +13bps, Wells Fargo +11bps, Bank of America +9bps). While still below pre-pandemic levels, this “normalization” of credit is worth keeping an eye on, especially if the U.S. enters a recession in 2023.
Even with consumers feeling the effects of high inflation, credit card purchase volume rse, across both discretionary and non-discretionary spend.
Citi’s installment lending business continued to grow, albeit at a slower sequential pace, even as many installment lenders have faced struggles due to rising interest rates. In contrast, Citi does not appear to have cut back on its installment lending business’ growth ambitions.
Source: Citi Earnings Presentation
Wells Fargo, the third largest mortgage lender (only behind Rocket and United Wholesale Mortgage) and the most mortgage dependent of the six largest U.S. banks announced it would step back from the housing market, choosing to focus on making loans to bank clients and minority borrowers. To go along with this, Wells Fargo will shut down its business that buys loans made by third-party lenders and will “significantly” shrink its mortgage-servicing portfolio through asset sales. Layoffs are anticipated to come.
Wells Fargo’s decision comes as rising rates have weighed on the housing market. Wells Fargo saw its home lending originations fall (32)% sequentially, while JPMorgan’s home lending originations fell even further ((45)%).
In the News:
Consumers More Upbeat About their Finances in 2023, New York Fed Finds (American Banker, 1/9/2023) ~30% of households surveyed in December said they expect to be worse off or much worse off next year, down 4 percentage points from November.
Daly Sees Fed Raising Rates Above 5%, But How Far Is Unclear (Bloomberg, 1/9/2023) The Fed meets at the end of the month and is expected to hike by either 25 or 50bps, based on inflation data.
Powell: Nonbanks Need Structural Reforms, Not Fed Backstop (American Banker, 1/10/2023) Powell warned that treating nonbanks like banks would entitle them to the Fed’s lender-of-last-resort facilities or other financial support.
BNP Paribas Invests in AccessFintech (Finextra, 1/9/2023) AccessFintech is working to improve the capital markets operating model through data and workflow collaboration.
For Community Banks, Fear of Loan Losses Intensifies (American Banker, 1/8/2023) 84% of lenders surveyed ranked potential loan losses as a major challenge for the year ahead.
Banks Seek Digital Transformation Via Fintech Collaborations (The Financial Brand, 1/9/2023) Banks and credit unions are increasing partnerships with fintechs, 3rd party solution providers.
Jack Ma Cedes Control of Fintech Giant Ant Group (Wall Street Journal, 1/7/2023) Ma doesn’t hold an executive role or sit on Ant’s board, but has controlled Ant via an entity in which he holds the dominant position.
Santander Moves into B2B BNPL Market (Finextra, 1/9/2023) Allianz Trade, Santander Corporate and Investment Banking and Two have partnered to develop a new B2B BNPL package dedicated to large multinational corporates.
Tulipshare Calls on PayPal to End Discriminatory Account Suspensions (Finextra, 1/10/2023) Tulipshare is an app that empowers individuals to drive ethical change at public companies by becoming a shareholder.
Families, Couples, Ex-Couples: Fintechs Delve into Shared Finance (American Banker, 1/10/2023) Neobanks are catering to a wide range of family situations.
Lighter Fare:
Planes on Titan and Pipelines on the Moon: NASA Considering Some Wild Future Tech (Gizmodo, 1/10/2023) NASA’s advanced concepts programs seeks to “make the impossible possible”.