Happy Sunday,

Economic growth remains higher than expected. Auto borrower delinquencies rise. Treasury yields exceed 5%. TransUnion credit data. Metropolitan hit with $30Mn in penalties for compliance failures. Regulators release finalized CRA rule updates. Prism raises $5Mn for cash flow underwriting. Flourish secures $350Mn for responsible fintech investing. Marqeta launches credit card issuing platform. Fintech lenders report earnings.

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Economic Growth Exceeding Expectations, Despite Headwinds

Too hot, too cold, or just right? While the Fed and economic analysts expected rising rates to cool economic growth by now, that hasn’t come to pass. Instead, economists are raising their forecasts, leading the Fed to ponder whether more rate hikes will be needed to get inflation under control. In fact, GDP grew at a 4.9% annual rate during the third quarter, the fastest pace since 2021.

Still, that doesn’t mean there are no signs of stress in financial markets. With most “excess” savings built up during the pandemic long gone, some household budgets are starting to show increasing signs of stress. Borrowers are falling behind on auto loans in increasing numbers, with delinquencies hitting the highest rate in nearly 30 years. The share of subprime borrowers at least 60 days past due hit 6.11% in September. A sell off in bond markets also helped drive the benchmark 10-year Treasury yield to 5%, with knock-on impacts to equity markets and mortgage rates.

Image: Wall Street Journal

TransUnion Consumer Credit Data Shows a Rise in Delinquencies

TransUnion just released its monthly credit snapshot for September. In September, 60+ DPDs increased across the board (MoM) for Bankcard +9bps, Auto +6bps, Unsecured Personal Loans (“UPLs”) +4bps, and Mortgage +3bp. This marks the second consecutive month of DPD increases for all products.

Looking at bankcard, 90+ DPDs rose 10bps MoM, marking a third straight month of increases. Q4 2022 vintage DPDs continue to track higher than Q4 2021 and well above Q4 2017-2020 vintages. Average bankcard balances rose 0.3% MoM, to $6,059.

Looking at prime and above delinquencies, there weren’t material increases across bankcard or unsecured personal loans. For example, prime UPL 60+ DPDs were only up 1bp from a year prior and prime bankcard 90+ DPDs were only up 2bps from a year prior. Bankcard 90+ DPDs appear to be driven from the subprime risk tier, which were up 193bps from a year prior.

Source: TransUnion

Turning to originations, we got information on UPL origination volume for the June 2023 – July 2023 period (lag due to reporting time). July MoM UPL origination growth was largely negative, after a mixed month in June.

July fintech UPL originations declined across all risk tiers (continuing the broader June trend) with super prime (1.8)%, prime plus (10.4)%, prime (10.5)%, near prime (5.9)%, and subprime (11.6)%. All risk tiers remain significantly below July 2022 levels, with super prime (46.0%), prime plus (44.7)%, prime (60.9)%, near prime (63.8)%, and subprime (62.6)%.

Credit unions reversed their June (prime and up) growth, reporting MoM declines in July across all risk tiers with super prime (0.6)%, prime plus (8.6)%, prime (2.4)%, near prime (0.9)%, and subprime (5.4)%. On a YoY basis, super prime +28.1%, prime plus +3.2% and prime +1.1% were above 2022 levels, while near prime (5.7)% and subprime (1.1)% slightly lagged.

Finance companies reported a steep decline in top risk tier originations in July, with super prime down (30.7)% and prime plus down (21.6)%. Prime +0.6%, near prime +0.8%, and subprime (3.8)% results remained relatively stable on a MoM basis. While super prime originations are up 5.3% and prime are up 1.0% from July 2022, all other risk tiers remain below year ago figures (prime plus (17.7)%, near prime (4.2)%, and subprime (13.6)%).

Banks reported UPL originations declines in all categories (prime plus (4.4)%, prime (3.8)%, near prime (6.3)%, subprime (1.8)%) besides super prime, which grew 1.8% MoM. Despite the declines, bank originations remained well above July 2022 levels, with super prime +96.2%, prime plus +28.0%, prime +9.5%, near prime +11.2%, and subprime +8.5% from a year prior.

Fintech companies took back their lead in UPL balances, accounting for 27.5% in September. Finance companies just fell out of the top spot, accounting for 27.4%, while banks accounted for 25.1% and credit unions for 20.0%.

Average UPL balances per consumer increased +0.4% on a MoM basis, to $11,850.

Metropolitan Commercial Bank Hit With $30Mn In Penalties

Metropolitan Commercial Bank has reached agreements with the Federal Reserve Board and NYDFS to resolve allegations that the bank and fintech client MovoCash facilitated some $300Mn in illegally obtained unemployment benefits, the lion’s share of which has not been recovered.

According to the enforcement actions, Metropolitan failed to maintain a compliant and effective BSA/AML program and thus was not operating in a “safe and sound” manner. Gaps in controls allowed fraudsters to open accounts with stolen identity credentials through MovoCash in order to illegally collect unemployment payments. Metropolitan agreed to pay a $15Mn fine to the NYDFS and $14.5Mn to the Fed as part of the settlement.

Regulators Finalize Updated CRA Rule

Regulators finally got an updated version of rules implementing the Community Reinvestment Act across the finish line. Part of the complexity in the process of updating the rule was achieving consensus across the Fed, the OCC, and FDIC, who jointly issued the new rule. Bankers have time to prepare: the new rule won’t go into effect until January 1, 2026.

The new rule changes asset size thresholds. Banks with less than $600Mn in assets will be considered “small banks,” those with between $600Mn and $2Bn as “intermediate,” and those with over $2Bn as “large banks.” Large banks will face four tests under the updated CRA rule, including assessments of their retail lending, community development financing, retail services and products, and community development services. Those considered small banks would be evaluated under the current CRA evaluation, unless they opt into the retail lending test.

One key reason for the CRA update? The declining importance of branch networks with the rise of online banking. The updates are designed to encourage banks to expand access to credit, investment, and banking services in low- and moderate-income communities, Fed Chair Powell said. Regulators also hope the updates will provide increased consistency and clarity in how CRA regulations are applied.

Prism Raises $5Mn For Cash Flow-Based Underwriting

Prism, the cash flow underwriting tech startup spun off from credit card issuer Petal, announced it has raised $5Mn in funding. The round was led by Obvious Ventures, with participation from Core Innovation Capital and Citi Impact Fund. Prism offers a suite of products, including its proprietary CashScore, to enable lenders to use open banking data and cash flow underwriting to assess applicants’ credit risk. According to the company, it has completed more than two dozen successful pilots and has signed more than 20 customers.

Flourish Ventures Locks In $350Mn In New Capital

Flourish Ventures, spun out from eBay founder Pierre Omidyar’s investment firm Omidyar Network, announced it has secured an additional $350Mn in capital. The additional funding brings the firm’s total assets under management to some $850Mn. Flourish has a couple unique characteristics. First, it is an “evergreen” fund, meaning it isn’t time-limited, as is the case with most funds raised by traditional venture firms. This is possible given Flourish functionally has a single LP: Omidyar himself. Second, the fund describes itself as a “fintech venture fund with a purpose,” in that it focuses on investing in companies with “new or better ways of doing business,” Flourish’s managing partner and cofounder Tilman Ehrbeck said. Historical investments include U.S. neobank Chime, banking-as-a-service platform Unit, and African payments platform Flutterwave, among numerous others.

Marqeta Launches Credit Card Issuing Platform

Issuer-processor Marqeta, best known for powering Block’s Cash App debit card, announced the launch of its credit card issuing platform last week. The offering leverages the assets of Power Finance, a credit card program manager, which Marqeta acquired for about $275Mn earlier this year. The new credit issuing platform will enable brands to offer embedded credit cards in their apps and websites and manage application flows and rewards programs themselves through a dashboard. To facilitate brands launching such products, Marqeta plans to help connect those interested in launching such programs with partners to provide BIN sponsorship, debt capital, and receivables management.

Fintech Lenders Report Earnings

Source: Yahoo Finance

We kickoff this quarter’s earnings season coverage with a number of fintech lenders results. As we have covered, consumer spending continues to drive strong economic growth. We saw this reflected in earnings data, with Capital One’s credit card spend volume rising 6.1% YoY and Synchrony’s purchase volume rising 5.5% YoY.

Despite concerns with profitability, BNPL continues to grow in popularity. Synchrony reported that it grew its installment and pay later business by 29% YoY.

Turning to originations, we saw Enova’s consumer division report a 19.2% sequential increase in originations, while OneMain (12.4%) and LendingClub (25.0)% saw sequential declines as they tightened credit. Enova CEO David Fisher explained the lender’s growth, stating, “Given the stronger than anticipated consumer demand we were seeing during Q3, we made the decision to increase our marketing spend to capture this demand at attractive unit economics.” OneMain explained that its continued tightening of credit in lower ROE segments led to the lower overall volumes. LendingClub pointed to reduced purchases by its bank loan investors as the driver for its lower volumes.

LendingClub is moving to increase its structured certificates held on balance sheet while reducing its originations retained HFI. As a refresher, CEO Scott Sanborn explained that “In Q2, we launched our structured certificates program, which is essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price.” The company expects to increase its volume held via structured certificates from 34% to 60-70% in Q4.

Source: LendingClub Earnings Presentation

Student lender Navient originated $382Mn in private education loans during the quarter, from $447Mn a year prior and $197Mn a quarter prior. Ahead of the student loan payment resumption, the company saw private education refi originations up 25.4% QoQ (but refi originations remained (22.9)% below year ago levels).

Looking at NCOs, we saw sequential increases for Enova – Consumer +280bps, LendingClub +70bps, Capital One – consumer banking +38bps, Navient – private education +27bps, and Capital One – credit card +1bp. On the other hand, we saw Synchrony (15)bps and OneMain (92)bps report sequential improvements in NCOs.

Synchrony +3.0%, LendingClub +2.3%, and Capital One +0.4% were all able to grow deposits from the prior quarter. However, in today’s rate environment, garnering consumer deposits comes at a cost; Synchrony paid 4.18% on interest-bearing deposits, up +34bps QoQ, LendingClub paid 4.16%, up +32bps QoQ, and Capital One paid 3.30%, up +39bps QoQ.

Hi all, Cole here. If you’ve made it this far, thank you for being a loyal subscriber to the PeerIQ newsletter. Looking for more updates on the companies covered during earnings season? Follow/connect with me on LinkedIn and join my Discord server for exclusive access to earnings updates (and archived updates), including bullet notes on important info from earnings releases, key quotes from earnings calls, and relevant slides from decks.

In the News:

Cross River’s New Series, In Conversation With, Focuses on the Transformation of B2B Payments and Launches its First Conversation with Visa (Cross River, 10/26/2023) Tune in to a live-streamed conversation with Visa’s Veronica Fernandez, SVP, Head of Visa Commercial Solutions North America and Anthony Peculic, Heads of BaaS and Cards at Cross River on November 1st at 12pm ET.

Banc of California wins timely Fed approval of PacWest acquisition (American Banker, 10/23/2023) Banc of California said it expects the deal to close by the end of 2023, as originally targeted.

How data sharing could change under CFPB’s proposed new rules (American Banker, 10/23/2023) The CFPB has finally proposed “open banking” rules; what it means for data sharing.

Banks Face Shake-Up of Low-Income Lending Rules (Wall Street Journal, 10/24/2023) Federal banking regulators have finally released an updated Community Reinvestment Act rule.

5 ways merchants are fighting card-swipe fees at the point of sale (American Banker, 10/22/2023) Merchants are pushing back on “swipe fees” through the legislative and regulatory process, as well as by deploying tech and policies to try to blunt the high fees they face.

Coinbase Poised to Make Final Pitch in Bid to Kill SEC Accusations Quickly (Coindesk, 10/23/2023) Coinbase is pushing back on SEC efforts to characterize most cryptos as securities.

Grayscale Gets Court Order in Fight With SEC on Bitcoin ETF (Bloomberg, 10/23/2023) Grayscale’s court victory sends the matter back to the SEC.

Money20/20 launches startup network (Finextra, 10/24/2023) The conference and networking event is launching its own “startup network” in an effort to promote companies it thinks could become future heavyweights in fintech.

The benefits and drawbacks for banks in buying fintechs (American Banker, 10/24/2023) For banks considering M&A, there are pros and cons to consider.

Mastercard adds open-banking partners as it preps for CFPB rules (American Banker, 10/24/2023) With a 1033 rule out, card network Mastercard is doubling down on its open banking efforts.

US Bank Debuts Avvance Installment Payment Tool (PYMNTS, 10/24/2023) US Bank announced its “embedded, multi-channel point-of-sale lending solution,” dubbed Avvance.

Lighter Fare:

​​Why aliens might already know that humans exist (BBC, 10/24/2023) We haven’t discovered alien life yet, but they may have discovered us.