Happy Sunday,

Fitch downgrades U.S. credit. Job openings fall, as do layoffs. SEC finalizes data breach reporting rule. Croissant exits stealth with $24Mn in funding. Mercury Financial inks $200Mn debt deal. Mastercard moves to block pot payments. Bread reports declining credit volume. Levchin skeptical of Elon’s “X” ambitions. SoFi earnings.

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U.S. Credit Downgraded

Fitch downgraded the U.S. credit rating from AAA to AA+. The credit ratings agency cited a deterioration in governance, as demonstrated by repeated close-calls on debt ceiling negotiations, and intense political polarization in the country. Fitch joins Standard & Poor’s, which cut the U.S. pristine AAA rating back in 2011.

Image: Bloomberg

Meanwhile, U.S. job openings fell to their lowest level since April 2021. The Labor Department’s JOLTS survey measured 9.6Mn open positions in June. Hiring has declined to the lowest level since February 2021. But layoffs also declined to their lowest level since the end of last year.

Minneapolis Fed President Kashkari sounded a positive note last week, saying the inflation outlook is “quite positive” and that the U.S. economy is proving “resilient,” though he does expect unemployment to tick up in the coming months.

SEC Rule To Require Prompt Data Breach Disclosures

The SEC finalized a controversial rule that will require publicly traded companies, including banks, to disclose data breaches more quickly than they have previously. Specifically, the rule states that firms must disclose “material” data breaches or other cybersecurity incidents within four days of determining such incidents are “material.” There is likely to be disagreement over what constitutes a material incident. There isn’t much guidance from regulators over how the term applies to data breaches and cybersecurity, which may leave it up to the courts to determine. The SEC’s final rule will become effective 30 days after being published in the Federal Register.

Croissant Announces $24Mn Seed Round

Croissant, a fintech that embeds a guaranteed buyback option in ecommerce merchants’ checkout flow, has exited “stealth” mode and announced a $24Mn seed round. Investors include Portage, KKR, Third Prime, BoxGroup, 25madison, and Twelve Below. The platform offers end-consumers a wallet that hosts their Croissant-linked goods, like an expensive pair of shoes or purse, for instance. Users can choose to resell their item at a later date and use the funds with the merchant for new purchases.

Like BNPL, Croissant seems to be looking to reduce the pain of the checkout experience, specifically, the psychological pain of paying. By providing a guaranteed buyback price, shoppers know they have the option to sell back the item later at a set price.

Mercury Financial Secures New $200Mn Debt Facility

Mercury Financial, not to be confused with Mercury the business charge card startup, announced it has secured a $200Mn debt facility. The facility was provided by investment banking firm Neuberger Berman. Mercury Financial offers credit cards targeting a near-prime audience. The company claims to use more than “100 million data points” to better assess risk in order to approve more applicants. It currently serves some 1.5Mn card holders. The company plans to use the new facility to expand existing cardholder relationships and to originate new accounts.

More Banks Leaning On “Hot” Deposits

Banks, especially smaller and mid-sized ones, have been leaning more heavily on so-called “hot” money deposits. To counter the deposit flight many banks experienced earlier this year, they turned to brokered deposits. Third-party brokers facilitate moving investor funds to banks. But such deposits come with strings attached. They are typically at higher rates than a bank’s own deposit base, crimping net interest margin. And, because the funds are not from direct customers of the bank, they are more likely to flee at the first sign of distress, thus the moniker “hot” money. Regional banks ramping up their use of brokered deposits include Truist, M&T, Western Alliance, Comerica, Zions, and KeyBank.

Image: Wall Street Journal

Mastercard Moves To Block Pot Payments

Mastercard isn’t happy about payment processors that are reportedly allowing merchants to process cannabis sales via PIN debit rails. While cannabis is legal for medical or recreational use in many states, it remains illegal at the federal level, which poses a challenge for nationally-chartered banks and the payment networks. Upon learning that certain processors were facilitating such transactions, Mastercard sent cease and desist letters to them last week. With few if any electronic payment options, many cannabis merchants resort to operating in cash. Not only is that inconvenient for customers, the merchants say, but it also poses a risk to the businesses and employees, as it makes them a target for potential theft. The SAFE Banking Act aims to make it easier for banking institutions to serve cannabis businesses but is struggling to get enough support to pass a divided Congress.

Bread Reports Declining Credit Volume

POS lender Bread Financial, previously known as Alliance Data, reported a decline in origination volume and a spike in delinquencies. The company reported credit sales declined 13% year-over-year to $7.1Bn. Management blamed inflation, rising interest rates, and the sale of its BJ Wholesale Club portfolio for the decline. The company has also been adjusting the composition of its private-label card portfolio, as it looks to move away from “mall merchants” that have historically comprised a significant chunk of its book. Bread is looking to diversify into other sectors, including travel and technology. For example, the company recently inked a deal with Dell to provide 6- and 12-month financing as well as taking over Dell’s existing card portfolio.

Levchin Skeptical of Elon’s “Everything” App

Affirm CEO Max Levchin is skeptical of his fellow “PayPal mafia” member Elon Musk’s ambitions to turn Twitter (errr, X, I guess) into a so-called “everything app.” Musk seems hellbent on creating a U.S.-clone of Chinese super-apps like WeChat and Alipay. But Levchin isn’t convinced. In an interview with Bloomberg last week, he said, “I don’t think the U.S. consumer is looking for a version of a Tencent product.” Still, never say never with Elon. According to Levchin, “Don’t ever put anything past Elon,” he said. “He has proven time and time again that he can achieve crazy things.”

Earnings Season: SoFi

We’re light on earnings coverage this week, with SoFi as the only company we cover that reported Q2 results. Despite continuing uncertainty over federal student loan policy, the company posted impressive numbers for the quarter. Overall loan originations were up a healthy 37% YoY. Personal loan volume was up 51% YoY, while student loan origination was basically flat at (1)% YoY, and home loan origination dropped (27)% YoY, as rising rates have slowed mortgage activity to a crawl. SoFi has continued its focus on prime borrowers. SoFi CEO Anthony Noto emphasized on this on the earnings call, saying, “Our underwriting model and our focus on high-quality credit have resulted in dependable performance of these loans as our annualized net charge-off rate was lower quarter-over-quarter at 2.94%.”

On the deposit side of the business, SoFi grew deposits by 26% QoQ to $12.7Bn. Essentially all (99%+) of SoFi’s deposits are interest-bearing, and nearly 98% of deposits are insured. The average yield on interest-bearing accounts has ballooned from 0.35% last year to 4.48%, tracking the sharp rise in the Fed funds rate. SoFi CEO Noto remarked on the high-quality of the deposit base, saying, “Importantly, more than 90% of our consumer deposits are from sticky direct deposit members, and nearly 98% of our deposits are insured.”

Galileo, the issuer-processor SoFi acquired, grew by 3Mn accounts to a total of 129.4Mn accounts. The results reverse a QoQ decline in Galileo accounts seen in Q1’23.

SoFi beat earnings estimates and raised revenue and EBITDA guidance for the back half of the year. Investors rewarded SoFi’s strong results, with shares closing up almost 20% on the day of the earnings release.

In the News:

Capital proposal may drive banks further away from mortgages (American Banker, 7/28/2023) A regulatory proposal that would require banks to hold additional capital may discourage mortgage lending.

Coinbase CEO Says SEC Wanted All Assets Except Bitcoin Delisted: Report (Decrypt, 7/31/2023) Coinbase CEO Brian Armstrong claims the SEC asked the exchange to de-list all cryptos except for bitcoin.

The fight over a bill targeting credit card fees pits payment companies against retailers (CNBC, 7/31/2023) “Durbin 2.0” is teeing up a fight between banks and payment networks vs. merchants. 

Can FedNow give U.S. processors an edge over global rivals? (American Banker, 7/31/2023) FedNow has the potential to grow real-time payments in the U.S. – if banks and credit unions adopt it.

US fintech Rocket Companies appoints Varun Krishna as new CEO (Fintech Futures, 8/1/2023) Rocket Companies appointed former PayPal and Intuit exec Varun Krishna as CEO, effective September 5th.

Proportion of US Banks Tightening Loan Terms Rises to 50.8% (PYMNTS, 7/31/2023) The monthly SLOOS data shows over half of respondents are tightening credit to medium and large businesses.

Rapyd acquires a piece of PayU from Prosus for $610M to scale its fintech-as-a-service platform (Techcrunch, 8/1/2023) Rapyd is expanding its “fintech-as-a-service” offering into emerging markets with $610Mn acquisition of Prosus.

Lighter Fare:

The Best Spaceflight Images From July Will Make Your Head Explode (Gizmodo, 7/31/2023) Exploding rockets, Barbies in space, and more.