Greetings,
Inflation remained elevated in July, but there are signs price increases are slowing. Unemployment continues to drop and job openings exceed 10Mn. Banks plan for excess deposits to stick around. Upgrade raises $105Mn. BNPL grow through differentiation, acquisitions. Brex withdraws its charter application. California reaches a deal on ISAs.
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PeerIQ’s Opportunity to Help FDIC Modernize the U.S. Banking System
We are excited to share that PeerIQ has been selected by the FDIC to participate in the next phase of the FDIC Rapid Phased Prototyping competition. We are humbled to be chosen alongside S&P Global Market Intelligence, Palantir Technologies, and Novantas out of the initial field of 33 fintech competitors. PeerIQ’s mission is to further transparency and efficiency in the consumer credit ecosystem. Our clients, which include FDIC supervised banks, use our platform to better manage their consumer credit portfolios. We plan to leverage our experience and capabilities to support FDIC’s goal of accelerating the adoption of modern technological tools at financial institutions.
Number of Open Jobs Exceeds Those Looking
Initial unemployment claims dropped for a third straight week, meeting forecasts with 375,000 new claims. Continuing claims dropped to 2.866Mn, the lowest level since March 2020.
Despite the economy continuing to add jobs lost during the pandemic, job openings reached an astounding 10.1Mn in June vs. 8.7Mn people unemployed in July. Analysis suggests part of the reason is a mismatch between the types of jobs available and where employees want to work. Likely some combination of pay, job quality, and fears of the Delta surge may be discouraging the unemployed from filling jobs in the service and hospitality sectors.
That said, there are signs the robust demand for labor is benefitting workers. Employers are raising wages, encouraging some workers who had been on the sidelines to start looking. The labor force participation rate edged up slightly to 61.7% in July.
Image: Wall Street Journal
Inflation Remained High In July But Shows Signs of Easing
Headline inflation numbers for July matched June’s, with prices rising 5.4% vs. the year before. There is some good news, in that the pace of price rises appears to be slowing. On a month over month basis, prices in July rose 0.5% vs. June, a sharp decline from June’s 0.9% increase. The slowdown comes amid signs that Delta is crimping economic activity, with a slowdown in air travel and restaurant visits already evident.
It’s not yet clear how the wildcard of the Delta surge and the likely to pass infrastructure package may impact the Fed’s timing of beginning to remove support from the economy, but we expect any change to be carefully telegraphed well in advance.
Deposit Glut Is Here to Stay
A year and a half into the pandemic, and additional deposits are still flowing into consumers’ and businesses’ bank accounts. Despite a trend toward relaxing measures and economic opening, albeit an uneven one, total deposits at commercial banks have continued to increase.
The stickiness of this trend is forcing large and small banks alike to determine their best approach to utilizing the excess liquidity on their balance sheets. Demand for loans has not returned as quickly as some expected, forcing bankers to consider how much risk to take in deploying those deposits in other ways, such as buying securities.
Image Source: S&P Global Market Intelligence
If you’re facing an excess of deposits and looking to deploy them, we’d love to talk. PeerIQ’s platform is designed to enable community banks to buy unsecured consumer loans with confidence, manage portfolios with ease, and stay compliant. With our partner Cross River Bank we are helping community banks diversify their portfolio and increase ROA. Reach out to Josh Karlgaard at jkarlgaard@crossriver.com to learn more about our program.
California Reaches Deal to Treat ISAs as Student Loans
California banking regulators and New York-based Meratas announced a voluntary agreement to treat Meratas Income Share Agreements (ISAs) in the state as student loans.
With an ISA, a student typically agrees to repay a set percentage of their future income for a set period of time in exchange for financing the cost of an educational program. ISAs are not a new product, with a history for financing education dating to the 1970s. With growing concerns about student debt and the affordability of higher education, they’ve received renewed interest in recent years — and renewed attention from regulators.
The agreement means that consumers with an ISA from Meratas in California will enjoy the same borrower protections as they would with a traditional student loan.
Smart regulation and voluntary agreements like Meratas’ with California are an encouraging sign. Innovation in financing options, with proper oversight and consumer protections, gives students more choice and flexibility in how they finance their education.
BNPL Players Jostle for Growth
With deep-pocketed Apple entering the BNPL fray with its partner Goldman Sachs and Square’s acquisition of Afterpay, existing BNPL companies in the US are looking for ways to differentiate and continue to grow.
For instance, Sezzle offers SezzleUp, which helps consumers build their credit history as they use the service. This is a point of contrast with most other “split pay” offerings, which position themselves as not being credit. Affirm is attempting to extend its reach by offering a debit card allowing consumers to use its service at bricks and mortar retailers.
Klarna has made several acquisitions, including Hero, a virtual shopping platform. The strategy is designed to help Klarna move upstream from checkout, keep consumers within its ecosystem, and make the payment experience feel “invisible.” On the merchant side, Klarna recently partnered with Liberis to offer its merchants small business loans from $1,300 – $350,000. The partnership provides additional revenue while giving merchants a reason to stick with Klarna vs. competitors.
Geographic expansion and consolidation continue as well. UK BNPL provider Zilch is planning a US market entrance via its acquisition of NepFin. Zilch offers a unique approach in the BNPL space, in that it focuses on the consumer directly rather than by partnering with merchants. Its offering allows consumers to split any transaction into four equal payments using a standard debit card.
Expect M&A activity within the BNPL sector and adjacent areas to continue as companies race to achieve scale in and across markets and expand and differentiate their product offerings.
Going Out (of Earnings Season) With a Bang
This week we wrap up earnings season, with heavyweights Upstart, Rocket Companies and SoFi. If you missed our earning coverage over the last few weeks, we have summarized it here.
Upstart and SoFi joined most of the non-bank lenders posting significant QoQ origination increases, 61.8% and 15.7% respectively.
Upstart pushed forward with their expansion into the auto refi market, expanding from 33 to 47 states, to cover more than 95% of the U.S. population. Upstart has grown this segment rapidly, entering its first state in January of this year. Upstart also reported that they now have over 150 institutions who buy Upstart-powered loans or bonds.
SoFi saw strength in its personal loan origination segment, which increased 60.7% from the first quarter. The company refined its credit policy and automation capabilities, with over 50% of personal loans processed during the quarter fully automated, up from less than 30% a year ago. Its home loan origination segment was up 7.7% from the first quarter, with the introduction of a new rates calculator. SoFi’s student loan originations lagged behind, dropping (14.5)% QoQ on seasonal differences and the impact of the payment freeze on federally-held loans.
Upstart’s share price jumped 26.2% on strong transaction volume growth as well as a 25% upward revision in revenue guidance for the year. Rocket Companies was up 10.3% on its strongest purchase closed loan volume in company history, nearly double both Q1 and 2Q20. SoFi stumbled, even with solid top line growth, its share price dropping (14.2%) on an earnings miss.
Truist ‘Improves’ Lending with Home Reno-focused lender
Truist, itself recently formed through the merger of regional banks BB&T and Suntrust, announced it’s acquiring home improvement-focused lender Service Finance Co. for $2Bn. Service Finance provides point-of-sale lending via a network of about 14,000 contractors and dealers focused on home renovations. Part of the attraction for Truist is the tech: more than 80% of Service Finance’s loans are applied for on mobile.
Expect opportunistic deals like Truist’s to continue. With compressed net interest margins and excess liquidity, it makes sense to seek out new lending opportunities to grow scale.
Brex Withdraws Charter App
Small business financial and expense management platform Brex has withdrawn its application for a Utah industrial loan company charter and FDIC deposit insurance. It’s not unusual for charter applications to be withdrawn, strengthened based on feedback from regulators, and refiled. Square and Nelnet both withdrew and refiled their applications before successfully being awarded ILC charters.
In the meantime, Brex continues to leverage bank partners UMB Financial, LendingClub Bank (formerly Radius), and Bank of the West to power its products.
Upgrade Raises $105Mn, Valued at $3.3Bn
Upgrade, co-founded by fintech veteran Renaud Laplance and Adelina Grozdanova, has raised $105Mn, valuing the lending company at $3.3Bn. The investment round was led by Koch Disruptive Technologies, an investment arm of Koch Industries.
Five-year old Upgrade focuses on everyday Americans who are already well-banked, according to Laplanche. The difference, he argues, is that Upgrade can provide better value and better experience. It seems to be working: Upgrade has extended more than $7Bn in credit since its founding and expects to do that same amount in 2021 alone.
Congrats to Renaud, Adelina, and the entire Upgrade team on the raise!
In The News:
Treasurys’ Big Rally Gets Help From Skeptics of Low Rates (Wall Street Journal, 08/09/2021) Heavy short covering helps to drive yields lower, even with a strong economic backdrop.
Gusto Secures A $10 Billion Valuation Tailwind As Its HR Software Sails Toward IPO (Forbes, 08/10/2021) The HR and payroll software company that caters to SMBs raised $175Mn in recent weeks, ahead of an anticipated 2022 IPO.
Crypto Lobbyists Falter in Bid to Fix Broad Tax Provision (Bloomberg, 08/10/2021) Lobbyists failed to win a change to crypto tax reporting rules in the infrastructure bill, leaving intact language for broad oversight of virtual currencies.
Buffett-backed Nubank Hires investment Banks to Lead IPO – Source (Reuters, 08/09/2021) The Brazilian digital bank has hired Morgan Stanley, Goldman Sachs and Citigroup to help lead its U.S. initial public offering.
Plaid Settles Class-Action Lawsuit for $58 Million (American Banker, 08/06/2021) Plaid settles lawsuit in which consumers alleged that the company used shady tactics to gather bank account data to share with fintech clients.
Crypto Firm Circle Eyes Bank Charter to Bolster Stablecoin Venture (American Banker, 08/09/2021) Best known for its stablecoin USDC, Circle signals its intent to become a “national digital currency bank” and notes it has filed documents with the SEC to go public.
Brian Brooks Quits as CEO of Crypto Exchange Binance.US (Wall Street Journal, 08/06/2021) The former head of the OCC resigns after just three months, citing differences over strategic direction.
Lighter Fare:
The Perseverance Rover’s Martian Rock Samples Just… Disappeared. What Happened? (Salon, 08/10/2021) NASA assembled a response team to figure out what happened when a rock sample went missing on Mars.