This week we look at the return of the “True Lender” question, big banks becoming fintech-y for new credit card customers, and Upstart earnings highlights.
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Unemployment Falls and Good Times Ahead
Unemployment claims fell to a new pandemic low last week. More American are getting vaccinated. Businesses and states are lifting more restrictions. We expect hiring to continue as the economy opens back up again.
With the economy heating back up, everyone is worried about inflation. Well everyone except for the Fed maybe. The Fed is confident that current inflation pressures are temporary.
“True Lender” Uncertainty Continues
Earlier this week, the Senate passed a resolution to repeal the OCC “True Lender” rule. The OCC’s rule clarifies that a national bank is considered a “true lender” if, at the time of a loan’s origination, it is named as the lender in a loan agreement or if the bank funds the loan.
That means the national bank is responsible for ensuring the loan complies with consumer protection laws. It also means that state interest rate caps do not apply.
At PeerIQ, we have been supportive of the OCC ruling as we believe it is good law — consumers have greater access to responsible credit and it provides a “level playing field” for offerors of financial services (FinTech or Bank alike).
We are disappointed by the vote in the Senate. However, we don’t think the repeal will significantly impact the bank fintech partnership model. True Lender has been an industry issue since 2015. It has not slowed the pace of innovation, although the regulatory uncertainty has limited growth.
We also hope that this decision can be an opportunity for regulators to take a nuanced approach that distinguishes predatory debt traps from responsible players.
Bank fintech partnerships have been a driving force of financial inclusion in our country.
We believe that the Colorado settlement is a great example for a national model. That settlement balances regulatory safeguards, state and federal authority, alongside the ability for banks to innovate within the ecosystem.
Credit Card Balance Declines Forcing Mega Banks to Copy From Fintech Playbook
Stimulus payments have been a blessing and a curse. On the one hand ,DQs and forbearance levels have come in much better than anyone anticipated. On the other hand, consumer demand for loans has dropped significantly.
Add to that — consumers (especially millennials) are increasingly shifting from credit cards to BNPL solutions.
In response, banks have loosened their underwriting standards. Banks are now expanding access to people with no credit score. At the same time, banks are incorporating alternative data — linkages to customer bank accounts for instance — the same kind of underwriting that FinTechs have used for years.
Upstart Earnings Highlights
UPST (Market Cap $7.8 B, P/S ratio 26.2x)
Upstart reported $1.73 Bn for the quarter, compared to $1.12 Bn in Q1 2020.
The FinTech delivered a blistering 340% YOY earnings growth on favorable YOY comparisons.
Shares jumped 3% on the news.
Upstart is doing a nice job of telling its story to public markets — reinforcing its AI-centered and marketplace positioning — while other public lenders have sometimes struggled to get their message cross.
“The advantages of AI in lending are becoming more apparent by the day” according to Dave Girouard, CEO of Upstart.
Many lenders incorporate automated decisioning into underwriting. Capital One pioneered the use of instant decisioning decades ago. But Upstart deserves credit for linking its story to several hot investment themes — AI & marketplace.
It is more than storytelling though. Upstart has followed thru its public positioning with tangible results — including decisive M&A deals that bolsters the storyline.
Prodigy, Upstart’s recently acquired auto commerce software, helped Upstart increase its dealership footprint by 45% in Q1 (~$800 MM in vehicles sold in Q1).
We applaud the idea of linking depository institutions to non-bank originators.
It’s a natural marriage. That’s why we built the best in class analytics for originators to distribute loans and for banks to acquire and monitor them with ease and confidence. Reach out to firstname.lastname@example.org to learn more about what we’re quietly building…
Treasury Prime Secures $20 MM in Series B to Scale BaaS Offerings
Treasury Prime, led by CEO Chris Dean, raised $20 MM in Series B funding. The company is a BaaS startup that delivers its product via APIs. Deciens Capital and QED Investors co-led the round with participation from Susa Ventures and SaaStr Fund.
This is a Better SPAC Merger
Better, led by founder and CEO Vishal Garg, plans to go public via SPAC by merging with Aurora Acquisition Corp. The SPAC acquisition has a pre-money valuation of ~$7 Bn.
SoftBank recently invested $500 MM in Better and could put in another $1.3 Bn through a private investment in public equity (PIPE), a common feature of SPAC mergers. The remaining $200 MM of the $1.5 Bn PIPE will come from Aurora, whose sponsor is the investment vehicle of Icelandic billionaire Thor Bjorgolfsson.
Better provides home loans for consumers through its website and bank partners like Ally Financial. According to people familiar with Better’s financials, the company generated over $850 MM in revenue last year and more than $200 MM in net profits.
Congratulations to Vishal and team!
In the News:
- Fans and Foes of OCC True Lender Rule Spar at Senate Committee “Rent-a-Bank” Hearing (JD Supra, 5/3/2021) Most observers predict that the True Lender rule will not be overturned because Congressional leaders do not think a Biden-appointed Comptroller will take care of their concerns.
- What’s the Fate of Bank-Nonbank Partnerships After ‘True Lender’ Vote? (American Banker, 5/12/2021) Blocking the True Lender rule adds continued uncertainty for bank and fintech partnerships.
- FDIC Seeks Feedback on Banks’ Crypto Plans (American Banker, 5/11/2021) Fed Chair Jelena McWilliams warned that the financial system in the U.S. will not be able to keep up with global counterparts if regulators are not willing to take risks.
- Buy Now, Pay Later Changed Retail. Health Care and Rent are Next. (Vox, 5/11/2021) BNPL could be a game changer for essential expenses like healthcare.
- Beyond Payday Loans: More Startups And VCs Bank On Subprime Lending Alternatives (Crunchbase, 5/13/2021) Over the past six months, venture capital investors have funded $19.6 Bn to startups focused on alternatives to payday lending and financial literacy.
- Figure Wins SEC Approval to Sell Securities on its Blockchain (American Banker, 5/12/2021) Figure needed SEC approval to bundle its mortgage and student loans into securities and sell them to investors.
- Treasury Prime Raises $20M to Scale its Banking-as-a-Service Biz (Tech Crunch, 5/12/2021) Treasury Prime, led by CEO Chris Dean, raised $20 MM in Series B funding, in a round co-led by Deciens Capital and QED Investors.
- Mortgage Startup Better to Go Public in SPAC Merger (WSJ, 5/10/2021) Better plans to go public via SPAC acquisition by merging with Aurora Acquisition Corp.
- Using Just His Thoughts, Paralyzed Man Texts at a Record-Breaking 16 Words a Minute (Gizmodo, 5/12/2021) Neuroscientists have translated the cognitive signals associated with handwriting into text at a rate of 90 characters per minute.