Inflation hit a new high. CBDCs and crypto remain top of regulators’ minds. Focus on overdrafts continues. CFPB sues Ace Cash Express. Kadmos raises $29.5Mn. Klarna confirms lower valuation. Upstart says funding “constrained.” Cross River teams with SmartBiz.

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Inflation at 9.1% as Economic Risks Intensify

Last week’s inflation print came in hot, at 9.1%, up from May’s 8.6%. That makes for the fastest pace of price increases since November 1981. Continued pressure on consumers’ cost of housing is likely to keep headline inflation numbers elevated, as they represent about two-fifths of core CPI. 

Meanwhile, the IMF warned the risk of a global recession is increasing, as the economic outlook “darkens significantly.”

CBDCs, Crypto Remain Top of Mind for Global Regulators

Fed Vice Chair Lael Brainard highlighted the potential for CBDCs to play an important role in protecting financial stability in a recent speech. Brainard described how CBDCs could act as a settlement layer between stablecoins and public money (central bank money).

Brainard’s comments were notable as the strongest endorsement yet from a Fed official of the idea of a “digital dollar.” Fed Chair Powell has maintained a neutral stance on the topic. Official Fed statements on a prospective U.S. CBDC have said undertaking any such project would require a specific authorization from Congress.

Meanwhile, the Treasury Department published a “framework” on international crypto regulation. The fact sheet is the Treasury’s first publication stemming from the Biden administration’s EO on crypto. The document highlighted the need to ensure consumer, investor, and business protections, the stability of the global financial system, and interoperability. It calls for continued engagement with international partners on these topics.

The Financial Stability Board, one such venue for international engagement, is calling for new rules and regulatory approaches to digital assets. The group pointed to recent market turmoil, including the collapse of the Terra ecosystem and its purported stablecoin. The FSB is expected to submit a report and recommendations to G20 finance ministers and central bankers by October.

Focus on Overdrafts Endures

Leading Democrats in Congress haven’t let up on overdraft fees. At a recent press conference, Rep. Carolyn Maloney (D-N.Y.) pushed for the House to move forward with her Overdraft Protection Act. The bill would introduce a monthly cap on the number of fees a customer could be charged. It would also require customers to opt in to such programs rather than opt out.

Meanwhile, the New York banking regulator is seeking to end certain overdraft practices in the state. Guidance issued from the NYDFS seeks to set “clear expectations” about non-sufficient funds and overdraft fees. The guidance addresses three key areas, including overdraft charges incurred when the consumer’s balance appeared sufficient at the time of the transaction, “overdraft protection” fees that transfer funds from a linked account but still don’t cover the transaction, and double-charging consumers when merchants make multiple attempts to debit failed transactions.

CFPB Sues Ace Cash Express

The CFPB has filed suit against payday and title lender Ace Cash Express. The suit argues that Ace pushed consumers into re-borrowing instead of using no-cost repayment plans, to which borrowers in some states are entitled once per year. The suit also alleges Ace withdrew money from borrowers’ bank accounts without their permission and in violation of their contracts.

The latest suit follows a 2014 enforcement action alleging Ace’s products pushed borrowers into a “cycle of debt.” Ace also had been operating under a 2002 OCC consent order that prohibited it from partnering with national banks, though the company was released from that order in 2018.

Salary Payment Platform Kadmos Raises $29.5Mn

Germany-based Kadmos announced it has raised a $29.5Mn Series A. The company’s platform is designed to simplify the management and administration of migrant workforces, including payment. Kadmos enables employers to have a centralized platform to make and track worker payments. Employees can download the Kadmos app, which includes an e-wallet from which they can spend via debit card or send funds back to their home country.

Klarna Confirms Fundraise, Valuation Drop

A sequence of stories have suggested the BNPL player was seeking new funds at progressively lower valuations. Now, Klarna has confirmed them. The company raised a fresh $800Mn in funding at a valuation some 85% lower than its last round. Once Europe’s most valuable startup at some $46Bn, the new funding saw Klarna’s valuation drop to just $6.5Bn.

Image: Klarna

While a gigantic drop, it’s not out of line with corrections public market fintechs have seen in recent months. Klarna founder Sebastian Siemiatkowski also pointed out the company only issues common shares to investors, rather than the preferred stock typical for U.S. startups.

Upstart Says Funding “Constrained”

AI-powered lending platform Upstart is hitting some speed bumps as debt funding becomes more scarce. As economic turbulence has increased, debt buyers have become increasingly picky and demand for Upstart’s personal loans has waned. Performance of Upstart’s loans has also deteriorated, with losses and late payments ticking up.

The impact has been swift. Upstart said it’s expecting revenue of $228Mn in Q2, down substantially from its prior guidance of about $300Mn. The company is expecting an overall loss of $27Mn to $31Mn, which is a significant revision vs. its original guidance of breakeven to a $4Mn loss.

Upstart’s results partly reflect the cyclical capital markets constraints faced by all non-bank lenders. Given the continued, concerning economic news, more pain may be ahead.

Cross River Teams with SmartBiz

Last week, Cross River and SmartBiz announced they’re teaming up. Cross River will leverage SmartBiz’s AI-powered financing platform for small businesses. SmartBiz provides an application that streamlines the process of connecting small businesses and entrepreneurs with SBA 7(a) loans.

We’re thrilled to join forces with SmartBiz to make an elevated SBA financing experience more readily accessible to small business customers. SmartBiz is at the forefront of the loan optimization process, and like Cross River, is operating at the intersection of cutting-edge technology and stellar customer service,” says Eli Hazan, Head of Business Lending at Cross River.

Earnings are Back, Consumers Continue to Spend

Large banks kick off earnings season, with Citi +13.2%, Wells Fargo +6.3% and PNC +1.6% rising on earnings beats, and JPMorgan falling (3.5)% on an earnings miss.

Source: PeerIQ

Banks increased their average consumer loan books from the first quarter, even as inflation and the threat of recession continue to rise (Citi – Branded Cards +5%, JPMorgan +2%, PNC +2%, Wells Fargo +2%, Citi – Retail Services +1%).

As loan books have grown, NCOs remain near historically low levels (JPMorgan – 0.57%, Wells Fargo – 0.43%, PNC – 0.11%, Citi NCLs as a % of average loans, retail services – 2.60%) 

Despite inflationary pressures, consumers have continued to spend, even on discretionary purchases. JPMorgan CFO Jeremy Barnum stated, “We have yet to observe a pullback in discretionary spending, including in the lower income segments, with travel and dining growing a robust 34% year-on-year overall.” JPMorgan reported combined debit and credit sales volume grew 13% from the first quarter. 

At Wells Fargo and Citi (Branded Cards), credit card volume also increased double-digits, 16% and 14%, respectively. Credit card volume growth outpacing inflation shows that the consumer has not yet cut back on purchases. While credit card spend has remained strong, Wells Fargo CEO Charlie Scharf noted that, “Spending, while still strong, started to slow in May and June.” 

Although we have seen a drastic drawdown in installment lenders’ valuations, these loans remain popular among consumers. Citi has been able to capitalize on their installment lending business, growing it 21% from the first quarter.

Source: Citi Earnings Presentation

Due to rising rates, both Wells Fargo and JPMorgan’s auto origination volume declined from the first quarter ((26)% and (17)%, respectively). The lenders experienced a slowdown in home lending originations from both the first quarter (JPMorgan (11)%, Wells Fargo (10)%) and on a year-over-year basis (JPMorgan (45)%, Wells Fargo (36)%). Citi was able to increase its mortgage originations 32% from the first quarter, putting itself roughly in-line with its prior year performance.

In the News:

HM Treasury Announces Regulations for BNPL (Fintech Nexus, 7/7/2022) The U.K. regulations require lenders to complete affordability checks.

Biden Nominee for Fed’s Top Banking Regulator Clears Key Senate Hurdle (Wall Street Journal, 7/12/2022) Michael Barr’s confirmation would give the Fed a full seven-member board.

Griffin Bags $15.5M Investment to Grow BaaS (PYMNTS, 7/7/2022) The company recently submitted an application for a banking license in the U.K.

Deuna Lands $30m in Series A Funding Round (Fintech Futures, 7/12/2022) The SaaS startup aims to deliver an online one-click checkout experience for customers.

Candidly Offers an Escape from Looming Student Debt Crisis (Fintech Nexus, 7/8/2022) Candidly is an AI-platform for student debt and savings optimization.

Wyre Integrates with Crypto-to-Cash Service Supported by MoneyGram, Stellar (Crowdfund Insider, 7/9/2022) Wyre, a crypto infrastructure provider integrates with the global on/off-ramp service for digital wallets launched by MoneyGram on the Stellar network.

Founders of Bankrupt Crypto Hedge Fund 3AC Go Missing, as Investors Try to Recoup Assets (CNBC, 7/12/2022) Lawyers representing 3AC say the physical whereabouts of Zhu Su and Kyle Davies are “currently unknown”.

Where Investors See Fintech Opportunities During a Downturn (American Banker, 7/11/2022) Embedded finance is still drawing strong interest from investors.

Why Regulation Will Help The Buy Now, Pay Later Giants (Forbes, 7/12/2022) Most BNPL is not regulated by TILA because they bill in 4 installments, just below the TILA threshold.

When a $490 Glock Can Cost $1,123: The Company Behind ‘Buy Now, Pay Later’ for Guns (Bloomberg, 7/13/2022) “Shoot Now Pay Later”.

Lighter Fare:

NASA’s Webb Reveals Cosmic Cliffs, Glittering Landscape of Star Birth (NASA, 7/12/2022) See the first images released from James Webb telescope.