Delta fears shrink GDP forecast, but employment picture is steady. The Fed stays the course on rates and asset purchases. BNPL maintains momentum. Embedded fintech Sila and homeownership startup Landis raise. Citizens buys Investors Bancorp. Small banks may lose in overdraft fight. Robinhood’s tough first day.

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GDP Forecast Dims on Delta; Jobs Growth Steady

Expectations for GDP growth in the back half of 2021 are shrinking on Delta variant concerns. 

Goldman Sachs’ latest forecast cut its growth projections for Q3 and Q4 by 1% point due to a slower than hoped for rebound in services spending. While goods like furniture and autos have seen a huge spike in demand, services normally make up the majority of consumer spending. Activities like concerts, dining out, and even returning to the office have been slow to return to normal, particularly with renewed uncertainty from the surging Delta variant. 

Despite Delta fears, new unemployment claims continued to trend downward, coming in at 400,000 last week. There’s little evidence that states that ended enhanced unemployment early have seen a spike in hiring, though some data suggests it has increased hiring of those over the age of 25 while decreasing hiring of teens.

While there is a distinct “two steps forward, one step back,” feeling to the reopening at the moment, economic and employment trends are still moving in the right direction.

Meanwhile, the Fed stayed the course last week, leaving interest rates and bond buying plans unchanged while saying the economy is “making progress” towards recovery. The Fed continued to describe inflation as the result of “transitory factors,” a sentiment that seems to be supported by declining public and bond market expectations of future price increases.

Any change in Fed plans around asset purchases or rates is likely to be carefully telegraphed well in advance in hopes of avoiding any repeat of the 2013 ‘taper tantrum.’

Small Banks Have More to Lose in Overdraft Fight

As regulatory scrutiny and competition from challenger banks has ramped up, some larger banks, like Ally and PNC, have moved to reduce or eliminate overdrafts. Smaller banks may have a harder time following suit, as they derive a larger share of their revenue from fees than their larger rivals. According to an American Banker analysis, small banks earn 4.49% of non-interest income from overdraft fees vs. 2.78% for larger banks.

We continue to be supportive of smart regulation that informs and protects consumers and their access to credit, while encouraging a competitive market where banks of any size can survive and thrive.

BNPL Sector Maintains Momentum

UK-based buy now, pay later player Zilch raised $110MM in equity and debt from Goldman Sachs’ asset management division and DMG Ventures. Zilch reportedly will use the funding to continue building its UK presence while planning an expansion into the highly competitive US market.

Fellow BNPL behemoth Klarna has been looking to expand its offerings and consolidate its market dominance via acquisition spree. In the past few months, Klarna has scooped up social shopping startups APPRL and Hero and German discount shopping app Stocard.

Established payment and lending companies aren’t taking the threat posed by BNPL lying down. Visa has announced APIs that enable card issuers to build their own installment plan offerings and make them available directly in merchants’ checkout flows.

For now, we don’t see any slowdown in the BNPL sector, as major players raise significant capital to drive global expansions and battle for market share.

Payment Growth Continues, Strong Non-Bank Consumer Lending in this week’s earnings

As covered last week, consumer spending jumped in Q2, and the QoQ  increase was reflected in this week’s payments companies earnings: Visa +12.2%, Mastercard +11.5%, PayPal + 9.1%. 

Source: Company Earnings, PeerIQ

Vasant Prabhu, Vice Chairman and CFO of Visa noted on U.S. spending, “U.S. payments volume growth was 40% and up 30% over 2019, benefiting from economic impact payments in the first half of the quarter and then, from the lifting of COVID-related restrictions across the country…The credit improvement was fueled by two interrelated factors: a significant acceleration in travel, entertainment and restaurant spending; as well as the resurgence of affluent cardholder spending.”

PayPal’s Venmo posted a strong performance, growing 14% QoQ to $58B. 

Non-bank lenders continued to showcase a strong rebound in originations and consumer demand, led by LendingClub’s blowout quarter.

LendingClub crushed earnings estimates, reporting a net income of $9.4Mn versus an expected loss of $30-40Mn. Management attributed its profitability largely to revenue growth in its marketplace, which was driven by robust origination growth of 83.5% QoQ and 735% YoY. Further growth is expected ahead, as Scott Sanborn put it, “consumer demand appears to be ticking back up, though currently remaining below pre-COVID levels.”

Enova’s consumer originations also experienced strong growth of 51% QoQ, to $280Mn. LendingTree saw growth focused in its consumer segment, with segment revenue up 31% QoQ driven by personal loans roaring back as the economy reopened, up 70% QoQ. Navient, the student loan-focused lender, did not see QoQ growth within its consumer segment, reporting private education refinance loan originations down 23.1% QoQ and average private education loans down 6.4% QoQ.

LendingClub led the share performance on earnings day this week with a 47.8% jump on a record quarter; PayPal dropped 6.2% on below-consensus guidance and pressure from its eBay transition.

Robinhood Floats, and Sinks

Last Thursday, Robinhood completed its much anticipated IPO and began trading on the NASDAQ. The no-fee brokerage priced its shares at $38, at the lower end of its range, for a valuation of $32Bn.

In a move in line with its “democratizing finance” ethos, Robinhood reserved as much as a third of its IPO shares for users of its app. Those that decided to buy may have ended up disappointed, as Robinhood ended its rocky first day of trading down 8% at $34.90 per share.

Citizen’s Beefs Up East Coast Presence

Rhode Island-based Citizens Financial Group plans to acquire New Jersey-based Investors Bancorp in a $3.5Bn deal. The combination would give Citizens a top-10 deposit share in the New York metro area. The acquisition comes on the heels of Citizen’s recent deal to acquire 80 of HSBC’s East Coast branches, further beefing up the bank’s geographic footprint.

While President Biden’s recent executive order instructed regulators to take a closer look at bank mergers and acquisitions, the underlying economic trends driving M&A activity remain unchanged. While the pace may slow due to heightened scrutiny, expect bank M&A to continue.

Will Smith-backed Home Ownership Startup Raises $165MM

Landis, a startup designed to help renters become homeowners, has raised $165MM in equity and debt. The equity round was led by Sequoia and included participation from Smith’s Dreamers VC fund, Signia Venture Partners, and Roc Nation’s investment arm Arrive.

Landis has developed underwriting technology to predict if a user is likely to become mortgage-eligible in the next 12 to 24 months. For users who are likely to, Landis works with them to buy a home on their behalf, which the user rents from the company while building their credit and downpayment. Once users are “mortgage ready,” Landis sells the house back to them.

Sila Raises $13MM Series A for Banking APIs

Sila, which offers payments and digital wallet APIs, has raised a $13MM Series A at an undisclosed valuation. Leaning into the idea that “everything is fintech,” Sila’s APIs streamline the process of embedding payment or digital wallet functionality into any application. Sila is one of several up and coming fintech infrastructure startups that create value for companies by abstracting the complexity of adding banking functionality to their products. Congrats to co-founder/CEO Shamir Karkal and the entire Sila team on the raise.

In the News:

Investors Are Buying American (Wall Street Journal, 07/25/2021) Investors put over $900Bn into U.S. funds during the first half of 2021, a record and an amount more than the rest of funds out elsewhere in the world combined.

Will States Lead the Way on Expanding CRA to Nonbanks? (American Banker, 07/26/2021) A move by Illinois to expand the CRA to nonbank mortgage companies, guidance from NYS Department of Financial Services and support from Powell could lead to the expansion of the CRA to nonbank lenders in more states.

Nonbank Lenders Balk at Ginnie Mae Capital Plan (American Banker, 07/26/2021) The Ginnie Mae proposal would include a risk-based capital requirement for nonbanks, affecting the many nonbanks that hold servicing rights for mortgages securitized by Ginnie Mae.

Goldman Sachs Incubated Fintech SIMON to Raise Up to $100M via Series B led by WestCap (CrowdFund Insider, 07/23/2021) The fintech that aims to transform the digital wealth management landscape via its platform for financial professionals raises $100Mn to enhance its offering and fund geographic expansion.

FICO Score’s Hold on the Credit Market Is Slipping (Wall Street Journal 07/24/2021) From Capital One and JPMorgan, to Fannie Mae and Freddie Mac, major players re-evaluate the usefulness and need for FICO scores.

What Gen Zers Want in Their Banking Apps (American Banker, 07/23/2021) Challenger banks add features such as financial education, parental controls, allowance tracking, and credit building to entice young people to use their platforms.

JPMorgan Becomes the First Big Bank to Give Retail Clients Access to Bitcoin (Bitcoin Magazine, 07/22/2021) JPM financial advisors are now allowed to execute client-requested bitcoin trades, but cannot recommend the investments themselves.

Venmo’s Real Threat to Banking: Making Payments Fun (The Financial Brand, 07/28/2021) Venmo’s young user base, name as a verb, and payments as social media make it a potent competitor to Zelle and other competitors.

Fiserv, Goldman Strike Pact on Cross-Border Payments (Banking Dive, 07/27/2021) The payments provider and investment bank partner to “remove the friction inherent in B2B payments related to high transaction costs and settlement speeds.”

Lighter Fare:

U.S. Sells One-of-a-Kind Wu-Tang Clan Album Forfeited by ‘Pharma Bro’ Martin Shkreli (CNBC, 07/27/2021) Wu-Tang is for the [anonymous buyer]? The Wu-Tang Album confiscated from Martin Shkreli, “Once Upon a Time in Shaolin”, was sold by the U.S. government to an undisclosed buyer.