Stablecoin Report is In; BNPL in Congress; Rocket Mortgage-as-a-Service
The Fed is ready to taper. Regulators want to treat stablecoins like banks. Congress hears testimony on BNPL. Mission Lane completes $320Mn securitization. Rocket Mortgage-as-a-Service. Affirm partners with American Airlines. Cross River acquires Betterfin. Klarna acquires PriceRunner.
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What does ‘transitory’ mean anyway?
Jobs waxing as Delta wave wanes. Weekly unemployment numbers came in better than expected at 269,000 initial claims. Continuing claims dropped to 2.1Mn. October’s jobs report showed a respectable 531,000 new roles created. The improving employment picture plus the Fed’s decision to begin reducing QE points to interest rate rises as soon as mid-2022, ammunition it may need as ‘transitory’ inflation persists.
Long-Awaited Stablecoin Report Recommends Bank-like Regulation
The President’s Working Group’s report and regulatory recommendations on stablecoins was released last week. The report acknowledges the potential for stablecoins to promote competition by creating “beneficial payments options.” But Treasury Secretary Janet Yellen highlighted risks. In remarks, she characterized current oversight as “inconsistent and fragmented.”
Risks the administration are worried about include “destabilizing runs” on stablecoins that lose consumers’ confidence, disruption to payment systems that rely on them, and the potential for concentration of economic power.
The working group is recommending Congress pass legislation that would require stablecoin issuers to comply with bank-like regulation by becoming insured depository institutions, limit their affiliation with commercial entities, and meet “appropriate risk management standards.”
The report also recommended “appropriate federal oversight” for custodial wallet providers like Coinbase, Gemini, and Binance. Such oversight would include liquidity and capital requirements and risk management.
In the absence of Congressional action, it appears that regulators are driving banks to serve as a regulatory compliance layer, by enforcing existing KYC/AML, liquidity, and capitalization standards.
Congressional Hearing Shows Advocates, Parties Split on BNPL Risks, Regulation
Last week, the House Financial Services Committee convened a hearing entitled “Buy Now, Pay More Later?” Representatives from the Financial Technology Association, Innovative Payments Association, Brookings Institute, National Consumer Law Center, and Center for Responsible Lending testified.
Advocates of BNPL products argued they expand consumer access and choice, particularly among younger Americans, who may have less access to or desire to use traditional credit. They contrasted BNPL favorably to credit cards, calling out the close-ended structure, quick repayment timeframes, and often 0% APR as consumer-friendly features driving exponential growth. On the flip side, consumer protection advocates point to risks of accruing debt, uneven consumer disclosures, and missed opportunities for building credit history.
Republicans on the committee generally viewed the category favorably and warned of stifling innovation with overly aggressive regulation. Committee Chair Maxine Waters (D-CA) urged the CFPB to ‘look deeply’ at BNPL lenders, which suggests scrutiny from the agency may increase and the potential for enforcement actions in the sector.
Increased regulatory attention to the category was inevitable, given its rocketship-like growth. How the CFPB and other regulators approach the category is likely to be informed by their perception of the size and scope of risk to consumers. Likely areas of focus are how BNPL companies determine consumers’ ability to repay and disclosures.
Mission Lane Completes Inaugural $320Mn ABS Transaction
Mission Lane, the credit card startup spun out from LendUp, announced its first ABS transaction of $320Mn. The oversubscribed transaction offered notes in three tranches, all of which were rated by Kroll. The company also raised $150Mn in redeemable preferred equity led by Oaktree Capital Management, with participation from existing investors Invus, QED, and LL Funds.
The startup, led by Barclays US and Capital One veteran Shane Holdaway, has flown relatively under the radar since being spun off. But that doesn’t seem to have hurt its growth. According to its press release, the company doubled its revenue in 2020 and is on track to double again in 2021.
While we see signs of deal pricing beginning to normalize, the transaction is a testament to the continued strengths of markets. New lenders are coming to market and achieving competitive pricing for their first deals, while investor appetite is enough to support growing sizes for more seasoned issuers.
Looking for the latest on fintech lending originations volume and performance? Reach out to firstname.lastname@example.org to learn about the data and analytics we have on the sector.
Rocket to Offer Community Banks Mortgage-as-a-Service
Already by far the largest mortgage originator, Rocket Mortgage is looking to expand its reach even further. The company has partnered with Salesforce to make its origination capabilities available directly to banks and credit unions via Salesforce Financial Services Cloud. 99% of community banks have some level of residential mortgage activity. Rocket Mortgage’s stack can serve as banks’ point-of-sale and loan origination system, reducing the need for specialized underwriting, processing, and compliance functions.
This is a great example of the opportunity of bank-fintech partnerships and the current trend of smaller banks rebuilding their technology stacks with newer, API- and SaaS-driven solutions. Because mortgage origination is a highly regulated but low margin business, scale and automation are key to making the business line work. Rocket’s “mortgage-as-a-service” has the opportunity to bring some of the benefits of at-scale mortgage origination to even the smallest community banks.
Fly Now, Pay Later
In the quest to grow its merchant footprint and originations, Affirm has announced a partnership with American Airlines. The deal will make Affirm the exclusive BNPL financing option for travelers booking flights through American’s website. Affirm isn’t the only BNPL company with an eye on the sector. Just last month, Klarna acquired an online trip planning product. And Uplift, a BNPL provider focused on the travel sector, already works with United, Air Canada, Frontier, and Southwest.
Not to mention cards. Co-brand credit cards have been a mainstay of the airline industry. Consumers holding such cards typically enjoy perks like earlier boarding and free checked bags (regardless of using the card as payment method) and bonus points for flights booked on the card. Credit cards also include travel protections and insurance that BNPL payment methods may lack. And card issuers continue to push back on the BNPL trend by offering “installment-ization” features that allow customers to convert card transactions into payment plans after the fact.
The upshot? The customer segment choosing to finance travel with a BNPL like Affirm may skew higher risk. Not a bad thing, as long as BNPL companies are pricing this risk properly.
Cross River Acquires SMB Lending Tech Startup Betterfin
Cross River Bank announced this week its acquisition of Alexis Ohanian-backed fintech startup Betterfin. Betterfin provides small businesses with a financial platform allowing them to access a range of financial products, services, and capital markets data, and to better manage borrowing and cash flow. The acquisition will complement Cross River’s already robust small business tech stack, helping the bank further digitize small business lending processes. Congrats and welcome to the Betterfin team.
Klarna Acquires PriceRunner
Klarna’s acquisition spree continues. The BNPL company announced it has acquired price comparison site PriceRunner. The move is the latest in a string of acquisitions designed to help Klarna move “up funnel” by becoming a shopping destination in its own right, rather than merely another payment button at checkout.
As competition among BNPL providers intensifies, strategies to retain and grow customers include expanding into brick and mortar commerce, developing product extensions that allow BNPL to be used at any merchant (whether or not the merchant directly offers it), and apps, websites, and features designed to make BNPL companies a destination, rather than a commodity financing option selected at checkout.
That same “up funnel” strategy was presumably behind rumors of PayPal’s desire to acquire social media site Pinterest, though skeptical shareholder reaction quickly sunk that deal.
Still, we can’t help but wonder what the end game of the relentless pressure for merchant and consumer market share will be. Merchant discount rates are already facing downward pressure. Mounting legislative and regulatory scrutiny (see above) inevitably will take its toll as well. While Klarna has the benefit of still being private, public market competitors like PayPal, Affirm, and Afterpay are likely to face more intense pressure to maintain profitability and earnings, not just revenue growth.
Fintechs Grow Loans, Credit Begins to Normalize, Square Stumbles
Another volatile week as companies continue to report earnings, with most stocks falling on earnings (Green Dot (1.1)%, Elevate (2.6)%, Rocket (3.7)%, Square (4.1)%, Curo (6.0)%), with Q2 Holdings the bright spot, jumping 12.2%.
Nonbank lenders Elevate and Curo Group reported double digit growth in their loan balances (Elevate +29.2%, Curo +14.8%) on strong consumer demand. Curo noted that its growth was driven by its Canadian direct lending segment, as well as continued impact from its March acquisition of Flexiti.
Elevate reported major growth in originations for new customers, up 78.7% from the second quarter, and slower, but still solid growth in originations for existing customers, up 22.9% from the second quarter. Elevate CEO Jason Harvison explained the reason for growth, “…while the broader demand environment has improved, we believe a significant driver of strong originations this past quarter had to do with many of the internal improvements that we have made here at Elevate over the past few years…includes new models, customer-friendly features and products tailored to the needs of everyday Americans.”
While Elevate and Curo continue to post strong growth, it comes with increased costs, both in the advertising expenses and in credit quality, as NCOs edged up from the second quarter.
Curo CFO Roger Dean spoke of the impact of increased costs on earnings, saying, “Looking ahead to the fourth quarter of 2021, I’ll again point out that we expect sequential loan growth and generally stable credit quality through year end…With continued sequential loan growth improvement in the U.S. and increases in operating expenses for advertising in Flexiti, Q4 earnings will likely be lower than any quarter this year.”
Elevate CEO Jason Harvison repeated this message, stating, “Consumer demand, combined with many of the enhancements we have made over the last year, has led to breakout loan growth for Elevate. While short-term earnings will be compressed due to growth, we are very excited for the opportunities ahead in 2022.”
Losses for the 2021 YTD vintage remain well below pre-pandemic vintages, but substantially above 2020, a trend we saw across the industry as government support ended and the economy inches closer to normality.
Like Elevate and Curo, Rocket saw growth in its origination volumes, driven by purchase volumes, with CEO Jay Farner reporting, “Q3 ’21 represented Rocket Mortgage’s strongest purchase closed loan volume in company history. Our purchase volume grew 70% over Q3'20 levels, driven by our focus on a superior, technology-driven client experience, product innovation and our integrated, end-to-end home buying ecosystem.”
During the quarter, Square expanded Cash App features, launching Cash App Pay, a way for customers to easily pay at Square sellers by scanning a QR code. Additionally, Cash App launched mobile-check and paper money deposits, allowing users to scan checks and to add physical cash to their accounts at over 30,000 retailers across the U.S., including Walgreens and Family Dollar. The broadening feature set puts Cash App squarely in competition with establishment banks and newer challengers catering to the lower income segment with an easy to use digital-first product with no or limited fees. The ability to pay Square sellers with a QR code allows the company to effectively operate as a closed-loop network, potentially retaining the entire transaction processing fee for itself, instead of sharing the bulk of it with card networks and issuing banks.
Along with adding Cash App features, Square pushed into a new target market, teens. Now ~20Mn teens can use Cash App for peer-to-peer payments, with the consent of a parent or guardian of course. By adding teens to Cash App, Square hopes to entrench the youth into its ecosystem.
Square fell (4.1)%, as analysts expected higher revenue from crypto trading and as Cash App missed gross profit estimates. While other fintechs have raced to expand access to a multitude of cryptos, Square remains committed to Bitcoin, with CEO Jack Dorsey reiterating that Square is not focused on adding any other cryptos besides Bitcoin, stating, “Our focus is on helping Bitcoin to become the native currency for the internet.” Other companies deriving significant revenue from crypto, like Robinhood, have taken a different tact by listing popular “memecoins” like Doge to capitalize on their heavy trading volume.
Green Dot’s consumer services segment stumbled, with GDV down (18.3)% YoY and (16.8)% QoQ, and active accounts declining to 3.38Mn, ~600k lower than 3Q20 and 2Q21. Green Dot management explained that the YoY (and to a lesser extent QoQ) comparison was difficult, due to enhanced unemployment benefits and a shifted tax season. Green Dot announced partnerships with Finicity and Experian, to help consumers build, improve and protect their credit. The Finicity partnership will allow customers to link their GO2bank, Green Dot’s online bank, accounts to 3rd party apps that use Finicity’s secure data network and financial data. Through the Experian partnership GO2bank will offer customers free access to Experian Boost to increase their FICO score by paying phone and utility bills, and Experian CreditLock to help protect against identity theft.
Green Dot’s declining number of accounts is all the more stark in comparison to the big gains neobanks like Chime, Varo, Current, and Aspiration claimed as the pandemic shut bank branches across the country. “Challengers,” including pseudo-bank account products like Cash App and Venmo, were quick to roll out and heavily advertise features like early direct deposit of stimulus funds to encourage users to sign up and switch their direct deposits. Green Dot has long been heavily reliant on Walmart for distribution, both of Green Dot’s own brand as well as its white label Walmart MoneyCard product. With Walmart’s not-yet-defined fintech still on the horizon, more trouble might yet await Green Dot in future quarters.
Q2 Holdings jumped 12.18% on earnings, reporting 3% sequential growth in revenue, to $126.7Mn, and 2% sequential growth in registered users, to 19.2Mn. Additionally, it announced several undisclosed Tier 1 and 2 credit union and banking partnerships.
In The News:
New ABA Chair on Big Tech, Credit Unions and Regulators’ Climate Focus (American Banker, 10/31/2021) Scott Anderson, the newly appointed ABA chair wants the CFPB to take a closer look at tech giants and other nonbanks that provide credit and financial services to consumers.
New York Expands CRA Requirements to Nonbank Mortgage Lenders (American Banker, 11/01/2021) Governor Hochul expands NY’s version of the CRA to apply the anti-redlining law’s obligations to nonbank mortgage lenders.
What’s Behind Barclays’ Hiring of Amazon Payments Veteran (American Banker, 10/29/2021) Barclays has reportedly been working on a partnership with Amazon to offer interest-bearing installment loans for Amazon’s U.K. customers.
Zelle on Keeping Transactions Secure and Compelling as Digital Payments, Identity Converge (PYMNTS.com, 11/01/2021) Tying consumers digital identities to their payment behaviors may help streamline payments but may create security and privacy challenges.
Q3 Global Fintech Funding Smashes Records (Business Insider, 11/2/2021) Global fintech funding is on pace to break $120Bn in 2021, after a third quarter where $31.1Bn was raised across 1,185 deals.
Jack Henry and Zelle Make Faster Payments More Accessible for Minority-Owned Institutions (Finextra, 11/2/2021) The partnership will offer a rebate program to MDIs to connect to Early Warning’s Zelle Network using JHA PayCenter.
PenFed Breaks Record as Loan Originations Rise in Q3 (Credit Union Times, 11/2/2021) The credit union broke another record for mortgage originations and increased auto loan originations by ~20% from the second quarter, even amidst shortages.
Zelle Sees Volume Rise from Bill Payments, Insurance Payouts (American Banker, 11/3/2021) Zelle has replaced many cash and check transactions and is preloaded on 74% of all mobile banking apps.
NASA Astronauts Pick Peppers in Space for the First Time on International Space Station (Fox News, 11/1/2021) While astronauts survive off freeze-dried and prepackaged meals, the ability to grow food in space will be key to longer missions.