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Fintech Headlines: March 27 - April 2, 2023
Apple starts rolling out its BNPL service, Apple Pay Later, Block refutes Hindenburg’s allegations, nCino reports fiscal Q4 2023 results, expects to grow despite the profitability guardrails
Stock Market Update
On Tuesday, Federal Reserve Vice Chair for Supervision, Michael Barr, and Federal Deposit Insurance Corporation Chairman, Martin Gruenberg, testified at the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the collapse of Silicon Valley Bank and Signature Bank. The officials highlighted the need for additional attention to capital, liquidity, and interest-rate risk regulation for banks with assets over $100 billion, and called on the necessity to improve operational resilience and contingency plans in the banking sector.
The Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 0.3% for the month of February 2023 and 5.0% compared to the same month last year, according to data released by the U.S. Department of Commerce on Friday. This compares to a 0.6% MoM and 5.3% YoY increase in January 2023, and a 0.3% MoM and 5.3% YoY increase in December 2022. The banking crisis seems to be contained (for now), and the inflation is falling, so the markets staged a rally with all major indices finishing the week in the green.
🟢 Marqeta (NASDAQ: MQ 0.00%↑) stock gained 28.01% during the week. The issuer processor, which generates over 70% of its revenue from processing Cash App and Square cards, was caught in the crossfire of the fight between Block Inc (NYSE: SQ 0.00%↑), the parent company of Cash App and Square, and the short seller Hindenburg Research. Last week, Hindenburg accused Block of inflating Cash App active user numbers and facilitating fraudulent transactions. The fight continues (more on that below), but the investors in Marqeta seem to have moved on.
Talking about short sellers… Next week, payment processor dLocal (NASDAQ: DLO 0.00%↑) will report its fourth quarter and full-year 2022 results. In November, Muddy Waters accused dLocal of falsifying accounting records, including adjusting the inter-company transactions and correcting the dates associated with option grants to the founders. It looks like the company took its time to produce a quality annual report and avoid further accusations. The company will report on Wednesday (April 5) before the markets open.
✔️ Key Fed inflation gauge rose 0.3% in February, less than expected
✔️ The Fed’s Preferred Inflation Metric Dropped a Little. It’s Still High
✔️ Stocks close higher Friday, Nasdaq notches best quarter since 2020
✔️ Wild Quarter for Markets Might Foretell Further Turbulence
Markets in Crypto Assets
Binance, the world's largest cryptocurrency exchange, is facing a lawsuit from the U.S. Commodity Futures Trading Commission (CFTC) over alleged violations of derivatives (token futures) trading rules. The CFTC accuses Binance of allowing US customers to trade derivatives without registering with the agency, violating CFTC rules, and failing to prevent money laundering. The lawsuit seeks a permanent injunction and civil monetary penalties against the exchange. As a reminder, last week Coinbase (NASDAQ: COIN 0.00%↑) received a Wells Notice from the SEC related to the listing of tokens that the agency considers to be unregistered securities. Trading of security futures is "jointly regulated by the CFTC and the SEC.”
In the meantime, Tether's (USDT) dominance in the stablecoin market has reached a 22-month high, while outflows of the second-largest stablecoin, USD Coin (USDC), have exceeded $10 billion, according to Coin Metrics data (as reported by CoinDesk). Tether's market share has continued to grow despite concerns about its transparency and reserve backing. In March, USD Coin experienced a temporary depeg (the value of the coin fell below its peg of $1), as Circle, the company behind the stablecoin, disclosed funds stuck at the failed Silicon Valley Bank. USDC regained the peg after the FDIC guaranteed the deposits of the collapsed bank.
✔️ Binance and Its CEO Sued by CFTC Over US Regulatory Violations
✔️ Binance Crypto Empire Dwarfs FTX at Peak and Dominates Industry
✔️ Binance Sees $2 Billion in Outflows as Troubles Compound
✔️ Tether Is Winning Stablecoin Battle Despite Looming Risks
✔️ Coinbase Calls for Efforts to Create Inflation-Proof Stablecoins
✔️ Huobi’s New Boss Shakes Up Crypto Firm With China Plan
Apple Launches Its Buy Now Pay Later Service, “Apple Pay Layer”, Plans to Act as a Lender
Apple (NASDAQ: AAPL 0.00%↑) has begun rolling out its much anticipated Apple Pay Later service, which allows consumers to “split purchases into four payments, spread over six weeks with no interest and no fees.” Users can apply for Apple Pay Later loans of $50 to $1,000, which can be used for online and in-app purchases with merchants accepting Apple Pay. Apple Pay Later service is natively integrated into the Apple Pay Wallet and uses BNPL functionality from Mastercard, so merchants do not have to do anything to implement the service, which gives Apple an advantage over other BNPL players, such as Affirm (NASDAQ: AFRM 0.00%↑), Afterpay (NYSE: SQ 0.00%↑), PayPal (NASDAQ: PYPL 0.00%↑ ) and Klarna.
Image source: Apple
Apple will act as a lender, which deviates from the strategy employed with the Apple Card. As such, Apple will issue loans through a new subsidiary, Apple Financing LLC, and its long-standing partner in financial initiatives, Goldman Sachs (NYSE: GS 0.00%↑), will only act as the card issuer. What is not clear is how Apple plans to generate revenue from this product. Other BNPL players make money by charging either the consumer or the merchant (merchant fees fund 0% APR loans). However, with Apple Pay Later, the product is free for consumers, so it's possible that Apple plans to monetize via merchant fees or producer subsidies. The service is currently only available in the U.S.
✔️ Apple introduces Apple Pay Later to allow consumers to pay over time
✔️ Apple Starts to Roll Out ‘Pay Later’ Service After Delay
✔️ Why Apple Pay Later is different from other buy now/pay later loans
✔️ Apple just launched its own buy now, pay later service—here’s how it compares with Affirm, Afterpay, Klarna and PayPal
Block Refutes Hindenburg’s Allegations, Discloses Details on Customer Identification and Fraud Levels
As I wrote last week, short seller Hindenburg Research accused Block (NYSE: SQ 0.00%↑), the parent company of Cash App and Square, of inflating Cash App active user numbers through fake and duplicate accounts, as well as facilitating fraudulent transactions. Block issued a short statement last week to address the allegations, stating that “Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price”, as well as threatening to “explore legal action.” This week, the company followed up with more details about its processes to challenge Hindenburg’s allegations, including information about the customer identification program and fraud controls.
Block revealed that Cash App had over 51 million monthly active users, of which 44 million (or 86%) were verified through the company’s Identity Verification (IDV) program. The remaining unverified accounts will go through identity verification, as they engage with the platform. The company estimated that the verified accounts constituted approximately 97% of Cash App inflows in December 2022. Additionally, Cash App’s losses on peer-to-peer transactions and cash-ins have “remained at or below 0.20% of both applicable peer-to-peer payment volume and of overall inflows for each of the past five years.” Hinderburg stuck with its allegation, saying that Block’s response just confirms its research.
✔️ Block Speaks Out Again After Short-Seller’s Claims. The Stock Is Rising
✔️ Hindenburg says Block response confirms it inflated Cash App user counts
✔️ A Short Seller Targeted Block Stock. Why It May Not Be as Bad as It Seems
nCino Reports Fiscal Q4 2023 Results, Expects to Grow Despite Profitability Guardrails
nCino (NASDAQ: NCNO 0.00%↑), a provider of cloud-based digital banking solutions, which serves more than 1,850 financial institutions, reported its Fiscal Q4 results on Tuesday (the company’s fiscal year ends on January 31). The company reported a 46% increase in total revenue to $109.2 million for the fourth quarter of FY 2023, compared to $75.0 million in the same quarter of FY 2022. Subscription revenue increased by 48% YoY to $92.8 million, while Professional services revenue increased by 35% YoY to $16.3 million. nCino's GAAP Net loss increased to $21.2 million for the fourth quarter, up from $7.1 million in the same quarter of the previous year. On an adjusted basis, the company reported a non-GAAP Income of $4.4 million compared to a Net Loss of $9.3 million in the fourth quarter of FY 2022.
nCino aims to become profitable on an adjusted basis in the fiscal year 2024 ending January 31, 2024, and thus, slowed down hiring already in 2022, as well as reduced its workforce by 7% in January 2023. For the full fiscal year 2024, nCino’s management expects total revenues between $476 and $483 million, including subscription revenues of $407 to $412 million and a non-GAAP operating income of $45 to $50 million (compared to a non-GAAP Operating loss of $2.1 million in FY 2023). However, despite the cost-cutting initiatives, as well as turbulence in the banking sector that the company serves, nCino’s CEO, Pierre Naude, reiterated on the earnings call that the company’s “overriding focus remains on driving growth.” The company’s guidance implies a 17% increase in total revenue.
In Other News
✔️ First Citizens Acquires Much of Failed Silicon Valley Bank
First Citizens agreed to acquire assets of Silicon Valley Bank after a run on deposits triggered one of the biggest banking failures in the U.S. recent history. First Citizens is buying approximately $72 billion of SVB’s assets at a discount of $16.5 billion. The transaction leaves about $90 billion in securities and other SVB assets with the FDIC.
✔️ Banks Warier of Serving Crypto Clients After Blowups, Scrutiny
Major banks are adopting a more cautious approach to serving clients in the cryptocurrency industry amid concerns over regulatory scrutiny and the risk of reputational damage. As reported by Bloomberg, the industry's association with fraudulent activities, money laundering, and high volatility has made banks increasingly wary of doing business with cryptocurrency companies.
✔️ Oscar Health announces ex-Aetna CEO to take over in April
Oscar Health, a tech-driven health insurance company, has announced that former Aetna CEO Mark Bertolini will take over as its new CEO in April. The move comes as Oscar Health looks to expand its offerings and grow its market share in the highly competitive health insurance industry. The company’s stock is down 81% since its IPO in 2021, but the appointment of Bertolini is seen as a positive sign by investors.
✔️ Checkout.com’s new president is bullish on US expansion
Checkout.com, a global payment solutions provider, is betting big on expanding into the US market under the leadership of newly-appointed President, Caroline Britton. She believes the company’s superior technology and customer service will allow it to compete with established payment processing companies such as Stripe.
✔️ Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks
Charles Schwab's $7 trillion investment empire, which was built on the foundation of low interest rates, is starting to reveal signs of weakness. The company's model relies on taking in deposits from clients, investing them in higher-yielding assets, and paying a lower interest rate on those deposits. However, as interest rates have risen, Schwab's profit margins have been squeezed.
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Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.