Fintech Headlines: March 6 - 12, 2023

Silicon Valley Bank is shut down by the regulator after experiencing a bank run, Paysafe aims to reignite growth in 2023, Dave's guidance falls short of its pre-IPO projections

Stock Market Update

Jerome Powell appeared in front of the U.S. Senate Committee on Banking, Housing and Urban Affairs on Tuesday, and The House Financial Services Committee on Wednesday, to present the Monetary Policy Report. Chairman’s presentation included statements like “the ultimate level of interest rates is likely to be higher than previously anticipated” and “we would be prepared to increase the pace of rate hikes.” The CME FedWatch Tool now estimates a 68.3% probability of a 50-basis point fed funds increase at the next FOMC meeting. In early February, the probability of a 50-basis point hike was estimated at 9.24%.

On Friday, the U.S. Labor Department released an update on February employment. The Department reported a 311,000 increase in nonfarm payrolls, which was lower than in January 2023 (+504,000 payrolls), but still higher than estimated by the economists (+225,000 payrolls). The unemployment rate rose to 3.6%, compared to 3.4% in January 2023 due to higher labor participation. On Tuesday (March 14), the U.S. Labor Department will release inflation data for February 2023.

Nevertheless, the key event this week was the collapse of Silicon Valley Bank (NASDAQ: SIVB 0.00%↑), which overshadowed Chairman Powell's comments and the jobs report, and triggered a selloff on Thursday and Friday. Silicon Valley Bank, a bank that specialized in serving technology and VC firms and had about $175.4 billion in total deposits, experienced a bank run and was shut down on Friday by the Federal Deposit Insurance Corporation (more on that below).

🟢 Banco Inter (NASDAQ: INTR 0.00%↑) and Stone (NASDAQ: STNE 0.00%↑) were the only Fintech companies finishing the week in the green (I track over 40 Fintech companies). Both companies will report their Q4 2022 results next week.

🔴 Shares of Katapult (NASDAQ: KPLT 0.00%↑), a “Buy Now Pay Later” company, declined 30.09% after the company reported its Q4 2022 results. Katapult did not provide guidance citing “uncertainty in the macro-environment related to inflation, consumer spending and a challenging labor market”.

🔴 Shares of Bill (NYSE: BILL 0.00%↑) declined 24.52%, most likely, due to the potential impact on the company and its clients from Silicon Valley Bank (NASDAQ: SIVB 0.00%↑) collapse. The company released a statement about its exposure to Silicon Valley Bank in an attempt to calm investors and clients.

Q2 2022 earnings season is coming to an end, with Banco Inter (NASDAQ: INTR 0.00%↑) reporting on Monday (March 13), Stone (NASDAQ: STNE 0.00%↑) and MoneyLion (NYSE: ML 0.00%↑) reporting on Tuesday (March 14), and Blend (NYSE: BLND 0.00%↑) reporting on Thursday (March 16).

Want to learn more about Stone (NASDAQ: STNE 0.00%↑) ahead of the earnings?
👉🏻 “Stone Profile: Warren Buffett's bet on Brazil's small businesses”
👉🏻 “Stone Q3 2022 Earnings: returning to profitability, one quarter at a time”

✔️ Jerome Powell Says Fed Is Prepared to Speed Up Interest-Rate Rises
✔️ Fed Chair says interest rates are ‘likely to be higher’ than previously anticipated
✔️ US Payrolls Top Estimates, Wages Cool in Mixed Signal for Fed
✔️ Payrolls rose 311,000 in February, more than expected, showing solid growth
✔️ Fed Rate Outlook Overshadowed as SVB Collides With Jobs Report
✔️ Dow closes more than 300 points lower, posts worst week since June
✔️ Bank Stocks Sink Most in Nearly Three Years as Sentiment Sours
✔️ Why SVB’s Bad News Clobbered Bank Stocks Like JPMorgan and Wells Fargo

Markets in Crypto-Assets

“Markets in Crypto-Assets” is a new section in this newsletter (named after the upcoming regulation). A number of publicly traded Fintech companies directly or indirectly participate in the crypto economy (Coinbase, Robinhood, Block, and PayPal to name a few), so I decided to follow the industry more closely. Would love to hear from you in the comments on how to make this section valuable!

On Wednesday, Silvergate Capital Corporation (NYSE: SI 0.00%↑), the parent company of Silvergate Bank, announced a voluntary wind down of operations and liquidation of the bank. Last week, the company warned investors that it might have underestimated previously reported losses, which can result in “the Company and the Bank being less than well-capitalized.” The announcement triggered stock selloff and departure of numerous company’s clients, including as Coinbase, Circle, Paxos, and Galaxy Digital. Silvergate and Silicon Valley Bank failed for similar reasons: outflow of deposits forced the banks to liquidate their securities portfolio at a loss.

The immediate ripple effect of Silicon Valley Bank (NASDAQ: SIVB 0.00%↑) collapse on the crypto industry was a temporary depeg of the USDC stablecoin. Thus, Circle, the company behind USDC, held $3.3 billion of its $9.7 billion cash reserves at Silicon Valley Bank (the company holds another $32.4 billion in U.S. Treasuries). As per the company’s update, the money was transferred out of Silicon Valley Bank accounts before FDIC take over, and the company’s management expects FDIC to settle the transfer on Monday. Circle’s other banking partners include BNY Mellon (NYSE: BK 0.00%↑) and Customers Bank (NYSE: CUBI 0.00%↑).

In the meantime, the industry moves on, with Coinbase (NASDAQ: COIN 0.00%↑) announcing the launch of “Wallet as a Service”, Nubank (NYSE: NU 0.00%↑) releasing its own cryptocurrency, Nucoin, out of beta, and Amazon (NASDAQ: AMZN 0.00%↑) planning to launch NFTs linked to the real-world assets. Exciting!

✔️ Silvergate Bank Is Winding Down Operations in Blow to Crypto Industry
✔️ Silvergate Bet Everything on Crypto, Then It All Evaporated
✔️ Silvergate’s Story Is About Fundamentals, Not Just Crypto
✔️ Crypto bank Signature slides amid troubles at Silicon Valley Bank, Silvergate
✔️ USDC breaks dollar peg after firm reveals it has $3.3 billion in SVB exposure
✔️ Coinbase Pauses Conversions Between USDC and U.S. Dollars
✔️ Crypto Exhales as USDC Stablecoin Rebounds Toward Peg
✔️ Coinbase announces Wallet as a Service
✔️ Coinbase Starts ‘Wallet as a Service’ Companies Can Build Into Their Own Apps
✔️ Nubank launches its own Nucoin cryptocurrency to 70 million customers
✔️ Amazon NFTs Will Be Tied to Real-world Assets, Token Possible
✔️ U.S. bankruptcy judge approves Binance.US $1.3 bln deal for Voyager

Silicon Valley Bank Is Shut Down by the Regulator After Experiencing a Bank Run

Silicon Valley Bank, a bank for many startups and VCs, experienced a bank run and was shut down by the regulator on Friday. The story unfolded within 48 hours. Thus, on Wednesday, after the market close, SVB Financial Group (NASDAQ: SIVB 0.00%↑), the parent company of the bank, announced a new stock offering in an attempt to shore up its capital. The offering included an explanation of why new capital was needed: "SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023." This, in turn, triggered a number of prominent VCs to ask their portfolio companies to move money away from SVB. Around $42 billion was wired out on Thursday alone. Outflows continued on Friday, and the regulator stepped in and shut the bank down.

SVB experience an unprecedented inflow of deposits during 2020 - 2021, as many of its clients raised new rounds of funding. The bank could not lend so much money, so they invested it in government bonds and mortgage-backed securities. Apparently, the bank ignored risk management principles, and invested short-term deposits into longer term securities to find yield. As the VC funding environment deteriorated, startups started burning through their cash balances, and the bank had to sell those bonds. The problem was that in the meantime, the Federal Reserve raised the rates, so SVB was selling its bonds at a loss (value of bonds declines when rates rise). As the outflows escalated on Thursday and Friday, the losses exceeded the bank’s equity capital and the regulator had to step in.

Failure of Silicon Valley Bank triggered a panic among startup community, as many companies had their funds locked with the bank and feared of not being able to make payroll. Moreover, the collapse could translate into a wider banking crisis and additional bank runs, which indeed started happening. Thus, over the weekend the regulator had to take over Signature Bank (NASDAQ: SBNY 0.00%↑). On Sunday, the U.S. government announced a plan to prevent further contagion. Thus, FDIC will compensate all Silicon Valley Bank and Signature Bank depositors, and the Federal Reserve will provide a funding facility for other financial institutions that were affected by the collapse of SVB. For some reason, I don't think this is the end of the story.

✔️ Silicon Valley Bank scrambles to reassure clients after 60% stock wipe-out
✔️ Silicon Valley Bank Closed by Regulators, FDIC Takes Control
✔️ Silicon Valley Bank is shut down in biggest bank failure since global financial crisis
✔️ Signature Bank Is Shut by Regulators After SVB Collapse
✔️ US Discusses Fund to Backstop Deposits If More Banks Fail
✔️ U.S. government steps in and says people with funds deposited at SVB will be able to access their money
✔️ Silicon Valley Bank, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis

PaySafe Aims to Reignite Growth in 2023

Paysafe (NYSE: PSFE 0.00%↑) reported its Q4 2022 results on Thursday (March 9). In Q4 2022, Total Payment Volume increased 5.1% YoY to $33.1 billion, revenue increased 3.2% YoY to $383.6 million and gross profit increased 1.7% YoY to $227.4 million. Revenue growth was driven by the company’s Merchant Solutions segment revenue, which increased 10% YoY, and was partially offset by the Digital Wallets segment revenue, which declined 4% YoY. The company reported a Net Loss of $33.7 million and an Adjusted EBITDA of $107.6 million for the quarter, compared to a Net Income of $90.3 million and an Adjusted EBITDA of $105.5 million in Q4 2021.

Paysafe, which is a merchant acquirer with a strong footprint in online gaming and entertainment industries, enjoys healthy gross profit and Adjusted EBITDA margins, but is struggling to reignite growth. The company’s management guided for $375-$380 million in revenue and $105-$108 million in Adjusted EBITDA in Q1 2023, as well as $1.58-$1.60 billion in revenue and $452 – $462 million in Adjusted EBITDA for the full year 2023. The guidance implies a 2-3% YoY revenue growth in Q1 2023, and 6%-7% YoY revenue growth for the full year 2023. The company will hold Analyst and Investor Day on Monday (March 13) to discuss 2023 plans.

✔️ Paysafe Reports Fourth Quarter and Full Year 2022 Results
✔️ Fourth Quarter & Full Year 2022 Earnings Presentation

Dave’s Guidance Falls Short of Pre-IPO Projections

Dave (NASDAQ: DAVE 0.00%↑), a neobank that focuses on serving lower income customers, reported its Q4 2022 results on Monday (March 6). The number of monthly transacting customers increased 27% YoY to 1.9 million and revenue increased 44.7% YoY to $59.6 million. Dave reported a Net Loss of $21.5 million and an Adjusted EBITDA of negative $11.8 million, compared to a Net Loss of $15.2 million and an Adjusted EBITDA of negative $12.6 million in Q4 2022. The company guided for $235 million - $260 million in Non-GAAP operating revenue, and an Adjusted EBITDA of negative $35-50 million in 2023. The company’s management plans to reach profitability on an adjusted basis in 2024.

Dave’s value proposition is faster and cheaper cash advances (up to $500 for 1-2 weeks), and the company monetizes its customer base through monthly subscriptions and interchange fees. Dave went public through a combination with the Special Purpose Acquisition Company (SPAC), VPC Impact Acquisition Holdings III, Inc., in January 2022. SPAC presentation included a forecast of $533 million in revenue and EBITDA of positive $29 million in 2023, and the transaction implied a market capitalization of the combined company of $3.95 billion. However, as the next year’s guidance suggests, things did not go according to the plan. Thus, at the time of this writing, the market capitalization of Dave was $82 million.

✔️ Dave Inc. Announces Fourth Quarter and Full Year 2022 Results
✔️ Dave CEO says it's on track to return to profitability
✔️ Why Neobank Dave Expects to Be a Profitable Fintech Survivor

In Other News

✔️ Credit card debt is at an all-time high, putting households near ‘breaking point’
✔️ U.S. CFPB's bid to curb late credit card fees faces strong opposition
✔️ US Banks Are Finally Being Forced to Raise Rates on Deposits
✔️ Mastercard: February retail, restaurant sales rise
✔️ Brazil’s central bank greenlights WhatsApp merchant payment business
✔️ SoFi Bank sues to block Biden’s student loan payment pause
✔️ Stripe Faces $3.5 Billion Tax Bill as Employees' Shares Expire
✔️ Nubank Adds Former Meta, PayPal Executive Marcus to Its Board
✔️ loanDepot announces year-end and fourth quarter 2022 financial results
✔️ PayPal CFO Blake Jorgensen Steps Down
✔️ Affirm Remains Attractive. Buy Now, Pay Later Firms ‘Adjusting’ to Rising Rates
✔️ Affirm exits Australia

Cover image: Microsoft Bing Image Creator, Powered by DALL·E, prompt “venture capitalists take all their money out of a bank cubism”

Disclosure & Disclaimer: I own shares in several companies that I write about in this newsletter, as I am bullish on the transformation in the financial services industry. However, the information contained in this newsletter is intended for 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.