Fintech Headlines: October 17 - 23, 2022

Goldman Sachs restructures its consumer finance business, Mastercard will help banks offer cryptocurrency trading, Bank of America and American Express beat analyst estimates on strong consumer demand

This Week in the Markets

The major U.S. stock indices finally posted weekly gains, as investors tried to digest corporate earnings and commentary from Federal Reserve officials on the future trajectory of interest rates. FOMC is not meeting until November 2, 2022; however, this does not prevent investors from forming expectations and Fed officials from expressing their opinion on where the rates should go. CME FedWatch tool currently predicts a 95% chance of a 75 basis points hike at the November FOMC meeting.

I believe by now it is clear that the Federal Reserve couldn’t care less about the stock market, and will keep raising rates until a) inflation does not return to the target levels, or b) the job market starts falling apart. However, inflation will not return to normalcy while consumers have confidence in their job prospects and keep spending, and companies will not start firing people while their earnings are boosted by that same consumer spending. So what will break this vicious cycle?

↗↗ Toast (NYSE: TOST 0.00%↑): shares of the restaurant management software and payments company advanced more than 22% this week on no particular news. However, the earnings results of American Express and Bank of America might have reassured investors that U.S. consumers keep spending money on dining out, travel, and entertainment, which boosted shares of payment companies.

↘↘ Dave (NASDAQ: DAVE 0.00%↑): shares of the neobank declined another 10% on no particular company news. The company’s stock is down 97% since its IPO in January (Dave went public by merging with Victory Park Capital SPAC, VPC Impact Acquisition Holdings III), and has been trading below NASDAQ’s minimum price requirement of $1 since late June 2022.

Next week the first Fintech companies, LendingClub (NYSE: LC 0.00%↑) and Shopify (NYSE: SHOP 0.00%↑), will report their Q3 2022 earnings, and we will also hear from the “original fintech” Capital One (NYSE: COF 0.00%↑), VISA (NYSE: V 0.00%↑), and Mastercard (NYSE: MA 0.00%↑).

✔️ Dow climbs more than 700 points as Wall Street clinches its best week since June
✔️ Fed-Obsessed Traders Lift Stocks as Yields Slide: Markets Wrap
✔️ Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes
✔️ Bullard Says Strong Job Market Gives Fed Room to Raise Rates
✔️ Two Fed Officials Make Case for Caution With Future Interest Rate Raises
✔️ Fed Officials Expect Debate on Rate Peak and When to Slow Hikes

Goldman Sachs Restructures Its Consumer Finance Business, Marcus

Goldman Sachs (NYSE: GS 0.00%↑) announced a firm-wide reorganization, which will split its consumer finance business, Marcus by Goldman Sach, into two parts. Thus, Marcus-branded consumer products, such as high-yield savings accounts and robo-advisory, will be merged into the asset and wealth management division, while its card partnerships with Apple and General Motors, as well as specialty lender GreenSky, will become the foundation of a newly-formed division, Platform Solutions.

During the earnings call, David Solomon, the company’s CEO, admitted that the reorganization marks a backtrack on Goldman’s consumer finance ambitions, and the company is planning to reorient its consumer-facing products toward its wealth management clients, instead of competing for new customers with incumbents and neobanks. The key takeaway from this experiment is that it is extremely hard to lure consumers to switch banks even if you have unlimited financial and tech resources.

Image source: Marcus by Goldman Sachs

✔️ Goldman CEO David Solomon’s latest remix breaks up the bank’s struggling consumer finance business
✔️ Goldman Shakes Up Leadership Ranks in Yet Another Overhaul
✔️ Rarely-humbled Goldman Sachs concedes missteps in plan to take on megabanks in retail finance
✔️ Goldman Plans Sweeping Reorganization, Combining Investment Banking and Trading

Mastercard to Help Banks Offer Crypto Trading

Mastercard (NYSE: MA 0.00%↑) continues to build its crypto capabilities, this time announcing the Crypto Source program, which aims to help financial institutions offer crypto trading capabilities to their customers. In this offering, Mastercard is partnering with Paxos, a blockchain infrastructure company, whose clients include PayPal, Credit Suisse, and Revolut. Mastercard will focus on regulatory compliance and security, while Paxos will provide custody and trading capabilities.

There is so much going on in the crypto space despite drawdowns in prices and muted trading volumes. Thus, this week alone, Plaid introduced Wallet Onboard, a service that helps developers connect crypto wallets to decentralized applications, Brazil’s Nubank announced its own cryptocurrency, Nucoin, and crypto exchange Coinbase waived fees for converting fiat money into USDC stablecoins in an attempt to grow global crypto adoption. Mastercard clearly wants to be a part of this industry.

Image source: Mastercard’s Crypto Card Program

✔️ Mastercard Debuts Service Offering Crypto-Trading Tied to Bank Accounts
✔️ Mastercard to bring crypto trading capabilities to banks
✔️ Mastercard will help banks offer cryptocurrency trading
✔️ Mastercard Taps Paxos to Launch Crypto Trading for Banks
✔️ Financial services giant Plaid makes first foray into crypto
✔️ Buffett-backed digital bank Nubank to launch its own cryptocurrency in Brazil
✔️ Crypto Exchange Coinbase Waives Fees for Converting Between USDC and Fiat

American Express and Bank of America Beat Estimates on Strong Consumer Demand

Bank of America (NYSE: BAC 0.00%↑) and American Express (NYSE: AXP 0.00%↑) beat earnings estimates on strong consumer demand and higher interest rates. CEOs of both companies stressed that U.S. consumers are (financially) healthy and keep spending money on dining out, travel, and entertainment despite historic levels of inflation and economic uncertainty. These statements echoed the reports from J.P. Morgan Chase and Wells Fargo from last week.

Many investors are looking for cracks in the economy or deterioration of corporate earnings, which would undermine the Federal Reserve’s ability to further hike rates. However, as Bloomberg journalists put it, “Recession Warnings Are Hard to Find in Wall Street Bank Earnings.” Next week big tech (Apple, Amazon, Microsoft, Google) will report their Q3 2022 results. Perhaps, tech companies will be less optimistic than banks in their outlook.

Image source: American Express Investor Relations

✔️ Recession Warnings Are Hard to Find in Wall Street Bank Earnings
✔️ U.S. consumer is soldiering on despite soaring inflation and recession risk, credit card giants say
✔️ Bank of America CEO says latest spending and savings data show that the U.S. consumer is healthy
✔️ Bank of America tops estimates on better-than-expected bond trading, higher interest rates
✔️ American Express Results Top Expectations. Travel Spending Provides a Lift
✔️ Visa, Mastercard profits expected to jump as travel rebounds

In Other News

✔️ Existing home sales fall to a 10-year low in September, as mortgage rates soar
✔️ Visa, Mastercard Draw New Government Scrutiny Over Debit-Card Routing
✔️ Why neobank Current left its main tech provider, Galileo, for Visa
✔️ Day Traders Go Back to Their Day Jobs as Stock Market Swoons
✔️ Rising Interest Rates Should Help Robinhood. It Doesn’t Mean the Stock Is a Buy
✔️ Coinbase Hires Fintech Executive to Lead European Expansion
✔️ Crypto Bank Silvergate Falls After Third Quarter Earnings Miss
✔️ FLEETCOR to Acquire European Workforce Lodging Business
✔️ JPMorgan-backed digital bank C6 to open Brazil branch network

Disclosure & Disclaimer: despite rocky performance in 2021 and 2022, I own shares in most of the companies that I write about in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your own research.