Fintech Headlines: September 12 - 18, 2022

Regulation is coming for BNPL companies, Goldman's consumer unit is facing mounting credit losses, and the Ethereum network completes "The Merge"

This Week’s Gainers and Losers

This was another brutal week for the markets, and this time it was brutal to every sector, not just the growth stocks. The U.S. Inflation results came in higher than expected (Consumer Price Index increased 0.1% for the month and 8.3% for the year, while economists forecasted a decline of 0.1% for the month and 8.0% increase for the year). Inflation is not slowing down, the Federal Reserve is committed to fighting it, so the interest rate hikes will continue. Federal Open Market Committee (FOMC) meets next week, on September 20-21, 2022.

Dave, the struggling neobank, was the only Fintech company (out of the 30+ companies that I track) that surprisingly advanced this week. Affirm and Block lead the pack on the downside and declined 15.05% and 12.65% respectively. On top of the overall market selloff, the Buy-Now-Pay-Later companies (Block owns Afterpay) were impacted by the news of the upcoming regulation (more on that below).

Legend: 5-Day Change, September 12-16, 2022

Regulation is coming for Buy-Now-Pay-Later

Following an investigation that was kicked off in December 2021, the U.S. Consumer Financial Protection Bureau (CFPB) issued a report suggesting that Buy-Now-Pay-Later companies, such as Affirm, Afterpay, and Klarna, should be subject to oversight similar to credit card companies. At the moment, the agency, that is responsible for consumer rights protection in the financial sector, does not oversee the BNPL sector, as its jurisdiction is limited to banks, credit unions, payday lenders, debt collectors, and mortgage servicers.

Max Levchin, the founder and CEO of Affirm, welcomed the idea of regulation and used the opportunity to remind the market (and the regulator) that he started the company with a promise of building a credit product that is more transparent and fair than credit cards (no fine print, no late fees). The regulation was imminent as the industry matured and gained scale, and I think it will actually benefit the largest players. Compared to smaller players, Affirm and Afterpay don’t rely on VC money to fund their operations, they have better access to capital to fund growing loan originations, and have more resources to comply with regulatory requirements.

✔️ U.S. consumer watchdog plans to regulate 'buy-now, pay-later' companies
✔️ CFPB signals that regulation is coming for BNPL
✔️ Regulators Are Coming for BNPL Companies. They Don’t Seem to Mind.
✔️ Affirm Bull Case Builds Despite Tougher ‘Buy Now Pay Later’ Regulation
✔️ Twitter thread by Max Levchin, CEO and founder of Affirm
✔️ Affirm CEO talks recession, Apple Pay Later, and being an entrepreneur

More problems at Goldman’s consumer unit

I remember the fear that Goldman Sachs brought into the Fintech industry when they announced their push into consumer banking with the launch of Marcus by Goldman Sachs. At least in theory they had all the ingredients to succeed: a strong global brand, technology muscle, and unlimited access to capital. Yet, six years later, things don’t look that bright: the bank’s consumer unit is still not profitable and the losses are mounting, the next big launch, checking accounts, is delayed, and now, they face increasing credit losses in their Apple Card portfolio.

As a reminder, Apple partnered with Goldman Sachs, to act as the issuer and the lender, for the Apple Card. This week, CNBC reported that Apple Card’s credit losses are the worst in the credit card industry, and more than a quarter of Apple Card holders are “subprime” borrowers (FICO score under 660). I mean above-the-norm credit losses and a large share of subprime borrowers are typical for neobanks, but I guess the expectations for Goldman were different. Goldman Sachs’ management will have a lot of questions to answer during their next earnings call.

✔️ Goldman’s Apple Card business has a surprising subprime problem
✔️ Goldman’s Apple Card faces mounting credit losses
✔️ Goldman Sachs Faces Fed Scrutiny of Money-Losing Marcus Consumer Unit
✔️ Schooling Goldman Sachs and the Apple Credit Card
✔️ Apple Card’s credit risk manager leaves for credit card startup X1

The Ethereum completes “The Merge”

The Ethereum completed the long-awaited “Merge”, switching from a “Proof-of-Work” to a “Proof-of-Stake” consensus mechanism. Going forward, the Ethereum network will not rely on “miners” using computational power to validate transactions and instead will rely on “stakers”. Stakers are the network users (companies or individuals) that lock their Ether coins for the right to participate in the validation of transactions (and earn fees for doing that). Their locked stakes create an incentive to do the validation right (kind of “skin in the game” principle).

The “Merge” is one of the steps in scaling the Ethereum network (there is also the “Surge, Verge, Purge, and Splurge”). Once all the steps are completed, the effort is expected to lead to much lower fees and higher transaction throughput, which in turn is expected to lead to higher user adoption. One can draw parallels with mobile data: when mobile data was slow and expensive, it was barely used. Now mobile data is fast and cheap, and it is hard to imagine our lives without smartphones. Hats off to the team behind the Ethereum network and good luck with the next phase!

P.S. the SEC chairman, Gary Gensler, used the opportunity to remind everyone that cryptocurrencies might be securities, especially those using “Proof-of-Stake” consensus.

✔️ The Merge is here: Ethereum has switched to proof of stake
✔️ Ethereum switches to proof-of-stake consensus after completing The Merge
✔️ The Ethereum Merge Is Done, Opening a New Era for the Second-Biggest Blockchain
✔️ Ethereum’s Merge Is Nearing. What It Means for Coinbase, Nvidia, and Other Stocks.
✔️ Coinbase, Robinhood Shares Jump As Ethereum Merge Holds Growth Prospects, Nvidia Steady

In other news

✔️ U.S. Retail Sales Rose 0.3% in August, Showing Resilience in Face of Inflation
✔️ U.S. Banks Lost a Record $370 Billion in Deposits Last Quarter
✔️ ‘Consumer spending has been remarkably stable,’ Visa CFO says
✔️ Mastercard: U.S. Retail Sales Expected to Grow 7.1% This Holiday Season
✔️ JPMorgan acquires payments fintech Renovite to battle Stripe and Block
✔️ Crypto Fees Are High. The Stock Market May Hold the Answer.
✔️ Schwab, Citadel Securities, Fidelity, Other Wall Street Firms Start Crypto Exchange
✔️ Robinhood’s August Metrics ‘Uninspiring,’ J.P. Morgan Says
✔️ Amazon hands out shipping software to merchants, including on rival sites
✔️ Shopify offers workers greater say in compensation structure to attract talent
✔️ Milk, Diapers and Checking Accounts: Banking Comes to Walmart
✔️ Cathie Wood Goes on Biggest Dip-Buying Binge Since February
✔️ PayPal Is Turning Around. Another Analyst Turns Bullish.
✔️ PayPal’s New CFO Takes Leave of Absence
✔️ PayPal is ‘clearly now at a turning point,’ its CEO says
✔️ SoFi Stock Gets an Upgrade to Buy. Student Loan Payments Are Resuming Soon.
✔️ Brazil’s retail companies move to become fintechs
✔️ Nubank to Delist from Brazil’s B3 Stock Exchange
✔️ Adyen selected as first financial technology platform to launch Cash App Pay
✔️ Marqeta Announces $100 Million Share Repurchase Program

Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 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.