Fintech Headlines: September 19 - 25, 2022

SEC is not expected to ban Payment for Order Flow, credit card interest rates in the U.S. hit historic highs, and crypto exchange FTX is raising capital for acquisitions

This Week in the Markets

Affirm expanded its partnership with Amazon, Block’s Afterpay launched in Canada, Coinbase received regulatory approval from the Dutch central bank, which will allow the company to license its operations across the entire European Union, and the Securities and Exchange Commission might not ban Payment for Order Flow after all, which is great news for Robinhood (more on that below).

However, none of that mattered and the markets returned to their June lows after the Federal Reserve raised the interest rates by 0.75% for the third consecutive time and signaled additional increases that might continue into 2023. The Federal Reserve continues its fight against inflation despite the concerns that its policy will lead to a recession. The next FOMC meeting is scheduled for November 1-2, 2022.

Blend, a software provider helping mortgage lenders digitize their lending processes, lead the group on the downside with the stock declining 20.15% during the week. On top of the overall stock market correction, Blend is dealing with plummeting mortgage origination volumes and collapsing real estate market.

Brazil’s Banco Inter, Stone, and XP advanced this week. The Central Bank of Brazil started raising interest rates well ahead of the Federal Reserve and the European Central Bank, and the expectations that the interest rates might have reached their peak in this cycle are fueling Brazil’s stock market.

✔️ Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting
✔️ Fed raises rates by another three-quarters of a percentage point, pledges more hikes to fight inflation
✔️ The Fed Raises Rates by 0.75 Point, Flags Higher Peak Than Expected
✔️ The Fed Wants to Beat Back Inflation. It’s Bad News for Investors.
✔️ Market Wrap: Cryptos Decline as FOMC Delivers Expected Rate Hike
✔️ Brazil’s Stocks Could Keep Climbing When Election Jitters Pass
✔️ Forget China. These 3 Emerging Markets Are Better Bets.

Payment for Order Flow is Here to Stay

As per a Bloomberg report, SEC will not be banning Payment for Order Flow (PFOF), a practice, in which retail brokerages would route transactions to market makers, such as Citadel and Virtu, instead of exchanges. Payment for Order Flow allowed Robinhood, Charles Schwab, and other brokerages to introduce commission-free trading for their retail customers, as under this arrangement, brokerages are compensated by the market makers and don’t have to charge their customers. I guess the obvious benefit of free trading outweighed the hypothetical drawbacks of PFOF, such as conflict of interest, lack of transparency, etc.

Robinhood in particular got a lot of hate from its customers for relying on the PFOF model (though the same customers didn’t hate the zero fees that this model provided). In addition, the SEC’s investigation put the company’s business model at risk, which didn’t help its stock performance. At the latest earnings call, Vlad Tenev, Robinhood's founder and CEO, commented that the company has diversified its income sources and PFOF contributed only 9% of the company’s quarterly revenue. And now, even those 9% are safe. Onwards.

✔️ The SEC May Not Ban Payment for Order Flow. Robinhood Stands to Benefit.
✔️ SEC Set to Let Wall Street Keep Payment-for-Order-Flow Deals
✔️ Robinhood stock gains on news SEC won’t ban payment for order flow
✔️ Are commission-free brokerages ripping you off? The SEC doesn't think so
✔️ Why Payment for Order Flow Made Trades Free But Left SEC Skeptical
✔️ There’s Officially No Going Back From the World Robinhood Built

Crypto Exchange FTX is Raising Capital

While Coinbase and Robinhood are dealing with regulatory scrutiny and plummeting stock prices, FTX, a privately-owned crypto exchange headquartered in the Bahamas, is using the fallout of the crypto industry to pick up valuable assets. Thus, the company struck a deal that gives it an option to buy lender BlockFi and is pursuing an attempt to acquire assets of the bankrupt lender Voyager Digital. The company raised $400 million from SoftBank, Tiger Global, and Temasek in January, and as per a CNBC report, is looking to raise an additional $1 billion to fund acquisitions.

FTX is a force to reckon with for the publicly-traded Coinbase and Robinhood (FTX launched stock trading in the U.S. in July), but what struck me in this story is the reported valuation. Thus, FTX is looking to raise new capital at a $32 billion valuation. As per the leaked financials, FTX made a Net income of $388 million on revenue of $1.02 billion last year, while Coinbase reported a Net income of $3.6 billion on $7.8 billion in revenue, and Robinhood reported a Net loss of $3.6 billion on $1.8 billion in revenue. As of today, the market cap of Coinbase is $13.93 billion, and the market cap of Robinhood is $8.31 billion. It looks like the investors in the new round value FTX 1.4 times more valuable than Coinbase and Robinhood combined. Interesting.

✔️ Crypto Giant FTX Eyes Raising Money to Fund Acquisitions: Source
✔️ FTX in talks to raise up to $1 billion at valuation of about $32 billion
✔️ Crypto Exchange FTX in Discussions for Up to $1B Capital Raise at $32B Valuation
✔️ Crypto Exchange FTX May Get a $32 Billion Valuation. That’s Probably Too Much.
✔️ Binance and FTX Make Top Bids for Bankrupt Lender Voyager

Credit Card Interest Rates Hit a 26-Year Peak

One might think that the Federal Reserve hiking rates (and destroying the stock market in the process) is bad only for the folks investing in the stock market. Wrong. An increase in the fed funds rate eventually leads to an increase in the prime rate, which is the variable component of the interest rate that U.S. banks charge on loans issued to their customers. As an example, this year’s fed funds rate hikes lead to the prime rate increasing from 3.25% in January to 6.25% in September, which, in turn, lead to the average interest rate on credit cards surpassing 18%, the highest since 1996 per Bankrate.com data.

According to the Federal Reserve Bank of New York, credit card balances reached $0.89 trillion at the end of the second quarter. The rising rates will hurt the consumers, but they also provide an opportunity for the Fintech lenders, such as LendingClub and SoFi, to deliver on their original promise: to help consumers pay less on their debt. Consolidating and refinancing credit card debt makes way more sense when the interest rates are at 18% (and rising) than when the rates are at 12%. Let’s see, if LendingClub and SoFi, which both got their banking charters by now, will strive in this environment.

Source: FRED (data up to May 2022)

✔️ Big U.S. banks' prime rate soars to highest since 2008 financial crisis
✔️ Credit Card Interest Rates Hit a 26-Year Peak—and Are About to Go Higher
✔️ Credit Card Interest Rates Hit Highest Level in More Than 25 Years
✔️ America's dependence on credit cards is growing. The Fed's rate hike will make it more painful
✔️ Inflation and higher rates are a ‘dangerous mix’ for consumers already stretched thin, says chief financial analyst

In Other News

✔️ U.S. Home Sales and Prices Fell in August as Mortgage Rates Rose
✔️ JPMorgan CEO: Bitcoin, other cryptos are 'decentralized Ponzi schemes'
✔️ Coinbase Wins Dutch Approval That Should Give Exchange Access to All of EU
✔️ Coinbase Tested Group to Speculate on Crypto
✔️ CEO of Crypto Exchange Kraken Steps Down
✔️ Square Sellers in Canada Can Now Offer Buy Now, Pay Later Through Afterpay
✔️ Block has ‘enormous potential’ but is bogged down by focus on bitcoin
✔️ Jack Dorsey’s Block Draws Analyst Downgrade on Bitcoin Sentiment
✔️ Bank CEOs defend Zelle in Senate hearing
✔️ Affirm and Amazon Introduce Pay-Over-Time Option to Customers in Canada
✔️ Affirm added to ‘zombie’ stocks list by equity research firm New Constructs
✔️ PayPal’s E-Commerce Platform Is Growing Fast. Why This Analyst Downgraded the Stock.
✔️ PayPal stock falls after downgrade as analyst worries about margin impacts of its ‘engine’

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.