Fed Holds Rates Steady; Revolut Gets U.K. License; Stripe and Fifth Third Partner

Fed holds rates steady but signals possible September rate cut. Job market slows. FDIC changes course on brokered deposits. Pagaya to acquire Theorem. Revolut clinches “restricted” U.K. bank license. Stripe partners with Fifth Third, announces Lemon Squeezy acquisition. Consumer lenders report earnings.

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Fed Signals September Cut Possible

The Fed held rates steady at last week’s FOMC meeting, but signaled a rate cut could come as soon as September. In a statement released after the committee’s two-day meeting, it emphasized that it is attentive to both parts of its mandate: stable prices and full employment.

Still, no matter what the Fed does at its next meeting may be viewed as political, in light of the contentious upcoming elections in November. Meanwhile, the job market remained fairly strong, with private sector employers adding 122,000 jobs in July, according to ADP data. That’s down from 155,000 in June. Wage growth also slowed, clocking in at 4.8% year over year. Slowing employment and wage growth is being viewed as a positive signal in the continuing fight against inflation. This is borne out by a less than expected rise in the employment cost index. The measure rose 0.9% from April to June, a slowdown from Q1 and below what analysts expected for Q2.

In the wake of last year's regional banking crisis and the still-unfolding Synapse disaster, the FDIC board voted 3-2 to issue a proposed rule that would effectively reverse the changes made in 2020 to brokered deposit rules. Brokered deposits, sometimes referred to as "hot money," are funds placed with a bank by a third-party agent or broker. Because they are perceived to be higher-risk, brokered deposits carry a higher deposit insurance assessment, and there are restrictions on banks that are less than well capitalized on using such funding. The changes are widely perceived as being unfavorable to fintechs and partner banks that work with them. FDIC Chair Gruenberg, CFPB Director Chopra, and Acting Comptroller Hsu voted in favor of the proposed rule, while Directors Travis Hill and Jonathan McKernan voted against it.

Pagaya to Acquire Theorem

AI lending network Pagaya announced it will acquire asset manager Theorem. Theorem has managed billions of dollars in credit investments since its founding about a decade ago. Together with the acquisition of Theorem, Pagaya’s fund management business is expected to grow $3Bn, separate from Pagaya’s existing securitization program. The tie up will give investors in Theorem’s credit funds access to assets generated by Pagaya’s network of 30 of the top U.S. lenders, which generate some $180Bn worth of application volume per quarter.

Revolut Clinches “Restricted” U.K. Bank License

After a years-long slog, Revolut has finally secured its U.K. banking license, with restrictions, in what is known as a “mobilization” process in that country. A full banking license will enable Revolut to offer overdrafts, lending, and savings products in the U.K. Competitors in the country, like Monzo and Atom, have held full bank licenses for some time.

While U.K. neobanks have remained largely focused on their home market, Revolut has pursued a much more ambitious strategy, obtaining a banking license in the EU and testing or launching offerings in the U.S., Mexico, and Brazil. In addition to the license news, the company is negotiating a secondary share sale that would see it valued at more than $40Bn, a material increase from its $33Bn valuation achieved in 2021.

Stripe Partners With Fifth Third, to Acquire Lemon Squeezy

Stripe announced last week it would partner with mega-regional Fifth Third to expand its embedded financial services offering, including Stripe Treasury. Stripe has previously partnered with Goldman Sachs’ Transaction Banking unit and Evolve Bank & Trust to power its Treasury offering. The partnership is the most substantial one announced to date for Fifth Third’s Newline platform, which enables clients to offer deposit, payment, and card products. Fifth Third’s efforts in the space were accelerated via the bank’s acquisition of middleware platform Rize Money last year.

In other Stripe news, the company announced it had reached an agreement to acquire four-year-old payment processing startup Lemon Squeezy for an undisclosed sum. Lemon Squeezy primarily serves SaaS businesses and acts as the “merchant of record,” handling fee and tax calculation and payment processing around the globe. The acquisition will add an often-requested feature to Stripe’s arsenal.

Consumer Lenders Report Earnings

This week, we got results from consumer lenders, with SoFi reporting a +12.1% YoY increase in originations while LendingClub reported a (9.1)% YoY decline in originations and OneMain Financial reported a (4.3)% YoY decline in its consumer originations.

OneMain attributed the decline to continued credit box tightening and pricing actions. LendingClub’s YoY decline can be attributed to its shift in strategy, as it transitioned from whole loan sales making up over 50% of originations in 2Q23 to its structured certificate program making up ~50% of originations in 2Q24. As a reminder, under this program, LendingClub retains the senior portion of the loan and sells the residual.

Both LendingClub’s (42.1)% and OneMain’s (7.7)% originations remain below pre-pandemic (2Q19) levels, as the companies have tightened credit.

While OneMain’s originations were lower on a YoY basis, its managed receivables grew to $23,657Mn, a +10.8% increase YoY. However, excluding the receivables it acquired via Foursight, the growth in managed receivables would be closer to +5% YoY.

Turning to credit, OneMain’s NCO ratio declined (29)bps QoQ to 8.3%, and are expected to have peaked in 1H24, due to the reduced size of its “front book” (originations post-Aug 2022 tightening). While management expects NCOs to decline in the second half, they remain substantially above pre-pandemic (2Q19) levels of 6.2%.

LendingClub’s NCO ratio declined (70)bps QoQ to 6.2%, with the improvement driven by the company’s decision to lean into its structured certificate program.

In contrast, SoFi reported a +39bps QoQ increase in its NCO ratio to 3.84%. However, it should be noted that SoFi was the only company of the three to post a YoY increase in origination volumes. While SoFi reported a 3.84% NCO ratio, the company sold $69Mn of late-stage delinquent personal loans during the quarter. CFO Christopher Lapointe explained, “Had we not sold these late-stage delinquencies, we estimate that including recoveries between 90- and 120-days delinquent, we would have had an all-in annualized net charge-off for personal loans of approximately 5.4%.”

Wrapping things up with deposits, both LendingClub +7.6% QoQ and SoFi +6.4% QoQ reported solid growth. LendingClub’s QoQ growth was primarily driven by an increase in high yield savings and CDs. Both fintechs offer substantially higher rates on interest-bearing deposits than many large banks, which has enabled them to continue their deposit growth. LendingClub’s average yield on interest-bearing deposits rose +7bps QoQ to 4.81% and SoFi’s average yield on interest-bearing deposits declined (5)bps QoQ to 4.24%. Deposits remain the key to funding loans affordably, with SoFi reporting that its deposits were able to reduce the amount of warehouse facilities utilized at a 213bps lower rate. That savings translates to ~$500Mn in annualized interest expense savings.