Rate Cut Looks Likely; CFPB Targets Cashback Fees; Arch Raises $75Mn

The interest rate “vibe shift” continues. CFPB targets retail cashback fees. Crypto lender Arch raises $75Mn. Neobank Comun announces Series A. Bureaus split on credit builder data. Sezzle partners on SMB lending. Klarna’s revenue jumps. OakNorth wins approval for representative office. PrizePool shuts down. Affirm reports earnings.

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Interest Rate Vibe Shift Continues

The tone on interest rate policy continues to shift. SF Fed President Daly told Bloomberg last week that “the time to adjust policy is upon us,” as the central bank’s focus seemingly moves from inflation to employment. Daly’s comments are consistent with Fed Chair Powell’s recent remarks at Jackson Hole, where he expressed confidence that inflation is on track to return to the Fed’s 2% target. Meanwhile, consumers are increasingly turning to their credit cards in response to higher prices. A recent Fed survey found that nearly 40% of U.S. adults are using cards or other loans to make ends meet, which is a 3%-point increase vs. the year prior.

CFPB Targets Cashback Fees

A CFPB report and blog post last week highlighted the fee practices of large retailers when consumers choose to get cashback at the point of sale. Director Chopra emphasized that, while the economy is increasingly digitized, cash still plays an important role, especially for lower-income households. Chopra wrote that “in many parts of the country, people can struggle to find easy and free access to their own cash,” instead relying on ATMs that assess sometimes lofty fees or on cashback. The CFPB’s report found that three major retailers, Dollar General, Dollar Tree (which includes Family Dollar), and Kroger, assess a fee when customers request cashback. The Bureau estimates consumers pay an aggregate of $90Mn a year in such fees at those three retailers, with lower-income and underbanked consumers disproportionately incurring such fees.

Arch Raises $75Mn in Debt & Equity

Arch Lending, which seeks to be “the new standard” in crypto-backed loans, announced it has raised $75Mn in debt and equity. The funding is composed of a $5Mn “oversubscribed” equity seed round, led by Castle Island Ventures and Morgan Creek Digital, and a $70Mn debt facility. Arch providers users with liquidity by lending U.S. dollars against their Bitcoin, Ethereum, and Solana. Past crypto lenders have run into trouble by turning around and lending out, or “rehypothecating,” in industry speak, users’ assets. Arch assures users that it never rehypothecates assets and holds them at regulated custodians, like Anchorage Digital, an OCC-chartered bank.

Comun Announces $21.5Mn Series A

At a time when many niche neobanks are struggling, or have shutdown altogether, immigrant-focused Comun’s just-announced $21.5Mn Series A is a vote of confidence. The round was led by Redpoint Ventures, with participation from Costanoa Ventures, FJ Labs, RTP Global, South Park Commons, and ANIMO Ventures. Comun focuses on immigrants to the U.S. who may lack a Social Security Number or typical identity documents, like a driver’s license or U.S. passport. According to Comun cofounder and CEO Andres Santos, the company has grown its number of users and revenue per user by 4x since the start of the year. The company has seen the strongest traction in areas of the country with large immigrant populations, including New York, Texas, California, Florida, and Georgia.

Bureaus Split on Credit Builder Data

Credit builder products have become increasingly popular, both with fintechs and with the consumers they serve. For companies that offer them, part of the appeal is often higher interchange, as credit builder cards are typically structured as charge cards, which earn higher interchange than debit. For consumers, the pitch is the ability to build their credit history without taking on debt or the hassle and upfront expense of a typical secured credit card. But the jury is out if these products are really delivering on their promise.

The big three bureaus, TransUnion, Equifax, and Experian, and scoring models FICO and VantageScore are grappling with if and how to use tradeline data generated from these products. Experian, which offers its own credit builder card, described the products as a “win-win.” Equifax and TransUnion, however, only utilize such data if they meet certain criteria. Both FICO and VantageScore, which is a joint venture of the three bureaus, are studying how to incorporate credit builder products in their scoring models.

Sezzle Partners on SMB Loans

BNPL provider Sezzle is teaming up with embedded finance platform Liberis to offer small business loans. The partnership is centered around Sezzle Capital, which offers working capital loans to SMBs. Charlie Youakim, CEO of Sezzle, said of the partnership, “At Sezzle, we’re committed to empowering the next generation of business owners through accessible funding opportunities for merchants of all sizes. Through our partnership, we’re thrilled to offer our merchants funding via Liberis—without the need to give up equity in their businesses.”

Klarna’s Revenue Jumps

Klarna, best known for its BNPL offerings, released earnings data last week that showed a 27% jump in revenue ahead of its anticipated IPO plans. For the first half of this year, adjusted profits jumped to $66Mn from an adjusted loss of $45Mn in the same period last year. The announcement comes on the heels of Klarna’s launch of “Balance,” a bank account-like offering, which has been widely viewed as an effort to compete with the likes of fintechs and traditional banks. The company also continues to tout its AI bona fides, claiming that deploying the tech will allow it to shrink its workforce by half over time, though Klarna CEO Sebastian Siemiatkowski declined to provide a timeline on achieving that goal.

OakNorth Wins Approval for Representative Office

U.K. business bank startup OakNorth has won approval to open a representative office in the U.S. The Federal Reserve and the New York Department of Financial Services approved the application, which enables OakNorth to market its products and services and conduct back-office operations. OakNorth CEO Rishi Khosla told Bloomberg that the company is open to acquisitions, saying, “Over time, we will continue to look at acquisition opportunities.” Acquiring an existing bank could be a quicker route to launching full U.S. operations, given the often-lengthy process of applying for a charter.

PrizePool Shuts Down

Neobank PrizePool has been acquired and is shutting down its consumer app, Fintech Business Weekly reported last week. PrizePool partnered with Evolve Bank & Trust, which has been at the center of the ongoing Synapse fallout, to offer spending and savings services, though PrizePool appears to have worked directly with Evolve, rather than through an intermediary platform. It’s unknown how many users PrizePool had, but the company has previously stated it had “tens of thousands” of users with “tens of millions” of dollars in deposits.

Affirm Reports Earnings

Affirm reported earnings this week, with its stock jumping +31.9% after beating earnings expectations. Affirm’s GMV rose +31.3% YoY to $7.2Bn, well exceeding guidance of $6.75-$6.95Bn.

The growth in GMV was driven by growth in active consumers, but also by an increase in the transactions per active consumer, which rose to 4.9, from 3.9 a year prior and 4.6 a quarter prior. At the same time, average order value declined to $293, from $317 a year prior. Consumers transacting more frequently and for lower-ticket purchases is in-line with Affirm’s strategy to capture more of the payments market (including smaller, routine purchases). To go along with this, consumers that transact quarterly or more with Affirm now account for 40% of transactions, up from just 10% in FY’21.

The majority of Affirm’s loans (75%) were interest-bearing, up slightly from 72% both a year and a quarter prior. Interest-bearing loans also accounted for over 80% of Affirm Card’s GMV, even as Pay Now, Pay-in-X and monthly 0% APR products increased their share of GMV. Overall, Affirm Card FMV increased to $507Mn, from $129Mn a year prior and $347Mn a quarter prior.

On the funding side, Affirm’s average cost of funds rose +70bps YoY to ~7.7%, but it has remained relatively flat the past three quarters. Additionally, Affirm has seen strong demand for its ABS transactions, with each of its most recent transactions “upsized and significantly oversubscribed.” Management noted that, “Since FQ3’23, each of our ABS transactions have priced well as evidenced by lower pricing spreads.”

Wrapping things up, 30+ day delinquencies (ex-Pay-in-4) rose to 2.4% for the FY 2024 vintage, up from 2.1% a year prior and the highest since its 2018 vintage. However, ex-Peloton, 30+ day delinquencies of 2.5% were up more modestly from 2.3% a year prior and were in-line with prior year levels. On the Pay-in-4 side, FY 2024 vintage NCOs have outperformed FY 2023 vintages.