Fintech Horror Stories - The month (or two) that was
Apple has been the key industry player amidst a sea of fintech horror stories and other developments.
Well, I’m finally back from my visit from out of the country. For those who are still here, thanks for your loyal readership! For those who are new to this space, I visited the UK during Ramadan and then I spent two weeks in Thailand. Since I’m still getting my bearings and just now diving back into the happenings of all things regulations, consumer finance, fintech, banking, payments, etc, I thought I’d spend this week recapping what I’ve “missed” and giving some quick takes from the Horror Stories perspective. We’ll be staying on top of our usual beats, and more, as usual going forward. Without further ado, here’s a look back:
Apple’s Fintech Ambitions - Activated
Perhaps the most frequent name in the world of fintech the last month has been Apple. While seemingly the entire sector was getting caught in the tidal waves created by the collapse of Silicon Valley Bank, First Republic, and Signature Bank based on the stock prices, Apple quietly went on the offensive, stepping into the turf that would normally have been that of fintechs and banks. They did so first by announcing the launch of a new BNPL product, Apple Pay Later, and by announcing the launch of a new Savings product, tied to its existing Apple Card product.
ANALYSIS
Under any other circumstance, it would be tempting to say that Apple was just experimenting and one would question whether Apple might have forgotten it was 2023 and not 2021 (when all sorts of companies were more prone to innovation, taking risks, and the like). However, the proof was in the pudding that this wasn’t some sandbox idea.
In the case of its savings product, two sources familiar with the product reported that in just four days, it drew almost $1 billion in deposits. It was estimated (from the same article) that Apple Card users withdrew around $3.8 billion annually in rewards, that presumably will now go to this product. Since the real hook here is the 4.15% rate, $3.8B is probably the absolute bare minimum. Looking at the most comparable product, which is Goldman Sach’s Marcus savings account, they have around $100 billion in consumer deposits on their books, but the issue is that they are winding down all things Marcus. Looking a few years back, when they were in growth mode, it seems they managed to gain around $10 billion of deposits year over year between 2021and 2022. If we use this as the barometer for Apple Pay’s potential growth, they could easily vault over a number of regional banks that are out there right now, nudging their way into the top 150 banks in the US by deposits. The fact that they are in a position to be able to achieve this is pretty astounding, given the entire valuation of the largest neobank in the US (Chime) is $14.5 billion (as of 2021, when valuations were at their peak).
In the case of the BNPL product, statistics on how well this has performed have yet to be obtained. It’s worth noting at the moment that the BNPL space in general is undergoing an overall right-sizing, with many companies experiencing significant declines in stock value (i.e. Affirm)). However, the interest that was generated when Apple made the launch announcement cannot be denied - a simple glance at Google Trends for Apple vs Affirm vs Klarna vs Afterpay shows the insane potential a mere announcement drove as evidenced by the below:
In both instances, the sky seems to be the limit. It will be interesting to see what this means for the overall fintech industry, as Apple has seemingly picked the perfect time to enter the space in both cases, with banks taking a hit in 2023 and neobanks already on the decline since 2022 with drops in investor funding and stock prices, and BNPL companies having credit cycles hit them hard with recessionary indicators revealing themselves.
RIP First Republic
We had already covered the demise of SVB thoroughly in this space (and I was half-tempted to use this newsletter to riff on former CEO Greg Becker’s testimony to Congress this week, Mystery Science Theater 3000 style). However, we only briefly touched on the possibility First Republic bank might fail and never got the chance to follow up in one of my last newsletters. Well, surprise - on May 1, it failed and the remaining pieces were subsequently acquired by JP Morgan Chase (as we noted earlier in this article).
ANALYSIS
Unlike SVB, which was touted for its offerings to startups and had some sympathy that it could generate given many of said companies needed to make payroll for its employees, First Republic was pretty clear on its niche target market - high-net-worth individuals. And so when said individuals reacted to the run on SVB and Signature Bank and started to pull out deposits from there too, there was essentially not enough left in portfolio of consumers with deposits at or below the insured level remaining, to survive. The stock price tanked, the FDIC stepped in, and JP Morgan stepped up.
When SVB chatter was at its peak back in March, in several chats with some former MBA classmates, we privately discussed which banks might be in trouble. Since then, the fact that Signature and First Republic were the unfortunate ones should not be a surprise. Since it’s been some time now, I can share the methodology we used to have an idea that this was probably going to be next. Back in March after the SVB collapse, an exhibit started doing the rounds online sourced from a consultancy, via Statista, that had managed to get information about deposits less than $250K as a percentage of a given bank’s total deposit holdings. I got the idea to cross-reference this against the total amount of deposits for each bank and specifically focus on those that had less than $250B in assets. This was because in 2018, changes to the Dodd-Frank act were made that, among many things, loosened stress testing requirements for any of those banks that did not have at least $250B (the threshold previously was $50 billion), with some leeway left to the Federal Reserve on how often it wanted to test banks that had assets between $100B and $250B.
Based on this joining/combination of sources, the banks we flagged as being in serious trouble were:
—Signature Bank
—Northern Trust
—SVB (had already failed)
While First Republic was in the crosshairs, we figured ~ 80% of the portfolio being comprised of non-insured deposits was still enough to survive. And meanwhile, as many of us were Chicagoans, we wondered how Northern Trust was going to make it.
Well, it turned out that SVB and Signature Bank managed to escape the requirement of less frequent stress testing as a result of their growth that took them from one category (less than $100B in assets) to another category (between $100B and $250B) by 2018, while Northern Trust was already in and remained in this newly relevant middle range and ended up having to report stress testing results in 2020 and 2022. It also turned out that First Republic’s growth was even more epic than SVB’s or Signature’s. It was at $99.2B in assets at the end of 2018, which put it a hair below the $100B - $250B range, thus exempting it from stress testing that Northern had to go through. So in essence, the number of assets in 2023 doesn’t tell the whole story.
Other Topics
There are other big items that came up while the newsletter was on hiatus:
—Earnings calls were held for the entire banking sector (of public banks, that is) which are gold for getting insights into how leaders are thinking and what moves are likely to be next for the entire industry (some speculative commentary prior to the calls being held is here which it might be valuable to revisit now). Where do we think the industry will go after a tumultuous Q1 and Q2? What does it mean for the broader stock market?
—An “I told you so” moment for those crypto advocates who claimed that the FDIC was going to use sales of distressed bank assets to make a statement on crypto - specifically, Signature Bank’s buyer was only offered the financial institution’s “non-crypto” assets. The FDIC instead returned the crypto assets directly to consumers. While that is all fine and good, what does this mean for how the regulators view digital asset holders now and in the future?
—Visa launches a new offering, Visa+ - is this just their latest attempt to try and keep up with Mastercard’s stellar record on innovation and partnerships, or is this actually something substantial?
—Roaring debates continue in the industry, with discussions around:
—WFH vs RTO - if you work for a financial institution, which way is the wind blowing in your institution?
—Twitter hiring a new CEO and doubling down on its intention to launch a superapp (despite the firing of Esther Crawford who was tasked with developing Twitter’s payment strategy pre-Elon) - do you use Twitter, and if so, would you be interested in an “everything app” as Elon puts it?
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Rather than dive into these topics, I thought I’d try something different and open up the comments section to get your take - what do you all think about these developments? Chime in in the comments below, and watch this space for more.