Unprecedented Inflation to Impact Financial Markets, Consumer Behavior

A report from PeerIQ notes that the official numbers are in and they’re not looking so great. Inflation, as measured by the CPI, surged at a higher than expected 7.5% annualized rate in January 2022. That’s the fastest rate of price increases since 1982. Expectations of a 0.50% interest rate hike in March 2022 “increased to 44.3%,” according to the latest CME data.

As mentioned in the update, employment was one of the few bright spots, at least. The U.S. added 467,000 jobs last month, decisively beating estimates, which is “particularly notable given the Omicron surge.”

The report added that CFPB has initiated a wide inquiry in fee practices. The CFPB’s release gave specific examples such as “service charges” on event tickets or “resort fees” on hotel stays and classified these as “junk fees.”

Examples of “junk fees” in consumer finance include late fees, NSFs, out-of-network ATM fees, money transfer fees, and inactivity fees, the CFPB has noted.

The inquiry and characterization have “raised alarm among bankers and lenders,” the update noted while adding that industry stakeholders say that that fees are “already well-regulated by existing legislation, like TILA, and that fees charged relate to specific services or work performed in connection with a product.”

Any action the bureau takes is likely  to “fall under its authority to regulate unfair, deceptive, and abused acts and practices (UDAAP).”

The update also mentioned that the topic of bank-fintech partnerships for lending has been a “bit out of the spotlight since the repeal of the “true lender” rule early in the Biden administration’s tenure.”

However, just because it’s been overshadowed by other pressing developments such as crypto, stablecoins, and BNPL, it doesn’t necessarily mean “the wheels aren’t continuing to turn behind the scenes.”

Recent weeks have seen:

Consumer Advocates Ask FDIC to Ban High APR Fintech Loans

This past week, a coalition of consumer advocates, “led by the National Community Reinvestment Coalition and the NAACP, sent a letter to the FDIC urging the regulator to crack down on banks facilitating ‘high-cost predatory lending.'”

The letter highlighted state-chartered banks that are working with non-bank Fintech lenders to originate loans “in excess of state usury caps.” The advocacy groups are “urging the FDIC to end what they refer to as ‘rent-a-bank’ schemes.”

Elevate Settles with D.C.

As noted in the update, Elevate is an example of the type of arrangement consumer advocates are “asking the FDIC to help end.” Elevate works with Republic Bank & Trust and FinWise to offer its Elastic and Elevate lending products, respectively.

However, consumer advocates aren’t the only group unsatisfied with these type of fintech-bank partnerships. The Washington D.C. attorney general has “sued multiple fintech lenders for allegedly violating D.C.’s 24% usury cap.” Elevate, the most recent target, “agreed to settle the case for $3.75 Mn and to cease offering loans above 24% APR in Washington D.C.”

OCC Prevails in State AGs Challenge to “Valid When Made”

In seemingly better news for the bank-fintech lending model, the OCC “prevailed in a challenge brought by state AGs to its ‘valid when made’ rule.” The U.S. District Court for Northern California “dismissed the state AGs complaint that the OCC had violated the Administrative Procedures Act by … failing to take into account that the rule would ‘inevitably’ be used to facilitate ‘predatory rent-a-bank’ schemes.”

Lawmakers Disinclined to Limit Stablecoins to Banks

The House Financial Services Committee “met last week to discuss the President’s Working Group report on the potential risks of stablecoins and other digital assets.” Committee members “expressed skepticism in that report: that stablecoin issuance be limited to federally insured banks.” One line of argument from committee members was that “limiting issuance to insured banks would limit competition and, potentially, negatively impact access and inclusion.”

When questioned about if tech firms such as Facebook should be able to issue stablecoins, Treasury Department Undersecretary for domestic finance Nellie Liang, testifying on behalf of the Biden administration, “pointed to the historic separation of banking and commerce in the U.S.,” and stated that stablecoins “should not be issued by a technology firm.”

The update also noted that Happy Money, a lending platform that works closely with credit unions to originate loans, announced it has acquired $50 million in equity funding. The firm’s Series D-1 fundraise brings its valuation to $1.1 billion.

Like other non-bank lenders, Happy Money saw “a rebound in lending in the back half of last year.” The firm had a “record breaking” 2021 and has seen “an average of 42% year over year growth in originations from 2018 to 2021.”

Small banks simply aren’t that into BNPL. According to American Banker, around eight in 10 community bank execcutives expressed “little or no interest” in providing BNPL-focused loans. A scant 2% of respondents “said they currently offer or plan to offer BNPL:”

This past week, American Express introduced its first consumer checking account and debit card. The launch is “the first consumer debit card the company, best known for its premium charge- and credit-card products, will offer.”

The account should “boast a 0.50% APY interest rate and allow cardholders to earn 1 Membership Rewards point for each $2 spent on the accompanying debit card.” The launch is designed “to fill a product gap and to appeal to millennials and Gen Z, who have historically favored debit cards and novel credit products, like BNPL.”

As mentioned in the update from PeerIQ, inflation came in at an annualized 7.5% in January. Accompanying rising inflation is “the expectation of potentially faster increases in interest rates.”

Higher rates could negatively impact BNPL providers. Firms that provide the pay-in-four plans typically “finance their lending by issuing bonds and short-term commercial paper. Rising rates are likely to increase their cost of borrowing.” However, with a 0% interest product, passing along cost increases to consumers “is easier said than done.”

As mentioned in the update, merchants are generally “the ones footing the bill for BNPL, in the form of merchant discount rate paid to the BNPL providers.” Increasing costs on merchants is “likely to be a challenge too.” As competition has increased, MDRs have “already begun compressing – something that isn’t likely to be changed by higher interest rates,” the update noted.

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