Results Season Special - Q1 2024

Hey Fintech Nerds 👋

Alex, Julie, and Simon here. This more macro take by Fintech analysts is another way to look at the market. Not as professional market analysts (or investment advice!). It is a pulse of where the industry is now and what we can learn from key public market companies.

After a strong finish in 2023, what’s ahead for 2024? 

Some shocking PR, that’s for sure.

1. Julie is shocked by PayPal’s shockingly bad PR.

2. Alex is fascinated by LendingClub’s boringness.

3. And Simon tells the tale of two megabanks separated only by competence.

Julie: PayPal over-promised and under delivered

The first rule of fight club is to not talk about fight club. The first rule of being a public company CEO should be that you under promise and over deliver. If you make a proclamation that you’re going to “shock the world” after what we’ve been through, with a celebrity becoming President of the United States, a global pandemic, terror attacks at a music festival, and much much more, you better make sure that you actually do. 

Apparently the new PayPal CEO, Alex Chriss, did not get this memo. 

Now, let me preface this by saying I have a lot of admiration for PayPal and I think the payments giant still has tons of potential. At the same time, the announcements from its Innovation Day on January 25th were a far cry from shocking. 

Here’s a recap of the five new features:

• Fastlane by PayPal: This feature offers a one-click guest checkout experience for shoppers, eliminating the need for lengthy sign-ins or updating personal information. Customers can make purchases quickly and securely, boosting sales for merchants.

• PayPal Smart Receipts: Smart Receipts use AI to predict what customers may want to buy next from a merchant, allowing personalized recommendations and cashback rewards to be included in receipts. This enhances customer engagement and encourages repeat business.

• PayPal Advanced Offers Platform: This platform provides merchants with a personalized, performance-based offers system, leveraging customer insights to deliver relevant promotions. Customers receive more targeted offers based on their purchasing behavior, enhancing their shopping experience.

• Reinvented PayPal App with CashPass: The PayPal app now includes CashPass, offering personalized cashback offers from top brands in the U.S. Customers can access these offers easily within the app, encouraging them to shop and pay with PayPal regularly.

• Next Generation of Venmo Business Profiles: Venmo introduces enhanced business profiles with subscribe buttons, profile rankings, and promotional capabilities. This helps small businesses increase visibility, drive traffic, and generate sales, while consumers can discover top-ranked businesses and enjoy cashback deals.

I’d say the more shocking part is that these features weren’t implemented a year or more ago, like a few competitors already have done in some cases. 

PayPal has had some rough weeks and months leading up to this announcement and was hoping for a win. In fact, a number of the 45 analysts covering the stock had issued new words of caution and concern over the company’s future since the start of the year. 

Morgan Stanley’s James Faucette downgraded PayPal to equal weight from overweight, arguing that PayPal is moving too slowly on key strategic initiatives. “James no longer thinks PayPal should trade at a significant premium to peers given his reduced confidence in its ability to gain and retain checkout market share online, especially with young consumers,” the note said. He’s also less optimistic on Venmo monetization amid already slow progress and growing competition. 

Mizuho’s Dan Dolev also sent out notes before and after the announcement issuing caution. In the initial note, Dolev called out Apple Pay, a consumer shift to mobile and a shift away from PayPal’s branded checkout as cause for concern. In the note after the announcement, Dolev said the new features don’t do much to solve these issues. “In our view, these measures are unlikely to solve the issues we called out in our downgrade to Neutral last week,” he wrote. 

I’ll close with a quote from my friend and payments expert Matthew Goldman, founder of consulting firm Totavi: “This PayPal announcement was awful. To use the phrase ‘shock the world’ and then dump warmed-over ideas, plus the AI tag is pretty embarrassing. PayPal needs to figure out its identity and pare its brands. Is it building for consumers or merchants and which of those brands matter? Especially after the failure to build out Venmo pay. Why would a merchant pay 2.9% for a Venmo transaction when they can just accept cards?” 

LendingClub: Just Keep Swimming – by 💰 Alex

One lesson that I’ve learned over the last 15 years is that it’s much easier to build a full-service digital bank by starting in lending and then expanding into deposits than it is to begin in deposits and expand into lending.

Lending is where most of the profits are in banking, but, as I am fond of saying, lending is a learning business. It takes time to figure out, and you can’t speedrun the process.

LendingClub is a great example. The company launched in 2007 as one of the first peer-to-peer lending platforms in the U.S. It quickly attracted significant interest from institutional lenders (making it more of a consumer-to-investor platform than a peer-to-peer platform) and went public in 2014 (the biggest tech IPO that year). In 2021, after a rocky seven-year stretch that saw co-founder and CEO Renaud Laplanche’s resignation, LendingClub successfully acquired Radius Bank for $185 million and set about integrating the bank’s charter into its operational infrastructure.

The result of that work is what LendingClub refers to as a ‘Marketplace Bank’, a chartered financial institution with an integrated loan marketplace for institutional investors. The virtue of this model is that it gives LendingClub significant flexibility to optimize its balance sheet and earnings. The company can sell whole loans or structured certificates (a security where LendingClub retains the senior note and sells the residual certificate to a marketplace investor), or it can hold loans on its balance sheet (either as ‘held for investment’ which triggers CECL or for extended seasoning before selling to a marketplace investor at a different price). 

Think of the modern LendingClub as a swimmer who is exceptionally good at treading water. They may not be the fastest under every condition (the CEO admitted on the most recent earnings call that application development on new product features is going a bit slower than they’d like due to a recent reduction in force), but they can stay in the water longer than most of their peers, regardless of the conditions (LendingClub executives talk about ‘sustainable profitability’ and ‘resilient balance sheets’ more than almost any financial services company I’ve seen.)

This brings three questions to mind for me:

1. What’s the current state of LendingClub?

2. Where is LendingClub going next?

3. What questions will LendingClub need to answer in order to get where it wants to go?

1. What’s the current state of LendingClub?

The basic story of the company, since acquiring Radius, is that it has been building up the liabilities side of its balance sheet (Q4 2023 deposits were $8.8 billion, up from $3.1 billion in Q4 2021) and getting its expenses under control (staffing, marketing, third-party vendors, etc.) while waiting to exit its standard operating agreement for a new bank with the OCC (which is, for all new banks, a natural constraint on growth) and surfing the interest rate waves (LendingClub is particularly sensitive to rate changes).    

2. Where is LendingClub going next?

A few things jump out to me:

• LendingClub officially exited from its operating agreement with the OCC last Friday. This suggests that the company was operating, post-Radius acquisition, in a way that met the expectations of prudential bank regulators. It also suggests that the company will have a bit more flexibility moving forward, in terms of its ability to deploy capital and its product roadmap. It’ll be interesting to see exactly what LendingClub does with this freedom.

• U.S. Federal Reserve officials expect to modestly cut interest rates three times in 2024, though the cuts won’t start until midway through the year. Assuming this happens, it’ll be good for LendingClub. Lower rates will drive better prices in the marketplace and lower funding costs (although LendingClub will likely be conservative in cutting rates on its high-yield savings product since it still wants to grow its overall balance sheet).

• LendingClub has a number of different product and feature enhancements in the pipeline, including a top-up feature for existing qualified personal loan customers and a line of credit product that allows approved customers to sweep accumulated credit card balances into fully amortizing payment plans. LendingClub views these as important upgrades to ensure that it remains the best-in-class lender for consumers looking to pay down debt. The line of credit product should also unlock additional product development opportunities in the future, as it is the company’s first revolving credit product.

3. What questions will LendingClub need to answer in order to get where it wants to go?

A few things I’m watching:

• Will LendingClub be ready to fully capitalize on the historic refinance boom that is coming? This is what is waiting for us on the other side of the Fed’s rate cuts and LendingClub is preparing for it (this is what those new personal lending features are for). However, it’s unclear how much of that boom will ultimately benefit LendingClub. In particular, I’m curious to see if the company decides to aggressively go after any non-credit card refi opportunities (auto jumps to mind).

• Will LendingClub be able to keep existing lending customers engaged and coming back to the platform for future financing needs? Roughly half of LendingClub’s lending volume comes from repeat customers. Can the company increase that percentage? On their most recent earnings call, LendingClub executives talked about a mobile loan servicing experience, introduced last year through the LendingClub app, as well as a debt monitoring and management tool that they are working on. Both have the potential to help the company create stickier more engaged customers.

• Will LendingClub be able to hold onto deposits once rates start going down? The company has been very successful at acquiring deposits in a rising rate environment, but that’s mostly been through the company’s high-yield savings products, which are expensive. As rates decline, can LendingClub find non-rate reasons to get deposit customers to stay? Can they create a differentiated experience or utility for checking account customers? Can they [gasp] make CDs sexy again? 

(Author’s Note — I’d love to do a similar analysis on the other big fintech lender that recently became a bank, but SoFi continues to insist on reporting its earnings using accounting techniques that are different from how every other bank in the country reports. This frustrates me (and other bank nerds like Jason Mikula and Kiah Haslett). Since going public via a SPAC, SoFi has felt like a good business trapped in a mirror universe populated by extremely online retail traders and ruled over by a man who looks remarkably like Chamath Palihapitiya. SoFi — I want to analyze you as a bank. I want to praise you and criticize you as a bank. Please report your earnings like a bank!)

A tale of two Megabanks, separated by competence - 🧠 Simon

Citi Bank had a pretty awful quarterly results season, posting a $1.8bn loss and announcing 20,000 job cuts. This happened in the same quarter JP Morgan announced its best-ever results season. 

JP Morgan is the sun. Its gravity is now so massive that everything is getting sucked towards it. 

The contrast between Citi and JP Morgan is stark precisely because if you go back to 2008, Citi was a bank with 2.2trn total assets, and Chase had %1.56trn. Today, Citi has $1.7trn, and Chase has $3.3trn. (I know asset size isn’t the perfect measure but it’s a good proxy)

📈 JP Morgan investing aggressively and smartly for growth.

JP Morgan's revenue is up 12% YoY, reporting $50bn of profit in 2023 on strong credit quality and net interest income. Shares are up 27% YoY, while the bank index is down 5%.

As competitors are closing branches, Chase continues to open new ones. While competitors are cutting staff, Chase is hiring and investing more in technology. You can see the return on tech investment in their mobile user base.

Considering that Chase, BofA, and Wells have roughly the same number of “active” customers (66m, 68m, and 68m, respectively), the gap in mobile users here measures their ability to convert people to mobile. Best in class for incumbent banks is ~90% of active users on mobile, which BBVA achieved in 2020. Chase is in that ballpark while Wells and BofA are closer to 50%. 

Indeed, Chase isn’t competing with other banks in consumer, it’s competing with wallets like CashApp and Venmo. That’s the right benchmark.

In small business, Chase is also ahead of the pack

If you look at total assets Chase is running away from the pack too

• Chase $3.3trn

• BofA $2.4trn

• Wells $1.8trn

• Citi $1.7trn

Growth is possible for banks. 

I don’t think anyone who works at Chase would tell you the place is perfect or free from the red tape that comes with being a bank. But the lesson is being consistent. 

Heck, for a bank with a CEO who’s so very anti-Bitcoin, they’re also the first in line to clear the new Bitcoin ETF for institutional buyers. Consistency is hard. One has to wonder what this bank will be if Jamie Dimon eventually retires, but until then there’s one large bank in the US with its act together.

Meanwhile.

🕳 Citi is trying to cut itself out of a hole.

Citigroup's revenue is down 3% to $17.44bn in the quarter. They took on new charges, including exiting municipal bonds, Argentina, and the distressed debt sector. There was also a series of charges related to severance packages for the announced job cuts. 

While Citi never had the scale of consumer franchise domestically of the other big 4 players, they were always the canonical “money center bank.” Global trade, payments, and presence across Asia, EMEA, and the Americas made them and their headcount truly massive.

Indeed, that part of the business is still a highlight. 

It’s just not growing nearly as fast as it is at JP Morgan

Citi has some headwinds with regulatory actions it needs to tidy up in its data management after a $400m fine in October 2020 for “accidentally” sending Revlon $900m. If this was the quarter to get all the bad news out, things should start to feel positive, as what’s left should be more profitable.

You have to credit Jane Fraser for having the courage to cut this hard and this fast. In my experience of all the large banks in the world, Citi was the one that believed its own BS the most. Ending that, culturally at least, could be significant.

But the real challenge is what kind of growth they can deliver in their new leaner state. 

It’s hard to cut your way into growth.

Perhaps some Keynesian spending is the key here. They need to invest in the right areas to grow. That’s going to take a multi-year commitment to tech transformation. 

I think they’re also missing a trick. The low-hanging fruit no bank uses enough. Partnerships. There’s an ocean of SaaS and Fintech companies looking to go enterprise, and Citi could be an amazing distribution partner. 

ST.

That's all, folks. 👋

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(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. 

(2) All companies or assets the author mentions in which the author has a personal and/or financial interest are denoted with a *. None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.

(3) Any companies mentioned are top of mind and used for illustrative purposes only. 

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