Payments News Digest 15 July 2022

Global: Zip cancels Sezzle merger and Klarna valuation tumbles

Australian buy now pay later (BNPL) firm Zip this week pulled out of a merger with US rival Sezzle citing difficult "macroeconomic and market conditions". The $491 million deal had been agreed in February but valuations in the sector have tumbled since, with rising interest rates, regulatory scrutiny and increased competition all contributory factors. Indeed, Sezzle's share price has fallen by almost 90 percent since the merger was announced which goes some way to explaining why the deal has fallen through. Looking to its own future, Zip has decided to refocus on its core BNPL business, deciding to close down its money management app, Pocketbook, which it acquired back in 2016. It is also reportedly seeking a buyer for its UK business. This strategy contrasts with some of its rivals which have looked to diversify away from a pure BNPL business.

Elsewhere this week, Klarna raised $800 million in a funding round which valued the company at just $6.7 billion, 85 percent lower than a year earlier when a previous funding round valued the company at $45.6 billion. Despite the lower valuation, Klarna put a positive spin on the investment in its own press release, highlighting the difficult market conditions and comparing its valuation to 2018. While this outlook appears somewhat optimistic, there is a kernel of truth to it: the overinflated valuations of recent years were driven by investors with cash to burn and not the fault of those receiving the funding. The explosion in popularity of BNPL amongst consumers suggests that there is a market for it in some form, and once the market settles a small number of stronger players will be left standing. Klarna, as one of the oldest and better diversified players will feel well placed to ride out the storm.

US: JP Morgan Chase earnings down 28 percent; credit cards grow

JPMorgan Chase was the first of the big US consumer banks to post its earnings for the second quarter with the bank falling short of analyst expectations. With concerns around the local and global economies, the bank increased loan reserves by $428 million which resulted in net income of $8.6 billion for the quarter, 28 percent lower than the equivalent quarter in 2021. For the first six months of the year, profits are down 35 percent on last year. These headline figures are somewhat misleading however as 2021 earnings were significantly boosted by the release of loan loss reserves which were originally set aside at the onset of the pandemic in 2020 and which proved to be overly conservative. The underwhelming performance in the last quarter owes much to reduced activity in the financial markets which has eroded fee income in the investment banking segment.

There were some encouraging signs in the credit card segment, with quarterly spending up 21 percent year-on-year and balances up 17 percent. This is a sign that US consumers remain healthy despite recession fears, with travel and dining spend reported to be particularly strong. Low unemployment also means that credit quality continues to remain strong. JPMorgan shares were down almost five percent in early trading on Thursday, with competitors including Citigroup, Bank of America and Wells Fargo also down in anticipation of their coming earnings releases.

Europe: Spain announces surprise windfall tax on the banking sector

The Spanish government has announced a 'temporary and extraordinary' windfall tax on large banks, which is expected to last for two years, beginning in 2023. While details remain scant at this stage, the tax is expected to raise some €3 billion ($3.01 billion) in total, which would represent between ten and 15 percent of the annual profits of the Spanish banking sector. This move is motivated by the increase in the benchmark one-year Euribor rate to 0.8522 percent at the end of June, compared to 0.2866 at the end of May, and is aimed at raising funds to combat the cost of living crisis.

In response to the move, Spanish banks suffered heavy losses on the stock exchange on Tuesday, to the tune of approximately €5.4 billion ($5.43 billion). Domestic-focused lenders were hit the hardest, while BBVA and Santander – cushioned by their much larger operations and global footprint – witnessed smaller declines. Industry representatives pointed out that the tax will reduce the ROE of the banking sector, while also increasing the cost of capital. Another complication is the likelihood that the increase in interest rates in Spain will also lead to an increase in bad loans, eroding the net interest revenues of the banking sector. The government also announced – like in other European countries – a windfall tax on the energy sector. It remains to be seen if other countries will follow the Spanish lead and impose a similar windfall tax on the financial sector.

Other stories of interest this week...

Global: Apple's Tap to Pay comes to the high street
India: Card-based fintechs switch to plan B for business continuity
Europe: EU Lawmakers Agree on Rules to Limit Credit Card Debt, Overdrafts
UK: MPs Demand Answers From Visa and Mastercard Over Post-Brexit Card Fees Hike
Asia Pacific: Southeast Asia central banks linking QR code payment systems

The weekly Payments News Digest from Argus Advisory Research is also distributed by email: sign up for the newsletter here.