Payments News Digest 22 July 2022

US: Consumer banking the bright light for US banks as loan provisions hit profits

With all of America's big banks reporting their second quarter earnings over the last week or so, more clues are emerging as to where the economy is heading in the midst of a turbulent period. The good news is that consumer spending remains robust with several banks reporting impressive rates of growth in card spending. Lending to individuals and businesses is also growing and credit quality has so far remained strong and, with interest rates finally rising, banks are seeing a boost to interest margins. However, fear of an economic downturn led banks to increase loan loss reserves, denting headline earnings which are also suffering from lower revenue in investment banking thanks to poorly performing stock markets. Some key highlights from the banks to report over the past seven days are below:

• Citigroup : US branded card revenue increased by 10 percent year-on-year, driven by 18 percent growth in card spend. Overall results beat analyst expectations.
• Bank of America : Consumer banking net income fell by five percent due to increased loan provisions despite revenue growth of 12 percent. Credit card spend was up 17 percent year-on-year.
• Goldman Sachs : Consumer banking revenue was up 67 percent year-on-year. This unit includes the Apple credit card and online bank Marcus.
• Wells Fargo : Net income in Consumer Banking and Lending was down due to increased loan provisions despite revenue growth of 17 percent. Credit card revenue grew by seven percent year-on-year.

Global: Google rebrands wallet while Apple Pay faces fresh antitrust challenge

Google has rolled out its new Google Wallet app in 39 countries around the world. The app, which largely replaces Google Pay, enables both contactless and remote payments as well as storing loyalty cards, tickets, identity cards and even car keys. Google Wallet was originally launched in 2011 but was phased out in 2018 when merged with Android Pay to form Google Pay. The fresh rebranding hints at disappointing uptake of Google's payments service despite dominating the global market for smartphone operating systems and explosive growth in digital payments in recent years. In contrast to its chief rival in the smartphone market, Apple, Google has favoured an open ecosystem for Android, allowing third parties including issuers to build their own payments apps with NFC capability.

Apple has taken a different approach: third-party apps are forbidden access to the NFC chip on Apple's iPhone meaning that only Apple Pay can be used to make NFC payments. Apple argues that this has security benefits but it has drawn the ire of issuers and rival payments services and has also attracted the attention of regulators around the world. Apple successfully defended a competition probe in Australia and are currently defending an antitrust probe by the European Commission. Now they are subject to a class-action lawsuit which was filed in the US this week, accusing the tech giant of anticompetitive practice which costs issuers billions of dollars in fees. If Apple was forced to open their hardware to competitors it could create opportunities for rival mobile payments providers to compete with both Apple and Google. As it stands, third parties with a payments app can offer NFC payments only to Android users, significantly reducing the addressable market and potential for network effects.

UK & US: Mixed fortunes for challenger banks

With fintech firms around the world coming under pressure, Starling Bank's announcement of its first year of profitability is well timed. Revenue almost doubled to £188 million in the 12 months to 31st March, turning a £31 million loss in the previous year into a £32 million profit. Founder and CEO Anne Boden pulled no punches in her CEO Letter, criticising the buy-now-pay-later model and the fintech approach of "grow customer numbers and boost the valuation without figuring out how to be profitable". Starling serves both individual and small business customers in the UK and expanded its mortgage business through the acquisition of Fleet Mortgages in 2021. Earlier this week, Starling announced it was withdrawing its application for an Irish banking license which would have given the bank passporting rights into the EU market. Instead, it plans to expand internationally using a software as a service model.

Meanwhile, Varo, the first challenger to receive a national bank charter in the US is facing a funding crisis. With fintech valuations tumbling, Varo has had to begin cutting costs to avoid running out of cash in the coming months. The bank has spent almost half of the $510 million it raised from investors in September last year, and with any future funding rounds almost certain to be less fruitful it has no option but to downsize. Varo is far from unique in its woes, and all loss-making fintech firms will be rethinking their path to profitability in the current market conditions.

Other stories of interest this week...

Australia: ANZ acquires Suncorp banking unit
China: Alipay, WeChatPay hinder China's digital yuan launch
Global: Australian BNPL Zip weighs US, Europe charges, 'deprioritises' crypto
Japan: Casio and Worldline to boost card payments in Japan
Taiwan: Taiwan to bar use of credit cards for purchasing crypto