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Cash App Now Originates 1m Small-Dollar Loans A Month
Dave & MoneyLion Earnings, FDIC's Sternly Worded Letters, Student Loan Payments Set to Resume (Maybe!)
Hey all, Jason here.
I had the chance to attend the Prinsengracht Concert in Amsterdam last night, which was celebrating its 40th anniversary as the largest classical open air concert (according to its website anyway). The event takes places on and around the Prinsengracht (Prince’s canal) in Amsterdam and was the perfect late summer evening.
It was amazing to see the city buzzing with tourist and locals alike, as it feels like we’re finally in a “post-COVID” moment (even if, in reality, the pandemic continues, though many have decided to move on.)
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Cash App Quietly Hit a Milestone: Originating More Than 1 Million Small-Dollar Loans Each Month
Most of the coverage of Block (née Square) — which has become somewhat of a sprawling entity — tends to focus on its bitcoin ambitions, performance of the original Square POS business, or how the acquisition of Afterpay (for a heady $29 billion) is turning out.
Something that hasn’t received much attention? How Cash App has quietly ramped up lending to its 47 million monthly active users. Cash App launched small-dollar lending as a beta two years ago (referenced in the second-ever issue of this newsletter!)
Since that launch, it appears Cash App has been diligently toiling away, refining its product design, UX, servicing/collections, and, most importantly, its credit policy.
Cash App began testing the product with 1,000 users by offering loans of $20 - $200. Loans were to be repaid within four weeks and carried a flat fee of 5% of principal.
After spending 2020 and 2021 testing and refining the offering, it looks like Cash App began scaling who is eligible to borrow aggressively in December 2021. The holiday period historically drives extremely high demand for small-dollar lenders.
Since December 2021, Cash App has continued to grow the offering, exceeding one million users borrowing funds through the app in June 2022:
Given many users of small-dollar loans borrow, repay, and quickly borrow again, often in line with pay or benefits deposit dates, one million monthly users could equate to a meaningfully higher number of loans originated per month.
Product Refinements, Max Loan Amount Grows to $600
According to Block’s most recent quarterly report, the product, dubbed Cash App Borrow, has been refined since its initial beta launch. Users can now borrow up to $600 and repay in scheduled installments or as a percent of incoming funds — whether those funds are direct deposits (payroll or government benefits) or peer-to-peer transfers.
Per Block’s quarterly report (spacing adjusted for readability and emphasis added):
“We believe credit is an area within our financial services offerings where we can provide simple, fair, and accessible products that promote financial health. Cash App Borrow, our first credit product, allows customers to access short-term loans for a small fee.
The product offers customers up to $600 that can be paid back in scheduled installments or as a percentage of what they receive into Cash App. This product has reached meaningful scale while also achieving strong economics: In June, there were more than 1 million monthly actives using Cash App Borrow. We have been focused on driving profitable unit economics, enabled by our discipline around risk management.
We can offer these loans to select customers based on their inflows, product usage, and other real-time customer insights, and as a result, we are uniquely able to provide access to credit to people who may be left out of the economy. In the second quarter, more than half of these loans were used for Cash App Card transactions or peer-to-peer payments, benefiting our broader ecosystem. Cash App Borrow actives are some of our most engaged customers, bringing in 4x the inflows as peer-to-peer actives.”
The structure of Cash App Borrow is largely similar to Varo’s Advance offering — Varo offers a flat fee structure that is also approximately 5% of principal and, like Cash App, users have up to a month to repay. But Varo offers a maximum loan amount of just $100 and is legally structured as a revolving line vs. Cash App’s $600 max and close-ended structure.
Varo has struggled to lend to its user base, with charge offs as a percent of its book exceeding 40% (annualized) in some quarters.
It’s unclear if Varo uses credit bureau data in assessing its customers eligibility, while Cash App Borrow does appear to use bureau data. Both also require users to have minimum amounts of incoming deposits in order to qualify for loans.
Cash App has an advantage vs. Varo when it comes to repayment — if the funds in a user’s account are insufficient when payment is due, Cash App also can attempt to debit the user’s external linked bank account; per the Cash App Borrow agreement (emphasis added):
“[I]f Your Cash App Stored Balance has insufficient available funds on the Due Date to pay Your Outstanding Balance in full then we may, after initiating a payment from Your Cash App Stored Balance, initiate a second transaction for the remainder of the Outstanding Balance from the debit card linked to Your Cash App account as a funding source.”
It’s unclear what kind of delinquencies and charge offs Cash App is experiencing with Cash App Borrow. Credit performance isn’t mentioned in its quarterly report, nor is Cash App Borrow’s performance broken out in Block’s 10-Q filing.
The call reports of Square Financial Services, the ILC bank owned by Block, also don’t provide any clues, as the loans are originated by First Electronic Bank of Utah, not Square.
What to Watch As Block Grows Its Consumer Lending Business
Given Block now has its own bank charter, originations are likely to shift from First Electronic Bank at some point, unless Block’s own ILC charter, for some reason, disallows this type of consumer lending.
While the term of the loan can be as long as a month, it’s likely many loans are for shorter durations than that — meaning, when calculated on an APR basis, they would reach triple digits. A loan repaid in one week would carry a 260% APR (APR isn’t a great measurement of short-duration loans, but it is legally required by TILA disclosures for most credit products.)
Such APRs may catch the attention of both consumer advocates and states with usury laws that cap APRs below that. While loans originated via a Utah ILC bank, whether First Electronic Bank or Square’s own ILC, enjoy interest rate preemption, attorneys general and regulators in various states have stepped up scrutiny of high APR lending from out-of-state banks.
The option to make payments as a percent of incoming payments may also raise eyebrows. While not specifically prohibited, it makes it difficult to give users an accurate APR as part of the legally required TILA disclosure.
Further, taking payments from a customer’s linked external bank account if their Cash App balance is insufficient may cause users to incur service fees at those institutions — something that may cause concern, given the ongoing heightened scrutiny of overdraft and NSF fees.
Cash App doesn’t appear to report customers’ payment history to the bureaus, meaning on-time payments wouldn’t help them build a credit history — but, if they don’t pay on time, Cash App warns it may report negative information.
Finally, it’s worth noting Block’s choice of the words “our first credit product,” which suggests it has designs on more credit products in the future. One can imagine various types of revolving credit products tied together with buy now, pay later functionality, Cash App’s peer-to-peer functionality, and its Cash Card (debit card).
Block, parent company of Cash App, did not respond to questions about its Cash App Borrow underwriting and credit reporting practices prior to publication.
After Some Crypto Investors Lose Everything, FDIC Sends Sternly Worded Letters
Better late than never?
The FDIC’s flurry of cease and desist letters sent late Friday are probably cold comfort to users of crypto exchanges like Celsius, who are now unsecured creditors in bankruptcy proceedings, in which they’re likely to take a substantial haircut on assets held at now-bankrupt crypto exchanges.
For an ecosystem in which many participants extoll the purported virtues of decentralization and express disdain for governments’ regulation of banking, it’s curious how eager some were to misrepresent crypto services as being “FDIC regulated” or “FDIC insured.”
Examples of false and misleading representations called out in the FDIC’s cease and desist letters include Cryptonews.com’s description of Coinbase as “regulated and insured by the FDIC” — a statement that is still live on its site as of writing:
Another example is Cryptosec.info, which incorrectly describes some crypto exchanges as being FDIC insured and that such insurance “means that the FDIC should protect your funds against losses if it’s the case that the exchange fails through either fraud, insolvency, bankruptcy, or business mismanagement in general.”
In these examples, the sites seem to be using the “FDIC” language as part of an SEO strategy to drive traffic and/or as part of an affiliate marketing strategy.
The FDIC Is Reading Crypto Twitter
The FDIC cease and desist letters weren’t restricted to marketing claims on various websites. The agency also took issue with tweets from Brett Harrison, president of FTX’s US operations.
Per the FDIC’s letter:
“It appears that on July 20, 2022, Mr. Harrison published a tweet on the Twitter account, “@Brett_FTX,” which stated, among other things, “direct deposits from employers to FTX US are stored in individually FDIC-insured bank accounts in the users’ names,” and “stocks are held in FDIC-insured and SIPC-insured brokerage accounts.”
Now, this tweet is, on its face, ridiculous — what’s an “FDIC-insured” brokerage account? At the time he tweeted it, one banking industry expert described it as “suicidal.”
Upon receiving the cease and desist, FTX’s Harrison deleted the tweet, saying FTX “really didn’t mean to mislead anyone” —
The intentions of FTX and other crypto ecosystem actors seem clear enough — to attempt to use the imprimatur of FDIC insurance to overcome potential users’ (justified) fears of losing their funds by holding them with a crypto exchange — whether through outright fraud, hacking, or bankruptcy.
With Student Loans Set to Resume (Maybe?), How Are Borrowers Doing?
Will they or won’t they? After numerous extensions, student loan payments are set to resume for millions of borrowers in just 10 days.
But a spokesperson for federal student loan servicers says they aren’t ready — and another last minute extension isn’t out of the question.
And while the Department of Education reportedly has a plan on how to handle a proposed $10,000-per-borrower debt cancelation, the Biden administration hasn’t given sign off on the plan as of yet.
For those who owe, it all adds up to massive uncertainty. Borrowers haven’t had to make payments on federal student loans since March 2020. Many have grown accustomed to the extra money in their monthly budget — and may be ill-prepared to resume payments.
According to a recently released report from the NY Fed, the student loan pause has had a “dramatically” positive impact on borrowers’ credit scores.
But much of that benefit was for borrowers who were delinquent before the pandemic — their loans began to be reported as current when pandemic-era relief measures were put in place. But, absent some change in their monthly income or payment amounts, those borrowers are at high risk of re-entering delinquency.
This is even more the case, as the average amount borrowers owe has increased since before the pandemic:
According to a Fed blog post on the data set:
“The share of borrowers with flat or growing balances increased from 48 percent at the end of 2019 to 66 percent at the end of 2021. Meanwhile, the share of borrowers with a delinquent or defaulted loan was halved from 15 percent to 7.5 percent as federal borrowers were not required to make payments and most delinquent borrowers were automatically marked current.”
While another payment freeze extension seems inevitable — there’s been little communication from the Biden administration and student loan servicers are woefully unprepared — presumably eventually student loan payments will resume.
When they do, many borrowers will be in for a rude awakening — and, potentially, so will their other creditors, as borrowers adjust to abruptly increased debt service payments and rearrange their payment hierarchies accordingly.
Dave & MoneyLion Q2 Earnings
It has become somewhat of a quarterly tradition to check in on how Dave and MoneyLion, two largely similar neobanks, are doing. Both began life as cash advance products before launching their own spending account offerings.
Dave has remained more narrowly focused on its spending account and cash advance products.
MoneyLion, on the other hand, is taking something of a “throw everything at the wall approach” and, on the consumer side, has rolled out investing, crypto, and a credit builder loan. MoneyLion also acquired affiliate marketing platform Even Financial and content platform/creator network MALKA Media — moves that have enabled MoneyLion to attempt to generate affiliate commission revenue by cross-selling all sorts of products to its user base, including credit cards, life insurance, subprime loans, and questionable-looking for-profit education offers.
Dave’s Q2 Highlights
Dave touts that it added 560,000 “net new” members, brining its total to approximately 7 million members.
However, just 1.54 million members actually use Dave in a given month — an increase of just 6% vs. the prior quarter. The proportion of overall members who use Dave at least once a month edged down slightly, from 22.65% in Q1 to 22% in Q2.
Transactions per monthly active member improved slightly, increasing from 4.4 to 4.5 in Q2.
The low number of monthly transactions explain Dave’s paltry revenue from “Transaction based revenue,” a category primarily made up of interchange and ATM-related fees. Dave earned $2.8 million in such revenue in Q2 — flat from the year prior — making up just 6% of its overall revenue.
The rest of Dave’s revenue is “Service based,” which is primarily composed of “optional” tips and express funding fees. Dave reported $43 million of such revenue in Q2, up 25% from the $34.4 million it did in the same quarter last year. Service based revenue made up about 94% of Dave’s revenue.
The revenue Dave made from “tips” and expedited funding fees is about equal to the operating expenses of its cash advance product: in Q2, $13.9 million set aside for bad debt and $7.6 million in processing and servicing fees — plus another $20.8 million in advertising and marketing.
While Dave saw its revenue increase 25% vs. Q2 2021, its total operating expenses ballooned by 127% to $98.8 million — leading to a total net loss for Q2 of $27.1 million vs. a loss of $0.9 million in Q2 2021.
Dave has narrowed its revenue target from its previous $200-$230 million to $200-$215 million for FY2022.
Dave’s shares sit just above their 52-week low at $0.57 a share, giving the company a market cap of $210.5 million.
MoneyLion’s Q2 Highlights
MoneyLion, which now describes itself as “the go-to destination for financial content, products and advice,” reaffirmed its guidance of hitting breakeven adjusted EBITDA exiting 2022.
The company’s release touted adding 950,000 customers to end Q2 with a total of 4.9 million customers. But the way MoneyLion defines the metric makes it difficult to understand what this actually means; total customers includes (emphasis added):
“[C]ustomers that have opened at least one account, including banking, membership subscription, secured personal loan, cash advance, managed investment account, cryptocurrency account or affiliate product. Total Customers also include customers that have submitted for, received and clicked on at least one offer, including loans, credit cards, mortgages, savings and insurance products, from a Product Partner via our Even Financial marketplace.”
Defining customers broadly allows MoneyLion to claim an exceptionally low CAC of just $9 — down from an already low $16 in Q1. And with stated ARPU of $76, you’d think MoneyLion’s business should be in pretty good shape.
Similar to Dave, 97% of MoneyLion’s revenue is classified as coming from “service and subscription” revenue. The category includes the $19.99 per month fee for MoneyLion’s “Credit Builder Plus” membership as well as expedited funding fees and “tips” from its Instacash Advance product.
But, much of that revenue is swallowed up by provisions for losses (up about 72% from Q2 last year to about $27 million) and direct costs (up 179% from Q2 last year to about $29.4 million).
At least MoneyLion has slightly increased its revenue forecast for 2022, now targeting $330-$340 million in adjusted revenue vs. its $325-335 million forecast from last quarter.
The upshot is a net loss for Q2 2022 of about $23 million, which, admittedly, is a significant improvement vs. the $39.2 million loss in Q2 2021.
MoneyLion’s shares closed on Friday at $1.79, giving the company a market cap of $434.5 million.
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