Tag: invest

What happens when the 18th-largest US bank offloads some of its stake to Canada’s third-biggest bank

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When SVB went under last year, it sent shockwaves through the US financial services industry, impacting every player in some way. Regional banks, however, were hit the hardest.

As soon as SVB’s troubles surfaced, regional bank stocks tumbled and have lagged behind the broader US equity market ever since. A year on, the landscape for small banks hasn’t changed much. They are still grappling with declining net interest income, and compelled to offer higher rates to depositors even as borrower demand remains sluggish. Even KeyBank, positioned 18th among US banks with assets of about $185.23 billion, found itself on the losing end of last year’s financial turmoil.

Despite the challenges at home, the situation has become a gateway for international players seeking to expand in the competitive US market. Scotiabank, Canada’s third-largest bank with around $1.2 trillion in assets, is among those capitalizing on the opportunity.

The deal

Earlier this month, Scotiabank agreed to a $2.8 billion investment in KeyCorp, the holding company for KeyBank. Scotiabank plans to buy 14.9% of KeyCorp or about 163 million shares of KeyCorp’s common stock in two installments: an initial $800 million investment and a further $2 billion, subject to the Federal Reserve’s approval.

The initial installment is expected to close by the end of Scotiabank’s fiscal fourth quarter in October, with the remaining amount to be finalized in fiscal 2025.

Both sides walk away with something

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What are publicly-listed non-bank firms currently focused on?

 

This week, we delve into the recent earnings and future direction of some of the non-bank companies currently in the spotlight.

1. Payoneer’s Q2 and the key buyout of Skuad

In its recent Q2 earnings update, Payoneer reported a 16% YoY increase in revenue to $239.5 million. The company experienced its sixth straight quarter of volume growth, up 22% YoY to $18.7 billion. B2B volume grew by 40% YoY, leading to an increase in the SMB take rate.

On the same day, Payoneer announced its key acquisition of the Singapore-based payroll and HR platform Skuad for $61 million in cash, with up to $20 million more in future payments, combining cash and equity, contingent on meeting specific performance and tenure milestones.

This acquisition aims to enhance Payoneer’s role as a business-grade financial stack for small and medium-sized enterprises (SMBs) operating internationally, tapping into global opportunities by exporting goods and services across borders.

Skuad will become a new addition to Payoneer’s product suite, integrating payroll and contractor management services. This will facilitate global talent access, international hiring, and cross-border payment automation for Payoneer’s customers.

According to Payoneer CEO John Caplan, the acquisition of Skuad is a strategic move that aligns with Payoneer’s product vision.

“Our acquisition of Skuad will extend our existing product set and represents Payoneer taking another step toward offering a comprehensive, integrated financial stack for SMBs,” Caplan told me

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Legacy banks are stepping out of their comfort zones to co-exist with non-banks and win over Gen Z

Lit, sick, gucci — how do traditional banks measure up in Gen Z lingo? Likely, they’re not even a contender among these words that scream cool and trendy. With the rise of new-age, youth-centric non-bank financial firms, traditional banks might find themselves at the end of the line.

It’s not that banks are oblivious, but their longstanding focus on security, slow-moving steps, regulations, and compliance tends to saddle them with a serious and boring image in the eyes of Gen Z.

Banks are now implementing tangible actions to adapt and stay competitive with the largest generation, who are currently their customers and also the talent of tomorrow. Growth begins where comfort ends — keeping this in mind, banks are overhauling their strategies related to employment, internal policies, and marketing. However, when it comes to products and services, some are opting for strategic partnerships. 

We explore each of these areas to see how some banks are approaching things differently, and, in a few cases, even diverge from the norm and conventional routes.

1. The most unusual fusion of traditional banks and TikTok

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Some have made it past the initial hurdle, while others remain bogged down by the entry exam

Fintechs typically outshine banks in terms of personalization and marketing, but their technological progress is where they truly lead. However, as the industry shifts toward digital, traditional banks are compelled to prioritize technology to remain competitive against fintechs, non-bank firms, and payment companies.

Deploying new software and modern tools reflects a bank’s readiness to adapt and compete. Yet, without overhauling legacy tech, adequate adapting, or well-trained staff, the shift alone won’t be sufficient and the transition may fall short.

It’s important to note that transitioning from legacy technology — known for its security but lacking in flexibility and speed — to modern tech infrastructure is no easy feat for incumbent banks and it might be years before these investments and transformations show tangible results. However, we’re starting to see a few banks take their first steps in this direction.

JPMorgan is one of the traditional incumbent banks showing signs of progress and leading the way in effective tech transformation in emerging areas.

In discussing the evolving generative technology within the banking sector, what began with several big banks including JPM banning employees from using consumer AI chatbots like ChatGPT in early 2023 is now a whole new ballgame.

Once cautious and threatened by GenAI when OpenAI’s ChatGPT hit the scene in 2022, banks are now building or collaborating on this technology, seeking to leverage its capabilities to improve their operational efficiency.

Build: JPMorgan’s ChatGPT-inspired “LLM Suite”

JPMorgan Chase has launched a generative artificial intelligence product for its employees, capable of performing tasks typically done by research analysts, such as writing, idea generation, and document summarization using third-party models.

The bank’s asset and wealth management division now has access to this large language model platform, dubbed LLM Suite, which is JPMorgan’s in-house equivalent of OpenAI’s ChatGPT.

According to an internal memo, employees can “Think of LLM Suite as a research analyst that can offer information, solutions, and advice on a topic.” 

JPMorgan began introducing LLM Suite to various parts of the bank earlier this year, reaching about 50,000 employees. This rollout represents one of Wall Street’s largest applications of LLMs. As JPMorgan integrates LLM Suite into its existing systems, the specific challenges faced by the tech model remain unknown, particularly in comparison to issues encountered by other AI models.

“There’s not going to be a single LLM that will be all things to all people, even in a single organization. Every use case might have its own specific, custom LLM, a situation that will create its own infrastructure issues,” said Steve Flinter, Engineer of AI and Quantum Computing at Mastercard.

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What key areas will Jon Kaplan target to increase sales and revenue?

The sting of rising interest rates is being felt by even the most high-flying fintech players, with funding becoming scarcer and valuations lowering than before. Despite a general rise in venture funding, fintech investment dropped 16% quarter-over-quarter to $7.3 billion in Q1’24, though deal activity increased.

Founders and CEOs are exploring various strategies to sustain and increase revenues, prompting them to invest in top-tier talent. In a firm’s hierarchy, the Chief Financial Officer [CFO] and Chief Revenue Officer [CRO] are pivotal C-suite roles in dealing with financial metrics. While a CFO is a staple in any organization, not all fintechs employ a CRO. Research shows, however, that companies with a CRO-like role experience 1.8 times greater revenue growth than those without.

Recently, there has been a wave of CRO hires and replacements, as founders seek professionals who can drive sales in tough economic times, too. Although the CRO role, positioned at the intersection of sales and marketing, is not novel, the expectations and strategies for this position are evolving in response to changing markets and consumer preferences.

Among the latest fintechs to appoint a Chief Revenue Officer is MoneyLion.

MoneyLion’s first Chief Revenue Officer

Last month, MoneyLion appointed Jon Kaplan as its first Chief Revenue Officer.

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Can the new changes to card transactions affect Chase card loyalty?

The completion of the first half of the year marks the release of second-quarter earnings reports from major banks. 

JPMorgan exceeded revenue projections thanks to investment banking fees and equities trading results. The bank earned $2.3 billion from investment banking fees alone, pushing its revenue up by 20% compared to the previous year, totaling $50.99 billion. Strong investment banking revenue was a key area driving the quarterly earnings of other large banks, including Citi, Bank of America, and Morgan Stanley, which all saw a parallel trend.

Although JPM reported strong Q2 earnings, the downside of inflation was also evident. The bank set aside $3.05 billion for credit losses in the quarter, surpassing its estimated $2.78 billion. The bank foresees increased defaults among borrowers, particularly due to its credit card business.

Alterations in card transaction policy: The bank’s second-quarter earnings report from the Friday before last was followed by new changes to its card payment policy last week. 

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JPM is ready to write the final chapter of free banking, but what comes next?

When a king feels threatened and restricted, it leads to confusion and repercussions for his subjects. JPMorgan Chase, the country’s largest lender, is currently dealing with a comparable power struggle.

The news: Marianne Lake, CEO of Consumer and Community Banking at JPMorgan Chase is cautioning that the bank may start charging for services that are currently free, such as checking accounts and wealth management tools. This change could affect approximately 86 million customers due to upcoming regulatory changes from Washington, which are set to impose limits on overdrafts and late fees.

These proposed regulations, which are yet to become law, would cap credit card late fees at $8 and overdraft fees at $3. Regulators also intend to impose additional restrictions on debit card fees and limit the charges levied on software companies like Venmo and CashApp for accessing and utilizing their customers’ data. Additionally, new capital requirements could force banks to hold more reserves for mortgages and credit card loans, potentially affecting lending practices and consumer credit access.

“The changes will be broad, sweeping, and significant. The people who will be most impacted are the ones who can least afford to be, and access to credit will be harder to get,” Lake told WSJ in an exclusive. 

The multiple angles to consider

 

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AI, on repeat

AI has sparked diverse opinions in the financial sector — it’s like something that’s too tough to swallow yet too crucial to discard. Whether embraced or resisted, AI is now a tough bullet to dodge — and the banking industry is gradually coming to terms with it.

The country’s largest lender is one of the prominent cases of major banks integrating AI capabilities. Tearsheet has been following JPMorgan Chase’s AI growth trajectory since last year, with CEO Jamie Dimon championing AI and Gen AI, leading its integration into the bank’s operational framework.

JPMorgan isn’t the only traditional bank in the game when it comes to embracing this technology; its peers — Morgan Stanley and Goldman Sachs — have also swiftly adapted, to stay competitive in the technological race. 

Over the last year and up until now, there has been a steady stream of news about financial firms implementing advanced AI in multiple aspects — from back-end office operations and employee assistance to new chatbots for consumer inquiries and AI-enhanced products. While AI is now a constant topic, we look at some of the recent developments that have stood out this week.

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Is it really a win-win together?

Like marriage, partnerships can either strengthen or weaken a bond. In fact, Will Stredwick, Senior VP and General Manager at Amex Global Network Services North America compares these relationships to dating dynamics, highlighting that trust is fundamental, compatibility is crucial, and strong partnerships last when there is alignment in chemistry and values.

The good, bad, and ugly partnerships

Some notable examples of successful bank-fintech partnerships have stood the test of time, such as Goldman Sachs-Stripe, Citi-IntraFi, and Cross River Bank-Revolut. But others haven’t been as smooth sailing; the Goldman-Apple partnership, for example, has faced more challenges than successes.

Another partnership formed in 2022 between Wells Fargo and Bilt appears to be teetering on the brink of trouble. Though not apparent on the surface, behind-the-scenes issues are coming to light through damning reports.

The Wells Fargo and Bilt saga: The evident and underlying realities

Wells Fargo and Bilt launched a co-branded Mastercard credit card that enables users to pay rent, earn rewards points, and count it toward their credit scores without incurring extra fees from landlords.

Launched in 2021, the Bilt Rewards loyalty program allows members to earn rewards on activities that typically don’t qualify for rewards, achieving immediate success. Earlier this year, Bilt secured $200 million in funding, increasing its valuation to $3.1 billion from $350 million in 2021, with Wells Fargo, Mastercard, and Blackstone among its financiers.

Bilt generates nearly $20 billion in annual spending with profitable unit economics. The firm engages with three networks including property owners, local merchants and businesses, and redemption partners. Its earnings are closely tied to the spending and loyalty it cultivates and interchange fees represent just a portion of Bilt’s revenue sources. 

Although the success of Bilt Rewards and its potential to help Wells Fargo attract new, younger customers likely influenced the bank’s decision to launch the co-branded credit card, the results have not aligned with the bank’s expectations. Despite bringing a novel feature to the market through the co-branded card, Wells Fargo is losing money on the deal.

According to the Wall Street Journal, Wells Fargo reportedly faces losses of up to $10 million per month from the program.

The effectiveness of targeting a new and younger customer base who value reward programs was mixed.

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