In the upcoming 18.1 release, the European Union is advocating for the opening up of Apple's NFC technology to third-party developers. This change will extend to more countries beyond the EU. Apple is expected to charge a fee for using these services, which were previously limited to Apple Pay. The service will be available in Australia, Brazil, New Zealand, the UK, and the US, in addition to the EU, where the regulatory body advocated for this change.

The revenue from services using Apple Pay will decrease, but with the increase in NFC transactions, it is very likely that Apple's services revenue will be higher. This is despite the lower fees and the higher number of transactions using Apple NFC. NFC technology has been in use since the early 2000s, and with a good scale of adoption in the US, it provides a strong foundation for accepting Appleect and/or third-party transactions. NFC-related dir

The Federal Reserve’s recent data release offers a comprehensive look at current trends in credit card debt, delinquencies, and mortgages. Key insights from the report include:

Credit Card Trends:

•Card Growth Slowed: Banks are tightening underwriting standards, leading to slower growth in new credit card accounts.

•Higher Origination Credit Scores: The average credit score for new credit card accounts reached its highest level in a decade.

•Decline in Card Origination: There were 1.3 million fewer new credit card accounts compared to the first quarter of 2023.

•No Limits on Existing Accounts: Despite tighter standards for new accounts, banks are not imposing limits on existing credit card accounts.

•Delinquent Accounts: Although the number of delinquent accounts for 30, 60, and 90 days has declined, the balances of those delinquent accounts are larger, with revolving credit reaching $629 billion.

Mortgage Trends:

•Record Low Mortgage Originations: Mortgage originations have reached their lowest point since 2012, with only 80,000 new accounts totaling $44 billion in lending.

•Increased Average Loan Size: The average mortgage loan size has hit a new high of $554,000, with the 90th percentile at $1.2 million.

Macroenvironment Implications:

Rate Cuts and Economic Growth:

The Fed will need to consider a rate cut in August to prevent economic slowdown. While GDP grew at 2.8%, this figure reflects past performance. Current tightening in the credit market and reduced personal consumption could pose risks to sustained growth.

Credit Card Companies:

Visa and American Express have both reported slowing growth earlier this week, reflecting broader trends in the credit market. The $30 billion settlement between Visa/MasterCard and merchants has been delayed by a judge, adding uncertainty to the ongoing dispute.

Impact of Student Loans:

The resumption of student loan payments will likely reduce disposable income, putting additional pressure on consumer spending.

Mortgages:

Around 130,000 mortgage loans are coming up for rate adjustment, which means borrowers will have to adapt to higher rates from (ARMs.

Looking Ahead:

Employment rates, wage increases, high-interest rates, and commercial real estate exposure are expected to remain key issues throughout the year. The Fed’s decision on rate cuts will be crucial in determining the economic outlook, particularly in an election year.

This data underscores the delicate balance the Fed must maintain in fostering economic stability while navigating evolving credit and mortgage landscapes.

This Friday, 4/12, marks a significant event as major banks unveil their quarterly results. While usual metrics like NII, CRE write-downs, and trading revenues will be scrutinized, the spotlight will also be on consumer lending provisions, particularly for credit cards.

Here's a snapshot of the relevant figures:

• The vast landscape of household lending amounts to a staggering $13.5 trillion, with credit cards contributing $1.13 trillion to this total.
• A notable development is the 50% surge in credit card delinquencies witnessed in 2023.
• Delinquencies with debts overdue for 90 days or more have spiked to 6.4%, marking a substantial 59% increase from the previous year-end figure of 4%.

This trend isn't isolated to credit cards; similar patterns are evident in other lending categories such as Auto loans. This suggests a broader narrative of financial strain, particularly among younger and lower-income households. With expectations of persistently high rates, this strain may continue to intensify.

Despite a recent sigh of relief from today's PPI data following yesterday's CPI numbers, the Federal Reserve's planned rate reductions for the year are scaling back. Initial projections of three cuts are now dwindling to likely just one. Realistically, any rate changes may not materialize until the September meeting.

Looking ahead, the upcoming bank quarterly calls are anticipated to highlight a growing reliance on AI, LLM/generative AI models. These technologies are set to revolutionize operations across customer service, risk management, wealth, marketing, and technology development. The focus is on driving operational efficiency and delivering an exceptional customer experience.

Late fee introduction with a cap at 25% of the purchase value is reducing the number of UK and US customers reported to debt collectors by Klarna. 

- BNPL customers sent for debt collection reduced to 0.84% from 1.95% in 2022. 

- Late fees introduced in 2023 are having an impact 

- A fee cap at 25% of order value (which seems a bit much) led to 55% payment on time

- In the US, the debt collection is down to 2.8%, a 180 bps improvement

There are two important considerations to keep in mind.

- Firstly, Klarna is preparing for an IPO in Q3 with a valuation of around $20B, and the quality of its on-time payments will help improve this quarter's results and the IPO prospectus.

- Secondly, it is worth noting that the markets are not regulated, and while there have been talks of market regulation in the UK, US, and other countries, it is unlikely that we will see any significant regulatory changes this year, especially with elections on the horizon.

A prolonged 2 decades of legal drama over interchange fees seems to be reaching at least a medium-term settlement. Key aspects here are: 

- Visa & MC rake in $100B in fees (2003 numbers)

- Rise in digital transactions is leading to increased volume of transactions CNP (tap, dip, and wallet) and card present transactions

- Total household card debt is around ~$1.5T (excludes corporate card spend at merchants). Delinquencies have been higher in the past three to four years. 

- Both networks paid $6 billion in a class-action lawsuit in 2019.

- The settlement will save merchants approximately $30 billion.

- The reduction in interchange fees is small, at 4 basis points over three years and 7 basis points over five years. SMB's will have limited benefits from changes in fees. 

- "Honor all cards" removal may lead to large merchants considering a surcharge option, which is unlikely to be implemented given the negative impact such a move has had in other markets around the world.

- A large trade group of over 200 members has agreed to the settlement.

- Finally, the impact on larger issuers, who generate most of the fees, is likely to be small, with only a 7 basis point reduction. This may be passed on to customers in the form of slightly higher annual fees or changes to reward programs to maintain current net income levels

In conclusion, this settlement should put an end to the ongoing legal battles, lobbying, and other activities, enabling stakeholders to focus more on creating value, including the growth of mobile wallets.

Beyond the headlines, you will notice the timing of this acquisition is a grand strategic opportunity for Capital One in many ways: 

- Credit card loan volume will surpass to be a leader with $257B

- Loan volume will be 2X of American Express $126B in card loans

- Capital one will gain a big foothold in payment networks ~40M merchants, ~100M cards

- Capital One will have a unique play being an issuer, processor, network

- Credit Cards portfolio expansion for Capital One known for reward cards, and Discover for cash back card

- Capital One used to historically issue cards to sub-prime profile of customers, however that has changed over the past decade with a focus on SMB's and reward cards including last year acquisition of Velocity Black

- Discover customers have credit ratings in good standing (mostly!), and carry a balance / revolve

- Capital One might become the 6th largest bank in the US

- Capital One will have the opportunity for compete with greater conviction on co-brand deals with likes of Costco card (currently with Citi in US), and other retailers, hotels, airlines

- Rich valuable data from payment processing that will help launch new services to capture more market with GenZ and Millennials

- Biggest deal in the industry since financial crisis 

MasterCard and Visa in the next 4 to 5 years (assume regulators approve the deal) will be gearing up for a good challenge from this merger entity. Fairbanks known for being digitally savvy will navigate through the current Discover challenges of compliance and risk management that has caused a 62% profit dip and resignation of CEO. 

While the regulators have to chew upon, there are some good tail winds including push by Biden to drive greater competition, transparency around junk fees, and aid Discover be more committed to recover from the compliance and risk management challenges. 

CFPB open banking proposal is a start in the right direction, however falls short in consumer data protection offered by regulators in Europe and Australia. As consumers, the right to data and its usage by third parties, data aggregators and other entrusted persons needs more definition to provide protection and highlight liabilities towards misuse. The Clearing House response does reflect some of these issues including screen scraping using credentials, third party obligations. There is tremendous insights / learning CFPB can take even from PSD1/PSD2/and the oncoming PSD3. 2024 will pave way for an open banking reg! 

Investors continue to wait for approvals to Spot EFT trading from the regulator. which seemingly is getting pushed into early next year. This move by Coinbase is interesting given its challenges with SEC in US allowing for International markets to engage in spot trades. With Binance bracing its US survival and SBF saga, there is good ground for Coinbase to make greater inroads! 

Apple's early exit from GS likely indicates a formal relationship with another issuer and servicer for its card and savings account offering. As suggested previously, time for Apple to get a banking license through acquisition to own the service offering that brings great value to its 'services revenue' bottom line!

Has Amex stepped in? Or is it Synchrony? Amex service and culture is more aligned to that of Apple. However strategically the expansion to health insurance and wealth for Apple will require another partnership or goes back to owning a license! 

X bold moves to engage users for banking and investing by end-2024; likely retail and SMB focus whilst X is securing MT licenses across states! A potential bank acquisition for licensing purposes??

TCH RTP and FedNow interoperability in question with FedNow having launched last week giving FI's greater choice across two RTP rails. The two real-time rails it seems for now will not compete on price and their lack of interoperability will require FI's to choose one over the other given difference around RTP settling with NY Fed and FedNow via Fed's master account - the later. might be preferred by FI's. 

Real-time rails have greater adoption opportunity in creating value for consumers (overdraft, payment scheduling) and businesses (24x7 operation) to be leveraged. A singular real-time system will need to prevail or interoperability will need to be established for wider use across US market.