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The interest-rate vibe shift hits fintech

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Monday: the interest-rate vibe shift, Lael Brainard on crypto risks and Sam Bankman-Fried sees the bottom.

Off the chain

You probably had a better Friday than Google’s Corey duBrowa, whose Twitter account spent most of the day claiming the comms VP was a Doodles community manager. “Well, it's been an interesting last 24 hours on this app. My account was hacked/hijacked by some NFT scammers,” he wrote after he recovered access. Not fun, especially when the beat reporters notice. Sorry that happened, Corey, but what we really want to know is if Elon Musk was taking your account into consideration when he sent that nastygram about bots to Twitter.

— Owen Thomas (email | twitter)


You're either real-time or out of time:Applications like this power our daily lives, and if they can’t access massive amounts of data stored in a database as well as stream data “in motion” instantaneously, you — and millions of customers — won’t have these in-the-moment experiences.

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The interest-rate vibe shift is here. For fintech companies that spent the past several years boosted by cheap funds and strong consumer spending, that means suddenly waking up to a world where everything looks different. Online personal loan lender Upstart saw its share price plummet Friday after reporting preliminary earnings.

Inflation, fears of a recession and rising interest rates have put "banks and capital markets on cautious footing," said CEO Dave Girouard, a former Google executive who founded Upstart a decade ago. The company published a preview of earnings ahead of the full August release — something that often serves as a red flag for investors.

  • Upstart is now expecting significantly worse results than it previously forecast. The company expects $228 million in second-quarter revenue, down more than 20% from its low-end guidance in May and a 26% decrease from first-quarter revenue.
  • Upstart expects to lose between $27 million and $31 million for the quarter, rather than its previous expectation of losing no more than $4 million.
  • Sometimes it helps to get out ahead of bad news — not the case here. Upstart's share price closed Friday down about 20%, at $27.09, and has lost 80% of its value since the start of the year.

Upstart was also hit by a downgrade. JMP Securities analysts warned that "with macroeconomic concerns driving interest rates higher and causing capital market partners to tighten lending standards, Upstart’s marketplace is funding-constrained."

  • Using AI to vet applicants, Upstart mostly makes its money off fees from matching lenders with borrowers, many of whom have poor or no credit history. The company securitizes many of those loans. About 80% of the $12 billion in loans funded through Upstart last year were purchased by institutional investors.
  • When demand on the loan investor side failed to keep up with consumer appetite for personal loans at the start of the year, Upstart parked between $100 million and $150 million in unwanted loans on its own balance sheet. Wall Street investors balked at that change in strategy when the company revealed it during first-quarter earnings in May. Shortly afterwards, an Upstart executive told the Wall Street Journal it would no longer hold the loans.
  • But those loans were, unsurprisingly, sold at a loss. On the positive side, Upstart said its existing loans are still performing as expected for investors and the company has about $800 million in cash on hand.

Fintech as a whole is feeling the pressure, especially on the consumer-focused side. Consumer sentiment is sinking, souring investors on businesses offering direct loans or services like “buy now, pay later.”

  • Cathie Wood's ARK Fintech Innovation ETF is down about 60% from the start of the year. Pay-later provider Affirm's share price is down 75% from the start of the year, while Block, whose business includes pay-later service Afterpay, is down 60%. Klarna on Monday announced new funding at a $6.7 billion private valuation, an 85% drop from a year ago. "We are not immune to public peers being down 75-90%," co-founder and CEO Sebastian Siemiatkowski said.
  • Many of the fintech businesses active today emerged after the financial crisis and have never been recession-tested, noted Ted Rossman, a senior analyst for Bankrate. (That’s not counting the rapid economic crash and recovery at the onset of the pandemic, he added.)
  • "The unemployment rate is as low as it’s been in 50 years and increasingly there is a feeling that there is only one way for it and for delinquencies to go, which is up," Rossman said. "Some of these companies benefit from a really big tailwind of low interest rates, a strong job market [and] spending and a lot of that stuff is starting to erode."

Upstart is also facing regulatory headwinds. In 2017, Upstart was the first company granted a no-action letter from the Consumer Financial Protection Bureau, promising that the CFPB would not pursue a fair-lending action against the company. Upstart asked for the letter to be terminated after the CFPB said it would require a lengthy review to approve any changes to Upstart's modeling — something Upstart said it needed to do quickly to respond to changing conditions. The CFPB under Rohit Chopra has taken a much more aggressive approach in scrutinizing things like AI in lending and the “buy now, pay later” industry as a whole, including by invoking authority to examine non-bank entities. While Upstart left the CFPB’s program on its own, it’s a good reminder of the potential double whammy ahead for the industry. Fintech may be hurting on Wall Street, but that's not going to stop scrutiny in Washington.

— Ryan Deffenbaugh (email | twitter)

On the money

On Protocol: Federal Reserve Vice Chair Lael Brainard stressed an “urgent” need for crypto regulation, citing the crypto crash as an example of how consumers need to be better protected against undisclosed conflicts of interests or manipulation.

Zip is closing down its Pocketbook app. The “buy now, pay later” company bought the app in 2016. It plans to introduce similar money-management features in its main app eventually, part of the drive by many pay-later companies to build financial super apps.

Celsius reportedly allocated $530 million to KeyFi to invest, incurring losses of $350 million. According to on-chain analytics reviewed by Arkham Intelligence, KeyFi engaged in high-risk trading strategies. KeyFi is suing Celsius. faces $270 million in losses from 3AC. CEO Peter Smith detailed in a letter to shareholders the company’s exposure to Three Arrows Capital’s insolvency.

Binance scored a regulatory win in Spain. Continuing its European expansion, Binance successfully got on Spain’s crypto registry, scoring another regulatory win in addition to those in France and Italy.

U.S. diplomats called on Japan’s crypto exchanges to sever ties with Russia. The request was reportedly directed to 31 licensed crypto exchanges in Japan that still operate in Russia, with Japan’s Financial Services Agency also reportedly renewing demands for the exchanges to do so.


El Salvadoran President Nayib Bukele isn’t happy with the latest New York Times story on how his big bitcoin bet is turning out. “It’s clear they’re afraid, #Bitcoin is inevitable. By the way, they say we’re heading to default. Will they publish an apology once we pay everything on time?” Bukele tweeted.

FTX CEO Sam Bankman-Fried seems optimistic about the future of Web3 despite the crypto crash, implying that there’s no way to go but up. “I don’t see any particular reasons that we couldn’t be at the bottom, and I’m not trying to say that we definitely are at the bottom. But I think the unwinding that had to happen, has happened,” he said in an interview.

Eight U.S. senators wrote to seven of the biggest banks behind the payments system Zelle, saying that the lack of safeguards against fraud “makes the platform a 'favorite of fraudsters' because consumers have no option to cancel a transaction, even moments after authorizing it."

Coming up

FTT DeFi 2022 is set for Tuesday. The conference will be held in Westminster, London, featuring speakers from Fireblocks, Chainalysis, Cardano and elsewhere.

JP Morgan Chase’s and Morgan Stanley’s earnings calls are on Thursday. JPM’s average estimated EPS is at $2.80, a 6% increase from the prior quarter. MS’ average estimated EPS is at $1.62, a 21% decrease from the prior quarter.

BlackRock’s and Citigroup’s earnings calls are scheduled for Friday. BLK’s average estimated EPS is at $9.12, a 4% decrease from the prior quarter. C’s average estimated EPS is at $1.63, a 19% decrease from the prior quarter.

Goldman Sachs’ earnings call is set for next Monday. GS’ average estimated EPS is at $7.45, a 31% decrease from the prior quarter.


You're either real-time or out of time: Many of the challenges facing our world today are increasingly complex and critical, such as climate change, talent shortages and supply chain disruptions. Solving these problems requires analyzing large data sets, quickly. Additionally, organizations must use data to predict future issues and then determine the most effective solution.

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