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Hugh Son, CNBC’s banking reporter, joins ‘The Exchange’ to discuss ongoing Goldman Sachs layoffs, employment trends across the banking sector, and financial expectations for 2023.
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Goldman Sachs is cutting up to 3,200 employees this week as Wall Street girds for tough year
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People enter the Goldman Sachs headquarters building in New York, U.S., on Monday, June 14, 2021.
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Goldman Sachs is laying off fewer employees than feared, but the cut is still a deep one.
The global investment bank is letting go of as many as 3,200 employees starting Wednesday, according to a person with knowledge of the firm’s plans.
That amounts to 6.5% of the 49,100 employees Goldman had in October, which is below the 8% reported last month as the upper end of possible cuts.
The final figure, reported earlier by Bloomberg, is a result of internal discussions between business heads and top management over the last month, said the person, who declined to be identified speaking about personnel decisions.
Goldman CEO David Solomon kicked off Wall Street’s layoff season in September and then opted to enact the industry’s deepest cuts so far. Bank employee levels swelled over the last two years in response to a boom in deals and trading activity, but the good times didn’t last: IPO issuance plunged 94% last year because of suddenly inhospitable markets, according to SIFMA data.
Now, with concerns that the economy will slow further this year, Goldman is pulling back on headcount in case stock and bond issuance and mergers don’t rebound. Solomon is also scaling back his ambitions in consumer banking, resulting in part of the layoffs.
Other investment banks are adopting a “wait and see” attitude in the coming weeks. If revenues are tracking below estimate in February and March, the industry could cut more workers, said a person familiar with a leading Wall Street firm’s processes.
Goldman’s move follows smaller cuts from Morgan Stanley, Citigroup and Barclays in recent months. Beleaguered Credit Suisse, which is in the midst of a restructuring, has said it would cut 2,700 employees in the last three months of 2022 and aims to remove a total of 9,000 positions by 2025.
Meanwhile, Goldman is still moving forward with plans to hire junior bankers and in other areas as needed, the source said.
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10 Places You Can Get a Loan In 2023
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Opinions expressed by Entrepreneur contributors are their own.
As I write this, commercial interest rates — the rate businesses pay for working capital, equipment and property loans — have more than doubled over this past year. My clients are now seeing commercial rates exceed 10% — that’s going to be a big challenge for those that rely on debt to fund their operations and expansion, let alone those entrepreneurs looking to startup and grow their businesses.
The financing environment will be tough in 2023. Less businesses will get approved for loans as the financial services industry contracts in response to continued high interest, inflation and a slowing economy. But it’s not a catastrophe. There will be money out there if you’re willing to pay for it. Here are your best choices to consider.
Related: 5 Best and Fast Small-Business Loans (Some of Which You’ve Never Heard of)
Big bank loans
For starters, if you don’t need a loan, then you should definitely go to a traditional bank. I’m kidding, of course. But traditional banks — and you know the names — are the most risk-averse of all lenders. They are going to lend money to businesses that have collateral, history, solid credit and the ability to pay the loans back almost without question. Interest rates and terms, assuming you meet those requirements, will always be the most favorable compared to other financing options.
Small bank loans
Besides the big banks, there are independent and community banks and credit unions all of which offer different types of loan arrangements and may be more amenable to dealing with a smaller company that isn’t as qualified to get a loan from a big bank. But still, these banks, though a little more entrepreneurial, tend to also be very risk averse and will require significant due diligence.
SBA Loans
The best option in 2023 is to seek out a loan from a lender certified by the Small Business Administration. Those loans (called Section 7a or 504) can be offered at market or slightly above market interest rates. Because most of the amounts are guaranteed by the federal government, the banks offering these loans can do so to smaller companies with less of a financial history or collateral available and are less at risk. But it’s still not a slam dunk and you’ll have plenty of hoops to jump through.
Related: How to Navigate the Volatile Business-Funding Environment
Online lenders
If you’re looking for a very short-term loan to satisfy an immediate financing need (a big inventory purchase, a down payment on a lease, a deposit on a new piece of equipment) you can try an online banker like Kabbage, Fundbox and OnDeck. These companies charge extremely high annual interest rates, but no sane business person would borrow from them for the long term. The upside is that these services provide funds very quickly — in some cases within 24 to 48 hours — and (as opposed to many banks) are more technology-oriented to gather data, monitor their loans and communicate issues.
Merchant advances
If you’re in the retail world then you might want to consider a merchant advance, which are short-term loans provided by popular payment services like Square, PayPal and QuickBooks Merchant Services. Your loan qualifications are determined by your actual sales volume to which these payment services are privy because, well, they’re already handling your cash. Like online lenders, interest rates are much higher than what traditional banks offer but the funds are quickly deposited in your account and payback is done automatically through the sales transactions you record with the service.
SSBCI
If you’re a very small business or a minority business owner or someone located in a lower-income part of the world then you should definitely look into the State Small Business Credit Imitative. Thanks to prior pandemic-related legislation, $10 billion is being distributed this year and next by the Treasury Department to states (based on a number of factors) that will then be allocated to local nonprofits and other organizations that support small and minority-owned businesses. You can Google your state and the State Small Business Credit initiative to find out what organizations are getting this funding and then apply directly to those organizations. Grants and equity investments are also available through this program.
Micro loans
For startups and very small businesses, you can also look for microloans offered by nonprofit organizations like Kiva, for example. These amounts are — by definition — very small but organizations like this one also provide good consulting services and can connect you to other places that offer finances for companies at your early stage.
Private lenders
Although these companies don’t charge as much interest as some of the short-term online lenders mentioned previously, interest rates are still higher but so are approval rates. Collateral — oftentimes receivables (for companies that “factor these amounts) and inventory — will be required. The best place to find these lenders (and other more traditional forms of financing) are platforms like Lendio and Fundera which offer a “marketplace” of different vehicles provided by their partners and an easy way to apply for them all.
Credit cards
What about credit card financing? You know you’ll pay a hefty interest rate but don’t knock it entirely — it may be a bad choice unless it’s for very short-term needs. Just make sure you’re not building your business around credit card debt because as interest rates continue to rise, so will credit card rates.
Family and friends
Finally, there are friends and family. A lot’s been written on this so I don’t have to tell you of the potential perils. You already know them. But getting a loan from a reasonable friend or family member can provide you with a reasonable rate of interest and flexibility. It all depends on the people involved.
The takeaway is that 2023 will be a tough year for financing. But not impossible. Just make sure you can afford it. And give yourself the flexibility to renegotiate in the future when rates do eventually come down.
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These 6 Club stocks look reasonably priced as Wall Street shuns high flyers
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A Halliburton oil well fielder works on a well head at a fracking rig site January 27, 2016 near Stillwater, Oklahoma.
J. Pat Carter | Getty Images
We’re growing increasingly worried about some richly valued companies in our portfolio, including the likes of Nvidia (NVDA) and Microsoft (MSFT). Expensive stocks remain out of favor on Wall Street — just as they had been for much of last year — and there could be more room for them to fall as recession fears mount.
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Wells Fargo Securities’ Mike Mayo breaks down his huge bullish call on Bank of America
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Mike Mayo, Wells Fargo Securities, joins CNBC’s “Fast Money” to discuss his huge bullish call on Bank of America shares.
02:59
2 hours ago
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Regulators warn U.S. banks on crypto risks including ‘fraud and scams’ after FTX collapse
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Ether has hugely outperformed bitcoin since both cryptocurrencies formed a bottom in June 2022. Ether’s superior gains have come as investors anticipate a major upgrade to the ethereum blockchain called “the merge.”
Yuriko Nakao | Getty Images
U.S. banking regulators warned financial institutions on Tuesday that dealing with cryptocurrency exposes them to an array of risks, including scams and fraud.
“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the regulators said in a joint statement from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The comments come just weeks after the spectacular collapse of crypto exchange FTX.
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The regulators said the risks include: “fraud and scams among crypto-asset sector participants” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.”
During the crypto boom, when financial players seemed to announce a new crypto partnership on a weekly basis, bank executives said they needed further guidance from regulators before dealing more directly with bitcoin and other cryptocurrencies in retail and institutional trading businesses.
Now, about two months after the bankruptcy filing of FTX, the industry has been exposed as rife with poor risk management, interconnected risks and outright fraud.
While the statement indicated that regulators were still assessing how banks could adopt crypto while adhering to their various mandates for consumer protection and anti-money laundering, they seemed to give a clue as to which direction they were headed.
“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the regulators said.
They also said that they have “significant safety and soundness concerns” with banks that focus on crypto clients or that have “concentrated exposures” to the sector.
Traditional banks have largely sidestepped the crypto meltdown, unlike the 2008 financial crisis in which they played a central role. One exception has been Silvergate Capital, whose shares have been battered in the past year.
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Don’t assume the interest on your savings account is keeping up with Federal Reserve rate hikes. Here’s why
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Valentinrussanov | E+ | Getty Images
As the Federal Reserve continues to hike interest rates, you may assume you’re earning more on the money in your savings account.
But that may not be the case.
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Carolyn McClanahan, a certified financial planner at Life Planning Partners in Jacksonville, Florida, was recently surprised when a client told her he was hardly making any interest on his cash.
The interest rate on his Capital One account was 0.3%, far lower than the 3.3% annual percentage yield the firm is currently advertising for new savings accounts. McClanahan discovered the same situation when she checked her own Capital One account.
“I was not happy,” McClanahan said.
While a call to Capital One’s customer service revealed it was possible to access the higher interest rate by opening a new account, McClanahan decided it was better to move the money elsewhere.
“I’ve been recommending Capital One for a long time, and they are now off my list,” McClanahan said.
Capital One did not immediately respond to requests for comment.
The Federal Reserve has raised the federal funds rate to the highest levels since 2007. While that makes borrowing more expensive for credit cards and other accounts, the expectation is that it will also push up the interest consumers can make on their cash savings.
Some online savings accounts are touting rates as high as 4%. Some certificates of deposit, or CDs, may provide higher rates, depending on the term.
Rates are expected to climb even higher as Federal Reserve poised to continue its hiking cycle in 2023. Bankrate.com predicts top-yielding national money market and savings accounts could climb to 5.25% by year end.
Yet like McClanahan, others may be in for a surprise if they realize their accounts are not keeping up with those top rates.
“Consumers need to check their accounts at least once a month to see what their accounts are earning,” said Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts.
“Don’t assume it’s the latest greatest rate,” he said.
More from Personal Finance:
From ‘Quiet Quitting’ to ‘Loud Layoffs,’ career trends to watch in 2023
How to use pay transparency to negotiate a better salary
‘This is a crisis.’ Why more workers need access to retirement savingsFollowing Fed rate hikes, online savings accounts should generally be in the ballpark of the federal funds rate within about a month, according to Tumin.
There are signs that may help consumers spot when they may get shortchanged on rates.
Watch for changing account names, Tumin said. If a bank is touting savings offers under a new account name from when you opened your account, the terms you are subject to might not be the latest.
If you see a new account, often you can request to be upgraded.
“That’s an easy way to get the benefit of the higher rate,” Tumin said.
Also be more vigilant when a bank, such as Emigrant Bank, has more than one online division, Tumin said. In September, Emigrant’s Dollar Savings Direct division was the first to offer 3% on an account, which eventually climbed to 3.5%.
Now, however, its My Savings Direct division has the highest rate for an online account, with 4.35%, Tumin noted.
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Here are some key things to consider before tapping your retirement savings to pay off credit card debt
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1. Most people should avoid 401(k) withdrawals
Withdrawals from 401(k) accounts before age 59½ are subject to a 10% penalty and taxes. That means if you needed $15,000, you’d have to take out close to $24,000, after accounting for those charges, according to Fidelity.
Of course, any cash you pull from the account will also miss out on market gains. Stocks have produced an average annual return of more than 10% over the last 100 or so years.
All that “should combine to far outweigh the average credit card rate,” said Ted Rossman, a senior industry analyst at CreditCards.com.
There may be exceptions, however.
Stopping your 401(k) contributions for a while — or at least cutting back — and redirecting those funds to debt payoff might make sense.
Ted Rossman
industry analyst at CreditCards.com
For people over 59½ and in a low tax bracket, a 401(k) withdrawal to pay off credit card debt may make sense because they’d avoid the 10% penalty and not be subject to a huge levy, explains Allan Roth, a certified financial planner and the founder of Wealth Logic in Colorado Springs, Colorado.
“Certainly, the math can make it worth it,” Roth said.
For most others, though, there are more appealing options than a withdrawal, Rossman said.
2. Suspending contributions means you’ll miss out on your company match
“Stopping your 401(k) contributions for a while — or at least cutting back — and redirecting those funds to debt payoff might make sense,” he said.
Still, that advice comes with an asterisk.
If your employer offers a company match, experts recommend you try to at least save up to whatever point that is, be it 3% or 5% of your paychecks.
“That’s free money that often doubles your return right there,” Rossman said.
A loan from your 401(k) plan is also usually preferable to a withdrawal, experts say.
3. 401(k) loans come with caveats, too
The interest rate on 401(k) loans is typically less than 5%, far less than the annual charge on most credit cards. The interest paid on the loan also goes back into your savings rather than to a bank.
“Using a 401(k) loan to pay off high-interest debt, like credit cards, could reduce the amount you pay in interest to lenders,” said Jessica Macdonald, head of editorial content at Fidelity Institutional.
Other benefits to a 401(k) loan, Macdonald said, are that they don’t require a credit check and they don’t show up as debt on your credit report.
Brand X Pictures | Stockbyte | Getty Images
But there are other factors to consider here, as well.
For one, you’ll have to be able to repay the loan within five years. You could also face consequences if you leave your job and fail to pay the loan back. In such cases, your loan would be deemed in default, and you’d be hit with taxes and that 10% withdrawal penalty on whatever you still owe. And, again, your money will miss out on market returns.
Anyone considering turning to their 401(k) to address credit card balances would also be wise to think about the behavioral reasons why they got into the debt in the first place, some experts say.
“If one takes out money to pay off their credit card debt and then buys more to build the debt back up again, it backfired,” Roth said.
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Watch CNBC’s full interview with RBC Capital Markets’ Gerard Cassidy
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Gerard Cassidy, RBC Capital Markets, joins ‘Closing Bell’ to discuss Goldman Sachs CEO saying layoffs could be coming in January.
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Expect layoffs across investment banking as they cut expenses, says RBC Capital’s Gerard Cassidy
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Gerard Cassidy, RBC Capital Markets, joins ‘Closing Bell’ to discuss Goldman Sachs CEO saying layoffs could be coming in January.
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Here are some smart moves borrowers should make while the fate of student loan forgiveness is still up in the air
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Creatas | Creatas | Getty Images
1. Make the most of extra cash
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to put away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
2. Consider making payments anyway
Boy_anupong | Moment | Getty Images
If you have a healthy rainy day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.
There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
3. Review your options for when payments resume
Even though there’s some uncertainty around the date that federal student loan bills will pick up again, you want to be prepared for whenever they do.
You can compare how much your monthly bill would be under different repayment plans using one of the calculators at Studentaid.gov or Freestudentloanadvice.org.
If you’re unemployed or dealing with another financial hardship, you might want to put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue.
If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that with forbearance, interest will rack up and your balance will be larger — possibly much larger — when you resume paying.
4. Check if refinancing makes sense now
Higher education expert Mark Kantrowitz had previously recommended that federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is on the table — if the president’s policy survives the Supreme Court — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option.
Betsy Mayotte
president of The Institute of Student Loan Advisors
Those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel, he said. The latter borrowers may want to look at refinancing the portion of their debt over the relief amounts, he added.
Still, borrowers should first understand the federal protections they’re giving up by refinancing, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.
For example, the U.S. Department of Education allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” said Mayotte in a previous interview about refinancing.
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Goldman Sachs CEO says jobs cuts are coming next month
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CNBC’s Hugh Son joins CNBC’s ‘Squawk on the Street’ to report on Goldman Sachs’ job cuts that are coming next month. The firm is expected to lay off about 4,000 employees in the first two weeks of January.
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Fintech reckoning: Consolidation will happen in next 6-12 months
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CNBC's Hugh Son reports on financial technology companies' prospects for the next year.
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The tech IPO market collapsed in 2022, and next year doesn’t look much better
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The Nasdaq MarketSite in New York.
Michael Nagle | Bloomberg | Getty Images
Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.
The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.
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In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.
The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.
In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.
With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.
As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.
“Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.
Hangover from last year’s ‘binge drinking’
For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.
Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’s mega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.
Money was plentiful. Financial discipline was not.
In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.
Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.
Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.
Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.
Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.
“There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.
Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.
“What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”
Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.
For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.
Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”
Cash is king
One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.
Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.
Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.
“If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”
Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”
Snowflake shares in 2022
CNBC
Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.
“We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”
That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.
Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.
Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.
Still, the stock is down almost 20% in the fourth quarter.
“The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”
— CNBC’s Jordan Novet contributed to this report.
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The fintech reckoning is upon us. Here’s what to expect next year
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Partygoers with unicorn masks at the Hometown Hangover Cure party in Austin, Texas.
Harriet Taylor | CNBC
Bill Harris, former PayPal CEO and veteran entrepreneur, strode onto a Las Vegas stage in late October to declare that his latest startup would help solve Americans’ broken relationship with their finances.
“People struggle with money,” Harris told CNBC at the time. “We’re trying to bring money into the digital age, to redesign the experience so people can have better control over their money.”
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But less than a month after the launch of Nirvana Money, which combined a digital bank account with a credit card, Harris abruptly shuttered the Miami-based company and laid off dozens of workers. Surging interest rates and a “recessionary environment” were to blame, he said.
The reversal is a sign of more carnage to come for the fintech world.
Many fintech companies — particularly those dealing directly with retail borrowers — will be forced to shut down or sell themselves next year as startups run out of funding, according to investors, founders and investment bankers. Others will accept funding at steep valuation haircuts or onerous terms, which extends the runway but comes with its own risks, they said.
Top-tier startups that have three to four years of funding can ride out the storm, according to Point72 Ventures partner Pete Casella. Other private companies with a reasonable path to profitability will typically get funding from existing investors. The rest will begin to run out of money in 2023, he said.
“What ultimately happens is you get into a death spiral,” Casella said. “You can’t get funded and all your best employees start jumping ship because their equity is underwater.”
‘Crazy stuff’
Thousands of startups were created after the 2008 financial crisis as investors plowed billions of dollars into private companies, encouraging founders to attempt to disrupt an entrenched and unpopular industry. In a low interest rate environment, investors sought yield beyond public companies, and traditional venture capitalists began competing with new arrivals from hedge funds, sovereign wealth and family offices.
The movement shifted into overdrive during the Covid pandemic as years of digital adoption happened in months and central banks flooded the world with money, making companies like Robinhood, Chime and Stripe familiar names with huge valuations. The frenzy peaked in 2021, when fintech companies raised more than $130 billion and minted more than 100 new unicorns, or companies with at least $1 billion in valuation.
“20% of all VC dollars went into fintech in 2021,” said Stuart Sopp, founder and CEO of digital bank Current. “You just can’t put that much capital behind something in such a short time without crazy stuff happening.”
The flood of money led to copycat companies getting funded anytime a successful niche was identified, from app-based checking accounts known as neobanks to buy now, pay later entrants. Companies relied on shaky metrics like user growth to raise money at eye-watering valuations, and investors who hesitated on a startup’s round risked missing out as companies doubled and tripled in value within months.
The thinking: Reel users in with a marketing blitz and then figure out how to make money from them later.
“We overfunded fintech, no question,” said one founder-turned-VC who declined to be identified speaking candidly. “We don’t need 150 different neobanks, we don’t need 10 different banking-as-a-service providers. And I’ve invested in both” categories, he said.
One assumption
The first cracks began to appear in September 2021, when the shares of PayPal, Block and other public fintechs began a long decline. At their peak, the two companies were worth more than the vast majority of financial incumbents. PayPal’s market capitalization was second only to that of JPMorgan Chase. The specter of higher interest rates and the end of a decade-plus-long era of cheap money was enough to deflate their stocks.
Many private companies created in recent years, especially those lending money to consumers and small businesses, had one central assumption: low interest rates forever, according to TSVC partner Spencer Greene. That assumption met the Federal Reserve’s most aggressive rate-hiking cycle in decades this year.
“Most fintechs have been losing money for their entire existence, but with the promise of ‘We’re going to pull it off and become profitable,’” Greene said. “That’s the standard startup model; it was true for Tesla and Amazon. But many of them will never be profitable because they were based on faulty assumptions.”
Even companies that previously raised large amounts of money are struggling now if they are deemed unlikely to become profitable, said Greene.
“We saw a company that raised $20 million that couldn’t even get a $300,000 bridge loan because their investors told them `We are no longer investing a dime.’” Greene said. “It was unbelievable.”
Layoffs, down rounds
All along the private company life cycle, from embryonic startups to pre-IPO companies, the market has reset lower by at least 30% to 50%, according to investors. That follows the decline in public company shares and a few notable private examples, like the 85% discount that Swedish fintech lender Klarna took in a July fundraising.
Now, as the investment community exhibits a newfound discipline and “tourist” investors are flushed out, the emphasis is on companies that can demonstrate a clear path toward profitability. That is in addition to the previous requirements of high growth in a large addressable market and software-like gross margins, according to veteran fintech investment banker Tommaso Zanobini of Moelis.
“The real test is, does the company have a trajectory where their cash flow needs are shrinking that gets you there in six or nine months?” Zanobini said. “It’s not, trust me, we’ll be there in a year.”
As a result, startups are laying off workers and pulling back on marketing to extend their runway. Many founders are holding out hope that the funding environment improves next year, although that is looking increasingly unlikely.
Neobanks under fire
As the economy slows further into an expected recession, companies that lend to consumers and small businesses will suffer significantly higher losses for the first time. Even profitable legacy players like Goldman Sachs couldn’t stomach the losses required to create a scaled digital player, pulling back on its fintech ambitions.
“If loss ratios are increasing in a rate increasing environment on the industry side, it’s really dangerous because your economics on loans can get really out of whack,” said Justin Overdorff of Lightspeed Venture Partners.
Now, investors and founders are playing a game of trying to determine who will survive the coming downturn. Direct-to-consumer fintechs are generally in the weakest position, several venture investors said.
“There’s a high correlation between companies that had bad unit economics and consumer businesses that got very large and very famous,” said Point72’s Casella.
Many of the country’s neobanks “are just not going to survive,” said Pegah Ebrahimi, managing partner of FPV Ventures and a former Morgan Stanley executive. “Everyone thought of them as new banks that would have tech multiples, but they are still banks at the end of the day.”
Beyond neobanks, most companies that raised money in 2020 and 2021 at nosebleed valuations of 20 to 50 times revenue are in a predicament, according to Oded Zehavi, CEO of Mesh Payments. Even if a company like that doubles revenue from its last round, it will likely have to raise fresh funds at a deep discount, which can be “devastating” for a startup, he said.
“The boom led to some really surreal investments with valuations that cannot be justified, maybe ever,” Zehavi said. “All of these companies across the world are going to struggle, and they will need to be acquired or shut down in 2023.”
M&A flood?
As in previous down cycles, however, there is opportunity. Stronger players will snap up weaker ones through acquisition and emerge from the downturn in a stronger position, where they will enjoy less competition and lower costs for talent and expenses, including marketing.
“The competitive landscape shifts the most during periods of fear, uncertainty and doubt,” said Kelly Rodriques, CEO of Forge, a trading venue for private company stock. “This is when the bold and the well capitalized will gain.”
While sellers of private shares have generally been willing to accept bigger valuation discounts as the year went on, the bid-ask spread is still too wide, with many buyers holding out for lower prices, Rodriques said. The logjam could break next year as sellers become more realistic about pricing, he said.
Bill Harris, co-founder and CEO of Personal Capital
Source: Personal Capital.
Eventually, incumbents and well-financed startups will benefit, either by purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers return to banks and asset managers.
Though he didn’t let on during an October interview that Nirvana Money would soon be among those to shutter, Harris agreed that the cycle was turning on fintech companies.
But Harris — founder of nine fintech companies and PayPal’s first CEO — insisted that the best startups would survive and ultimately thrive. The opportunities to disrupt traditional players are too large to ignore, he said.
“Through good times and bad, great products win,” Harris said. “The best of the existing solutions will come out stronger and new products that are fundamentally better will win as well.”
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The credit scoring system has its downsides — here’s what a new credit scoring and reporting system could look like
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In the U.S., credit scores can affect every aspect of someone’s life. This three-digit number can determine the interest rate you get on a mortgage, the APR you receive on a credit card and the rates you pay for car and homeowner’s insurance.
There are three major credit bureaus — Experian, Equifax and Transunion — which collect information on an individual’s credit use. This information is then recorded in a credit report, and a three-digit credit score is calculated using one of two major scoring models, FICO and VantageScore.
Most scores range from 300 to 850 with higher scores indicating that a borrower is lower risk and more likely to make on-time payments. FICO uses factors like payment history, amounts owed, credit mix, length of credit history and new credit.
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What credit scores don’t capture
Lenders have always needed a way to determine a borrower’s creditworthiness, and credit scores were a faster, easier way to do so.
Yet are these three-digit numbers really a foolproof way of figuring out someone’s creditworthiness? What happens to people who don’t have credit scores or those who have poor scores?
Barbara Kiviat, assistant professor of sociology at Stanford, explains that while credit scores are meant to predict whether or not someone will default on a loan, these scores don’t reflect why someone has defaulted.
For example, someone may fail to pay their credit card bill in full during an economic downturn or a job loss but this doesn’t necessarily mean they’ve been irresponsible with their credit. Credit scores are supposed to show how creditworthy someone is, but they can be a flawed measure of creditworthiness because they don’t account for the many factors that affect someone’s ability to repay their debt.
“If you look at credit scores from the perspective of other social actors, like policymakers or consumer advocates, why someone does or does not repay might start to have more bearing on how you make sense of credit scores,” says Kiviat.
The credit scoring system can also reflect and even worsen existing racial and wealth inequality.
As Kiviat writes, “it is harder to maintain good credit when one faces precarious work, has no wealthy family members to turn to in emergencies, is sold predatory loans, and otherwise experiences the disadvantages minorities in the U.S. disproportionately do.”
For racial minorities, a lack of a credit score or a credit file that’s too thin to be scored can mean a lack of access to credit. This leads many to rely on cash or loans with high APRs, creating a vicious cycle where people end up with high-interest debt that’s hard to pay off and which may ultimately hurt their credit scores.
A 2010 CFPB report found that a more significant percentage of Black and Hispanic individuals (15%) are credit invisible, or unscorable, compared to White and Asian individuals (9%). Furthermore, a larger percentage of credit-invisible individuals reside in low-income neighborhoods (30%) than in high-income ones (4%).
“It’s important to note that credit scores didn’t create some of the social economic disparities,” Sally Taylor, vice president and general manager at FICO, told CNBC. “They simply reflect the social economic disparities that are out there…”
Reforming the credit scoring system
One proposed solution to make more people’s credit visible is to include alternative forms of data on credit reports. For example, mortgage payments are included on your credit report while rental payments are typically not. Therefore, the system benefits homeowners but not renters.
Experian Boost was launched in 2019 and uses data not typically collected on people’s credit reports such as on-time utility, streaming subscription and telecom payments. It’s a free service and it only considers positive payment history, so late payments on added accounts won’t negatively affect your score. It also recently added the ability to include rent payments in the calculation of your credit score.
Experian Boost®
On Experian’s secure site
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Cost
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Average credit score increase
13 points, though results vary
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Credit report affected
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Credit scoring model used
Results will vary. See website for details.
However, the use of alternative data could come with drawbacks. Just as homeowners are prone to falling behind on mortgage payments during a recession, renters are too. If credit bureaus or policymakers aren’t careful, including alternative data could end up hurting the people that it’s supposed to help the most.
Another proposed solution is using cash-flow data from people’s bank accounts for underwriting, yet more research is still needed.
“Credit underwriting with cash-flow data involves using financial data insights from a bank account or other types of transaction accounts to evaluate consumers and small businesses for credit,” says Melissa Koide, CEO of FinRegLab.
FinRegLab looked at data from six non-bank financial services providers, such as Petal and Kabbage, and found that cash flow data for underwriting worked as well as traditional credit scores, and primarily benefited borrowers who were credit invisible or who had poor credit scores.
And of course, while the credit reporting system is error-free for the majority of people, many still have mistakes on their reports that could affect their credit scores, according to Aaron Klein, senior fellow in Economic Studies at the Brookings Institution.
How to check your credit score for free
A recent survey done by Consumer Reports found that more than one-third of people who checked their credit report found an error, the majority of which were related to an individual’s personal information, such as an incorrect name or address. This leaves consumers with the responsibility of checking their credit reports and scores for errors.
Credit reports became available to consumers for free in 2003. People can access one free credit report from each of the main credit bureaus once a year through annualcreditreport.com, which is authorized by federal law.
Consumers can also check their credit scores for free throughout the year using resources provided through credit card issuers. For example, people can use Chase Credit Journey or CreditWise from Capital One to find out their VantageScore® 3.0 credit score, even if they don’t have any credit cards.
Chase Credit Journey
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Cost
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Credit bureaus monitored
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Credit scoring model used
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Dark web scan
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Identity theft insurance
CreditWise® from Capital One
Information about CreditWise has been collected independently by Select and has not been reviewed or provided by Capital One prior to publication.
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Cost
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Credit bureaus monitored
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Credit scoring model used
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Dark web scan
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Identity insurance
Getting your FICO score can be a bit trickier. People can access it through Experian or a lender that partners with FICO. If you want to get it through a card issuer, you’ll need to be a Discover member in order to use Discover Credit Scorecard which provides free FICO scores.
And in Washington, there’s been some political appetite for reform but not enough for change.
Congresswoman Ayanna Pressley (D-MA) has spearheaded The Comprehensive CREDIT Act of 2021 which would reform the dispute process for mistakes on credit reports and would require that credit reporting agencies provide a free score to consumers once a year.
Bottom line
Credit scores provide an easy way for lenders to determine whether a borrower is creditworthy. However, the credit scoring and reporting systems can function imperfectly, leaving many of the most marginalized without credit scores or with poor credit scores. This can harm people’s ability to gain access to credit.
While there’s no consensus on how credit reporting and scoring can be more inclusive, some have proposed using alternative data or cash-flow data to underwrite decisions. Furthermore, policymakers have been considering how to make it easier for people to access their credit scores and resolve mistakes on their credit reports.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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