♨️ Sezzle Applies to Become a Real Bank. American Express Raises Its Guidance Again. Nasdaq Posts Record Index Inflows.

0:00So, if you really want to understand how a business survives the long haul, you know, you shouldn't just be staring at a balance sheet. you should really look at a Formula One race. Oh, absolutely. Right? It's the perfect analogy. Right. Because the teams that actually win championships, like they eventually realize they have to stop renting parts from other people. Yeah, you have to start building your own cars if you want to win. Exactly. And when you look at the filings we're dissecting today, you see modern financial companies facing that exact same brutal reality. Like we're looking at three companies today at completely different stages of deciding when to stop renting their infrastructure and start building it.

0:35Right. And it's a fascinating mix. It is. I mean, we have Sezzle, right, frantically trying to build a bank from scratch. We have a legacy player, American Express, executing some really heavy structural engineering to optimize its legacy engine. And then we have NASDAQ, a company that just decided racing is entirely too stressful. So they just bought the track. Exactly. They bought the track. So for you listening, we're going on a deep dive today into these source materials to figure out how these financial giants are securing their dominance. And, you know, it is a critical transition to study because this isn't just some abstract exercise in corporate strategy.

1:10Right. The underlying mechanics of how these companies fund themselves, it dictates the shifting machinery of consumer finance. Yeah, it hits everybody. It really does. Like when a buy now, pay later app decides it needs to become a federally regulated bank or when a massive credit card issuer starts tweaking its loan loss reserves just to hit earnings targets. Which we will definitely get into. Right. Right. The ripple effects from that directly dictate the cost of capital. I mean, that translates into the interest rates on your savings account, the credit limits you get approved for, and, well, the fees baked into the apps on your phone.

1:46Okay, let's unpack this by starting with the company trying to escape the rental market entirely. We're looking at Sezzle, right? A buy now, pay later platform based in Minneapolis. Yeah, a classic BNPL player. Right. And according to the filings in our sources, they just made a massive pivot. They officially apply to the OCC, the Office of the Comptroller of the Currency, for a national bank charter to create Sezzle Bank N.A. And they are like simultaneously applying to the FDIC for deposit insurance. Which is a huge deal. I mean, this is a fundamental rewiring of their business model. Yeah, they're not just a checkout button anymore.

2:22Exactly. They're attempting to evolve from a transactional payment feature on Emergence checkout page into a full-fledged depository institution. They want to move away from just, you know, breaking your purchases into four installments to directly holding consumer funds through checking and savings accounts. I love how the sources refer to this as the Hannah Montana strategy. It's so accurate, right? It really is. Like, by day, they remain this breezy, frictionless checkout app. But by night, they transform into a heavily regulated, federally supervised bank holding company. The best of both worlds, supposedly.

2:59Supposedly. But the timing of this is what really caught my eye. Because back in August, SEZL CEO Charlie Ewakum actually abandoned their previous plan, which was to secure a Utah industrial loan company charter. And historically, I mean, Utah ILCs were the absolute golden ticket for fintechs, weren't they? Oh, they were. For a long time, the Utah ILC was the ultimate loophole. It allowed a technology or retail company to own a bank and originate loans without the parent company being subjected to the suffocating oversight of the Federal Reserve. Like a traditional bank holding company would be.

3:34Exactly. It was how non-financial firms basically got a foothold in banking. But, you know, that window has essentially slammed shut. Yeah, the regulators caught on. They did. The FDIC has shown extreme reluctance in recent years to approve new ILCs. It's created this massive backlog. So SESL realized they were just waiting in a line that wasn't moving, and they pivoted to a full OCC charter. But the filings indicate there's a much more immediate threat pushing them toward this federal charter. Yeah, the state regulators. Exactly. The state-level regulatory squeeze. The sources specifically highlight this aggressive new buy-now-pay-later legislation advancing in New York, Illinois, and Oregon.

4:15And that is the real catalyst here. for years. BNPL platforms basically operated in a regulatory gray area. Because they weren't technically charging interest, right? Right. Because they typically didn't charge explicit interest on those pay-in-for products. They argued they weren't extending credit under traditional banking definitions. But the states are finally waking up and closing that gap. Yeah. New York is not playing around. Not at all. New York is demanding strict licensing, capping late fees, mandating rigorous consumer disclosures. And Oregon and Illinois, you know, they're following suit with their own consumer protection frameworks.

4:51Which completely destroys the unit economics of a tech platform. Like if you're a national software company operating on a single unified code base, you cannot afford to manually adjust your underwriting algorithms to comply with 50 different state regulators. It's impossible to scale. Right. So by securing a national bank charter with the OCC, Settle gets federal preemption. They basically trade 50 separate state bosses for one overarching federal regulator. Which allows them to standardize their product nationwide. Federal preemption is the prize here. But the market's reaction to the strategy tells a very different story about the cost of that prize.

5:28Yes. OK, that is the glaring contradiction in the source material that I wanted to ask about. So Settle announced a Q2 revenue jump of 52 percent, hitting around$150 million. Which is huge. On the surface, that is explosive growth. Yet on the exact same day they announced those numbers, the stock plummeted 34%. A total nosedive. Yeah. I mean, the text notes their forward guidance underwhelmed investors. But wait, a 34 % haircut on a day you post 52 % top-line growth? That's a bloodbath. It feels like the market is pricing in something much darker than just a modest guidance raise. Well, the market is pricing in the reality of the regulatory dead zone, you know?

6:05The stock market is a forward-looking discounting mechanism. Right. They don't care about what you did yesterday. Exactly. That 52 % revenue growth is in the rearview mirror. They achieve that under their current relatively light regulatory burden. The 34 % drop reflects Wall Street looking at the timeline for an OCC and FDIC approval process. Which takes forever. You are looking at 12 to 18 months of regulatory purgatory. Right. I mean, they aren't going to just launch a SEZL checking account tomorrow. They have to survive until like the fall of 2027 just to get the keys to the bank. And during those 18 months, their compliance costs are going to skyrocket.

6:46They have to build out the infrastructure required to pass OCC muster, all while continuing to fight those state-by-state skirmishes they're trying to escape in the first place. So they're fighting a two-front war. Basically. Wall Street is looking at that timeline and asking, you know, can your core BNPL business generate enough cash to fund this 18-month transition? Especially considering how jammed the BNPL to bank pipeline is right now. Like the filings point out that a firm has an active application for a Nevada ILC and PayPal is pushing for a Utah ILC. Everyone is rushing the gates. Yeah.

7:21Everyone in the space has simultaneously realized that the ultimate moat isn't the transaction itself. It's holding the cheap, sticky consumer deposits that fund the loans. Because in a 5 % interest rate environment, the cost of capital dictates everything. Right. When interest rates were near zero, these fintechs could fund their loan books with incredibly cheap institutional debt. Now that wholesale funding is expensive, the only way to maintain their margins is to secure retail deposits. They need you to park your paycheck with them. Which brings us to a really fascinating contrast because Sezzle is, you know, willingly walking into an 18-month regulatory nightmare just to get their hands on those consumer deposits.

8:00But when you look at our next source, American Express, you see that even if you already have the deposits and the legacy and this wealthy consumer base, you still have to execute massive structural engineering just to keep the machine moving. Oh, the established giants have an entirely different set of pressures. They aren't trying to build the engine from scratch. They're trying to prove to Wall Street that their 170-year-old engine can still accelerate. And looking at American Express's Q3 numbers, I mean, they certainly want you to think it's accelerating. Record revenue of$20.1 billion, which is up 9 % year over year.

8:33Massive numbers. Build Business hit$454 billion. And they reported an adjusted earnings per share of$4.68, which was up 13 % and easily beat the consensus estimate. But if you dig into the mechanics of how they arrived at that EPS beat, it is heavily engineered. Very heavily. Like this wasn't driven by raw consumer spending growth. What's fascinating here is that the top line is solid, sure, but the bottom line beat requires a lot of context. When you look at the mechanics of their income statement, you see a company pulling very specific levers to maintain shareholder return in a tightening macroeconomic environment.

9:15Yeah, I noticed three specific levers in the filings that I want to run past you. Go for it. First, their provisions fell from$1.3 billion down to$1.0 billion because they executed a massive reserve release. Right. They essentially took$300 million in loan loss reserves, capital they had previously locked away to cover bad debt, and they just released it straight back onto the income statement to boost net income. That's the first lever, yeah. Then second, their effective tax rate dropped significantly from 24.1 % down to 18.1%. And third, they shrunk their outstanding share count by 3 % through buybacks.

9:52A classic combination. It is. Buying back stock to artificially inflate the earnings per share just feels like, you know, the oldest trick in the legacy bank playbook. So are they just masking a stagnant core business with accounting maneuvers? Well, masking might be too strong a word, but they're certainly optimizing. Okay. Let's look at that reserve release, for instance. You can't just release$300 million back into your earnings arbitrarily. You need actuarial justification. They have to prove the loans are safe. Exactly. Okay. And to their credit, the filings note that their net write-off rate actually slipped to 1.8 % from 1.9%.

10:30Their core consumer base is affluent, and those consumers are continuing to pay their bills on time. OK, so the math supports it. Right. Because their delinquency models improved, accounting rules allow and sometimes even dictate that they release those excess reserves. It makes sense mathematically. I get that. But it still means that a significant chunk of their earnings beat came from reversing a previously recognized expense. Right. Not from new revenue. Exactly. Not from new money coming in the door. It reminds me of like a race car driver who goes to the press after the summer break and says, look at my lap times.

11:05I got significantly faster. Oh, I like this. But when you look closely, they haven't added any horsepower to the engine at all. They just stripped the heavy passenger seat out, removed the air conditioning, and ran the car with a half-empty fuel tank. That's a great way to put it. It's an optimization of existing parts, sure, but it isn't structural growth. That is the perfect distinction. Optimization versus new horsepower. And, you know, Amex's leadership knows they cannot rely on reserve releases and tax rate drops indefinitely. You eventually run out of seats to strip out of the car. Exactly.

11:39Which is why the filings also detail their aggressive push deeper into the exact same territory Sezzle is fighting for, which is sticky deposits. Right. The text highlights that Amex just launched a new business savings account alongside a new strategic partnership with Airbnb. They're attacking the deposit problem from the opposite end of the spectrum. Like, Sezzle has captured the young, digitally native demographic and is building a bank to capture their initial deposits. And Amex already has the high net worth spenders. Right, the established spenders. And they are expanding their depository products to capture a larger share of that existing wealth.

12:16So whether you're a volatile BNPL startup or a blue chip credit card giant, the terminal goal is exactly the same. Securing a massive, stable pile of cheap retail funding. Exactly. The war for those deposits is just absolutely brutal. I mean, you have Sezzle enduring a 34 % market cap wipeout just to enter the arena. And Amex is over here engineering its balance sheet to stay dominant. But what if you don't want to fight in that arena at all? Right. Like, what if you realize that the war for deposits is just a low margin bloodbath and you decide to just tax the participants instead? Now you're talking about structural monopolies.

12:57Exactly. Here's where it gets really interesting. Let's look at NASDAQ. Oh, the numbers here are wild. The numbers in these filings are staggering. NASDAQ pulled in a record$49 billion of net inflows just in the third quarter alone. Unbelievable. Over the trailing 12 months, they've captured$141 billion. Their Q3 net revenue was up 13 % to$1.5 billion. You know, most people hear NASDAQ, and their mind immediately goes to the physical stock exchange founded in 1971. Sure, the ticker tape, opening bell. Exactly. But these filings reveal a company that has fundamentally transformed its underlying economics.

13:33They are essentially a massive enterprise software company now. Precisely. Historically, exchanges relied on transaction-based revenue. You get paid a tiny fraction of a cent every time a share trades hands. Right. But transaction revenue is highly cyclical. It dries up when market volatility drops or, you know, when the IPO market freezes. NASDAQ realized that the real multiple in modern finance comes from annual recurring revenue, ARR. And the breakdown in the sources shows just how far they've pivoted. Software as a service, SaaS, now makes up 38 % of their total ARR. Almost 40 % of their recurring revenue is just selling software subscriptions.

14:13It's a huge shift. And their fintech ARR specifically grew by 18 % year over year. They basically used their dominant position as an exchange to fund their transition into a SaaS monopoly. And they do still dominate that core exchange business, by the way. Oh, for sure. The sources note they welcomed 15 new listings this quarter that raised$32 billion. They captured eight of the 10 largest operating company IPOs. Wow. So they own the most prestigious track in the world, and they charge a premium to race on it. But the software side is where the true brilliance of their model lies. Wait, looking at these NASDAQ filings alongside Sezzle's OCC application, this is incredible.

14:53Yeah, you see the connection. I do. So Sezzle is applying for a national bank charter. If they get approved, the OCC legally mandates that they implement an incredibly rigorous BSA AML compliance program. Bank Secrecy Act and anti-money laundering. Exactly. They have to monitor millions of transactions to flag terrorist financing or money laundering. It is an incredibly complex, compute-heavy regulatory requirement. And NASDAQ's Verifin unit sells that exact cloud-based compliance software to banks. And if we connect this to the bigger picture, it is the ultimate picks and shovels play. It is.

15:30I mean, Sezzle is killing itself to become a bank. They're fighting state attorneys general. They're enduring stock crashes and waiting 18 months in regulatory purgatory. And if they finally cross that finish line and get their charter, their immediate reward is that they have to write a massive recurring check to NASDAQ every single year for Verifin compliance software. And that is why NASDAQ's FinTech ARR is growing at 18%. You know, Verifin isn't just a basic compliance checklist. Right. It's advanced software. It utilizes massive data sets across thousands of financial institutions to train its fraud detection models.

16:06It benefits from intense network effects. Oh, so the more banks that use it, the better it gets. Exactly. If Verifin flags a new type of money laundering scheme at, say, a regional bank in Ohio, the software instantly updates to protect a newly chartered fintech bank in Minneapolis. Like Sezzle. Like Sezzle. Because the regulatory burden on banks is only going in one direction, which is up. The demand for NASDAQ's compliance software is completely inelastic. They don't have to care if Sezzle successfully disrupts Amex or if Amex crushes the BNPL upstarts. No matter who wins the war for consumer deposits, the victor is legally mandated to buy the safety equipment from NASDAQ.

16:44It's a beautiful business model. It is. When you lay all three of these strategies out, it provides a very clear map of the current financial ecosystem. Yeah, it really does. You have the builders, like Sezzle, taking on massive short-term existential risk to build a regulatory moat from scratch. You have the optimizers, like Amex, pulling sophisticated accounting and product levers to defend a massive legacy position. And then you have NASDAQ. Right. The infrastructure owners, who have abstracted themselves away from the risk of consumer lending entirely to just focus on toll collection. So, what does this all mean?

17:18It's the difference between trying to win the championship and simply owning the pavement the cars drive on. It is. But, you know, there is a massive secondary consequence to that infrastructure play that I don't think the market is fully pricing in yet. Oh, like what? Well, think about it. If this BNPL to bank pipeline continues to jam up, if Sezzle, Affirm, PayPal, and dozens of other fintechs successfully transition into chartered banks, they are all going to rely on the exact same third-party software for compliance. Oh, wow. If every regional bank and newly minted fintech uses Nasdaq's Verifin to satisfy their BSA AML requirements, Nasdaq isn't just a software vendor anymore.

18:00They become a single point of failure. Exactly. They've become a single point of failure for the entire United States banking system's security architecture. Wow. We spend so much time analyzing bank capitalization and, you know, deposit flight, but if a single line of code in one vendor software misses a vulnerability... It compromises the anti-money laundering defenses of thousands of institutions simultaneously. That is terrifying. Regulators are obsessed with the capital requirements of individual banks. But the real systemic risk might actually be vendor concentration. As these financial companies stop building their own internal systems and start renting NASDAQ software, the track itself becomes the biggest vulnerability.

18:44That completely flips the script on the infrastructure model. I mean, if you own the track, you are also entirely responsible when the pavement cracks. Precisely. Well, thank you so much for joining us on this deep dive. keep questioning the filings look closely at how these companies engineer their earnings and we will catch you next time