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Amex Launches Consumer Checking; Congress Holds Stablecoin Hearing; What’s a “Junk Fee”?

By Cole Gottlieb

February 13, 2022


Inflation is coming in hot. CFPB takes aim at “junk fees.” Fintech-bank partnership landscape is evolving. Congress holds stablecoin hearing. Happy Money is a unicorn. Small banks not interested in BNPL. Amex launches a consumer checking account. BNPL providers face risk on rising rates.

Finally, we’re proud to say Cross River Bank won for best “CryptoFin” at LendIt’s recent industry awards show for demonstrating the best application of crypto technology in traditional finance. Congrats to the entire Cross River team on the win!

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Inflation: Coming In Hot

The numbers are in and they’re… not great. Inflation, as measured by the CPI, jumped at a higher than expected 7.5% annualized rate in January. That’s the fastest rate of price increases since 1982. Expectations of a 0.50% interest rate hike in March increased to 44.3%, according to CME data.

Employment was a bright spot, at least. The U.S. added 467,000 jobs in January, easily beating estimates, which is particularly notable given the Omicron surge.

What’s a Junk Fee?

The CFPB has opened a broad inquiry in fee practices. The CFPB’s release gave specific examples like “service charges” on event tickets or “resort fees” on hotel stays and characterized these as “junk fees.”

Examples of “junk fees” in consumer finance include late fees, NSFs, out-of-network ATM fees, money transfer fees, and inactivity fees, according to the CFPB.

The inquiry and characterization have raised alarm among bankers and lenders. Industry stakeholders argue that fees are already well-regulated by existing legislation, like TILA, and that fees charged relate to specific services or work performed in connection with a product.

Any action the bureau takes would likely fall under its authority to regulate unfair, deceptive, and abused acts and practices (UDAAP).

Fintech-Bank Partnerships Face Contentious Landscape

The topic of bank-fintech partnerships for lending has been a bit out of the spotlight since the repeal of the “true lender” rule early in the Biden administration’s tenure. But just because it’s been overshadowed by other hot topics like crypto, stablecoins, and BNPL, doesn’t mean the wheels aren’t continuing to turn behind the scenes. Recent weeks have seen a number of relevant developments:

Consumer Advocates Ask FDIC to Ban High APR Fintech Loans

Last week, a coalition of consumer advocates, led by the National Community Reinvestment Coalition and the NAACP, sent a letter to the FDIC urging the regulator to crack down on banks facilitating “high-cost predatory lending.” The letter highlighted state-chartered banks that are partnering with non-bank fintech lenders to originate loans in excess of state usury caps. The advocacy groups are urging the FDIC to end what they refer to as “rent-a-bank” schemes.

Elevate Settles with D.C.

Elevate is an example of the type of arrangement consumer advocates are asking the FDIC to help end. Elevate partners with Republic Bank & Trust and FinWise to offer its Elastic and Elevate lending products, respectively.

But consumer advocates aren’t the only group unhappy with this type of fintech-bank partnerships. The Washington D.C. attorney general has sued multiple fintech lenders for allegedly violating D.C.’s 24% usury cap. Elevate, the most recent target, agreed to settle the case for $3.75 Mn and to cease offering loans above 24% APR in Washington D.C.

OCC Prevails in State AGs Challenge to “Valid When Made”

In better news for the bank-fintech lending model, the OCC prevailed in a challenge brought by state AGs to its “valid when made” rule. The U.S. District Court for Northern California dismissed the state AGs complaint that the OCC had violated the Administrative Procedures Act by, among other things, failing to take into account that the rule would “inevitably” be used to facilitate “predatory rent-a-bank” schemes.

Lawmakers Disinclined to Limit Stablecoins to Banks

The House Financial Services Committee met last week to discuss the President’s Working Group report on the potential risks of stablecoins and other digital assets. Committee members expressed skepticism in that report: that stablecoin issuance be limited to federally insured banks. One line of argument from committee members was that limiting issuance to insured banks would limit competition and, potentially, negatively impact access and inclusion.

When asked if technology companies like Facebook should be able to issue stablecoins, Treasury Department under secretary for domestic finance Nellie Liang, testifying on behalf of the Biden administration, pointed to the historic separation of banking and commerce in the U.S., and stated that stablecoins “should not be issued by a technology firm.” 

Happy Money Valued at $1.1 Billion

Happy Money, a lending platform that works with credit unions to originate loans, announced it has raised a fresh $50 Mn in equity funding. The company’s Series D-1 fundraise brings its valuation to $1.1 Bn – edging into “unicorn” territory.

Like other non-bank lenders, Happy Money saw a brisk rebound in lending in the back half of 2021. The company had a “record breaking” 2021 and has seen an average of 42% year over year growth in originations from 2018 to 2021.

Small Banks: Thanks, But No Thanks on BNPL

Small banks just aren’t that into BNPL. According to American Banker, about eight in 10 community bank execs expressed “little or no interest” in offering BNPL-style loans. A scant 2% of respondents said they currently offer or plan to offer BNPL:

Image: American Banker

Amex Launches First Consumer Checking Account

Last week, American Express rolled out its first consumer checking account and debit card. The launch is the first consumer debit card the company, best known for its premium charge- and credit-card products, will offer.

The account will boast a 0.50% APY interest rate and allow cardholders to earn 1 Membership Rewards point for each $2 spent on the accompanying debit card. The launch is designed to fill a product gap and to appeal to millennials and Gen Z, who have historically favored debit cards and novel credit products, like BNPL.

BNPLs Face Risks on Rising Rates

As mentioned at the top of this newsletter, inflation came in at a whopping annualized 7.5% in January. Accompanying rising inflation is the expectation of potentially faster increases in interest rates.

Higher rates may hurt BNPL providers. Companies that offer the popular pay-in-four plans typically finance their lending by issuing bonds and short-term commercial paper. Rising rates are likely to increase their cost of borrowing. But, with a 0% interest product, passing along cost increases to consumers is easier said than done.

What about the merchants? They’re generally the ones footing the bill for BNPL, in the form of merchant discount rate paid to the BNPL providers. Increasing costs on merchants is likely to be a challenge too. As competition has increased, MDRs have already begun compressing – something that isn’t likely to be changed by higher interest rates.

Affirm Arrives Early, Fiserv Announces Acquisition of Finxact

This week in earnings, we gained insight into recent acquisitions, updated guidance, and future tech strategies. 

Affirm made headlines when an employee slipped up and accidentally tweeted out a portion of earnings results midday Thursday. Initially, the stock gained over 10%, as the tweet had indicated a revenue beat. However, once full results dropped, with a greater than expected earnings loss, the stock tanked, ending the day down (21.4)%. 

Fiserv underperformed on earnings, down (6.0)%, while Jack Henry and Curo rose on earnings (+3.5% and +2.4%, respectively), before giving back those gains in the following day of trading.

Source: PeerIQ

Despite falling over (20)%, Affirm posted impressive GMV growth, growing 115% YoY or 64% QoQ, to $4.6Bn. Affirm processed 1.6% of all U.S. online transaction volume for the Black Friday to Cyber Monday period, highlighting the rapid adoption of BNPL by consumers, while showing there is still plenty of room for growth. Active merchant growth exploded, up to 168k from ~8k a year prior “driven primarily by the adoption of Shop Pay Installments by merchants on Shopify's platform.

While some have raised concerns over BNPL’s business model amidst rising interest rates, Max Levchin and the Affirm team are choosing to view this as a potential opportunity, emphasizing that their product can become even more attractive to consumers compared to credit cards, which often have variable rates.

Fiserv announced that it will acquire Finxact, in a move to broaden its solutions to include large financial institutions, fintechs, BaaS, and embedded finance opportunities. Finxact develops cloud-native digital banking solutions and should help Fiserv bring innovative tech to community banks and credit unions. 

Curo Group closed its acquisition of consumer finance company Heights Finance on December 27th, a move that helps to diversify its products offered and customer mix. Heights Finance provides secured and unsecured installment loans to near- and non-prime consumers. The average consumer that takes out a loan on Heights Finance is more financially stable than the average Curo consumer, with a FICO score 40-50 points higher and an income of 10k-12k higher.

Curo also provided an update on its new credit card program, First Phase, that it launched at the end of the year. It plans to begin rolling out the Visa-branded card to non-prime U.S. consumers shortly.

Jack Henry announced plans to develop a single cloud-native, modern open-banking platform to provide easy access to Jack Henry and third party fintech solutions. The four stated steps to their tech modernization strategy include: redefining the core processing system, providing multiple integration options supported by our open philosophy and tech, delivering industry-leading capabilities across a single next-gen platform, and operating as more of a core processor.

In The News:

Treasury Official Behind Stablecoin Report to Testify at Senate Hearing Next Week (The Block, 2/8/2022) Nellie Liang will be the sole witness for the February 15 hearing on stablecoins.

Acting FDIC Chief Signals Shifts on Climate Risk, Merger Review, Crypto (American Banker, 2/8/2022) Martin Gruenberg outlined the FDIC’s policymaking priorities, which included items like the completion of reforms tied to the CRA, reforms of the bank-merger policy, and completing the implementation of Basel III regulatory framework.

GoCardless Joins Unicorn Club After Sealing $312m Funding Round (altfi, 2/9/2022) Permira, who previously backed Klarna, led the Series G funding round.

The Road Ahead for Meta’s Diem Under Silvergate Bank’s Ownership (American Banker, 2/7/2022) With the purchase of Diem’s tech assets, the Diem token is now in the control of a regulated bank.

Nubank Focusing Sharply on Banking the Underbanked Despite Share Softening (LendIt Fintech, 2/8/2022) The Brazilian fintech has seen its market value drop ~40% from its December valuation.

M&T Bank Cuts Overdraft Fee to $15, Scraps Other Charges (American Banker, 2/8/2022) M&T is the latest financial institution to restructure its overdraft fees in response to competition from challenger banks and regulatory scrutiny.

FDIC Researchers say Tech-Savvy Banks Outperformed on PPP Loans (American Banker, 2/8/2022) Banks with greater tech adoption made more PPP loans, gaining more customers outside their usual market, than similarly sized competitors with less tech adoption.

Apple Confirms Launch of Tap to Pay on iPhone (Finextra, 2/8/2022) Merchants will be able to accept Apple Pay and contactless payments with just their iPhones, without needing any additional hardware.

Lighter Fare:

Four Years Ago, Elon Musk Sent a Tesla to Space. What Happened to it? (ZME Science, 2/9/2022) The Roadster has gone on a journey of over 2 billion miles.