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BlockFi Bankruptcy; Progress on Zelle Fraud; FICO Price Hikes

By Cole Gottlieb

December 4, 2022

Happy Sunday,

Pace of rate hikes likely to slow. Government agencies defend MLA rights. BlockFi declares bankruptcy. A rare bright spot for crypto. Progress on Zelle fraud. FICO raising mortgage score prices. BNPL faces holiday test. Neobanks still getting funded.

In case you missed it, we released our Q3 Consumer Lending Review this past week.

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Pace of Rate Hikes Likely to Slow

Despite recent news of layoffs in high-profile sectors like tech and banking, the labor market is still robust. Fed Chair Jerome Powell argues that the tight labor market must slow down in order to combat persistently high inflation and to reach the 2% target. However, Powell indicated the Fed will slow its pace of rate increases, with the next increase expected to 50 bps instead of 75 bps. Don’t get too excited. Powell says we still have “a long way to go” in restoring price stability.

Meanwhile, there are signs hiring is slowing. ADP’s private payroll report showed just 127,000 jobs added in November, significantly below the 190,000 estimate. November’s report was also a significant drop from the 239,000 jobs added in October.

In a warning of the potential for recession, the yield curve inversion reached a new extreme. Yields on 10-year Treasuries dropped to 0.78 percentage points below the two-year, which is the largest gap since late 1981.

Image: Wall Street Journal

Finally, in a bright spot, holiday sales have been brisk. Black Friday online sales were up 2.3% year over year, hitting a new record of over $9Bn (though it’s not clear if the figure is inflation adjusted!).

Government Agencies File Amicus Brief Defending MLA Rights

The CFPB and FTC filed an amicus brief in the 11th Circuit Court of Appeals seeking to defend servicemembers’ rights under the Military Lending Act. In the case in question, the plaintiff alleges their rights under MLA were violated because the defendant misrepresented the interest rate and required mandatory arbitration on financing related to a timeshare agreement, which is prohibited under the MLA. However, the case was dismissed in district court, with the judge ruling the plaintiff could not demonstrate actual harm and thus did not have standing.

In their amicus brief, the CFPB and FTC warned of the risks of accepting the district judge’s standard, arguing it would make it difficult or impossible for members of the military to make claims under the MLA in many situations.

Neobanks Still Getting Funded

Neobanks are dead; long live neobanks? While many investors have pulled back from consumer fintech in favor of fintech “infrastructure,” enterprise, and B2B, some consumer-focused startups are still getting funded.

Totem, a challenger bank for Native Americans, raised $2.2Mn in pre-seed funding. The round was led by Raven Indigenous Capital Partners with participation from Alloy Alchemist Fund, Debut Capital, Ruthless for Good, and the Candide Group. The company says the funding will go towards hiring staff and building its app from scratch.

Greenwood, a neobank for Black and Latino individuals and businesses, raised an additional $45Mn in funding. The round was led by Pendulum with participation from Cercano Management, Cohen Circle, The George Kaiser Family Foundation, NextEra Energy, Bank of America, Citi Ventures, PNC, Popular, Truist Ventures, TTV Capital, and Wells Fargo. Greenwood says it will use the funds to expand its operations, its reach, and to extend the actual product offerings and capabilities.

Greenwood also announced the launch of Elevate. The new membership program includes a membership network, physical “clubhouses” in Atlanta, Washington, D.C., and Los Angeles, and access to a professional networking service.

Contagion Spreads as BlockFi Enters Bankruptcy

Last Monday, crypto lender BlockFi announced that it officially filed for Chapter 11 bankruptcy as the FTX contagion continues. The crypto lender had halted withdrawals and limited activity on its platform last month, driven by its “significant exposure” to FTX.

When Alameda research, an FTX affiliated trading firm, collapsed last month, it also defaulted on an $680Mn loan owed to BlockFi. According to the bankruptcy filing, BlockFi’s top 10 creditors alone are owed close to $1.2Bn. The firm owes $729Mn to Ankura Trust Company and an outstanding $30Mn towards a settlement with the SEC. Bankruptcy gives the company a chance to structure a repayment plan for creditors and recover what it can from FTX.

BlockFi was on shaky ground prior to FTX’s collapse. It had to be bailed out earlier this year after facing a liquidity crunch as crypto prices cratered in the wake of the collapse of the TerraLuna “stablecoin,” crypto lender Celsius, and crypto hedge fund Three Arrows Capital.

BlockFi is seeking to distinguish its bankruptcy from that of FTX’s, which lacked basic or reliable information on the company’s assets and how it would restructure its debt. According to BlockFi’s bankruptcy advisors, its financial information looks trustworthy and the company will remain as transparent as possible. The company’s restructuring plan will focus on returning the cash, crypto, and other assets it has to its customers.

A Rare Bright Spot for Crypto

Despite the months of drama in the digital currency space, crypto remained the largest investment sector in 2022, outpacing fintech and biotech. According to a recent report from Pitchbook, Web3 and DeFi are leading in funding activity in the venture capital arena for the year.

However, investment in emerging technologies fell once again for the third consecutive quarter. Investment in crypto during Q3 was $879Mn, the lowest since 2021, and totalled $6.5Bn invested over the past 12 months. Mysten Labs and Aptos Labs raised value at $300Mn and $200Mn respectively which were two of the largest deals in the quarter.

Progress on Zelle Fraud Reimbursements

JPMorgan, Wells Fargo, and Bank of America are among banks in discussions to develop rules for reimbursing customers who are victims of Zelle fraud. Currently, there are few protections for users who lose money on Zelle transactions, as they are usually tricked into making them themselves. Banks argue this means the transactions are not “unauthorized” and thus not fraud. Banks hope that adding specific policies to address fraud and scams on the platform can help preserve users’ trust in Zelle.

Under the current plan, if banks determine a user was in fact tricked into sending money, the bank that houses the receiving account would be responsible for returning the money and the user would be refunded. The policies are currently being tested to make sure they do not encourage a fresh set of scams. Once QA’d, the changes should roll out more broadly early next year.

FICO Raising Mortgage Score Prices As Much As 400%

Last week, the National Consumer Reporting Association sent a memo saying that the “vast majority” of their mortgage lenders will incur a 400% price increase starting January 1st, 2023. The price increases will vary by tier. Tier 1, comprised of 46 lenders, will see its price increase by 10%. Tier 2, which includes just 6 lenders, will see its price increase by 200%. And Tier 3, consistenting of all other lenders, will face a 400% price rise. The list containing the lenders and respective levels is not accessible by the public. The tiers are primarily based on volume.

Currently, FICO charges 60 cents per score to all mortgage lenders regardless of their size and volume of business.  A FICO statement said total increase for any tri-merge report will not be more than $6 for most lenders.

BNPL Faces Holiday Season Test

This holiday season may turn out to be a make or break one for BNPL providers. On the one hand, there’s good news. Use of BNPL to pay for transactions during the Black Friday shopping holiday rose 78% vs. the prior week.

On the other hand, BNPL lenders shouldn’t celebrate until customers actually pay them back. Many credit card issuers have said they’re tightening underwriting in response to rising delinquencies. This could be pushing borrowers to use BNPL instead. Combined with continuing inflation and rising interest rates, BNPL providers may be leaning into growth at the riskiest part of the cycle.

In the News:

Fed’s Williams Says Inflation Fight Could Last Into 2024 (Wall Street Journal, 11/28/2022) The President of the Federal Reserve Bank of NY says he expects inflation pressures to recede over the next year but that there is still more work to do.

Banks, Fintechs Both Want More Transparency for Fed Master Accounts(American Banker, 11/23/2022) Some argue that clear criteria could help new entrants with novel business models.

Bahamian Attorney General Defends Handling of FTX Collapse (Wall Street Journal, 11/27/2022) The AG’s statements come after FTX's new CEO and lawyers in U.S. Bankruptcy Court questioned whether Bahamian regulators had the authority to take control of the local FTX's subsidiary's assets.

Early Alameda Staffers Quit After Battling Sam Bankman-Fried Over Risk, Compliance Concerns (Wall Street Journal, 11/30/2022) Some staffers (including Alameda co-founder Tara Mac Aulay) left in 2018, saying it was due to concerns over risk management and business ethics.

On Affinity-Focused Fintechs, the Future of BNPL and More (TechCrunch+, 11/28/2022) An interview with the co-founders of VC firm Fiat Ventures and sister arm Fiat Growth.

Zilch Latest BNPL Firm to Lay Off Staff (PYMNTS, 11/29/2022) Zilch is reported to cut over 10% of its workforce.

Brazil Passes Law to Legalize Crypto as a Payment Method(CoinTelegraph, 11/30/2022) The law was approved by the Chamber of Deputies of Brazil but still requires the approval of the executive branch.

Lighter Fare:

The Existential Pleasures of Trying to Drop an Egg from Space (Boing Boing,11/28/2022) Follow YouTube engineer Mark Rober, Joe Bernard of, and a team of others’ 3-year journey to launch an egg into space and safely land it back to Earth.