Back Cross River Intelligence Archives

CreditKarma Fined $3Mn; HELOCs Are Back; Mesh Payments Series C

By Cole Gottlieb

September 11, 2022

Greetings,

As prices rise, more Americans are eating at home. Markets anticipate another 0.75 rate hike later this month. Fed officials insist higher rates will beat back inflation. Regulatory scrutiny of bank/fintech partnerships heats up. CreditKarma fined on “pre-approved” claims. Mesh Payments raises a Series C. HELOCs are back. Zelle’s rapid growth. SoLo Funds hits a $100Mn milestone.

New here? Subscribe here to get our newsletter each Sunday.

As Prices (and Rates) Rise, Fewer Americans Dine Out
Fewer Americans are eating out. In what could be a sign of inflation continuing to bite, the share of consumers eating out has dropped from 73% in May to 70% in July. Middle-income consumers cut back the most, with the proportion spending at restaurants dropping from 78% to 73%.

Meanwhile, the Fed is on track to continue hiking rates. Consensus is now for another 0.75 point rate hike at the Fed’s meeting later this month. It would be the third hike of that size. Fed Vice Chair Lael Brainard said the rate hikes will work to bring down inflation. She emphasized the risk of pulling back too soon and the need to prevent consumers and businesses from forming expectations that inflation will continue at elevated rates.

The Cleveland Fed’s President generally concurs. Pres. Mester expects rates to hit “somewhat above” 4% by next year, though she is optimistic the U.S. economy can avoid recession on the back of its exceptionally strong labor market.

Regulatory Focus on Fintech/Bank Partnerships Ramps Up

There have been signs for some time from federal banking regulators, including the OCC and the CFPB, of increasing scrutiny of how banks partner with fintechs to deliver services to end users.

Now, Blue Ridge Bank has publicly disclosed an agreement it reached with the OCC regarding its third-party fintech partnerships. Blue Ridge both works directly with fintech partners and through “banking-as-a-service” platform Unit.

The agreement touches on a number of areas, including how Blue Ridge selects what fintechs to work with, its third-party risk management framework, and how it ensures partners meet BSA/AML requirements, among other things. The agreement is notable for its requirement that Blue Ridge seek the OCC’s “non-objection” before onboarding new fintech partners or offering new products or services through existing partners.

CreditKarma Fined $3Mn for “Pre-Approved” Claims

The FTC has fined free credit score and offer aggregator site CreditKarma $3Mn for a feature on its site that told users they were “pre-approved” for credit products when they were not. The site, owned by Intuit, also told some users they had a 90% likelihood of being approved, but nearly a third of users who applied were ultimately declined, the FTC alleges.

CreditKarma’s settlement neither admits nor denies wrongdoing. After the settlement was released, CreditKarma made a statement vigorously contesting the FTC’s allegations and stating the company settled to avoid disruption “to its mission.” The company says it no longer uses the marketing terms cited in the FTC complaint.

The FTC complaint is also notable for describing CreditKarma’s use of A/B testing, a standard web design tool across all industries, as facilitating “dark patterns” designed to ‘trick’ consumers.

Mesh Payments Raises $60Mn Series C

Mesh Payments, a finance automation platform, announced it has raised a fresh $60Mn in funding. The Series C round was led by Alpha Wave with participation from Tiger Global, TLV Partners, Entreé Capital, and Meron Capital.

Mesh’s product is competing in the increasingly crowded corporate spend and expense management space. Its platform enables companies to “automate, control, and optimize” their corporate spend, according to the company. Companies as varied as Ramp, Brex, and Bill.com compete to some extent with what Mesh Payments is offering.

The new funding will be used to continue expanding the product and for continuing growth and customer acquisition.

HELOCs Are Back

Rising interest rates have put a damper on consumers taking cash out of their homes via cash-out mortgage refis. But that doesn’t seem to have cooled demand for homeowners who are looking for liquidity. Instead, they’re turning to an old favorite: home equity lines of credit.

In the first five months of 2022, lenders originated some $100Bn in HELOCs, which is a nearly 50% increase from the same period last year. Analysts suggest that further increases in HELOC volume are likely as mortgage rates continue increasing. Rates hit 5.5% last month.

Banks have historically dominated the HELOC space. But this time around, more non-bank lenders are trying to get in on the action. Rocket Mortgage, loanDepot, and Guaranteed Rate all now offer HELOC lending products.

Last Year, Zelle Processed Double The Volume of Payments of Cash App and Venmo Combined

Who needs a first mover advantage anyway?

Zelle launched just five years ago, in 2017. That’s eight years after P2P trailblazer Venmo and four years after Cash App. Despite the late start, Zelle processed a whopping $490Bn in transactions in 2021, which amounts to double Venmo ($230Bn) and Cash App ($15Bn) combined.

What accounts for Zelle’s rapid growth? One key ingredient: distribution. Zelle is run by Early Warning Services, which, in turn, is owned by seven of the country’s largest banks. Zelle became a standard feature on many consumers’ bank accounts, appearing in mobile apps they already had – no download required. Zelle’s footprint of 1,700 banks and credit unions equates to coverage of 79% of all checking accounts.

Business payments have been another driver of growing payment volume. Some retailers and service providers have leaned in to Zelle as a payment option for their customers, as it allows them to avoid credit card processing fees that eat into margins. Zelle is also making inroads for B2B payments, a segment where paying by physical check is still quite common.

Still, there are some headwinds facing the P2P service. Fraud across all P2P payment services increased dramatically during the pandemic, but Congress and regulators have paid particular attention to Zelle, given it is bank-owned and integrated into banks’ websites and apps. Experts anticipate some kind of regulatory action from the CFPB to clarify liability for fraud on these types of services, which could increase banks’ costs to operate the service.

SoLo Funds Hits $100Mn Originations Milestone

SoLo Funds, which facilitates peer-to-peer lending of small amounts, has hit a $100Mn milestone. The company says its 700,000+ users have now borrowed over that amount on its platform.

While an impressive feat, the company faces legal headwinds. The model is conceptually similar to what LendingClub and Prosper pioneered a decade ago. But SoLo itself doesn’t register the loans as securities nor does it hold lending licenses, which attracted the scrutiny of Connecticut’s banking regulator. The state’s banking commissioner imposed a cease and desist order on the company, alleging that “tips” on the small loans equated to interest rates as high as 4,280% APR.

The founder said the company is “working through that process.” The company has requested a hearing regarding the banking commissioner’s order, which is scheduled for December.

In the News:

OCC's Hsu says Bank-Fintech Relationships May be a Systemic Risk (American Banker, 9/7/2022) Hsu worries about the “de-integration” of banking services.

Banks' Tech Upgrades Can Hinder Financial Inclusion, Treasury Official Warns (American Banker, 9/6/2022) Bowdler warns that the moves could put up new barriers to minorities and underserved groups.

Regulator says Bankrupt Crypto Lender Celsius Misled Investors (Finextra, 9/7/2022) The Vermont watchdog says Celsuis made "false and misleading claims" about its "financial health and compliance with securities laws".

Banks Get Reprieve as California Emissions Reporting Bill Stalls (American Banker, 9/6/2022) The bill would have required companies that do business in CA and have over $1Bn in revenues to report their own and their suppliers’ greenhouse gas emissions.

California, New York AGs Push Card Companies to Add Firearms Category (American Banker, 9/2/2022) The two AGs wrote letters to the CEOs of Visa, Mastercard, and Amex, saying that the new category code would help law enforcement spot potential red flags.

Block Launches Cash App Pay Beyond the Square Network (Tech Crunch, 9/1/2022) Previously, users could only make payments using Cash App Pay on Square terminals or online Square merchant partners.

A Tough Time for Buy Now/Pay Later Fintechs (American Banker, 9/1/2022) Amidst falling valuations and upticks in delinquencies, the CFPB says it will soon release findings from its analysis of the 5 most prominent BNPL lenders.

Revolut Rescinds Job Offers to New Grads as it Reviews Operations (PYMNTS, 9/7/2022) Revolut says that this was an isolated business unit, and not part of a wider hiring freeze.

DailyPay Launches ‘Friday’ Reloadable Card for Instant Wage Access (Fintech Nexus, 9/7/2022) With the new prepaid card, there is no fee to load up earned wages.

What Would It Take To Get You To Change Banks? (You’re Probably Lying) (Forbes, 9/1/2022) Fewer mobile banking customers are changing their primary checking accounts, and many users hold multiple accounts.

Visa, Mastercard Face Cross-Border Fee Questions in U.K. (Payments Dive, 9/7/2022) U.K.'s parliament and regulators scrutinize higher fees, which Visa and Mastercard say were triggered by the U.K.'s exit from the E.U.

Lighter Fare:

A Giant Space Tarantula has been Caught by NASA's Webb Telescope (CNN, 9/6/2022) No, not the spider, but the Tarantula Nebula.