SoFi Settles with Finra; FIS Launches BaaS Platform; BNPL’s “Phantom Debt” Problem
By Cole Gottlieb
May 12, 2024
Happy Sunday,
Slower growth may be necessary to tame inflation. Chime enters into consent order. SoFi settles with Finra. SEC investigating Upstart. FIS launches BaaS platform. Mercury expands into spend management. BNPL’s “phantom debt” problem. Crowded taps Visa Direct. Fintechs wrap up our earnings season coverage.
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Slower Growth Necessary to Tame Inflation
Boston Fed President Susan Collins lamented the lack of progress on inflation so far this year and signaled slower economic growth will be necessary to ensure inflation is on a sustainable path to the Fed’s long-term 2% target. Meanwhile, data show that Gen Z is taking on greater debt than Millennials did at the same age, according to an analysis from Bloomberg. High rents and pandemic-induced inflation are forcing some Gen Z’ers to lean more heavily on credit to cover their expenses.
Image: Bloomberg
CFPB Fines Chime $3.25Mn
Last week, neobank Chime entered into a consent order with the Consumer Protection Financial Bureau, stemming from Chime’s alleged failures to issue refunds to users who had closed their accounts in a timely manner. Although Chime’s terms and conditions specify it will return funds to users within 14 days, the Bureau found numerous instances of Chime failing to do so, including “thousands” of instances in which it took Chime longer than 90 days to return users’ funds. The Bureau argues that Chime’s failure to return funds to users in a timely manner constitutes “unfair” practices, in violation of Dodd-Frank’s prohibition of UDAAP. Per the settlement agreement, Chime will pay $1.3Mn in redress to impacted consumers and a $3.25Mn penalty. Chime neither admits nor denies the findings of fact or conclusions of law in the Bureau’s consent order.
SEC Issues “Wells Notice” to Robinhood
The SEC sent Robinhood a Wells notice, informing the company it is a target of an investigation by the agency and could be charged. The SEC’s action stems from Robinhood’s crypto offerings, specifically, the crypto tokens it lists and its custody and platform operations. The SEC argues that some tokens Robinhood lists are unregistered securities and, therefore, the company is operating an unregistered securities exchange. The SEC charged crypto exchange Coinbase in 2023 under a similar fact pattern. For its part, Robinhood has previously disclosed that the SEC was investigating and argues that it does not believe the crypto tokens in question constitute securities.
SoFi Reaches $1.1Mn Settlement with Finra
SoFi’s retail brokerage was fined $1.1Mn by Finra for identity verification failures, which, in turn, enabled fraudsters to steal $8.1Mn from customers of other institutions. According to the Finra action, SoFi failed to design and operate an identity verification program that reasonably verified the true identity of account holders. Fraudsters took advantage of the gaps to open approximately 800 accounts with false identities and then transferred funds from hacked accounts held at other institutions. The issue in question occurred approximately from December 2018 to April 2019. SoFi has since enhanced its identity verification procedures and processes.
SEC Investigating Upstart
Last week, fintech lender Upstart revealed it has been subpoenaed by the SEC regarding its disclosures, including its artificial intelligence models. Upstart has said it is cooperating with the SEC, and that the company is “unable to predict the outcome of this matter,” according to a regulatory filing. The SEC’s focus on AI is part of a broader government effort, including other financial regulators, to monitor and understand how firms are deploying AI in their business and whether such use runs afoul of applicable regulations.
FIS Launches Atelio BaaS Platform
Core banking provider FIS unveiled its banking-as-a-service play, Atelio, last week. Atelio appears to be built on the foundation of BaaS platform Bond, which FIS quietly acquired last year. FIS describes the offering as enabling companies from all industries to create and embed financial experiences in their products, including deposits, money movement, card issuing, invoicing, fraud risk mitigation, and cashflow forecasting, among other possible applications. FIS touted KeyBank, College Ave, and RoyalPay as clients of the new platform. The announcement comes at a time of increasing uncertainty over the future of banking-as-a-service, including the future of standalone BaaS platforms. FIS, presumably, is hoping to capitalize on its existing deep relationships with banks it serves and its close relationship with merchants via its recently spun off WorldPay subsidiary.
Mercury Expands into Spend Management
The great feature convergence continues… Mercury, originally focused on providing business banking through its relationships with bank partners Evolve and Choice is now adding spend management capabilities, putting it squarely in competition with other fintech heavyweights, Brex and Ramp. Mercury is adding features like bill pay, invoicing, and employee reimbursement. New features include the ability to pay bills directly from users’ Mercury bank account, approving bill payments via mobile or Slack, and duplicate bill detection.
BNPL’s “Phantom Debt” Problem
A standoff between BNPL providers and credit bureaus means an increasingly large pile of Americans’ debt isn’t showing up on their credit reports. BNPL is expected to grow to nearly $700Bn globally by 2028. Americans spent some $19.2Bn in the first quarter of this year through BNPL plans, Adobe Analytics reports. But most BNPL providers do not use credit bureau data to underwrite their users, nor report BNPL usage back to the bureaus. BNPL providers argue that the credit bureaus, used to accepting data from loans or credit cards with a monthly payment cadence, aren’t capable of ingesting their data. BNPL firms are also worried about negative consequences to users’ credit scores. But the three major bureaus say they’re ready, and FICO and Vantage say they’re ready to test how BNPL data would impact their scoring models. Lenders aren’t the only ones who would benefit from the fuller picture of consumers’ finances provided by furnishing BNPL data to the bureaus. The Federal Reserve also leverages credit bureau data to understanding what’s happening on household balance sheets and in the economy at large.
Crowded Adds International Currency Transfers
Digital platform Crowded is now working with Visa Direct and Cross River to enable global payments for nonprofit organizations. Registered nonprofit institutions will be able to push funds to international recipients. With many of Crowded’s nonprofit clients working in the education space, the global payments capabilities can help the likes of international counselors working at U.S. summer camps, fraternities with international chapters, and nonprofits with international operations and/or travel.
Fintechs Close Out Earnings Season
Source: Google Finance
We wrap up our weekly earnings season coverage with a host of fintechs reporting. Pagaya reported a +31% YoY increase in network volumes driven by its personal loan and single-family rental businesses. Despite a rise in network volumes, credit has held up with President Sanjiv Das reporting, “30-day delinquencies for six, nine and 12-month seasoned personal loans are at their lowest levels since April 2021, on average 30% to 40% lower than peak levels in 2021, and have been in continuous steady decline since then.”
Upstart reported +13% YoY growth in transaction volume (originations from bank partners). While Upstart has continued to maintain disciplined credit standards, it reported a 14% conversion rate for the quarter, above the 8% from the prior year quarter. Additionally, the consumer lender launched auto secured personal loan pilot programs in seven states, which enable borrowers to provide autos as collateral to their personal loan applications. By doing so, Upstart says it is able to offer rates 20% lower than unsecured personal loans. Importantly, this expands Upstart’s potential borrower base, as borrowers who may have been “priced out” by the 36% APR cap may be eligible for this loan product.
Similarly, Oportun’s recently launched a secured personal loan product and has seen early traction. CEO Raul Vazquez highlighted the expanded product reach, stating, “Our SPL [secured personal loan] product has allowed us to invite 3 of 10 applicants who we weren’t able to approve to unsecured personal loans to apply for an SPL loan.” Notably, Oportun reported that its secured personal loans produced greater revenue per unit than unsecured, “Since, on average, SPL loans are over $3,000 larger.” Oportun reported a (17)% decline in aggregate originations, as it has continued to tighten credit. The credit tightening actions appear to be working, as both NCOs and delinquencies declined from a year and a quarter prior.
OppFi has also continued to maintain a tighter credit posture, with 58% of originations made to existing customers. CFO Pamela Johnson noted that, “On an absolute basis, new customer originations for the quarter decreased by 1.7% year-over-year, while existing customer originations increased by 5.7%.” Despite the tighter credit posture, the lender grew originations +2% YoY. However, NCOs as a % of average receivables remained elevated at 62%.
Fintechs that focus on short-term cash advance originations capitalized on major demand from consumers, with MoneyLion reporting a +42% and Dave reporting a +32% YoY increase in origination volumes. Facing high inflation, consumers have turned to these products to mitigate cash flow problems. While Dave reported a substantial increase in ExtraCash originations, it has continued to report declines in delinquencies, with its 28-day delinquency rate down (77) bps YoY.
Wrapping things up, Affirm reported a +36% YoY increase in GMV as consumer demand for installment loans remains high. Affirm users are transacting more frequently, and for lower-ticket, everyday purchases (transactions per active customer up to 4.6, from 3.6 a year prior and average order value down to $293 from $323 a year prior), in-line with Affirm’s strategy. As CEO Max Levchin said last year, “We've more or less conquered the bicycle and couch space, and we're trying to take our unfair share of doughnuts and coffee.” The Affirm Card has continued to report momentum, with active cardholders crossing 1Mn and Card GMV increasing to $374Mn.
In the News:
Bankers say CFPB overdraft rule harms vulnerable consumers most (American Banker, 5/6/2024) Trade groups argue the rule will reduce access to overdraft protection.
Small banks 'feel like hostages' to their core systems: OCC's Hsu (American Banker, 5/3/2024) Regulators, including the OCC and Fed, have been paying more attention to the market for core banking systems.
Wells Fargo says US investigating Zelle complaint handling (Finextra, 5/6/2024) The bank revealed in an SEC filing how it handles Zelle complaints is under investigation.
Fed proposes expanded operating hours for FedWire and NSS (Finextra, 5/6/2024) The Fed has floated a proposal to expand the window to 22 hours a day.
CFPB to distribute nearly $40 million to consumers misled by fintech company LendUp Loans (CFPB, 5/8/2024) LendUp victims will receive compensation from the CFPB’s victims relief fund.
FDIC Investigation Finds Culture Rife With Sexual Harassment, Discrimination (Wall Street Journal, 5/7/2024) An independent investigation revealed shocking allegations.
JPMorgan Offers Faster Domestic Payments Via Visa Direct (PYMNTS, 5/6/2024) The US’s largest bank will leverage Visa Direct for instant payments.
Revolut launches standalone crypto trading platform for UK retail customers (The Block, 5/7/2024) Revolut launches Revolut X, a standalone crypto exchange.
Nubank Surpasses 100 Million Clients Across Latin America (Bloomberg, 5/8/2024) Brazilian neobank NuBank hit a 100Mn user milestone.
Marqeta Processing Volumes Surge 33%; Earned Wage Access Beckons (PYMNTS, 5/7/2024) Marqeta results show growing momentum in its core processing business.
Lighter Fare:
The deep ocean photographer that captured a 'living fossil' (BBC, 5/8/2024) Underwater photographer captures image of fish thought extinct.