Back Cross River Intelligence Archives

Student Loan Forgiveness; P2P Fraud Liability; Goldman Delays Checking

By Cole Gottlieb

August 28, 2022

Happy Sunday,

Biden rolls out student loan forgiveness plan. Time is running out for Rep. Maloney’s Overdraft Protection Act. Showdown over P2P fraud liability. Banks push back on increase in FDIC assessment. Ramp launches invoice financing. Nonbank lenders seek stable funding. Inflation boosts appeal of EWA. Goldman delays checking, hikes rates.

Catch up on earnings season with PeerIQ’s Q2 Consumer Lending Review.

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

Student Loan Forgiveness

After much speculation, the Biden administration is moving forward with a plan to forgive some student loan debt. Borrowers making less than $125,000 ($250,000 for households) are eligible to have $10,000 in federal student loan debt forgiven. Pell grant recipients are eligible to have $20,000 canceled. Biden also announced another four-month extension of the student loan moratorium, which has been in place since early 2020.

Despite the Fed’s quantitative tightening, stocks and bonds have rallied in recent months. That may be due, in part at least, to shrinking deficits. A surge in tax receipts and a drop in pandemic-related spending means the Treasury has cut the size of new bond issuance. This has helped cushion the potential impact from the Fed’s QT.

Image: Wall Street Journal

Time is Running Out for Maloney’s Overdraft Protection Act

Rep. Carolyn Maloney (D-NY) is running out of time to advance a bill that would place new restrictions on bank overdraft practices. That’s because Maloney lost her primary to fellow Democrat Jerrold Nadler. The two House vets were facing off as a result of redistricting following the 2020 census.

Maloney has been the sponsor and vocal proponent of the Overdraft Protection Act. The bill has been introduced in every Congressional session since 2009. The bill would limit banks to charging customers one overdraft fee per month and a maximum of six per year. It would also prohibit “high to low” transaction ordering, which can result in customers incurring more overdrafts.

Maloney has about four months to see if she can advance the measure. It’s possible she could rally support from colleagues to get the measure included in other legislation before her term is up.

Who Is Liable for P2P Fraud?

There’s no doubt consumers find peer-to-peer payment services like Venmo, Cash App, and Zelle convenient. But so do fraudsters.

Various types of P2P fraud dramatically accelerated during the pandemic. The CFPB has taken notice and is expected to release guidance that could expand banks’ and payment platforms’ liability for fraudulent transactions.

Currently, payment providers are liable for unauthorized transactions under Reg E and generally must reimburse customers. But providers argue that if customers make an error or are tricked into authorizing payments, providers are not liable.

If the bureau attempts to substantially shift liability for errors and “authorized” fraud to payment platforms, litigation is a near certainty. The CFPB has already shown a willingness to be more aggressive in this space. Earlier this month, the bureau said a failure to prevent ID theft could constitute an “unfair” practice. And in July, the CFPB fined Bank of America $100Mn over fraudulent disbursements of unemployment benefits.

Banks Push Back on FDIC Assessment

The FDIC is asking banks to pay more – and they’re not happy about it.

With many depository institutions carrying an excess of deposits stemming from various pandemic-era relief measures and changes in consumer and business behavior, the FDIC plans to hike deposit insurance assessments by 2 basis points. The rate hike is part of a plan to get the deposit insurance fund’s reserve ratio to its statutory requirement of 1.35% by 2028.

Industry groups argue the FDIC isn’t taking into account how rising rates may impact deposit math. Trade groups have asked the FDIC for an additional six months to see how economic data unfold, before moving forward with the rate hike.

Ramp Launches Flex

B2B BNPL? That’s not what Ramp is calling it, but, basically, that’s what its new “Flex” offering amounts to.

Ramp’s core product is an expense management platform and charge card. The card enabled businesses to defer payment by 30-ish days for card payments.

But now, as part of its Bill Pay product, Ramp has launched up-to 90 day financing for invoice payments, which it has dubbed “Flex.” With Flex, Ramp pays the business’ invoice in full upfront, and the business has up to 90 days to repay Ramp. According to company CEO Eric Glyman, the cost would be “around 1% to 2% for a 30-day period.”

The move is the latest example of “B2B BNPL” type financing. Financing products in this space are quite similar to trade finance and invoice factoring, depending on whether the buyer or the seller is the one doing the financing.

Fintech CFOs Seek Stable Funding

Non-bank lending tends to be a cyclical business with a key risk that banks are much less exposed to: capital markets. As interest rates have begun to rise and signs of stress appear, particularly for lower income borrowers, fintech lenders’ ability to tap capital markets is beginning to become constrained.

As a result, some non-banks are seeking new types of investors. Upstart, which saw shareholders revolt when it began taking loans onto its own balance sheet, is considering new sources of funding like sovereign wealth funds, pension funds, and insurance companies. At an investor conference in June, Affirm emphasized it is looking to line up a diverse set of loan buyers and funding channels.

Meanwhile, original P2P lender LendingClub is looking to take advantage of the bank charter it got through the acquisition of Radius Bank. LendingClub’s charter and deposit base gives it more flexibility to balance sheet loans it originates when capital markets conditions tighten.

Image: Wall Street Journal

Inflation Boosts Demand for EWA Cards

Some employers are leaning into earned wage access to attract employees as inflation remains elevated. While EWA doesn’t equate to higher wages, being able to access wages earlier is proving to be attractive as employees struggle with soaring prices for everything from rent to food and energy.

Some EWA products have begun rolling out their own debit cards as part of their offering. Payroll solution Ceridian, for instance, offers a service called “Dayforce Wallet.” It is no cost to employers and employees, but generates revenue for Ceridian through interchange income generated from spending on the associated Dayforce Card debit card.

Goldman Mulls Checking Delay, Hikes Marcus Rates

Goldman promised a Marcus checking account by mid-2021. But in the face of technical challenges and mounting losses at the consumer unit, the bank is now debating pushing back a broad launch until 2023. Instead, Goldman is considering launching the account to a select group of the bank’s existing wealth management customers.

Meanwhile, Goldman is hiking the rates Marcus pays on savings products. It increased the rate paid on online savings accounts to 1.7% from last month’s 1.5%. The increase puts the company’s rate back at pre-pandemic levels, though it lags other online-only offerings like LendingClub and SoFI, which both offer 2% APY.

Affirm Drops on Earnings, but Continues to Grow its Business

Affirm’s stock fell 21.3%, as it missed earnings estimates and provided weaker-than-expected revenue guidance. Despite this, Affirm continues to grow its business, increasing GMV by 12% sequentially, helped by the 40% sequential increase in its Travel and Ticketing segment.

Consumers are coming back to use Affirm, with CEO Max Levchin reporting that Affirm “Set a new record for consumer re-engagement with 85% of transactions coming from repeat users.” On top of that, active consumers grew 10% sequentially and active merchants grew 14% sequentially.

As we have seen amongst other fintech lenders, delinquencies have begun to tick up. Affirm’s FY 2023 delinquencies have trended higher than FY22 and FY21 but are still below pre-pandemic (FY19) levels. While delinquencies have trended higher than the past year, CEO Max Levchin made clear to note that, “Unlike the folks in the marketplace lending businesses, we are not dealing with the decaying performance of loans made years ago in pursuit of growth at all costs.”

Source: Affirm Earnings Supplement

In the News:

Crypto Exchange Coinbase Faces Class Action Lawsuit Over Alleged Lapses in Security (CoinDesk, 8/23/2022) A class action suit alleges Coinbase failed to secure users' accounts against theft and hacks.

FDIC Orders Crypto Exchange FTX US, 4 Others to Cease 'Misleading' Claims (CoinDesk, 8/19/2022) The FDIC published five cease-and-desist orders, alleging the companies “made false representations” suggesting that crypto products might be FDIC-insured.

Payments FinTech Highline Looks to Expand After $13M Series A (PYMNTS, 8/22/2022) Highline’s platform lets consumers automate bill payments directly from their paychecks, helping them avoid missed payments and overdraft fees.

As Crypto Slumps, Goldman Sachs Aims for a Wall Street Built on Blockchain (Wall Street Journal, 8/22/2022) Banks like Goldman and JPMorgan have been using and investing in blockchain technology.

FTX Grew Revenue 1,000% During the Crypto Craze, Leaked Financials Show (CNBC, 8/20/2022) FTX grew its revenue from under $90Mn in 2020 to over $1Bn in 2021.

Klarna Brings BNPL to StyleSeat for Flexible Beauty Care (PYMNTS, 8/22/2022) Klarna brings its pay-in-4 solution to the online salon booking platform.

Coinbase CEO says Crypto Exchange has Ongoing Plans to Cut Costs and is Actively Engaged with Regulators (CNBC, 8/23/2022) Coinbase expects clarity over SEC regulations after the midterm elections.

Fintech’s Next Big Down Round May Have an Upside (Reuters, 8/24/2022) Down rounds can bring additional upside to employee stock options, helping to attract and retain talent, and can be used to grow the business, gaining an edge on competition.

Lighter Fare:

NASA Shares Sound of Black Hole and it Sounds Exactly as Creepy as You Thought it Would (Mashable, 8/22/2022) Check out this eerie sound from the Perseus galaxy cluster.