2023 Predictions Graded; OCC Releases BNPL Guidance

Republicans Ask OCC For Answers On Ex-Fintech Chief's Fake Résumé

Dec 10, 2023

Hey all, Jason here.

We’re in the home stretch of 2023. And, while I enjoy the holiday season, I always struggle with the weather and lack of daylight in the Netherlands this time of year. There’s a grand total of about 8 hours of daylight today — that is, if you could even see the sun through the clouds.

But fear not, I’ll be in warmer climes by the time next week’s newsletter reaches you!

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Republican Congressmen Ask OCC For Answers On Ex-Fintech Chief’s Fake Résumé

Last week, the current head of the OCC’s Office of Financial Technology, acting deputy comptroller Donna Murphy, joined other innovation-focused personnel from various financial regulatory agencies to testify before a subcommittee of the House Financial Services Committee.

And, while subcommittee chair French Hill’s opening remarks referenced the embarrassing debacle of the OCC’s hiring of Prashant Bhardwaj as its first Chief Fintech Officer, the OCC’s Murphy didn’t face any questions as to how it happened or what, if any, changes the regulator is making as a result. Bhardwaj’s quiet disappearance from the OCC and apparent degree mill MBA were first reported by Fintech Business Weekly in early September 2023.

Two days after the hearing, top Republicans on the House committee sent a letter to Acting Comptroller Michael Hsu pressing for answers, American Banker is now reporting.

Lawmakers, including Reps. French Hill (R-AR), Bill Huizenga (R-MI), and Andy Barr (R-KY) have asked Hsu to provide a briefing on the hire and what Bhardwaj worked on during his brief time at the regulator. “There is risk that some of the recently proposed federal banking rules from the OCC were made with input from unqualified individuals, or individuals with complacency toward attending to detail and accuracy,” the legislators wrote in the letter.

They also pointed out the potential reputational risk to the OCC from the scandal, writing:

“There are significant risks of negligent vetting practices at the OCC that cannot be understated. There is reputational risk to the OCC through loss of credibility if such high-level positions can be filled with unqualified individuals. There is also a risk of establishing an OCC culture where positions are not based on qualifications and merit but instead on personal connections or other characteristics not aligned with the roles' duties and responsibilities. And most importantly, there is risk that the OCC has broader problems with vetting personnel, which can blossom into larger risks, including to safety, soundness, and stability of the banking system.”

2023 Predictions: Graded

Each year, I go out on a limb and make predictions for events I think are likely to occur in the following twelve months.

Now, it’s time to check in and see how I did for 2023.

Crypto Tumult Continues

At the beginning of 2023, we were already in the midst of a “crypto winter,” with the then-recent collapses of exchanges and crypto lenders like FTX and BlockFi. In the wake of the fallout, reputable auditors and banks were becoming increasingly reluctant to work with crypto businesses.

At the beginning of 2023, I predicted:

I expect the tumult from 2022 to continue — there will be more failures and bankruptcies as hidden leverage and opaque interlinkages between crypto exchanges, lenders, and investors continue to unwind. Crypto-focused banks like Silvergate and BankProv are likely to incur some kind of regulatory action. Increasing interest rates will continue to put pressure on crypto prices, but “true believers” will keep bitcoin trading in a narrow range around where it started the year — $16,605.

I’m going to give myself a “B” on this one.

In early 2023, crypto-focused Silvergate collapsed, touching off the spring bank crisis that also took down SVB, First Republic, and fellow crypto-focused institution Signature Bank. And Metropolitan Commercial Bank, which also had numerous crypto clients, got hit with a consent order, though the order did not stem from crypto-related activity. One-time “good guy” in crypto Sam Bankman-Fried was found guilty on all seven criminal counts against him and faces a potential jail sentence as long as 115 years.

And, toward, the end of the year, the largest crypto exchange still standing, Binance, was hit with a $4.3 billion fine, and its founder and CEO, known as CZ, agreed to step down from the company and is also facing criminal charges.

Following the failures, bank regulators have taken an increasingly hard line on the idea of depository institutions serving crypto customers. The SEC’s posture toward the industry has become increasingly aggressive.

Bitcoin is trading at just shy of $44,000 as I write this, proving that hope springs eternal.

Goldman (Almost) Kills Off Marcus

As far back as late 2022, it was already clear to me that Goldman’s consumer ambitions were circling the drain.

In October 2022, the bank underwent a reorganization that saw its consumer businesses split between a combined asset and wealth management division and a new “Platform Solutions” group. The move signaled a de-emphasis of Goldman’s struggling consumer ambitions that was a harbinger of things to come in 2023.

By the end of 2022, the firm had ceased writing personal loans under its “Marcus” consumer brand, though it was still operating its GreenSky business, as well as Apple and GM credit card products.

At the beginning of the year, I predicted:

At this point, it seems the writing is on the wall for Marcus. I expect that Goldman will wind down the Marcus brand sooner rather than later and transition any remaining general market consumer products, like its high-yield savings accounts, to the Goldman Sachs brand.

I’m also going to give this a “B.” While Goldman hasn’t killed off the Marcus brand, yet, it has substantially progressed the dismantling of its fledgling consumer business.

Goldman sold off GreenSky and is reportedly looking to offload the GM card and its Apple partnership — if it can find any takers.

I do still believe Goldman will continue to offer high-yield savings and CDs — it’s the only part of the Marcus business that ever had a meaningfully positive impact on the firm-wide P&L by lowering its cost of funds.

Apple Continues FinServ Push

The tumult with bank partner Goldman didn’t dissuade Apple from continuing its push into financial services and identity. At the beginning of the year, I predicted:

It’s a safe bet that Apple Pay Later will finally launch, probably in the first half of the year. The savings account feature will also launch and, I expect, expand from Apple Card users only to a general market offering. Also a possibility that Apple Card and the Wallet savings feature launch in the UK.
Low but possible that Apple announces plans to expand its identity offerings to include US passports or identity credentials in a foreign jurisdiction.

While a fairly safe bet to make, I’m still giving myself an “A” on this one.

Early in the year, Apple began rolling out its BNPL feature, and, by October, it was generally available to US users. Apple and Goldman launched the savings feature in April, though I believe this is still only available to Apple Card users.

Apple’s mobile driver’s license efforts are progressing a bit more slowly — only four states offer such credentials as of November.

The Apple Card and savings did not launch in the UK, though the company did launch an open banking-enabled feature that lets UK users view data from linked debit and credit cards directly in the Wallet app.

Banking-as-a-Service’s “Come to Jesus” Year

Throughout 2022, it was general wisdom that scrutiny of banking-as-a-service was increasing.

But by the start of 2023, there had only been a single BaaS-related consent order: OCC-regulated Blue Ridge Bank.

A normalization in VC funding to fintechs and the “pivot to profitability” suggested moderating demand for banking-as-a-service capabilities — potentially foreshadowing a rationalization of the number of providers in the space.

I predicted:

I expect at least two prominent partner banks to get hit with some type of regulatory action. Partner banks and middleware platforms become increasingly selective about the clients they’ll take on.
Amidst increasing oversight and thus rising compliance costs and decreasing demand from crypto and fintechs, the number of banks pursuing BaaS business models declines. At least one BaaS platform is acquired or fails outright.
Startups focused on providing automated and scalable compliance capabilities, particularly around BSA/AML compliance, become increasingly must-have vendors.

On this one, I’m going to give myself an “A+.”

We’ve seen several institutions get hit with BaaS-related consent orders this year, including: Cross River Bank, Metropolitan Commercial Bank, and First Fed.

In addition to enforcement actions, we’ve also seen a number of policy developments from bank regulators. The Fed introduced its “Novel Activities” program, which will see banks engaged in “complex, technology-driven” partnerships get additional scrutiny.

The OCC has started describing emerging approaches of delivering financial services as a “supply chain,” where increased complexity may drive increased risk and thus should receive a closer look from regulators.

And the OCC together with the FDIC and the Fed released joint interagency guidance on managing third-party relationships, thereby attempting to establish a consistent approach and thus even playing field, regardless of a bank’s primary regulator.

As regulatory scrutiny has increased and the consent orders start to pile up, banks have begun derisking; for example, Blue Ridge, Evolve, and Coastal Community have all begun shedding fintech partners. Many banks onboarding net new fintech programs have become increasingly selective, avoiding higher-risk areas, including accounts for people living outside the US, international payments/remittances, and anything with a crypto/web3 connection.

Developments in the “middleware” sector have been even more stark: Bond was acquired by FIS (first reported by Fintech Business Weekly), Fifth Third acquired Rize, and Qenta acquired Apto Payments.

Synapse, arguably the first BaaS middleware, appears to be in a death spiral, having lost its most important client, Mercury, to its former bank partner Evolve, leading to mass layoffs (as first reported by Fintech Business Weekly.) Synapse’s relationship with key bank partner Evolve turned into an acrimonious divorce, with Synapse alleging $13 million in user funds are missing, and Evolve withholding $16 million in payments — including end-user interest — owed to Synapse.

And, as first reported by Fintech Business Weekly, it was revealed BaaS platform Solid allegedly faked its revenue numbers to raise its Series B, leading its own investor, FTV, to sue the company and its executives personally.

If there’s a silver lining, it’s for vendors focused on building fraud, AML, and compliance solutions, especially those tailored to the unique challenges of BaaS operating models. Companies like Themis, Cable, Performline, Sardine, Unit21, and Alloy are in demand as banks, middleware, and fintechs look to step up their capabilities.

Still Tough Times For Neobanks

Heading into 2023, the bloom was already off the rose when it came to neobanks.

Publicly traded companies like Dave and MoneyLion saw massive valuation declines once they hit public markets. Varo, which is a fully licensed bank, was struggling to find a sustainable business model and path to profitability.

At the beginning of the year, I predicted:

All signs indicate the macro environment will continue to be challenging: inflation is likely to remain elevated, and interest rate hikes will continue. Rate hikes quickly pulled the rug out from under asset valuations and put the mortgage and housing markets into a deep freeze. While employment so far has proven resilient, it’s unlikely that central banks can tame inflation without inducing a recession and unemployment rising.
Any recession is likely to hit US neobanks disproportionately hard, as their customers are overwhelmingly lower income and lower credit score. Neobanks have not been successful in lending to this segment, and macro headwinds may reduce interchange income and encourage user churn; losses from overdraft, small-dollar loans, and credit builder cards are likely to increase.
The upshot? I expect to see Varo continue to struggle, though it will survive 2023. Chime may be forced to fundraise at a substantially lower valuation than its last $25 billion round. And Monzo just might finally cut its losses and exit the US market.

I’m going to have to give myself a C on this one.

While inflation has remained elevated and rate hikes continued, there was no recession; indeed, we appear to be coasting towards the much-hoped-for soft landing. Chime did not fundraise as far as we know. Monzo not only didn’t exit the US market, it hired a new CEO for its US business and plans to double down on the market.

Even Dave and MoneyLion have seen a bit of a rebound in their stock prices, amid a broader fintech market rally (though they’re still down 98% and 85%, respectively, since their market debuts.)

I was right on Varo though! It has struggled but continued to survive. Varo quietly raised $50 million at a significant valuation cut, as first reported by Fintech Business Weekly — and had spent the funds with basically nothing to show for it by the end of Q3.

CFPB Continued War On Junk Fees, Big Tech

Finally, 2022 saw a fairly active CFPB — the consumer protection agency began waging war on “junk fees” and, toward the end of the year, announced it would undertake rulemaking for 1033, better known as open banking. In late 2022, the Bureau also revealed its first-ever inquiry into a crypto company, Nexo.

For 2023, I predicted:

Like other government agencies, the CFPB publishes information about its rulemaking agenda, which gives us decent insight into the agency’s plans for next year. Yes, “Required Rulemaking on Personal Financial Data Rights” is there in the “Prerule Stage,” but so are items about overdraft fees and NSF fees (Prerule) and credit card penalty fees (Proposed rule).
I think it’s safe to predict the bureau’s war on fees will continue, as will its quasi-antitrust obsession with big tech’s push into financial services and “data harvesting.”
Given the broad and continuing fallout in the crypto sector, I suspect more CFPB inquiries into crypto companies will commence or come to light.
Low probability but a possibility is the bureau designating a major nonbank entity as “posing a risk” to consumers to justify bringing it under the CFPB’s examination authority — potentially a “big tech” player, like Apple, or a fintech infrastructure company, like Plaid.
This may be more wishcasting than a likely-to-happen prediction, but perhaps the CFPB will take meaningful action, through enforcement or rulemaking, clarifying how “tips,” “expedited funding fees,” and membership fees should be treated for the purposes of TILA and APR calculations.
Finally, and a near-certainty, is the grilling of Director Chopra by the House Financial Services Committee, now under Republican control. House Republicans may also seek to choke off funding to the bureau, depending on how an ongoing legal challenge turns out.

On my CFPB predictions, I’ll give myself a “B.”

The Bureau’s war on “junk fees” certainly has continued, as has Chopra’s quasi-anti-trust fixation on “big tech.” Consumer privacy and data harvesting have been top-of-mind, especially with the explosion of interest in AI this year.

However, as far as I’m aware, there have been no additional public inquiries into crypto firms and no non-bank entities were designated as “posing a risk” to consumers. The CFPB hasn’t taken meaningful action on how it views “tips,” though a recent comment letter in support of a California regulatory rulemaking signals this issue is on its radar.

OCC Releases BNPL Guidance

Last week, the OCC, which supervises nationally chartered banks, released a bulletin providing guidance on the risk management of buy now, pay later products.

While BNPL is often used to refer to a variety of product formulations, the document specifically is geared towards what it describes as “BNPL loans that are payable in four or fewer installments and carry no finance charges (i.e., the loans carry 0 percent interest and no other finance charges).”

The use of the word “loan” is worth noting, as many BNPL providers rely on the fact that there is no finance charge and plans are repayable in fewer than four installments to avoid having to comply with some regulations, like TILA Reg Z.

The OCC’s bulletin flags a number of risks for banks offering “pay in four” BNPL:

borrowers may not fully understand BNPL repayment obligations
borrowers may become over indebted
lack of clear and consistent disclosures could obscure the nature of the loan or present UDAAP risk
how BNPL providers handle merchant disputes and returns, given the short timeframe of BNPL plans, may be problematic
if banks are leveraging third-parties, including merchants, such relationships expose banks to operational and compliance risks
the digital distribution and automated nature of BNPL underwriting may expose banks to fraud risk
lenders may lack complete visibility into a BNPL user’s other debt obligations, if they have BNPL plans with other providers that are not reported to major credit bureaus

In order to appropriately mitigate these risks, the bulletin makes the following suggestions:

banks should have a credit risk underwriting approach tailored to the product, including “methodologies to assess repayment capacity” — this is notable as many BNPL providers take an “underwriting-lite” approach in order to facilitate a low-friction application process
banks should establish portfolio monitoring and reporting that is tailored to the shorter timeframe of BNPL plans; the traditional approach of monitoring 30/60/90 days past due is ill-suited to the pay-in-four product structure
evaluate charge-off practices; while banks typically charge off debt after a set period, typically 120 or 180 days, given the shorter timeframe of BNPL plans, a shorter window is likely appropriate
BNPL loans should be incorporated into a banks’ allowance for credit losses methodology
reporting BNPL use to the credit bureaus, in line with the requirements of the Fair Credit Reporting Act, would help banks manage the credit risk associated with BNPL lending
BNPL loans may present unique operational and third-party risks, especially if distributed via integration with merchants; banks should develop appropriate policies and procedures to mitigate these risks
banks should consider the applicability and implications of relevant laws and regulations, including the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), the Electronic Funds Transfer Act (EFTA), and the FTC’s and CFPA’s respective prohibitions on UDAP and UDAAP.

The OCC’s guidance bulletin is a bit curious, as the majority of pay-in-four BNPL providers are non-bank fintechs — companies like Affirm, Klarna, PayPal, and Afterpay (Block).

Where these companies do partner with banks, they are typically state-chartered banks, like WebBank and Cross River, rather than nationally chartered banks overseen by the OCC.

For OCC-regulated banks that do offer pay-in-four, it’s typically offered in conjunction with an existing credit or debit account, where a user first makes a purchase and then has the option to convert the transaction into a BNPL plan after the fact.

This structure reduces some of the risks flagged in the OCC bulletin by taking merchant-distribution out of the mix and substantially reducing fraud risk.

However, other elements of the guidance are relevant, including around underwriting a user’s ability to pay, handling disputes/returns, and furnishing data to credit bureaus, for instance.

FT Partners December Update

FT Partners’ monthly update is always a good pulse-check on what’s happening in fintech VC funding at a macro level — a great complement to individual deal-level news aggregated by This Week In Fintech.

We’re now more than a year on from the frothiest times of 2021/2022 — and while that adjustment has come with plenty of pain, it was a much-need normalization.

Still, I expect 2024 will see its share of fintechs, especially mid-to-later stage, struggle to raise fresh capital and look for graceful exits.

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