BNPL Furnishing May Cause Avalanche of Complaints; TransUnion's Crypto Partnership
Cash App Taxes, Current Offers 4% APY, PayPal's Stablecoin, Citi Says "Adios," Navient's $1.85B Settlement, BAML & WF's Slow Progress on Fees
Hey all, Jason here.
You may have noticed I’ve been spending more time reading, thinking, and writing about the rapidly expanding and evolving crypto world lately. My interest is primarily focused on how these products impact end consumers and the intersection of crypto and “TradFi” — worlds that are increasingly intersecting, presenting both opportunities and risks.
Like fintech before it, it’s unlikely that any corner of banking and financial services will remain untouched by the impact of crypto (which, for my purposes, includes things like stablecoins, CBDCs, NFTs, smart contracts, etc).
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Complaints About BNPL Are Minimal. Credit Reporting May Change That.
As use of buy now, pay later products has exploded in the past couple of years, so has scrutiny of the category. It has drawn attention from legislators, regulators, and consumer advocates, who argue the products may cause consumers to become over indebted, lack the purchase protections of credit cards, and don’t have adequate disclosures.
Things are moving quickly in the sector. Equifax recently announced it would support furnishing of BNPL pay-in-4 plans, with Experian and TransUnion appearing to follow suit. And the CFPB opened an inquiry into the sector, requesting information from the major BNPL players in the US: Affirm, Afterpay (acquired by Square), Klarna, PayPal, and Zip (acquired Quadpay).
The CFPB’s market monitoring questionnaire for BNPL providers should yield an interesting data set, as it includes questions on repeat usage, loan size, repayment method, underwriting process, among other proprietary data points.
While we’re waiting for the output of the CFPB’s inquiry, we can look to an already-public data source to get a better understanding of what’s happening in the sector: CFPB complaint data.
Caveat: there are some significant gaps, shortcomings, and biases in CFPB complaint data, so please take the following with a grain of salt.
Complaints on Buy Now, Pay Later Are Minimal But Growing
Firstly, for frame of reference, from January 2019 to January 2022, the CFPB receive approximately 1.2 million consumer complaints. It’s difficult to know exactly how many of those relate to buy now, pay later products, as the CFPB doesn’t include BNPL as a possible product categorization.
However, looking at the largest BNPL-focused companies in the US, there were just 607 complaints from 1/2019 to present — or about 0.05% of total complaints (all complaints data in this post excludes PayPal, as it is difficult to segment which PayPal complaints were driven by BNPL vs. other products.)
But the number of complaints about BNPL has grown substantially over time — from approximately 0 per month in 2019 and most of 2020 to ~80 per month by the end of 2021:
This still represents a tiny fraction of overall consumer complaints. Credit bureau Equifax received 10,718 complaints in December 2021 alone.
The breakdown of which companies are driving complaints in the category reveals something interesting.
Of consumers using BNPL services, there’s a wide spread in the relative popularity of the various providers:
But just a single BNPL company, Affirm, drove a whopping 70% of complaints for the time period examined:
Digging into the issue types and consumer narratives tied to the complaints, it becomes much more clear why Affirm is driving a disproportionate share of consumer complaints to the CFPB: for its longer-term term loans, Affirm underwrites applicants using credit bureau data and furnishes tradeline data back to the bureaus. Nearly all pay-in-4 providers do not.
Because using Affirm’s longer-term product shows up on the bureaus, there are more opportunities for users to complain, compared to pay-in-4 products and providers that don’t currently leave a trace on the credit bureaus.
Most consumer complaints to the CFPB about Affirm in some way relate to credit bureau reporting, debt collection, or identity theft — issues that are less likely to be detected and complained about, if they don’t show up on the bureaus:
With it looking more likely than not that more BNPL providers will begin reporting to the bureaus — including for pay-in-4 plans — complaints about BNPL are likely to increase by an order of magnitude. This is made even more likely as consumer usage of BNPL continues to increase.
How Have BNPL Providers Responded to Complaints So Far?
Complaints submitted through the CFPB are forwarded to the named company. Companies that respond within 15 days, or indicate that their response is in progress and provide a final response within 60 days, are considered to have responded in a timely manner.
Even at at relatively low volumes of complaints, BNPL providers are struggling to handle complaints in a timely manner — for the time period examined, nearly 8% of consumer complaints did not receive a timely response. During the same period, the overall timely response rate for all ~1.2 million complaints was 98.8%.
Consumers that complained via the CFPB rarely received the relief they were seeking, though this isn’t an unusual outcome for complaints made to the bureau.
Of complaints received about BNPL companies, 98% were “closed with explanation,” vs. just 2% closed with either monetary relief or non-monetary relief (eg, removing a hard inquiry or erroneous/fraudulent tradeline from a credit report).
Complaints to BNPL providers were significantly less likely than the average complaint (about half of which are about credit bureaus) to receive monetary or non-monetary relief:
TransUnion and Spring Labs Put Traditional Credit Data on the Blockchain
TransUnion has partnered with Spring Labs to enable users to make their credit reports available to crypto lenders through Spring Labs’ ky0x Digital Passport.
According to Coindesk:
“Cryptocurrency investors could now receive better interest rates when borrowing money thanks to lenders being able to judge their risk profile based on credit data.
Furthermore, lenders could now issue loans without requiring any collateral at all depending on the customer's creditworthiness. At present, investors must put up crypto assets such as bitcoin as collateral.”
This is a significant development that demonstrates the increasing intersection of “TradFi” and crypto worlds.
Borrowing and lending are plenty common in crypto world, driven primarily by demand for liquidity (eg, access to dollars without selling bitcoin) and leverage for crypto trading strategies.
Lacking a data set analogous to what establishment bureaus have, crypto loans are typically collateralized or even over-collateralized, to account for cryptos’ outsized price volatility.
There are crypto-native projects attempting to fill this gap. LedgerScore, for instance, aims to generate a “crypto credit profile,” based a given wallet’s associated identity, crypto assets, income, and transaction history.
While bringing traditional credit data into the crypto world promises to unlock a variety of use cases, one has to wonder how the news is being received in certain corners of the crypto community.
After all, what is more the antithesis of the pseudo-anonymous, ‘democratizing,’ and decentralized nature of crypto than traditional credit reporting agencies?
Bank of America & Wells Fargo’s Slow Progress on Fees
Bank of America will lower its overdraft fee from $35 to $10 and eliminate its non-sufficient funds fee altogether. The bank will also scrap a $12 charge it assessed when it automatically transferred funds between linked accounts (eg, checking/savings) to prevent a user from overdrafting.
Bank of America president of retail banking Holly O’Neil said (emphasis added):
“Eliminating overdraft altogether is not really what clients want. If you take the fee to zero, it is going to be very hard for banks to allow clients even that occasional access.”
For its part, Wells Fargo will also eliminate non-sufficient funds fees, drop a $12 overdraft protection charge, and begin giving customers who overdraw 24 hours to bring their balances above $0 before assessing a fee. Like most all neobanks and some establishment banks like Capital One, Wells Fargo will begin making users’ direct deposits available up to two days early.
Wells Fargo’s overdraft fee, however, remains $35 per item.
Bank of America and Wells Fargo’s moves to trim fees and help users avoid overdrafts seem primarily designed to placate regulators, rather than a response to competitive pressure from challenger banks. While their policy tweaks will reduce overdraft and NSF fees, which are disproportionately paid by low-income consumers, I would be surprised if new fees don’t pop up to replace them.
Cash App Adds Bitcoin Lightning Network Support, Launches Cash App Taxes
The engineers at Cash App have been busy. Last week, Block’s (formerly Square) consumer app announced support for the Bitcoin Lightning Network and the launch of Cash App Taxes.
Cash App Taxes represents the incorporation of the acquisition of Credit Karma’s tax product, which Credit Karma was required to divest during its acquisition by tax prep behemoth Intuit.
Cash App Taxes promises “free filing that’s actually free” — a not-so-subtle swipe at Intuit’s Turbotax product.
Tax payers who use Cash App Taxes to file can also get their refund up to two days faster — if they’re directing that payment into their Cash App account.
Zooming out and considering the wider ecosystem Block is assembling with Square (merchants/SMBs), consumers (Cash App), BNPL (Afterpay), crypto, and stocks, the tax prep offering is a nice tuck-in acquisition that gives users a reason to spend more time (and keep more money) in the Block ecosystem.
Cash App Adds Lightning Support
Cash App also announced last week it has added support for the Bitcoin Lightning Network. Lightning is a level two (“L2”) protocol that works in conjunction with the Bitcoin blockchain. Lightning solves some of the issues that have blocked bitcoin payments use cases — namely, speed and cost. Transacting in bitcoin can be slow and expensive.
The Lightning Network solves that by functioning similarly to card networks in the fiat world. The Lightning protocol can verify the existence of and hold a set amount of bitcoin (authorization) and then record transactions to the Bitcoin blockchain in batches (settlement). This allows Lightning to “instantly” process transactions while incurring lower transaction costs.
The move is potentially significant for Cash App as it could unlock an alternate method for moving value into/out of Cash App wallets or between Cash App users and users of other Lightning-enabled wallets. This could pave the way for additional use cases, particularly around international remittances — an area that is also being explored by companies as varied as Meta (Facebook), Revolut, and Dave.
PayPal Plans Its Own Stablecoin
PayPal is planning its own stablecoin, according to hints in its app code discovered by a software developer and subsequently confirmed by PayPal.
Such a move makes sense for PayPal. As a payment processor, it has always been dependent on the card networks and ACH to actually move money. Developing its own stablecoin could enable PayPal to form a proprietary payment rail, potentially enabling it to reduce fees paid to others to move money and process payments.
There are intuitive synergies with other PayPal products and services as well — areas like crypto trading, peer-to-peer payments (remember, PayPal owns Venmo), and international remittances (PayPal also owns Wise-competitor Xoom).
Navient Settles ‘Predatory’ Student Lending Case for $1.85 Billion
Navient, the giant student loan servicer, reached a settlement with 39 state attorneys general over allegations it had steered students into more expensive forbearance options instead of more affordable income-driven repayment plans.
The suit also alleged that Navient made loans to subprime borrowers, including in order to attend questionable for-profit institutions, even when it knew those students were likely to default on the loans. Navient allegedly used private loans it offered as a “baited hook” to originate more federally-backed loans to the same students.
Josh Shapiro, attorney general of Pennsylvania, one of the states suing Navient, said:
“Navient repeatedly and deliberately put profits ahead of its borrowers — it engaged in deceptive and abusive practices, targeted students who it knew would struggle to pay loans back and placed an unfair burden on people trying to improve their lives through education.”
Other Good Reads
They Promised Quick and Easy PPP Loans. Often, They Only Delivered Hassle and Heartache. (ProPublica)
We All Need to Stop Only Seeing the Dark Side of Crypto (Wired)
BNPL is the New Overdraft (Fintech Takes)
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