BNPL Service Afterpay Faces Class Action
OCC Fintech Charter News, Ally Ends Overdrafts, Crypto Charter Review?
Hey all, Jason here.
I had my second shot of Moderna yesterday and rushed home to put this week’s issue together before feeling any of the unpleasant side effects I’ve heard about. If there are any egregious typos this week, I blame the vaccine!
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Afterpay Faces Potential Class Action Suit on Overdrafts, NSF Fees
Last week, a proposed class action against buy now, pay later service Afterpay was filed in the Northern District of California.
The crux of the case’s argument is that Afterpay’s marketing as interest / fee-free is deceptive, as it can cause users to incur insufficient funds (NSF) and overdraft fees, if a repayment is attempted when a user’s balance is too low to cover the charge.
The case further argues that Afterpay targets lower income consumers living paycheck to paycheck (emphasis added):
“Afterpay specifically targets young and poor consumers and those struggling to make ends meet on a week-to-week basis. This group is its core constituency.
To that group, Afterpay purports to offer a solution to cash-strapped consumers: Afterpay prominently markets itself as a service that allows users to pay for purchases at a later date, with no interest, no fees and no hassle. These representations are false. In fact, there are huge, undisclosed fees and interest associated with using the service.”
And that, because of the user segment Afterpay is targeting, it knew or should have known that its users could incur overdrafts (emphasis added):
“This is the same group of consumers that Afterpay targets with its marketing: consumers living paycheck to paycheck. As a result, Afterpay knew or should have know that such users were at extreme risk of overdraft fees when using the Afterpay service.”
I’ve argued previously that some aspects and use cases of BNPL, particularly of the ‘split pay’ variety, are reminiscent of payday loans:
lack of traditional underwriting or ability to pay checks
not reporting outstanding BNPL balances to the credit bureaus
the short repayment timeframe.
Just because a service is “free” doesn’t mean it isn’t debt and that consumers can’t get into trouble, as the claims in this case illustrate.
The “debt trap” argument commonly deployed against payday loans could apply equally well to BNPL, where users could find themselves perpetually needing to split everyday expenses like groceries or clothing into multiple payments because they don’t have enough cash in their account.
Undoubtedly the lack of direct fees associated with BNPL is preferable to traditional payday loans, but, as this suit shows, users can end up incurring substantial fees with their bank or other creditors from overdrafts or late payments.
Lack of visibility across BNPL providers poses a particular challenge in ensuring responsible underwriting and usage. There’s nothing to stop users from leveraging multiple BNPL providers concurrently, potentially overextending themselves — a problem that also exists in the payday market.
Some states have addressed that problem in payday loan usage by mandating use of a centralized database, Veritec, to ensure borrowers aren’t exceeding state caps on the number or dollar value of loans. A similar system could benefit BNPL providers and their users by ensuring users don’t take on an unmanageable debt load.
Ally Bank Eliminates Overdraft Fees
Ally Bank is the latest to add or modify its product offerings to help consumers incur fewer service fees. In recent months, PNC launched its “Low Cash Mode” feature. Fifth Third began offering lower-cost accounts that give users a grace period to cure overdrafts before a fee is assessed. Wells Fargo and Huntington announced similar offerings.
Overdraft fees during the pandemic were one of several topics big bank CEOs got a grilling on when they testified in front of multiple Congressional committees last month. While Ally’s users skew higher income and thus are less likely to incur fees, Ally’s announcement is notable for linking the move to social and racial justice issues. Via the Wall Street Journal (emphasis added):
The charges disproportionately affect people who are living paycheck to paycheck, Ms. Morais [Ally Bank’s president of consumer and commercial banking] said, and the bank also studied research that found that overdraft fees disproportionately affect Black and Latino households.
“We came to the conclusion that these fees are a great source of stress and anxiety for consumers,” Ms. Morais said. “It became clear to us that the best way to relieve that anxiety was to eliminate those fees.”
Still, despite the pressure from legislators and startups offering “no fee” accounts, big banks continued to rake in billions in overdraft fees in 2020:
2nd Circuit Revives Hope for National Fintech Charter, But Uncertainty Remains
The charter was proposed to offer a streamlined approach to licensing for fintechs that don’t hold consumer deposits; instead of needing a variety of state lending and money transmitter licenses, they could get a single federal license.
The 2nd Circuit found that New York’s challenge was too speculative, because no such fintech charters have yet been issued. The ruling, however, did not address whether the charter exceeds the OCC’s authority under the National Bank Act, which opponents of the charter argue limits the OCC to issuing charters for deposit-taking institutions.
Other legal challenges to the charter remain unresolved. The Conference of State Bank Supervisors is suing the OCC to block Figure Technologies’ unique charter application, which it argues is essentially the same thing as the OCC’s proposed fintech charter.
Given the continuing uncertainty around the novel charter type, it’s an unappealing choice for fintechs. According to Catherine Brennan of Hudson Cook LLP via Bloomberg Law:
“I don’t know a single company that has high on their list pursuing a fintech charter at this time, because no one wants to be the target” of state regulators, she said.
Acting Comptroller Hsu: Review of Crypto Charters Is On The Table
In late May, acting head of the OCC Michael Hsu testified before the House Financial Services Committee. While his written testimony covered a wide variety of topics, one that caught attention was his signaling that the OCC would undertake a thorough review of past and pending decisions, including charters in the pipeline or those with conditional approval.
That includes crypto firms Anchorage, Paxos, and Protego, which have received conditional approval for national trust charters to custody digital assets.
According to American Banker (emphasis added):
“At the OCC, the focus has been on encouraging responsible innovation. For instance, we created an Office of Innovation, updated the framework for chartering national banks and trust companies, and interpreted crypto custody services as part of the business of banking. I have asked staff to review these actions,” Hsu said.
“My broader concern is that these initiatives were not done in full coordination with all stakeholders,” he added. “Nor do they appear to have been part of a broader strategy related to the regulatory perimeter. I believe addressing both of these tasks should be a priority.”
Hsu is taking initial steps to expedite better coordination of federal banking regulators’ approach to crypto; according to The Financial Brand (emphasis added):
“Hsu has directed both an internal review of these efforts and asked fellow federal banking regulators to launch an interagency “sprint” to focus specifically on cryptocurrency activities on a quicker-than-usual basis. A key task will be devising a common set of terms among the agency, simply so the regulators and the industry can begin communicating effectively on crypto issues.”
FT Partners June Monthly Update
Check out FT Partners June update for the latest analysis on public market P/E multiples, deal activity highlights, M&A transactions, and financing transactions.
Other Good Reads This Week
Lex Sokolin Long Take: The $2.2 Billion Acorns SPAC
Shamir Karkal A Simple Tale: The First Pitch
New Yorker The Pied Piper of SPACs
🎧 Listen: HBR Cold Call Podcast Running a Consumer Fintech Startup Within Goldman Sachs (I lived it, and this is a pretty fair and accurate summary of the choices, challenges, and trade-offs of building a ‘startup’ inside a 150-year-old bank.)
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