Brigit's Good Intentions Aren't A Defense to FTC Allegations
Brigit's Good Intentions Aren't A Defense to FTC Allegations
Solid Cofounder Took $4.5M Secondary, Newly Unredacted Docs Show; Fed Proposes Lowering Debit Interchange Cap
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Brigit’s Good Intentions Aren’t A Defense to FTC’s Allegations of Deception
“The road to hell is paved with good intentions,” or so the saying goes.
Building a consumer finance company that serves segments of the market ignored or poorly served by big banks — lower-income and bad- or no-credit consumers — is often a thankless task.
Even if users of the products have a positive experience, legislators, regulators, and consumer advocates can always find something not to like about companies serving these consumers — particularly those with “novel” product structures (I’m no exception; I’ve explained my dislike of so-called “tip”-based business models numerous times.)
But — and there is a but here — businesses serving lower-income and credit-constrained consumers continually face what are often zero-sum trade offs: make a decision that’s better/cheaper for consumers and forgo revenue, or prioritize the company’s bottom line, even when that’s bad for users.
Of course, this trade off isn’t unique to business serving lower-income users, but these businesses tend to (justifiably) receive more scrutiny.
Brigit is one such company serving lower-income/lower-credit score users with a novel business model.
Unlike a typical short-term loan, where a borrower pays a fee each time they borrow, Brigit offers a subscription model: pay $9.99 per month and get access to an advance of up to $250.
In the fee-per-loan model, lenders have a built-in incentive to encourage users to re-borrow — think the kinds of endless automated calls, emails, text messages, and even home visits deployed as part of a “retention” strategy that have been mentioned in other small-dollar lenders’ regulatory actions.
By contrast, the subscription model attempts to better align incentives: in theory, Brigit shouldn’t care whether or not users borrow, as long as they’re paying their monthly subscription. In fact, it’s actually better for Brigit if they don’t borrow, as that eliminates the risk of default and reduces costs related to originating and servicing the loans.
FTC Alleges “Up To” Claims, Hidden Instant Funding Fee Were Deceptive
Despite it’s positioning that it is helping its users, Brigit was recently hit with an FTC action over allegations that the company deceived users and made it overly burdensome to cancel their subscriptions.
Specifically, the FTC’s complaint alleges that Brigit:
advertised that users could receive “up to $250,” when, in fact, only 1% of users actually qualified for that amount, and about 20% of users didn’t qualify for any advance
advertised “free instant transfers” and “no hidden fees,” but charged an “additional, undisclosed $.99 fee for ‘express delivery’”
advertised that users could cancel at any time, but used “dark patterns” to make it difficult to cancel and prohibited users who had an outstanding advance from canceling altogether
The complaint also alleges that Brigit didn’t disclose to users the amount they would qualify for until after they had signed up and agreed to pay $9.99 per month (Brigit disputes the accuracy of this and the instant fee claim; more on this below.)
It’s worth expanding a bit on the subscription cancellation issue, as it touches on a piece of regulation many in banking/fintech are likely unfamiliar with: the Restore Online Shoppers’ Confidence Act (ROSCA.)
Passed in 2010, ROSCA aimed to address problems and abuses faced by consumers as commerce migrated from in-person to online, including the proliferation of “negative option” subscription services. In Brigit’s case, “negative option” merely means that a subscription — and billing for it — continue until a user cancels the subscription.
According to the FTC, ROSCA (emphasis added) “requires negative option sellers to provide a simple, reasonable means for consumers to cancel their contracts. To meet this standard, negative option sellers should provide cancellation mechanisms that are at least as easy to use as the method the consumer used to initiate the negative option feature.”
Brigit’s cancellation process, as described in the FTC’s complaint, can only be characterized as labyrinthine.
There is no option to “cancel” a paid Brigit Plus subscription, but rather the option to “switch” to the free plan.
Until January 2022, the Brigit mobile app didn’t even support switching plans, instead redirecting users to the mobile website. Per the FTC complaint, Brigit added the ability to cancel in-app to avoid being removed from Apple’s app store.
If a user tries to switch their plan, they’re first presented with an option to “pause” — which, if they choose, automatically resumes billing after 31 days.
If they do choose to cancel/switch plans, users are presented with a mandatory survey.
After submitting the survey, they’re presented with a “special offer” of a free month of Plus service, which they can claim instead of canceling.
Only after making it through this gauntlet of five screens can a user actually cancel their paid subscription.
Brigit Disputes FTC’s Allegations As Factually Inaccurate
While Brigit agreed to a settlement to put the matter behind the company, it admits no wrongdoing and disputes the factual accuracy of the FTC’s claims.
A spokesperson for Brigit shared the following official statement:
“We strongly disagree with the FTC’s allegations against our business. Their claims are factually inaccurate, misunderstand our business, and go against everything we have worked so hard to build on behalf of our customers. Though we feel that we would have prevailed had this case gone to trial, it is in the best interest of our customers and employees to put this matter behind us. We remain focused on our mission to promote sustainable financial health for the people who need it most.”
Based on a review of the Brigit app, the FTC complaint does appear to contain some factual inaccuracies.
While Brigit has, historically, marketed “up to $250,” users of the app are made aware of the amount they qualify for prior to enrolling in a Brigit Plus subscription — contrary to the allegations made in the FTC complaint:
In response to the FTC’s allegation that Brigit deceived users about the $0.99 instant funding fee, a Brigit spokesperson clarified that the company rolled out the fee as a test to a small subset of users in June 2022.
Per the spokesperson, prior to doing so, Brigit removed “no instant fee” and “no hidden fee” language from its marketing materials and updated its terms and conditions — contrary to allegations in the FTC’s complaint.
Regarding the FTC’s claim that Brigit’s cancellation flow is overly burdensome and thus in violation of ROSCA, a company spokesperson argued its cancellation process is inline with peers in the market.
My Take: “Good Intentions” Don’t Make A Good Legal Defense
If you take the FTC complaint at face value, the allegations do sound pretty bad.
The additional context from Brigit and apparent factual inaccuracies present somewhat of a more mixed picture. Here’s my take:
On the “up to $250” claims: on the one hand, this does have the potential to be deceptive to potential users. However, Brigit is far from the only small-dollar option making these kind of claims, when, in reality, the large majority of users won’t qualify for the maximum amount.
This isn’t purely a small-dollar phenomenon either: personal lenders regularly advertise loans “up to” $30,000 or $40,000 — in SoFi’s case, up to $100,000. There is no bright line test on what proportion of applicants must qualify for an amount in order for it to be defensible.
If anything, my issue with Brigit’s (and many other small lenders’) adverts is the lack of a qualifier like “if approved.”
Brigit is currently running ads that say things like “you’re one tap away from $50 - $250” and “tap ‘Install Now’ to get up to $250 sent straight to your bank account.”
While this is arguably still deceptive, it isn’t as bad as what the FTC case accuses Brigit of doing: tricking users into signing up for a $9.99 per month subscription with the promise of $250.
On the instant fee claims: taking the Brigit team at their word, it sounds like the FTC’s allegations on the instant claim issue may be unfounded.
Now, if Brigit had historically used language like “we’ll never charge you instant transfer fees,” there could still be an argument here — but one that’s substantially diminished if, as Brigit says it did, the company stopped using marketing language promoting “free instant transfers” and “no hidden fees” and updated its terms prior to beginning to charge the $0.99 fee.
On the cancellation claims: the Brigit team’s defense here basically amounts to “everybody else is doing it.”
While that may be true, it’s also not a particularly compelling legal defense. Especially given that a competitor, MoneyLion, was hit with a CFPB enforcement action over similar subscription cancellation issues more than a year ago.
Based on internal communications cited in the FTC complaint, Brigit knew that users found the subscription cancellation process confusing, and that it generated complaints; there was even internal discussion about whether or not the tactic was aligned with the company’s value.
But ultimately Brigit’s priority — maximizing revenue by reducing churn — won out, at the expense of its users.
As someone who has had to navigate similar tensions, I understand the challenge.
But, all too often, “good intentions” of “helping” users — especially in lower income and credit-constrained segments — have a way of turning into justifications for product decisions that benefit the company while hurting the very users it sought to help.
On potential ECOA/TILA issues: While not an element of the FTC’s case against Brigit, how the company is advertising on platforms like Meta poses potential Equal Credit Opportunity Act (ECOA) risks.
The company doesn’t make use of Meta’s “special ad categories,” which restrict the ad targeting criteria and optimization algorithms to better ensure compliance with ECOA and fair lending requirements. (Meta actually prohibits ads for all short-term loans, defined as those repayable in 90 days or less, but the company seems to only enforce the policy selectively.)
Advertisements for similar products from Dave and MoneyLion do make use of the special ad category restrictions.
One could argue that Brigit technically doesn’t meet the definition of “credit” under TILA Reg Z, as it is repayable in fewer than four installments and doesn’t carry a finance charge.
The counterargument would be that Brigit’s subscription fee functions as a regulatory arbitrage to avoid classifying the product as “credit” and evade the consumer protections afforded by ECOA and TILA.
On “no credit check” claims: The FTC complaint did not mention Brigit’s marketing claims of “no credit check,” as the company relies on bank transaction data, not traditional credit data, to assess users’ eligibility for an advance.
Typically, advertisers making this claim do so to indicate they aren’t pulling consumer credit data from one of the big three bureaus: Equifax, Experian, or Transunion — though there are other sources of FCRA-regulated credit data, including “specialty” credit reporting agencies, like Clarity (part of Experian), DataX/Teletrack (part of Equifax), and FactorTrust (part of Transunion.)
The kind of income and cash flow data Brigit and many other fintech lenders use typically isn’t subject to the Fair Credit Reporting Act (FCRA).
But with “open banking” rulemaking now a reality, lenders of all types increasingly using “alternative” and cash flow data, and some data aggregators that facilitate access to such data opting to be regulated as consumer reporting agencies, one can imagine a future where transaction data used for underwriting could be treated similarly to how CRA-based credit data is today — including potentially extending applicable protections of FCRA and ECOA.
Solid Cofounder Took $4.5M Secondary In Now-Disputed Series B, Newly Unredacted Filing Shows
In the latest twist in the Solid-FTV saga, a recently released unredacted version of FTV’s original complaint adds additional color to the investor’s fraud claims.
FTV’s suit stems in part from allegations, first reported by Fintech Business Weekly, that Solid manipulated revenue figures, including in materials used in its $63 million Series B fundraise.
By late September, FTV filed suit against Solid, seeking to recoup its $61 million share of that investment. Solid filed a counterclaim, describing FTV as an “aggressive private equity firm” that had its chance to do due diligence and, essentially, has buyer’s remorse.
The unredacted version of FTV’s original complaint provides additional detail on the investor’s allegations against Solid, including that:
As part of the Series B transaction, FTV purchased $13 million in shares from existing Solid investors, including 1,883,333 shares worth over $4.5 million from cofounder and CEO Arjun Thyagarajan.
CEO Thyagarajan and cofounder and President Raghav Lal told Solid’s then-Head of Finance to “keep showing the higher revenues to the FTV guys and if they catch it then we’ll figure out what to say.”
Solid’s investor presentation showed a consistently growing number of customers:
As well as claiming to have grown annual recurring revenue (ARR) by 10x in just six months:
But FTV’s suit alleges that “with respect to the monthly subscription fees the Company charged to its customers, which served as the primary driver of the Company’s representations of $10 million in ARR, the majority of the Company’s revenues were fictional.” Revenue reported by Solid included:
monthly fees charged to customers who never received agreed-to services
monthly fees charged to one-time customers who had cancelled their services
monthly fees charged to companies that had never engaged with the company after signing an initial agreement
The suit further alleges that “at least 70% of the Company’s purported customers at the time of the Series B Stock Purchase Agreement had never paid a single invoice issued by the Company and the Company lacked evidence that such ‘customers’ would ever pay such invoices,” yet Solid accrued 100% of amounts invoiced upon issuance of the invoice.
Fed Revisits Debit Interchange Cap, Proposes Lowering It
When Dodd-Frank passed in 2010, it included an amendment that would unintentionally pave the way for an explosion of non-bank consumer fintech companies: the Durbin Amendment.
And while many in banking and fintech use “Durbin” as shorthand to refer to debit issuers that are exempt from its requirements — banks with less than $10 billion in assets — the amendment also instructed the Federal Reserve to devise regulations defining permissible debit fees for issuing institutions with over $10 billion in assets, which account for the lion’s share of cards and transaction volume.
Specifically, Durbin calls for a cap such that (emphasis added):
The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
The Fed undertook that rulemaking exercise and ultimately devised a formula of a flat $0.21 + 0.05% of the transaction (plus $0.01 if issuers implemented certain fraud-prevention measures.)
The measure went into effect in 2011, and the average interchange fee for covered transactions promptly dropped from nearly $0.60 per swipe to a bit over $0.20. Covered transactions have consistently held around that average since the measure took effect:
The Fed seems to have taken a “set it and forget it” approach, as, until now, it hasn’t revisited how the cap is calculated and whether or not it is “reasonable and proportional” to actual transaction costs.
As required under the Durbin Amendment, the Fed has continued to collect data from covered debit issuers every other year. According to the Fed, that data show that the cost of processing debit transactions has declined significantly since 2009.
Why the Fed waited this long to adjust the cap, if analysis showed issuers’ actual costs were declining, is unclear. But, last month, the Fed released a proposed rule that would lower the cap and codify an approach for updating the cap every other year without allowing for public comment.
Fed analysis found the average cost for processing a debit transaction declined by nearly 50% from $0.077 in 2009 to $0.039 in 2021; that fraud losses over this period have declined; and that fraud prevention costs have increased slightly.
Under the proposal, the new cap would see the base component decrease from $0.21 to $0.144, the “ad valorem” component decrease from 0.05% to 0.04%, and the fraud prevention adjustment increase from $0.01 to $0.013.
The potential impacts the Fed foresees from the lower cap are… interesting (emphasis added):
With respect to merchants, the proposal should lower merchants’ costs of accepting debit card transactions. Merchants, in turn, may pass on some portion of their savings from lower interchange fees to consumers.
Furthermore, lower debit card acceptance costs could lead merchants to adopt debit cards in market segments where acceptance may be lower, such as card not-present (e.g., e-commerce) transactions.
First of all, while generally accepted as true, it’s not actually the case that the Durbin Amendment reduced debit acceptance costs for all merchants: the impact depended on the merchant sector, distribution of ticket sizes, and makeup of card issuer types (covered vs. exempt.)
Many small ticket transactions actually became more expensive after Durbin went into effect, as the flat $0.21 + 0.05% replaced preferential pricing networks previously offered for small transactions in order to encourage merchants to accept card payments.
Survey data suggest while some merchants saw debit acceptance costs decline, many believe their costs stayed the same, and some reported cost increases, after the original fee cap went into effect.
The impacts of the proposed update are somewhat easier to predict than when the original Durbin Amendment went into effect. Debit acceptance costs for merchants should decline — but history suggests it’s quite unlikely those savings will be passed along to consumers.
The claim that lower costs will boost acceptance for card-not-present / ecommerce transactions is just confusing — virtually all US ecommerce merchants already accept debit card payments.
The Fed acknowledges that covered issuers may attempt to make up for lost revenue by increasing consumer fees, as happened in the wake of the original Durbin Amendment, but assumes “competition” will keep any fee increases in check (emphasis added):
The proposal would reduce covered issuers’ interchange fee revenues. Covered issuers may seek to offset lost revenue through a combination of cost reductions and adjustments to consumer terms and fees, although the latter effect would be tempered by competition between issuers.
The lesson from when Durbin originally went into effect, however, doesn’t suggest “competition” will effectively constrain fee increases.
The decline in interchange revenue after Durbin went into effect is widely seen as a major driver in banks dramatically reducing “free checking” offerings and ramping up overdraft, minimum balance, and NSF fees — costs borne disproportionately by the lowest-income consumers. One study estimates Durbin drove a 40 percentage point decline in the provision of free checking accounts.
While the impact of the proposed lower cap is unlikely to be as dramatic, covered issuers will seek to make up for that lost revenue.
And, if history is any guide, in addition to the intended impact of lowering debit interchange for covered issuers, there are likely to be a plethora of hard-to-predict, unintended consequences as well.
FT Partners: Q3 Fintech Market Insights
FT Partners is out with its third quarter fintech financing and M&A research report, and it’s well worth a read. Globally, private funding volume ticked up slightly, to $10.7 billion, while the number of deals declined from 763 in Q2 to 650 in Q3. Overall, the median seed round weighed in at about $3 million, while the median Series A is now approximately $12 million.
Deal activity in the US declined slightly quarter over quarter, with $3.8 billion invested across 214 deals.
Other Good Reads
Listen: The OCC’s Michael Hsu on the Big Risks Facing Banking Businesses Right Now (Odd Lots Podcast)
‘Ray, This Is a Religion’ How the world’s largest hedge fund lost two top hires — and was paralyzed by puddles of pee. (New York Magazine)
Big Banks Cook Up New Way To Unload Risk (Wall Street Journal)
Maybe the Real PFM Was The Fintech We Built Along the Way (Fintech Takes)
Our Money In Data (Chaos Engineering)
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