"Certified B Corp" Still Charging Over 1,000% APR
CFPB's BNPL Inquiry, 2021 Predictions Graded, FDIC Chair Fires Back
Hey all, Jason here.
Somehow the holiday season is upon us — and we’re back in lockdown here in the Netherlands. Talk about déjà vu. I guess I’ll be enjoying the next couple weeks at home. Anyway, here’s wishing you and yours a happy, relaxing, safe holiday.
A quick programming note; Fintech Business Weekly will be off next week. Expect to see me back in your inbox on Sunday, January 2nd.
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Peer-to-Peer Payday Lending App Gets “B Corp” Certified, Still Charging Over 1,000% APR to Vulnerable Borrowers
Last week, SoLo Funds, which bills itself as a lending “community,” announced it had become a certified B Corp. B Corp certification (not to be confused with a public benefit corporation) is a status granted by B Labs, a 501(c)3 non-profit, intended to signal a company’s commitment to “the highest standards of environmental and social performance.”
The certification is based on an assessment carried out by B Labs. According to its website (emphasis added):
“The B Impact Assessment evaluates how your company’s operations and business model impact your workers, community, environment, and customers. From your supply chain and input materials to your charitable giving and employee benefits, B Corp Certification proves your business is meeting the highest standards of verified performance.”
Some popular companies that are often thought of as progressive or socially responsible, like Patagonia, Ben and Jerry’s, and Allbirds, boast that they are B Corp certified.
So I was surprised when I saw that SoLo Funds sent a marketing email touting it had obtained certified B Corp status. The company positioned the certification as indicating it does “good business in every sense of the word ‘good’.”
Why was I surprised SoLo had obtained this status?
The company, which I’ve written about before, offers a platform to connect individual lenders and borrowers. SoLo positions the loans it is brokering as the “most affordable loans in the market,” claiming they carry 0% interest and no finance charge — just a “lender appreciation tip” and optional donation to SoLo itself:
However SoLo chooses to describe the fees, describing them as ‘the most affordable loans in the market’ is demonstrably false — less expensive short-term borrowing options exist in the form of fee-free overdrafts, from neobanks like Chime, and small-dollar loans like Bank of America’s Balance Assist or US Bank’s Simple Loan.
APRs Can Reach 2,555%
Loan requests visible on that platform, if calculated on an APR basis, would carry rates reaching as high as 2,555%, owing to the option to borrow for periods of time as short as 3 days — a loan term that is generally not permitted, even in states that allow payday loans:
Beyond the APR issue, there are a plethora of potential legal and regulatory problems with SoLo’s model, which I explored in greater detail in my original post on the company:
SoLo claims it is not a lender, and does not hold state lending licenses; the individual people funding loans on SoLo’s platform also do not hold lending licenses, which is likely in violation of state law in many of the jurisdictions SoLo operates.
SoLo appears to be functioning as a broker, an activity for which it does not hold a license.
SoLo appears to be operating as a debt collector, an activity which requires a license in many states.
SoLo appears to be operating as a consumer reporting agency, by collecting data on loan applicants and computing its proprietary “SoLo Score,” which would make it subject to the Fair Credit Reporting Act.
So How Did SoLo Get B Corp Certified?
By design, the B Corp certification process needs to be generic enough to apply to a wide variety of companies across different industries. The assessment is more geared towards companies that produce physical goods or provide tangible services; it also skews towards larger corporations vs. small companies or startups.
The evaluation for B Corp certification awards points across five categories: community, customers, workers, environment, and governance. Companies need to score a minimum of 80 points in order to be eligible for B Corp certification.
However, a company can earn points from areas that have seemingly little to do with the impact of its actual business, like offering paid family leave, giving employees an ownership stake, recycling, or preferring local suppliers.
In SoLo Fund’s case, it derives just over 1/3 of its 103 points from the “Customers” category because it is “empowering” and serving underserved populations.
Combined with points it earns from the Community category for “economic impact” and diversity, the Governance category for being “mission-based,” and the Workers category, SoLo Funds easily exceeds the 80 point minimum for B Corp certification.
Shouldn’t it take more than points to qualify?
The B Corp certification process does go beyond a points rubric; companies seeking the status must also complete a disclosure questionnaire certifying whether they operate in certain industries or have faced certain negative outcomes or penalties.
In its disclosure form, SoLo Funds claims it is not involved in “Payday, Short Term, or High Interest Lending” and that it has not had any formal complaints to regulatory agencies:
And yet, later in the same document, the company describes its business model as offering “short-term funds” of $100 to $500, which must be repaid in a lump sum within 35 days:
SoLo Funds claims that “electing not to tip or donate has no impact on a member’s ability to request a loan” — which, in a narrow sense, is true; users can request a loan while offering no tip or donation. But, because such tips are specified in advance of funding, such requests are exceptionally unlikely to be funded.
SoLo Funds advises users that increasing the amount of their tip will increase the speed and likelihood of their loan request being funded and that loans with the maximum tip (12%) are twice as likely to be funded — a practice similar to that for which cash advance company Earnin has already gotten into trouble.
The company’s claim that it hasn’t had any formal complaint to a regulatory agency also may be inaccurate — a quick search of the CFPB’s complaints database reveals at least one such complaint; and, while it’s not a regulatory agency, the company has also had 51 complaints to the Better Business Bureau.
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My 2021 Predictions: Graded
Toward the end of 2020, I made four predictions for 2021. Let’s check in and see how I did!
1. Monzo or N26 exit the American market
It may seem obvious now, but, remember, at the end of 2020, Monzo was in the process of applying for a US bank charter. In August of 2020, N26 had celebrated its 1-year anniversary of operating in the US by claiming it had 500,000 users.
And yet, here we are. Monzo, which has struggled (though recently rebounded) in its home market, withdrew its US bank charter app after being told it was unlikely to succeed. Its US banking product, offered via Sutton Bank, still hasn’t publicly launched — and, at this point, my suspicion is it never will.
For its part, N26 announced a month ago it will wind down its US operations, despite accumulating “500,000 users” (independent market research puts the number at closer to 100,000) “in order to sharpen [their] strategic focus on the important role [they] have to play as a pioneer in digital banking in Europe.”
N26 seems to have its work cut out for it in Europe: the German banking regulator BaFin has limited the neobank to a maximum of 50,000 new customers per month due to its “shortcomings in risk management.”
Prediction grade: A+
2. Apple and Goldman roll out an Apple Wallet/Apple Pay-integrated buy now/pay later offering
Again, accurate predictions tend to feel obvious in retrospect. In late 2020, the BNPL trend was hitting critical velocity in the US market; PayPal had only just launched its split pay offering at the end of August, 2020.
In July, 2021, news broke that Apple was in fact working with Goldman on a BNPL offering; according to Bloomberg at the time:
“Apple Inc. is working on a new service that will let consumers pay for any Apple Pay purchase in installments over time, rivaling the “buy now, pay later” offerings popularized by services from Affirm Holdings Inc. and PayPal Holdings Inc.
The upcoming service, known internally as Apple Pay Later, will use Goldman Sachs Group Inc. as the lender for the loans needed for the installment offerings, according to people with knowledge of the matter.”
The pairing made sense — the two companies already partner on the Apple Card credit card, which includes 0% installment financing for Apple purchases. Goldman has already tried its hand a POS-style BNPL, though the offering seems to have never rolled out beyond a single partner, Jetblue.
Putting the pieces together, extending the Apple/Goldman partnership to BNPL just made sense — though the offering has yet to actually launch.
Prediction grade: A-
3. At least one merger in the regional space, and at least one acquisition of a small bank by a fintech as a route to acquire a charter
For the first part of this prediction, I meant a M&A of two large regional players, a la 2019’s BB&T-Suntrust merger. Nothing of that scale ended up materializing in 2021, perhaps owing in part to clear signals from the Biden administration that it wanted to promote competition in banking, including by updating bank merger guidelines and taking a tougher look at proposed deals.
The biggest deal in 2021? U.S. Bank’s (a top 10 bank by assets) acquisition of MUFG Union Bank. Regional banks like Citizens, Regions, and M&T made smaller, tuck-in acquisitions to complement their existing businesses.
The second half of this prediction, fintechs acquiring small banks as a path to a charter, more clearly came to pass in 2021. Early in the year, SoFI announced it would buy tiny Golden Pacific Bancorp for just $22.3 million. And just last month, BM Technologies announced it would buy First Sound Bank in a deal valued at $23 million.
The fintechs-buying-banks trend held south of the border as well. Mexican small business lender Credijusto announced in June it would buy Banco Finterra for an undisclosed sum. Argentine fintech Ualá also revealed it would buy Mexican bank ABC Capital.
Prediction grade: B
4. Governments evaluate and implement overhauls in how citizens and businesses apply for and receive benefits
Perhaps this prediction was more wishful thinking. The pandemic made clear the necessity of being able to move quickly to spin up programs and disburse aid to families and businesses. The existing state and federal systems in place proved ill-equipped to meet the challenge.
The result? Overloaded state unemployment programs with huge backlogs desperately looking for COBOL programmers; stimulus payments disbursed via a confusing mix of direct deposits, paper checks, and scammy-looking prepaid cards — resulting in some families facing long waits to get their money; and the rushed PPP program, designed to get money to small businesses, 15% of which may have been fraud.
This prediction was focused on federal and state governments deploying tech to improve the UX of applying for a receiving benefits… which hasn’t really happened. The private sector, however, has developed solutions that solve some pain points for end users, like a portal to simplify the process of applying for benefits in California and the EBT management app Propel.
Prediction grade: C-
CFPB Seeks Information from BNPL Sector
The CFPB dropped a bomb on buy now, pay later’s gangbusters holiday season on Thursday. The consumer regulator announced it is opening an inquiry into the sector; it is seeking information from Affirm, Afterpay, Klarna, PayPal, and Zip. Affirm’s share price slid as much as -16% on the news.
But regulatory moves to take a look at the sector shouldn’t come as a surprise to anyone who is paying attention. Australia and the UK, both countries where BNPL gained traction earlier and faster than in the US, have both initiated regulatory reviews.
In the US, as far back as January 2020, the California DFPI was treating split pay BNPL as a loan and requiring providers to obtain licenses; this July, the CFPB published a blog post aimed at educating consumers about the category; and the House Committee on Financial Services held a hearing focusing on BNPL just last month.
The key areas the CFPB highlights as concerning include the risk of accumulating debt; its release states (emphasis added):
“Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins.
If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled. And when there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider. Because of the ease of getting these loans, consumers can end up spending more than anticipated.”
The CFPB’s statement also highlights concerns about “regulatory arbitrage.” Split pay-style products are commonly formulated as a payment at the time of purchase and three subsequent payments, typically spread two weeks apart. Because there is no interest/finance charge and fewer than five payments, BNPL providers aren’t defined as creditors under TILA, which, they argue, exempts them from certain disclosures.
Per the CFPB’s statement (emphasis added):
“Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products. For example, some BNPL products do not provide certain disclosures, which could be required by some laws.”
Finally, the CFPB flags the risk of what it terms “data harvesting.” It correctly flags the trend of downward pressure on merchant discount rates and suggests the pressure that puts on BNPL providers’ business models may lead them to seek to monetize the data they collect on users:
“BNPL lenders have access to the valuable payment histories of their customers. Some have used this collected data to create closed loop shopping apps with partner merchants, pushing specific brands and products, often geared toward younger audiences. As competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability. The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.”
BNPL providers do have access to more data than, say, credit card companies, in that they have item-level detail of each transaction. Still, no BNPL company is operating at the scale of Big Tech companies like Google, Amazon, or Facebook — another recent target of CFPB scrutiny around data practices.
FDIC Drama Continues: Chair Fires Back in WSJ Op-Ed
In a sign that the FDIC board drama isn’t likely to be resolved quickly, Trump-appointed Chair Jelena McWilliams fired back at Democratic-appointed FDIC board members Rohit Chopra and Martin Gruenberg — in the form of a Wall Street Journal op-ed. In it, she said (emphasis added):
“This conflict isn’t about bank mergers. If it were, board members would have been willing to work with me and the FDIC staff rather than attempt a hostile takeover of the FDIC internal processes, staff and board agenda.
This episode is an attempt to wrest control from an independent agency’s chairman with a change in the administration. More than that, it’s an example of the erosion of America’s democracy. Many government institutions are built on norms and practices that encourage parties to work together. This foundation depends on agency leaders who recognize that the long-term benefits of cooperation outweigh the short-term incentive to blow up institutions in pursuit of immediate partisan gains.”
Even if Ms. McWilliams is sincere in her belief, she would do well to read the room. A Trump-appointee, the party McWilliams belongs to (whether or not she agrees with it) spent an entire administration destroying the “norms and practices that encourage parties to work together.”
And, as far as the “erosion of America’s democracy,” McWilliams’ party is in the process of laying the groundwork to overturn the outcome of future elections if they don’t turn out in their favor.
So forgive me if I’m not up in arms about her colleagues’ arguably legal attempts to bypass her obstructionism to implement the current administration’s chosen policies (even if I don’t personally agree with all of those policies). Ms. McWilliams should remember that most hackneyed of sayings: elections have consequences.
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Other Good Reads
What’s Not Going to Change (Fintech Takes)
The Financialisation of Art (Net Interest)
2021’s Wild Year of Trading Stocks, NFTs and Crypto (Bloomberg Businessweek)
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