CFPB Sues TransUnion, Financial Technology Association Q&A

Facebook's Metaverse Cash Grab, Step Adds Crypto Trading for Kids, California Sues OppFi, BNPL Grab Bag

Apr 17

Hey all, Jason here.

I’ve made it to New York, safe and sound — and was awake at 4:00am. Thanks, jet lag! Looking forward to kicking off Fintech Week tomorrow. If you’re in town, hopefully I’ll see you around at one of the many great events planned.

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BNPL Grab Bag: Klarna’s Future, Affirm Acquisition Rumors, Buyer’s Remorse for Block?

Is Klarna’s Future in “Self-Driving Money”?

Klarna has been on something of a PR push lately, trying to move beyond its “buy now, pay later” label. The company has been emphasizing that some 40% of its European volume is “pay now” — eg, that it operates as a payment network, in addition to providing financing. In fact, it also owns a European payment network, Sofort.

It’s also taken pains in recent weeks to point out the open banking infrastructure it has built, something that was necessary as part of underwriting its users for affordability. But now it’s making that infrastructure — connections to some 15,000 banks — available as a B2B product for others to build on top of.

Now, Klarna founder Sebastian Siemiatkowski is envisioning a more automated future where financial services better serve consumers, even if it means they’re less profitable. According to reporting from AltFi:

“‘Klarna has pivoted its business a couple of times but the trajectory and journey we’re on right now comes from this one type of insight that we had. We sat down and said, what are financial services going to look like in the future?,’ he said this week at Innovate Finance Global Summit.
‘The conclusion was one day you wake up and your computer tells you, hey, I've analysed your mortgage, and I realised that you can save £10 pounds by just switching and the only thing you need to do is say yes, and that's us,’ he said.”

The concept goes beyond the financial “super app” that so many American fintechs seem hung up on at the moment.

Is Affirm For Sale?

The rumor mill is churning on unconfirmed reports that an unnamed party is interested in acquiring BNPL provider Affirm. The company has seen its share price slide from nearly $170 less than six months ago to below $40 per share, as of last week. That puts Affirm’s market cap just below $11 billion.

At that price tag, who might be interested?

I’ve speculated previously that Affirm would make an interesting tuck-in acquisition for Goldman’s Marcus unit — though $11 billion would make a larger-than-typical acquisition for the firm’s consumer business. Not to mention potential antitrust scrutiny.

What about Apple, given the recent reports of its desire to grow its financial services capabilities? It certainly has the war chest to afford it. But this seems unlikely. Affirm’s business is built on directly integrating with and serving merchants — something Apple is keen to avoid.

What about Klarna? Affirm could represent a quick route to expanding its presence in the US, given Affirm’s existing merchant footprint and bank partnerships. While Klarna has done plenty of acquisitions, they have primarily been in complementary businesses — payments, ecommerce — not other BNPL companies.

Amazon? Walmart? While the list of potential acquirers could include other BNPLs, establishment banks, tech companies, and retailers, my best guest? None of the above.

Founder Max Levchin still owns ~11% of Affirm and hasn’t sold any shares. Despite the market turbulence, there’s little reason to think he’s eager to sell now.

Did Block Overpay for Afterpay?

Earlier this week, Block (formerly Square) released Afterpay’s financials from the second half of 2021, and they were… not great? The regulatory filing showed:

Expenses growing more quickly than revenue
Revenue grew 55% (Affirm grew revenue 67% over the same period)
Gross margin declined by 170 bps
Operating expenses grew 118% YoY (excluding impairment and loss on a fair value adjustment)
Late fees increase 124% YoY, accounting for 12% of revenue vs. 8% in the comparable prior period

Given the cooling market for tech broadly, fintech specifically, and the abysmal performance of public BNPL companies… it certainly feels like Block overpaid for Afterpay.

CFPB Sues TransUnion for Deceptive Marketing, ‘Dark Patterns’; Complaint Names Individual Exec.

The CFPB has filed suit against TransUnion for allegedly violating a 2017 consent order and has taken the unusual step of individually naming a former company executive in the suit.

According to the CFPB’s press release (emphasis added):

“The order was issued to stop the company from engaging in deceptive marketing, regarding its credit scores and other credit-related products. After the order went into effect, TransUnion continued its unlawful behavior, disregarded the order’s requirements, and continued employing deceitful digital dark patterns to profit from customers. The Bureau’s complaint also alleges that TransUnion violated additional consumer financial protection laws.
‘TransUnion is an out-of-control repeat offender that believes it is above the law,’ said CFPB Director Rohit Chopra. ‘I am concerned that TransUnion’s leadership is either unwilling or incapable of operating its businesses lawfully.’”

The lengthy complaint focuses on allegedly deceptive practices related to the marketing and enrollment process for credit report, credit score, and credit monitoring products sold by TransUnion’s subsidiary, TransUnion Interactive, including alleged violations of Reg V, which implements FCRA, and the Electronic Funds Transfer Act.

The case seems designed to make several points, which bureau Director Chopra drove home in an accompanying statement — that the CFPB is willing to go after executives personally, in addition to the companies they work for; the CFPB’s scrutiny of so-called “dark patterns,” which the bureau argues are designed to “deceive, steer, or manipulate users into behavior that is profitable for an entity offering a product or service online, but they are often harmful to users”; and the bureau’s commitment to pursuing “repeat offenders.”

Step Launches Stocks, Crypto for Kids

Step, a neobank for the under 18 set, announced its plans to add stock and crypto trading. According to the press release (emphasis added):

“[A]s Gen Z continues to lean into the “DIY culture” with increased financial curiosity as they turn their side hustles into full-time gigs, they’re looking for an immediate way to start becoming active contributors to the economy and growing their wealth.
In fact, not only is investing one of the top-requested Step features, but a recent survey of Step teens revealed that 56% are bullish on crypto (with Bitcoin and NFTs at the top of the list). Additionally, 25% of teens said they believe investing is the single-most important skill to master before graduating high school.”

I mean… I guess? If adults are “investing” by gambling on meme stonks and crypto, why shouldn’t 16 year olds?

Still, I can’t help but think the current get-rich-quick investing climate — to be fair, both in traditional equities as well as crypto and NFTs — is going to permanently color how younger people experiencing it think about investing.

There’s ample evidence, for instance, that those coming of age during the 2008 crisis, who may have seen parents’ retirement accounts decimated or even losing their homes, have consistently more risk-averse attitudes toward investing.

Of course, it’s not fair to lay the blame for today’s bonkers investing climate at Step’s feet. But, instead of teaching its under-age user base a responsible, balanced, long-term approach to investing, the company appears to be cynically cashing in on the current trend.

Why Facebook’s Cash Grab Could Doom Its Metaverse Ambitions

Meta, Facebook’s parent company, confirmed reports its fees for the sale of digital goods on its nascent Horizon Worlds “metaverse” platform will be as high as 47.5%. The fee will be comprised of a 30% charge from the Meta Quest Store, a rate that’s comparable to today’s mobile phone app stores, plus an additional 17.5% fee for Horizon Worlds. Wowza.

By way of comparison, leading NFT platform OpenSea charges a commission of just 2.5%, though sales could involve other costs, like unpredictable and often high crypto “gas fees.”

Meta’s seemingly extortionate fees have creators understandably up in arms — and may doom the company’s metaverse plans before they’re even out of the gate.

A key narrative of web3, a so-called ‘decentralized internet,’ is that it will correct the sins of the centralized internet by letting users and creators, rather than corporate giants, capture economic benefits (whether or not this will be the case with web3 is a subject of fierce debate and remains to be seen.)

Setting such a high commission rate before the platform has reached a critical mass of adoption is likely to discourage creators from using Meta’s metaverse and leaves plenty of greenspace for other platforms — centralized or not — to capture users by charging lower rates.

Beyond the obvious economic argument, Meta’s near-50% take rate exemplifies everything that crypto/defi/web3 purports to be rebelling against. The decision makes Meta and Mark Zuckerberg look deeply out of touch.

California Claps Back at OppFi

First, OppFi sued California’s financial regulator. Now, the regulator is firing back, filing its own suit against the lender, whose loans reach 160% APR.

In its filing, California’s DFPI argues that OppFi is engaging in a “rent-a-bank” scheme with Utah-based FinWise, and, that because OppFi is the “true lender,” its loans are in violation of California’s usury cap. Its filing states:

“There is no question that OppFi, a non-bank lending company, is subject to California’s interest rate caps while FinWise, a federally insured state-chartered bank, is not. Under the OppFi-FinWise partnership model, FinWise funds the OppLoans as the putative ‘lender’ while OppFi is responsible for the marketing, underwriting, and servicing of the OppLoans.
Within days after FinWise funds an OppLoan, OppFi purchases upwards of 95 percent of a loan’s receivables from FinWise, resulting in OppFi, not FinWise, collecting nearly all the profits from the loans. Through this rent-a-bank ruse, OppFi uses FinWise as a straw-lender in a gambit to circumvent interest rate limits that the State of California deemed reasonable and necessary to curb the abuses of predatory lending. Regardless of which entity the loan documents proffer as the purported ‘lender,’ OppFi is the true lender of the OppLoans, and the loans OppFi makes are illegal in California.”

Such partnerships are commonly used to enable non-bank fintechs to offer loans nationwide. Companies like Affirm, Prosper, Avant, and numerous others use this approach — for loans up to 36%. While it uses the same model, OppFi’s OppLoan product typically carries a 160% APR — something that has drawn the ire of consumer advocates and scrutiny of state regulators.

The California case is likely to add uncertainty to the future of fintech-bank partnerships.

Even if OppFi is victorious and is able to continue lending at 160% APR, the California regulator has other tactics it can use to bring OppFi under state supervision; for instance, California recently added a requirement that first-party debt collectors, like OppFi, be licensed and supervised in the state.

Interview with Financial Technology Association’s Penny Lee

The pace of technological and business model innovation in the financial services space has created a plethora of new products and services that don’t neatly fit in existing regulatory frameworks.

As legislators and regulators grapple to balance promoting innovation and financial inclusion, the companies developing new products understandably desire to have a voice in that process.

Enter the Financial Technology Association, a recently formed trade association representing fintech payment and lending companies like Plaid, Afterpay, Klarna, and Stripe. I recently had the chance to catch up with FTA’s CEO Penny Lee. What follows is our written Q&A.

The Financial Technology Association was started about a year ago. What was the impetus for starting the organization? What gaps is it trying to fill?

Financial innovation is transforming financial services and creating economic opportunities for so many who have been shut out in the U.S. and globally. The Financial Technology Association (FTA) was formed to give the industry a collective voice in Washington that we felt was missing. We work with our members to champion the positive impact of fintech and advocate for modernized financial policies to allow innovation to thrive while safeguarding consumers.

What kinds of companies does FTA represent? Are there types of companies FTA wouldn't welcome as members (eg, high-cost short term lenders)?

FTA represents growing, innovative market leaders using technology to advance financial services to drive better outcomes for consumers, small businesses, and the economy. Our members include modern payments systems, lending platforms, personal finance apps, AI/ML innovators, and platforms offering investment advice and expanding equity ownership. All members have a shared mission of embracing innovation, safeguarding consumers, and providing fair, accessible, and transparent financial services.

How do you think about the role of an association like the FTA (vs. other stakeholders, like legislators, regulators, consumer advocates, the companies themselves, etc.)?

Associations like FTA bring together like-minded companies to communicate the value of their products and advocate for common industry interests. This emphasis on impact, education, and storytelling is particularly valuable for an emerging and rapidly growing industry like fintech. We’re energized to tell the industry-wide story of its benefits while also lifting up inspiring founder stories and the impact of fintech on everyday consumers, investors, and small businesses.

What unique challenges does the US system of government - discrete state and federal systems - pose to your member companies?

There are often different regulations for state-based operations, requiring companies to comply with 50 distinct state laws, while also adhering to regulations applied on the federal level. We advocate for harmonization where possible and our members regularly engage with elected officials and policymakers at all levels of government.

In the current political environment, it seems more difficult than ever for Congress to get anything done -- sometimes leading to executive branch regulators stepping into the breach, other times leading to inaction altogether. What do you think about navigating this challenging environment?

FTA works with Congress and regulators alike to advance our policy priorities and advocate for the benefits of technology-driven finance to break down barriers to financial services. Some of our priority issues are regulatory – such as CFPB action on open banking and the 1033 rule – while others are legislative. Ultimately, we focus on education and advocacy at all levels of the federal government.

What kind of policy or process changes do you think would be beneficial in fostering more productive relationships between fintechs and their regulators?

FTA advocates for modernized financial policies and regulations to better reflect the current state of innovation in the market. In practice, that means advocating for proactive policy changes like securing an open banking infrastructure that enables fintech competition across the board, enabling faster and more secure payments through access to Fed services, expanding access to affordable capital, encouraging broad chartering authority, advancing the responsible use of AI/ML, and increasing access to equity and capital markets.

Part of FTA's mission is to educate -- what are some common misperceptions you've encountered about "fintech," in general, and FTA's member companies, specifically?

As a new industry, we’re working hard to show how fintech not only enables so many of the everyday products and services people enjoy but also brings choice to the marketplace, driving down costs like overdraft fees for consumers. Whether it’s paying for a food delivery on your phone, sending money to a family member overseas, a local business owner accepting digital payments, or applying for a small business loan online – that’s financial technology at work. Our mission at FTA is to tell those stories and also advocate for modernized financial policies to ensure this innovation continues flourishing in a safe, responsible way.

Many of FTA's members rely on modeling, including AI/ML models, which are coming under greater scrutiny for potential discriminatory impacts. What do regulators need to know about how these models are developed and deployed? What can the industry do to ensure that technology doesn't perpetuate or exacerbate historical discrimination?

Some 50 million American consumers are so-called thin-file credits — they can’t get traditional access to loans because they have little or no financial history at the major credit bureaus. Traditional lenders shy away from these customers because the cost of underwriting exceeds expected returns. But AI and machine learning can provide new insights into a borrower’s creditworthiness and improve credit underwriting. When built properly, AI/ML models can be more equitable and predictive than a human. That means baking sophisticated bias detection and mitigation directly into products to ensure fairness and equity.

How do you think about striking a balance between promoting innovation and ensuring consumer protection? Are these two goals necessarily in opposition?

We believe that innovation and consumer protection should go hand-in-hand. Ultimately, the mission of technology-driven financial services is to give consumers more choice and better options in the marketplace for lower cost and easier-to-use services. When it comes to open banking, for example, FTA strongly believes that consumers should have the right to control their data and move it between financial institutions.

There has been a lot of scrutiny in Congress and from regulators lately over buy now, pay later providers -- many of which the FTA represents. What context does this scrutiny miss about BNPL?

Buy Now Pay Later (BNPL) allows customers to manage their cash flow through small, short-term, and low-cost payment options. The Pay-in-Four model offered by FTA members Afterpay, Klarna, Zip, and Sezzle allows consumers to pay for a purchase in four installments over six to eight weeks. Unlike revolving debt products like credit cards or payday loans, BNPL relies on customer repayment success, not failure. Approximately 95 percent of BNPL users don’t experience late charges. The consumers that use this product prefer it as it allows them to manage their finances better and provides more price certainty.

What opportunities and risks does open banking pose for consumers? Does the FTA hold a specific position about the currently in-progress rulemaking under 1033?

Open banking, or consumers’ right to securely control and share their own data and finances, enables more consumer choice and simpler, more convenient financial services and products. It’s a foundational issue for FTA and our members but also a competitive issue for the United States as many other countries have already implemented. Right now, we’re calling on the Consumer Financial Protection Bureau to undertake rulemaking under Section 1033 of the Dodd-Frank Act that will secure the open banking infrastructure and strengthen consumers’ rights to their data.

Anything I didn't ask about the Financial Technology Association that I should have?

As part of our mission to educate stakeholders on the value of fintech, we are excited to launch a new blog, Fintech Explained. If you want to stay up-to-date on fintech policy insights and analysis and get exclusive updates from our members, sign up for our blog here.

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