CFPB Takes Aim at Credit Card Late Fees
Update on El Salvador's Bitcoin Experiment, FTX as Lender of Last Resort, Binance.US Launches No-Fee Trading, Klarna at $10 Billion?
Hey all, it’s Jason.
I’m wrapping up my last few days in Chicago and will be headed home to the Netherlands later this week. It’s been great to spend time with family and friends (and catch up with a few Chicago fintech folks).
If I missed you this time around, feel free to drop me a line, and we can find a time for a “Zoom coffee” instead!
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CFPB Takes Aim at Credit Card Penalty Fees
Pressure from the CFPB and Congress, combined with the competitive threat from no-fee neobanks, have been fairly successful at encouraging establishment banks to reform their overdraft practices.
Recent analysis from Pew found that among the top 25 banks by branch count, half will no longer charge NSF fees. A similar proportion will cap the number of overdraft charges at no more than three per day, have reduced or eliminated charges to transfer funds from a linked account at the same institution, or have added a grace period to correct an overdraft before a fee is charged.
Pew suggests this will save consumers more than $4 billion annually.
Fresh off that win, the CFPB is now taking aim at credit card penalty fees, which the consumer protection agency says cost consumers some $12 billion per year. Late fees make up 10% of the total cost of credit cards to customers, according to the bureau.
The fees are also disproportionately paid by lower-income and subprime card holders.
According to the CFPB’s statement announcing the proposed rulemaking:
“The CFPB is seeking data about credit card late fees and late payments, assessing whether those fees are “reasonable and proportional.” We are also seeking data about card issuers’ revenue and expenses, the potential deterrent effect of late fees, and the role late fees play in credit card companies’ profitability.
“Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” said CFPB Director Rohit Chopra.”
2009’s CARD Act included a requirement that penalty fees be “reasonable and proportional to the omission or violation,” but provided card issuers safe harbor if they set fees at or below a specified cap.
Now, the CFPB is moving to reconsider that safe harbor. Again from the CFPB’s announcement (emphasis added):
“Today, the CFPB has published an Advance Notice of Proposed Rulemaking to review the Fed’s immunity provision and determine whether adjustments are needed to address late fees.”
Given the bureau’s reasonable success at encouraging overdraft policy changes and its ongoing war on “junk fees,” it seems likely that card issuers can expect a similar full-court press on late fees.
Given the relatively greater concentration in the credit card market vs. bank accounts, issuers may prove more reticent to respond to a pressure campaign; but, if the rulemaking process is successful, they may not have much of a choice but to reform their late fee practices accordingly.
Checking in on El Salvador’s Bitcoin Experiment
El Salvador’s President, Nayib Bukele, became something of a hero in bitcoin world when he pushed through the adoption of the cryptocurrency as legal tender alongside the US dollar.
Despite a high degree of skepticism from El Salvadorians and slow uptake of the country’s Chivo wallet, Bukele has remained a cheerleader for bitcoin, repeatedly tweeting about using the country’s funds to “buy the dip,” even as the price was crashing last month.
He even proposed issuing so-called “bitcoin bonds” to finance the creation of a special economic zone dubbed “Bitcoin City” and, of course, the purchase of more bitcoin.
The proposal had few takers, which isn’t surprising, given the economics would have been empirically worse than investing in El Salvador’s sovereign debt and bitcoin separately.
While Bukele hasn’t been able to raise funds through the bitcoin bond scheme, his embrace of the cryptocurrency has had the effect of alienating traditional funders, like the IMF.
The IMF has outlined concerns that include financial stability, money laundering, and consumer protection risks. The agency explicitly “does not recommend” the use of bitcoin as legal tender, arguing “the costs and risks largely outweigh the benefits.”
As Bitcoin Price Plummets, How is El Salvador Responding?
With the price of bitcoin hovering around $20,000, analysis shows the return on El Salvador’s bitcoin investments sits around -57%.
But President Bukele doesn’t seem worried:
Bukele’s finance minister Alejandro Zelaya went so far as to suggest the losses “didn’t exist,” telling a local TV station (emphasis added):
“When they tell me that El Salvador’s budgetary risk has increased because of the supposed loss, that loss doesn’t exist. That must be made clear, because we have not sold.”
Still, while the drop in value of El Salvador’s bitcoin is surely a political black eye, the holdings represent around 0.5% of the country’s annual budget.
The bigger problem than the write down may be the tension Bukele’s bitcoin experiment has introduced into its relationship with the IMF and other external lenders. According to CNBC (emphasis added):
“Negotiations have stalled with international lenders in part because they are unwilling to throw money at a country that is spending millions in tax dollars on a cryptocurrency whose price is prone to extreme volatility.
Rating agencies, including Fitch, have knocked down El Salvador’s credit score citing the uncertainty of the country’s financial future, given the adoption of bitcoin as legal tender.
That means that it’s now even more expensive for President Bukele to borrow much-needed cash.”
How Low Will Klarna’s Valuation Go?
Valuations are “stairs up, elevator down,” or so goes the saying.
Klarna seems to be learning that lesson the hard way.
The BNPL behemoth was once Europe’s most valuable startup. A SoftBank-led funding round last year valued the startup at some $46 billion.
But now, as the macro economic climate and fundraising environment have rapidly cooled, so too has Klarna’s valuation. Recent reports indicated Klarna was seeking to raise funds at $30 billion valuation, then a $15 billion valuation.
And now, the WSJ is reporting the company’s valuation could fall as low as $10 billion.
Part of the discussion with funders centers around Klarna’s strategy in the United States. According to the WSJ:
“Klarna laid out two routes for its U.S. business in a recent presentation to prospective investors that was reviewed by The Wall Street Journal. The Number 1 route was “Not recommended,” and involved cutting back on costs and keeping revenues the same as a way to increase profit margins.
The Number 2 route (“Recommended!”) showed increasing revenues while holding costs of services more or less steady, turning profit margins positive a year from now.
The company counted 27 million U.S. customers as of the first quarter, up 65% from a year earlier.”
Binance.US Launches No-Fee Bitcoin Trading
Binance.US, the US affiliate of the largest crypto exchange by volume, announced it has eliminated fees on bitcoin trading on its platform. Binance.US CEO Brian Shroder said (emphasis added):
“As an established leader on low fee trading, we are excited to be the first US crypto exchange to eliminate spot trading fees on numerous Bitcoin pairs for all users.
We see this as an opportunity to revolutionize the way fees are approached in our industry, increase accessibility to crypto, and better support our market and customers in a time of need. Binance.US is on a mission to empower everyone to do more with their money, and this brings us one step closer in that journey.”
The move could herald a transition toward no-fee trading becoming the industry standard, analogous to what happened with equities trading after Robinhood entered the sector.
A reduction or elimination of such fees could be painful for fintech companies that leaned in to crypto trading as a new source of revenue.
Cash App, for instance, generated some $10 billion in revenue and $218 million in gross profit tied to bitcoin trading during 2021. Robinhood saw crypto-related revenue of $54 million in Q1 2022. If no-fee trading becomes the norm, these revenue streams are likely to be at risk.
FTX As “Lender of Last Resort”
Who needs the Federal Reserve anyway?
Crypto exchange FTX, led by billionaire Sam Bankman-Fried, has been stepping up to bailout competitors in the ecosystem.
Last week, FTX inked a deal with BlockFi granting the crypto lender a $250 million credit line. BlockFi reportedly had counterparty exposure to troubled crypto hedge fund Three Arrows Capital. The credit facility gives BlockFi additional liquidity to meet customer redemptions and avoid the fate of fellow crypto lender Celsius Networks, which froze all customer withdrawals earlier this month.
Also last week, Alameda Research, a crypto trading shop co-founded by Bankman-Fried, provided a loan of $485 million to broker Voyager Digital as the firm seeks to “safeguard” customer assets.
By acting as a voluntary lender of last resort, Bankman-Fried seems to be playing a modern day version of J.P. Morgan’s role in the panic of 1907, when Morgan and other bankers pledged substantial amounts of their own money to stabilize the banking system in the face of a liquidity crisis and loss of confidence among depositors, resulting in numerous runs on banks and trust companies. Sound familiar?
A Congressional investigation and proposed reforms after the 1907 crisis eventually led to the creation of the Federal Reserve System, which could serve as a lender of last resort to provide liquidity and mitigate the risk of bank runs.
Other Good Reads
Mapping the Identity Verification Stack in Financial Services (Jelena Hoffart)
Do Kwon’s Crypto Empire Fell in a $40 Billion Crash. He’s Got a New Coin for You. (WSJ)
How to Survive Open Banking (Fintech Takes)
Listen: What can crypto learn from TradFi? (11FS Fintech Insider)
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