Current Can't Seem to Decide If It's a Bank

MoneyLion Facing Five Investigations, Basel Capital Rules for Crypto, Nacha RFI on Early Direct Deposit

Hey all, Jason here.

I’m safely home in the Netherlands, after arriving on the red eye Thursday morning, and how much changes in a month! Vaccine distribution has markedly progressed, as has re-opening, and the weather feels like summer (as much as it ever does here).

I was even able to bring my bike back with me (a Giant TCR 2 Advanced, if you’re wondering) and took my first real ride this morning since moving here. If any Dutch readers have bike etiquette tips I should be aware of, let me know!

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Huntington Latest to Help Consumers Avoid Overdrafts

Huntington Bank is the latest traditional financial institution to make moves to launch or re-configure products to help consumers avoid overdraft fees. In recent months, PNC introduced its “Low Cash Mode” to help its users avoid overdrafts, Ally eliminated overdraft fees altogether, and Bank of America and US Bank launched small-dollar lending products as a more structured, less expensive option vs. overdrafting.

Earlier this month, Huntington announced its “Standby Cash” feature, which allows qualifying users to access a credit line between $100 - $1,000. If users opt in to automatic repayments, there is no cost for the feature; if they choose not to use automatic payments, outstanding balances incur 1% interest per month (12% APR) — no tips required.

Notably, users’ eligibility is based on how they manage their Huntington checking account (cash-flow based underwriting) and does not rely on their credit reports, unlike BAML’s Balance Assist.

Standby Cash extends Huntington’s previous overdraft fee reduction options, where a user could cure an overdraft within 24 hours to avoid fees or overdraft by up to $50 without penalty.

This is the latest sign of incumbent financial institutions responding to changing regulatory guidance on small-dollar lending, legislative pressure on overdraft practices, and competitive threats from fintech offerings like Chime and Varo.

Current Can’t Seem to Make Up Its Mind: Is It a ‘Bank’ or Not?

Current, which previously used the tag line “The Bank for Modern Life”, has launched a new ad campaign emphasizing that it isn’t a bank.

Initially, I couldn’t help but think this repositioning had something to do with Chime’s late March settlement with the California banking regulator over its use of “bank" and “banking” to describe its services.

But Current’s spokesperson told me the new campaign, which kicked off May 3, had been in the works for over six months and was unrelated to the regulatory action. I know how long it can take to put together an out-of-home campaign, so the timing does seem to be a coincidence.

In its blog post touting the new campaign, Current states (emphasis added):

We’ve never been, nor do we have any plans to, become a bank. We’re focused on building the best, most innovative technology that can solve real problems for our members and enable them to change their lives through working with our partner banks to provide banking services.”

According to Current, the company has built its own core banking system, the Current Core and owns the ledger, enabling unique features like its instant gas hold refunds and ‘brand blocking,’ which allows users to block transactions from specific merchants.

Pursuing a charter would require shifting its focus to pursuing more affluent customers in order to grow deposits instead of building features to solve problems for its users, the company said.

Still, I’m skeptical of the argument that not being a bank better enables Current to build ‘the best, most innovative technology,’ when there are inherent product and business model limitations in operating via a partner bank, like the inability to hold insured customer deposits, easily write loans, issue its own payment cards, or directly access Federal Reserve payments systems.

“Bank” vs. “Banking”

Despite this new emphasis on NOT being a bank, Current’s Facebook page still describes it as a “mobile bank”:

And new ads that began running two days ago, on June 11th, continue to describe the product as “modern mobile banking” and “the future of banking,” with no disclosure or clarification in or near the ad that banking services are provided via a partner.

While I think I understand what Current is trying to do here — position itself as “not a bank” (like Chase or Wells Fargo) but still make clear that it offers bank-ing functionality — I’m not sure your average consumer is parsing the difference between a noun vs. a gerund.

As a marketing message, it’s trying to have the best of both worlds, but just ends up being confusing.

SoFI, which is currently in the process of becoming a bank, tried ‘not a bank’ positioning back in 2016 but eventually abandoned it. Varo, which recently acquired its national bank charter, is leaning into the fact that it is a bank, arguing users understand and value the difference.

While regulators appear to be paying more attention to how these products describe themselves, it’s still not clear to me that the distinction of bank vs. ‘not bank’ is something that consumers care about.

What do consumers care about? Does a product solve their problem, is it priced fairly, is their money safe, can they trust the company providing it.

Marketers of these products seem to be operating from a set of assumptions that consumers either like/trust banks or hate/distrust banks, which is an oversimplification.

If you ask consumers if they like/trust “banks,” you’ll likely get a very different answer than if you ask consumers if they like/trust THEIR bank. Context matters.

Consumers who don’t — say, because they’ve been charged minimum balance or overdraft fees — may be persuaded by different features and messaging than the majority of consumers who are reasonably satisfied with their primary banking relationship.

With the lines between “bank” and “non-bank” increasingly blurred, especially for your typical consumer, perhaps it’s time to shift from an entity-based regulatory regime to one that focuses on activities and the risks, whether prudential, systemic, or to consumers, that those activities entail.

MoneyLion Releases Q1 Financials, Under Investigation by Two Federal & Three State Agencies

MoneyLion, in the process of going public via a SPAC merger, announced some impressive Q1 results. Via its press release:

First Quarter 2021 Highlights*:

  • Net revenue increased 98%, reaching $33.2 million, compared to $16.8 million in Q1 2020, while adjusted revenue increased 125%, reaching $32.5 million, compared to $14.4 million in Q1 2020

  • Contribution profit increased to $19.4 million, compared to $5.0 million in Q1 2020

  • Total customers grew 80% to 1.8 million, compared to 1.0 million in Q1 2020

  • Total originations grew 204% to $188.7 million, compared to $62.0 million in Q1 2020

  • Total payment volume grew 213% to $306.4 million, compared to $97.9 million in Q1 2020

  • Net loss was reduced to $2.2 million, excluding a non-cash $80.5 million change in fair value of warrants and convertible notes, compared to $6.8 million loss in Q1 2020. Including this adjustment, net loss increased to $82.7 million

*Based on information available to MoneyLion as of the date of this release and subject to the completion of its quarterly financial closing procedures and review by MoneyLion’s independent registered public accounting firm.

The Q1 release didn’t mention the numerous investigations into MoneyLion’s potential compliance lapses and business practices.

As part of an SEC filing last week related to the SPAC merger, MoneyLion revealed a civil investigative demand from the CFPB — the third it has received from the agency since 2019 regarding its membership model and compliance with the Military Lending Act (MLA). The MLA prohibits lending to members of the military or their families at APRs above 36%, among other protections.

The CFPB isn’t the only regulator asking questions. The filing disclosed a third information request from Minnesota’s Department of Commerce, which is also probing MoneyLion’s lending and membership program.

California’s banking regulator is also asking more questions. As part of the same SEC filing last week, MoneyLion revealed a follow-up information request from the California DFPI. MoneyLion had previously disclosed it is working to complete remediation required by the state regulator and enhance its compliance policies and procedures to comply with California law.

According to BankingDive, Colorado’s Consumer Protection Unit had issues with the banking startup too, finding faults in compliance and seeking updates to record keeping and, potentially, customer refunds on some loans.

And finally, MoneyLion has received an investigative subpoena from the SEC about a subsidiary it uses to fund its credit and payroll advance products, which is at an early stage and with which MoneyLion has said it is cooperating.

Mixed Bag in Basel Committee’s Suggested Capital Rules for Crypto

A report out of the Basel Committee on Banking Supervision, which develops global banking standards, called for the most stringent capital requirements to apply to banks with exposure to some cryptoassets like Bitcoin and Ethereum. Capital requirements have a significant impact on the profitability of offering products or engaging in trades tied to specific asset types.

According to the FT (emphasis added):

“The Basel committee proposed a risk weight of 1,250 per cent, in line with the toughest standards for banks’ exposures on riskier assets. That would mean banks would in effect have to hold capital equal to the exposure they face, and be prepared if the value of the asset were worthless. A $100 exposure in bitcoin would result in a minimum capital requirement of $100, Basel said.”

However, the committee recognized that not all types of crypto carry identical risk, with tokens tied to more traditional assets, like stocks, and stablecoins pegged to existing currencies fitting into updates of existing rules on capital requirements.

Even with the suggested conservative treatment of more volatile cryptoassets, there is a silver lining in that global banking regulators are taking them seriously enough to incorporate into the global banking regulatory framework.

This begins paving the way for traditional banks to develop products and services around the emerging asset class. The committee is open to revisiting the cautious treatment of certain cryptoassets as the space continues to evolve.

Nacha Seeks Comment on Risks Tied to Early Direct Deposit

The (up to) two-day early direct deposit feature offered by many challenger banks is ultimately a bit of ‘hack.’ Most payroll processors transmit ACH files in advance of their settlement date. Traditionally, banks wouldn’t make the funds available to their users until the specified settlement date.

Challenger banks like Green Dot’s GO2Bank, MoneyLion, and Current can offer “early” direct deposit simply by posting the funds when they receive an ACH file, rather than waiting for the settlement date.

In a recently released request for comment, ACH administrator Nacha highlights some risks tied to this practice:

While providing access to funds prior to settlement is a benefit for Receivers, it also can create or increase several risks (ed: ODFI = Originating Depository Financial Institution; RDFI = Receiving Depository Financial Institution):

  • The risk of a loss by the ODFI (or its Originator) when an ACH credit was initiated erroneously, or fraudulently, and less time is available to attempt to recover the funds

  • The risk of a loss by the RDFI in the event that the scheduled settlement does not occur

  • RDFI does not receive settlement for the ACH credit, and cannot recover funds from the account holder

The likelihood of any of these happening, especially in a file from a major payroll provider, is very, very low. In an American Banker article on the topic, co-founder of challenger bank Simple and current CEO of Sila Money Shamir Karkal is quoted as saying in hundreds of thousands of payroll transactions, he’s never seen it happen.

Nacha’s proposed options for changes include doing nothing (eg, status quo), reallocating risk between the ODFI and RDFI, providing a mechanism for funds recovery, and prohibiting the practice of early availability altogether.

While blocking the practice seems quite unlikely, if it were to happen, it would be a significant blow to challenger banks (and users) that have come to depend on it.

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Other Good Reads This Week

Solving the Credit Invisibility Problem (Alex Johnson / Fintech Takes)

Inside Credit Suisse’s $5.5 Billion Breakdown (Wall Street Journal)

There’s a New Vision for Crypto, and It’s Wildly Different From Bitcoin (Joe Weisenthal / Bloomberg OddLots)

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