Evolve Partner PrizePool To Shut Down
Big News: I've Joined Taktile, Klarna Launches "Banking," SoLo Funds Argues CFPB Is Unconstitutional
Hey all, Jason here.
Longtime readers will know that I donate 15% of net subscription revenue to a charity. I’ve been behind on my bookkeeping but finally caught up. After seeing Fereshteh Forough’s inspiring keynote at Moov’s Fintech Devcon last month (and thanks to paying readers of this newsletter), I’ve just made a donation to Code to Inspire, which helps create a brighter future for Afghan women through coding.
Also, folks who follow me on Twitter may have seen I mentioned some exciting personal news this week — you’ll find that below 👇
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Big News: I’ve Joined Taktile
I’m excited to announce I’m joining the team at next-gen decision platform Taktile as Head of Industry Strategy, Banking and Fintech. In an era where data is more plentiful than ever, making good use of data, in some ways, is actually becoming more challenging.
There seems to be an ever-increasing number of data sources, meaning more vendors to onboard and integrations to build and manage. And building robust technology infrastructure to turn data into decisions is no simple task.
Taktile solves these challenges in financial services — and not just for credit risk, but across the entire customer lifecycle, from onboarding and KYC/KYB to transaction and portfolio monitoring. Taktile simplifies onboarding new data sources and leveraging them to quickly test and learn by iterating new decision processes in areas that include identity, fraud, credit, and pricing.
After spending 10 years in operating roles in consumer lending companies, I’ve learned first-hand that the best-run lenders are the ones whose decisions are grounded in rigorous data and iterative cycles of testing and learning.
I’m looking forward to the opportunity working with Taktile will give me to experience the financial services industry from the infrastructure provider perspective.
Every company, whether a pre-seed startup or a mega-bank, faces decisions about when to buy vs. build vs. partner, with companies that grow to be large and successful doing so from solid foundations. One of the reasons I’m confident in my decision to join Taktile is that I’m convinced that Taktile is and will continue to be an innovator and market leader in the decisioning infrastructure space.
Is Anything Changing With Fintech Business Weekly?
Rest assured, nothing is changing with Fintech Business Weekly.
Creating and growing this publication into what it is today, reaching more than 70,000 readers and listeners, has been one of the most unanticipated but rewarding experiences of my career. I continue to be dedicated to delivering well-researched, thoughtful, independent, and fearless analysis of what is happening in banking and fintech.
You will continue to see Fintech Business Weekly newsletters and podcasts in your inbox at the same cadence. If anything, my work with Taktile will further enrich the newsletter, by providing me with the opportunity to develop a deeper understanding of the data and decisioning infrastructure that is so critical to running a successful financial services business.
Klarna Launches Banking Gift Cards
As Klarna eyes an eventual IPO, it’s understandable the company would want to craft a narrative that it’s more than just a “buy now, pay later provider.”
And, indeed, it is!
While BNPL services like Klarna and Affirm were originally relegated to the checkout screens of ecommerce merchants with which they partnered, they have become shopping destinations in their own right.
Klarna’s homepage today looks more like Amazon than it does JPMorgan Chase.
The company does hold a bank charter in its home country of Sweden, which enables it to offer banking services across the 27 countries in the European Union.
Last week, in a brief press release, Klarna announced that it had “launched two new products tapping into retail banks’ core business: everyday spending and saving.”
The company described the products, launched in 12 European markets and the US, as “a significant step forward in Klarna’s mission to disrupt retail banking and become an every day spending partner to the world’s consumers.”
Media reports echoed Klarna’s talking points, generally describing the new capabilities as offering “banking” to users.
CNBC described Klarna as (emphasis added) “launching a personal account for deposits and cashback rewards in the U.S. and Europe.”
Bloomberg went even further, leading with a headline that Klarna is taking on “JPMorgan, BofA With Foray Into Bank Accounts,” and describing the company as “adding retail-banking services in the US and across much of Europe.”
And while, in EU markets, Balance functions as a bank account — funds are insured by the Swedish Deposit Guarantee Scheme up to SEK 1,050,000 (about $100,000), and users can withdraw funds — in the US, Balance is, literally, a gift card.
A quick look at the terms and conditions for Balance makes clear that, in the US market, it is a stored value account, not a bank account, meaning funds held in Balance are not FDIC-insured and, unless otherwise required by law, cannot be redeemed as cash or withdrawn (emphasis added):
Klarna balance (“Klarna balance”) account is a gift card account that allows you to receive cashback or add funds in the Klarna app as described in Section 4 for us within the Klarna app or Klarna website. Funds maintained within the Klarna balance may be used for the purchase or goods or services you purchase through the Klarna app or Klarna website, or may be applied to outstanding balances on Klarna products or products issued by a partner bank of Klarna as further outlined in Section 5.
Unless otherwise required by law or permitted by this Agreement, the funds within your Klarna balance are nonrefundable and may not be redeemed for cash.
In the US, once deposited in Balance, users can only spend funds at Klarna merchants or use them to pay an outstanding Klarna balance.
There are a number of reasons why Klarna may have chosen this structure, with the most likely being speed to market. In the US, Klarna already works with WebBank to offer installment and revolving credit and to issue its Klarna Card.
Klarna certainly could have worked with WebBank (or another partner bank) to offer a true deposit account rather than the stored value structure it is using to launch Balance in the US.
The stored value structure is substantially simpler than a full demand deposit account and does not require a bank partner, making it easier and faster to launch.
Because users’ funds in Balance are held on Klarna’s balance sheet, rather than with a bank partner, they functionally represent an interest-free loan to the company, as Klarna isn’t paying interest on funds held in Balance in the US, though it does in the EU.
Klarna also stands to benefit from what’s known in the gift card business as “breakage” — funds users deposit into Balance but don’t end up spending.
Given the company’s positioning and strategy, I would imagine that the choice of stored value vs. a true DDA was primarily about speed to market, and I’d expect that Klarna eventually launches a regular deposit account via a partner bank — or seeks its own US bank charter.
Evolve Partner PrizePool To Shut Down
PrizePool, a prize-linked spending and savings startup similar to better-known Yotta, is being acquired and shutting down its consumer app, Fintech Business Weekly has learned.
The company, which works with troubled partner Evolve Bank & Trust, has raised a total of about $14.3 million in capital from investors that include Coatue, SciFi VC, Bling Capital, Accomplice, and M13, which led PrizePool’s $10 million Series A.
It’s unclear how many users PrizePool currently has, but at the time the company announced its 2021 Series A, it claimed to have “tens of thousands” of users who had saved “tens of millions” of dollars. PrizePool’s app for Android phones has been downloaded over 50,000 times.
Winding down a neobank like PrizePool can be quite disruptive to users who have come to depend on it, especially if they’re using it as their primary bank account for critical tasks like receiving direct deposits and paying bills.
Ideally, in a shutdown scenario, a neobank is able to give its users ample advanced notice to open a new account elsewhere, if needed, and transfer their funds electronically.
PrizePool has informed users they have until September 19th to initiate withdrawals to an external bank account.
In situations where users still hold funds through a neobank when it ceases operations, the typical course of action would be to mail a physical check — which can result in users losing access to their funds for a period of days or weeks.
Of course, in order to wind down in an orderly fashion, a neobank and its bank partners need to have orderly books and records, including accurate balance information for all users.
Thankfully, PrizePool works directly with Evolve, and does not appear to have relied on an intermediary platform to support critical tasks like ledgering — though it is unclear if Evolve’s direct partners suffer from the same kinds of reconciliation challenges exposed by the ongoing meltdown of Synapse.
PrizePool joins a growing group of neobanks that have been acquired, pivoted to other business models, or shutdown altogether, a list that includes names like HMBradley, Oxygen, Ahead Money, Cheese, Kinly, and Daylight — begging the question, are American neobanks’ interchange-dependent business models sustainable?
Is Evolve Prepared For Fintechs — And Their Deposits — To Leave?
Beyond the impact to users of PrizePool, there’s also the question of the impact to PrizePool’s bank partner, Evolve.
Evolve, which has seen a wave of senior leaders depart in recent days, was hit with a wide-ranging enforcement action about two months ago.
Among other requirements, the order calls for the bank to conduct a liquidity analysis before exiting any of its fintech partnerships and share said analysis with its regulatory supervisors.
According to its most recent call report, Evolve holds over $460 million in cash and balances due from depository institutions on its balance sheet, meaning it is unlikely to have any issue returning PrizePool users’ funds.
But, as Evolve continues to deal with the fallout of the Synapse disaster and the Russia-linked ransomware attack, it does beg the question of Evolve’s future as a partner bank and if it is prepared for a potentially significant number of fintechs — and their deposits — to leave the bank.
While some fintech programs have brought substantial deposits — billions of dollars — to Evolve, the bank hasn’t actually kept most of those deposits on its own balance sheet.
It’s true that on balance sheet deposits grew quickly and substantially, over 300% from about $373 million at the end of 2019 to over $1.5 billion at the end of 2022.
But the deposits Evolve kept off its own balance sheet, classified as “custody and safekeeping non-managed” in FDIC filings, grew from about $1 billion at the end of 2019 to peak above $9 billion at the end of 2021.
The FDIC describes such accounts as:
…one in which securities or other assets are held by a bank on behalf of a customer under a safekeeping arrangement. Assets held in such capacity are not to be reported in the balance sheet of the reporting bank nor are such accounts to be reflected as a liability. Assets of the reporting bank held in custody accounts at other banks are to be reported on the reporting bank's balance sheet in the appropriate asset categories as if held in the physical custody of the reporting bank.
Funds held as custody and safekeeping have dropped nearly 85% since the end of 2021, with Evolve reporting $1.4 billion of such funds at the end of Q2 2024 — a sharp drop even from the prior quarter, when the bank held nearly $5 billion for custody and safekeeping.
The composition of Evolve’s on balance sheet deposits has changed substantially over time as well.
Until 2023, the bank reported nearly zero use of brokered deposits. But by the beginning of 2024, Evolve reported nearly $465 million of its $1.1 billion of on balance sheet deposits, or over 40%, as “brokered.”
It couldn’t immediately be determined if the jump in brokered deposits is due to Evolve backfilling for deposits that left the bank, or if the increase was caused by a reclassification of deposits the bank already held.
Unlicensed P2P Payday Lender Argues CFPB’s Funding Is (Still) Unconstitutional
CFPB leadership, no doubt, breathed a sigh of relief when the recent Supreme Court challenge to its funding mechanism, CFPB v. Community Financial Services Association of America, was decided 7-2 in its favor.
The Bureau said at the time that “[t]his ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole.”
But for those facing CFPB enforcement actions, the mantra seems to be, if at first you don’t succeed, try, try again.
Per recent reporting by American Banker’s Kate Berry, four firms facing enforcement actions are using a new theory to argue the Bureau’s funding structure is unconstitutional: lease-to-own app Acima, subprime small-dollar lenders Heights Finance and Populus Financial Group (which owns ACE Cash Express), and unlicensed peer-to-peer payday lender SoLo Funds.
Following the CFPB’s May victory in the Supreme Court, Harvard Law professor emeritus Hal Scott argued in a Wall Street Journal op-ed that the Bureau was open to a different challenge to its funding structure.
Per Dodd-Frank Section 1017(a), the CFPB is to be funded from the Federal Reserves “earnings,” up to a cap of 12% of the Fed’s total operating expenses (emphasis added):
“the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law”
When the Fed generates excess earnings, they are deposited into the US Treasury, meaning that, consistent with the Appropriations clause to the constitution, though the Bureau’s funding is linked to the Federal Reserve, it could be construed as being “drawn from the Treasury.”
However, since September 2022, as interest rates rose, increasing the cost of servicing its liabilities, the Fed’s expenses have exceeded its revenues — meaning, by any commonly understood definition of the word, that the Fed has no “earnings.”
SoLo Funds and the other firms argue that the CFPB’s funding from the Fed is unconstitutional, given the central bank has no earnings, and thus the actions against them should be dismissed.
In a motion filed last week seeking to dismiss the Bureau’s lawsuit against it, SoLo Funds’ attorneys argue that “the Bureau may not flout its enabling statute and bypass Congress by using unlawfully requisitioned funds to prosecute this enforcement action. The Court should dismiss the Complaint with prejudice.”
That’s not to say the Bureau doesn’t have other options, if its funding via the Fed were to be deemed unconstitutional in periods when the Fed doesn’t produce earnings.
If funding from the Fed is “not ... sufficient to carry out [its] authorities,” the CPFB is permitted to seek appropriations from Congress, though such a request seems quite unlikely to succeed as long as Republicans control at least one chamber of Congress or the White House.
In the meantime, the situation casts a new shadow of uncertainty over the CFPB’s efforts to rein in firms like SoLo Funds, which the Bureau describes as deceiving borrowers into loans with APRs that reach over 1,000% and making false threats to collect money that consumers do not owe.
Other Good Reads
Brokered Deposits Rule Threatens To Upend Bank Balance Sheets (Bank Director)
As Generation X Approaches Retirement, Reality Still Bites (Wall Street Journal)
Fed’s Goolsbee Says Job Market in Focus as Inflation Cools (Bloomberg)
Dynasties in the Making: 15 Companies Cultivating Tomorrow’s Fintech Leaders (Gilgamesh Ventures)
Big Banks Watched as Con Men Wiped Out a Widow’s Life Savings (Bloomberg)
Online sports betting hurts consumers (Slow Boring)
Democrats Complete the Big Crypto Reset (The American Prospect)
Why is it so hard to freeze your credit report? (Fintech Takes)
FDIC Argues that Jarkesy Does Not Affect Its In-House Proceedings (Bank Reg Blog)
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