Fed Stonewalls Synapse FOIA Request
Cash App Settles With CFPB, 48 States; CFPB's BNPL Report: Eight Key Takeaways
Hey all, Jason here.
I drafted this week’s newsletter from my hotel in lower Manhattan. I’ve been in town for some meetings with my colleagues at Taktile and plan to take advantage and catch up with some other industry folks early this week, before I head out to Salt Lake City to speak at the Fintech XChange event toward the end of this week.
I also had the chance to swing by the Fintech Meetup office last week, where I recorded an interview with event Chairman Sanjib Kalita, which should be published in the next couple of weeks.
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!Get Ready For a Massive 2025 with Fintech Meetup!
Sponsored content: It’s time to get ready for a huge 2025: join thousands Fintechs and FIs for the ecosystem event of the year on March 10-13 at the Venetian, Las Vegas.
You’ll be part of the industry's largest, most productive, and highest-rated meetings program. Don’t miss your chance to connect in over 60,000 meetings with banks, credit unions, fintechs, investors, and professional services firms. Sign up now and secure your spot.
The event will feature a carefully curated agenda packed with insights into the future of fintech. You’ll hear from industry visionaries like Kathleen Peters, Chief Innovation Officer at Experian, Eric Sager, COO at Plaid, and Kate Walton, MD & CCO at Merchant Payments, JPMorgan Chase & Co.
Whether you’re a start-up pitching for investment, an exhibitor unveiling cutting-edge AI solutions, or a financial institution developing the next-gen digital platform, Fintech Meetup 2025 is THE place to be this Q1.
Fed Stonewalls Synapse FOIA Request
The Freedom of Information Act, popularly known by its acronym, FOIA, was passed on July 4th, 1966. It was signed into law by then-President Lyndon B. Johnson, despite his initial misgivings.
The passage of the law was the result of a 12-year quest by California Congressman John E. Moss. FOIA applies only to the Executive branch, giving “any person” the ability to request access to “agency records,” such as print documents, photographs, maps, videos, electronic records, and e-mails.
FOIA allows agencies to decline to provide or to redact documents under a number of exemptions, including by citing national security interests, confidential business information, privileged communications, and personal privacy.
The application of FOIA to federal banking agencies is unique in several respects.
The supervisory relationship between federal regulators and the banks they supervise is confidential; FOIA recognizes this in its eighth exemption, which protects agencies from disclosing records “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.”
Of the federal banking regulators, the Federal Reserve System has an additional quirk. While the Federal Reserve Board is unquestionably a federal agency subject to FOIA, the twelve regional Federal Reserve Banks are quasi-private institutions that are owned by their member banks.
Whether or not regional Federal Reserve Banks are required to comply with FOIA requests has been a point of contention in the past.
In response to pressure from Congress and in an effort to preempt litigation and preserve their independence, all twelve regional Fed banks adopted what they describe as a “voluntary” policy that follows the “spirit of FOIA,” which became effective as of January 1, 2024.
Under the policy, regional Federal Reserve Bank records created on or after January 1, 2024, “will be published or provided upon request,” unless otherwise exempt.
Regulatory Leaders Laud “Transparency,” But Agencies Fall Short
The topic of the “transparency” of federal banking regulators has been a hot topic of conversation as of late, as a result of crypto exchange Coinbase’s successful efforts to use the Freedom of Information Act to compel the FDIC to release so-called “pause letters” the regulator sent to banks regarding their crypto, stablecoin, and/or blockchain activities, which some in the industry have dubbed as “Operation Chokepoint 2.0.”
Coinbase, through its representative History Associates, sued the FDIC, as well as the Securities and Exchange Commission, seeking to compel the agencies to comply with its FOIA requests.
In the case against the FDIC, the judge in the matter, Ana C. Reyes, criticized what she described as the FDIC’s “lack of good-faith effort in making nuanced redactions,” writing that the regulator could not “simply blanket redact everything that is not an article or preposition.”
Reyes ordered the FDIC to re-review the documents, make more “thoughtful” redactions, and warned the FDIC to be prepared to defend its redactions in an ex parte discussion with her.
Current FDIC Vice Chair Travis Hill, widely viewed as a front-runner to be the next FDIC Chair, directly spoke to the “Chokepoint 2.0,” the alleged “debanking” controversy, and the need for greater transparency in remarks delivered earlier this month about the need for the FDIC to chart a new course.
While Hill was describing the FDIC’s approach to policymaking, rather than how the agency responds to FOIA requests, he emphasized that the FDIC’s approach to regulating innovative technology, including digital asset-related, should be “clear[] and transparent[] on the front end, with an opportunity for the public to comment and provide feedback.”
Hill went on to say that, when it comes to supervising banks’ digital asset and tokenization activities, it would have been and remains a better approach “for the [regulatory] agencies to clearly and transparently describe for the public what activities are legally permissible and how to conduct them in accordance with safety and soundness standards.”
Federal Reserver Governor Michelle Bowman, a likely candidate for Vice Chair of Supervision in the wake of Michael Barr’s resignation, also emphasized the need for regulators to be transparent in remarks she recently gave at a California Bankers Association event.
Bowman said in part (emphasis added):
Regulators should operate in a transparent way and carefully and meticulously follow administrative procedures when making revisions to the regulatory framework. We should take a similar approach to shifts in supervisory focus. Doing so promotes trust and accountability to the public and should be integral to the important work we do promoting the safe and sound operation of the banking system and financial stability. Transparency also promotes innovation in the financial system by enabling banks to understand how to engage in new activities.
Bowman continued to say that, (emphasis added) “When we identify areas that suffer from a lack of transparency, we should act promptly to address those concerns… Transparency can lead to better public engagement and outcomes and should be a central part of the regulatory and supervisory approach, even when not legally mandated, such as in supervision.”
Federal Reserve Slow Walks, Stonewalls Synapse Documents Request
Pledges of increased transparency, however, mean little if agencies’ actions fail to uphold these promises.
While federal banking regulators have been more than happy to point to the Synapse disaster in public remarks and to justify their own policy proposals, like outgoing FDIC Chair Martin Gruenberg’s ineffectual effort to rollback 2020’s brokered deposit rule, regulators have been conspicuously quiet about how their actions or inactions may have contributed the situation.
Despite the Chapter 11 trustee in the Synapse bankruptcy, former FDIC Chair Jelena McWilliams, explicitly calling on regulators to take a stronger hand in resolving the situation, or to at least respond to victims’ requests for help, regulators have taken a largely hands-off approach, in public at least.
In an effort to better understand what the agencies knew or didn’t and what actions they took or failed to take, I filed Freedom of Information Act requests with the Federal Reserve Board (including records at the St. Louis Fed), the OCC, and the FDIC, seeking records related to Synapse, Synapse Brokerage, and/or Synapse Financial Technologies.
I originally filed my request with the Fed on July 19th, 2024, and requested “expedited” processing.
While my request for expedited status was initially declined, it was subsequently granted in response to an appeal on a “discretionary” basis on August 12th, 2024.
Despite granting such status and a general requirement to make a determination in response to a FOIA request within 20 business days, the Fed provided no meaningful update for months, sending only unsigned status updates that it “hope[d]” to complete processing the request by a given date.
The Fed sent functionally identical delay letters on September 4th (pictured above), October 4th, November 4th, December 2nd, and January 10th.
On January 14th, I reached out to the Federal Reserve Board’s and St. Louis Fed’s media teams to inquire about the cause of the delay and to request the expeditious fulfillment of my FOIA request or, if the Federal Reserve Board and St. Louis Fed were declining to do so, an explanation of under what exemption.
Two days later — despite having the request for nearly six months — I received a letter from the Deputy Secretary of the Federal Reserve Board, Benjamin W. McDonough, informing me that my request could not be processed, as it is “vague and lacks the specificity necessary to allow Board staff to identify responsive records,” and, as such, “Board staff cannot process your request with reasonable effort and without unduly burdening or significantly interfering with any of the Board’s operations.”
While offering the option to revise the scope of the request, McDonough’s letter warns (emphasis added):
Please be advised, however, that to the extent you are seeking information related to Synapse Financial Technologies and/or Synapse Brokerage that may be in the Board’s records because of the Board’s supervision of Evolve Bank, which had a service agreement with Synapse Financial Technologies, Inc., or otherwise are seeking confidential supervisory information that is in the Board’s possession due to the Federal Reserve’s supervisory oversight function, such information and records would, by their very nature, be exempt from disclosure pursuant to Exemption 8 of the FOIA, 5 U.S.C. § 552(b)(8).
OCC, FDIC Agree To Process Functionally Identical Requests
While nearly identical FOIA requests sent to the OCC and the FDIC on October 22nd, 2024, also have not yet been fulfilled, the agencies do appear to be processing them as requested.
A media inquiry sent to the OCC, copying the Treasury’s Office of Inspector General, on January 14th did not receive a reply, but the following day, the agency’s disclosure office informed me it has “received records from the program office pertaining” to my request, which are currently being reviewed.
A media inquiry sent to the FDIC, copying the agency’s Ombudsman’s office, prompted an update from the staffer working on the request, who clarified that the request is in process with an estimated completion date of late April or early May.
CFPB’s BNPL Report: Eight Key Takeaways
Last week, the Consumer Financial Protection Bureau released a 35-page report based on data provided by six major buy now, pay later providers and borrowers’ corresponding de-identified credit records.
The report helps provide insight into how consumers are using BNPL in conjunction with other credit products — something that’s been difficult if not impossible to analyze, as BNPL firms generally do not furnish data on the use of pay-in-four products.
The CFPB found that 21% of American consumers financed at least one purchase using a BNPL plan from one of the six providers covered in the data in 2022. Consumers took out an increasing number of BNPL loans in 2022 vs. the year prior, with the majority who use BNPL taking out multiple loans at the same time.
And over the time frame 2020-2022, the bureau found that approval rates for BNPL applicants increased, primarily driven by lenders’ increased use of counter offers.
1. Most BNPL LoansAre For $100 Or Less
Not exactly surprising, but the CFPB’s report puts concrete numbers to the typical size of BNPL loans. The mean loan size in the bureau’s unmatched transaction sample was $131.
2. Number of Applications Increasing As Approval Rate Remains Steady
The number of applications received by the six largest BNPL providers combined has steadily marched higher, with pronounced peaks around the holiday shopping season. The lenders’ approval rates have remained fairly steady around 75% since 2021.
3. Nearly Half of BNPL Originations Are To Deep Subprime Borrowers
Perhaps also not totally unsurprising, given how some lenders have positioned BNPL as “expanding access” or offering an “on ramp” to credit, but it is worth noting that only 3.9% of originations are to borrowers with no score, vs. 45% to deep subprime borrowers.
4. Nearly Two-Thirds of BNPL Borrowers “Stack” Loans
Of the 21% of consumers using BNPL loans, over 62% are currently using multiple loans, with nearly a third using simultaneous loans from different providers, in a practice known as loan “stacking.”
5. Nearly One in Five Are “Heavy” Users of BNPL
Of those using BNPL, the CFPB describes 18.3% as “heavy” users, borrowing a median of 22 times per year, with a median time between originations of approximately two weeks.
6. BNPL Users Default On Credit Cards at High Rates
While default rates on BNPL loans are relatively low, coming at 1.9% overall in 2022 (first chart below), the same users are defaulting on their credit cards at substantially higher rates (second chart below.)
The CFPB’s report speculates that BNPL’s repayment mechanism, which typically automatically draws repayment from a users linked debit card or bank account, may help account for the lower default rates on BNPL vs. consumers’ credit card accounts.
7. Heavy BNPL Users More Likely To Hold Other Unsecured Debt
Those that the CFPB defined as “heavy” BNPL users are more likely to hold other unsecured consumer debt vs. occasional users or non-users, including markedly higher use of alternative financial services, such as payday or auto title loans.
8. BNPL Users Carry High Card Balances
Despite the common positioning that BNPL is “better” than or a replacement for credit cards, in fact, most BNPL users are using the product in addition to heavy credit card use.
The CFPB report found that the average credit card utilization rate for BNPL users is between 60% to 66% and, perhaps most alarmingly, tends to increase after the date of first BNPL use.
Block Reaches $80M Settlement For Cash App BSA/AML Failures, $175M For Failures To Stop Fraud
Last week, Block, parent company to peer-to-peer payment service Cash App, entered into two settlements related to the popular service.
The Conference of State Bank Supervisors (CSBS) announced a coordinated action by 48 state financial regulators that will see the company pay an $80 million fine for violations of the Bank Secrecy Act and anti-money laundering laws and regulations.
According to the terms of the settlement, in addition to the penalty, Block must engage an independent consultant to assess the efficacy of its BSA/AML program, submit a report to the states within nine months, and correct any deficiencies identified in the report within 12 months.
Meanwhile, Block also entered into a consent order with the Consumer Financial Protection Bureau, stemming from what the CFPB describes as Cash App’s “weak security protocols” that put users at risk.
The CFPB argues that, while Cash App is required by law to investigate and resolve disputes about unauthorized transactions, its investigations are “woefully inadequate.” The bureau also alleges that Cash App deployed “a range of tactics to suppress” users from seeking help.
CFPB Director Chopra, whose time leading the agency will, presumably, end next week, said, “Cash App created the conditions for fraud to proliferate on its popular payment platform. When things went wrong, Cash App flouted its responsibilities and even burdened local banks with problems that the company caused.”
Per the consent order, Block will pay impacted Cash App users up to $120 million in redress and a $55 million civil money penalty and must set up and staff a live, 24-hour customer service operation.
The consent order further requires Cash App to fully investigate complaints of unauthorized transactions and to provide timely refunds, where appropriate.
Is Your Organization Prepared For The Latest SMB-Related Fraud & Scam Threats?
Fraud and scams aren’t just a consumer problem.
In fact, the risk and the dollar amounts in play when businesses are involved can be orders of magnitude higher than consumer fraud and scams. Yet, the robustness of data and tooling to help banks and fintechs combat SMB fraud and scams often lag what’s available for consumer use cases.
In this installment of Taktile Expert Talks, we’ll bring together industry experts Jonathan Awad, cofounder and CEO of Baselayer, Chris Tremont, chief digital officer of Grasshopper Bank, Anchit Singh, chief business officer of Fundbox, and Alex De Jesus, Head of Fraud Management at Ramp, to discuss emerging threats in the space and how their organizations are staying ahead of them.
Start your 2025 off right by getting up-to-date on the latest threats facing small and medium-sized businesses and the financial institutions that serve them.
Other Good Reads
The CFPB Finally Does Something On Crypto (Fintech Takes)
Stablecoins aren't cheaper; They're better. (Fintech Brainfood)
The Federal General Counsel, Law, and Our Democracy at a Crossroads (Seth Frotman/CFPB)
The Law of Unintended Consequences (Matthew Goldman/Open Banker)
About Fintech Business Weekly
Looking to work with me in any of the following areas? Email me.
Now available: buy my best-selling book, Banking as a Service: Opportunities, Challenges and Risks of New Banking Business Models, here
Vendor, partner & investment opportunity advice and due diligence
Fintech advising & consulting
Sponsoring this newsletter
News tip or story suggestion — reach me on Signal at +1-316-512-1571