Fidelity & PNC Lead Akoya's Open Banking Land Grab; CFPB's Chopra Not Amused, Statements Indicate
Exclusive: Kafene Extends Series B To $30.8m; OCC Releases 2024 Supervision Plan & Names New Office of Fintech Leader
Hey all, Jason here.
It has been a week. I understand the phrase “unexpected expense” more than ever, after getting the vet bill for my pup’s emergency surgery. (Thanks everyone for your well wishes — he is doing great now.)
I’ll be headed to my first-ever trip to Asia tomorrow — Tokyo, specifically. If there are any bank/fintech folks there I should meet with, please let me know!
And finally, a shout out for TWIF’s upcoming Fintech Formal event, taking place on December 8th. The Fintech Formal is the global fintech community's end-of-year black tie charity gala, held at a new location in New York every December. You can learn more and RSVP at fintechformal.com
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Exclusive: Kafene Extends Series B To $30.8 Million
Kafene, a lease-to-own fintech, has raised an additional $12.6 million in equity, bringing its Series B haul to a total of $30.8 million, the company exclusively revealed to Fintech Business Weekly. While tight-lipped about the valuation, the company did confirm it wasn’t a down round — which, in this climate, is a meaningful accomplishment.
The company had initially announced its $18 million Series B, led by Third Prime with participation from existing investors, last September.
Of the fundraise news, Kafene CEO Neal Desai said, “When we announced our initial Series B, we were confident in our ability to underwrite a consumer whose conditions are inherently recessionary. Our plan continues to be to double down on point-of-sale merchant partnerships as others retreat.”
Despite tightening credit conditions, Kafene has continued to grow at steady clip, surpassing $100 million in customer financing earlier this year.
In some ways, the company has actually benefited from tightening credit conditions, as consumers who may have previously had access to prime credit options “trade down” to options that remain available to them — options like Kafene’s lease-to-own financing. Kafene has actually seen the average FICO score of its users increase as they get locked out of other options.
Of the evolving credit quality and unit economics, CEO Desai commented, “The thesis is playing out as predicted with unit economics turning positive late last year and consumer credit quality rising to the highest it’s been since inception. Credit performance remains strong, the balance sheet has grown, and we continue to gain traction while others pull back.”
I had the chance to catch up with Kafene CEO Neal Desai about the fundraise, how the macro environment is impacting the business and its unit economics, how the evolving regulatory climate may impact the lease-to-own space, and what’s on deck for the company as we head into 2024.
You can catch that conversation here:
Fidelity & PNC Lead Akoya's Open Banking Land Grab. CFPB's Chopra Not Amused, Public Statements Indicate.
If you haven’t heard of Akoya, you aren’t alone.
The open banking platform was founded in 2018 as a wholly-owned subsidiary of the largest brokerage in the US by number of accounts, Fidelity.
Fidelity has long been a vocal critic of “screen scraping” and envisioned Akoya not only has a vehicle to move towards more secure API-based data sharing, but as a way to exert more control over what customer data is shared and how it’s used.
Cognizant that driving adoption of Akoya as, functionally, a two-sided marketplace requires a critical mass of data providers — incumbent financial institutions — to get onboard, Fidelity spun out Akoya as a standalone company in 2020 by selling shares to megabanks like JPMorgan Chase, Wells Fargo, Bank of America, and PNC, as well as big bank-owned consortium The Clearing House, which also operates ACH and Real-Time Payments (RTP) networks.
Despite launching in 2018 and major banks taking an ownership stake and beginning to offer data through Akoya in 2020, Akoya has had little if any meaningful traction on the other side of its two-sided marketplace: those consuming the data, whether existing “aggregators,” like Plaid, MX, Finicity, and Yodlee, or consumer- and SMB-facing fintechs.
Having made little progress turning Akoya into a self-sustaining business, CEO Stuart Rubinstein, who left Fidelity after six years at the brokerage to lead Akoya, stepped down. Early this year, Rubinstein was replaced as CEO by Paul LaRusso, who came from long career at JPMorgan Chase — including leading the bank’s data aggregation and open banking/connected banking efforts.
One of the original goals of Akoya was to serve as a shared, commodity service for banks and other financial institutions to facilitate securely sharing customer data — thereby reducing the need (and expense) for each institution to build their own solution.
But, with no meaningful uptake of Akoya among data consumers, some establishment FIs built their own API-based data sharing solutions anyway — a group that, notably, includes JPMorgan Chase.
With some banks getting antsy about continuing to fund Akoya’s losses, CEO LaRusso appears to be charting a more aggressive course, based on actions owner-members, including Fidelity and PNC, are taking.
Fidelity, where Akoya was incubated, has taken by far the most aggressive steps to limit data sharing outside of Akoya. The brokerage serves 37.1 million retail accounts, 40.9 million workplace accounts, and 8.2 million accounts managed by wealth management firms and has some $10.3 trillion in assets under management.
Over the summer, Fidelity began notifying third-parties that access its customers’ data that they had until October 1 — today — to transition to Akoya or lose access.
Late last month, the brokerage released a statement to that effect, which said in part (spacing adjusted and emphasis added):
To enhance the protection of our customers’ account data, Fidelity has implemented a secure connection to allow access to our customers’ Fidelity accounts by the third parties that our customers have authorized.
Fidelity is now requiring all third-party websites, apps, and data aggregators to transition to this secure, integrated connection, or standardized application programming interfaces (APIs), to access our customers’ Fidelity account data. Fidelity has been working with many of the industry’s data aggregators on smooth transitions to this integrated connection for years.
Starting on October 1, Fidelity will begin prohibiting third parties that are not making this transition from accessing our customer data through the unsafe practice of screen scraping.
Fidelity’s press release doesn’t name Akoya, but that appears to be the “secure connection” it refers to in the statement.
A representative for Fidelity provided additional context, including that there are alternatives for aggregators that don’t want to integrate via Akoya, saying, “While we believe our solution benefits both our customers and the aggregators—as evidenced by most of the major aggregators integrating with it—it’s important to note that aggregators that do not want to use Akoya have alternatives to still access our customers’ data as long as the data shared by Fidelity customers with the aggregator flows through a secure API.”
Pittsburgh-based PNC Bank, which serves about 12 million retail customers, has also taken a fairly aggressive stance.
PNC initially gave some third-parties that access its data a deadline of November 1, 2023, to transition to Akoya before they’d be cut off.
After pushback from industry participants and, some sources suggested, conversations between the CFPB and PNC, the bank pushed back this deadline to June 2024.
But for PNC, like for Fidelity, the end goal remains the same: require those accessing customer data to go through Akoya.
Asked about the transition to Akoya, a representative for PNC said:
“We value our customers being able to use the financial applications of their choice in a safe and secure manner. We have enabled a method—powered by Akoya—for consumers to share their data with greater transparency and control. We encouraged data aggregators to move to this more secure data sharing solution by November 1 to ensure continued connectivity for our customers and are working with any aggregators who have informed us they can't make that transition on time.”
But what about the other large banks, particularly those that have an ownership stake in Akoya?
They seem to be taking a wait-and-see approach, before deciding whether to follow suit — both to see if the CFPB or other government agencies take action against Fidelity, PNC or Akoya, but also to see the proposed 1033 rule — and whether or not the CFPB still exists and has funding after the pending Supreme Court case.
So What’s The Problem With Akoya?
Akoya, launched in 2018, was about half a decade late to the party.
If it were competitive from a coverage, technology/capability, and pricing standpoint, presumably it would win business from the now-established open banking players: Plaid, MX, Finicity, Yodlee, and the like. It hasn’t.
Instead, some owner-members of Akoya, including Fidelity and PNC, appear poised to use their control to force Akoya as the only option for accessing their customers’ data.
Industry experts Fintech Business Weekly spoke to, granted anonymity given the sensitive nature of the topic, pointed out various issues and downsides of the Akoya approach:
Akoya typically charges third-parties for data access; this is not usually the case for third-parties that integrate directly with a bank’s API or that leverage screen scraping.
Akoya may prohibit third-party aggregators from manipulating or enriching data; rather, companies like Plaid, MX, and Yodlee could only operate as “dumb pipes” between Akoya and the company accessing the data on a consumer’s behalf.
The impact of these two elements would functionally render existing aggregators non-competitive: if they’re incurring a fee to access data through Akoya and are prohibited from doing value-add enrichment, why would a consumer of that data use a third-party vs. going directly to Akoya?
Despite Akoya’s role as a middleman platform, third-party users of data must still register with the underlying financial institutions sharing data via Akoya.
Akoya may provide less data than what is called for by the Financial Data Exchange standard — even though big banks and their trade groups/consortiums hold outsized sway in that standards setting body.
Akoya may override a consumer’s consent in some cases, if it believes it’s in the consumer’s “best interests.”
Akoya may block access to data for certain use cases.
Akoya doesn’t offer service level agreements (SLAs) — as a mission-critical vendor for many uses cases (think cash-flow based underwriting or payments), the lack of SLAs presents a major obstacle to adoption.
Akoya is untested — it has very few data-consuming clients; it does not have a proven track record of handling high volumes of API calls.
Some industry experts described Akoya’s technology architecture and capabilities as sub-standard vs. existing solutions.
Akoya uses The Clearing House’s standard for tokenizing ACH routing and account numbers — meaning Akoya-linked accounts would only be able to route payments over The Clearing House RTP, but not FedNow. Given that ecommerce is not an approved use case for TCH RTP, some speculate the tokenization requirements could, intentionally or otherwise, stymie adoption of “pay by bank” account-to-account payments (correction: a previous version of this article incorrectly stated that tokenization would prohibit routing over FedAch.)
Risks to Innovation, Consumers From Monopoly Control of Open Banking Infrastructure
The impacts of requiring consumers and their authorized third-party agents (fintechs, aggregators) to go through Akoya are likely to be far reaching.
The immediate impacts will include breaking existing data sharing that users have authorized — whether to power personal financial management tools, robo-advisory services, bill pay, or even peer-to-peer payment services, like Venmo and Cash App.
In fact, Fidelity specifically warned users about disruption if they use Venmo with a Fidelity bank account via a Plaid link, telling them they would need to take action “before October 1, 2023, to maintain the connection between Venmo and your Fidelity accounts and avoid any disruption in service.”
Fidelity instructs customers that the “easiest” way to re-link Venmo is by using their Fidelity debit card — which has the benefit of generating interchange income for Fidelity.
If users don’t want to use their debit card, because Venmo’s aggregator, Plaid, hasn’t signed with Akoya, they must follow a lengthy and confusing process to manually enter their Fidelity-associated ACH routing and account numbers in Venmo:
Beyond the clear negative impact to user experience for services that don’t agree to go through Akoya, there are likely to be other knock-on impacts to fintechs and end consumers.
Depending on the types and amount of data Akoya facilitates sharing, certain use cases may be undermined or impossible.
For instance, cash-flow based underwriting typically uses several months worth of bank transaction data; if Akoya were to limit third-parties to accessing a shorter window of data, this would impede the ability of lenders to use cash-flow data to better underwrite applicants — with the brunt of the impact being borne by consumers who are already marginalized or excluded altogether by traditional credit score-based underwriting approaches.
Using TCH’s tokenization standard for bank routing and account numbers would inhibit adoption of FedNow — widely viewed as the preferred faster payment network of smaller banks — in favor of TCH RTP, the preferred network of the larger finacial institutions that own The Clearing House and Akoya.
And undermining the business models of existing data aggregators, by charging for data access while prohibiting value-added services, is likely to inhibit innovation by de facto favoring Akoya monopoly control of open banking connectivity.
Representatives for Akoya did not reply to a request for comment by the time of publication.
CFPB, Chopra’s Public Statements Warn of Any One Group “Owning” Open Banking Infrastructure
When it comes to “competition,” there’s no love lost between CFPB Director Chopra, the big banks, and their trade associations and consortiums.
The Bureau has made clear it hopes that open banking will support increased competition by making it easier for consumers to compare and switch providers, whether for checking or savings accounts, credit cards, loans, or mortgages.
The CFPB acknowledges that open banking may make customers “less sticky” — in fact, that’s the entire point.
Chopra has made numerous statements emphasizing these points and warning against any one group “owning” key infrastructure, including in open banking:
At last year’s Money2020, in remarks announcing the kickoff of rulemaking for 1033, Chopra said in part (spacing adjusted and emphasis added):
“[E]ven when large institutions that share personal data with their customers use APIs, there is no guarantee those institutions don’t play games on availability, latency, and critical data points, like price…
[W]e will be looking at a number of ways to stop incumbent institutions from improperly restricting access when consumers seek to control and share their data.
[W]e are exploring safeguards to prevent excessive control or monopolization by one, or even a handful of, firms. A decentralized, open ecosystem will yield the most benefits for creators and consumers alike. At the same time, there will be strong incentives for gatekeepers and intermediaries to emerge, extract rents, and self-preference.
In consumer financial services, we have a number of highly concentrated submarkets: the credit reporting conglomerates, the card networks, the core processors, and more. It’s critical that no one “owns” critical infrastructure.”
This May, Director Chopra was interviewed by the American Fintech Council’s Phil Goldfeder, where he said in part:
“Many of you may be familiar with the ACH system of moving payments. Many people complain that the rules around that set by industry are too tilted in favor of the largest banks. That’s what we want to avoid when it comes to open banking…
I think when you design the rules, just for the biggest incumbents, you create problems.
We’re looking more at how you promote a competitive decentralized market structure. How do you make sure that intermediaries and gatekeepers don’t get to eat a big part of the pie? And ultimately, how do you create rules that promote switching and shopping?”
In June blog post, Chopra made not particularly veiled references to Akoya and its members’ efforts to control access to consumers data, writing in part (spacing adjusted and emphasis added):
“To thrive, standard-setting organizations must not skew to the interests of the largest players in the market. They must reflect the full range of relevant interests — consumers and firms, incumbents and challengers, and large and small actors. In consumer finance, powerful firms have sometimes looked to manage emerging technologies through utilities, networks, or standard setting organizations skewed to their interests – or even owned by them.
Control of the open banking system by such players threatens competition and the consumer’s control of their own financial affairs. While the CFPB intends for the market to play a significant role in developing and maintaining open banking standards, it will pay close attention to any attempts to limit consumers’ exercise of their data rights, particularly where such attempts proceed from coordinated efforts by dominant firms.
As the CFPB expects fair standards to play a critical role in open banking, our proposed rule will seek to take appropriate account of that role. We continue to encourage those seeking to develop industry open banking standards in the United States to discuss their plans with the CFPB so that those standards appropriately allow consumers to exercise their personal financial data rights.”
And, just last month, Director Chopra spoke at the Philadelphia Federal Reserve’s Fintech Conference, saying in part (spacing adjusted and emphasis added):
“The Fed has operated one of the two ACH networks, with the other network essentially controlled by the large banks. And more recently, the Fed launched the FedNow real-time payments network that banks and credit unions, large and small, are eligible to offer to their customers. These services have provided an important check against control and dominance over essential infrastructure by private incumbents.
However, while the rules will help, we know that the existing financial market structure is full of chokepoints and toll booths imposed by large firms acting as mini-governments that can privately regulate markets and distort outcomes, particularly when it comes to payments.”
This is all to say, the Bureau has given every indication it won’t tolerate an outcome where Akoya centralizes control over consumers’ ability to access their data by requiring — or having its owner/member institutions require — that third-parties go through Akoya.
What Happens Next?
What happens next is anything but clear.
The Bureau’s proposed rule is expected to be released in the coming weeks — though that could be delayed by the looming government shut down.
Multiple industry sources have suggested they can’t imagine Akoya existing in its current format if elements of the proposed rule are included in the final regulation.
While an industry-led court challenge to the rule is possible, the dynamics are significantly less favorable than the dispute with the CFPB over its expansion of UDAAP to include “discrimination” not covered by ECOA.
The Bureau’s authority to formulate regulations governing consumers’ data access rights are clearly spelled out in Dodd-Frank, and it has scrupulously followed Administrative Procedure Act requirements in developing the rule. That fact pattern is far less favorable to a potential industry challenge than the UDAAP discrimination suit.
But another, more significant wild card remains: the Bureau’s appeal of the Fifth Circuit court’s ruling that its funding mechanism is unconstitutional. Oral arguments in that case are slated to take place this Tuesday, October 3.
While an outcome that invalidates the Bureau’s existence altogether seems unlikely, having the Bureau’s funding become subject to the Congressional appropriations process is well within the realm of possibility.
With the CFPB a frequent target of Republican criticism, and a Republican-controlled House of Representatives, an attempt to “starve the beast” by proposing to slash the agency’s budget is distinctly possible.
Akoya, Fidelity, and PNC seem to be playing a game of odds — sowing uncertainty for those that depend on open banking data and attempting to establish their preferred facts on the ground, while daring the CFPB (or FTC or DOJ) to come after them.
If Fidelity and PNC are successful in forcing those seeking their customers’ data to go through Akoya — and potentially to pay for the privilege — other large banks are likely to follow suit.
OCC Releases 2024 Supervision Plan and Names New Office of Fintech Leader
Last week, the OCC released its FY2024 supervision operating plan, which lays out the agency’s supervision priorities and objectives for its next fiscal year.
While there is, unsurprisingly, a significant amount of overlap with last year’s plan, there are a couple shifts worth calling out:
Specifically calling out asset and liability management as a focus area. Given this year’s bank failures, driven at least in part by combination of rising rates, declining asset prices, and deposit flight, this shouldn’t come as a shock: “Reevaluation of the timing and amount of deposit outflow assumptions under both idiosyncratic and systemic liquidity stress scenario analyses may be warranted based on recent market disruptive events.”
The section also called for assessing banks’ operational readiness to execute contingency funding plans — again, not surprising, given the challenges some banks had earlier this year accessing emergency liquidity through the Fed discount window.
Highlighting “operations,” which includes a grab bag of topics that have recently jumped to the top of regulators’ agenda, including fintech, BaaS, and AI: “Examiners should identify and assess products, services, and third-party relationships with unique, innovative, or complex structures, such as real-time payments, banking-as-a-service arrangements, distributed ledger-related activities, or use of artificial intelligence technologies. Examiners should determine whether banks’ due diligence, ongoing monitoring processes, and risk governance are commensurate with the nature and criticality of new, modified, or expanded products and services.”
A stand-alone item highlighting “distributed ledger technology” aka blockchain.
Again, not surprising, given the coordinated crackdown on anything that smells like crypto across the banking regulatory system: “Examiners should assess risk management processes for any DLT-related products and services, including cryptoasset custody, tokenization of real-world assets and liabilities, payments, and other uses to support business operations. Reviews should include banks’ due diligence and risk assessments, including the integrity and controls for distributed ledgers used (e.g., governance structure, consensus mechanism, encryption methods) to determine whether management has effectively identified and mitigated risks.”
Change management: while change management-related themes appeared in 2023’s supervisory plan, change management is highlighted as a top-level item in 2024’s plan.
The item says in part: “Examiners should identify banks that are implementing significant changes in their leadership, operations, risk management frameworks, and business activities, including the use of third-party service providers that support critical activities… This includes changes resulting from mergers and acquisitions, system conversions, regulatory requirements, and implementation of new, modified, or expanded products and services, such as the use of technological innovations.”
And consumer compliance, which, while included as an item last year, in the 2024 plan, specifically calls out consumer compliance risk from “new and innovative products,” including those offered via fintech and BaaS: “Examiners should focus on banks’ compliance risk management systems for new or innovative products, expanded services, and delivery channels offered to consumers or that involve products or services offered through third-party relationships, including those with fintechs or through banking-as-a-service activities. Examiners should also evaluate the effectiveness of compliance functions supported by third-party service providers.”
In other developments at the OCC, after the agency’s pick to lead the newly-formed Office of Financial Technology mysteriously disappeared without explanation, the agency has named a new leader: long-time OCC vet Donna Murphy.
Murphy will hold the title of Acting Deputy Comptroller for the Office of Financial Technology. She’s worked for the OCC for over a decade and, prior to that, had a 22-year career at the Department of Justice.
Murphy is joined by another OCC vet, David Stankiewicz, who will hold the title of Acting Chief Innovation Officer. Stankiewicz has a legal background and previously served as a technical expert for asset management policy and special counsel.
Other Good Reads
Listen: Part Two of my conversation with the Fintech Cowboys (Youtube)
The CFPB Creates News Adversity for Lenders (Fintech Takes)
Vibes-Based Supervision (Bank Reg Blog)
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