Fintech, Financial Literacy & More: Interview with Financial Health Network's Mimi Joy
OppFi Sues California to Continue Lending at 160% APR
Hey all, Jason here.
Wrapping up this week’s newsletter from Oaxaca, Mexico, where I’ve been for the past week. It’s been nice to have a bit of a break from the status quo, but I’m looking forward to getting back to the Netherlands and back to work in a couple more days!
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OppFi Sues California to Continue Lending at 160% APR
OppFi, which offers loans under its OppLoans brand, has sued the Commissioner of the state’s financial regulator, the DFPI, in an apparent effort to head off an impending regulatory action against the company.
The source of the conflict? Whether or not OppFi is the “true lender” and thus bound by the California Financing Law’s 36% cap. OppFi, which is not a bank, works with Utah state-chartered bank FinWise to offer loans at up to 160% APR in California.
In its suit, OppFi argues that the CFL’s cap doesn’t apply for several reasons:
“First, Program Loans are constitutionally and statutorily exempt from California’s maximum interest rate caps because the loans are made by FinWise, a state-chartered bank located in Utah.
Second, OppFi does not make loans under the Program in California. As such, it is not a “finance lender” under the CFL with respect to its Program-related activities, and, therefore, is not subject to the interest rate caps established by AB 539 for those activities.
Third, even if AB 539 could arguably apply to OppFi, Section 27 of the Federal Deposit Insurance Act (“FDIA”), 12 U.S.C. § 1831d (hereinafter “Section 27”) preempts application of AB 539 to Program Loans.”
It’s fair to say that the California DFPI disagrees. According to OppFi’s suit (emphasis added):
“On February 23, 2022, Johnny Vuong, Senior Counsel in the Enforcement Division of the DFPI, acting in his official position and by and at the direction of the Commissioner, informed OppFi that the Commissioner had concluded that OppFi’s Program-related activities were subject to the CFL and violated AB 539 because, according to the Commissioner, OppFi is the ‘true lender’ on Program Loans, and the interest rate on those loans exceeds the interest rate cap in AB 539. He also stated that the Commissioner had concluded
(1) that OppFi had violated California Financial Code section 22303 because the interest rate on Program Loans in amounts under $2,500 exceed the interest rate cap set forth in the CFL; and
(2) that OppFi’s purported interest rate violations constitute unfair and deceptive practices under the California Consumer Financial Protection Law (“CCFPL”). Mr. Vuong, on behalf of the DFPI, threatened legal action to enforce the Commissioner’s legal position.”
OppFi’s decision to fight in California is interesting but not surprising. When faced with a near-identical problem in Washington, DC, OppFi instead opted to settle the case and stop operating in DC. While it may be tolerable to give up a small market like DC, OppFi can’t afford to exit a large state like California.
Yet, the “true lender” fight almost feels like a distraction. After all, the object of regulators’ and consumer advocates’ ire is really the interest rate, not who is making the loan. “True lender” is just a tactic available to wage that war. I don’t see many people arguing whether or not Affirm or PayPal is the “true lender” of a given credit vs. their bank partners. Nor is anyone, that I’m aware of, arguing that OppFi’s bank partner, FinWise, doesn’t have the right to originate loans to Californian consumers at 160% APR.
Regulators and advocates should, at a minimum, acknowledge the potential impact of their position. Enforcing a 36% rate cap will result in a reduction of access to credit for those with lower credit scores and for those seeking to borrow smaller amounts. Consumers who were borrowing at 160% APR will not magically qualify for prime rates just because a rate cap was created or enforced.
I don’t mean to be an apologist for 100%+ loans — but at least companies like OppFi operate within a strong regulatory and compliance framework, including with core lending laws like ECOA, FCRA, TILA, and the FDCPA.
Other companies skirt regulations by offering products they claim aren’t loans or by collecting “tips,” accepting “donations,” or charging expedited funding fees — while claiming they’re not finance charges and don’t need to be disclosed as an APR.
Fintech, Financial Literacy & More: Interview with Financial Health Network’s Mimi Joy
The opportunity for financial services companies to play a positive role in increasing consumer access and inclusion and promoting financial health is part of what attracted me to fintech.
After spending over a decade in the sector, I’ve come to appreciate the complexity of creating financial products and services that align a business’s and its customers’ outcomes (even when that means giving up revenue or margin), while achieving profitability and staying on the right side of regulation.
Frequent readers of this newsletter will know I remain interested in financial health themes — including in directly supporting efforts in the space by donating 15% of paid subscription revenue from this newsletter. Thanks to generous subscribers, I raised $1,000 for the Financial Health Network!
Recently, I had the chance to interview the Financial Health Network’s Senior Director of Market and Business Development, Mimi Joy, about the difference between “financial literacy” and “financial health,” the impact of COVID and government stimulus measures, how fintech, neobanks and BNPL could impact financial health, and more. What follows is our written interview.
Jason: For readers who are unfamiliar, what is the Financial Health Network?
Mimi: The Financial Health Network was founded 18 years ago, and our mission is to improve financial health for all. We are transforming the way business leaders, policymakers, and innovators think about the role they play in improving the financial lives of low-to-moderate income populations and communities of color, with a particular focus on those most likely to experience financial health challenges. We work across the sectors that play the greatest role in financial health outcomes - financial services, workplace and health care.
Our focus is to improve financial health outcomes for all, with a specific focus on historically underserved populations. We do this via:
Education to help business leaders and policymakers better understand that financial health is a key driver for business success and economic well being.
Deep consumer research, communicating critical data points and analysis, and investing in cross-sector thought leadership.
A focus on innovation by encouraging companies to invest in and pilot technology-led financial health solutions and by actively supporting founders who are designing products and practices centered on improving financial health outcomes.
Advise by developing a deep understanding of the specific needs of an organization's customers, patients, and employees and then helping to deploy solutions, measuring and communicating outcomes.
Our team produces landmark research that delves into the Financial Health of Americans, specifically the Financial Health Pulse Trends Report and FinHealth Spend Reports:
Our 2021 Financial Health Pulse Trends Report found that overall financial health in the U.S. improved over the last year, with more than a third (34%) of people in America now considered financially healthy. However, despite government relief programs and changes in consumer spending that helped boost savings and liquid account balances during 2021, a full two-thirds of Americans (187 million people) are still not financially healthy.
The 2021 FinHeath Spend Report found that Financially Coping and Vulnerable households account for 84% of spending on fees and interest for financial services (for a total of $255B) despite representing less than two thirds of the population. In particular, Financially Vulnerable households spent, on average, 13% of their annual income on the products studied, compared with 5% for Financially Coping households and just 1% for Financially Healthy households.
We are also partners in the BlackRock Emergency Savings Initiative, and in partnership with PayPal, JUST Capital and The Good Jobs Institute on the Worker Financial Wellness Initiative to help companies understand their worker’s financial vulnerabilities and improve resilience.
Our Financial Solutions Lab accelerator - recently recognized as the 2021 Best Fintech Accelerator by Finovate - seeds early-stage tech companies building solutions to the biggest financial health challenges facing underserved consumers. To date, we have have invested in 45 companies with a combined reach of over 10 million customers, at least half of whom are low- to moderate-income
Jason: A lot of the narrative in fintech around meeting the needs of lower-income consumers is grounded in “financial literacy.” Is that the right framework?
Mimi: Financial literacy can be productive at an individual level, but we believe that financial health is embedded in the daily systems that shape an individual’s financial outcomes - systems that can deeply affect how they spend, save, borrow and plan.
Financial health is directly influenced by social and systemic issues that can create barriers and hurdles for consumers as they navigate their daily lives. These are especially present for lower-income consumers who are at greater risk of experiencing income inequity, lack of affordable housing, generational wealth gaps, access to affordable insurance, and access to reliable public transportation to get to their jobs, etc. These barriers are deep and structural and cannot be removed by becoming more financially literate.
Jason: What is the difference between “financial literacy” and “financial health”? How do you think about measuring financial health?
Mimi: Financial health is a composite measurement of a person’s financial life, specifically how individuals can spend, save, borrow and plan in a way that helps them build financial resilience so they can weather shocks and pursue financial goals over time.
Financial literacy can help individuals learn more about tools and habits that can increase their financial health, but without income that allows them to pay bills on time, sufficient liquid savings and manageable debt, knowledge and education alone won’t help people make ends meet.
Jason: Federal and state governments instituted a wide variety of programs to blunt the economic impact of the COVID pandemic, including direct stimulus payments, expanded unemployment eligibility and benefits, increased SNAP benefits, and the Paycheck Protection Program (PPP). What lessons can we draw from these efforts?
Mimi: One of the most critical takeaways from the pandemic is that technology can be used to get services to people that need them most, although challenges persisted to reach vulnerable consumers. However, technology and policy changes based on pandemic-era lessons can make a difference to vulnerable populations going forward.
An example of how fintechs helped users during the pandemic and beyond is from Propel, an alum of the Financial Health Network’s Financial Solutions Lab Accelerator. Propel developed a suite of tools to help their more than 5 million Fresh EBT users navigate resources during the COVID crisis:
Propel’s app Providers (formerly Fresh EBT) updated users about national and state-specific policy updates about SNAP, and also carefully vetted resources and offers that would be useful to users.
Many Propel users live paycheck-to-paycheck so the team regularly surveys users to understand how the circumstances in their lives are changing or creating greater uncertainty. This SNAP Household Survey gave insights about how users were experiencing food insecurity, how delivery of services and funds reached household, and about levels of savings and debt.
Propel also partnered with GiveDirectly to help their users access what they ran out of funds and needed immediate assistance. During the pandemic this partnership provided 200k households with a cash transfer of $1,000.
Jason: One COVID-era initiative, the monthly child tax credit, has recently lapsed. What kind of impact have you seen that have?
Mimi: The reality of the pandemic played a large role in how Americans were able to navigate their financial lives. Parents were strongly impacted by school closures and the transition to virtual learning, particularly women. In fact, women were more than twice as likely as men to not work due to child care responsibilities in 2021. The proportion of women who reported not working due to the rising cost of and lack of access to childcare has increased by 61% since 2020.
A recent study from The Center on Poverty and Social Policy at Columbia University showed that there was a 41% increase in child poverty from December 2021 through January 2022, with an additional 3.7 million children now in poverty after the Tax Credit Expired (with Black and Latino children seeing the biggest percentage point increases).
Jason: Bank fees - particularly overdraft fees and non-sufficient funds (NSFs) fees have received increasing scrutiny from legislators and regulators recently, and many banks have lowered or even eliminated these fees. Have establishment banks done enough to create products that work for lower-income and credit-constrained consumers?
Mimi: This increased focus on consumer financial health is changing overdraft practices and business models from banks and regulators. However, the need for short term credit is still great. Last year, Financially Coping and Vulnerable households ( those who struggle to spend, save, borrow, and plan) accounted for 84% of spending on fees and interest for financial services (The FinHealth Spend Report 2021).
We are very encouraged that many banks have eliminated fees that have a disproportionate impact on the most vulnerable, and encouraged by innovations that fintechs and neobanks are bringing to the market. Fintech firms have delivered cheaper forms of liquidity, like cash flow-based products such as Buy Now Pay Later solutions. Meanwhile, more than 100 traditional banks and credit unions have introduced no-overdraft checking accounts and have seen that uptake was higher than expected.
Incumbent banks are offering more products that can be used to improve financial health, and the pandemic created an increased focus on digital banking products and technology that can help reach more customers. There is still much to be done, but innovation and technology have a key role to play in reaching customers that previously were left behind.
Jason: Credit bureaus and credit scores have also received renewed attention from legislators and regulators. What would meaningful reform to this sector look like?
Mimi: Unlike only using one metric like a traditional credit score, financial health assesses whether people are spending, saving, borrowing, and planning in a way that will enable them to be resilient and pursue opportunities over time.
The FinHealth Spend Report shows that Americans who are least likely to afford it are paying the most in fees for everyday financial services such as credit cards, auto loans, remittances, and overdraft charges, and spend a greater share of their income on those fees compared with those who are financially healthy.
To create better financial health, consumers need access to low-cost credit that will help them build credit scores over time, and also access to credit with less fees for everyday financial services.
Jason: Fintech “challenger banks” offer an alternative to establishment banks – but they aren’t without criticism or drawbacks. For instance, Chime has been criticized for closing vulnerable users’ accounts without notice; some merchants refuse to accept debit cards from challenger banks due to perceived or actual higher risk of fraud. Is the current “challenger banking” model the answer to traditional banks’ shortcomings in meeting the needs of lower income consumers?
Mimi: Fintechs have the potential to improve financial health, especially for underserved communities and low-income people since they aren’t bound by geographic limitations and can scale quickly.
Many fintechs are hyperfocused on the user experience and can innovate and pivot more easily to address the needs of customers. Fintechs can also focus on a narrow consumer need; note that not all fintechs are banks, although some of the banks are fintechs.
Neobanks are continuing to build traction with many relying on interchange revenue from business users as a key driver of their business model, which can often be much higher than fees charged by traditional banks. This is one of the primary reasons why Financial Solutions Lab Accelerator alum Digit, charges a flat, monthly fee for their fintech product. Incentives matter.
Jason: Another novel credit product, buy now pay later, has exploded in popularity in recent years, particularly since the onset of the pandemic. While there seem to be benefits to the model (potential for no-cost short-term financing), there also may be risks. How do you think about BNPL in relation to financial health? What steps should BNPL providers implement to ensure they’re offering their product in a responsible way?
Mimi: The BNPL market is estimated to have grown by 300% per year since 2018, and has vast implications on financial health. Our team is working on forthcoming research that will explore the evolving BNPL market to understand how it works, who is using it and what risks/implications they are for consumer financial health and explore what researchers and regulators to consider.
It is encouraging that the CFPB is looking into rulemaking around BNPL because not all products and options are created equal. To your point, there certainly are risks, but there are also large benefits to those that have less access to traditional credit. If regulated and utilized correctly, the option could be a great tool for financial health.
Jason: For nearly all Americans, wage employment is their only source of income. What role can (or should) employers have in supporting employees’ financial health?
Mimi: As workers continue to struggle with finances, they are looking to their employers for solutions. Employers have a role to play in helping their employees manage financial health, and most are aware of the challenges their employees are facing, with many starting to take action to address the challenges.
Employers can help meet employees’ needs more fully through a holistic and responsive set of benefits–but first employers need to better understand the financial health needs of the employees, evaluate the solutions and options available as part of benefits offerings and test financial health solutions for their teams.
For example, an employer may offer retirement planning offerings, but may have a large number of employees who would first benefit from an emergency savings offering or help managing debt. Until those needs are met, those particular employees would not use retirement planning services since their financial health needs are more acute and short term.
Without analysis and measurement, employers would not understand the gap between what employees need, and which solutions they can offer to help employees the most.
Jason: Something I haven’t asked about Financial Health Network that I should have?
Mimi: For organizations interested in taking action on their financial health initiatives, we offer a financial health measurement solution as well as consulting services.
The same measurement framework that is the foundation of our national research, Financial Health Pulse is available to organizations focused on measuring financial health. Measurement is a great place to start and provides insights into the products and services needed to improve financial health for consumers.
We’ve built a digital platform called Attune to make measurement efforts easy to understand while benchmarking against the Pulse research. This enables organizations to understand where to focus to better meet the needs of their employees and customers.
To learn more about the Financial Health Network or how we can help organizations understand or measure financial health, I can be reached at mjoy@finhealthnetwork.org or visit www.finhealthnetwork.org.
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Other Good Reads
Commodities Trading (Net Interest)
Bitcoin Can’t Finance A War: The Crypto Industry And Being On The Right Side Of History (Lawrence Wintermeyer/Forbes)
Facebook Libra: the inside story of how the company’s cryptocurrency dream died (FT)
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