FloatMe Hit With FTC Action and $3 Million Penalty For Deception, Illegal Discrimination
NY Gov To Propose BNPL Regs, Montana AG Says EWA Not A Loan, Seven Predictions for 2024
Hey all, Jason here.
Happy New Year!
While the holidays (and actually seeing the sun) were nice, I’m glad to be home, rested, and hitting the ground running here in 2024. I’m looking forward to another busy, fun, hopefully not-too-chaotic year in fintech!
If you were busy actually enjoying your holiday season, you may have missed my special Banking-as-a-Service 2023 Wrapped from New Year’s Eve; if you want a quick recap on what happened in BaaS last year, find it here.
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Seven Predictions For 2024
Turns out, I did pretty well on my predictions for 2023, so I feel compelled to try again.
I should note this is somewhat of a tongue-in-cheek exercise for me — in order to be a prediction, it should be specific enough to be able to look back and evaluate fairly conclusively whether or not it was correct.
It’s also an excuse for me to engage in rank speculation, which I usually try not to do!
1. A Contraction In BaaS Middleware
Given recent developments in the middleware space, I suppose I’m not going too far out on a limb with this one.
There were already signs last year that a consolidation was under way, with FIS’ acquisition of Bond, Fifth Third’s acquisition of Rize, and Qenta’s acquisition of Apto Payments.
With the explosion of consumer fintechs, many of which built on top of middleware BaaS providers, behind us, there just wasn’t enough business to go around to support the number of players in the market.
Indeed, questions remain if BaaS as a standalone company is a viable business model, vs. having the capabilities middleware sought to provide integrated into core banking solutions or into banks themselves, particularly with a new generation of banks focused on solving these problems, like Column, Piermont, and Grasshopper.
In the middleware space, the two most challenged players are Synapse and Solid, both of which are facing various legal problems, have lost key bank partners, and, as a result, are likely to have difficulty holding on to fintech clients or raising additional capital.
The prediction: Synapse and Solid each stick it out for as long as they can, but ultimately wind down, for one reason or another, before the end of 2024.
2. Regulatory Repercussions Continue For BaaS Banks
Also pretty favorable odds on this. By their nature, regulatory actions are backward looking and, when public enforcement actions happen, it is typically only after multiple exam cycles where issues have been raised but not adequately remediated.
That said, we’ve seen more than enough evidence that “complex, technology-driven partnerships” between banks and non-banks have jumped up on the list of regulators’ concerns — and, as anyone working at or with a partner bank likely knows, recent exam cycles have been a lot more intensive than in the past.
For better or worse, regulators — and not just in banking, to be fair — have a tendency of reacting to the last crisis and, in so doing, sometimes overreacting. The pendulum swings from one extreme to another, but it eventually returns.
I think in the case of BaaS, the pendulum will swing back eventually — once bank regulators get their arms around the issue, feel like they have the appropriate frameworks for overseeing banks engaged in this business model, and banks have responded by improving their controls where necessary.
But we’re not there yet.
The prediction: I don’t think we get through this cycle of regulatory scrutiny without several more public enforcement actions, where regulators set examples and illustrate what the compliance expectations are for banks operating BaaS business models. If I had to pick a number, let’s say at least four BaaS/partner-bank-related public enforcement actions in 2024 — most likely focused on BSA/AML compliance, but perhaps also fair lending or consumer protection.
3. Regulators Take Action Against Credit Builders
This one’s for you, Alex!
Joking aside, amid the scramble to find “pathways to profitability” and continued growth, many consumer fintechs added some flavor of credit building feature to their products or pivoted to focus exclusively on credit building — benefiting from the higher interchange on secured charge cards or by charging a sometimes hefty membership fee.
And who can blame them! Despite the explosion of CreditKarma-like sites that show you your credit score, how to improve it remains a mystery for many consumers.
And, historically, building a credit profile if you were thin/no file actually required work — usually a secured card (which are generally awful products), or a credit builder loan.
Fixing your credit if you had “damaged” credit (major derogs, bankruptcy, etc.) was an even tougher challenge, with consumers seeking to do so often preyed upon by dubious credit repair services.
So the problem and the demand have been there.
But many fintechs’ answer has been to attempt to provide an “easy button” for credit building — with the flipside being, the data points some of these credit building features generate may be dubious at best, and actually a negative signal to potential lenders at worst.
As too often is the case in fintech, some of the claims about the positive impact of credit building products have dramatically outpaced the reality.
Given the prevalence of credit building features across consumer fintech and the large number of potentially impacted consumers, it is a logical area for regulators to probe and, if they find wrongdoing, pursue enforcement actions.
The prediction: At least one consumer fintech is the subject of a legal or regulatory action due to its business practices in relation to a credit building product — with the most likely regulatory issues being UDAP/UDAAP- or FCRA-related.
4. AI — Continued Handwringing, Experimentation
It’s not even a prediction to say that “AI” will continue to be a major theme across the business world writ large, including in banking and fintech.
As difficult as it is to separate fact from fiction when you’re in the middle of a hype cycle, the likelihood of AI driving a fundamental change in the technology landscape that ripples out to business, employment, and society in general seems orders of magnitude higher than other recently hyped “game changers” like blockchain or the metaverse.
That said, established companies and government are far more attuned to potential downside consequences than, say, the early days of the internet or social media.
“Legacy” businesses, particularly media and publishing, learned the hard way last time around — with the rise of search and especially social, media businesses participated in their own disintermediation and, as a result, saw their primary revenue stream — advertising — migrate to the platforms that controlled users’ attention.
This time around, businesses far better understand the threat of failing to defend their intellectual property — why does someone need to pay to read the New York Times, if ChatGPT can draw from that work for them, and capture the economic benefit in the process?
Similarly, government, which, historically, has done little to regulate much of the internet and many businesses built on it, for fear of impeding “innovation,” is already exhibiting a far more active posture when it comes to AI.
The prediction: first, I’ll acknowledge that “AI” is a pretty broad bucket and, as I’ve said before, many AI techniques, like machine learning, have already been in use in financial services for a decade or more.
When it comes to the current wave of generative AI, including large language models, the most likely place for them to show up this year is in customer service channels or in providing PFM-like tools — indeed, some fintechs are already experimenting with both of these.
On the flipside, I expect the use of genAI to execute fraud and scams to balloon this year — whether to induce authorize push payment fraud or to impersonate users to gain access to financial accounts, I fear the industry is woefully unprepared.
On the legislative/regulatory side, I’d expect to see growing scrutiny of the use of AI models in financial services, especially of potential bias or disparate impact to certain classes when it comes to things like fraud screening and credit scoring.
Expect at least one fair lending enforcement action related to AI.
5. Apple Charts A New Course On Its Credit Card
We already know Apple and Goldman are negotiating their divorce — the real question is, is Apple ready to date someone else?
The consensus view is that Apple will partner with another major issuer that has experience in cobrand programs — someone like Chase or Citi — though any new potential bank partner is likely to demand changes to the unfavorable terms Goldman agreed to.
But, what if Apple decided it was happy being single?
In the US, Apple will always need a bank partner to some extent — only banks can be principal members of card schemes, and banks benefit from interest rate preemption.
But when Apple decided to integrate a buy now, pay later offering into Apple Wallet, it chose to do as much as possible itself, including providing the capital to fund the loans — though it did still need Goldman to handle issuing virtual Mastercard credentials to enable payment processing at the point of sale.
With Apple’s “Project Breakout” and acquisition of UK cashflow underwriting startup Credit Kudos, Apple has been looking to insource many financial service-related capabilities typically handled through partnerships and vendors.
The prediction: While I realize this may not be the most likely outcome, what if Apple took a much larger role in running its card program — working with a BIN sponsor and taking over the role of program manager itself, rather than a cobrand arrangement more typical of big brands like airlines or hotel chains? It would give Apple greater (though still not total) control — an area that was clearly a point of contention in the relationship with Goldman. And Apple would get a greater share of the economics to boot.
6. Goldman (Finally) Shutters Marcus
Ok, also not the most out-there prediction.
The writing has been on the wall for Marcus since late 2022, when Goldman “split the baby” and reorganized chunks of its consumer business into two separate divisions of the bank. It also ceased writing personal loans under the Marcus brand and, subsequently sold off its GreenSky POS lending business. Reports also emerged last year that Goldman is also looking to unload its partnerships with Apple and GM.
The prediction: By the end of 2024, Goldman has substantially completed its dismantling of its consumer business and sunsets the Marcus brand — but holds on to the online savings accounts, folding them under the Goldman Sachs name.
7. Fintech IPO Window Re-opens (for companies that actually make money)
Last but not least… will 2024 be the year the fintech IPO window reopens?
The consensus seems to be yeah, probably — though, I imagine, it’s more a cracking of the window, and not like the anything-goes SPAC days of 2020.
With something resembling a return to reality, investors will likely be looking beyond the vanity KPIs of yore — “members,” daily active/monthly active users, and top line revenue/revenue growth — to prioritize businesses that are profitable or have a viable path to profitability. Valuation multiples remain compressed, even when compared to pre-pandemic levels.
The prediction: Apex Fintech Solutions (previously Apex Clearing) has already confidentially filed to go public so, baring unforeseen circumstances, that seems likely to happen. My next-best guesses are Stripe, Chime, and Klarna IPO, but below their peak private market valuations. Plaid is also a good candidate for IPO and, last valued at $13.4 billion in 2021, has a shot at debuting above that number. Revolut will probably talk about IPOing, but I doubt that will happen this year.
FloatMe Hit With FTC Action and $3 Million Penalty For Deception, Illegal Discrimination
FloatMe, a consumer fintech offering “free” cash advances in exchange for a $3.99 per month membership fee, reached a settlement with the FTC stemming from alleged violations of the Restore Online Shoppers Confidence Act (ROSCA), the FTC’s prohibition on unfair and deceptive acts (UDAP), and the Equal Credit Opportunity Act (ECOA).
This isn’t entirely surprising.
The news comes less than two months after fellow cash advance app Brigit agreed to an $18 million settlement with the FTC over similar issues.
Fintech Business Weekly has repeatedly flagged risks in this category of cash advance apps, including FloatMe specifically.
While the exact product structure varies by provider, the category is typified by offering small cash advances, often marketed as “free,” “0% APR,” “instant,” and “no credit check.” Companies typically earn revenue through some combination of membership fees, “tips,” “donations,” and expedited funding fees.
Potential users are often surprised to find out that they don’t qualify for the amounts advertised or don’t qualify at all, that promised instant transfers actually require a hefty fee, or that memberships that were suppose to be cancelable at any time are all but impossible to get out of.
FloatMe is fairly typical of the category — in exchange for a $3.99 monthly “membership” fee (previously as low as $1.99 per month), FloatMe will monitor a user’s connected bank account and allow users to get a “float” (advance) of up to $50.
Positioning these kinds of a products as “memberships” that have bona fide benefits apart from access to a loan is key to their regulatory strategy: to avoid having that monthly fee considered a finance charge in disguise, that would need be included in and calculated as an APR, there need to be material benefits apart from access to credit.
FloatMe Deceived On Advances, Illegally Discriminated Against Users Receiving Public Benefits, FTC Alleges
The FTC’s complaint argues FloatMe makes numerous misrepresentations about its cash advances, charged consumers without consent, made it overly burdensome for users to cancel their membership, and illegally discriminated against users whose income included public assistance.
According to the FTC, FloatMe advertised to users on social media, its website, and Apple and Google’s app stores that they could “instantly” get up to $50 “free” and with no hidden fees.
But, per the FTC’s complaint, no users qualified for $50 upon initially signing up for FloatMe, instead having access to a maximum of $20.
FloatMe allegedly told users who asked about being able to borrow larger amounts that, if they stayed enrolled, they could “automatically” qualify for larger amounts that would be set by the “Float system.”
But in reality, the FTC says, there was no “system” or “algorithm.” Rather, increases were manually applied by FloatMe’s customer support team on a limited basis according to unspecified criteria.
Fewer than 5% of users qualified for an advance of more than $20 in the most recent quarter, according to the complaint.
FloatMe also heavily advertised its “Floats” as both “instant” and, after the at the time $1.99 per month fee, “free” and as having “no hidden fees.”
But in reality, to obtain a $20 advance the same day, users had to pay a $4 fee; otherwise, they had to wait up to 3 days to receive the funds. A $4 fee on a $20 advance repaid in two weeks would equate to an annualized interest rate of 520%, not including the monthly membership fee.
The company also charged users without their permission — in some cases, charging users multiple times for the same monthly membership period, for the same advance repayment, or after they had canceled their subscription.
FloatMe intentionally made the recurring membership charges nearly impossible to cancel, the FTC says, as a customer retention tactic.
Users could not cancel in the app or the website, instead needing to email customer support — but such requests often faced extensive, unexplained delays, during which users continued to be charged.
FloatMe eventually added a webform and an in-app cancelation process, but, in FloatMe’s CEO’s own words, designed them to “make[] it difficult for someone to quit.”
Finally, despite marketing its advances as “no credit check” and failing to disclose qualification criteria, FloatMe did not consider income derived from public assistance when determining if a user qualified for an advance.
The Equal Credit Opportunity Act prohibits discriminating against credit applicants on the basis of protected characteristics, including if an applicant derives income from public assistance. Based on the stipulated order FloatMe reached with the FTC, it appears that company had no fair lending program or controls in place whatsoever.
The FTC argues the above fact patterns constitute violations of the FTC’s prohibition on UDAP, ROSCA, and ECOA.
FTC Order Names FloatMe Cofounders Personally
The agreement reached with the FTC is notable as it names not only FloatMe, but also cofounders Joshua Sanchez and Ryan Clearly, both as officers of the company and personally.
The order:
prohibits the company from further misrepresentations of the amount users may qualify for, when funds will be available, any fees (including for delivery), customers’ ability to cancel their membership, and that any automated process is used to determine the amount users qualify for
prohibits the company from describing services that include negative option billing as being “free,” a “trial,” or “no obligation”
prohibits the company from obtaining users’ billing information for a service with negative option billing without explicitly disclosing that a user must take affirmative action to avoid charges
requires the company to implement a simple mechanism to cancel the recurring membership subscription
prohibits the company from discriminating against users/applicants on a protected basis, including because part or all of their income is derived from public assistance
requires the company to establish, implement, and maintain a fair lending program
The FTC also assessed a $3 million penalty.
Asked about the case, FloatMe CEO Joshua Sanchez told Fintech Business Weekly:
“The FTC has presented us in the worst light possible and without context, which is far beyond the truth. We disagree with the assertions and have admitted no wrongdoing, and we settled to avoid the ongoing expense and distraction of litigation. All of our energy is directed toward our mission of providing a customer-focused, alternative consumer funding source without the onerous overdraft fees and predatory lending practices that pervade consumer finance.”
The action serves a reminder for fintechs that there are legal and regulatory risks to keep in mind beyond the “banking” ones, particularly for companies with novel business models, like those relying on recurring membership fees covered by ROSCA.
Given this is the FTC’s second case in quick succession focused on a similar segment (cash advance apps) for similar issues (deceptive marketing, subscription plans), it suggests other actions may be in the pipeline.
Other consumer fintechs that offer similar features — a group that includes names like Dave, MoneyLion, SoLo Funds — should consider themselves warned.
Montana AG Says EWA Isn’t A Loan
How regulators should treat earned wage access products is continuing to gain attention, particularly with the CFPB’s comment letter on California’s proposed rule and stated intention to issue further guidance about how TILA and Reg Z apply to such products.
Late last month, Montana’s attorney general released a legal opinion, pursuant to a request by the Speaker of the Montana House of Representatives, addressing questions about whether or not EWA providers needed a license in the state.
The question posed by the Speaker was:
Whether an Earned Wage Access (“EWA”) product meets the definition of: (1) “consumer loan” in MCA § 32-5-102(2)(a) requiring licensure by the Montana Division of Banking and Financial Institutions under MCA § 32-5-103; or (2) “deferred deposit loan” under MCA § 31-1-703 requiring licensure under MCA § 31-1-795.
Much of the discussion and legal analysis about whether or not EWA should be considered a “loan” or “credit” and subject to applicable regulations include:
whether or not the amount advanced is made only against the accrued value of unpaid cash wages at the time the advance is made
whether or not the advance is “no recourse,” meaning that, in the event of non-payment, the party making the advance has no legal or contractual remedy and cannot pursue debt collection activities
whether or not an advance is conditioned on the mandatory payment of interest, fees, or other compensation
The attorney general’s opinion argues that earned wage access programs are not “loans” under the Montana Consumer Loan Act nor the state’s Deferred Deposit Loan Act, “[s]o long as the EWA product is fully non-recourse; does not condition an income-based advance on any interest, fees, or other consideration or expenses; and limits income-based advances to income already earned by the consumer.”
Accepting “tips” or charging for certain ancillary services (eg expedited funding) would be permissible — so long as those charges are optional and the user “is not required to pay any charge or fee to be eligible to receive or in return for receiving the advance.”
The opinion concludes that, if EWA programs meet the above criteria, they are not subject to either Montana law and thus do not require licensure in the state.
New York Gov To Propose Legislation To Regulate BNPL
As part of her 2024 State of the State, New York Governor Kathy Hochul announced a forthcoming measure that would require buy now, pay later providers to be licensed in the state and to empower New York’s Department of Financial Services to propose and issue regulations for the sector.
Gov. Hochul argued the measure was necessary, as New Yorkers increasingly turn to BNPL as an alternative to traditional credit products.
According to the governor’s statement: “This legislation and regulations will establish strong industry protections around disclosure requirements, dispute resolution and credit reporting standards, late fee limits, consumer data privacy, and guidelines to curtail dark patterns and debt accumulation and overextension.”
The specific proposed legislation will be released later this month as part of the governor’s budget proposal and must still go through the legislative process in the state before becoming law.
The New York proposal is the latest sign of increasing legislative and regulatory scrutiny on the category, coming on the heels of recent guidance from the OCC, the CFPB’s 2022 report on the industry, and scrutiny in Congress.
Other Good Reads
Top Bank Regulator Takes on ‘Drive Fast, Crash’ Risk Culture — Interview with Acting Comptroller Michael Hsu (Wall Street Journal)
1033: Letters From The Frontlines (Fintech Takes)
Washington Watch: 5 Issues Bankers Should Monitor in 2024 (The Financial Brand)
Rate Exportation Opt-Out and “Anti-Evasion” Bill Introduced in Washington D.C. (Ballard Spahr)
Implications Of High Inflation For Banking Outcomes and Deposit Flows: Observations from 2021-2022 and the 1970s (FDIC Quarterly)
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