FTC Alleges Dave Deceived Users On Tips, Instant Fees, Advance Amounts
Knives Out In Synapse Bankruptcy, Rate of Unbanked Households Drops to 4.2%, FT Partners Q3 Funding Highlights
Hey all, Jason here.
I’m excited to be heading to Washington, DC, tomorrow to speak at the American Fintech Council Policy Summit as part of a panel, alongside some of my favorite fintech and banking thinkers: Kiah Haslett (Bank Director), Jonah Crane (Klaros Group), Simon Taylor (Fintech Brainfood), and Alex Johnson (Fintech Takes). I’ll also be attending the FinRegLab AI Symposium on Thursday, as well as taking a variety of other meetings while I’m in town.
Following DC, I’ll be swinging by Chicago through Thanksgiving, which, if I’m remembering correctly, will be my first time spending the holiday back home since moving to the Netherlands five years ago!
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!Credit Builders: Assessing Signal v. Noise Of New Kinds of Tradeline Data
I’m excited to announce the second installment of the Taktile Expert Talks series, examining the topic of credit builders. While the category has long existed, like much of consumer fintech, credit builders have exploded in popularity in recent years, including various new “innovative” takes on helping consumers build or repair their credit history.
However, not all tradeline data is created or treated equally, so to speak. In this session, I’ll be joined by industry experts Jason Capehart (Mission Lane), Chris LaConte (Self Financial), Alex Johnson (Fintech Takes), and Jesse Silverman (Troutman Pepper), in what promises to be an enlightening and entertaining conversation on Assessing the Signal vs. Noise of New Kinds of Tradeline Data.
Join us on Tuesday, December 3rd, at 12:00pm Eastern / 9:00am Pacific for this can’t-miss session.
Knives Out: Synapse Bankruptcy Gets Heated, As AMG, Lineage Call Evolve “Irresponsible and Disingenuous”
On November 4th, Evolve Bank & Trust began informing end users caught up in the Synapse bankruptcy that many of them would receive just pennies on the dollar — or nothing at all.
Last week, I had the chance to interview Synapse cofounder and former CEO Sankaet Pathak live on X Spaces, and Pathak also answered end user questions, though some of his responses were evasive or lacked critical context.
During that interview, Pathak described operational processes between Synapse and Evolve which caused balances between their systems to vary substantially day to day, which, Pathak said, Evolve was aware of and said not to worry about. Pathak also alleges that Evolve was aware and acknowledged that third party fees were debited from customer funds, but that Evolve disputed whether it was the bank’s fault and obligation to cover the shortfall caused by the error.
Asked during the interview about his robotics startup’s attempt to raise funds and purported relationship with GM, first reported by me and subsequently confirmed by CNBC, Pathak went on the attack, describing the CNBC reporter as “a piece of shit” and “highly unethical,” alleging that the reporter contacted an auto industry union leader, not GM, leading the union leader to threaten a strike if GM didn’t pull out of the deal. However, the CNBC piece quoted a GM spokesperson as saying, “GM has never invested in Foundation Robotics and has no plans to do so. In fact, GM has never had an agreement of any kind with the company. Any claims to the contrary are fabricated.”
During the interview, Pathak also alluded to having a “plan” to get users their money back, but declined to elaborate, saying he didn’t want Evolve to know the details.
Last week’s status filings and hearing in the bankruptcy case suggest the situation is transitioning to a more, let’s say, adversarial phase.
As the Chapter 11 trustee, former FDIC Chair Jelena McWilliams, and the judge in the case, Martin Barash, lack the authority to compel Evolve or the other banks involved to share information with each other, release information publicly, or take a specific course of action, end users are preparing to pursue other avenues, including civil litigation and continuing to pressure legislators and regulators to take action on the matter.
In a joint status report prior to Wednesday’s hearing, AMG and Lineage said they were “disappointed” in Evolve’s public statements and described the bank’s implication that Lineage or AMG may still hold substantial amounts of end user funds as “irresponsible and disingenuous.”
In their statement, Lineage and AMG included what they say is each bank's cash flow to and from Evolve, presumably for the full length of the time the banks were part of the Synapse "ecosystem," reflecting a net flow of about $957 million from Lineage and AMG to Evolve.
For her part, McWilliams, the Chapter 11 trustee, also expressed disappointment in Evolve’s efforts.
According to McWilliams’ status report (emphasis added), “Evolve has declined to provide most details of the outcome of its reconciliation to the Trustee beyond publicly available information due to pending litigation,” meaning that, the trustee writes, it “has less information on the anticipated distributions by Evolve than even the end users.”
The Synapse estate lacks the funds to undertake its own reconciliation efforts and, instead, the trustee will shift its focus to selling Synapse’s assets, preserving data, and investigating how it may be able to make data available to parties in interest in the bankruptcy. To date, the trustee has not received any actionable offers for Synapse’s assets, per the most recent status hearing.
The trustee also writes that the estate is evaluating the “feasibility of pursuing certain causes of action and paths to recovery.” While the trustee didn’t specify what these causes of action may be, the most significant is presumably any reserve funds Evolve holds that the Synapse estate may have a claim to. However, pursuing that claim presumably would require resources and funding — neither of which the estate has at the moment.
Former Synapse CEO Pathak himself made a brief virtual appearance at the bankruptcy hearing, during which he told end users that he will “fight” for them, and that he would spend a good portion of his time helping them to get their money back.
Pathak called on Evolve to make the findings of its third-party reconciliation public, pointing out that the baseline Evolve used for its effort was September 30, 2023 — after the actions that caused much of the shortfall in customer funds at Evolve, Pathak said. Synapse’s largest program, Mercury, had migrated off of its platform shortly before this date, and another large program, Brazilian neobank Nomad, migrated off shortly after it.
Pathak also took a shot at Evolve founder Scot Lenoir, alleging that Lenoir “has a history of cooking the books” and has been sued for that before. As a represented party appearing without counsel, Evolve’s external counsel was prohibited from responding to Pathak’s comments and allegations during the hearing.
Tips about what’s happening in the Synapse bankruptcy? Let me know by replying to this email, or you can reach me on secure messaging app Signal at +1-316-512-1571Rate of Unbanked Households Drops to 4.2%, New FDIC Survey Shows
Last week, the FDIC released its biennial survey of unbanked and underbanked households, which was conducted in June 2023. Per the survey, the rate of unbanked households declined slightly, by 0.3% points, from 2021, though the change is not statistically significant.
The rate of unbanked households reached its highest level since the survey began in 2011, following the Global Financial Crisis, hitting 8.2%.
Since then, the rate of unbanked households has fallen by approximately half, equating to over 5 million households gaining access to the banking system.
What drove the change? According to the FDIC’s survey and analysis, two-thirds of the improvement in the rate of unbanked households was correlated with changes in household economic status, particularly income and education levels (though, as always, correlation does not equal causation.)
While the overall rate of unbanked households has markedly improved since 2011, there remain significant differences by demographics. The unbanked rate of Black, Hispanic, and American Indian/Alaska Native households remains four to six times as high as for White households.
Of households who were very or somewhat interested in having a bank account (darker blue bars below), minimum balance requirements and account fees were the most commonly cited reason for not having an account.
Households who were not very or not at all interested in having a bank account (lighter blue bars below) were more likely to cite a lack of trust in banks or privacy concerns.
Unsurprisingly, the primary way most consumer access their bank account is via a mobile banking app, with nearly half (48.3%) citing this as their preferred method — a nearly 43% point increase since 2013 (for frame of reference, the iPhone first launched in 2007.)
Just shy of 20% of consumers indicated they preferred online banking (web), making for a combined 68.1% who cited a digital channel as their primary method of accessing their account.
Yet 15.1% — a slight (probably statistically insignificant) increase from 14.9% in 2021 — said the primary way they accessed their account was via a bank teller.
Looking at mobile banking preference by age cohort (below) strongly suggests the continued decline of the relevance of bank branches, perhaps calling into question some banks’ initiatives to build substantial numbers of new branches.
Unbanked households are, unsurprisingly, far more likely to report using a nonbank online payment service, which the survey define as including PayPal, Venmo, and Cash App but not bank consortium-owned Zelle, to “save or keep money safe.”
Nearly 41% of unbanked consumers reported using non-bank apps to save money. The Synapse bankruptcy illustrates the admittedly unlikely, worst-case scenario of using such apps — a risk that most all unbanked households likely do not understand that they’re taking.
Use of certain bricks and mortar non-bank financial services has declined significantly in recent years, even among the unbanked.
Specifically, use of money orders by unbanked households has declined, with 50.6% of unbanked households reporting using money orders in 2013 vs. 26.3% in 2023. The large majority of households that reported using money orders, some 93.8%, did so to pay bills, according to the survey. In the same timeframe, the proportion of unbanked households using check cashing services declined from 38% to 18.2%.
It’s also unsurprising that unbanked households are far less likely to report using mainstream credit products, with 78.4% of unbanked households reporting no use of mainstream credit vs. just 13% of banked households.
Unbanked households were significantly more likely than their banked peers to use a rent-to-own service, payday, pawn shop, auto title, or tax refund anticipation loan. Combined, 5.8% of unbanked households used such services.
For the first time, the FDIC survey included questions about household use of buy now, pay later (BNPL) plans.
Per the survey, a relatively paltry 3.9% of all households reporting using a pay-in-four BNPL service in the prior 12 months. The rate was higher for banked households, at 4%, vs. unbanked households, at 1.6%.
The survey also found that use of BNPL was four times higher among households that used rent-to-own, payday, pawn, title, or tax refund anticipation loans, with 14% of that group using BNPL vs. 3.2% for households that did not use such products.
The 2023 survey also included new questions on crypto, finding that, in the prior 12 months, 4.8% of households reported owning or using crypto. Banked households were more likely to use crypto, with 5% reporting doing so vs. 1.2% of unbanked households.
Crypto use varied substantially by household demographic characteristics, with higher-income, more educated, and younger households more likely to report owning or using crypto.
The vast majority, some 92.6%, of households that reported owning or using crypto indicated they did so as an investment.
FTC Alleges Dave Deceived Users On Tips, Instant Funding Fees, Made It Overly Burdensome To Cancel Monthly Charges
The FTC has filed suit against neobank and cash advance app Dave, alleging the company misled consumers about the loan amounts they were likely to qualify for, instant funding fees, “tips,” and recurring subscription charges, in violation of the FTC Act’s prohibition on unfair or deceptive acts and practices (UDAP) and the Restore Online Shoppers’ Confidence Act (ROSCA).
Approximately 90% of Dave’s revenue in its most recent quarter was derived from “processing fees” (instant funding fees), tips, and subscription charges.
The FTC’s complaint alleges that Dave:
deceptively advertised “instant” cash advances of up to $500, even though only a “minuscule” number of consumers qualify for amounts anywhere near what is advertised. Dave’s advertisements made claims such as “Tap for up to $500,” “Download Dave and get up to $500 instantly,” and “Get cash now.” (Fintech Business Weekly reported on Dave’s and other cash advance apps’ potentially misleading adverts more than three-and-a-half years ago.)
did not make clear to consumers before they agreed to connect their bank account and pay a $1 per month membership fee that very few users actually qualify for the amounts advertised. Only after enrolling and connecting a bank account, the complaint says, did most users learn they qualified for significantly less than the amounts Dave had advertised or nothing at all.
advertised that its cash advances are available “instantly,” “on the spot,” “now,” and “in under five minutes,” but did not make clear that, unless users pay an undisclosed “Express Fee,” ranging from $3 to $25, they would need to wait 2-3 business days to receive their funds.
leveraged so-called dark patterns to encourage users to leave “tips.” For example, after accepting an advance offered by Dave, users would be presented with the screen below — which strongly suggests users’ “tip” goes to provide healthy meals to children, when, in fact, Dave donates only $0.10 per percentage point of tip, or a $1.50 if a user selects a 15% tip. Fifteen percent is preselected, and, the complaint argues, there is no clear way to decline or leave a 0% tip. To do so, users must select “Leave a custom tip” and move a slider all the way to 0%, which replaces the imagery of a happy cartoon child surrounded by food with “an empty plate with a fork and spoon,” the complaint says.
failed to provide a simple mechanism for users to discontinue the monthly $1 subscription charge. From August 2021 to November 2022, users who had a Dave bank account, which, beginning in early 2022, was required to obtain an advance, had no way to stop the recurring charge in app. Nor did Dave inform consumers what options existed for stopping the charge. For example, it took one user 27 days, nine messages to Dave customer support, and threatening to contact the Better Business Bureau to get Dave to discontinue the charges.
in some circumstances, Dave did not allow users with outstanding advances to stop the recurring monthly membership fee.
The FTC’s complaint alleges Dave has violated the FTC Act’s prohibition on UDAPs by misrepresenting the amounts users are likely to qualify for and misrepresenting “tipping” and expedited funding fee charges. The complaint alleges Dave violated the ROSCA by not clearly and conspicuously disclosing all material terms of transactions before obtaining a user’s billing information, failing to obtain express informed consent, and failing to provide a simple mechanism to stop recurring charges.
The FTC is seeking a permanent injunction to prohibit Dave from future violations of the FTC Act and ROSCA, monetary and other relief within the court’s power to grant, and any additional relief the court deems appropriate.
Of the FTC action, the company released a statement saying in part (spacing adjusted):
Following months of good-faith negotiations, we are disappointed the FTC has chosen to file suit against Dave, a company on a mission to level the financial playing field for the millions of Americans poorly served by the legacy financial system. The FTC asserts many incorrect claims regarding Dave’s disclosures and how the Company acquires consent for the fees associated with our products...
We believe this case is another example of regulatory overreach by the FTC, and we intend to vigorously defend ourselves. We take compliance and customer transparency very seriously and believe that we have always acted within the law. We remain focused on serving our members who love and rely on our products.
Dave CEO Jason Wilk added, “It is worth emphasizing that the FTC’s action, for which we believe we have strong defenses, is related to consumer disclosures and consent, not our ability to charge subscription fees and optional tips and express fees moving forward.”
Dave also made an unusual announcement last week — that the company had signed a non-binding letter of intent with a potential new bank partner, which Dave CEO Wilk described as “one of the most highly respected sponsor banks in the industry.”
The move appears designed to assuage any investor concerns about Dave’s current bank partner: embattled Evolve Bank & Trust, which is facing not only the fallout from the Synapse bankruptcy, but also the ramifications of a wide-reaching enforcement action and the fallout from a Russia-linked hack and data leak earlier this year.
Investors seemed to take the news of the FTC action, coming on the day of the US presidential election, in stride, with the company’s market capitalization more than doubling from about $477 million before the FTC filed suit to just over $1 billion as of Friday’s close.
FT Partners: Q3 Fintech Funding Highlights
Despite the relative slowdown in fintech VC funding, it is worth putting current funding levels in context. Despite a wildly different macro context, including interest rates that are substantially higher, in the first three quarters of the year, fintech deal volume totaled over $200 billion across VC, M&A, and IPO activity — still up nearly 75% vs. full-year 2014.
And, with Klarna confidentially filing paperwork to go public and other late-stage companies evaluating similar moves, the fintech IPO window may finally crack open in 2025.
Other Good Reads & Listens
Supervision and Regulation Report (Federal Reserve System)
Combating Authorized Push Payment Scams in Fast Payment Systems (Kansas City Fed)
CFPB looks to place Google under federal supervision, setting up clash (Washington Post)
Chevron, Loper, and the Administrative State (Open Banker)
Listen: Affirm lands in the UK and what does Trump's election win mean for fintech? (11FS Fintech Insider)
Listen: Interview — Synapse's Ex-CEO Says He Has A Plan To Get Depositors Their Money Back (Fintech Business Weekly)
Listen: Interview — Affirm CEO Max Levchin (Fintech Business Weekly)
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