Future of Goldman's "Platform Solutions" Looks Grim
Eco Shuts Down Banking App & Lays Off Team As It Focuses On "Fixing" Money, CFPB Roundup
Hey all, Jason here.
I can’t believe it is less than a month until Money2020 and, unlike Alex, I’ve done approximately zero planning, apart from booking my travel 😅 — this is to say, if you’re interested in scheduling time to catch up (or inviting me to the cool parties/dinners), let me know!
On another note, last week I had the chance to join Dave and Tanner Mayo, of FedFis, Bankers Helping Bankers, and the BaaS Association, on their podcast — you can check out part one of our conversation here.
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Eco Shuts Down Banking App, Lays Off Team, As It Focuses On Building A “New And Better Money”
a16z- and Founders Fund-backed Eco, facing an increasingly challenging operating environment, announced it will shut down its US fintech app and pivot to a strategy comprised of four initiatives designed to foster adoption of its fledgling ECO/ECOx cryptocurrency.
Many of the partners Eco previously partnered with, a group that includes BlockFi, Wyre, Signature Bank, and Prime Trust, are now bankrupt.
Amid the wider crypto market meltdown, the economics of Eco’s scheme to store user funds as USDC, lend them out to earn a yield, retain part of the returns for itself and pass along the rest ceased to make sense.
Eco transitioned to using Piermont as its banking partner and became, essentially, a vanilla neobank offering a below-market 4.00% APY.
As the bank regulatory climate has turned strongly against crypto, the calculus for banks that partner with companies offering some kind of crypto-related product has changed: the increased risk, in many cases, outweighs any potential revenue from the partnerships.
The company was using the neobank app as part of a strategy to encourage users to interact with and adopt components of the Eco “currency” ecosystem: Eco points and the $ECO/$ECOx tokens.
But, with little feature differentiation, users had no compelling reason to sign up for the banking app.
With significant costs and little to show for it, the company is killing off the banking app to focus on its “Ecosystem” strategy, comprised of four initiatives:
Beam, which the company refers to as “onchain Venmo,” a non-custodial wallet and payment app
Ecoins, which the company refers to as “onchain Blackhawk,” a kind of branded loyalty/rewards token built on top of $ECO/$ECOx
EcoNet, which the company refers to as “onchain Visa,” which Eco believes can serve as a new payment system competitive with incumbent card networks
and the Eco Association, which aims to handle governance and encourage adoption of all of the above
Still, if the company’s plan is to capture a return by encouraging adoption of $ECO/$ECOx, thereby increasing the value of the tokens — a substantial proportion of which the company and its investors hold — it doesn’t seem to be working.
$ECO’s price has been more or less constant at $0.01-$0.03 since it launched, while $ECOx’s price has dropped around 80% from about $1.46 last November to about $0.28 today.
Daily trading volumes of both tokens has been muted, with as little as $6 worth of $ECO and as little as $128 of $ECOx trading hands some days — with the trend towards less, not more activity:
By way of comparison, DogeCoin, the satirical homage to bitcoin, generally sees $100-$400 million in trading activity each day.
Eco’s decision to shutdown its fiat banking app does make sense — why would anyone want to use this? And given the company has raised a lot of money, it should have ample time to explore this new direction.
But, so far, the signs are not particularly promising.
Goldman Nears GreenSky Sale, Future of “Platform Solutions” Division Looks Grim
Reports indicate Goldman Sachs is nearing a deal to sell home improvement lender GreenSky, which the bank acquired for about $1.7 billion just a year and a half ago.
A consortium that includes Sixth Street, Pacific Investment Management, and KKR are said to be the sole remaining bidder in a deal that would value the business unit at around $500 million — less than a third of what Goldman paid for it at the height of the fintech market in 2021.
At the time of the deal, Goldman CEO David Solomon said, “We have been clear in our aspiration for Marcus to become the consumer banking platform of the future, and the acquisition of GreenSky advances this goal.”
But even back then, the deal had doubters.
Some Goldman partners were skeptical of the strategy of cross-selling other products and services to GreenSky borrowers, as their original point of contact was typically with a contractor or retailer offering the credit — not Goldman itself.
In late 2022, when Goldman underwent a firm-wide reorganization that created the new “Platform Solutions” division, Goldman’s Marcus-branded products went to the newly combined Asset & Wealth Management division, while GreenSky, along with Apple and GM card partnerships and the Transaction Banking (TxB) business went into the newly formed Platform Solutions division.
Even as Goldman was paring back the Marcus business, including ceasing to write new personal loans under that brand, it remained bullish on GreenSky.
As recently as this February, while layoffs were hitting other parts of its consumer business, Goldman was doubling down on GreenSky.
Stephanie Cohen, the head of Platform Solutions and an original proponent of the GreenSky deal, envisioned growing GreenSky by offering additional credit products, like financing for solar projects, as well as cross-selling GreenSky businesses and their owners — largely local SMBs — on Goldman transaction banking and wealth management services.
But, by spring, the bank confirmed it was exploring a sale of GreenSky. And by summer, reports surfaced that Goldman was in talks with American Express to offload its marquee partnership — powering Apple’s credit card and savings products — as well as its General Motors co-brand card.
Without Apple/GM and GreenSky, the Platform Solutions division would consist solely of Goldman’s nascent Transaction Banking business.
Goldman has been scaling the TxB business aggressively. It launched serving the US market in June 2020, and, since then, has expanded to the UK, the EU, and Japan.
But not every TxB initiative has been firing on all cylinders.
In late 2020, Stripe announced its banking-as-a-service capability, Stripe Treasury — powered in the US through partnerships with Evolve Bank & Trust and Goldman Sachs.
While Evolve is a well-known, if troubled, bank partner in the fintech space, at the time, Goldman wasn’t exactly well known for providing these kinds of backend capabilities to others. Stripe was interested in working with Goldman because the firm could provide certain capabilities that Evolve couldn’t.
The tie up seemed like a win-win and could signal Goldman’s bona fides as a force to be reckoned with in fintech.
But the partnership between Stripe and Goldman never materialized into much.
While Evolve was willing to delegate first-line compliance for Treasury, including client onboarding, Goldman wasn’t. Goldman itself would handle the onboarding and due diligence reviews for Stripe Treasury clients operating through its platform.
Sources with direct knowledge of the partnership describe an operating model where, if Stripe wanted to put Treasury clients on Goldman, it couldn’t even establish a timeline for when the onboarding review would be complete and a client could go live.
For Stripe, known for its developer-friendly and mostly self-service UX, the experience trying to put Treasury clients on Goldman wasn’t a good one.
The situation turned in to a catch-22: Goldman didn’t want to prioritize improvements in the process, because there wasn’t a meaningful volume of Stripe Treasury clients coming on to the platform. Stripe preferred to route Treasury clients to Evolve, where it had more control over the onboarding, yielding a faster, smoother experience.
The challenges in the partnership seem to be borne out by the dearth of clients that actually built anything on Stripe Treasury + Goldman: just two companies appear to be live in production. (A spokesperson for Goldman Sachs declined to comment about the bank’s partnership with Stripe.)
Despite this cautious approach, the Fed warned Goldman earlier this year about due diligence and monitoring of high-risk non-bank clients tied to its TxB division, the FT reported earlier this month.
What’s the Future For “Platform Solutions”?
With Goldman selling GreenSky, a bearish outlook on its consumer platform, and its banking-as-a-service offering feeling more like banking-as-a-disservice, the Platform Solutions division really consists of only the Transaction Banking business.
And Goldman has been cleaning house in TxB as well.
The firm recently fired Goldman partner and head of the TxB business, Hari Moorthy, ostensibly because of use of non-firm communication channels. Several others, including TxB’s COO, were also terminated as part of the matter.
Stephanie Cohen, once considered a contender for the firm’s top job and the division head of Platform Solutions, has been on leave since June, with speculation she may not return.
All of which casts doubt on the continued existence of Platform Solutions as a standalone division.
Two possible outcomes seem most likely: TxB — which Goldman has reiterated it continues to be committed to — gets folded into the Global Banking & Markets division, which includes the investment banking unit where TxB began; or Goldman exits the TxB business altogether.
CFPB Roundup: Circular Warns on AI for Credit Decisions, Rulemaking to Remove Medical Debt, Setback on Discrimination/UDAAP Case
Earlier this month, the CFPB faced a widely anticipated setback in its attempt to expand the definition of UDAAP to include “illegal” discrimination in a wider set of circumstances, “including in situations where fair lending laws may not apply.”
Both the substance of the change and the CFPB’s approach — an update to the UDAAP section of its Exam Manual, rather than undertaking a notice-and-comment rulemaking — led to a court challenge by the American Bankers Association, the US Chamber of Commerce, and five other industry trade associations.
The trade groups pursued several arguments to invalidate the updates to the exam manual, including that the CFPB’s funding mechanism is unconstitutional, that the updates violated the Administrative Procedures Act (APA), and that the change exceeded the Bureau’s authority under Dodd-Frank.
The Fifth Circuit has already ruled the Bureau’s funding structure unconstitutional; the CFPB’s appeal of the ruling will be heard by the Supreme Court this fall.
In part because the Bureau acknowledged the Fifth Circuit ruling on its funding mechanism, the court ruled in favor of the trade associations in granting summary judgment.
The ruling, employing the so-called “major questions doctrine,” also found that the CFPB’s revision to its UDAAP exam procedures exceeded its authority under Dodd-Frank.
The “major questions doctrine” holds that executive agencies require clear Congressional mandates for policy decisions. The ruling pointed out that, unlike the Equal Credit Opportunity Act, the UDAAP portion of Dodd-Frank doesn’t specifically discuss discrimination in the text of the law or in its statutory history. Thus expanding UDAAP to include a sweeping ban on “discrimination” exceeds the Bureau’s authority, the court ruled.
The court did not adjudicate the APA-related claims made by the trade associations.
Lenders Using AI Must Provide Specific Reasons for Adverse Action
Last week, the CFPB issued a circular and accompanying statement reminding lenders of their requirement to provide users with specific reasons for taking an “adverse action,” like declining an application for credit or changing the amount or terms of an existing account.
The Bureau’s statement announcing the circular specified that using the CFPB’s sample adverse action form and checklist is not sufficient, if they don’t accurately capture the reason why the company took the action: “creditors cannot simply use CFPB sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit or a change of credit conditions.”
The statement called specific attention to the use of artificial intelligence and “data harvested from consumer surveillance,” with CFPB Director Chopra saying:
“Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied. Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”
On the one hand, this is absolutely correct — a wide array of businesses that use credit data, including landlords, have an obligation under FCRA and ECOA to provide notices of adverse action, including specific reason(s) why they declined an applicant or changed terms of an existing relationship.
On the other hand, the Bureau’s circular may be viewed as a shot across the bow, resulting in lenders being more averse to using novel techniques or data from sources other than FCRA-compliant bureaus; the knock-on impact may be more limited access to credit or worse terms for thin/no-file borrowers or those with subprime credit scores.
Kareem Saleh, founder and CEO of Fairplay AI, a “fairness-as-a-service” technology provider, commented on the circular in part by saying:
“The circular could have a profound effect on the types of data lenders might choose to use and how they use them: While the circular doesn't ban any specific type of data, it underscores the risks of using unconventional variables, engineered variables and variables that might be predictive of credit risk but lack an intuitive relationship to it.
Engineered variables which often combine multiple raw data points or transform them in some way can be particularly challenging to explain in clear terms. Similarly, variables that don't have a clear connection to creditworthiness, even if they are predictive of risk, can be perplexing for consumers to grasp.
When loan denials are influenced by these kinds of variables, lenders will have to deconstruct them to their fundamental components to offer a clear and specific reason. This could deter the use of certain variables if they prove too complex to explain easily or where they cannot be effectively deconstructed into a “primary” reason for the credit decision.”
CFPB Kicks Off Rulemaking To Remove Medical Debt From Credit Reports
Last week, the Bureau also kicked off a rulemaking to remove unpaid medical bills from Americans’ credit reports. Some 20% of Americans report having outstanding medical debt.
Proposals include to:
Remove medical bills from consumers’ credit reports: Consumer reporting companies would be prohibited from including medical debts and collection information on consumer reports that creditors use in making underwriting decisions.
Stop creditors from relying on medical bills for underwriting decisions: The proposal would narrow the 2005 exception and prohibit creditors from using medical collections information when evaluating borrowers’ credit applications.
Stop coercive collection practices: As unpaid medical bills would no longer appear on consumers’ credit reports used by creditors in making underwriting decisions, debt collectors would no longer be able to use the credit reporting system as leverage to pressure consumers into paying questionable debts.
The Bureau has previously argued that medical debt data on credit reports is less predictive of applicants’ creditworthiness than traditional credit data.
Still, it’s unclear how impactful the change may be for borrowers and their credit scores — as of April 2023, fully paid medical debts and those under $500 should have already been removed from consumers’ credit reports.
Interestingly, the announcement about the rulemaking didn’t mention other, potentially more significant proposals, including defining data brokers as “consumer reporting agencies” and restricting the sale and use of credit header data.
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