Lots of Talk, Few Cases from CFPB; Fast Fails Furiously
Lots of Talk, Few Cases from CFPB; Fast Fails Furiously
Another Play-to-Earn Heist, the Return of "Zuck Bucks," VC Data Dump
Hey all, Jason here.
This time next week, I’ll be in NYC. Definitely looking forward to spending some time in town, both for NYC Fintech Week and to catch up with old friends. If you’re in NYC, hopefully I’ll see you around town at some of the great events that are planned!
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Lots of Talk, Few Cases from Chopra’s CFPB
There has been a lot of heated rhetoric since Rohit Chopra, one of the original architects of the CFPB, took the reins as director. Favorite targets have included bank overdraft fees, “junk fees” across a wide swath of industries, “data harvesting,” buy now pay later, use of AI/ML models, and credit reporting agencies, to name a few.
Last week alone saw Director Chopra make critical comments characterizing credit bureaus as a “cartel,” a report on use of payday loan repayment plans, and comments critiquing “heavy consolidation” in the core banking software market.
Comments on Bureau Response to Medical Debt
Earlier this year, the CFPB released a detailed report about how medical debt impacts consumers in the US. The results were stark: as many as 20% of Americans carry some form of medical debt, and medical debt collection tradelines appear on some 43 million Americans’ credit reports — potentially negatively impacting their ability to borrow and access to housing, insurance, and employment.
So you’d think Director Chopra would generally respond positively to news that the major bureaus are planning changes that would eliminate as much as 70% of medical debt information currently reported to the bureaus.
Chopra acknowledged the change, seemingly attributing it to the CFPB’s report (even though it was surely in the works for some time):
“Less than 21 days after we published our report, Equifax, Experian, and TransUnion issued a joint statement to announce they were changing how medical bills would be reported on credit reports.”
But he went on to use news of the announcement, inarguably a win for consumers, if an incomplete one, to describe the bureaus as a “cartel” (emphasis added):
“The firms appeared to have made an agreement to decide how they wanted to report medical debt. This raised a key question: are these three firms acting as competitors or as a cartel?
Important decisions about credit reporting should not be left up to three firms that arbitrarily decide how reporting will impact consumers’ access to credit.”
Setting aside obvious network effects and the government’s own role in creating a credit reporting oligopoly through regulation, some amount of policy coordination among the bureaus makes sense — and, arguably, benefits consumers.
When a consumer is applying for credit (or insurance, an apartment, a job, etc.), they don’t know and can’t choose from which bureau their consumer report is obtained (and many lenders may pull from more than one bureau.)
Having significant policy differences regarding the data they hold could result in large swings in an applicant’s credit score from bureau to bureau — arguably an ‘unfair’ outcome and one likely to drive consumer complaints and confusion.
Coordination on this specific policy is also likely to drive better outcomes for consumers.
Imagine if two bureaus dropped the medical debt, but one kept it?
Underwriters always prefer more data to less — they would rather make the decision of whether or not the data holds predictive power, rather than having external parties make that decision for them. A single bureau keeping medical debt data would likely significantly undermine the impact of the other two eliminating it.
Use of Payday Loan Repayment Plans
Last week, the CFPB also dropped a report about consumers’ use of payday loan extended repayment plans, in the states where such loans are available. In many states where payday loans are permitted, state laws require an “off ramp,” in the form of an extended repayment plan (eg, longer than the initial term of the loan), often with no or minimal additional fees. According to the bureau’s report:
“There is substantial variation in State extended payment plans, but typical features include: disclosure of the right to elect an extended payment plan at the time consumers enter into a payday loan agreement, the requirement that an extended payment plan be repaid in several installments, and that there be no additional fees charged for an extended payment plan.”
The bureau’s report finds that, despite many states requiring these plans be offered, use rates are low relative to the rate at which borrowers rollover or default on loans — suggesting that this is due to financial incentives of the lender:
“Despite the prevalence of State laws providing for no-cost extended payment plans, data show that rollover and default rates consistently exceed extended payment plan usage rates. The Bureau has observed that monetary incentives encourage lenders to promote higher-cost rollovers at the expense of extended payment plans.”
The report also found that, although payday loan volume dropped significantly during the pandemic (owing to government stimulus), use of extended payment plans during the period rose:
“Although payday loan volume declined during 2020 compared to 2019 by as much as 65 percent, coinciding with the COVID-19 pandemic, extended payment plan usage rates generally rose during the same time period.”
This actually doesn’t surprise me. Those still borrowing, either despite receiving government stimulus or because they didn’t receive stimulus, were logically higher risk than those who no longer needed to borrow. As the population of payday borrowers became riskier, it’s not surprising the rate of payment plan usage would increase.
The report found that the rate at which borrowers entered into repayment plans varied substantially by state…
…but such variation is mostly explained by variance in state requirements to qualify. For instance, Florida requires borrowers to enter a credit counseling program in order to be eligible — apparently a meaningful barrier driving significantly lower utilization:
“Eligibility requirements for extended payment plans vary and likely impact reported usage rates. For example, in Florida, a consumer must enroll in credit counseling to be eligible for an extended payment plan. In Washington State, a consumer may request an extended payment plan at any time and there are no limits on the number of plans a consumer may elect. Extended payment plan usage rates range from less than one percent in Florida to 13.4 percent in Washington State.”
Core Banking Market “Unsustainable”
Last week Chopra also made some surprising comments at a joint meeting of the Community Bank Advisory Council and Credit Union Advisory Council.
He took the opportunity to call out core banking software providers like Fiserv, FIS, Jack Henry, and Finastra — an area the CFPB hasn’t previously focused on.
In his remarks, Chopra describes concerns about concentration in the core banking market, its impact on cost and service, and the downstream impact on consumers — apparently, setting up an antitrust argument of sorts. He stated (emphasis added):
“The core services provider market is heavily consolidated. Fiserv, Jack Henry & Associates, FIS, and Finastra serve 78% of all U.S. banks. The consolidation of the providers among these four is affecting service and cost – with one community bank CEO aptly framing the problem as ‘stand-in-line and write a big check.’ In an age of constant tech innovation, with many younger consumers craving digital banking solutions, patience is not a viable solution.
The CFPB is concerned because the downstream effects of this on relationship banking and consumers. The contracts written by the major core services providers are making it harder for local financial institutions to switch providers or use add-ons from outside technology providers, which allow the major incumbents to charge exorbitant amounts of money for their services, while discouraging them from quickly adapting their own products and services to fit with an ever-evolving banking tech landscape.”
and he continued (emphasis added):
“I have asked our staff to work with core services providers and our federal partners, including to answer questions related to banks’ collective bargaining on core services’ contracts. We will also work with other agencies to examine third-party service providers and potentially referring complaints to other law enforcement agencies.”
Few Cases, Little Rulemaking
While there have been plenty of press releases, there has been notably little new rulemaking and few enforcement cases. The cases we have seen since Chopra was confirmed have generally been fairly narrow in scope and against smaller companies.
While the bully pulpit has been fairly effective at driving change, it begs the question — is “name and shame” the approach of the Chopra CFPB, or is this the calm before a storm of renewed enforcement and rulemaking?
(for those interested in the topic, I’d highly recommend listening to this recent episode of Ballard Spahr’s Consumer Finance Monitor podcast, featuring guest Chris Peterson, who previously served at the CFPB under Director Cordray)
Fast Fails Furiously
I had no idea the one-click checkout space could be so… dramatic.
First, we had CEO of Bolt Ryan Breslow’s epic tweethread describing Stripe and Y Combinator as “mob bosses”:
And now Fast, a Bolt competitor, which counted Stripe as a major investor, has abruptly called it quits after failing to raise a new round of financing.
The approximately three-year-old startup had raised some $124.5 million in equity from major Silicon Valley VCs, including Index and Susa Ventures.
But, apparently, Fast mistakenly assumed that the good times would never end and burned through that cash aggressively. The company reportedly was spending around $10 million per month, mostly on payroll, while bringing in just $600,000 in revenue in all of 2021.
So perhaps it’s not a surprise that, as the fundraising environment has tightened (somewhat), Fast had difficulty raising new funds. Refocusing on fundamentals — not just growth, but workable unit economics — is long overdue.
Still, I’d be cautious about generalizing Fast’s failure to the broader fintech funding environment. Instead, it seems a more extreme example of the risks of outsized funding rounds designed to help young companies capture market share coupled with zero spending discipline.
“Zuck Bucks,” Take Two
After seeing its stablecoin ambitions die slowly, then quickly, Meta (fka Facebook) is reportedly developing a new virtual currency strategy.
The company is reportedly evaluating various approaches to boosting engagement and retention of its existing properties while developing new approaches to monetizing its user base. According to the FT (emphasis added):
“This is unlikely to be a cryptocurrency based on the blockchain, some of the people said. Instead, Meta is leaning towards introducing in-app tokens that would be centrally controlled by the company, similar to those used in gaming apps such as the robux currency in popular children’s game Roblox.
According to company memos and people close to the plans, Meta is also looking into the creation of “social tokens” or “reputation tokens”, which could be issued as rewards for meaningful contributions in Facebook groups, for example. Another effort is to make “creator coins” that might be associated with particular influencers on its photo-sharing app Instagram.”
The plan harkens back to the on-platform currency Facebook Credits, which could be used to make in-app purchases in games like Farmville; the company shutdown the initiative in 2013 due to costs.
NFTs are, of course, also part of the new plan. Again via the FT:
“According to one memo shared internally last week, Meta plans to launch a pilot for posting and sharing NFTs on Facebook in mid-May. This will be “quickly followed” by testing of a feature that will allow membership of Facebook groups based on NFT ownership and another for minting — a term for creating — NFTs. NFTs may be monetised via “fees and/or ads” in the future, according to another internal document.”
Still, given its history of missteps, declining reputation among potential employees, and aging user base, Meta may have difficulty successfully rebooting its financial services strategy.
Another Week, Another Play-to-Earn Hack
Just days after the $625 million hack of the blockchain powering popular play-to-earn game Axie Infinity, another such game has been compromised.
WonderHero announced it would suspend all services, including withdrawals, after hackers were able to mint the game’s token, enabling them to withdraw some $300,000 worth of crypto.
While the amount is significantly lower than Axie’s record-setting theft, it speaks to rampant, ongoing problems in the sector. While deep-pocketed investors have occasionally stepped up to bail out victims, that is the exception, rather than the rule.
Any theft of user funds is problematic, but those in the play-to-earn space are even more worrisome, given the sector’s history of leveraging low-income gamers in the global south in a sort of ‘digital sweatshop.’
While having one’s crypto game money stolen might be a passing irritation to a player in the US, it could wipe out a player’s monthly earnings or more in the developing world countries these platforms are leveraging to drive adoption.
VC Data Dump: CB Insights, FT Partners Reports
While it’s probably not fair to generalize from Fast’s inability to raise new funding and subsequent implosion, there are signs things are tightening in the VC ecosystem.
As we’ve covered before, the performance of fintechs that recently went public has been pretty abysmal.
Last week’s reports from CB Insights and FT Partners speak to the current fundraising environment.
CB Insights’ report, looking at the overall venture ecosystem, found a 19% drop in money raised in Q1, to $143.9 billion — with just under half of that going to US companies. Mega rounds accounted for a lower share of total funding, while 1 in 5 VC dollars continued flowing to fintechs.
Meanwhile, FT Partners’ monthly tracker shows fintech-specific funding, on a dollar basis, has slowed from last year’s frothy peaks, but remains elevated compared to pre-pandemic:
Other Good Reads
Who is Axos? The bank funding Trump’s loans (NBC News)
Deception, exploited workers, and cash handouts: How Worldcoin recruited its first half a million test users (MIT Technology Review)
Jamie Dimon’s Annual Letter To JPMorgan Chase Shareholders Talks Technology (Ron Shevlin/Forbes)
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