Mercury Seeking $30M From Synapse, Emergency Court Filing Reveals

13 Takeaways From CFPB's Credit Card Market Report, MoneyLion Settles With Colorado, OppFi Beats DFPI's Prelim Injunction Request, TAB Pays UDAP Penalty

Hey all, Jason here.

Happy holidays!

Yes, this is arriving in your inbox early — just as I push back from the gate here in Amsterdam en route to Mexico City.

This week’s newsletter was suppose to be a bit of grab bag of various reports or news bits that have been sitting in my brainstorm doc and never quite got published (with some late-breaking BaaS news, naturally!) Gotta clear it out so I can start 2024 fresh.

I do want to take a moment to thank everyone who makes this newsletter possible: readers, paying subscribers, sponsors, story sources, and my friends and family — this wouldn’t be possible without all of you!

Finally, a programming note: there will be no newsletter for the next two Sundays (well, hopefully.)

Expect to see Fintech Business Weekly back in your inbox on Sunday, January 7th, 2024.

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Mercury Seeking $30M From Synapse, Emergency Court Filing Reveals

Startup banking platform Mercury has filed an emergency lawsuit against Synapse seeking a temporary protective order, a right to attach, and a writ of attachment as it seeks to recover some $30 million from the embattled company, Fintech Business Weekly has exclusively learned.

The suit — of which only a heavily redacted version is publicly available — was filed in the Superior Court of California for San Francisco County on December 13th.

The filing follows a December 11th arbitration claim filed by Mercury against Synapse. The suit seeks to prohibit Synapse from transferring any interest in property, pending a hearing on Mercury’s application for a right to attach and writ of attachment.

Mercury has filed suit seeking to preserve assets to fulfill a potential arbitration win against Synapse.

The move follows news earlier this fall that Mercury, Synapse’s largest client, was breaking ties with the banking-as-a-service platform to strike a deal directly with bank partner Evolve, and that Evolve was ending its relationship with Synapse.

At the time, Synapse also alleged some $13 million in funds were missing, due to ongoing reconciliation failures with Evolve. As a result of the alleged shortfall, Evolve withheld a $16 million payment due to Synapse and sought a $50 million reserve payment from the company, which, to date, it has been unable to make.

Mercury’s filing argues the measures are necessary in order to preserve its chance to recover funds pursuant to what it views as a likely win in its arbitration case against the company.

The filing argues that “Mercury may not succeed in collecting money from Synapse through arbitration because Synapse is collapsing.”

Mercury argues that, “[g]iven Synapse’s ongoing financial collapse, its failure to pay its outstanding debts, its apparent lack of liquidity, and the risk that it will liquidate its assets, Mercury has brought this application for provisional relief pending arbitration.”

In support of its case, Mercury cites outstanding tax liens on Synapse from Idaho and Texas, though the total amount owed is a mere $4,900; repeated rounds of layoffs at the company; and that Synapse owes fintech clients (not Mercury) approximately $14 million.

Per the filing, “Mercury is entitled to an arbitration award from Synapse of at least $30 million. But without provisional relief, it is doubtful that Synapse will have anywhere close to that amount by the time Mercury secures an arbitration award.”

According to Mercury’s filings, “Synapse is in financial freefall—it laid off nearly half of its staff last month, it has failed to pay its undisputed debts, and it has acknowledged owing approximately $14 million to other customers (not including Mercury) that it has not repaid. A TPO—and, after a hearing, a right to attach order and writ of attachment—is needed to ensure that money is available to satisfy an arbitration award.”

The non-redacted portions of the filing do not specify the circumstances that gave rise to Synapse owing Mercury $30 million.

A hearing for Mercury’s application for a right to attach order and writ of attachment is scheduled for January 24, 2024.

Despite Synapse’s ongoing financial difficulties, including repeated layoffs, unpaid tax bills, and the payments Evolve withheld, the company is still telling clients it has enough funds to continue operating until the end of 2024, based on comments from Synapse clients to Fintech Business Weekly, who were told as much by Synapse executives.

Requests for comment from Synapse and Mercury were not immediately returned.

MoneyLion Reaches Settlement With Colorado Over Membership Fee Requirement

Last month, MoneyLion reached an agreement with the administrator of Colorado’s Uniform Consumer Credit Code, which regulates the terms and conditions of consumer credit in the state, including setting permissible rates and charges.

MoneyLion had operated as a licensed lender in the state beginning in 2017, but, around February 2019, it gave up that license, under the premise that its loans were below the 12% threshold at which licensing is required.

Instead, MoneyLion marketed loans at rates of 5.99% APR to Colorado consumers — if they signed up for a membership, which cost $19.99 or $29.99 per month at various points. The “membership” fee also purportedly covered and included a deposit account, an investment account, and a “loyalty” program, in which a user could earn rebates towards the membership fee.

However, while MoneyLion claimed to allow users to cancel their membership at any time, it disallowed users with an active loan or outstanding balance from canceling their memberships — a similar fact pattern to the recent Brigit/FTC case.

Colorado’s UCC allows for a finance charge of up to 36% per year on unpaid balances when the amount financed is less than $1,000, as was the case for MoneyLion products in the state.

Colorado also allows for certain other permissible charges, including:

(a) Official fees and taxes;

(b) Charges for insurance as described in subsection (3) of this section;

(c) Annual charges, payable in advance, for the privilege of using a credit card or similar arrangement;

(d) Charges for other benefits conferred on the consumer, including insurance, if the benefits are of value to the consumer and if the charges are reasonable in relation to the benefits, are of a type that is not for credit, and are authorized as permissible additional charges by rule adopted by the administrator.

However, Colorado argued that MoneyLion’s membership fee is not a permissible additional charge and thus is in violation of C.R.S. § 5-2-202(1).

While MoneyLion disputes the allegation, it has agreed to cease originating loans to Colorado consumers under the former or current paid membership program.

MoneyLion also agreed to refund approximately $271,000 to impacted Colorado borrowers and must notify the state at least 60 days in advance of resuming lending, if it chooses to do so in the next three years.

OppFi Scores Win Against California DFPI In Ongoing “True Lender” Usury Dispute

OppFi and, by extension, its bank parter, Utah-based FinWise, scored a victory in an ongoing court battle with the California Department for Financial Protection and Innovation.

The case dates to March 2022, when OppFi preemptively sued the DFPI in an effort to head off an impending regulatory action against the company.

OppFi, through its bank partner, offers loans at rates as high as 160% APR. The DFPI is arguing that OppFi is engaged in a “rent a bank” scheme and, as the true lender, must comply to California usury caps under the California Financing Law (CFL).

This February, the DFPI sought a court order prohibiting OppFi from continuing to make loans above the CFL cap, which is 36% + the Fed funds rate for loans from $2,500 to $9,999.

At the end of October, a California state court denied the preliminary injunction sought by the DFPI.

The court’s analysis focused on whether or not the arrangement with partner bank FinWise “was a mere sham and subterfuge to cover up” usurious transactions.

In analyzing whether OppFi’s partnership with FinWise as a “mere sham” or a bona fide arrangement, the court pointed out that:

• FinWise used its own funds to originate the loans from accounts that it controls;

• FinWise retains the ownership and title to the loans throughout their life;

• FinWise only sells the receivables (the right to collect payment) to an OppFi affiliate;

• FinWise retains a 5% stake in the loan receivables;

• FinWise collects a percentage fee on each loan.

Based in part on the above, the court concluded that “the [DFPI] has not sufficiently shown that the OppFi-FinWise partnership was a mere sham and subterfuge.” As such, the court concluded that “[t]o the extent ‘FinWise-originated’ [loans] had permissible interest rates at the time the loans were made, the fact that the bank sold, assigned, or otherwise transferred the loans to OppFi should not make the loans usurious.”

The October ruling doesn’t conclude the case, but the favorable ruling for OppFi on the preliminary injunction sought by the DFPI suggests a favorable outcome for the lender is more likely than not.

TAB Ordered To Pay Civil Money Penalty For BNPL UDAP

Transportation Alliance Bank, better known as TAB, is a Utah-based state-licensed bank that powers a number of fintech lending programs, including credit cards and BNPL-style financing.

As of earlier this year, TAB’s non-bank lender partners included Integra, FlexLending, Sunbit, Snap Finance, Mission Lane, and EasyPay.

TAB’s relationship with EasyPay caught the interest of Washington, DC, and Iowa’s Attorneys General earlier this year, as the product carries APRs as high as 188.9%.

The confusing structure of the product, which purported to be “interest free” if fully repaid within 90 days, but still carried a $40 fee, earned bank partner TAB a CRA downgrade for “discriminatory or illegal credit practices,” as FDIC examiners deemed the practice to constitute UDAP under Section 5 of the FTC Act.

This October, apparently as a result of the same underlying issue, the FDIC ordered TAB to pay a $315,000 civil money penalty for the UDAP violation.

13 Key Takeaways from Credit Card Market Report

In October, the CFPB released its biennial analysis of the consumer credit card market, as required by 2009’s CARD Act. This year’s marks the sixth installment of the report.

Credit cards remaining overwhelmingly popular with consumers across the credit spectrum — as of the end of 2021, 190.6 million US adults had at least one card in their name out of a total of 258.3 million adults, or 74% of the adult population.

Count of consumers with at least on general purpose and/or private label credit card account by credit tier as of end of 2021. Image: CFPB

The Bureaus’s report is lengthy, weighing in at 175 pages. And while it’s worth a read in full, particularly for those interested in US payments or consumer credit, I’ve pulled out my 13 most interesting takeaways from the report:

1. New Account Origination Strongly Rebounded After 2020

Lenders understandably sought to de-risk in the early days of the pandemic, tightening credit policies and thereby slowing new account originations.

But, in some regards, the pandemic-era turned out to be a boon for some consumer lenders, as a flood of government support and stimulus cash drove lower than average delinquencies and charge-offs, especially in lower credit segments.

As the uncertainty of the early days of the pandemic gave way to the so-called “new normal” (at the time, anyway), especially once vaccines became widely available, card issuers sought to cash in on pent-up demand by ramping up issuing in 2021 and 2022:

New general purpose credit card accounts opened by year by credit tier. Image: CFPB

2. Private Label Cards Fall Out Of Favor

General purpose credit cards have remained extremely popular, with the number of open accounts steadily increasing, except for a small dip in 2020, owing to the pandemic.

Private label credit cards, which are issued by banks but are store-branded and can typically only be used at a specific retailer, have been declining in popularity. The total number of such accounts peaked around 2018 at 251 million and has been declining since then.

Possible factors driving the decline include the rise of ecommerce, as in-store distribution is a key channel of private label card origination, and the growth in popularity of buy now, pay later as an alternate financing mechanism.

The total number of open general purpose credit cards has steadily increased (except 2020), while the number of private label card accounts began declining around 2019. Image: CFPB

3. It’s All About The Rewards (Duh)

The general purpose card market is utterly dominated by rewards cards, for those who qualify for them.

The share of purchase volume put on rewards credit cards has been gradually creeping up, from mid-80%s in 2015 to over 90% in 2022.

The overall average is skewed by superprime and prime plus consumers, who spend more on cards on average than lower credit tiers. But even among deep subprime cardholders, more than 60% of card spend in 2022 was on a rewards card.

Rewards cards are more dominate than ever in the US market. Image: CFPB

4. Card Issuing Market Slightly Less Consolidated

There are over 4,000 credit card issuers in the US market.

But, despite the large number of issuers, market share remains highly consolidated with the top 10 issuers, which, in 2022, held nearly 83% of credit card loans.

The top 10 issuers’ share of market has been slowly declining, with gains going to the next 20 issuers.

Despite over 4,000 issuers in the US market, the top 10 continue to dominate. Image: CFPB

5. Loan Loss Provisions Have Driven Profitability Swings

Profitability, as measured by issuers’ return on assets, has been volatile in recent years, primarily owing to accruing and then releasing provisions for loan losses in 2020 and 2021, respectively.

As issuers set aside funds to cover expected losses in 2020, ROA declined. When losses were better than expected, issuers released provisions in 2021, driving a spike in ROA. Image: CFPB

Private label cards are consistently less profitable than general purpose cards, owing to their lower net interest income and larger provisions for loan loss. Private label cards tend to skew to lower credit scores, driving higher losses.

Private label cards are typically less profitable than general purpose cards, as measured by ROA. Image: CFPB

6. Revenue & Expense Makeup of General Purpose vs. Private Label

The distinct business models and use patterns of general purpose vs. private label cards create important differences in how the products generate revenue.

While interest income is the primary revenue driver for both, interchange income is a key revenue source for general purpose cards, but is essentially a non-factor for private label cards.

However, private label cards drive a greater share of revenue from fee income, likely owing to their less creditworthy user base being more inclined to make late payments or incur other penalties.

There are differences in revenue drivers for general purpose vs. private label cards. Image: CFPB

On the expense side, there are also key differences between the two business models.

General purpose cards’ single largest expense as a share of receivables is interchange and rewards expense, which is a non-factor for private label cards; though private label cards incur greater loan loss provisions, owing to less creditworthy portfolio composition.

Interchange and rewards expense are a key driver of general purpose card issuers’ P&L. Image: CFP

7. Average Card Debt Back At Pre-Pandemic Levels

Consumers de-leveraged in the early days of the pandemic, benefiting from government stimulus measures, pivoting to using debit, and, briefly, dramatically increased savings rates.

But those trends were short lived. By the end of 2022, overall average balance per cardholder was back to where it was pre-pandemic, at just shy of $5,300 per cardholder — and, given continuing inflation and lackluster real wage gains, looks set to continue increasing.

Declines in average balances during the early days of the pandemic were temporary. Image: CFPB

8. Share Of Those Paying In Full Has Increased Over Time

In a positive sign, the proportion of cardholders paying in full has increased over time. In 2015, slightly over 1/3 paid their balance in full. At the end of 2022, that had risen to 44%.

On the flip side, those paying less than 10% of their total balance has declined, from 41% in 2015 to 33% in 2022.

Overall, some 56% of cardholders are “revolvers,” meaning they carry a balance month to month and thus accrue interest charges.

The share of those paying in full has increased over time. Image: CFPB

9. Delinquencies Have Ticked Up

Unsurprisingly, after hitting record lows during the pandemic, credit quality and delinquencies have begin to normalize. Private label card balances that are 60 or more days past due hit 2.1% at the end of 2022, generally in line with where they were pre-pandemic.

General purpose card delinquencies jumped from pandemic lows to 3.6% that are 60+ DPD, though this is still somewhat below where they were pre-pandemic.

Delinquencies have generally returned to pre-pandemic levels. Image: CFPB

10. “Transactors” Get Lions’ Share Of Rewards

The mechanics of the costs of cards (interest and fees) vs. the benefits (rewards) break down quite unevenly, depending on if a cardholder is a “transactor” (pays balance in full each month) or “revolver” (carries a balance.)

Revolvers account for an astounding, though not surprising, 94% of interest and fees charged — while earning just 27% of rewards, owing to revolvers’ lower levels of spend.

Transactors bear just 6% of the cost of interest and fees, as they pay their balances in full, while benefiting from 73% of rewards earned.

Transactors account for a small share of interest and fees charged while realizing the majority of rewards benefits. Image: CFPB

The result for transactors, including the economic value of rewards earned, is a negative annualized net cost of credit on average.

Because transactors incur little interest and fee expense and realize outsized rewards benefits, their net cost of credit can be negative. Image: CFPB

11. Rate Hikes Are Flowing Through To Card APRs

While not at all surprising, given the current rate hiking cycle, issuers have been aggressively re-pricing cards since the start of 2022.

The average general purpose card APR in mid-2020 was 18.8%, which rose to 22.7% by the end of 2022.

Despite some 4,000 card issuers, the CFPB argues there may be a lack of competition on rate, as surveys indicate most consumers aren’t aware of what their card APR is and do not shop based on interest rate, instead prioritizing rewards and annual fees.

Both private label and general purpose cards have re-priced upwards as benchmark rates have increased substantially. Image: CFPB

12. Card-Based BNPL Grows In Popularity

Major card issuers increasingly offer BNPL-style options to convert qualifying transactions into installment plans after the fact.

Despite a relatively more cumbersome user experience, vs. using a BNPL provider integrated at checkout, these plans have grown in popularity with cardholders across the credit spectrum.

The dollar amount covered by these installment plans more than doubled in 2022 to reach $9 billion.

Half of such card-based installment plans were for periods of less than six months; 37% were for 7-12 months; and 13% were for 13 months or longer. The average amount financed was $953.

BNPL-style installment plans tied to existing credit cards have grown in popularity. Image: CFPB

Part of the appeal of such installment plans is that the effective APR a cardholder pays is substantially lower than if they revolved the same balance, and that is true across credit tiers.

On average, cardholders pay 15.7% points lower APR by using an installment plan vs. revolving the same balance.

Installment plans offer less expensive financing for transactions that qualify. Image: CFPB

13. Dispute & Chargeback Volume Is Steady

Last but not least — dispute and chargeback volume.

Despite what at times is portrayed as a tsunami of fraud, including “friendly fraud,” disputes and chargebacks as a percent of purchase volume have been flat since mid-2020 — though are above pre-pandemic levels.

After spiking early in the pandemic, chargebacks and disputes volume have been steady. Image: CFPB

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