Morgan Stanley-Backed TomoCredit Isn't Paying Its Bills, Faces Mounting Legal Challenges
Mission Lane Raises $50m From QED & Invus, Cheese Calls It Quits, How Stable vs. Fragile Households Use BNPL
Hey all, Jason here.
Somehow, we’re closing in on the end of February already! Just two weeks from now, I’ll be kicking off the spring conference season, attending Fintech Meetup in Las Vegas.
I’ll be moderating two session there on — you guessed it! — banking-as-a-service: one Monday at 1:00pm and the other Tuesday at 9:15am (full agenda here.) I’ve already put together outlines for the sessions, so hopefully not too much in BaaS world changes between now and then…!
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!Mastercard- and Morgan Stanley-Backed TomoCredit Isn’t Paying Its Bills, Faces Mounting Legal Challenges
In 2022, when TomoCredit raised $22 million from Morgan Stanley, Mastercard, and other VCs, and a $100 million debt facility from SVB, founder and CEO Kristy Kim gave every indication the “no FICO, no problem” credit card startup was on the path to success.
She claimed that the company had signed up some 2.5 million customers, more than half of which were acquired organically, and had achieved 1,000% revenue growth year over year — and was on track to grow 1,000% for the second year in a row.
TomoCredit claimed to have a default rate of just 0.1% — a fraction of traditionally-underwritten credit cards, despite being a new issuer and relying primarily on cashflow data.
In an effort to mitigate credit risk, Tomo required cardholders to link a bank account and make payments weekly — a structure that appears to be incompatible with CARD Act requirements that issuers must provide users with a written statement at least 21 days before payment is due and requiring payment be due on the same day each month.
At the time the company announced the round — about a year and half ago — it said it would use the funding to expand into offering auto loans and mortgages.
Company founder and CEO Kristy Kim, with an inspirational story of succeeding in “bro”-dominated Silicon Valley as a female immigrant, became something of a media darling.
Investor Mastercard published a fawning blog post about Kim, profiling her inspiration for starting Tomo — being “forced to pay in cash for her Lexus” — and highlighting Tomo’s use of Finicity, the open banking infrastructure company Mastercard acquired, to access users’ bank account data.
She’s done countless interviews and profiles, including with American Banker, the Observer, TearSheet, TechCrunch, was named to Inc.’s 2020 Female Founders 100 list, and even appeared on CNBC to discuss the collapse of Silicon Valley Bank.
But despite portraying the card as a smashing success in interviews, the company abruptly stopped issuing new cards and pivoted to a highly dubious credit building offering — and appears to be struggling to pay its bills, based on multiple lawsuits filed against the company.
Card Fulfillment Vendor Sued Tomo For Over $700,000 In Unpaid Bills
The largest financial claim against Tomo, which the company ultimately settled late last year, was for $718,530.46 plus interest, attorneys’ fees, and costs stemming from Tomo’s refusal to pay a vendor it used to faciliate physical card fulfillment.
The vendor, I.C. Security Printers, Inc.-Marketing (referred to as IC from here), says in its original complaint that it began working with Tomo in late 2021. IC, in turn, leveraged a sub-vendor, Perfect Plastic Printers, that set its own fees that IC paid on behalf of Tomo and billed Tomo for on a passthrough basis.
IC begin fulfilling card requests from Tomo in March 2022, with Tomo paying some $581,042 to the company without incident through October 2022.
During this timeframe, Tomo began testing alternate card fulfillment designs and strategies, including shipping cards via 2-Day FedEx instead of typical USPS shipping — incurring substantially more manual work and expense, which, IC says in its filing, the company was aware of and agreed to.
But when the invoices for the more expensive approach came due, Tomo refused to pay, alternately claiming the costs were too high, that it didn’t owe the amounts because it never signed a master services agreement, and that Tomo’s CFO wasn’t authorized to approve and incur the expenses.
Tomo eventually said it would continue working with IC, if the card fulfillment vendor did it the “business favor” of waiving $506,355 of outstanding charges, more than half of which were third-party shipping and fulfillment charges IC was invoicing on a passthrough basis.
In September 2023, the lawyers representing Tomo in the matter quit the case, citing TomoCredit’s lack of cooperation in preparing its defense and unresolvable disagreements over “case strategy.”
Shortly after a new attorney began representing Tomo, IC filed a motion for summary judgment, but, before the motion could be decided, the two sides reached a mediated settlement and mutually agreed to withdraw the case.
Ex-Employee Sued Over Unpaid Settlement For Sexual Harassment, Retaliation For Reporting Illegal Business Practices
In August 2023, a former employee of Tomo, Joshua Kim, filed a suit against the company and CEO Kristy Kim, whose legal name is Soyeon Kim, for failing to pay a previously agreed to settlement.
Joshua Kim’s suit states that he and the defendants reached a mediated settlement over his claims of sexual harassment and retaliation for reporting illegal business practices in late 2022. Defendants made the first of six agreed upon payments but still owed the remaining five payments, totaling some $55,000.
In October, with Tomo and its CEO still refusing to make the agreed to payments, Joshua Kim sought a writ of attachment of $135,500 against the company and Kristy Kim personally, including on a $1.1 million San Francisco condo she owns. The order was granted, as Tomo and Ms. Kim failed to oppose the request.
Two days after the writ of attachment was granted, the matter was dismissed, suggesting the parties reached an out-of-court agreement to settle the matter.
Trademark Attorney Sued TomoCredit Over Unpaid Bills
Just last week, a New York-based trademark attorney, Elizabeth Oliner, filed suit in San Francisco small claims court, alleging Tomo failed to pay her for work the company requested and authorized, including filing fees she incurred on the company’s behalf.
Oliner’s complaint is seeking $4,250 for a trademark application filed with the USPTO, a cancellation proceeding filed with the Trademark Trial and Appeal Board, and USPTO filing fees.
Despite repeatedly reaching out to the company, including CEO Kim, Oliner was unsuccessful at getting the company to pay its bills and subsequently filed the small claims suit.
TomoCredit Faces A Purported Class Action For Spam Texts
In late December 2023, a Texas resident filed a potential class action suit against TomoCredit alleging the company’s unsolicited text message promotions violate the Telephone Consumer Protection Act.
The plaintiff in the suit says he never signed up for Tomo’s card product, its credit builder product, or even provided the company with his phone number, which is registered in the national Do-Not-Call Registry.
Upon receiving an unsolicited advertisement from the company in October, the plaintiff replied with “STOP,” purportedly unsubscribing him from the messages.
Yet despite receiving a confirmation he had been “unsubscribed,” the plaintiff continued to receive numerous text messages promoting Tomo’s credit building service, TomoBoost.
The plaintiff is seeking class action status and an award of damages of $500 per each violating text message received by a member of the class and treble damages of $1,500 per each message sent to a class member on the Do-Not-Call Registry — what potentially could be a very large amount, depending on the number of impacted consumers and how many messages they received in violation of the TPCA.
Cardholder Sues Over Failure To Furnish Accurate Credit Data
Finally, a user of Tomo’s credit card product filed suit against the company and TransUnion late last year for alleged failures to correct inaccurate data at the credit bureau.
The plaintiff claims Tomo has furnished duplicate data — two tradelines — when the plaintiff only had a single account with the company.
Upon noticing the error, plaintiff filed a dispute with TransUnion, which, under the Fair Credit Reporting Act, is required to notify the data furnisher of the potential error.
FCRA requires furnishers to have policies and procedures in place to ensure the accuracy of the data they furnish and to undertake reasonable investigations when informed of a dispute.
The plaintiff in the case alleges both TransUnion and Tomo violated the Fair Credit Reporting Act, causing the plaintiff harm in the forms of “loss of ability to purchase and benefit from credit, loss of time, loss of money, harm to his reputation, a chilling effect on applications for credit, mental and emotional pain, anguish, humiliation, and embarrassment of having fraudulent information on his credit report, in his credit file, and for credit denial and its after-effects.”
The plaintiff is seeking costs, attorneys’ fees, and actual, statutory, and punitive damages for violation of the Fair Credit Reporting Act from TransUnion and Tomo.
What’s Next For TomoCredit?
Tomo hasn’t publicly announced any new funding since its $22 million Series B back in July 2022.
It’s not clear why the company pivoted from its cashflow-underwritten charge card product, but I wouldn’t interpret that as a good sign — particularly given the pivot to a legally dubious credit building product that is generating extremely negative feedback from consumers who feel misled or have found it impossible to cancel their subscription.
It’s also unclear if Tomo isn’t paying its bills because it’s unwilling to or unable to, but either circumstance wouldn’t seem to bode well for the future of the company.
After publication, a representative for TomoCredit shared the following statement: “TomoCredit is meeting its obligations and legal matters are being resolved. This allows us to focus on our core business of innovating for financially underserved consumers such as immigrants and students. As a team of immigrant founders, we are committed to our mission of financial inclusion.”
Cheese, A Neobank For Asian-Americans That Pivoted To Credit Building, Calls It Quits
Startup Cheese, which began as a neobank targeting Asian-Americans, before pivoting to offering credit building loans, informed users last week that it is shutting down due to “unforeseen circumstances.”
In its most recent incarnation, Cheese largely served as a front-end that facilitated loans through banking-as-a-service platform Synapse, which holds lending licenses in some states.
Credit building loans like the ones offered by Cheese and Synapse work by taking a user’s loan proceeds and placing them in a sort of escrow account while a user makes repayments, which are furnished to the major bureaus to build their credit history. When the user successfully completes repaying the loan, the amount held in escrow is released to them, less any applicable fees or interest.
Revenue from the product is typically minimal — in Cheese’s case, the Synapse-originated loans carried an interest rate of 5%, equating to an $11 finance charge on a $500 credit builder loan repaid over 12 months.
It’s not clear how revenue generated from these loans was shared between Synapse and Cheese, or if Cheese had any other sources of income.
In an email to Cheese users last week, the company said that accrued principal should be refunded by the end of February and that all positive on-time payments would be reported to bureaus to help users build their credit history.
Still, it’s difficult to predict how the company’s unfulfilled promises will impact individual users. Reporting of a new tradeline, even without a hard inquiry, can actually lower a user’s credit score, by decreasing the average age of their accounts.
Making recurring, on-time payments would generally outweigh any hit from opening the new account — but users who’ve had their account closed shortly after opening it won’t have that opportunity.
Subprime Card Startup Mission Lane Replaces CEO, Raises $50 Million From QED and Invus In Internal Round
Mission Lane, spun off from payday lending startup LendUp prior to its liquidation, is replacing its CEO and has quietly raised $50 million in capital from existing investors QED and Invus in an effort to get back on track. (Disclosure: I previously worked for LendUp, but have no connection or economic interest in Mission Lane.)
The company, sometimes referred to as “Capital Two” by industry insiders, owing to links to the original data-and-analytics-driven subprime card giant, was spun off from LendUp in 2019.
Since then, the company has been helmed by Shane Holdaway, who previously spent about 14 years in various roles at Capital One and had a brief stint at Barclays’ US unit before taking the reins at Mission Lane in 2019.
During Holdaway’s tenure, the company launched an ill-fated effort dubbed Earn, designed to help gig workers increase their income and better manage their money.
The company also acquired Honeydue, which it leveraged to launch its own spending account and debit card, the Mission Money Card. Both initiatives were ultimately unsuccessful and shut down.
Holdway’s CEO role is being filled by existing Mission Lane board member Brandon Black. Black started his career at Capital One and served in senior roles, including as CEO, at debt collection behemoth Encore Capital Group for approximately 15 years, though Black hasn’t held a hands-on operating role in some eight years, per his LinkedIn.
According to the press release announcing Black’s appointment, the company concurrently closed additional funding from Invus Opportunities and QED.
The release didn’t specify the amount of funding raised, but sources with direct knowledge of the matter indicate QED and Invus put in an additional $50 million.
A representative for the company neither confirmed nor denied the amount raised.
How “Stable” vs. “Fragile” Households Use BNPL
The Fed’s Liberty Street Economics blog is out with a new analysis looking at differences in how financially “stable” vs. “fragile” households use buy now, pay later.
While households in both categories make use of the financing mechanism, the authors found more fragile households tended to use BNPL plans more frequently and for smaller purchases than more financially stable households.
The data show both stable and fragile households were likely to have used BNPL financing more than once in the preceding 12 month period:
In addition to differences in frequency of use, the types of purchases households used BNPL for also varied.
Fragile households were more likely to use BNPL for smaller purchases, those of $250 or less, than stable households.
Stable households are much more likely than fragile ones to use BNPL to finance a large purchase of $1,750-$2,000.
Interestingly, the authors don’t find that household income is the main driver of these disparities.
Even when controlling for income, they find that fragile households, defined as a credit score below 620, being declined for credit in the past year, or falling 30 or more days delinquent in the past year, use BNPL for purchases that are, on average, $220 smaller than stable households.
Other Good Reads
Stabilizing Fake Banks (Todd Phillips and Matthew Bruckner)
Federal regulators are probing Cash App (NBC News)
Heartland Tri-State Bank Material Loss Review (FDIC Office of Inspector General)
Supervision with Speed, Force, and Agility (Fed Vice Chair Barr)
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