Otto Promises Low APRs, If You Pledge Your Car Title
Monzo & Oportun Charter Woes, Klarna Crashes the Mall, Google Axes Plex, CB Insights Fintech 250
Hey all, Jason here.
I’m wrapping up a week in New York, and I really couldn’t have asked for a better time to visit. Apparently fall weather here means ~70 degrees now — I’ll take it.
I was in town primarily for CB Insights’ Future of Fintech conference. If I had the time and flexibility, I’d stay through New York Fintech Week, but I have people (and a dog) counting on me back in the Netherlands.
For anyone I missed at the event or while I was in town, I’m planning on being at Money2020 in Vegas later this month — let’s plan to connect there.
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Auto Title-Secured Credit Card Otto Promises Better Rates (but maybe it will repo your car?)
A funding announcement caught my eye this week for a startup promising to provide 95% cheaper credit to applicants with no credit check, no need for a bank account, and instant pre-approval.
Knowing how challenging extending credit to consumers with damaged credit or thin file/no file can be, I had to know more.
Upon closer inspection, the company, called Otto (get it?), offers what is essentially a secured credit card. Instead of the traditional secured card model, where a lender’s risk is mitigated by holding a cash deposit, typically equal to the amount of credit granted, Otto mitigates its risk by taking a lien against a user’s car.
According to TechCrunch (emphasis added):
“The Dallas-based company is building a mobile platform that will essentially let people borrow against their vehicles at the same interest rate as standard credit cards. But unlike other cards, Otto will not charge fees or overdraft charges, and will not require applicants to supply their FICO credit scores. Users will be able remotely verify and collateralize their cars through Otto’s mobile platform, which is set to launch in early 2022.”
Isn’t this just an auto title loan, you might ask? Not exactly. Auto title loans have a fixed term, often as short as 30 days, and carry interest rates that can run as high as 300% on an APR basis.
By comparison, Otto’s stated max APR of 24% and revolving structure, with minimum payments of about 2-3% of outstanding balance, are comparatively appealing, especially to borrowers who may not normally qualify for such a product.
However, from examining the site, it’s unclear how or if the company assesses an applicant’s ability to repay. Otto’s FAQs state that it uses “alternative underwriting,” but without leveraging credit bureau data, any ‘alternative’ underwriting (I’m guessing cashflow-based) is likely to present an incomplete picture of a user’s ability to pay.
Like many products aimed at subprime consumers, Otto promises to help users “get ahead” and increase their credit scores by reporting payments to the credit bureaus (a claim other subprime lending startups have gotten into trouble for in the past.)
The reality for many users of Otto may end up being starkly different. Credit-constrained users like the ones Otto is targeting tend to aggressively use credit when they are able to get it. According to TransUnion data from 2017, the average utilization rate on subprime credit cards was as a high as 94%. More recent data from Equifax puts card utilization for subprime consumers at a still-high 55-61%.
It’s not unusual for subprime consumers to quickly max out a new credit line and then make the minimum payment of around 3% of the balance each month. This leads to users incurring substantial interest charges and is likely to hurt, not help, their credit score, due to the high utilization rate. Once a card is near-maxed out and a consumer is making minimum payments, it offers little additional utility and acts as a tax on a user’s monthly budget.
It should be no surprise, then, that subprime credit card holders default at rates significantly higher than prime or super-prime borrowers. Otto hedges this risk by holding a lien on its borrowers’ cars as collateral. So will it repossess their cars if they default?
Otto’s FAQ says “No,” but goes on to clarify the company “can exercise [its] right to recover an outstanding balance” — an oblique way, that some Otto borrowers may not understand, to say, yes, Otto can repossess your car:
Despite holding a lien on borrowers’ vehicles, Otto’s approach is likely to face a number of challenges. Because vehicles are a depreciating asset, the longer an Otto user has their account, the less valuable the asset used to secure it will become. Otto could gradually lower a consumer’s credit limit as the car depreciates but (1) that would be a terrible user experience, and (2) if they’ve already maxed out the line, it doesn’t matter.
Further, assuming Otto plans to operate nationwide, it may need to contract with hundreds or thousands of vendors to build the operational capability to repossess and auction off vehicles of defaulted users (unless someone is working on a Repo-as-a-Service startup?)
So, is this better than a classic title loan? I guess? But as industry legal expert Todd Baker points out, the product isn’t likely to be marketed narrowly as a replacement or alternative to title loans.
Instead, it’s likely to broadly attract subprime consumers who own vehicles — potentially drawing in applicants who never would have considered a title loan and putting them at risk of losing their vehicle.
(One additional note — the entire consumer-facing website makes it appear the product is live and available. It encourages users to “get started,” but if you click the call to action to do so, the site harvests your information, including PII — without agreeing to any privacy policy or terms and conditions — when, in fact, the product isn’t live and it’s impossible to apply for it.)
Monzo & Oportun Charter Woes
UK challenger bank Monzo is walking away from the OCC empty handed after withdrawing its national bank charter application. Monzo originally filed its charter application in April 2020 while simultaneously building out a waitlist for a banking product leveraging popular partner bank Sutton.
According to the FT (emphasis added):
“The move highlights the caution among US regulators about allowing lossmaking start-ups to become banks, in contrast to countries such as the UK that have handed out dozens of licences in recent years in order to promote competition.
Monzo was hoping that its experience of securing a full banking licence in the UK would help it succeed where others had struggled, but a person close to the bank said it had been made clear in recent weeks that its bid to the Office of the Comptroller of the Currency was unlikely to be successful.”
It’s not uncommon for bank charter applications to be withdrawn and re-filed. Varo took about four years and multiple filings before being granted a charter; Rakuten is on its third attempt to win approval for the FDIC insurance it needs to open an ILC.
Still, the high-profile setback reflects the difficulty a number of European challenger imports are having in expanding to the fragmented and highly competitive US market.
Germany-based N26 has failed to carve out a meaningful niche. Though it claimed upwards of 500,000 US customers in August 2020, survey data from Cornerstone Advisors in February 2021 suggests the number of active accounts is considerably lower:
Revolut is also making a play for the US market, an effort which it has ramped up recently with announcements of a so-called US-Mexico remittance corridor and plans to offer commission-free stock trading. Like Monzo, Revolut has ambitions of obtaining a US banking license.
While Revolut is seeking a state banking license in California (Monzo sought a license from the OCC), it shares a common problem with Monzo: it’s not profitable. That is likely to give California banking regulators and the FDIC reason to pause.
Oportun Withdraws Charter Application (For Now)
In other charter news, Latinx-focused subprime lender Oportun, which is seeking a national bank charter from the OCC, has withdrawn its application. The move comes amidst pressure from numerous state and federal consumer advocacy groups stemming from Oportun’s high interest rate products and aggressive collections practices, including suing thousands of delinquent borrowers.
Oportun says it is committed to obtaining a charter and plans to revise its application based on conversations with regulators and refile it.
If Competition Is The Goal, More Flexible Charter Options Are Needed
A recent Biden administration Executive Order emphasized its desire to foster competition, including in the banking sector. The government’s approach to licensing and regulating financial services is increasingly at odds with that goal. As the classic components of “banking” (storing, moving, and borrowing money) have been dis- and re-aggregating, today’s consumer banking landscape looks far different than the one of yore. But the licensing and regulatory apparatus remains stubbornly stuck in the past — in a “bank” vs. “non-bank” dynamic.
There are examples of countries that have (mostly) successfully migrated to a more flexible regulatory regime that recognizes a broader array of financial services providers (like “e-money institutions”) or recognize that a company may require time to mature into meeting the regulatory requirements that go along with holding a traditional banking license.
On the one hand, the current administration wants to encourage healthy competition that benefits consumers; meeting that goal may require a more flexible, updated approach to licensing and regulating financial services providers.
Klarna Wants to Crash the Mall
The magic of buy now, pay later is that it appears exactly when you might need or want it (contextually, at check out), and that it is extremely low friction (often no incremental fields vs. a standard checkout). This works really well online, but has proven harder to replicate at the physical point of sale.
As BNPL providers compete for market share, they’ve pursued a number of strategies, including branded apps as a shopping/discovery channel, virtual cards that can be used at any merchant (including bricks & mortar), and in-store point of sale integrations.
Now, multinational BNPL juggernaut Klarna has struck a deal with the largest US mall operator, Simon Properties.
According to Forbes, the partnership will go beyond making Klarna available at “participating merchants” across Simon’s portfolio. The idea seems to be to leverage Klarna’s audience of 20 million mostly millennial and Gen Z shoppers to encourage them to visit Simon’s properties by offering promotions and discounts at mall-based retailers.
The success of such an approach will hinge on whether Simon’s malls offer brands that Klarna’s user base actually wants to shop at.
Google Axes Plex, to Refocus on Selling to Banks
Announced nearly two years ago, Google is scrapping plans to offer checking accounts within its Google Pay app via a network of partner banks. And not for lack of interest, as Citibank reported some 400,000 waitlist signups that came through the app.
The backstory seems to be rooted in a botched rebuild of the core Google Pay app, leading to tensions within the team and numerous employee departures, including senior executives Felix Lin and Caesar Sengupta — key sponsors of the Plex project.
With former PayPal exec Bill Ready taking over, priorities have changed. Instead of partnering with banks to offer consumer products, Google will focus on “delivering digital enablement for banks and other financial services providers rather than us serving as the provider of these services,” according to the WSJ. The general read on this is that Google would rather sell enterprise services to banks (cloud and computing services) vs. offering a consumer product that some banks could view as competitive.
With Big Tech companies generally pursuing strategies of partnering with or selling to banks, rather than competing head-on, perhaps it’s time to revisit the “Big Tech is going to eat banks’ lunch” narrative?
CB Insights: Fintech 250
I had the pleasure of attending CB Insights Future of Fintech conference this week in New York, and I can honestly say I was not disappointed. The event featured top-tier companies, star-studded panels, and, yes, amazing food.
The event also included the unveiling of CB Insights “Fintech 250,” the top 250 private fintech companies of 2021. According to CB Insights:
“The 2021 Fintech 250 cohort has raised approximately $73.8B in aggregate funding across nearly 1,200 deals since 2016 and includes startups at different investment stages of development, from early-stage companies to well-funded unicorns.
They were chosen based on several factors, including data submitted by the companies, company business models and momentum in the market, and Mosaic scores, CB Insights’ proprietary algorithm that measures the overall health and growth potential of private companies.”
Other Good Reads This Week
Anyone Seen Tether’s Billions (Bloomberg)
Bitcoin Preaches Financial Liberty. A Strongman Is Testing That Promise. (NYT)
As more workers go solo, the software stack is the new firm (a16z Future)
Can crypto embrace regulation and still drive innovation? (Fintech Nerd Collective)
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