PayPal Uproar Misses the Point; Money20/20 Preview
Another Look at Goldman's Re-org, Cloud of Uncertainty Hangs Over CFPB
Hey all, Jason here.
It’s time! Money20/20! Despite the intense windstorm here in Las Vegas yesterday, my flight made it without issues.
Given the nine hour time difference from Europe, I’ve already been up for several hours — which is going to make for a long day. If you see me wandering around The Venetian in the next few days, please say hi!
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Money20/20: Preview
Money20/20 kicks off around the time this lands in your inbox. I’m looking forward to four days of informative panels, valuable network, and, yes, the parties (if I can stay awake for them!)
If you’re looking to get a taste of the topics the event is likely to focus on, check out my 7 Key Takeaways from Money20/20 Europe, which took place in June. While there are certainly plenty of differences in the American market, I imagine there’ll be a good amount of overlap.
Some of the sessions this week I’m most excited for include:
and plenty more!
And, of course, Alex Johnson, author of the Fintech Takes newsletter, and I will be recording a podcast at the MoneyPot podcast stage Monday morning at 10:00am — if you’re so inclined, you can watch and listen live: details here.
Outside of the official programming, I’ll also be hosting a happy hour with Performline on Tuesday evening — you may still be able to snag a spot here.
And, finally, a late addition — I’ll be joining execs from Unit, Finix, and Middesk to do a live podcast recording during their Monday Game Night event at Redtail. We’ll be “taking a gamble” (ha, get it?) on making our best fintech and banking predictions for 2023.
PayPal Uproar, Now a “Culture War” Issue, Misses the Point
Earlier this month, PayPal found itself in the midst of a firestorm of criticism for an update to its acceptable use policy (AUP), something generally likely to go unnoticed by the vast majority of users.
But, former PayPal President David Marcus, who left the firm back in 2014 for Facebook, weighed in on Twitter, saying:
First Amendment hobbyist Elon Musk responded in a Tweet that simply said “Agreed,” amplifying the issue to his nearly 110 million followers.
The controversy quickly mushroomed across social media and into the tech and mainstream press.
Despite quickly backtracking, claiming the change “went out in error,” the problem is hardly over for PayPal. Now, seven Republican Senators, including Bill Hagerty (R-TN), who sits on the Senate Banking Committee, are seeking answers from PayPal about the matter.
The uproar focused on changes to the AUP that were interpreted as enabling PayPal to “seize” up to $2,500 from users’ accounts for “spreading misinformation” — though many, including David Marcus in his initial tweet, portrayed this as PayPal “tak[ing] your money if you say something they disagree with.”
“Misinformation” does appear in the now-rescinded AUP update, though it was but one component of a longer section.
Here’s the entire section from an archived version of the policy (spacing adjusted and emphasis added):
“You may not use the PayPal service for activities that:
…involve the sending, posting, or publication of any messages, content, or materials that, in PayPal’s sole discretion,
(a) are harmful, obscene, harassing, or objectionable,
(b) depict or appear to depict nudity, sexual or other intimate activities,
(c) depict or promote illegal drug use,
(d) depict or promote violence, criminal activity, cruelty, or self-harm
(e) depict, promote, or incite hatred or discrimination of protected groups or of individuals or groups based on protected characteristics (e.g. race, religion, gender or gender identity, sexual orientation, etc.)
(f) present a risk to user safety or wellbeing,
(g) are fraudulent, promote misinformation, or are unlawful,
(h) infringe the privacy, intellectual property rights, or other proprietary rights of any party, or
(i) are otherwise unfit for publication.”
Now, the intention of this analysis is not to wade into the middle of some kind of “free speech” debate — though I will note that PayPal, like Twitter and Facebook or Truth Social and Parler, are private companies and clearly have the right to choose to moderate (or not) what happens on their platforms.
The first word of the first amendment makes clear that, “Congress shall make no law… abridging the freedom of speech, or of the press” — Congress. Not PayPal, Twitter, or any other private, for-profit corporation.
Additionally, PayPal has legal obligations, including complying with relevant AML and KYC requirements.
While the disinformation/free speech debate has been the focus of this story, two other elements have gone largely unexamined.
One — PayPal’s reaction to the fracas was to release a statement saying (emphasis added):
“An AUP notice recently went out in error that included incorrect information. PayPal is not fining people for misinformation and this language was never intended to be inserted in our policy. Our teams are working to correct our policy pages. We’re sorry for the confusion this has caused.”
This statement seems rather unlikely to be true. Anyone who has worked at large financial institutions on areas that touch on user-facing terms and conditions or contracts will be familiar with “change control” processes and the many, many layers of review and approval such updates typically go through, before being released to production and communicated to users.
If PayPal — a publicly traded company with some 426 million users — did, somehow, implement this change in error, that would be worthy of deeper scrutiny.
Instead of restoring confidence and user trust, PayPal’s implausible claim that this policy change was “an error” is likely to further undermine many users’ perception of the company’s trustworthiness.
The second, and more important unanswered question is: what gave rise to PayPal’s decision to update its AUP to include the section in question?
Given the time, expense, complexity, and risk of making such policy updates, the decision to do so, unless it was a bona fide error, presumably arose from problematic activity PayPal has detected on its platform. The rescinded AUP would have given PayPal an enforcement tool but, more importantly, served as a signal and disincentive to bad actors on its platform.
While it is only possible to speculate based on the rescinded portion of the AUP, it seems likely PayPal was trying to discourage “misinformation,” hate speech, and violence targeting specific groups (race, religion, gender, etc.)
With domestic extremism now identified as a primary security threat in the country, particularly tied to the current political climate and upcoming midterm elections, financial services companies — including “peer-to-peer” payment services like PayPal but also Cash App and Zelle — have a regulatory obligation, if not a moral one, to ensure their services are used in accordance with the law.
Goldman Retrenches, But Doesn’t Give Up on Consumer Banking
Plenty of ink has already been spilled over recent developments at my former employer, Goldman Sachs — both on its recently expanded partnership with Apple and the announcement last Tuesday that it would reorganize the firm, shrinking from four to three operating divisions.
The reorg was announced alongside its Q3 earnings, which I covered briefly in a tweet thread here:
Much of the analysis of the reorg focused on three themes — that Goldman is adjusting its structure to (try to) reduce reliance on volatile investment banking and trading revenue; that the new structure will make it easier to compare Goldman to peers like Morgan Stanley or JPMorgan; and that it’s an all-out retreat from consumer banking.
In considering Goldman’s consumer banking future, there are two key slides worthy of further examination:
The branding of Goldman’s wealth management offerings is admittedly… confusing.
But the theory of the case seems to be, instead of competing in a crowded open market to acquire new customers for Marcus, to leverage channels and relationships that already exist via the firm’s wealth channels.
While estimates of the cost to acquire new checking account customers vary widely, several studies put the CAC between $150 to $350 — and potentially much higher, when incorporating brand marketing expenses and incentive costs when first rolling out a new offering. The marketing costs to originate a personal loan, Marcus’ first offering, typically run $300 to $400 but can also run significantly higher. Cross-selling through existing channels and to existing clients could equal a less expensive customer acquisition strategy.
Still, Goldman has its work cut out for it. It may have a semi-captive audience, in the form of wealth management clients, but these consumers form a distinct segment compared to those that Marcus has been targeting.
Back of envelop math puts the assets per client at the time of the United Capital acquisition at just over $1.1 million — presumably a far cry from the Marcus user borrowing $10,000 to consolidate credit card debt.
Likewise, Goldman’s wealth clients, even at the lowest tier, are unlikely to find much utility in the firm’s underwhelming roboadvisor or the personal financial management tool Marcus Insights, the result of the firm’s $100 million acquisition of Clarity Money.
Platform Solu-who?
The second slide worth of additional scrutiny covers the newly formed “Platform Solutions” division:
With Marcus seeming to shrink into the background, “Platform Solutions” may be the more interesting division for fintech watchers to pay attention to. It houses Goldman’s existing consumer partnerships — Apple and GM — and the firm has said it will continue to selectively develop new partnerships. T-Mobile is rumored to be a new, additional credit card partner.
Transaction banking (“TxB”) may be the dark horse candidate to help drive the success of the newly formed division. Goldman initially built and tested the capabilities for its own, significant treasury management needs, before rolling it out to corporate clients and via partnerships.
The service, launched in 2020, has attracted 400 clients and some $65 billion worth of deposits. It not only provides Goldman with a source of cheap deposit funding, but also generates revenue while deepening client relationships.
While its own efforts seem to have been successful, it’s less clear if Goldman’s partnership to power Stripe Treasury has delivered meaningful results. Goldman’s recently inked partnership with fintech Modern Treasury demonstrates it’s still pursuing this “banking-as-a-service” strategy.
Perhaps more importantly, Goldman has already expanded its Transaction Banking offering, under its own name, to the UK market, and is also bringing it to Europe.
What About GreenSky?
Finally — how does GreenSky, the “BNPL” lender Goldman acquired for $2.2 billion, at the top of the market, fit in? It’s not particularly clear.
Even calling GreenSky buy now, pay later is a stretch — it originates interest-bearing personal loans through home renovation-focused retailers and service providers. The financing it offers looks much more like Marcus’ unsecured installment loans than what BNPL-focused companies like Afterpay or Klarna offer.
Given the nature of the business unit (“Platform Solutions”) and the other elements, GreenSky seems like, at best, a distraction — perhaps Goldman sells it off, likely at a steep loss, to a fintech-oriented consumer lender like Affirm.
Cloud of Uncertainty Hangs Over CFPB After Fifth Circuit Ruling
The CFPB under Rohit Chopra has aggressively made use of the various tools at its disposal, including market monitoring, rulemaking, enforcement actions, and, of course, the bully pulpit.
But now, the consumer protection agency faces a potentially catastrophic setback — not just on its forward-looking agenda, but on previous rules and enforcement actions.
The proximate cause? Last week’s ruling in the Fifth Circuit in Community Financial Services Association of America, Limited vs. Consumer Financial Protection Bureau. The CFSAA, a trade association representing payday lenders, filed suit seeking the reversal of the bureau’s “payday loan rule.”
While the CFSAA appeal made several arguments for why the rule should be reversed, the one the Fifth Circuit found convincing was the argument that the CFPB’s funding structure is unconstitutional.
Not the First Constitutional Challenge
The CFPB was created as part of Dodd-Frank, passed in the wake of the financial crisis.
Cognizant that a change in political control could result in changes that would reduce the consumer protection agency’s effectiveness, architects of the bill designed the agency with some relatively unique features to attempt to preserve its independence.
“Congress did not merely cede direct control over the Bureau’s budget by insulating it from annual or other time limited appropriations. It also ceded indirect control by providing that the Bureau’s self-determined funding be drawn from a source that is itself outside the appropriations process—a double insulation from Congress’s purse strings that is ‘unprecedented’ across the government.” — CFSSA vs. CFPB
Namely, an independent director that could only be removed for cause and funding that comes from the Federal Reserve (rather than through the Congressional appropriations process.)
In a prior challenge to the independent director structure, the Supreme Court ruled (5-4) that it violated the separation of powers clause. The decision left the agency intact, but made the director removable by the President at will.
The ruling last week, if it stands, would, presumably, make the CFPB subject to the typical Congressional appropriations process.
Even if Democrats were to retain control of both houses of Congress, this would expose the agency to greater scrutiny and uncertainty around its budget.
With Republicans’ 80% odds of taking control of the House next month, they could attempt to “starve the beast,” or to stymie the agency by reducing its funding.
What’s Next?
The CFPB is almost certain to contest the decision — either by requesting a rehearing in front of the full Fifth Circuit or appealing to the Supreme Court. As Ballard Spahr breaks down here, a request to have the case heard en banc is unlikely to be successful, given the make up of judges sitting on the Fifth Circuit.
The CFPB can also appeal directly to the Supreme Court — but even if it agrees to hear the case, given its current composition, it seems unlikely the agency would get the outcome it’s hoping for.
In the meantime, a cloud of uncertainty will hang over the bureau. That cloud is intensified by the fact that Fifth Circuit’s ruling invalidates the CFPB’s payday rule — a result that would seem to cast doubt on all rules and guidance the CFPB has issued, as well as enforcement and other actions undertaken by the bureau.
I tend to agree with Reggie Young, author of the excellent Fintech Law TL;DR newsletter (and actual lawyer) on his view of the likely outcome:
“I imagine the realistic outcome is the CFPB appeals to the Supreme Court and (1) the Bureau’s funding is found unconstitutional but (2) that doesn't unwind their existing rules and (3) the Bureau limps along and has to get funding from Congress.”
Other Good Reads
What the Apple Card High-Yield Savings Account is Really About (The Financial Brand)
What Fintech Forgets About Consumer Lending (Fintech Takes)
The Future of B2B Fintech (Fintech Brainfood)
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