Six Predictions for 2022; Will BNPLs Furnish to CRAs?
Six Predictions for 2022; Will BNPLs Furnish to CRAs?
2021's Fintech IPOs & SPACs, CFPB Shuts Down LendUp, FDIC Chair Resigns, CFPB Seeks AI Whistleblowers, MoneyLion Reaches Settlement with Minnesota
Hey all, Jason here.
Happy New Year’s — congrats on making it to 2022! If this year looks anything like last year did, it’s bound to an eventful one, if nothing else. Makes me miss the ‘90s.
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Six Predictions for 2022: Crypto, the Metaverse & Fintech
It’s the start of a new year, and it feels like anything is possible in fintech (and crypto, and defi, and even regular old “banking”). So I thought I’d try my hand at making some wild predictions on what might happen this year in these rapidly evolving sectors.
A run on (or complete collapse of) a stablecoin
Stablecoins, though lacking a specific definition, are most often pegged in value to a “fiat” currency — typically, the US dollar, though stablecoins backed by other major currencies, like the Euro or Yen, also exist. You can think of a stablecoin as a representation of a dollar (or Euro, Yen, etc.) on the blockchain.
There are various approaches to constructing currency-linked stablecoins, but they share a common characteristic: you should always be able to redeem the stablecoin for an equivalent amount of the linked currency.
Stablecoins form a lynchpin in the crypto ecosystem because it’s quicker to transact and settle trades between, say, bitcoin and a USD-linked stablecoin in the same exchange account, like Coinbase or Binance, than to trade back into actual dollars.
The size of the stablecoin market has grown incredibly rapidly, rising 23x from about $5 billion USD to $120 billion USD from 2020 to 2021 — the largest of which is Tether, which has approximately $78 billion in circulation.
The prediction: a currency-linked stablecoin experiences a “run,” causing it to break its peg (eg, redeem below par) or collapse altogether (most likely Tether)
A Major Correction in Established Crypto Prices
Crypto prices are notoriously volatile. For many crypto traders and enthusiasts, as they say, that volatility is feature, not bug. Whether they’re chasing adrenaline or out-sized returns, volatility enables a broader array of trading strategies.
Bitcoin, which started the year around $32,000, reached as high as $67,000 in November, before shedding about 31% of its value to end the year just above $46,000. Other cryptocurrencies have seen even greater volatility, on a percent change basis.
Innumerable factors could impact established cryptos’ prices in 2022: macro factors, like inflation and interest rate policies; increasing scrutiny or crackdowns from regulators; competition from new cryptos offering greater utility; or a ‘run’ or collapse of a stablecoin linked to the sector, for example.
The prediction: a major established cryptocurrency like Bitcoin or Ethereum experience a significant 50%+ correction in price.
NFTs Dim but Don’t Disappear
NFTs exploded into the world’s consciousness in March 2021, when Christie’s auctioned an NFT of a work by digital artist Beeple for an incomprehensible $69 million.
Since then, the NFT world has had a pronounced gold rush/get rich quick feeling, with search interest in the topic exceeding cryptocurrency for the first time in December 2021.
But now, the marketers have shown up, and it feels like the trend may be getting a bit long in the tooth.
Brands trying to leverage the trend include toilet paper brand Charmin, Taco Bell, Campbell’s Soup, Marriott, Crockpot, Baby Shark, and countless others.
Even former First Lady Melania Trump is looking to cash in on the trend (proceeds go to her “Be Best” initiative, which is evidently still a thing):
The prediction: the NFT trend has already peaked and interest wanes going in to 2022, though communities like CryptoPunks and Bored Ape Yacht Club and “collectibles” like NBA Top Shot persevere (though values decline); use cases continue to evolve, creating new opportunities for niche adoption.
The Metaverse is a Flop (next year, anyway)
If NFTs kicked into high gear last March, the idea of the metaverse drew headlines around the world in October, owing to Facebook’s corporate rebrand to “Meta.”
And while, to a large extent, “the metaverse” isn’t even yet defined, if we take Facebook’s (er, Meta’s) vision at face value, it will be the next version of how we experience the activities we do on the internet, in a future where users will be “in an experience,” instead of interacting via screen, keyboard, and mouse.
The prediction: the metaverse remains more trend story than actual product. Adoption of VR headsets needed for Zuck’s vision are limited to hardcore early adopters and hobbyists.
Consumer Fintech Consolidation Accelerates
2021 saw a not insignificant amount of dealmaking in fintech, including: Square/Afterpay; Goldman Sachs/GreenSky; JPMorgan Chase/Nutmeg; MoneyLion/Even Financial; and Oportun/Digit, among others.
After years of venture dollars pouring in to the sector, is 2022 the year we see a bit of a shake out and consolidation in consumer fintech?
The prediction: accelerated M&A activity in US consumer-focused fintech, with a smaller challenger bank like Current, First Boulevard, Daylight, or Novo and a BNPL provider like Sezzle, ChargeAfter, or SplitIt being merging or being acquired.
Bonus Prediction: A Foreign Challenger Bank in the US Calls it Quits
It’s the second year running for this prediction. At the end of 2020, I correctly predicted a major challenger bank would exit the US market, specifically naming Monzo and N26. N26 announced it would wind down its US business last November.
But I think the same will hold true again this year.
The prediction: Monzo announces it is leaving the US market before it even launches a product in the country.
How Some of 2021’s Most Anticipated Fintech IPOs & SPACs Have Fared
Last year was undeniably a huge year for fintech fundraising and liquidity events.
Depending on how you define “fintech,” one in five venture dollars raised in 2021 was by a fintech company — amounting to $34 billion raised in Q2 2021 alone.
2021 also saw a significant number of fintechs hit the public markets, both via IPOs and SPACs. And while some have performed well once they began trading, that has been more the exception than the rule.
In a year that saw the S&P 500 return a 28.7%, many newly public fintechs lost value, with companies like Remitly, Robinhood, OppFi, Blend, and MoneyLion seeing share price declines around 50% — and insurtech hippo, which offers homeowner’s insurance, shedding 72% of its value.
With a number of high-profile fintechs still going through the SPAC process, including Aspiration (neobank), kin (insurtech), Dave (neobank), Acorns (microinvesting), and Better (mortgage), there may be more pain ahead in 2022.
CFPB Reaches Settlement That Shuts Down LendUp
[disclosure: I worked at Lendup from 2014-2016 and hold (held?) a small amount of equity in the company]
Just months after suing LendUp, alleging it had violated its 2016 consent order with the agency, the CFPB announced that the company agreed to cease writing loans, effectively putting the company out of business, to resolve the case.
The September 2021 suit alleged the company had:
“Deceived consumers about the benefits of repeat borrowing: LendUp misrepresented the benefits of repeatedly borrowing from the company by advertising that borrowers who climbed the LendUp Ladder would gain access to larger loans at lower rates when, in fact, that was not true for tens of thousands of consumers.
Violated the CFPB’s 2016 order: The CFPB’s 2016 order prohibits LendUp from misrepresenting the benefits of borrowing from the company. LendUp’s continued misrepresentations about the LendUp Ladder violate this order.
Failed to provide timely and accurate adverse-action notices required by fair lending laws: Adverse-action notices inform consumers why they were denied credit. Timely and accurate notices are vital to maintain a transparent underwriting process and protect consumers against credit discrimination. LendUp failed to provide adverse-action notices within the 30 days required by the Equal Credit Opportunity Act (ECOA) for over 7,400 loan applicants. LendUp also issued over 71,800 adverse-action notices that failed to accurately describe the main reasons why LendUp denied the applications as required by ECOA and Regulation B.”
The agreement prohibits LendUp from making new loans; collecting on outstanding loans to harmed consumers; making misrepresentations when providing loans, collecting on debt, or helping others to do so; and a $100,000 civil money penalty “based on LendUp’s demonstrated inability to pay.”
The order also bars LendUp from selling its users data. The company had spent years saying it wouldn’t sell users’ data, only to quietly update its privacy policy in November to permit it to do so — an issue first reported in this newsletter.
It’s unclear if LendUp’s fledgling neobank, Ahead, will continue operating.
CFPB Statement Calls Out VCs in Unusual Move
The agency’s statement made the unusual move of calling out investors in the company, stating (emphasis added):
“LendUp was backed by some of the biggest names in venture capital,” said CFPB Director Rohit Chopra. “We are shuttering the lending operations of this fintech for repeatedly lying and illegally cheating its customers.”
and naming specific firms:
“LendUp attracted equity and debt investments from prominent investors, including Google Ventures, Andreessen Horwitz, Kleiner Perkins, PayPal Holdings, and QED Investors.”
Equifax to Support Furnishing on “Split Pay” Plans, But Will BNPLs Choose to Do So?
Equifax made news late last year, with the Wall Street Journal reporting the bureau would “begin recording” use of pay-in-4 plans in its credit reports. According to the story (emphasis added):
“Early next year, Equifax Inc. will begin recording installment plans that allow shoppers to make four biweekly payments instead of covering the full cost at checkout. The move is meant to give lenders a fuller picture of people’s financial commitments, including how much they owe on these plans.”
However, it isn’t Equifax’s decision whether or not creditors furnish data to it. In all likelihood, the bit of news here is that Equifax will enable BNPL providers to report data on “split pay” financing, should they choose to do so.
Bureaus have historically categorized accounts as revolving (credit cards, charge cards, store brand cards), installment (auto loan, student loan, personal loan, etc.), mortgage, or other. Further, the bureaus historically have accepted tradeline data from furnishers on a monthly cadence and generally did not accept data for short duration products, like payday loans.
Thus updates to bureaus’ technical infrastructure are required to ingest and process data from BNPL providers, whose products are likely to be considered “installment loans,” typically include biweekly payments instead of monthly, and have short durations of only about six weeks.
If Buy Now, Pay Later Providers Can Report, Will They?
So, although Equifax is planning to enable the reporting of split pay plans (and presumably TransUnion and Experian will follow suit), I have yet to see any provider of split pay financing announce plans to begin furnishing this data.
Sezzle offers a product, Sezzle Up, that does report to the bureaus, though it is structured more as a revolving product than the pay-in-4 format typical of split pay offerings.
As the technical pieces of this are ironed out, pressure will increase on BNPL providers to report this data. But, from the companies’ perspective, there are arguments to be made for and against furnishing data on split pay plans.
Reasons to Begin Reporting
Pressure from legislators / regulators: BNPL has already been the subject of Congressional hearings, including questions around affordability and credit reporting. For its part, the CFPB recently initiated an inquiry into the sector, including questions on credit underwriting and furnishing.
Helping users build credit: part of the narrative around the use case of BNPL is that it enables consumers who may have little credit history to access credit. Furnishing data to the bureaus would allow BNPL providers to position their products as helping their users build a credit history. Whether or not tradeline data on split pay actually improves users’ creditworthiness and scores remains to be seen; users missing payments on BNPL plans would surely see their scores drop.
Improved underwriting and preventing “loan stacking”: If a majority of BNPL providers begin reporting to bureaus and using bureau data to underwrite, they would gain better visibility into users’ overall ability to pay, and should be able to make better underwriting decisions, resulting in lower credit losses.
Reasons Not to Begin Reporting
Pressure to use bureau data to underwrite: if BNPL providers begin furnishing data to bureaus, no doubt the pressure will increase for them to also use bureau data to underwrite split pay products. Consumer advocates and legislators already argue this would help ensure affordability and prevent users from becoming overly indebted.
But, for BNPL providers, using bureau data to underwrite could erode a key user value proposition: a near-seamless user experience. Using bureau data would likely require additional user inputs, opt-ins, acknowledgments, and disclosures, potentially lowering conversion rates.
If BNPL providers began using bureau data to underwrite and furnishing tradeline data back to the bureaus, the products increasingly look like, well, loans, which could weaken the industry’s argument that the companies aren’t “creditors” under TILA.
Infrastructure to furnish data to bureaus: reporting tradeline data to bureaus incurs real costs for creditors — both directly (lenders must pay the bureaus to send them data) and indirectly (IT, compliance, etc.).
BNPL providers would need to ensure compliance with FCRA, including building the capability to handle consumer disputes of tradeline data. Given the large number and short duration of transactions, this could generate a large volume of complaints. Reporting tradeline data would also likely increase complaints to the CFPB, which require processes and staff to respond to.
Other Good Reads
Millions in Minutes : The Zoom Boom in Covid Era Startup Fundraising (Matt Ward)
Why bitcoin is worse than a Madoff-style Ponzi scheme (FT)
Chris Dixon and Packy McCormick on the future of crypto (The Economist)
Can defi fix lending? (Fintech Brain Food)
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