Solid Claps Back At FTV In Countersuit, PR Push; Synapse CEO Confirms Reconciliation "Challenges"
Hamas-Linked "Gaza Now" Asks For Donations Via Wise & Evolve; CFPB Roundup
Hey all, Jason here.
This time next week, I’ll probably be roaming the Venetian, looking for a half-decent coffee that doesn’t require waiting in an impossibly long queue. That’s right — Money2020 is just around the corner.
My calendar is already overflowing, but, I hope to make the most of my time and catch up with as many folks as possible. You can also catch Alex Johnson and me doing a live recording of our Fintech Recap podcast on Tuesday morning — details here.
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As The Banking-as-a-Service World Turns…
A number of stories across the fintech/bank partnership world continued to develop last week, including Synapse’s CEO partially responding to the company’s fallout with bank partner Evolve and Solid filing a counterclaim against its Series B lead investor, FTV.
Last week also saw The Information report that two other partner banks, Lincoln Savings Bank and Sutton, previously entered into non-public MOUs with regulators for gaps in compliance controls.
Finally, late Friday, remittance platform Wise informed some users whose payment accounts are linked to Evolve that they had until the end of the month to update routing and account information to Wise’s other US bank partner, CFSB.
Synapse Cofounder Confirms Reconciliation “Challenges,” Erroneous Debits Of Customer Funds
On Friday, embattled banking-as-a-service platform Synapse’s CEO, Sankaet Pathak, released a statement partially addressing revelations of the strained relationship with its key partner, Evolve Bank & Trust.
Pathak’s statement did not dispute any of last week’s reporting, which detailed Evolve’s move to poach Mercury, Synapse’s marquee client, persistent and significant reconciliation failures, Evolve’s decision to withhold a $16 million payment to Synapse, and over $13 million in missing customer funds.
The statement confirmed much of the reporting, with Pathak describing the intention and contents of his letter to Evolve as follows:
“[W]e brought forth several concerns:
Bank Charges: We highlighted instances of charges appearing on customer GLs [general ledgers], which, by our understanding, should not have occurred. We asked for explanations, remedies, and urged our partner to initiate an investigation into these matters.
Underpayments: We discussed instances of underpayments, underscoring the need for prompt and fair resolutions to these discrepancies.
Rebate Revenue Withholding: We delved into the matter of revenue withholding. We firmly believe that this issue has not only impacted our partnership but has also had adverse effects on our valued fintech customers.
Reconciliation Challenges: We laid bare the challenges we’ve faced in the reconciliation process and our need for response and resolution to open processing incidents and data feed requests. These are crucial issues for us to conduct effective reconciliations. To clarify, our concern is not that this has simply been a challenge. It is that, in addition to this being a challenge, we were stressing the need for increased attention and resources.”
Solid Claps Back At FTV, Goes On PR Offensive
Facing allegations of fraud and an attempt to recoup $61 million from its Series B lead investor FTV, Solid and its cofounders Arjun Thyagarajan and Raghav Lal are going on the offensive.
In a counterclaim filed last week against FTV and FTV partner Robert Anderson personally, Solid describes FTV as “an aggressive private equity firm” that is “resorting to made-up claims of fraud, threats, and strong-armed tactics to try to get its money back.”
The crux of Solid’s counterclaim is that FTV did thorough due diligence prior to deciding to invest, including having “full access” to Solid’s data, the opportunity to interview clients and bank partners, and the chance to review customer contracts, invoices, bank statements, activity logs (including API call logs), and detailed financial information.
According to Solid’s counterclaim, the diligence process spanned about two months, and FTV retained six outside specialist firms to assist in the process, including legal, regulatory, management, market, ESG, and accounting firms.
The lengthy due diligence process culminated in a report which, Solid’s suit says, contradicts many of FTV’s claims.
While not part of the publicly available version of Solid’s counterclaim, Fintech Business Weekly has exclusively obtained a portion of the summary of FTV’s due diligence report (shown below), which suggests that, at the time of its Series B investment, FTV had some idea that Solid had materially significant accounts receivable that were unlikely to ever be collected:
After the diligence process, FTV sought to and was successful in re-negotiating terms to invest at a discount to the original term sheet, Solid’s filing says.
In Solid’s version of events, for several months after FTV’s investment closed, all was well, and the company was “thriving.”
In Solid’s telling, FTV’s enthusiasm for its investment in Solid changed as the “crypto winter” accelerated with FTX’s collapse and as VC funding for fintechs dramatically slowed down.
Solid’s counterclaim suit argues FTX’s collapse and the greater scrutiny it led to from bank partners explain negative developments in its customer base and revenue around that time (though, it’s worth noting, there were other major problems around this time, including the short-lived launch of “anonymous” debit card startup ZELF, among other questionable Solid clients.)
With its financial performance deteriorating, Solid says FTV’s Robert Anderson sought a “side deal” to renegotiate FTV’s economics. When Solid wouldn’t entertain this “one-sided deal for FTV,” Solid alleges that “FTV and Anderson pivoted to a new tactic: unsubstantiated fraud allegations.”
In its counter suit, Solid denies the allegations laid out in FTV’s initial suit, including regarding Solid’s revenue recognition practices, that Solid claimed revenue from clients that lacked valid, binding, and enforceable contracts, that transaction-based revenue was inflated, and that Solid didn’t disclose material customers intended to decrease or cease their business with Solid.
Solid’s isn’t limiting its pushback to the courtroom.
The company has retained a crisis PR firm and has been reaching out to industry analysts to pitch its side of the story.
The future for Solid looks increasingly uncertain. While the company appears to have a significant amount of the Series B funding it raised remaining, its ability to attract and retain clients — let alone the bank partners necessary for its business — has a giant cloud of uncertainty looming over it.
A representative for FTV didn’t respond to a request for comment.
Wise Abruptly Moving Clients Off Evolve; Wise & Evolve May Have Facilitated Funds Transfers To Hamas-Linked “Gaza Now” News Site
Late Friday, remittance platform Wise (formerly TransferWise) informed some customers that their USD account details would change.
Specifically, users who had account details provided by Evolve Bank & Trust were told they had until the end of October — just 12 business days — to update any third-parties that send money to or debit money from their USD-denominated Wise account.
This change includes Wise business accounts, where invoices/payment terms could easily stretch beyond the end-of-October deadline.
Wise’s bank partner, Evolve, has broadly been de-risking its fintech relationships and the transition was likely planned for some time, though the brief notification period is unusual and suggests there may have been a newly developed issue driving the urgency.
The timing of revelations that Gaza Now, a media organization that reportedly has links to terrorist group Hamas, solicited contributions via Wise and Evolve appears to be coincidental, if inauspicious.
Gaza Now has also solicited contributions through PayPal (which suspended its account) and continues to solicit contributions through USD stablecoin Tether.
A spokesperson for Wise did not have any comment for publication.
A spokesperson for Evolve Bank & Trust denied facilitating any funds transfer to the group, saying, “Evolve did not facilitate any funds transfers to Gaza-linked organizations.”
Lincoln Savings Bank, Sutton Under Regulatory MOUs After Rapid Cash App-Fueled Growth, The Information Reports
Tech news site The Information is reporting (paywalled) that fintech partner banks Sutton and Lincoln Savings Bank both faced non-public regulatory actions after compliance efforts failed to keep up with their rapid pace of growth — much of which was driven by P2P payment service Cash App.
Lincoln entered into a memorandum of understanding (MOU) with the FDIC stemming from a 2019 exam and is still under the order, according to the reporting.
Per The Information, Lincoln saw its customer count balloon from about 18,000 in 2014 to over 2 million once it began working with Cash App.
Lincoln Savings Bank has also served as bank parter for cash advance app MoneyLion, brokerage apps M1 Finance and Acorns, and PFM service Qapital.
Cash App stopped working with the bank at the end of its contractual agreement in 2021; MoneyLion ceased working with Lincoln and transitioned to Pathward (formerly known as Metabank); and M1 is in the process of transitioning to a new bank partner.
Sutton, which also partnered with Cash App to issue its debit cards, saw its balance sheet nearly triple from 2019 through the end of 2022. It also entered into an MOU stemming from concerns about its compliance functions, The Information reports.
UK Embedded Payments Firm Modulr Restricted From Onboarding New Clients
UK embedded payments company Modulr, which holds an e-money license in the UK as well as in the Netherlands, provides payment capabilities to numerous well-known British and European fintechs, including iwoca, Salary Finance, Gain Credit, and Wagestream.
Earlier this month, the Financial Conduct Authority (FCA), the UK regulator, prohibited the company from onboarding new clients without the regulator’s explicit written permission.
The order, dated October 4, 2023, states:
The Firm has agreed with the Authority that it will not without the prior written consent of the Authority, on-board any new agent and/or distributor (as defined under the Electronic Money Regulations 2011).
Only an existing agent and/or distributor may be permitted to distribute and/or redeem e-money and/or provide payment services (as applicable) on behalf of the Firm.
CFPB Roundup: “Junk Fees,” Discriminating Based on Immigration Status & Two Actions Against TransUnion
War on “Junk Fees” Continues
Last week, the CFPB released an advisory opinion providing additional guidance on a 2010 provision that prohibits financial institutions from imposing “unreasonable obstacles” on customers — including charging “excessive” fees — to access basic information about their own accounts.
The provision, part of Dodd-Frank that was passed in the wake of the 2008 financial crisis, requires banks and credit unions with $10 billion or more in assets to “in a timely manner, comply with a consumer request for information in the control or possession of such covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including supporting written documentation, concerning the account of the consumer.”
The requirement prohibits institutions from imposing “unreasonable” barriers on consumers accessing this information, and the Bureau’s new guidance argues that “requiring a consumer to pay a fee or charge to request account information, through whichever channels the bank uses to provide information to consumers, is likely to unreasonably impede consumers’ ability to exercise the right granted by section 1034(c), and thus to violate the provision.”
Beyond the content of the advisory opinion itself, the accompanying statement is noteworthy for its emphasis on so-called “relationship banking,” with CFPB Director Chopra stating (emphasis added), “While small relationship banks pride themselves on customer service, many large banks erect obstacle courses and impose junk fees to answer basic questions. While the biggest banks have abandoned the relationship banking model, federal law still requires them to answer certain customer inquiries completely, accurately, and in a timely manner.”
CFPB and DOJ Warn On Discriminating Based On Immigration Status
Last week, the CFPB and Department of Justice issued a joint statement on the fair lending implications of creditors denying applications due to applicants’ immigration status.
While the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Reg B, don’t prohibit consideration of an applicant’s immigration status, the CFPB and DOJ’s statement warns that “creditors should be aware that unnecessary or overbroad reliance on immigration status in the credit decisioning process, including when that reliance is based on bias, may run afoul of ECOA’s antidiscrimination provisions and could also violate other laws.”
ECOA expressly prohibits discrimination on the basis of a protected characteristics, including race and national origin. The joint statement notes that “[i]mmigration status may broadly overlap with or, in certain circumstances, serve as a proxy for these protected characteristics. Creditors should therefore be aware that if their consideration of immigration status is not ‘necessary to ascertain the creditor’s rights and remedies regarding repayment’ and it results in discrimination on a prohibited basis, it violates ECOA and Regulation B.”
CFPB Takes Action Against TransUnion For Inaccurate Rental Applicant Screening, Failing to Place and Remove Security Freezes
Finally, the CFPB took two separate actions against credit reporting agency TransUnion last week.
The Bureau and the FTC entered a joint complaint that would see TransUnion pay $11 million to consumers and a $4 million penalty over Fair Credit Report Act violations in how the credit bureau prepared rental background check reports.
The CPFB and the FTC allege that TransUnion:
Failed to take steps to produce accurate reports: The company violated the Fair Credit Reporting Act by failing in numerous instances to take steps to assure the maximum possible accuracy of eviction records in its rental background check reports. For example, the company failed to assure that its reports reflected the current status of public records. This included failing to share information showing that an eviction was dismissed and not preventing the inclusion of sealed records or multiple entries about the same eviction case…
Failed to identify who provided inaccurate information: When the company obtained criminal and eviction records from third-party vendors, it failed to identify the third-party vendors in its disclosures to consumers. Instead, the company told people that criminal and eviction records were taken only from the jurisdictions where the proceedings took place…
In a separate action against TransUnion, the CFPB argues the credit reporting agency failed to place or remove security freezes in a timely manner and did not protect certain individuals, including active-duty members of the military, by removing them from “pre-screen” solicitation lists:
Failed to timely place or remove security freezes and locks: For tens of thousands of individuals, since at least 2003, the company failed to timely place or remove security freezes and locks on tens of thousands of credit reports. Despite these failures, TransUnion falsely represented to consumers that their requests were processed when they were not.
Failed to protect certain populations from pre-screened solicitation lists: TransUnion unlawfully failed to exclude thousands of individuals, including active-duty members of the military and other potential victims of identity theft, from pre-screened solicitation lists.
The CFPB’s order requires TransUnion to pay $3 million to impacted consumers, pay a $5 million penalty, and remediate its business practices.
Other Good Reads
Fintech Hangover Cures (Fintech Takes)
The Wager That Betting Can Change The World (NYTimes)
The very costly and unpleasant business of saving Metro Bank (FT)
Inside FTX’s All-Night Race to Stop a $1 Billion Crypto Heist (Wired)
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