Techstars-backed Solo Funds Sued for Unlicensed Lending, Deceiving on "Tips," 4,280% APR
El Salvador's Bitcoin Experiment, Stripe's Financial Connections, Klarna Adds Credit Reporting in UK, Revolut's Charter Slowed by Compliance, Crypto & Russia Concerns
Hey all, Jason here.
Happy mother’s day to all my fintech moms out there! Hopefully you’re able to spend today celebrating with family (or at least give them a call, which I’ll do later today once it’s daytime in the US.)
This Sunday, I also want to give a shout out to Plaid Accelerate, an incubator that supports entrepreneurs who are Black, Indigenous, or People of Color. It is now accepting applications for its third cohort. You can learn more about the program and apply to join here.
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Techstars-backed Solo Funds Told to Cease and Desist for Operating Without Licenses, Deceiving Borrowers
Solo Funds has made a considerable effort to portray itself as being a force for good.
A TechCrunch headline announcing the company had raised $10 million in equity from investors like ACME Capital and Techstars described the company as offering “an alternative to predatory payday lenders.”
The company partners with Evolve Bank & Trust through banking-as-a-service platform Synapse and is a member of Visa’s Fast Track program. It works with non-profit Kiva. It was selected for Accenture and the Partnership Fund for New York’s Fintech Innovation Lab. It received glowing praise from People Magazine for committing to donate an unspecified percentage of its “donation” revenue to non-profits like Habitat for Humanity and the United Way.
Fast Company named it as a 2022 finalist in its World Changing Ideas Awards. Solo Funds is even a Certified B Corp (when Fintech Business Weekly raised concerns about material misrepresentations in Solo Fund’s B Corp application, B Labs, the certifying body, declined to investigate and ceased responding to communications.)
But all of that positive PR didn’t dissuade banking regulators in Connecticut from seeking an immediate cease and desist order against the company for numerous alleged violations of state laws and the federal Consumer Financial Protection Act — including deceiving borrowers about APRs reaching as high as 4,280%.
Solo Fund’s Risky Business Practices Finally Catching Up With It
Longtime readers of this newsletter will be familiar with the company — I analyzed some of the red flags of the company’s business model more than a year ago, in February 2021.
At the time, some of the potential legal/regulatory problems I found included: operating without lending licenses, operating without broker licenses, operating without debt collections licenses, acting as a consumer reporting agency without licenses, misleading marketing and TILA disclosures, and cost of credit (in the form of “tips” and “donations”) that exceed state usury laws.
The Connecticut Banking Commissioner seems to have come to largely similar conclusions.
Last week, subsequent to conducting an investigation of the company, the Commissioner issued an immediate order for Solo Funds to cease and desist operating in the state; per the order (emphasis added):
“As a result of the Investigation, the Commissioner finds that the public welfare requires immediate action to issue an order to cease and desist from violating subdivisions (2) and (3) of Section 36a-556(a) of the Connecticut General Statutes, Section 36a-561(4) of the Connecticut General Statutes and Section 36a-801(a) of the 2022 Supplement to the General Statutes, pursuant to Section 36a-52(b) of the 2022 Supplement to the General Statutes.”
What Did Connecticut’s Investigation Find?
It is possible to request a loan on Solo’s platform with no tip and no donation — which, apparently, was part of the company’s response to Connecticut’s investigators.
However, according to the order, every loan Solo facilitated in Connecticut included a tip or donation (emphasis added):
“Respondent has represented to the Department that ‘Borrowers may opt to include a Lender Tip or a SoLo Donation, but neither is required to submit the Loan request nor to receive a Loan.’
Nevertheless, 100% of the loans to Connecticut residents originated on the Platform from June 2018 to August 2021 either contained a Lender Tip or a SoLo Tip. In addition, Respondent recommends that consumers ‘Tip’ to receive a loan.”
Based on Connecticut’s analysis of loans facilitated in the state, the typical principal amount was $100, with an average ‘lender tip’ of $21 and an average ‘donation’ to Solo of $10 — equating to APRs that ranged from 43% to as much as 4,280%.
Despite these high costs, Solo Funds provided customers a purported Truth in Lending Act disclosure showing a “0% APR,” which, Connecticut found, was likely to mislead borrowers — per the order (emphasis added):
“Furthermore, even though all loans originated via the Platform to Connecticut consumers contained an APR between approximately 43% and 4280%, Respondent provided Loan Disclosures to the Connecticut consumers stating that the loans had APRs of 0%, likely misleading Connecticut consumers as to the loan’s APR, a material term of the loan.
Through such Loan Disclosures, Respondent provided wholly inaccurate information to Connecticut consumers and caused loan transactions to appear more advantageous than they truly were.”
In fact, in April 2021 — shortly after reporting in this newsletter — Solo Funds went so far as to remove itemized “tip” and “donation” information from its loan disclosure and promissory note — further obscuring the true cost of borrowers’ loans (emphasis added):
“From April 2021 to the present, promissory notes to Connecticut borrowers failed to indicate any obligation of the borrower to pay tips on their loans and corresponding Loan Disclosures stated that only one payment, for the principal loan amount, was due at the end of the loan.
Nevertheless, on the loan’s due date, the total loan amount, including tips, was withdrawn from the borrower’s account at Evolve Bank and Trust. Such promissory notes and Loan Disclosures misled borrowers as to the total amount due on their loans and the amount that would be withdrawn from their bank account at the end of the loan.”
Connecticut also found that Solo Funds operated as a debt collector on behalf of its lenders, without proper licensing. Borrowers that became delinquent were hit with numerous additional fees — a portion of which Solo Funds kept for itself (emphasis added):
“Approximately 15% of loans with Connecticut borrowers were assessed a late fee of 15% of the principal loan amount. Such late fee was generally split equally between the Lender and Respondent. Respondent also charged several other fees on delinquent loans, including an administrative fee, a synapse transaction fee and a recovery fee, for its collection efforts.”
Such practices would seem to run contrary to the company’s claims it is disrupting ‘predatory’ lending and its marketing claims that its loans have no ‘surprise’ fees and thus no debt trap.
At no time while operating in the state was Solo Funds licensed as a small loans company nor as a consumer collections agency, nor was it exempt from the requirements to hold such licenses, the Connecticut order states.
Solo Funds Ordered to Immediately Cease and Desist
Connecticut’s order includes an immediate temporary cease and desist, notice of intent to order a cease and desist, restitution, and a civil monetary penalty that could theoretically be as much as $640 million (though it’s likely to be a small fraction of this.)
Solo Funds does have the right to request a hearing on these matters, though it is unclear, at the time of publication, if it will do so.
Where Was the Due Diligence?
When I first covered this company, I asked (rhetorically):
“What due diligence are investors, bank partners, vendors, and payment processors doing before partnering with nascent fintechs?”
The list of investors in and service providers to Solo Funds is impressive — did they just not ask enough or the right questions during diligence? Or did they ask, but not care about the answers?
One group that deserves additional scrutiny that was absent from that initial list: the media. Solo Funds was able to launder it and its product’s reputation through fawning profiles and awards from publications like TechCrunch, Fast Company, CNBC, Forbes, ZDNet, LendIt, American Banker, and even People Magazine.
The media owes a duty of care to its audience to go beyond reading a press release to understand if the claims a company is making are accurate — something these publications failed to do in the case of Solo Funds.
A Shot Across the Bow for the Fintech “Tipping” Model
What is the lesson here for other fintech companies? While, at first glance, it might be easy to look at the scope of Solo Fund’s problematic business practices and assume there’s nothing here that has broader implications, it is worth paying attention to the Connecticut order’s language around treating Solo’s so-called ‘tips’ as finance charges (emphasis added):
“The Annual Percentage Rate (“APR”) measures the cost of credit on an annual rate, or in other words the “finance charge”. 12 CFR 1026.4 of Regulation Z provides, in pertinent part, that, ‘[t]he finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.’
SoLo Tips and Lender Tips were incident to or conditions of the extension of credit by Lenders and therefore represent a cost of the consumer credit extended to borrowers via the SoLo Platform.”
The order states unequivocally that the tips — even if, theoretically, optional — were ‘incident to or conditions of the extension of credit,’ and thus should be included in the finance charge and APR calculation and disclosed to borrowers as required by TILA Reg Z.
Solo Funds, while perhaps the most egregious example of a “tipping” business model, is far from the only fintech that encourages tips or derives revenue from related fees, like membership fees or charges for expedited funding in excess of the actual cost incurred.
Companies that have business models that rely on these sources of revenue should take note — particularly as Connecticut is likely not the only state investigating these types of practices.
Stripe Launches Plaid Competitor
Fintech sure feels dramatic lately — perhaps, with swooning valuations and VCs closing their wallets, everyone is a bit on edge?
Not that Stripe or Plaid, presumably, have any worries when it comes to funding.
Last week, Stripe announced the launch of Financial Connections, a bank account connectivity product that directly competes with…. Plaid!
According to Stripe’s documentation, it leverages banking connectivity platforms MX and Finicity under the hood, though, according to a Stripe employee’s posts on Hacker News, Stripe also has built its own integrations with major banks.
Stripe’s entrance into the banking connectivity isn’t surprising. The capability is supportive of existing Stripe products and services, such as Stripe Treasury, Capital, and Connect. (Alex Johnson and I go deeper on the capabilities and potential target market in the next episode of our Fintech Recap podcast — if you’re subscribed to this newsletter, that’ll be in your inbox sometime next week.)
Plaid founder and CEO Zachary Perret took issue with the launch, suggesting that Stripe’s product manager inappropriately leveraged information gained from interviewing at Plaid and from Stripe RFP processes that Plaid engaged in:
Still, I can’t help but think this kind of argument spilling into public view is a bad look for everyone involved — and the fintech ecosystem as a whole.
El Salvador’s Bitcoin Experiment, ‘Volcano’ Bond Have Few Takers
El Salvador’s millennial President Nayib Bukele is arguably one of bitcoin’s most visible proponents. He pushed through a bill making the cryptocurrency legal tender in the country — despite significant skepticism and opposition from a majority of El Salvador’s citizens.
Then, he proposed issuing so-called “bitcoin bonds” (aka “volcano bonds”) to fund the creation of a bitcoin city at the foot of a volcano, which would include harnessing energy from the volcano to power bitcoin mining operations — though, as Bloomberg’s Matt Levine noted, the bonds were empirically a bad investment.
So! How’s all that going? Turns out, not well.
There have been no takers so far for the volcano bonds. And now, due to the country’s embrace of bitcoin as legal tender, the IMF is reluctant to lend the county any more money. Ratings agency Fitch cut the country’s credit rating to CCC, citing its limited sources of funding.
The yield on El Salvador’s regular old fiat currency bonds has spiked to 24%, suggesting investors expect it will have difficulty making payments and may default.
Meanwhile, adoption of bitcoin among citizens of El Salvador is also… not great?
According to analysis from the IMF, the country spent an estimated 1% of GDP developing and rolling out bitcoin infrastructure in the country, including its buggy Chivo wallet app and physical ATMs.
Now, a new research paper from the NBER is showing that, after collecting a $30 signup incentive, few Salvadorians are continuing to use the app. While some 60% of eligible citizens downloaded the Chivo app, just 20% of that group continued to use the app after cashing out their bonus.
Remittances — long touted as a key use case by bitcoin-advocates — haven’t fared much better. Just 2% of remittances to El Salvador were sent via bitcoin, the paper found.
Catch Me On Last Week’s Fintech Insider Podast
Last week, I was fortunate enough to be invited to join the 11fs crew and fellow guest Julia Ménayas, of French neobank Helios, on 11fs’ Fintech Insider podcast. We discussed and debated recent fintech news, including Stripe re-entering the crypto space, Helios’ recent fundraise, Revolut’s refugee policy change, the launch of new banking-as-a-service platform Column, and more.
Listen via Apple Podcasts or search for “Fintech Insiders” on your preferred podcast app.
FT Partners: Monthly Fintech Tracker
With the interest rates rising, the war in Ukraine, renewed COVID-induced supply chain disruptions in China, and an unexpected drop in US GDP in Q1, some are starting to whisper the “R” word — recession (or, worse, stagflation.)
Public market fintech stocks are down sharply, as is the broader Nasdaq index. And we’re beginning to see layoffs — at directly impacted companies, like Better and Blend, but now also at companies like Robinhood, which trimmed its workforce by 9% last week.
There’s typically some delay between what happens in the public market and the private, but there’s increasingly loud discussion that “winter is coming” to private market fundraising, particularly for large, late-stage rounds, given the IPO window is closed. These sentiments may be beginning to show in the data, with the total amount raised in fintech deals last month beginning to tick down from 2021’s heady numbers.
Other Good Reads
'Buy now, pay later' is sending the TikTok generation spiraling into debt, popularized by San Francisco tech firms (SFGate)
TikTok’s Work Culture: Anxiety, Secrecy and Relentless Pressure (WSJ)
Crypto’s evolution adds new risks to potential rewards (FT)
The Underbanked Triangle (Fintech Takes)
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