Nearside, Recently Acquired, Abruptly Shuts Down
Hey all, Jason here.
To all my American readers, I hope you had an excellent Thanksgiving and hopefully enjoyed a couple days off. While it isn’t a holiday here in the Netherlands, we celebrated last night hosting a traditional dinner for some friends — I even made a whole turkey (brining! game-changer!)
A reminder that there’s still time to take advantage of a Black Friday/Cyber Monday discount — if you become a paying subscriber by end of day Monday, you’ll enjoy 20% off, forever!
💵 Fraud Trends & Predictions for 2023 🔮
Sponsored content: Today’s fraudsters are more well-funded, technologically savvy, and agile than they've ever been before.
So how are the top risk & compliance teams preparing for fraud in 2023?
Join us for a live webinar Dec 15, where several industry-leading voices will present their insights about the biggest fraud trends for 2022 and their predictions for where fraud is headed in 2023.
Frequent readers will know I typically write about whatever topics have caught my attention in a given week — with themes like consumer protection/UDAAP, banking-as-a-service, neobanking, consumer credit, and regulation making regular appearances.
This week, I decided to turn the tables, and solicited reader questions on Twitter and LinkedIn — thanks to everyone who submitted one! I’ve done my best to answer nearly all of them, though a couple didn’t make the cut due to time and space constraints — next time!
Reggie asks: how do you think the OCC attention on fintechs plays out over the next year?
Given what we’ve seen in 2022, with general guidance and Blue Ridge specifically, this is a very timely and pertinent question. The Treasury Department report published earlier this month specifically “recommends that fintech-bank partnerships be subject to enhanced supervision.”
So I think it’s safe to say that it is rather unlikely that the formal agreement reached between Blue Ridge and the OCC will be the only enforcement action stemming from regulators’ increased focus on bank/fintech partnerships.
While the OCC, which oversees nationally chartered banks, has been far more active than the FDIC, the Fed, and state banking regulators, I would expect to see similar activity from them in the coming year.
Although the ongoing blowups in the crypto ecosystem haven’t spread to the traditional banking system, there are likely to be questions about banks that provided services to crypto exchanges like FTX and BlockFi, among others.
What partner banks, BaaS platforms, and fintechs should hope for is clear, transparent guidance on what is expected from each party from a compliance perspective around key risk areas, like BSA/AML, information security, IT, fair lending, consumer protection, and so on.
Unfortunately, what seems more likely to happen is “regulation by enforcement,” where we see a series of enforcement actions from various regulators, and stakeholders are left to interpret and respond to those on an ad hoc basis.
Javier asks: after Blue Ridge, which other bank(s) in your opinion do you think will get “scolded” by the banking regulators on their bank and fintech programs?
This is designed to be a spicy question… and I suppose I’ll take the bait (though my answer shouldn’t be a surprise to frequent readers of this newsletter).
I’ll start by saying that essentially everyone is at risk, as we have yet to hear what the “right answer” is — and, indeed, it could vary from one banking regulator to another.
While I hope this isn’t the outcome, it’s entirely possible the OCC has a different point of view on what is and is not OK in bank/fintech partnerships vs. the FDIC or state banking regulators.
With that said, I’d argue that banks that have been in the partnership game for a long time — names like Bancorp and MetaBank (now known as Pathward) — in theory should have a better handle of managing compliance risk in these kinds of relationships.
That said, Bancorp has previously had issues that resulted in a consent order and just made the transition from a state charter to a national one — meaning it is now under the supervision of the OCC.
I’ve flagged potentially problematic Bancorp partnerships in this newsletter previously, specifically, the confounding decision to partner with LendUp/Ahead and Kinly’s troubled rollout that left users unable to access their funds.
State chartered Evolve Bank & Trust, given the sheer volume of fintech partner programs it supports, is also frequently mentioned as being a potential target of heightened regulatory scrutiny. It partners with two BaaS platforms — Synapse and Solid — as well as directly supporting fintech partners. Evolve has also taken on some questionable clients, including now-bankrupt FTX and “community lender” SoLo Funds, which has faced multiple state regulatory actions.
Nationally chartered Column, which officially launched earlier this year, has also faced its own challenges. Nearly all of the clients it touted when it launched have transitioned to other bank partners or shut down altogether.
Francisco asks: who’s the most underlooked [ignored] consumer fintech?
This is an interesting question, given how aggressively fintech companies have leaned in to narratives of “democratizing” financial services and “expanding access and inclusion” across a variety of products — bank accounts, credit, investing, etc.
Lower income/income volatile, thin file/no file, and consumers with a poor credit history were obvious first segments for startups to address.
Those with little or poor credit history have historically lacked access to affordable credit.
Lower income consumers saw “free” checking accounts become anything but in the wake of Dodd-Frank and the Durbin amendment, which contributed to banks amping up overdraft, NSF, minimum balance, and monthly maintenance fees to make up for lost interchange revenue — fees disproportionately borne by account holders least able to afford them.
The result was an explosion of fintechs addressing these users’ pain points by developing fee-free banking products, alternative approaches to underwriting, and novel credit and credit-adjacent products, like no-fee overdraft and earned wage access.
Some of this “innovation,” however, may not be accompanied by sustainable business models. Neobanks like Chime and Varo are inarguably more consumer friendly than the fee-laden accounts those consumers historically have had access to at Chase or Wells Fargo. But neobanks serving these segment are highly dependent on interchange income — a model that increasingly does not seem viable.
On the credit and lending side, the biggest unknown is how these novel products and alternative underwriting methodologies will fare through a credit cycle (and with increasing regulatory scrutiny.) Is cashflow-based underwriting sufficiently predictive as consumers face rising inflation and interest rates and, potentially, unemployment? Will calling charges “tips” and “expedited funding fees” instead of “interest” and “finance charges” be defensible?
To get back to Francisco’s specific question, after spending so much time and capital building products for lower income and credit-constrained consumers, it is difficult to argue that it is a segment that has been ignored.
Even relatively smaller segments, like those who have recently immigrated to the United States or those needing to send remittances have arguably been reasonably well addressed with products like Stilt (though it appears to have shut down), Tomo, Wise, and Xoom (now part of PayPal). Oportun is working to better meet the needs of Spanish language consumers in the US.
If I had to pick a consumer segment I rarely hear mentioned in fintech, it would be consumers with disabilities. Particularly as financial services migrate increasingly to mobile phones — and with human customer service often difficult to access — I struggle to think of a fintech that is working to address the unique challenges of consumers facing various physical or cognitive impairments.
Alex asks: What do you think of the future prospects of niche neobanks focused on specific customer segments? Will they survive? If yes, how might they evolve?
I’ll say that I’ve generally been pretty skeptical of “affinity” neobanks.
While the explosion of fintech “infrastructure,” including Banking-as-a-Service providers, have made it faster and cheaper than ever to launch banking products, for the most part, affinity neobanks lack differentiation.
Rather than offering products and services that address unique challenges of the group they seek to serve, most of these niche neobanks seem to be primarily making a marketing play — assuming it will be cheaper to acquire customers in their specific segment.
Also, some players in this space have faced execution challenges — earlier this year, I documented challenges facing Kinly, a neobank for black Americans, where users had difficulty opening new accounts, didn’t receive debit cards in a timely fashion, and were unable to transfer money out of their accounts for months.
However, we are beginning to see some evolution here. Daylight, focused on the LGBTQ+ community, recently announced its forthcoming Daylight Grow service. Grow will offer family creation planning, including connecting users to non-financial services like legal advice, IVF, surrogacy, and adoption services.
Offering a bank account and debit card is table stakes; the opportunities for niche neobanks lie in offering products and services tailored to their specific needs — even when those may fall outside the traditional scope of financial services.
Brenda asks: In your opinion, how do crypto exchanges build trust moving forward?
This is the many million dollar question facing the exchanges still standing, like Coinbase and Binance.
Starting with a slightly higher level view, I see two main groups in the “crypto” ecosystem — which, itself, encompasses a wide array of stakeholders, technologies, projects, and use cases.
The first group wants to see mass adoption — a crypto wallet for every American, bitcoin in every 401(k) plan. But, getting there will require everyday Americans to feel safe “investing” in crypto assets. That’s a tall order, given the sectors long history of hacks and scams and, more recently, high-profile blowups that have left users unable to withdraw their funds and unlikely to ever see them again.
Despite the anti-centralization and anti-bank narrative coming from some corners of crypto world, it is structures like regulation, compliance, the central bank as lender of last resort, and deposit insurance that engender consumers’ trust in the traditional banking sector.
Even if consumers themselves don’t know or even like the government or central bank, the overwhelming majority do feel safe keeping their cash in a US bank — because bank failures in the United States are exceedingly rare, and, when they do happen, most all depositors are made whole.
Crypto evangelists who want to see mass adoption certainly understand this.
That’s why you saw all manner of crypto sites portraying having registered as a money services business as being “regulated by the US government” or misleadingly claiming consumer funds were FDIC-insured — these sites were trying to gain legitimacy by deceptively claiming some kind of government oversight or backing.
This camp will, presumably, advocate for their preferred version of regulation that would enable crypto to continue its push into traditional banking and investment spaces.
On the other hand, there is a group that views succumbing to government regulation — and the necessary centralization that likely requires — as antithetical to the mission and ethos of crypto.
Those in this camp are likely to resist oversight, particularly from US regulators like the SEC, CFTC, and banking regulators (OCC, FRB, FDIC). Instead, they’ll continue to seek out crypto-friendly offshore jurisdictions, like the Bahamas or El Salvador, and avoid centralized intermediaries and exchanges in favor of the defi ecosystem.
To try to more directly address the question: centralized crypto exchanges can attempt to restore trust by agreeing to the kinds of regulation and oversight that traditional exchanges, like the NYSE or Nasdaq, have long had to comply with.
Further, “exchanges” should work to disaggregate the services they offer. While FTX was ostensibly an exchange, it was also engaged, itself and through Alameda, in numerous other activities, including market making and proprietary trading — meaning users of FTX were exposed to massive but invisible counter-party risk.
Niall asks: What are the prospects for ‘climate fintech’?
I suppose this depends on what we mean when we say “climate fintech.”
If we’re construing this narrowly to offerings like “green” neobank Aspiration, I’m not particularly bullish on the prospects. While Aspiration is positioned as a fintech, consulting and selling carbon credits are far bigger drivers of its business model than “banking” services.
If we’re taking a wider view on what “climate fintech” encompasses, then I’m cautiously optimistic. While I’ll admit that areas like ESG scoring and carbon account and trading are well outside my areas of expertise, they have the potential to be key pieces of (gulp) infrastructure in how we address climate change and climate risk as a society.
A piece of this puzzle I’ve mentioned before that I think has gone under examined is how climate change and the impacts we are already feeling today are impacting consumers’ financial situation.
We are already facing dramatically higher risk from wildfires, stronger hurricanes, flooding, drought, and extreme heat. Areas of the Southwest are already having difficulty accessing reliable water supplies. Florida’s homeowners’ insurance market is already on the brink of collapsing with additional government support.
I’m not saying that finance and fintech can solve these problems — but certainly they can incorporate and attempt to address the risks consumers face because of these problems.
Zach asks: can you explain 2-3 idiosyncrasies of the US banking system vs. other leading systems and how they affect US market structure?
The two that come immediately to mind are somewhat interrelated.
First: interchange. Specifically, debit interchange rates for “Durbin-exempt” banks — those with less than $10 billion in assets. Debit interchange for most transactions in the UK and EU is capped at 0.20% — compared to, on average, 1.19% for exempt cards in the US.
This has helped power an explosion of startups offering debit and, more recently, credit and charge card products.
The second is that the US hasn’t created any new types of licensing for “neobanks” or payments — like the “e-money” or payment services licenses that exist in other countries. The result is that fintechs that want to offer regulated products must partner with a bank to do so. The favorable interchange rate for banks with less than $10 billion in assets makes them the preferred partners for many fintechs — helping to drive the boom in what we’re now calling “banking as a service.”
Keith asks: what do you think the over/under is for number of banks/credit unions in the US by 2030?
While I’ve accepted as fact that the number of licensed banks and credit unions inevitably will continue to decline, I haven’t thought about what this specific number might look like at the end of the decade.
We’ve seen a steady decline in the number of banks, particularly since the mid-1980s, driven by ongoing consolidation.
The number of licensed credit unions over time shows a similar trend.
I’ll operate from the assumption that the forces that have driven the trend to date will generally continue, but ask — what forces might influence the rate of decline in the number of licensed banks and credit unions in the US?
The ongoing shift to digital distribution has already contributed to a decline in branches and, by extension, number of banks. But, as of 2021, the US still has approximately 72,000 bank branches.
The US is, arguably, “overbanked” both in number of licensed banks and certainly in the number of branches.
As consumers continue to shift from branch interactions to digital channels, the economic case for maintaining 72,000 branches and 8,000+ licensed banks and credit unions — which offer largely commodity products — will continue to erode.
Instead, we’re likely to see the banking value chain disaggregated, somewhat like it has in the mortgage space — indeed, we’re already seeing this, with the rise of “neobanks,” bank/fintech partnerships, and banking-as-a-service providers.
While the largest banks — your Chase, Bank of America, Wells Fargo — will likely survive and look mostly like they do today, the smaller banks that survive are likely to take on new roles as behind-the-scenes service providers.
Consumers will interface with a seamless front-end “fintech” app that leverages multiple underlying banks to power a variety of products: spending, saving, borrowing, investing.
The upshot of this is that the market will need far fewer licensed banks than it does today.
What forces might work on the opposite direction to slow the decline? Political will and regulation — though this tends to vary based on what party is in power. The current administration has expressed strong support for encouraging “competition,” including in the banking sector. One way this has taken shape is through support for smaller, local banks and “relationship banking.”
Still, it will be hard if not impossible to turn back the clock. The number of licensed banks in the US makes no sense in an era where geography is no longer a constraint on acquiring customers and distributing products.
I realize this has been a long-winded non-answer… looking at banks specifically, the number of chartered banks has been shrinking by about 200 per year over the last decade — there were 6,279 banks in 2011, which had declined to 4,236 in 2021.
A lazy extrapolation would put us at about 2,400 banks in 2030. I’m less familiar with dynamics in play for credit unions, so I’ll take a pass on that one!
“Rogue CFPB” asks: an annual list of the worst UDAAP issues you saw during the year?
This question is tailor-made for me — though I’ll answer a slightly different version, which is a handful of my “favorite” UDAAP risks I’ve seen this year, if there is such a thing.
Crypto-world was simply chock-full of potential UDAAP problems, with my favorite being services that presented to users like they were a standard bank account with funds held in “fiat” US dollars, when, in reality, the service was converting them into some type of stablecoin and lending them out to generate yield.
Companies offering these products often made misleading claims or presentations that suggested they were FDIC insured or described themselves as being “government regulated” as a function of being money services businesses.
Examples of the genre include Monie, Linus, and Stablegains, all of which have shut down.
Another perennial favorite — “free” cash advance apps that claim 0% APR but “encourage” tipping and carry hefty expedited funding fees.
The most well known in the space are Dave and MoneyLion, though imitators abound. Honorable mention to MoneyLion for its $19.99 per month “membership fee” for its credit building loan product. SoLo Funds also deserves a mention, for adding an optional “donation” to the company on top of a “lender appreciation tip” in its peer-to-peer payday lending app.
And a last-minute addition — Tellus, which I covered recently — for positioning its product as if it were as risk-free savings account, when, in fact, the company deploys users’ funds to originate risky mortgages.
A LinkedIn reader asks: unbanked, credit invisible, and ‘underserved’ consumers: what technology or data do you think is needed to disrupt the traditional way of evaluating risk? What do you see as the biggest barriers for companies to push into these customer segments?
From a technology standpoint, I think the kinds of cashflow-based underwriting enabled by open banking have been a game-changer in trying to serve thin file/no file borrowers — though we still need to see how they perform through the cycle.
It’s less clear to me that cashflow underwriting is a solution for applicants with a demonstrated history of not paying debts on time. For these consumers, earned wage access and the emerging capabilities around “paycheck-linked lending” provide opportunities to access more affordable credit, though they come with risks as well.
This might be a bit of a provocative comment, but moving beyond an arbitrary 36% APR cap would expand access — with the obvious tradeoff being that it would be at a higher interest rate.
“Unbanked” — consumers with no bank account — isn’t a particularly large segment in the US. Something like 95% of households have a bank account and, of those that don’t, about half say they don’t want one. This isn’t the case many developing markets; for example, in Mexico, something like 60% of adults do not have a bank account.
Daniel asks: Will RTP be ready by 2030?
Phil asks: How have VC exit strategies been affected by the higher rates environment? How will the VC exit strategy changes impact their new KPI’s or ‘features’ for both valuation and performance of their investments?
I wouldn’t necessarily consider myself an expert when it comes to the VC mindset, but I’ll try my best…
I think the biggest factor here is whether or not we see the return of crossover investors and mega-sized late-stage funding rounds. Over the past 10 or 15 years, companies have been able to stay private (and loss-making) far longer than what was historically the norm. This was enabled by the flood of VC capital, which, in turn was spurred on by rates being near 0% for the better part of 15 years.
If you believe we’re moving into a “new normal” where rates are higher for longer — particularly if inflation proves harder to beat than the current conventional wisdom suggests — then that unlimited cheap capital is unlikely to return in the foreseeable future.
That means, presumably (hopefully?) investors become more selective, do better due diligence, more tempered valuations, and, perhaps, companies moving into public markets earlier in their lifecycles.
Nearside, Acquired by Plastiq, Tells Customers It’s Time to Go
Small business neobank Nearside, formerly known as Hatch, was acquired by business payments platform Plastiq earlier this month.
Now, the company has shut down its banking products, citing “developing macroeconomic conditions” in an email to its users informing them their accounts would be terminated effective immediately:
Other Good Reads
Winning at Embedded Finance (Fintech Brainfood)
A Heaping Plateful of Fintech Takes (Fintech Takes)
Crypto Firm FTX’s Ownership of a U.S. Bank Raises Questions (NYTimes)
Contact Fintech Business Weekly
Looking to work with me in any of the following areas? Email me.
Fintech advising & consulting
Sponsoring this newsletter
News tip or story suggestion — reach me on Signal at +1-316-512-1571
Early stage startup looking to raise equity or debt capital