Varo Expands Lending With Confusing Line Of Credit Offering
Varo Expands Lending With Confusing Line Of Credit Offering
Chase Announces New Marketing Biz, Empower Acquires Petal, Regulatory Remarks, Fintech Funding Hits Four-Year Low
Hey all, Jason here.
After six weeks away from home, I arrived back in the Netherlands early Saturday morning to a picture-perfect sunny spring day.
Many thanks to everyone who made New York Fintech Week an amazing success, especially Jon Zanoff and the team at Empire Startups, my fellow speakers/panelists across a week’s worth of events — Neepa Patel (Themis), Alex Johnson (Fintech Takes), Riaz Syed (Infinant), Trevor Marshall (Current), Rory O’Reilly (Knot), and Erin Pursell (Visa). Also thanks to Arc and Stripe for hosting an amazing dinner and conversation to close things out on Thursday!
I’m heading (briefly!) to Istanbul this Tuesday through Thursday to speak at an event there and then, I swear, no work travel scheduled til the fall.
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JPMorgan Chase Leverages Transaction Data For New Marketing Biz
Every business with first-party data and somewhere to display them seems to become an advertising business eventually.
Data-rich businesses, both digital and bricks and mortar, including Amazon, Uber, and Walmart, have leaned into the strategy to generate incremental, high-margin revenue.
Leveraging its large customer base to drive marketing revenue isn’t new for Chase. Like many financial services firms, the bank has long offered card-linked offers, which allow users to take advantage of certain promotions by activating them in advance of making a purchase with their Chase credit or debit card.
While the UX of such card-linked offers may be lacking, marketers benefit from the ability to conclusively attribute purchases back to such such campaigns.
The new capability, which stems from Chase’s 2022 acquisition of marketing platform Figg, will enable businesses to target users based on their past purchase behavior. Marketers will be able to analyze the incremental user spend driven by such campaigns, though users’ personally identifiable information will not be shared.
According to Bloomberg, Chase is already working with companies including Whataburger, Solo Stove, Blue Bottle, and Air Canada on creating campaigns using the new platform.
Industry watchers have been quick to point out the irony of launching the new marketing service vs. the position JPMorgan Chase has staked out on user data privacy in open banking — where the bank is seeking to protect its treasure trove of transaction data by limiting third-parties secondary use of consumers’ data, or use beyond what is necessary to deliver the product or service requested and authorized by a consumer.
“Privacy” tends to be something consumers say they care about in surveys, but their behavior in practice tends to say otherwise.
And while Director Chopra and the CFPB have repeatedly railed against “data harvesting” and proposed new rules to classify data brokers as consumer reporting agencies under the Fair Credit Reporting Act, Chase is well-positioned to navigate the existing and any new regulatory requirements that may apply to this new business unit.
Varo Expands Lending With Confusing Line Of Credit Offering
Struggling neobank Varo, the first fintech to be awarded a de novo charter, needs to do more lending. But its recently announced “line of credit” (sort of?), launching this summer, is a bit of a head-scratcher.
Although Varo describes the product as a line of credit with amounts ranging from $600-$2,000, in reality, it functions more like a close-ended installment loan.
While it is legally structured as a line of credit, users must completely repay their first draw in equal, fixed monthly payments over a period of 3-12 months before being eligible to draw additional funds.
Varo also describes the product as having a simple fixed-fee and 0% APR — suggesting the fee, which Axios reports reaches as high as $400 on a 12-month $2,000 line, is fully earned at origination. The full terms and conditions of the product do not yet appear on Varo’s website.
Varo CEO Colin Walsh touted the fee structure as “help[ing] people borrow at a transparent cost.” But structuring the loan as fee-based rather than interest-accruing and disclosing an APR makes it more difficult for users to comparison shop and ensure they’re borrowing in the most cost-effective way possible.
Further, if the fee is fully earned at origination and is not refunded pro-rata for early repayment, as appears to be the case, the effective APR could easily reach into the triple digits. It is fairly common for lower-income / lower-credit score users to frequently cycle small-dollar loans as a month-to-month cashflow management tool, regardless of the actual length of the term of the loan.
Varo does need to take concrete steps to boost its revenue, including by doing more lending. But launching what’s functionally a larger loan amount of its existing Varo Advance product does nothing to address the core problem: that Varo’s typical user isn’t particularly creditworthy to begin with.
Empower Acquires Cashflow Credit Card Petal
The consumer fintech consolidation continues with Empower’s acquisition of Petal Card.
In the past year, Robinhood has acquired credit card startup X1; Tabby, Onyx Private, and HMBradley have pivoted to B2B offerings; and one-time fellow cashflow credit card TomoCredit has pivoted more times than I can count.
Empower partners with nbkc and FinWise to offer budgeting, savings, credit monitoring, cash advances up to $250, and lines of credit up to $400. The company charges users an $8 per month subscription fee. Empower operates in the US and Mexico.
About 80 employees of Petal, valued at $800 million as recently as January 2022, will join Empower as a result of the acquisition. Empower simultaneously announced the acquisition of Cashalo, which offers small loans in the Philippines.
Last year, Petal spun off Prism Data, which productized the cashflow underwriting engine Petal had built to sell to other lenders.
Prism Data announced it had raised $5 million in seed funding last October and boasts over 20 clients and distribution partners, including Plaid, Provenir, and Zoot.
Regulatory Remarks: Hsu at NCRC & Bowman on De Novos, M&A
In remarks Acting Comptroller Hsu made at the National Community Reinvestment Coalition’s Just Economy conference earlier this month, he highlighted progress on reining in overdraft fees, fair lending supervision, access and inclusion for “credit invisibles,” and affordable housing, among other topics.
The OCC, along with pressure from the CFPB, lawmakers, and competition from fintech, has driven a significant reduction in the amount of overdraft-related fees the largest banks collect.
In April 2023, the OCC highlighted elevated risks from banks engaged in “authorize positive, settle negative” and from representing failed transactions, both of which can cause consumers, especially lower-income ones, to incur punitive fees.
Hsu highlighted that overdraft fees charged by OCC-regulated banks have declined by over 40%, from $6.5 billion in 2021 to $4 billion in 2023.
Hsu also used his remarks to touch on the nominal success of Project REACh, including a pilot program in which national banks use deposit account transaction data to qualify “credit invisible” consumers for their first credit cards.
While only 110,000 accounts have been opened through the pilot, Hsu notes that customers’ credit scores 12 months after opening such accounts averaged 680 FICO.
In addition to highlighting progress, Hsu also touched on emerging risks — specifically, AI and fraud. Hsu argues that “[f]airness is not self-enforcing,” meaning it doesn’t just happen on its own.
On AI, he struck a balanced tone, saying that “AI holds both promise and peril,” and that industry stakeholders need to create spaces to “safely explore and develop” its potential.
Hsu linked the topic of AI with fraud, noting a sharp rise in fraud losses faced by consumers in recent years and arguing that fighting AI-driven fraud is likely to require AI-powered solutions.
Bowman On De Novos, Bank M&A
There tends to be a lot of handwringing in the US over the long-term trend of the declining number of chartered institutions, a trend that has numerous underlying causes and dates to the loosening of interstate branching regulations in the mid-1980s.
The near-freeze in de novo bank formation post-2008 crisis has further contributed to the gradual but continuing decline in the number of chartered institutions.
With fewer newly-formed banks to take the place of those that fail or are absorbed through M&A activity, the question of how best to promote competition — and what the “right” number of banks is — remains top of mind.
Federal Reserve Governor Michelle Bowman touched on these hot topics in remarks at a Kansas City Fed conference earlier this month.
Bowman flagged what she describes as an “unmet need” for de novo bank formation as evidenced by the continuing demand for so-called “charter strip” bank acquisitions, in which a buyer acquires an existing bank but repurposes the license for new lines of business, as well as pointing to the continuing shift of activities outside of the banking system and the rise of demand for banking-as-a-service partnerships.
Bowman ascribes some of the uncertainty around the de novo process to shifting — and opaque — regulatory expectations, saying in part, “Even controlling for the variability in business model, the standards and expectations for a de novo application that will be viewed and treated favorably are opaque and may shift significantly over time, even between and among the regulators.”
The lack of de novo creation will, over time, “create a void in the banking system, a void that may contribute to a decline in the availability of reliable and fairly priced credit, the absence of financial services in underserved markets, and the continued shift of banking activities beyond the regulatory perimeter,” Bowman argues.
With regulators actively discussing reform of how bank M&A applications are evaluated, Bowman emphasized that “we should consider whether the regulatory review process is fair, transparent, and consistent with applicable statutes. This should begin with an important threshold question—what are the identified shortcomings with the current process or standards, and are the proposed reforms targeted and effective to address these shortcomings?”
There are, however, competing public policy objectives in considering any reforms to M&A processes. For instance, one federal regulator recently proposed releasing statements explaining what concerns the agency’s board had in the event an applicant withdraws an application (as opposed to the agency declining the application.)
But, Bowman warns, doing so “could put regulators in the untenable position of needing to disclose confidential supervisory information or nonpublic business information about applicants even in the case of a withdrawn application.”
Bowman further emphasizes the need to apply review standards that are consistent with the statutory framework and to improve the speed and timeliness of regulatory decision making.
Fintech Funding Hits Four-Year Low in Q1’24
CB Insights’ latest State of Venture report pegs global funding to fintech startups at $7.3 billion in Q1 — a four-year low. FT Partners monthly recap (image below) shows a slightly more robust $8.9 billion for the same period.
While venture funding to fintech startups is worth keeping an eye, these aren’t numbers that keep me up at night — capital is an input and, I think it’s safe to say, the glut of capital we saw deployed in 2020-2022 led to significant value destruction by funding numerous copycat startups, enabling uneconomical business models, and empowering undisciplined founders to spend without consequence.
The right question is, how much capital can fintechs absorb and use productively? And it seems the market is still adjusting to determine where that equilibrium is.
Other Good Reads
New York Fintech Week Reflections (Fintech Takes)
Brazil: The country of Fintech’s Future (Fintech Brainfood)
Halving A Bad Time (Citation Needed)
Listen: BaaS Consent Orders, Trade Groups v. Colorado on DIDMCA (Fintech Recap)
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