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What Happens When A Neobank Goes Bankrupt?
As LendUp Liquidates, Kinly Acquires Assets From Its Neobank, Ahead Money
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What Happens When A Neobank Goes Bankrupt?
After an incredible bull run in fintech startups powered by ultra low interest rates and cheap, plentiful capital, many companies are getting an overdue reality check. Investors’ priority has abruptly shifted from “growth at all costs” to “do the economics work”?
The impact of this shift has only begun to be felt across the ecosystem. We’re likely to see more M&A activity and, yes, outright failures as startups struggle to raise new capital.
Which begs a question — what happens to the customers of failed fintech startups?
This is a particularly important question for neobanks. Companies like Chime, Varo, and Current have aggressively courted users — many of whom are lower income. They’ve incentivized users to make the services their “primary” bank account, with features like early direct deposit and no-fee overdrafts.
Customers use these accounts to pay rent, buy groceries, put gas in their cars, etc. — and many would have few other ways to pay, if the funds in their neobank account were inaccessible.
That makes it all the more important that neobanks — and their banking-as-a-service providers and bank partners — have plans in place to ensure customer funds are protected and users have uninterrupted access to their funds and accounts in the event the business needs to be wound down.
FDIC insurance protects deposits from a failure of the bank partner holding them, but the failure of a consumer-facing neobank or BaaS platform could nonetheless result in disruptions to consumers’ access, if not handled methodically.
This isn’t purely theoretical — a number of neobanks have already wound down. In Australia, Xinja, which had a full banking license, shut down in late 2020, and Volt ended operations earlier this month. UK neobank Dozens, operating on an e-money license, also called it quits this month.
When BBVA decided to shut down neobank app Simple and move the accounts to BBVA proper, the account transition process went awry — leaving users unable to access their accounts.
In perhaps the most extreme related example, customers of prepaid provider RushCard were unable to access their funds for days during a botched transition to a new processor. RushCard’s parent company was ultimately fined $13 million, with the director of the CFPB at the time, Richard Cordray, warning (emphasis added):
“Companies will face the consequences if consumers are denied access to their money. All of this stemmed from a series of failures that should have been anticipated and prevented.”
LendUp Enters Liquidation
[disclosure: I worked at LendUp from 2014-2016 and held common shares in the company]
LendUp, a once-highflying fintech “alternative” to payday lending, has quietly begun liquidating its remaining assets — including its neobanking subsidiary, Ahead Money.
The company was once a VC darling, winning investment from a virtual who’s who of top-tier firms like GV (Google’s venture arm), Andreessen Horowitz, Kleiner Perkins, and Y Combinator.
But a lack of focus on compliance led to early missteps — and regulatory actions from the CFPB and the California DBO (now the DFPI). Regulators argued LendUp violated multiple consumer protection laws, including by misleading its customers about how its products worked, understating the APR, and failing to report credit information as promised. The company ultimately entered into consent orders and paid a total of $6.3 million in fines and restitution to settle the matter.
Though the consent order appeared to put the matter behind LendUp, problems at the company seem to have continued. In late 2020, the company was again cited by the CFPB; this time, for violations of the Military Lending Act. The company agreed to a $1.25 million settlement.
The final straw came towards the end of 2021, when the CFPB sued LendUp for violating its 2016 consent order.
Within a few months of filing the suit, LendUp agreed to shutdown its loans business (though it had ceased originating new loans months earlier), cease collecting on any outstanding loans, and not to sell its trove of consumer data.
Company Seeks to Keep Liquidation Out of Public Eye
With the lending business shuttered, LendUp appeared headed for imminent bankruptcy.
But instead of a typical bankruptcy filing — which would make details of the company’s failure public — LendUp opted for an “Assignment for the Benefit of Creditors,” (ABC) a non-judicial alternative to a public bankruptcy.
LendUp CEO Anu Shultes signed the paperwork to move forward with the “ABC” liquidation process on June 24th, 2022.
According to the American Bar Association, this approach to liquidation can be the “most advantageous and graceful exit strategy,” especially when the goals are (emphasis added):
“(1) to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor and
(2) to wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management.”
What About LendUp’s Neobank, Ahead Money?
LendUp announced its neobank subsidiary, Ahead Money, in December 2020, and it went live the following May. The offering leveraged partner Bancorp and offered a standard array of neobank features, like two-day early direct deposit and up to $100 of no-fee overdraft.
Given its history of regulatory issues and consumer protection violations, it’s surprising a bank partner would be comfortable working with LendUp and its new subsidiary. While LendUp’s exact financial condition at the time is unclear, the company hadn’t announced significant equity funding since August 2016 and had ceased making new loans sometime around the first half of 2021.
At the time Ahead launched, Bancorp declined to answer questions about what due diligence Bancorp had conducted, whether it had assessed LendUp/Ahead’s solvency, and how Bancorp would protect Ahead’s consumers and ensure they had continuous access to their funds in the event that Ahead failed.
Within a year of launching, Ahead informed customers via email that a “new app was coming,” which appears to have been LendUp preparing to shut down and liquidate its remaining assets — and transfer Ahead’s users to another company.
Neobank Kinly (formerly First Boulevard) Appears to Have Acquired Assets and Customers from Ahead
The email from Ahead telling users to expect a new app included its phone number — 833-33-AHEAD.
When dialed this week, callers would be greeted with a message stating:
“Welcome to the automated Kinly customer service line. Please be advised that the transfer funds feature is currently not available. We are working diligently to resolve this issue. If you are attempting to transfer funds, please check back later for availability. Thank you for your patience.”
The same phone number — 833-332-4323 — also appears on Kinly’s website.
A Kinly customer service agent reached at that number said that Ahead had “rebranded its name to Kinly.”
The implication that Kinly acquired some of the assets of Ahead — and that the company is blocking users’ fund transfers — is borne out by comments left by users in reviews on Apple’s App Store and Google Play:
Frustrations at not being able to transfer funds also popped up on social media:
Multiple new users attempting to open accounts complained of not being able to do so, encountering “errors” when attempting to verify their information:
One Kinly user shared details of their experience, including being unable to spend or transfer funds deposited in their Kinly account (emphasis added):
“I made an account around 6/13. I have had deposits to go into that account since then. Luckily it wasn’t my full check but just a portion. Iv had to order cards 2 times because I have yet to get my debit card from them.
Because of that issue I haven’t been able to use any of my money in that account. And since I can’t transfer funds it’s stuck there. If I close the account it will take 3 to 5 weeks to get the check in the mail.
So for over a month I haven’t been able to use any of my money that’s in that account. When I called customer service, it took 4 or 5 calls and speaking to managers for them to finally tell me that the people that emboss their cards is running behind. There was no email or communication to inform me of this issue. This is by far the worst experience with any bank Iv had”
Root Cause Of Kinly’s Problems Unclear
While it’s not entirely clear what is happening here, industry experts suggested Kinly could be experiencing some type of fraud attack.
Freezing money transfers and blocking users from opening new accounts could be emergency stop gaps while the company investigates and attempts to solve any problems. Kinly has pushed five updates to its iOS app in the past month.
Still, initial user reports on social media and app store reviews date to early June — as of this morning, Kinly’s phone system is still warning users that the ability to transfer funds isn’t working.
Another possibility is that the money transfer and account opening issues are tied to a systems integration or migration — potentially tied to the Ahead acquisition.
Kinly originally planned to use the Central Bank of Kansas City (CBKC) as its banking provider. But about four months ago, the company changed direction, and ultimately partnered with Bancorp instead.
It’s unclear if this decision had anything to do with Kinly acquiring assets from Ahead Money — which also utilizes Bancorp as its banking partner. Ahead’s parent company, LendUp, and Kinly also share an investor in common — Kapor Capital.
Kinly “officially launched” this June 13th, though the company said it already had 22,000 “beta” users at that time. The complaints about problems opening accounts and transferring money began popping up around the same time.
Ahead, Kinly Sites Don’t Mention Customer Transition, Blocked Transfers
As of today, Ahead’s website is still operational, and makes no mention of customers being transitioned to Kinly. There is no FAQ for customers who may experience trouble, nor is there any contact information on Ahead’s website — no email, no phone number.
If users try to open the Ahead app on their phone, they’re greeted with a notice that an update is required. But if they click OK, they’re told the app is not available — it has been removed from the app store.
Likewise on Kinly’s website, there is no mention of Ahead Money. No FAQs for customers who transitioned from Ahead to Kinly.
Nor is there any mention of or help for users experiencing problems trying to open a new account or existing customers trying to transfer money.
Accounts May Have Been Closed Without Notification Or Refund
While some Ahead users seem to have successfully transitioned their accounts to Kinly, my Ahead Money account was not.
While I received an email from Ahead on May 2nd that a “new app” was coming, I received no subsequent communication from Ahead, Kinly, or Bancorp.
When I was unable to access my account through Ahead’s app, I called its customer service number — now answered by reps that identified themselves as working for Kinly — and I was told my account had been closed (without any notice), though they confirmed it did still show a positive balance.
The rep said there was no reason noted for the closure, but assured me they would escalate the matter to a “higher up at the client,” and would get back to me in 1-2 business days. I have yet to hear back or to receive the funds from the account.
It’s unclear how many of Ahead’s accounts may have been closed without notifying account holders or returning their funds.
Bancorp Should Have Known the Risks
It’s ultimately Delaware-based Bancorp, overseen by state banking regulators and the FDIC, that bears regulatory responsibility here.
Ahead and Kinly are, technically speaking, vendors of Bancorp. As such, they presumably would have gone through a third-party risk management due diligence process at the outset and be subject to ongoing compliance monitoring and obligations.
The kinds of due diligence checks banks entering these types of partnerships are advised to carry out include examining a potential partners’ business experience and qualifications, financial condition, legal and regulatory compliance, risk management and controls, information security, and operational resilience.
Banks entering such partnerships also typically evaluate whether the partner’s “proposed activity can be implemented in a safe and sound manner, consistent with applicable legal and regulatory requirements.”
How Ahead could have passed such diligence checks is unclear. Ahead’s common ownership with LendUp, with its history of compliance failures and questionable financial condition, should have been an immediate and serious red flag to Bancorp.
Validates Regulators’ BaaS Concerns
These developments come on the heels of escalating scrutiny of “banking-as-a-service” business models.
Ahead’s failure — within about a year of launching — and Kinly’s blocking of users’ ability to transfer funds seem like the exact situations banking regulators are trying to avoid.
Not only do these situations bring into question banks’ ability to oversee such relationships, they expose real, everyday, often vulnerable consumers to material harms.
Representatives for LendUp/Ahead Money, Sherwood Partners (which is managing LendUp’s liquidation), Kinly, and Bancorp did not respond to requests for comment on this story.
Other Good Reads
Is Selling Shares In Yourself The Way Of The Future? (The New Yorker)
The Aging Student Debtors of America (The New Yorker)
An Apple Bank Account? (Fintech Takes)
Neobanks Struggle for Profits as Funding Shrinks (Protocol)
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