What OppFi's $2.4m Settlement Means For Bank/Fintech Partnerships

CFPB Says Banks Have "Deep Dependence" on Overdrafts, Nubank Trims Valuation Target

Dec 05, 2021

Hey all, Jason here.

I hope this week’s newsletter finds you well! I’m finishing this up in the departure lounge of a small airport in Oaxaca. I’m heading to Mexico City before continuing on to the US tomorrow. The past week here was a great opportunity to *try* to unplug a little and recharge as we head into the holiday season.

Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday:

Subscribe or Upgrade to Paid

Update: Fintech Meetup, March 22-24 (Online)

Sponsored content: No, it's not too early to start thinking about 2022 already. If part of your plan for next year is meeting new partners and customers across fintech and banking, then Fintech Meetup is the can't-miss event. Like its 2021 inaugural edition, next year's event will be completely online, with an intuitive platform enabling you to easily identify and get meetings with the people most relevant to you -- including senior execs and decision makers. All meetings are double opt-in (you both swiped right!) so there’s no wasted time.

Now taking place March 22 - 24, 2022, Fintech Meetup will facilitate 30,000+ meetings for more than 3,000 participants. Qualifying startups can get special startup rate tickets, qualifying banks and credit unions are eligible for FREE tickets.

Learn more about the event, a limited number of sponsorship opportunities, and get your tickets here:

Learn More & Register

OppFi Pays $2.4 Million to Settle Charges It Mislead, Overcharged DC Borrowers. What Does It Mean for Bank/Fintech Partnerships?

Last week, online lender OppFi reached an approximately $2.4 million settlement in a case brought by Washington, DC’s Attorney General. In DC, OppFi, together with its bank partner FinWise, a Utah state chartered bank, offered loans at APRs up to 160% APR — well in excess of DC’s 24% usury cap.

The AG’s key argument in the original complaint was that OppFi, not its bank partner, was the “true lender,” and thus operating in DC without proper licenses and in violation of the 24% usury cap.

The complaint stated (emphasis added):

“OppFi is the true lender of OppLoans. OppFi has the predominant economic interest in OppLoans, bears the risk of poor loan performance, and funds the expenses for the provision of the loans.”

and continued (emphasis added):

“FinWise’s risk and reward in conjunction with these loans is minimal. Both FinWise’s fees and its expenses are capped under its agreements with OppFi. OppFi’s assumption of the risk and purchase of the receivables is guaranteed through their agreements with FinWise”

Per the terms of the settlement, OppFi is required to:

“Pay a total of $1.5 Million in restitution to refund impacted District consumers: The funds will compensate District consumers who paid interest on their loans in an amount greater than they would have paid had the interest due on any loan been calculated at a 24% APR.
Pay a total of $250,000 to the District.
Waive over $640,000 in past due interest owed by District consumers who took out loans from OppFi: OppFi will be immediately providing this debt forgiveness to District consumers that paid interest over what OppFi was legally permitted to charge.
Follow District law that protects consumers: OppLoans will not on its own, or working with third parties such as banks, engage in any act or practice that violates the CPPA in its offer, servicing, advertisement, or provision of loans to District consumers.
Cease charging rates above the District’s legal cap: OppLoans will not provide loans to District consumers at an interest rate above 24% APR, the cap in the District.
Accurately represent its company to consumers: OppLoans will not represent that it is permitted to offer loans in the District without possessing any required District money lender license.”

“Rent a Bank” Argument Is A Means to an End

States can’t do anything about the interest rate preemption rights that banks like FinWise enjoy, and they know it. FinWise could begin offering loans at 160% in DC tomorrow directly, and there’s little the AG could do to stop it.

And so jurisdictions that are opposed to certain products — typically, credit with rates higher than 36% APR, are deploying alternate approaches to discourage companies from offering them.

And, in this case, it worked. Rather than engage in a lengthy legal battle, particularly for a relatively small market, OppFi paid to settle and ceased operating in DC.

According to an OppFi spokesperson (emphasis added):

“Although OppLoans denies the allegations in the complaint filed by the District of Columbia and denies that it has violated any law or engaged in any deceptive or unfair practices, this matter was resolved to avoid the expense of protracted litigation.”

The case may be settled, but the question of who is the true lender in bank/fintech partnerships is not

Arguably, the settlement increases uncertainty for fintechs operating under this model. This is particularly true for those offering products at APRs in excess of a given state’s usury limit — rates that vary considerably by jurisdiction.

Is This A Win for Consumers?

DC’s case here was supposedly about “consumer protection.” So, are consumers better off with OppFi no longer offering loans to DC residents?

Much of the discussion around this question tends toward the ideological, with consumer advocates’ narrative grounded in “protecting borrowers from debt traps”, while industry advocates argue higher APR products expand “access, inclusion, and choice.”

Reality is more complicated; it depends on when, how, and why consumers are borrowing, and how their financial circumstances evolve over time. Evidence of the impact of availability of small-dollar loans on financial outcomes is mixed.

A borrower who was using a 160% APR product from OppFi won’t magically qualify for a 24% loan now that the company has stopped operating there; instead, they’re likely to turn to other forms of small-dollar credit, which may not carry the same disclosures and consumer protections as a loan: buy now, pay later, overdrafts, cash advances (eg Dave, MoneyLion), earned wage access, tribal lenders, etc.

Support this Newsletter — and Financial Health Non-Profits

For just $15 per month, you can support independent fintech journalism — I’ll also be donating a portion of revenue to non-profits focused on improving financial health, access & inclusion.

The first recipient will be the Mission Asset Fund, which will receive 15% of all subscription revenue received through December 31:

Upgrade to a Paid Subscription

Capital One To Stop Charging Overdraft Fees as CFPB Warns on Some Banks’ “Deep Dependence”

Capital One is the latest — and largest — bank to eliminate overdraft and NSF fees on consumer checking accounts, a policy change which will take effect next year. It joins a string of banks that have developed features or changed policies to help users incur fewer overdraft fees — or eliminated them altogether.

Capital One customers will still have the ability to opt-in to overdraft protection service, which will be free. Qualification will be based on deposit account activity, like a regularly recurring direct deposit.

According to CEO Richard Fairbank, most customers will qualify:

“We expect the vast majority of current bank customers, as well as the vast majority of overdraft users, to be eligible for free overdraft protection. The same is true for our low and moderate income customers.”

Capital One’s decision to eliminate the fees will cost it about $150 million in revenue per year.

CFPB Describes “Deep Dependence” on Overdraft Fees

As more banks are jettisoning overdraft fees, regulatory attention continues to swirl. Last week, the CFPB released a pair of reports on overdraft practices.

According to the press release (emphasis added):

“Banks continue to rely heavily on overdraft and non-sufficient funds (NSF) revenue, which reached an estimated $15.47 billion in 2019, according to research released today by the Consumer Financial Protection Bureau (CFPB). Three banks—JPMorgan Chase, Wells Fargo, and Bank of America—brought in 44% of the total reported that year by banks with assets over $1 billion.”

While it’s true that JPMorgan Chase, Wells Fargo, and Bank of America collect a large proportion of industry-wide fee revenue, it comprises a small proportion of those banks’ operating revenue — only about 2-4% — hardly “deep dependence” on the fees as a revenue source:

The reports analyze fee revenue coming from overdraft/NSFs, monthly service fees, and ATM fees. “Reliance” is defined as the proportion of overall fee revenue coming from overdrafts/NSFs (emphasis added):

“In this report, we consider how these three types of fees (which we refer to collectively as “listed fees”) have evolved since banks with assets over $1 billion started reporting on them in 2015. In addition, we introduce the concept of “overdraft/NSF fee reliance” (or at times simply “reliance”), which we define as the share of overdraft and NSF fees among the listed fees at a given institution.”

Even if the absolute amount of fees is declining, this framing would consider a bank “reliant” if the proportion of fee income coming from overdrafts/NSFs is stable.

Which is more or less what you see. Total fees and fees as a portion of operating revenue have declined since the beginning of the pandemic, and, while increasing from their Q2 2020 low, have remained below pre-pandemic levels. With banks continuing to lower or eliminate fees, there’s no immediate reason to think this trend will reverse.

While the CFPB’s comments and previous Congressional hearings have focused on America’s largest banks, it actually tends to be smaller banks that are more “reliant,” in the commonly understood definition of the word, on fee revenue.

For instance, Woodforest National Bank derives a whopping 30.6% of its operating revenue from fees:

To be clear, I’m not defending overdraft fees as a product feature or revenue strategy.

But I do wonder if regulators’ good intentions may have unintended consequences.

Overdrafts are a form of credit. By encouraging banks to lower the cost, basic economic theory would suggest this will also lower the supply: less overdraft credit will be extended.

As banks seek to mitigate potential losses, it’s logical that they would add additional qualification criteria for who can overdraft. For example, this could reduce access for those with less consistent direct deposit activity, a group that includes part-time or shift workers, whose paycheck amounts may vary, gig economy workers, freelancers, stay-at-home moms, and the unemployed.

Another possible side effect? Banks will seek to find a way to replace the lost revenue. When the Durbin Amendment capped interchange income for larger banks, they lost a key revenue generator for middle-income customers who enjoyed their free checking accounts. That change set the stage for increasingly aggressive service fees (overdraft/NSF, minimum balance, ATM), but those fees are disproportionately incurred by lower-income consumers.

As banks move away from overdraft fees, whether by choice or in response to regulatory action, new fees are likely to pop up to replace them — the question is, who will pay the bill?

Nubank Trims Target Valuation, Grab’s Shares Drop 21% on Trading Debut

Nubank, a neobank that operates in Brazil, Colombia, and Mexico, lowered its price target to $8-$9 per share in advance of its IPO. The updated price range lowers the company’s valuation target from $55 billion to approximately $42 billion. The company pointed to “current conditions in financial markets” — a recent rout in tech stocks driven by the Omicron variant — in explaining the lowered price target.

Meanwhile, Southeast Asian ride hailing / superapp company Grab completed the world’s biggest SPAC deal, valuing the company at $40 billion, to began trading on the Nasdaq last week — and saw its share price drop 21%. The lackluster debut is symptomatic of wider malaise in the SPAC market, and was likely exacerbated by the emergence of Omicron, which is likely to dent demand for Grab’s core ride hailing business.

Fintech Market Update & Analysis

FT Partners December market update and analysis is available here and well worth a read, as always. Deal volume and dollars raised remain sharply elevated as we head toward the end of 2021:

Contact Fintech Business Weekly

Looking to work with me in any of the following areas?

New: Product strategy or go-to-market consulting
Sponsoring this newsletter
Content collaboration or guest posting
News tip or story suggestion
Early stage startup looking to raise equity or debt capital

Feel free to reach out to me: jason@fintechbusinessweekly.com

Fintech Business Weekly