3 FINTECH NEWS STORIES
#1: OOPS!
What happened?
The CFPB busted Navy Federal Credit Union for illegally charging members surprise overdraft fees:
Today, the Consumer Financial Protection Bureau (CFPB) took action against Navy Federal Credit Union for charging illegal overdraft fees. From 2017 to 2022, Navy Federal charged customers surprise overdraft fees on certain ATM withdrawals and debit card purchases, even when their accounts showed sufficient funds at the time of the transactions. The CFPB is ordering Navy Federal to refund more than $80 million to consumers, stop charging illegal overdraft fees, and pay a $15 million civil penalty to the CFPB’s victims relief fund. This is the largest amount the CFPB has ever obtained from a credit union for illegal activity.
So what?
Navy’s overdraft protection service — the Optional Overdraft Protection Service or OOPS (amazing acronym, BTW) — charged members $20 for most overdraft transactions. The credit union collected nearly $1 billion in overdraft fees from 2017 to 2021.
The problem, according to the CFPB, is that Navy displayed the incorrect amounts for members’ available funds in certain circumstances, which led to members unintentionally overdrafting their accounts and incurring fees. Specifically, the CFPB found two such circumstances:
Charging illegal, surprise overdraft fees on purchases made with sufficient funds: Navy Federal charged fees to consumers whose accounts showed sufficient funds when making purchases, only to charge fees when the transactions were later processed.
Charging overdraft fees caused by delayed peer-to-peer payments with undisclosed processing times: The credit union showed incoming payments from services like Zelle, PayPal, and Cash App as available to spend, but failed to disclose that payments received after specific cutoff times would not post until the next business day, while still charging overdraft fees to some customers who attempted to use these apparently available funds.
A couple of quick reactions:
- Between this enforcement action and the recent action against VyStar, the CFPB has really been cracking down on big credit unions lately. From my vantage point, this is a good thing. The popular notion of a credit union — small, non-profit, member-focused — can sometimes obscure the reality that these institutions, like banks, often behave in reckless or predatory ways. This has been especially true over the last decade with credit unions and overdraft protection.
- As the peer-to-peer payments example cited by the CFPB illustrates, the increasing complexity at the intersection of payments, digital banking, and systems of record is going to be a problem that banks and credit unions are going to need to solve for, especially as pay-by-bank and faster payments become more ubiquitous. Customers/members need to know how much money they actually have at any given moment. This feels like an area that is due for a significant UX upgrade.
- This is also a good reminder of why you don’t want to have a business model that depends on your customers/members making mistakes. There’s a lot less motivation to fix these types of problems when they are directly contributing a substantial amount to your bottom line.
#2: Bespoke, Automated Claims Management
What happened?
Bluespine, a fintech company focused on the health insurance space, raised a seed round:
Bluespine, a health claims analysis software provider for self-insured employers, raised a $7.2 million seed round led by Team8, CEO David Talinovsky tells Axios exclusively.
Bluespine’s LLM analyzes documents including plan summaries and carrier billing guidelines to identify and mitigate areas of over-billing for employer insurers.
Its customers include Mattel, DavidShield Insurance Company and Alliant Insurance Services.
The company has onboarded over a dozen customers, with a “solid pipeline for 2025.”
So what?
As you likely know, I love it when fintech companies hone in on hyperspecific, deeply boring problems. Bluespine is a great example, and it doesn’t surprise me that it emerged from Team8’s rigorous startup incubation process. This isn’t the type of idea that a 24-year-old first-time founder comes up with on their own.
The problem Bluespine is solving is a fascinating one.
For companies that are big enough (like Mattel, which has 33,000 employees), it can make a lot of sense to self-ensure their employees’ healthcare. The problem with going this route is that it places a huge operational burden on the company to ensure that it is not being overcharged by healthcare providers (this is a major issue in healthcare) and to ensure that any rejected claims don’t create legal risk for the company. This challenge is magnified for self-insurers because, unlike large insurance carriers, each self-insurer has different insurance plans and benefit terms. They don’t benefit from offering a common set of plans across multiple clients.
Bluespine leverages AI (including LLMs) to analyze each employer’s unique health plan documents and specific coverage terms and automate the claim review process at scale. Think of it as the healthcare cousin of chargeback dispute management in payments, except every client is their own Visa and Mastercard.
Smart stuff.
#3: Should We Eliminate Deposit Insurance Limits?
What happened?
Director Chopra at the CFPB, who also serves on the Board of Directors of the FDIC, put out an interesting statement:
Last month, a small community bank in Oklahoma failed due to fraudulent misconduct. Small relationship lenders tend to cater to the tailored needs of local businesses, houses of worship, farmers, schools, and families in the local community. As a result of the failure, some depositors in this rural area of Oklahoma are expected to take a loss, since their account balances exceeded federal deposit insurance limits.
In March 2023, policymakers invoked extraordinary powers to backstop the uninsured depositors of Silicon Valley Bank and Signature Bank. There was compelling evidence to suggest that if the banks had failed and uninsured depositors experienced losses, a cascade of destabilizing bank failures would follow. According to public reports, the uninsured deposits at these banks were not primarily held by local businesses. Instead, these banks served much larger firms with very large account balances, including well-known companies in gaming, crypto, media streaming, and venture capital. It was only possible to protect these uninsured depositors because the failures of these banks threatened to crash the entire banking system.
In other words, big businesses putting their money in big banks enjoy free deposit insurance, and small businesses putting their money in small banks don’t. This is fundamentally unfair. The status quo gives an unfair competitive advantage to the largest banks in the country.
So what?
Director Chopra then ends his statement by arguing that Congress should increase or entirely eliminate limits on federal deposit insurance for payroll and other non-interest-bearing operating accounts.
Interesting!
I have three thoughts on this:
- In the case of these specific examples (SVB and First National Bank of Lindsay), I agree that it’s fundamentally unfair for the government to bail out one set of uninsured depositors and not another, especially when it seems evident that the political influence (and unhinged social media ranting) of SVB’s depositors played a significant role in the government’s decision to bail them out.
- I still don’t understand why more banks (particularly small banks) don’t take advantage of the reciprocal deposit networks’ ability to expand their deposit insurance coverage for big retail and commercial customers. I know it’s a bit more operationally complex, and I know it costs money, but come on! This is an essential feature for payroll and other non-interest-bearing operating accounts!
- It’s interesting to me to see FDIC Board members support, in some circumstances, narrowly tailored changes that are focused on the unique behaviors and risks of certain deposits (this + the Henrichs Rule) and then also support broad-based changes that don’t take any of those nuances into account in other circumstances (brokered deposits). Seems inconsistent to me!
2 FINTECH CONTENT RECOMMENDATIONS
#1: Chevron, Loper, and the Administrative State (by David Silberman, Open Banker) 📚
OK, this one is pretty nerdy, but if you’ve heard anything about the impact of the Supreme Court’s recent decision to end the Chevron doctrine, which granted deference to government agencies’ decisions in certain cases, on the future of financial services regulation, you should read it.
The key takeaway is that Chevron wasn’t all that useful to government regulators anyway and that agencies (especially the CFPB) have other tools at their disposal (interpretive rules, enforcement actions, public comments, etc.) that sit outside the reach of the Loper decision.
Also, credit to my bank nerd friend Evan Weinberger at Bloomberg Law, who was the first person to make the case to me that the feared impact of the Loper decision was being overrated. BTW — Evan joined Kiah and me on the most recent episode of Bank Nerd Corner if you’re curious to hear more of his smart takes.
#2: Interview: Affirm CEO Max Levchin (by Jason Mikula, Fintech Business Weekly) 🎧
Max Levchin is one of the more thoughtful CEOs in fintech (IMHO) and Jason is a great interviewer, so the odds were high that I would enjoy this podcast.
And I did!
1 QUESTION TO PONDER
Why is it that credit card issuers will allow you to simply cancel some recurring transactions with the click of a button but require you to call the merchant directly and cancel your subscription in other cases?
Is it the nature of the subscription service and the contract that the merchant has with the customer? Is it a technical constraint or barrier imposed by specific merchants? Is it due to the relationship between issuers and certain large merchants?
