DALL·E 2 painting based on the prompt “A cheerful oil painting of a Christmas stocking hanging in front of a fireplace with a Christmas tree off to the side.”

#1: Too Big To Be Competent

What happened?

Stop me if you’ve heard this one before – Wells Fargo screwed over a bunch of its customers and was fined by a regulator:

Today, the CFPB is ordering Wells Fargo to pay more than $2 billion in redress to over 16 million consumers and a $1.7 billion civil penalty for widespread illegal activity across its major product lines for which it has never been held to account. The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes.

Between at least 2011 and 2022, consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank. Consumers were also charged unlawful surprise overdraft fees and had other incorrect charges applied to their checking and savings accounts 

So what?

As the Director of the CFPB noted in his comments, this is not the first time Wells Fargo has gotten in trouble for something like this recently. It happens ALL THE TIME!

Wells Fargo is one of the most powerful banks in the world. Unlike some other massive U.S. banks, Wells Fargo primarily concentrates on consumer banking. One in three American households are customers and are affected by its corporate culture and business practices.

In the CFPB’s eleven years of existence, Wells Fargo has consistently been one of the most problematic repeat offenders of the banks and credit unions we supervise:

  • In 2015, CFPB ordered Wells Fargo to pay $24 million in penalties for its role in an illegal mortgage kickback scheme.
  • In 2016, it paid $4 million to the CFPB for scamming student loan borrowers. A few months later, the CFPB fined Wells Fargo $100 million for its fake account fraud.
  • In 2018, the CFPB assessed a $1 billion fine for illegal fees and insurance practices in its auto lending and mortgage lending business.

The list could go on and on, from defrauding the government to labor abuses and more. The Department of Justice, state attorneys general and other federal regulators have obtained billions more in forfeitures, including civil and criminal fines.

Put simply, Wells Fargo is a corporate recidivist that puts one third of American households at risk of harm. Finding a permanent resolution to this bank’s pattern of unlawful behavior is a top priority.

I’ve never heard a U.S. banking regulator talk this way about a bank, but he’s absolutely right. Wells Fargo’s inability to get its shit together and just act like a regular bank (keep track of how much money your customers owe, don’t improperly repossess their cars, etc.) is just bizarre. It’s like Wells Fargo stepped on a rake in 2015, got hit in the face, and fell down, and every time it  tries to stand back up, it steps on the rake again. It’s embarrassing.

It’s like the cousin to ‘too big to fail’ – ‘too big to be competent’.

#2: How Direct Auto Lending Should Work 

What happened?

An interesting fintech company raised a Series A:

Carputty, a FinTech company modernising auto financing and ownership, has raised $12.3m in a Series A funding round.

This raise, co-led by Fontinalis Partners and TTV Capital, brings Carputty’s total funding amount to $21.9m.

Additional investors include Porsche Ventures and Grand Ventures, as well as Kickstart Fund, who led the Company’s seed round.

So what?

The basic idea here is that instead of consumers applying for a car loan each time they buy a car or refinance an existing car loan, Carputty will approve them once for an ongoing auto ‘line of credit’ which they can use to manage all the financial services aspects of automobile ownership (purchases, sales, refinancing, lease buyouts, etc.). And Carputty will give them a brokerage-like dashboard for managing their automobiles like financial assets.

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This is a neat idea! And it speaks well of Carputty that investors like Fontinalis Partners and Porsche Ventures (who know a thing or two about the automobile market) invested.

This is how direct auto lending should work (reminds me a bit of the original idea behind CuneXus).

Two challenges for Carputty:

  1. Indirect auto lending is incredibly popular among consumers for a reason. Even though it’s usually a horrible experience, it’s still the most convenient option overall for most buyers.
  2. It’ll be difficult for Carputty to compete with banks, credit unions, and other companies for direct auto lending customers (maybe partnering with banks and CUs is the way forward?)  

#3: A Different Perspective on Chime & DailyPay

What happened?

I covered this one earlier this week, but I think it’s worth revisiting. Chime tried to acquire DailyPay (twice):

Chime offered to buy earned wage access startup DailyPay twice this year, first for $1.6 billion and then for $2 billion, and was rejected twice, The Information reported Thursday, citing sources familiar with the matter.

So what?

My original take on this was that it didn’t really make sense for either party.

I still think that (I think), but it’s worth considering the other side of the argument.

Early wage access, when offered through partnerships with large employers (like Mcdonald’s), can be an extraordinarily low-cost customer acquisition channel. Large employers that have a large number of hourly workers see a lot of turnover. That turnover is a problem for the employer (which is one of the big reasons they want to offer EWA), but it would benefit the theoretical DailyPay + Chime company because it would give them access to a constantly replenishing well of potential customers. Not all employees sign up for EWA, and of those that do, not all of them would sign up for a bank account with that EWA provider, but it would still be an incredibly efficient acquisition channel for Chime … in theory.   

#4: Transparency and Trust Aren’t the Same Thing

What happened?

Brian Armstrong at Coinbase has some ideas for how to regulate crypto (which I’m guessing regulators and lawmakers now have basically no interest in considering) and an argument for why DeFi should be left alone:

The role of financial regulators should be limited to centralized actors in cryptocurrency, where additional transparency and disclosure is needed. In an on-chain world, this transparency is built in by default, and we have an opportunity to create even stronger protections. With the internet, we got better regulation through Uber’s star ratings system than we had with taxi medallions. Crypto has the potential to take this idea even further, by encoding trust on-chain in a cryptographically provable way.

So what?

This is a very popular notion in DeFi – you can trust the protocols you are transacting with because everything is “on chain” and “transparent”:

smart contracts, which power DeFi and Web3 apps, are public and open source by default. This means anyone can go audit the code to see if it really does what it claims to do. This is the ultimate form of disclosure. Instead of “don’t be evil” (Google’s famous company value) we can have “can’t be evil”, where you can trust the laws of math instead of human beings.

This is completely contrary to our experiences to date. Smart contracts are exploited by hackers and scammers constantly:

research showed that between January and July 2022, hackers stole $1.9 billion worth of cryptocurrency – a 37% increase on the same period in 2021. According to Solidus Labs, threat actors in the crypto industry launch up to 15 crypto scams per hour.

They revealed that in Q1 2022, 97% of all stolen cryptocurrency came from DeFi protocols. According to the FTC, consumers lost over $1 billion from the beginning of January 2021 through March 2022 to cryptocurrency scams.

Did all those victims just not audit the code carefully enough? Is this the future we want? caveat emptor on steroids? 

#5: What Pipe Should Have Built

What happened?

I’m not sure how I missed this one:

Cacheflow, a startup building tools for the software sales closing process, announced this morning that it closed $10 million in new capital.

Cacheflow CEO and co-founder Sarika Garg told TechCrunch that the new capital doubled her company’s valuation, added prior lead investor Glenn Solomon (GGV) to its board and brought new investor Crystal Huang (GV) on as a board observer. Huang led Cacheflow’s newest investment — what Garg described as a seed+ round — for GV, while Solomon put in more capital to the round than his pro-rata rights guaranteed, she said.

So what?

The funding news is interesting all on its own (more money at seed at double the valuation? In this market?), but I think the more interesting bit is the company and its product.

If you are unfamiliar with Cacheflow (like I was), let me catch you up.

It’s basically deal-close software. It gives companies that are selling SaaS software the ability to quickly and easily generate sales proposals with embedded B2C-like ‘checkout’ functionality, which allows buyers to easily review, accept, and sign the proposals. 

This software, by itself, is valuable to SaaS companies, as it streamlines the sales process and leads to more wins. Without doing any fintech things, Cacheflow is solving a problem.

But, of course, there’s a fintech component as well. If the SaaS company doesn’t want to wait for the buyer to pay their invoice, they can sell the invoice to Cacheflow for cash today.

It’s a bit like Pipe (invoice factoring), but it doesn’t depend solely on SaaS companies and investors having a voracious appetite for transacting on the platform (which was never going to sustain in a rising rate environment) in order to thrive.

This is what Pipe should have built.   

#6: MaaS

What happened?

A mortgage-as-a-service (MaaS?) startup raised a seed round:

Pylon, the startup bringing a way for lenders and fintechs to embed end-to-end mortgage tools to their existing platforms, will announce today the raise of $8.5 million in seed funding. Conversion Capital led the round, with participation from Peter Thiel, Fifth Wall, Montage Ventures, QED Ventures and Village Global. The round included angel investors from Zillow, SoFi, Ramp, Figure and Blend. 

So what?

I’m torn on this one.

On the one hand, this appears to be a very well-thought-out concept and product, backed by a lot of investors who I respect. And the strategy here is intriguing. Build a full-service, end-to-end, developer-first solution for embedding mortgage loans in any and all channels where it might make sense. Mortgages have very healthy margins. Plenty of pie to split between Pylon and the front-end partner.

On the other hand, how many places does it really make sense to embed mortgage loans? It’s not like consumers are constantly getting mortgages all the time. And when they do, isn’t it worth a bit more work on their part to shop around and get the best possible deal given the amounts of money involved? Also, embedded mortgage lending would seem like the first thing to suffer in a rising rate environment where new mortgage origination stalls out?

#7: Keeping Pace With Fintech

What happened?

The FDIC is updating some very important rules:

The Federal Deposit Insurance Corporation (FDIC) Board of Directors today issued for public comment a proposed rule to amend part 328 of its regulations to modernize the rules governing use of the official FDIC sign and advertising statements and clarify the FDIC’s regulations regarding misrepresentations of deposit insurance coverage. 

“The FDIC last made major amendments to the official sign and advertising statement rules in 2006,” said Acting Chairman Gruenberg.  “The revisions are intended to extend the certainty and confidence provided by the FDIC official sign found at bank branch teller windows to digital channels, such as bank websites and mobile applications, through which depositors are increasingly handling their banking needs.” 

So what?

This is incredibly important, and I hope the FDIC gets it right.

We use ‘BaaS’ as something of a catch-all term to describe a diverse and rapidly growing number of relationships between regulated banks and non-regulated companies offering financial services. The potential for consumer confusion on important questions like ‘where is my money actually being kept?’ and ‘is my money safe?’ is significant and seems likely to get worse before it gets better, especially as embedded finance grows in popularity.

To its credit, the FDIC seems to understand this:

Growth in the fintech sector has also served to blur the distinction between IDIs and non-banks in the eyes of many consumers, increasing the potential for confusion regarding deposit insurance coverage. Business arrangements between IDIs and non-banks can take many forms and continue to evolve at a rapid pace.

Also, as a side note, it’s hilarious to me that along with very timely and urgent  concerns about fintech and BaaS, the FDIC is still carving out room to think about how its physical sign might be displayed in bank branches with different layouts:

all IDIs would be required to continuously, clearly, and conspicuously display the official sign in their principal place of business and all their U.S. branches. To accommodate evolving styles and footprints of branches, however, the proposed rule would provide separate requirements for traditional footprint branches and non-traditional branches or other places.   

#8: BNPL Bank FUD Has Fizzled Out

What happened?

Galileo introduced a new product:

The new tool lets financial institution enter the buy now, pay later (BNPL) market and provide more spending power to customers at a time when the industry is posed to skyrocket, Galileo said in a news release Tuesday (Dec. 6).

“However, non-bank BNPL providers offer the service based on very limited customer data, putting both the provider and the consumer at higher risk,” the company said.

“With Galileo, clients, and banks that provide Buy Now, Pay Later to their consumers will be offered financing through their bank or a sponsoring bank partner that considers the consumers’ financial health and ability for repayment.”

The company says a bank-issued BNPL tool offers repayment flexibility to more consumers and in more places, as underwriting decisions are made by someone with greater insight into the customer’s financial history.

So what?

In 2020 and 2021, there was a lot of discussion about how BNPL was disrupting credit cards and speculation about how and when traditional banks might respond with their own BNPL solutions.

The fear, uncertainty, and doubt caused by BNPL was a big opportunity for fintech infrastructure providers and other companies that sell products and services to banks to help them “keep pace with fintech innovation” and “avoid disruption”. Mastercard, Amount, and Marqeta (among others) all benefited from this BNPL-inspired FUD.

It feels like Galileo got to the party a bit late.

Long term, I think BNPL will stick around as a payment and financing tool (especially for e-commerce transactions), but the novelty and fear that was driving banks to respond (sometimes rashly) to BNPL has, from my perspective, fizzled out. 

Fintech infrastructure providers and bank tech technology vendors are going to need to find a new wedge.

#9: Scarier and More Complex Than Meets The Eye

What happened?

A new fintech app focused on retirement savings launched, in partnership with Atomic Invest:

Lilly, a company that gives credit card users the chance to transform cash back rewards into retirement savings, has announced its partnership with Atomic Invest, who creates APIs that enable fintechs and other financial institutions to offer best-in-class investing experiences. Together, they will help average Americans convert existing and future cash back rewards into traditional and Roth IRA deposits, and then invest.

According to Lilly, the average American earns roughly $375 to $570 each year in cash back rewards. Many don’t even realize the money is there. Using a standard Roth IRA and assuming a 7% rate of return, those rewards could grow to more than $60,000 over 30 years, with no change in consumer behavior.

So what?

OK, on the surface, this looks straightforward. If you read the press release and browse around the website for 5 minutes, you will come away assuming that Lilly acquires users, gets them to link their credit cards and/or debit cards via Plaid, and then automatically channels the cashback rewards that users get from those cards into investments into a tax-advantaged retirement account (enabled through the partnership with Atomic Invest).

Pretty simple. And compelling! Anything that helps consumers turn idle rewards into meaningful and compounding investments in their future should be celebrated!

Except … that’s not what Lilly is doing.

If you look at Lilly’s terms of service, you will notice a scary term that has no logical reason for being there:

The Lilly Funds Platform allows you to link your bank account and complete deposits into your Account via automated clearing house (“ACH”) transfer.  When you complete a “deposit” from your bank account into your Account, you are exchanging your U.S. Dollars (or other supported fiat currency) for USDC through a Third Party Provider which will then be credited to your Account balance (a “Deposit”).    


Wait, what?

Why am I storing funds with Lilly in the first place? And why are they being converted into USDC?

To earn interest, apparently:

You may receive interest on the balance held in your Account (“Interest Rewards”), represented as an annual percentage rate (“Applicable Interest Rate”). Such Interest Rewards will be paid by the applicable Third Party Provider that is custodying your Account balance in accordance with applicable Third Party Terms, but Lilly will facilitate you receiving the Interest Rewards into your Account. You acknowledge that Lilly may receive compensation in connection with such activities in excess of the Interest Rewards paid or payable to you. You further acknowledge that such activities could result in the loss, or loss of value, of your Account balance.

Cool, but like, who are these third-party providers custodying my account balance, and what are they doing with my stablecoins to generate this interest that I’m getting, and are my funds safe?

Account balances held on the Lilly Funds Platform through Lilly or directly or Third Party Services are held in USDC. While USDC is a “stablecoin” designed to remain pegged in value to the U.S. Dollar, and backed by U.S. Dollar reserves, Lilly does not control the issuance,  redemption or backing of USDC and cannot guarantee that 1 USDC will always remain redeemable for 1 U.S. Dollar.  

Lilly is not a bank or otherwise licensed as a financial institution. Lilly is a financial technology company that partners with Third Party Providers to allow you to access certain licensed Third Party Services.

Deposits held on the Lilly Funds Platform are not insured by the Federal Deposit Insurance Corporation (FDIC), Securities Investor Protection Corporation (SIPC), or any other governmental or private deposit insurance scheme or program.

When you hold a balance in your Account, the applicable funds are held by a Third Party Provider.  If such a Third Party Provider suffers a security breach or other loss, you may suffer a loss of some or all of your Account balance. 

OK, this sounds way scarier and more complex than I thought or that, quite frankly, it needs to be in order to fulfill the brand promise that Lilly is making to customers.

I don’t know if Lilly is yield farming with customer deposits (although I can’t imagine why else they would be converting funds to USDC or where else this unspecified interest is being generated from), but regardless, I shouldn’t be having to wonder about this at all! There is a simple, non-scary way to solve this problem!

Alex Johnson
Alex Johnson
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