Tipping in Fintech is Complete Bullshit

3 New Fintech Stories

#1: Tipping in Fintech is Complete Bullshit 

What happened?

Earned wage access (EWA) is the focus of a new bill in Congress:

The U.S. House Financial Services Committee (HSFC) advanced “Earned Wage Access Consumer Protection Act,” a bill that aims to provide a regulatory framework and establish consumer protections for services that offer workers access to their paychecks before their scheduled payday.

The act defines EWA providers and sets strict operational boundaries, specifically regulating both employee-sponsored programs and direct-to-consumer offerings.

A notable feature of the bill is the requirement for EWA companies to provide a fee-free option for accessing earned wages, aiming to enhance the financial wellbeing of workers who use these services. Additionally, in a move to protect consumers, the bill prohibits EWA companies from using debt collectors.

So what?     

In general, I like this.

EWA has been the subject of A LOT of intense lobbying between consumer advocates and fintech trade associations in various State Houses across the country, and the resulting legislation has been a bit of a mixed bag.

Federal legislation that brings clarity and consistency to this product category would be welcome, and overall this bill seems like a decent stab at it. I really like the focus on ensuring a free option for consumers and disallowing any collections on delinquent payments.

Having said that, this bill has a huge problem — it allows EWA providers (with some constraints) to ask for voluntary tips.

(Editor’s Note – The rest of my analysis here is basically an unhinged rant. My apologies. This topic gets me worked up.)

Fintech apps asking for tips, like they’re struggling art school students picking up extra waitressing shifts in order to scrape by, is complete and utter bullshit. It makes me embarrassed to work in this industry.

Pick whichever side of the argument you want. There’s no good defense for it.

If you argue that it’s a bad deal for consumers because most of them will consistently choose to pay a tip and will, in many cases, pay more than a company might choose to charge as a mandatory fee, well, obviously, that’s bad. Like, predatory lending bad.

(By the way, the available evidence and common sense suggest that this argument is correct. According to the California Department of Financial Protection and Innovation, more than 5.8 million transactions across three tip-based apps in 2021 showed that users added tips on over 70% of transactions.)

If you argue that it’s actually not that bad because most customers don’t choose to tip consistently, and the ones that do don’t pay very much, well, that’s bad too! How do you build a sustainable business when you don’t know how much money you’re going to generate?    

Tips are either bad for companies or bad for their customers. Either way, they’re an extraordinarily dumb business model in fintech.   

#2: International Regulatory Arbitrage

What happened?

Some good news for Revolut:

Fintech company Revolut received a banking license in Mexico and is preparing to expand operations in Latin America’s no. 2 economy, the company said in a press release.

“This license will allow Revolut to offer a wide range of financial products and services to users in Mexico,” the company said, adding that it is preparing for a third-party audit process by Mexican authorities that will signal the start of expansion plans.

The company aims to facilitate cross-border remittances for Mexican customers. Remittances to Mexico reached a record $63.3 billion in 2023, mostly sent from the United States and a nearly 8% jump from the prior year.

So what?     

Revolut has successfully acquired a banking license in Mexico, despite the fact that it has thus far failed to acquire a banking license in its home country:

Since applying in 2021, Revolut has been in negotiations with the Bank of England and the Financial Conduct Authority about getting licensed in the U.K. It has so far faced pushback amid issues surrounding internal working culture, accounting issues, and complex share structures.

Revolut was late to file its accounts earlier this year, which exposed the company to criticisms over whether it is ready to become a fully licensed bank. 

And this isn’t just some weird dispute with U.K. banking regulators. Revolut has yet to move forward in its pursuit of a U.S. banking license, despite submitting a draft application with the FDIC in 2021. Perhaps it knows it won’t go great, given (among other things) this astonishing lapse in its internal controls from a few years ago:

Organized criminals exploited a flaw in Revolut’s payment systems to steal more than $20 million of the fintech’s money, the Financial Times reported, citing multiple sources with knowledge of the incident who weren’t identified.

The issue arose due to differences between Revolut’s US and European systems that meant some transactions were declined and then erroneously refunded, the newspaper reported. Criminal gangs began exploiting the issue early in 2022 after it was identified in late 2021. They would encourage individuals to make large transactions that would be declined, then withdraw the refunded sums via ATMs.

The problem came to light when a partner bank in the US notified the UK-based company that it was holding less cash than anticipated.¹

I’m not sure what Mexican banking regulators are thinking, but good for Revolut to exploit this international regulatory arbitrage opportunity. Not sure I’ve seen a fintech company do that before.

#3: Too Opinionated

What happened?

Block announced a new feature for Square merchants, allowing them to automatically convert a portion of their daily sales to bitcoin:

The feature, rolling out in the U.S. starting today, will transfer 1-10% of Square sellers’ daily sales to their personal Cash App account. This amount will convert into bitcoin at the end of the day. Merchants will receive a confirmation of the conversion when the transaction is complete.

Block said that the bitcoin conversion feature will be available to all sole proprietors or single-member LLCs in the coming months.

“Block believes that bitcoin is an instrument of economic empowerment and provides a way for people around the world, including business owners, to participate in a global monetary system,” the company said in a statement.

So what?

Ugh.

Block is generally very smart when it comes to stacking value propositions for its customers. Take Square’s small business banking products, for example. Here’s the pitch (straight from Square’s website):

Make a sale and instantly access the funds in your Square Checking account → Spend it instantly with your Square Debit Card → Automatically set aside a percentage of daily sales into a high-yield Square Savings Folder → Become eligible for a Square Loan and automatically repay it through your Square sales  

Fantastic. Every part of that makes perfect sense and the experience is connected in a way that reduces the cognitive load for overworked small business owners.

If you were thinking rationally about what products and experiences to add to that stack, automated dollar-cost averaging for bitcoin wouldn’t be near the top of the list (how about a less volatile wealth management option like mutual funds? Or a rewards credit card?).

Unless, of course, your company is run by someone who has a weird philosophical obsession with bitcoin … then, I guess, you do what the boss wants, regardless of how much sense it makes for your customers (the fact that Block is only introducing this feature for sole props and single-member LLCs is interesting in this regard).

This is what opinionated product design looks like when it goes too far.

2 Fintech Content Recommendations

#1: Is Pay by Bank the Next Payment Rail? (by Simon Taylor, Fintech Brainfood) 📚

With all the pay-by-bank news happening these days (Stripe/Uber, Visa/Tink, etc.), it’s worth revisiting this excellent post from Mr. Taylor from a few months ago. His analysis of pay-by-bank has been spot on. 

#2: How AI-Powered Work Is Moving From Copilot to Autopilot (by Sarah Hinkfuss, Bain Capital Ventures) 📚

This one reminds me of a post I wrote a while back on self-driving money.

It makes a lot of sense to use the same “6 Levels of Autonomous Work” framework to talk about the future of generative AI.

Sarah, as always, is sharp and concise in her analysis.

1 Question to Ponder

What questions do you have about the present and future of BNPL? 

I will be creating a lot of content on this subject over the next couple of months, and I’d love to know what you’re curious about.

1. The fact that Revolut only figured out that this was happening after its partner bank in the U.S. noticed that it didn’t have as much money as it expected is insane. ↩︎