3 Fintech News Stories
#1: Bilt Expands Into Healthcare
What happened?
Bilt launched a new feature and entered into a partnership with Walgreens:
Billions of dollars in Flexible Spending Account (FSA) funds go unspent every year. Bilt, the company known for offering points on rent payments, and Walgreens have partnered to address this issue by making your FSA or HSA (Health Savings Account) funds easier to access. Through this partnership, you can use your FSA or HSA funds to offset eligible purchases through the Bilt app when you use any card linked to Bilt Rewards.
You can also now earn Bilt Points at Walgreens (including prescription refills), and you don’t need a Bilt Mastercard to benefit from this partnership. You earn the bonus points when you use a credit or debit card linked to your Bilt Rewards account.
So what?
OK, two things here:
1.) I love this feature. Found money is one of my favorite categories of product innovation in fintech. Breakage on FSA and HSA accounts is insanely high because the process of either shopping intentionally for eligible products and services only or submitting reimbursements for eligible purchases after the fact is too much hassle for most people. This is bad for everyone except the bank holding the FSA/HSA dollars.
This feature is being enabled through a behind-the-scenes partnership with Banyan, which (I’m guessing) analyzes the item-level transactions from the linked debit or credit card in the Bilt app, which then automates the reimbursement process for eligible purchases.
2.) I still don’t really understand Bilt.
When the Wall Street Journal reported a while back that Wells Fargo was losing its shirt on the Bilt credit card, both Bilt and Wells Fargo vigorously pushed back on the story, and Bilt emphasized the relative unimportance of the Bilt card compared to its mobile app, which allows users to link whichever debit or credit cards they want and still get rewarded.
I guess it’s possible that Bilt took advantage of a once-in-a-generation global pandemic to force landlords (who were worried about attracting and retaining tenants) to accept partnership terms that they would never have agreed to otherwise and Bilt has leveraged the resulting traction to solidify and expand its beachhead.
However, I also think it’s possible (likely?) that Bilt’s core unit economics simply don’t make sense, and Bilt and its investors are trying to scale their way out of the problem before the money runs out.
Expanding from rewards for renters into HSA/FSA reimbursements feels like the sort of thing you do in the latter scenario, but I guess we’ll see.
#2: New Units
What happened?
Unit launched a couple of new products.
Many people are familiar with wallets from apps like Uber. When an end-customer loads $50 onto their Uber Cash account, those funds are stored in a wallet rather than a traditional bank account.
Today, we’re excited to announce Wallets, a simple way for your customers to move and store money for use cases that do not require a traditional bank account.
And a business continuity planning tool:
Today, we’re excited to announce our Business Continuity Tool, a first-of-its-kind solution built to enhance operational resilience for banks in the event of the failure of a third-party partner.
The Business Continuity Tool is a suite of white-labeled digital banking experiences designed to help banks enhance their business continuity procedures and reduce operational disruption in the event of the failure of a third-party program partner—without being dependent on the partner.
The tool is built on top of Unit’s White-Label App, giving end-customers timely access to their banking services and funds via the same account numbers and card numbers that they previously used. This new service can streamline and reduce the uncertainty associated with the wind-down of a third-party program.
So what?
Let’s take these one at a time.
The stored value wallet product construct is a logical one for Unit to add. Stored value wallets are becoming more prevalent inside and outside of fintech (Klarna just announced one for power users outside of the EU), and, as Unit notes in their blog post, they can be quicker and easier to set up than a traditional bank account.
I am a bit nervous about the long-term implications of making it easier for any company to launch a stored balance wallet. They’re great for the companies offering them (funds are really sticky because they can only be used to pay for the services provided by the company), but they aren’t always great for the end customer (makes budgeting harder, no FDIC insurance, etc.)
The business continuity tool is neat, and an obviously good thing for Unit to launch given the increasing emphasis that regulators are putting on operational resilience for banks that partner with fintech companies. Indeed, it would have been nice to have such a tool a long time ago, but intermediate platforms haven’t always been so focused on the needs of their bank partners.
It is also worth pointing out that this tool is helpful if the fintech company fails and the partner bank has to conduct an orderly wind-down. It wouldn’t have been helpful in the Synapse situation because Synapse (the intermediate platform) was the one that failed, not the end fintech programs.
#3: Can I Gamble With Your Money?
What happened?
First & Peoples Bank, a small community bank based out of Russell, Kentucky, has gotten itself into some trouble thanks to a fintech partner:
First & Peoples started working with US Credit, a fintech that promised to usher community banks into the world of online lending, in August 2020. Besides banks, US Credit partnered with merchants to offer its instalment loans as a method of payment to their customers. Although the money was coming from First & Peoples, US Credit did all the servicing of the loans, setting them up and collecting payments, as well as deciding who to lend to.
Shortly after inking the deal with First & Peoples, US Credit signed up Growth Cave, an online education company that was co-founded by a social media influencer that offers courses in “digital marketing” and promises in its marketing materials to teach students how to make as much as “$5,000 a month while sitting on your toilet”.
By mid-2022, First & Peoples executives told US Credit they were uncomfortable with the types of loans US Credit was extending, according to a lawsuit the bank filed against US Credit last year. Shortly after, the relationship between them began to deteriorate, the complaint said.
At the end of 2022, First & Peoples took its first big hit, writing off $10mn in loans it had made through US Credit. The bank took another $8mn in losses on its US Credit loans last year. US Credit filed for bankruptcy in January.
So what?
Imagine that you have a lot of money and you have a membership to a very exclusive casino, which allows its members to play very high-risk, high-reward games of chance.
Someone comes to you and says that they will pay you a hefty fee to borrow your membership so that they can go and gamble. This is probably a good deal, assuming you can avoid getting into trouble with the casino for renting out your membership.
However, let’s say that the person then asks you to loan them your money, in addition to renting them your membership. And they tell you, “Don’t worry about it, no need to look over my shoulder, I know what I’m doing,” despite never having gambled before.
Now, you should be terrified.
The first model (originate and sell) is very common in BaaS. It has its risks (compliance risk, primarily), but if you can manage that risk well, it can be an extremely lucrative transactional business model.
The second model (originate and hold) is much less common. Typically, banks don’t want to risk their own capital with their fintech partners (that’s what the private credit industry is for!), and if they do, they typically evaluate and monitor the fintech companies’ underwriting processes very carefully.
First & Peoples, umm, didn’t do that:
Earlier this year, the FDIC and Kentucky’s Department of Financial Institutions put the bank under a consent order. Among other things, the regulators ordered First & Peoples to figure out who the fintech had lent the bank’s funds to — something, according to regulators, it did not know.
Bad. Very, very bad.
2 Fintech Content Recommendations
#1: A Modest Proposal for Fintech Account Insurance (by Matthew Goldman, CardsFTW) 📚
Matthew Goldman, who writes a newsletter that you should absolutely subscribe to, is proposing an idea in this article that I am deeply intrigued by — a privately administered insurance fund for fintech companies, which would protect fintech companies’ customers in much the same way that the FDIC protects bank depositors.
I like this idea, especially when paired with a rigorous compliance and certification process (fintech SOC2). I’m not sure it’s workable (many non-FDIC insurance schemes in banking have failed over the years … insurance is hard!), but it’s definitely an idea we should all be discussing.
#2: 2024 RankingBanking Report (Bank Director) 📚
I’m told by Kiah Haslett that this is good, and we should all be reading it.
That’s good enough for me!
1 Question to Ponder
If I wanted to interview someone for the Fintech Takes podcast who could speak, with incredible depth and passion, about the challenges (and opportunities) in providing front-line customer service for Reg E-covered accounts offered by fintech companies, who should I interview?
If you have thoughts on this question, please let me know!
