3 FINTECH NEWS STORIES
#1: Take Your Medicine
What happened?
JPMorgan Chase is mad that the CFPB might punish them for failing to adequately protect customers from Zelle-enabled scams:
The lender disclosed that the Consumer Financial Protection Bureau could punish JPMorgan for its role in Zelle, the giant peer-to-peer digital payments network. The bank is accused of failing to kick criminal accounts off its platform and failing to compensate some scam victims, according to people who declined to be identified speaking about an ongoing investigation.
In response, JPMorgan issued a thinly veiled threat: “The firm is evaluating next steps, including litigation.”
So what?
Instead of litigation, I have a proposal for Chase — take your medicine.
You’re the biggest bank in the U.S. You’ve collaborated with your biggest competitors to create a payments network — the first real-time bank-to-bank payments network to reach significant scale in the U.S. — which you give to all of your customers for free so that you don’t lose them to the upstart fintech rivals that your CEO is so concerned about.
You argue that it’s the responsibility of your customers to protect themselves when they use this extremely powerful tool you’ve given them. If they get tricked into sending their money to a fraudster and cannot stop or reverse the transaction (because you made the network real-time by default!), that’s their problem. Mistaken electronic funds transfers authorized by the customer are considered scams, not fraud, and are not eligible for reimbursement. That’s the law.
The problem is that this stance doesn’t hold up under close scrutiny.
If you are not legally required to reimburse customers for scams and you are confident that you are effectively and fairly investigating all customer-initiated disputes, I would assume that the rate of scam reimbursement would be 0%, right?
Wrong!
In 2020, JPMorgan Chase investigated 41,390 disputes that it classified as scams. Do you know how many it reimbursed?
3.
That’s damning. If this was A Few Good Men, this would be the part where Daniel Kaffee asks Colonel Jessep why Santiago hadn’t packed or called anyone on the eve of his supposed transfer.
[Daniel Kaffee voice] I WANT THE TRUTH!
And the truth is that JPMorgan Chase’s process for investigating customer disputes and issuing reimbursements is inconsistent and ridiculously biased toward the economic interests of the bank, even when the evidence in favor of reimbursement is overwhelming.
How do I know this?
Here’s a disturbing anecdote from a report on Zelle from the U.S. Senate Permanent Subcommittee on Investigations:
A consumer was robbed at gunpoint by assailants who demanded her phone and the password to her JPMorgan bank app. The assailants then transferred nearly $1,700 out of her bank account using Zelle. JPMorgan reportedly denied the claim as “authorized.” JPMorgan continued to deny the consumer reimbursement even after she submitted a video tape of the robbery and the policy report to the bank. The consumer was only reimbursed after journalists contacted Chase and Zelle on her behalf.
That’s some bullshit.
So, again, my advice — stop complaining and take your medicine.
I know it’s unpleasant. I know it even feels a bit unfair. But you did a big thing badly, and now you have to pay for it.
#2: I Will Not Lose My Cool
What happened?
Galileo announced a new product:
Galileo Financial Technologies … announced the launch of Secured Credit with Dynamic Funding. Built to help fintechs, banks and other businesses address the needs of underbanked and underserved customers, Galileo Secured Credit with Dynamic Funding simplifies the secured credit process, making it easier for consumers to manage their debit and credit accounts. This streamlined solution also reduces the risk for lenders by backing credit with secured deposits.
So what?
Jason Mikula sent me this because he knows about my curse and he’s hoping to provoke me into ranting about this new credit builder offering from Galileo.
Well, what Jason doesn’t know is that I’ve matured. Ranting about credit building was so 2023 Alex Johnson. I have become a calmer and more disspassionate fintech analyst. I will not lose my cool.
To prove it, let’s run through more of the press release:
With more than 45 million Americans either credit unserved or underserved, the need for secured credit is high.
That’s true! If anything, Galileo is undercounting on that 45 million.
Go on:
Customers face the dilemma of keeping their cash in their demand deposit account (DDA) for use with their debit card or in their collateral account to use as secured credit. The behavior of dividing these funds puts consumers at a disadvantage throughout their credit-building journey.
Well, that’s not exactly right. Asking consumers to set some money aside to build credit and manage that deposit against their ongoing cash flow needs can actually be a positive signal, of both willingness and ability to pay.
But whatever, keep going:
This credit product helps consumers avoid falling into a debt cycle by combining DDA and collateral balances. When approved for a secured credit card, there is no immediate impact on their spending account. Once their credit is built, retrieving their deposit doesn’t affect their credit score–it was always accessible to them.
OK, no. I can’t keep this up.
We obviously don’t want consumers falling into debt in order to build credit, but if we don’t allow for them to take that risk (at a low level, set by the secured deposit) and demonstrate responsible financial management behaviors then the data that is being generated by this charge card (and it is a charge card, not a credit card, to be clear) with a dynamic limit isn’t that useful to other lenders.
THE WHOLE POINT OF CREDIT BUILDING IS TO GIVE CONSUMERS WITH NO OR NEGATIVE CREDIT HISTORIES LOW-STAKES OPPORTUNITIES TO PRACTICE THE BEHAVIOR OF MANAGING CREDIT OBLIGATIONS RESPONSIBILY. IF WE AUTOMATE AWAY ALL OF THOSE OPPORTUNITIES AND REMOVE ALL THE RISK WE ARE UNDERMINING THE PURPOSE OF CREDIT BUILDING!
Damn you, Mikula.
#3: Slow Progress is Lasting Progress
What happened?
Google continues to iterate on the identity portion of its Google Wallet product:
Google announced on Thursday that it’s introducing new Wallet updates for travelers and commuters. Most notably, Google Wallet will soon start beta testing the ability to create a Digital ID from your U.S. passport. The ID pass will work at select TSA checkpoints when traveling domestically.
In addition to TSA checkpoints, Google says it’s working with partners to make digital IDs acceptable in more situations, such as car rentals, account recovery and identity verification.
So what?
Well, OK then!
I gave Google a hard time last month for introducing the capability to add any document into Google Wallet as a “digital pass.” My take was that this capability was basically useless because there was no way for the party on the receiving end of the digital pass to verify its authenticity:
The value of storing a credential in a digital wallet is the attestation of the trusted issuer of that credential. If you don’t have that, if you don’t have, I don’t know, Sam’s Club saying, “Yes, that is indeed Alex Johnson’s Sam’s Club membership card, and here is how much Sam’s Cash he has”, then it’s not very useful. It can’t function fully as a digital pass if the if the issuer of the physical version isn’t verifying and standing behind it.
My apologies Google!
These updates make a lot more sense. If you do the hard work to get your digital credentials accepted by organizations with rigorous compliance requirements like the TSA, you can create a lot of value for consumers.
And apparently it’s not just passports:
As for state-issued IDs and driver’s licenses, users in Iowa, New Mexico and Ohio will join the growing list of states where people are able to save their ID in Wallet in the coming months.
This is great. It will take a long time to reach ubiquity in digital identity issuance and acceptance, but that’s OK. As the wise man says, slow progress is lasting progress.
2 FINTECH CONTENT RECOMMENDATIONS
#1: Reciprocal Deposits and the Banking Turmoil of 2023 (by Edward S. Prescott & Grant Rosenberger, Federal Reserve Bank of Cleveland) 📚
This was blowing up in my bank nerd group chat, so I though I’d pass it along to y’all.
If you’re curious to learn more about what reciprocal deposits are, how they work, and the role they played (and could have played) in last year’s spring banking crisis, you’ll enjoy this one.
#2: The Retention Perk That Also Improves Financial Health (by Mary Wisniewski, Money Isn’t Everything) 🎧
Employer-led financial health continues to intrigue me. And this podcast, from my friend Mary, continues to delight me.
1 QUESTION TO PONDER
Has anybody seen or heard any smart takes on how OpenAI’s new o1 transformer, which uses “thinking” time rather than training data to scale up its performance, might address regulatory concerns about both AI accuracy and explainability?
I wanted to write about it in last week’s newsletter, but I didn’t know quite enough to do so intelligently (and I didn’t trust ChatGPT to be unbiased 😂).
