
3 FINTECH NEWS STORIES
#1: Bad Fiduciary!
What happened?
PNC got sued by some of its customers:
PNC Financial is facing a class action lawsuit after one of its customers alleged in court documents that the banker profited at clients’ expense.
The claim is that PNC placed invested cash from clients’ investment accounts into affiliated PNC Bank accounts, earning customers a mere 0.04% in interest while other banks and money market accounts offered rates around 5%.
“Because PNC Bank’s accounts pay far below market rates of interest, plaintiff and other class members have lost significant amounts of interest they would have otherwise earned had PNC Financial swept their cash into bank accounts that pay a reasonable market rate of interest,” the lawsuit said.
So what?
This is becoming a bit of a trend. The CFPB sued Capital One over similar conduct last month. In my analysis of that suit, I wrote:
This is how fractional reserve banking (in which banks take in deposits that can be withdrawn at any time and lend them out through structured repayment arrangements … a process known as maturity transformation) works.
Banks will use dry, technical-sounding terms to describe this strategy, such as “deposit franchises” and “deposit betas,” but those are essentially code for “we have lazy customers who won’t constantly monitor our interest rates, and thus we can take advantage of them when rates change to maximize our revenue.”
It’s not very nice, but it’s very much how banking works.
The question is, where is the line? Under what circumstances does maturity transformation become a UDAAP violation?
Can a bank promise to deliver a competitive interest rate on its flagship savings account and then launch a second, similarly-named account that pays a higher rate and keep it a secret from all of its existing customers?
Rohit Chopra’s CFPB (RIP) didn’t think so.
Can a bank holding company deliver sticky, low-cost deposits to its bank subsidiary by having its investment subsidiary sweep excess money from its investment accounts into that bank’s accounts rather than shopping them around to get the highest rate for its customers? Is that OK? Even if the investment company is supposed to act in a fiduciary capacity for those customers?
The plaintiffs in this lawsuit don’t think so.
In the short term, it will be interesting to see how the courts feel about these questions (although it seems very possible that the new CFPB won’t vigorously pursue the Cap One lawsuit).
In the long term, I expect technology (specifically the combination of open banking and AI agents) will render banks’ deposit pricing trickery irrelevant. All money will be hot by default, and banks will need to figure out different, more durable approaches to acquiring and retaining low-cost deposits.
#2: Incremental Infrastructure Innovations
What happened?
A couple of small product/partnership announcements from the world of cash flow underwriting.
Today, Nova Credit unveiled industry-leading fraud detection capabilities in Income Navigator, significantly strengthening our ability to identify falsified documents. Our enhanced platform improves our analysis of both PDFs and images, now detecting sophisticated tampering through more than 700 fraud indicators distilled into clear insights.
The alliance between LexisNexis Risk Solutions and Prism Data offers lenders a more comprehensive approach to credit data solutions, aiming to clarify consumer credit risk. By embracing these advancements, lenders can not only enhance their risk assessment strategies but also foster financial inclusion.
So what?
We have A LOT of work to do to bring the infrastructure that supports cash flow underwriting up to par with the infrastructure that supports traditional credit underwriting, and if you watch the big players in this space closely, you’ll notice that’s precisely what they’re doing.
For Nova Credit, this product enhancement makes its income verification product more robust.
While the platonic ideal in income verification is direct, system-to-system verification (both the most convenient and most reliable option), it’s not possible (yet) to build fully comprehensive and reliable coverage using direct data integrations with banks and payroll systems. And income verification is a business that requires fully comprehensive and reliable coverage (mortgage lenders are fussy that way).
Thus, the waterfall verification process that Nova enables, which allows end customers to manually upload paystubs when direct data integrations don’t work or aren’t available. However, the fear that lenders have with this backup option is that it will become a new vector for fraudsters, especially in the era of generative AI (hey, ChatGPT, please create a fake paystub for me). This product enhancement is aimed at alleviating those concerns.
For Prism Data, this is the continuation of a very smart partnership strategy, which it has pursued for the past couple of years.
One of the biggest hurdles that Prism and other players in the cash flow underwriting space need to overcome is helping lenders move from using cash flow data for second-look underwriting (in which cash flow data is only used when credit data isn’t enough for an approval) to dual-source integrated underwriting (in which cash flow data is used alongside credit data for every application).
By working with the biggest traditional CRAs (like LexisNexis) to jointly develop, backtest, and implement credit and cash flow attributes and scores, Prism can help lenders feel more comfortable jumping up to that next level.
#3: Better On-Ramps!
What happened?
Foyer, an early-stage fintech company, just raised a seed round:
On Foyer, users can create target savings goals and access personalized guidance on the best ways to save for a home, information about mortgage rates, and choosing a real estate firm. The company has a subscription model, offering memberships to users looking for more support. It can connect users with real estate professionals and also allows customers to earn rewards that can be used toward a home purchase.
Investors clearly see some shine in the idea. Today, Foyer is announcing a $6.2 million seed round led by Alpaca VC and Hometeam Ventures. Accion Venture Lab and Clocktower Ventures also participated in the round.
So what?
I first chatted with Landy Liu (founder of Foyer) more than a year ago. I loved this idea when I first heard about it, and I love it now.
Foyer checks a few different boxes for me:
- Employer-sponsored fintech. Foyer also partners with employers to create housing benefits for their employees, which is very smart given the impact that housing affordability can have on employee retention. After cooling on the idea, I’m all the way back in on the “fintech as a benefit” trend, in which fintech companies distribute their products through employers. (Related – Watch Chime very carefully in this space).
- Better on-ramps. One of the most significant opportunities in fintech is building a product that tells customers, “It’s OK that you don’t understand how to get started. Banks haven’t made this easy. Don’t feel embarrassed. We’re here to help.” I call these fintech products “better on-ramps,” and there is a massive opportunity to build them in this area, given Gen Z’s growing nihilism regarding homeownership.
- Fintech + tax-advantaged accounts. There are many different types of tax-advantaged accounts in the U.S. (retirement, college savings, disabilities, etc.) and some of my favorite fintech innovations were designed to make such accounts more accessible and usable. 12 U.S. states offer First-time Homebuyer Savings Accounts (FHSAs), and it appears (from my read of the company’s website) that Foyer helps its eligible customers take advantage of them.
- Savings as a wedge product. The beauty of making a savings account the centerpiece of your product is that it self-selects for customers based on a very simple but important question — what are you saving up for? That self-selection creates tremendous downstream opportunities because you understand your customers’ intent (one of the ways that Foyer makes money is by partnering with real estate service providers who want access to Foyer’s customers). More fintech companies should use savings accounts as a wedge product.
2 FINTECH CONTENT RECOMMENDATIONS
#1: Visa wants a bigger slice of commercial payments (by Jevgenijs Kazanins, Popular Fintech) 📚
I really can’t believe that Jev’s newsletter is free, but whatever, I’m not complaining. His latest piece on Visa and Mastercard’s ambition to move more commercial payments volume to their networks is a great read.
#2: Elon Musk May Have Your Social Security Number (by Chas Danner, Intelligencer) 📚
Between tariffs (what did Canada do to deserve this?!?), NBA trades (we didn’t even talk about De’Aaron Fox teaming up with Wemby!), and a never-ending stream of AI headlines, I’ll forgive you if you missed the news that Elon Musk and his band of DOGE warriors got access to the U.S. Treasury Department’s payment system, which is used to distribute $500 billion in payments per month for things like Social Security and veterans’ benefits.
This article gives a good rundown of what happened and what it might mean.
1 QUESTION TO PONDER
Will Klarna, once it goes public, trade at a higher premium than Affirm? The public market is generally a pretty dispassionate judge and I’m curious to hear your thoughts on how it will evaluate Klarna relative to its peers.