FICO Hits Back
Happy Monday, Fintech Takers!
I’m looking forward to this week’s Fintech Takes Coworking Day in Washington, D.C.
I am also looking forward to the networking reception that evening, hosted by the good folks at Canapi Ventures. If you’ll be in D.C. on Thursday (10/9), you can register to attend. I’d love to see you there!
I’ll also be in town for a while on Friday, before I fly back home, in case anyone wants to grab a quick coffee.
- Alex
Dempsey and Firpo (1923–1924) by George Wesley Bellows.
3 FINTECH NEWS STORIES
#1: FICO Hits Back Copy anchor linkCopied
What happened?Copy anchor linkCopied
Well, now things are going to get interesting:
Fair Isaac is upending the credit-scoring industry by giving mortgage lenders a way to get its credit scores without buying them from Experian, Equifax or TransUnion.
Until now, mortgage credit specialists known as tri-merge resellers had to purchase FICO scores through Experian, TransUnion and Equifax to provide lenders with a combined score drawing from all three. These resellers exist because federal guidelines require mortgage lenders to evaluate scores from each bureau, but lenders prefer to work with a single company.
FICO sells algorithms that generate three-digit credit scores based on data compiled by the credit bureaus and doesn’t have access to the same type of customer data on its own. That means resellers will still have to pay bureaus for credit reports, even if they opt to buy the score directly from FICO.
FICO’s new program streamlines that process by letting resellers buy scores straight from the company for $4.95—the same price it charges credit bureaus—and an additional $33 once a loan closes. Under the new program, both fees are charged for scores from each credit bureau. After credit-bureau mark ups, the average cost for resellers and other mortgage companies is about $10 a score.
So what?Copy anchor linkCopied
Let’s start by clarifying exactly what’s happening here.
FICO is now offering to directly distribute its score to the companies that resell it to mortgage lenders, rather than requiring them to go through the credit bureaus. FICO is offering these resellers two different pricing options.
Option #1 is a $4.95 fee for each pull, plus a $33 fee (per bureau) for each closed loan. Option #2 is a flat $10 fee for each pull, with no closing fee. Option #2 mirrors the cost that resellers already pay to the credit bureaus (the bureaus mark up the score by 100%). Option #1 provides a cheaper option for lenders with high pull-to-close ratios (lenders are allowed to pass closing costs on to borrowers).
Excuse my indelicate languague, but this move is, first and foremost, about FICO telling the credit bureaus to go fuck themselves.
It’s an understandable response to the constant lobbying that the bureaus have been doing through VantageScore to end FICO’s monopoly over the mortgage credit score market, which succeeded earlier this year when the FHFA announced that it would be putting VantageScore 4.0 and Classic FICO on equal footing.
FICO obviously objects to the credit bureaus having their cake (a 100% markup on the FICO Scores they resell) and eating it too (getting VantageScore 4.0 officially blessed by the FHFA as a competitor to FICO for those same transactions).
As a result of this move, FICO’s stock price is up, and the credit bureaus’ stock prices are down. So, in a narrow sense, mission accomplished.
This move also gets Bill Pulte (somewhat) off FICO’s back.
The Director of the FHFA has been a constant thorn in FICO CEO Will Lansing’s side, with his relentless and very public campaign to lower costs for mortgage borrowers. In response to this news, Director Pulte tweeted:
(Editor’s Note — It’s a little weird that Pulte is so happy about this, given that FICO’s move is going to introduce additional technical and operational challenges for resellers and lenders, which are accustomed to one integration for retrieving both the data and the score. Avoiding technical integration disruptions was the reason that Pulte backed off from moving from a tri-merge to a bi-merge. It’s also not guaranteed to lower costs for borrowers, depending on which pricing model lenders select and how much of the costs they choose to pass along.)
Finally, and most importantly, I think this move will, with the benefit of hindsight, come to be seen as a significant inflection point in the history of the credit data and analytics market.
FICO has, for years, entertained the idea of directly distributing its scores, rather than relying solely on the credit bureaus. Ever since 2006, when VantageScore was launched, it has been clear that the company’s reliance on the bureaus is a strategic vulnerability.
However, until now, FICO never took that step.
I think the main reason is that, despite the public spats that FICO and the credit bureaus have gotten into over the years, they both implicitly understood just how valuable their shared control over the credit data and analytics market was. Sure, FICO spent the last seven years aggressively raising the price of the FICO Score for mortgage lending, which put a Bill Pulte-shaped target on everyone’s back. But it’s not like those pricing increases didn’t benefit the credit bureaus as well. The bureaus were marking up those higher prices by 100%. It was a mutually beneficial arrangement!
Now, FICO and the credit bureaus’ unified control over the credit data and analytics market is over. Their relationship has fractured in a way that won’t be easy to repair. The credit bureaus are going to have to respond to this move by more aggressively leaning into the VantageScore and bundling it with their data products. FICO may look at opening up its scores outside of mortgage and forming new distribution partnerships with decisioning platforms and alternative data providers. And, most importantly, lenders are now going to be forced to take a more modular approach to the acquisition of credit data and credit analytics, which should further open the door to disruptors (especially in the cash flow space).
#2: Not Taking Risk is a RiskCopy anchor linkCopied
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The Comptroller of the Currency, Jonathan Gould, was interviewed last week at the AI-Native Banking and Fintech Conference.
I was in attendance, furiously scribbling notes, and I thought y’all might like to hear what he said!
So what?Copy anchor linkCopied
In his answers, Gould spent a lot of time emphasizing the importance of tailoring regulations to the risks posed by the different financial institutions, with the specific goal of reducing compliance work and costs for community banks:
We are making changes to our supervision portfolio. Do they reflect the promise of supervisory tailoring? Having a specific supervision portfolio group that is dedicated to community banks. That was really important to me, so we put that in place just a couple of weeks ago. Dropping assessments immediately across the board for banks by up to 30%, for banks up to $40 billion in assets, and trying to reduce the burden on banks.
Gould also strongly advocated for (measured) risk-taking by banks:
It could be a very real source of risk to the banking system if banks don't innovate over time. Innovation or engaging in new activities or embracing new technologies can be a source of risk. But so too can the failure to embrace them, right?
I think my job is to ensure that banks have as many paths to long-term viability and relevance as possible. And that includes ensuring that banks can, if they so desire, embrace new activities and new technologies, consistent with the law and in a safe and sound manner.
One of the things I think has occurred in the past is that regulators have sometimes taken their view that risk management means risk elimination. And trying to build a wall around the banking system. That may have some benefit in the short term, but that's not our charge as regulators. We need to take a longer-term perspective on risk. And what it means to be a steward of the federal banking system. …
As regulators, I don't want us to look at otherwise legally permissible activities or technologies and throw up our hands and say, “Well, you know, that's really hard to figure out how to do that in a safe and sound manner, so we're just gonna take the default approach.” That is not the right strategy. That is a failed strategy.
This, of course, led to an interesting discussion on debanking:
On debanking, obviously, there has been a lot of documented evidence … there was an effort to shut crypto firms out of the banking system on multiple levels that involved prohibiting banks from engaging in the legally permissible activities related to digital assets, whether it be custody or stablecoin issuance or preventing banks from actually banking crypto companies or people who just happened to work in a crypto company. I've seen that occurring still, as recently as a couple of months ago. So that is a real issue.
We've done a couple of things to try to address it. One is we've got this reputation risk rule, which is coming out. We're just gonna tie our hands going forward, so the regulators themselves will be unable to put pressure on banks to do this or that.
Gould also mentioned BSA/AML compliance as an area where debanking can creep in:
Another issue that we're working on, which is a longer-term issue and a little bit harder to solve, is BSA/AML, which is also sometimes used as a pretext to debank for other reasons.
He went on to suggest that interagency improvements to BSA/AML compliance systems, processes, and requirements could significantly reduce costs and operational burdens for banks (and potentially shrink or eliminate the market for financial crime compliance vendors):
Obviously, BSA/AML compliance is very important. The public policy objectives that those laws serve are of paramount importance. But I think BSA/AML compliance is crying out for reforms and automation. Candidly, I don't think we need these massive billion-dollar or multibillion-dollar companies that have sprung up over the last 15-20 years. It is a huge burden for banks. And we need to think of a better way to do it, while still achieving the very important public policy objectives that underlie our BSA/AML laws.
Also, on the subject of debanking, Gould pointed the finger very directly at big banks:
We are actively looking into the largest national banks and what they have done in this space. Some of them were pretty public about basically actively debanking certain kinds of politically disfavored industries that were nevertheless engaged in lawful business. So we're looking to that. We're focused on the very largest banks. This is not a phenomenon that I'm aware of occurring at smaller banks.
Gould also went out of his way to talk about banking-as-a-service:
The inability of banks to partner with fintechs or third parties is not sustainable. Banks of all sizes, but particularly smaller banks, need to be able to partner responsibly with third parties, whether it's for access to technology or balance sheet capacity, or whatever it may be. The situation over the last few years has been a disaster. … [This problem] is definitely solvable, and so I'm working actively with them to chart a path forward so that banks can actually partner with fintechs.
And, of course, AI, which Gould sees as a potentially powerful tool to level the playing field between big and small banks:
AI could help to level the playing field between banks, but only if all banks, if they so desire, can embrace it. One of the things I'm worried about is the creation of a two-tiered system where only the very, very, very largest banks have the sophisticated risk management and massive balance sheets needed to make regulators feel comfortable with them doing something new. That I really want to avoid.
However, Gould did say that he believes that many of the risk management frameworks that we have in place for AI need to be updated:
There are some specific issues. Like, for example, model risk management, where if AI falls into the trap of being deemed a model, we're all kind of screwed, right?
Our current approach to model risk management really needs to be revamped and revised because it is impeding the ability of banks to take advantage of things like AI.
Overall, Gould’s remarks were clearly designed to signal a return at the OCC to a more industry-friendly, open-to-innovation agency, albeit perhaps with a slight bias towards community banks and fintech and crypto companies and against large national banks and rent-seeking legacy vendors.
#3: Your money's in Joe's house.Copy anchor linkCopied
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Stablecoin advocates continued advancing their argument that consumers should (and, inevitably, will) receive market or near-market rates on their deposits, whether banks want to offer them or not. Patrick Collison, CEO of Stripe, recently weighed in:
I think that stablecoin issuers are going to have to share yield with others, but this is just one instance. Everyone is going to have to share yield. Today, the average interest on US savings deposits is 0.40% (FDIC data), and $4T of US bank deposits earn 0% interest.* Things aren't better in the EU: 0.25% average interest on non-corporate deposits; corporate deposits just 0.51%.** In my view, this is going to change: depositors are going to (and should!) earn something closer to a market return on their capital.
So what?Copy anchor linkCopied
Remember that scene in It’s a Wonderful Life, when there’s a run on the Bailey Building and Loan and George Bailey has to calm the nervous customers? He says:
You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
That’s not exactly how banking works, but it is roughly how banking works.
(Editor’s Note — What do we think the Bailey Building and Loan’s deposit beta was? Their members didn’t seem terribly rate-sensitive. Plus, they probably didn’t have a lot of margin to play with. I always got the sense that the Bailey Building and Loan was also being quite generous on the mortgages it was making off the other end of its balance sheet. Although that wasn’t entirely charity. George was kicking Mr. Potter’s ass on customer acquisition with his Bailey Park subdivision, filled with “dozens of the prettiest little homes you ever saw.” Regardless, there’s no way the Bailey Building and Loan was paying anywhere close to market rates on deposits. Also, thanks to the tutelage of my coworker Kiah, I can say confidently that the Baily Building and Loan was an interest-rate-risk time bomb, just waiting to explode.)
Stablecoin folks tend to think of all bankers as modern versions of Mr. Potter, ripping people off by paying 0% (or near 0%) on deposits and only making extremely lucrative commercial loans to their wealthy friends and predatory loans to desperate working-class families.
I can’t deny that there are some Mr. Potters in banking. The bank CEO who named his boat “Overdraft” comes to mind.
However, I personally know of too many counterexamples, particularly among community bankers and credit union executives, to accept that characterization as being universally accurate (or even accurate in the majority of cases). Few, if any, bankers or credit union executives are as selfless and community-oriented as George Bailey, but, for the most part, their organizations do take in deposits, pay minimal interest on them, and then use that money to make reasonably-priced loans to consumers and businesses, including many who would be otherwise unable to access them.
It cannot be understated how important that broad availability of credit is to the health and growth of the economy. Credit is, in fact, the lifeblood of the economy. And I’m not talking about overcollateralized loans made against the securities that borrowers hold in their investment portfolios. I’m talking about plain old unsecured and (non-securities-based) secured loans.
So, when stablecoin advocates argue that competition can and will force banks to pay market rates for their deposits and that such competition is ultimately going to benefit end customers, I am always going to ask this follow-up question: Who is going to lend the money back out?
Stablecoin issuers aren’t going to do it. They’re legally not allowed to.
Crypto platforms like Coinbase do make loans, but they require more than 100% of the loan’s value in crypto (usually bitcoin) as collateral.
Fintech platforms, including Stripe, also make loans, but those loans are usually funded by banks (using their cheap deposits) or by investors, including private credit funds (which have, historically, been very sensitive to downturns in macroeconomic conditions).
The simple truth is that the U.S. banking system has been designed (and thoroughly tested) to facilitate aggressive, socially-oriented, and well-regulated lending, at a massive and well-distributed scale, while ensuring the safety of customers’ deposits. The price we collectively pay for that service is something less than a market return on our money.
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MONEY20/20 SPOTLIGHT
It’s officially Money 20/20 season, which means I’ll be highlighting a handful of sessions, meetups, and happenings in every newsletter.
💰 Deepfakes, Real Risk: Fighting Fraud in an Age of Synthetic Identity | 10/26 | 3:00pm–3:30pm PT
I’m thrilled to be moderating this discussion at Money20/20, featuring the head of fraud at Varo and the co-founders and CEOs of SentiLink and Oscilar.
☕ Nova Credit Coffee + Conversation | 10/27 | 8:15am–10:30am PT
Start the AM with lending leaders unpacking the real-world journey of cash flow analytics (where to begin, how to apply it, and what it takes to make it work). Breakfast, networking, and discussion included! RSVP here.
🍸 MX Happy Hour Panel: Data into Action | 10/27 | 3:30pm–6pm PT
Small panel conversation featuring Jane Barratt (Chief Advocacy Officer, MX) and yours truly (among others!): 3:30pm–4pm panel, followed by drinks and hors d’oeuvres at The Grand Lux Cafe, Venetian (5-6). RSVP here.
🍸 Fundbox After Hours | 10/27 | 7:30pm–9:30pm PT
Come for the conversation on the future of embedded finance and small business lending. Stay for the one-on-one conversations (over drinks and appetizers, of course!)
2 READING RECOMMENDATIONS
#1: BVNK: Bvnking on Stablecoin (by Jas Shah, Fintech Under the Hood) 📚Copy anchor linkCopied
Jas does an excellent job on these sponsored deep dive essays, and I’d been wanting to learn more about BVNK anyway, so yay!
#2: Someone Tipped Me Off About a Crypto Story. What I Found Was Crazy. 📚Copy anchor linkCopied
Just a wild, wild story from the New York Times Op-Ed section.
Bonus: The Future of Consumer Credit Data and Payments 📚Copy anchor linkCopied
Why reinvent the wheel? With a few clicks, Spinwheel’s APIs instantly surface credit data, PII, and payments into a single connection - see for yourself.*
* this rec is brought to you by one of our fantastic brand partners
1 QUESTION FROM THE FINTECH TAKES NETWORK
There are a TON of interesting questions being asked in the Fintech Takes Network. I’ll share one question, sourced from the Network, each week. However, if you’d like to join the conversation, please apply to join the Fintech Takes Network.
NuBank is reportedly seeking a U.S. bank charter. What is the company’s strategy for the U.S.? Is it just going to try to out-Chime Chime? Or does it have a less obvious (but better) plan to differentiate itself in our crowded-but-lucrative market?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
FINTECH TAKES: BUILDERS SUMMIT
As you may know, Fintech Takes is hosting our first-ever in-person event on November 12th and 13th in the mountains outside Bozeman, Montana.
The Fintech Takes: Builders Summit is the industry event that I’ve always wanted, but have never quite been able to find. We are bringing together experienced founders and operators from banking and fintech — the folks who are actually building products in our industry — and giving them the content and networking opportunities they need to find (and understand) the next big problem they are going to tackle.
If that sounds like something you’d be interested in participating in, apply to attend or hit reply to this email to get more information on sponsorship opportunities. We still have room, but it is going fast!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
