Nukes Detonated Off the Coast of BaaS Island
Happy Monday, Followers of Fintech!
A (belated) Happy Mother’s Day to all the fintech moms out there, including and especially my mom and my wife. Y’all are a force of nature, and I appreciate you.
Before we dive into the news, a few things to share:
- As I announced in Friday’s newsletter, I will be hosting a virtual summit on BNPL on June 26th. If you’re available, you should attend. It’s going to be awesome.
- Also, as per usual, my monthly Fintech Office Hours event is coming up on Wednesday of this week. I’ll be reviewing the latest happenings in fintech and answering your questions, so be sure to register. It’s free.
- If you’re looking for something to watch/listen to, my friend Zach Anderson Pettet had me on his podcast – Fintech Family Hour. As always, we had a ton of fun. The focus of our conversation was credit reports and scores, which … I have some thoughts on! Listen on Apple or Spotify or watch on YouTube.
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Palm tree with an island (ca. 1891–1941) by Leo Gestel.
3 FINTECH NEWS STORIES
#1: Nukes Denoated Off the Coast of BaaS Island Copy anchor linkCopied
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TabaPay's proposed deal to acquire Synapse collapsed, as Synapse cannot locate $50 million in user funds that it alleges that startup neobank Mercury improperly moved out of its accounts:
With the collapse of the TabaPay deal, the Synapse bankruptcy estate having its access to funding likely cut off in five days, and Lineage terminating ACH and wire processing for Synapse and its clients today, there really are no good paths forward at this point.
Judge Martin Barash, who is overseeing the bankruptcy case, commented that the fallout of the acquisition not being approved would be a “hot mess.”
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Our embedded reporter on BaaS Island, Jason Mikula, is now telling us that all remaining residents are stockpiling drinkable water and anti-radiation medication as they await the fallout.
My goodness. This is exactly the opposite of what the doctor ordered for BaaS (and fintech, more broadly) at this moment.
The gist is that TabaPay didn’t want to buy Synapse until Synapse could confirm that all the money that should have been sitting in its accounts was, in fact, there. Synapse and Evolve (Synapse’s old banking partner) are having a disagreement about that point, which involves Mercury, a former fintech client that is now working directly with Evolve. Due to the inability to resolve this disagreement, TabaPay isn’t buying Synapse, and Synapse is almost out of money and is having its banking services turned off by its existing banking partner (Lineage Bank).
And here’s the really terrifying potential outcome of all of this, as outlined by Lineage’s lawyer:
There are approximately $60 million to $80 million of Synapse end-user funds held at Lineage in an FBO in Synapse’s name, that, absent Synapse’s cooperation or access to information that it controls, Lineage cannot return to users.
As I and others have said before, FBO accounts are the original sin of banking-as-a-service. The worst possible outcomes in BaaS all have one thing in common – the bank doesn’t know whose money is whose.
I know prudential regulators don’t like to be prescriptive when it comes to guidance on topics like third-party risk management, but I wish they would make one specific exception – BAN FBO ACCOUNTS IN BAAS!
#2: Direct Lending is Usually a Bad IdeaCopy anchor linkCopied
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The Small Business Administration (SBA) wants to directly make loans to small businesses:
In 2022, the agency sought unsuccessfully to win approval for a plan letting it make loans under its flagship 7(a) program, as well as guaranteeing them. SBA renewed the push last month, only to see the staunch opposition that characterized the initial bid quickly resurface.
In addition to near unified condemnation from congressional Republicans, direct lending has triggered similarly strong, similarly negative reactions from financial services trade groups.
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To start, I’ll say that we probably shouldn’t care too much about what financial services trade groups think on this particular issue. Those groups stress the importance of the current SBA 7(a) model – the public-private partnership – while, at the same time, vigorously opposing the SBA’s plan to open up participation for more non-bank lenders in that public-private partnership. Give me a break.
We should also acknowledge the problem that the SBA is trying to solve. In 2023, the denial rate for loans and lines of credit for Black-owned businesses was roughly twice what it was for white-owned businesses. The racial small business lending gap is real.
That said, the history of direct lending at the SBA doesn’t inspire much confidence.
One government study found direct loans originated by the SBA – such as Economic Opportunity Loans – produced significantly higher loss rates than the private-sector credits guaranteed by the SBA. For example, in 1978, direct loans had a 6.61% loss rate, compared to 3.37% for guaranteed private-sector loans.
The SBA should stick to strengthening the public-private partnership model, and leave the actual lending to banks, credit unions, and qualified non-bank lenders.
#3: Chime Must Always Be Above Reproach, ApparentlyCopy anchor linkCopied
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Chime entered into a consent order with the CFPB:
The Consumer Financial Protection Bureau (CFPB) has taken enforcement action against consumer fintech company Chime Financial for “failing to give consumers timely refunds when their accounts were closed.”
In a news release on Tuesday, the watchdog agency said that “thousands of consumers [waited] weeks or even months” to get their remaining balances back from Chime after closing their accounts. As a result, the CFPB is levying a $3.25 million penalty against the company, and ordering it to repay at least $1.3 million to customers.
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Let’s start by looking at this story through a narrow lens.
It’s obviously not good. Customers were supposed to get a check within 14 days and many of them had to wait significantly longer. And given that these customers probably weren’t flush with cash, those delays likely caused some serious problems. It’s right for Chime to be punished here, and the company seems to agree based on this quote given to Jason Mikula:
Our settlement agreement with the CFPB reflects our belief that the timely handling of customer matters is critical, even amid the pandemic’s unique challenges. In this case, the majority of the delayed refunds were caused by a configuration error with a third-party vendor during 2020 and 2021. When Chime discovered the issue, we worked with our vendor to resolve the error and issued refunds to impacted consumers.
More broadly, however, this story is a bit weird.
It seems obvious it was a mistake (a configuration error at Galileo, according to Mr. Mikula’s analysis of the story). Again, it’s not good, but it happens from time to time. Nothing here seems like an intentional attempt to deceive or steal from customers, but Chime is still getting hit over it.
In fact, the CFPB found that they were at fault as both the “covered person” engaged in “deposit-taking activities” and as the “service provider” that enables its partner banks. Chime is getting whacked twice for the same thing while its partner banks (The Bancorp Bank and Stride Bank) and its own service provider (Galileo) get off with no punishment.
That’s weird!
I understand it when this happens in the world of prudential regulation. The OCC, Fed, and FDIC don’t want to hear from banks how it was their fintech partners (or their service providers) that screwed up. The bank is responsible for everything that happens under its charter. End of story.
However, the CFPB has a lot of discretion when it comes to stuff like UDAAP. Why single out Chime while leaving the other parties in the stack untouched? And for that matter, why hit Chime on this while allowing numerous less-well-known neobanks and B2C fintech companies to get away with stuff that is orders of magnitude worse?
2 FINTECH CONTENT RECOMMENDATIONS
#1: A Few Reasons to be Bullish on PayPal (by Jevgenijs Kazanins, Popular Fintech) 📚Copy anchor linkCopied
Everyone is down on PayPal right now, but very few people actually pay attention to the quarter-to-quarter numbers and trends like Mr. Kazanins.
Go Jev! Zag! Keep zagging!
#2: No One Knows What Universities Are For (by Derek Thompson, The Atlantic) 📚 Copy anchor linkCopied
This isn’t fintech content, but I think the broader lesson is really interesting for any organization that is growing.
Thompson’s main point is that as universities get bigger, they tend to hire more administrators (in fact, the increase in the number of administrators at many universities is outpacing the growth in students and professors). When that happens, all those new administrators bring their own goals and objectives, and the mission and focus of the university – the things that made it special – are muddied.
1 QUESTION TO PONDER
With the BNPL Summit coming up, I’d love to know what specific BNPL questions, topics, and debates you’d be most interested in learning more about and get your suggestions on good speakers for the event.
If you have any thoughts on this question, reply to this email or hit me up on Twitter or LinkedIn.
JOBS
Here are some jobs that I’m curating for fintech operators. You can see the full list of jobs I’ve curated here. If you’re looking to hire, use the promo code FINTECHTAKES to get your first job listing free on my curated job board.
Product Manager - Developer Platform, Plaid
As our Internal Developer Platform PM, the person in this role will help identify, maintain, and incrementally deliver value on an evolving set of priorities in the Internal Developer Platform space. Doing so will require using all of the tools in the PM toolbox, including understanding the needs of customers (Plaid's engineers), collecting and reporting on data, and developing the product artifacts (e.g., strategy, roadmaps, user stories, briefs) that keep the team engaged, aligned, and excited.
Director of Product Management, Banking Products, Chime
The person in this role will lead the product management teams building the cards, products, and experiences that empower Chime members to use and spend their money, and power Chime’s business model. This person will define and execute the company’s vision to redefine at-scale consumer banking products and the spending experience for millions of everyday Americans.
Director, Product Management, Affirm
As a Director of Product on the Network Growth team at Affirm, the person in this role will play a pivotal role in shaping the future of consumer financial services, commerce, and payments. The Network Growth team is responsible for growing the adoption of the Affirm payments amongst merchants, consumers and partners. They do this by building Merchant Solutions that scale whether by building our own merchant self service experiences or growing via strategic partners and custom, API-based solutions.
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
