Well, this was predictable.
Happy Monday, Fintech Fans!
I’m back from vacation!
After a week of having to entertain kids nonstop, I have picked up a number of new tricks and fun facts. I’ll save most of them for the fintech parenting podcast I want to launch someday.
But, in the meantime, here’s one fun fact for y’all — humpback whales disrupt Orca hunts.
It’s a well-documented behavior that is utterly baffling to scientists. The humpbacks aren’t just doing it to protect their own calves. They will protect other animals, such as gray whales and seals. And they will go way out of their way to do so, intervening from up to 40 miles away.
Is it an instinct? Do humpbacks just despise orcas? (This would be understandable given that orcas are godless killing machines on a level that makes the shark from Jaws look like a coyote nosing through the trash.)
Or, perhaps, are humpbacks motivated by some evolved sense of altruism that we don’t fully understand? Is that why the aliens in Star Trek IV returned to Earth to check on them (and proceeded to destroy the planet when they couldn’t find them)?
Anyway, there you go! Fun trivia!
And now, fintech!
- Alex
Horses in landscape (1928) by Leo Gestel.
3 FINTECH NEWS STORIES
#1: Giving Issuers Better Tools to Manage Disputes Copy anchor linkCopied
What happened?Copy anchor linkCopied
A fintech company focused on credit and debit card disputes raised a Series A:
Casap has just raised $25 million in new funding at a $105 million valuation, the company shared exclusively with Forbes. Silicon Valley venture firm Emergence Capital led the financing, and Lightspeed Venture Partners, Primary Venture Partners and SoFi also invested.
The startup’s software acts as a system of record and tracking tool for the surprisingly complex, highly regulated worlds of credit and debit card disputes. The resolution of disputes is a drawn-out, opaque ordeal involving a back-and-forth between a consumer, his or her bank and a merchant. Disputes often take an excruciating 45 to 90 days to resolve and can cause consumers to hate their credit card or debit card bank
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The background story here is great. The co-founders — Shanthi Shanmugam and Saisi Peter — were both fintech product managers who ended up falling into customer support at Robinhood and Chime, respectively, finding out how broken it is, and founding a company to build better customer support tools.
And, in the case of credit and debit card disputes, better tools are certainly needed.
Think about it from the issuer’s perspective. You have three foundational problems:
- You need to help your customers solve one of the most frustrating and scary problems that exists in consumer payments: I gave my card information to a company I don’t know, and I didn’t get what they promised me. Ideally, you want to solve it in a way that fosters greater affinity and trust in your brand.
- You need to engage in a highly regulated activity (card disputes are governed by both government regulators and the card networks) that includes a lot of heavy and expensive operational work (dispute investigations frequently involve dozens of back-and-forth interactions with consumers and merchants, along with lots of manual evidence gathering). Additionally, this work is often quite adversarial, as merchants have an even greater incentive than card issuers to “win” disputes, and there are dozens of cutting-edge fintech companies that have built tools designed to help merchants do just that.
- You need to protect yourself from first-party fraud (in which a consumer falsely claims not to have received the good or service that they purchased). This form of fraud has absolutely EXPLODED over the last few years, as social media influencers have educated consumers on it while softening the language to make it feel more acceptable (rebranding fraud to “hacks”). Indeed, today, consumers increasingly opt for the convenience of a chargeback over the hassle of obtaining a refund for a product they no longer want.
Casap has reportedly built a product that addresses all three problems.
Customer experience:
Banks usually outsource dispute management, paying $20 to $40 per dispute, Shanmugam says. When end customers call their bank to ask for an update, banks themselves have little visibility into a dispute’s status, leaving everyone frustrated.
Casap takes a cue from Domino’s beloved pizza-delivery tracker and provides a status update page for consumers on where the dispute stands. Rob Keatts, an executive vice president at Chartway, says it used to take the credit union 90 days to resolve disputes. Now with Casap, it takes 23 days on average.
Operational efficiency:
After consumers click submit on a dispute, Casap’s AI analyzes their responses and spits out a probability score for the bank’s operations staff, predicting how likely the merchant will be to cough up the refund. If that probability is high, the bank can instantly issue a refund to the consumer, since it now has more confidence it will be made whole.
As a dispute progresses, the merchant’s side of the story might come back in a tedious, 50-page document. Casap runs the seller’s response through its own AI and generative AI models from OpenAI and Google to summarize and evaluate its validity.
Shanmugam says Casap charges less than half of what incumbents charge for dispute management.
First-party fraud:
Beyond trying to improve disputes for honest consumers, Casap aims to fight first-party fraud, which means schemes where people commit fraud under their own names. A typical example: Your neighbor has buyer’s remorse over a TV he ordered from Best Buy, so he files a phony dispute saying he never received it. First-party fraud costs businesses an estimated $100 billion a year, according to fraud prevention firm Socure. To help banks, Casap’s software flags how many disputes a customer has previously filed and can send automated emails to serial disputers.
Shanmugam explains what the email might say: “Here are the 10 disputes you filed. Here's what happened and how much money your bank lost. By the way, did you know it's illegal to lie about these things?” Shanmugam calls this a “rehabilitation email” and says such notes help nudge consumers towards better behavior.
#2: Well, this was predictable. Copy anchor linkCopied
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It appears that regulated payment stablecoins in the U.S. will offer yield (for the time being):
During the months-long debate over stablecoin legislation this spring, crypto industry leaders tried, and failed, to notch a key victory: getting lawmakers on board with interest-bearing stablecoins.
The GENIUS Act, which formally legalizes approved stablecoins in the U.S. and was signed into law last month, now prohibits stablecoin issuers from engaging in the increasingly common practice of offering users passive yield—typically, between 3% and 5%—on staked or deposited balances.
Republican congressional leaders ultimately deemed the incentive program too lucrative, arguing stablecoins should be greenlit as a payment currency, not as an investment product.
But in the aftermath of GENIUS’ passage, American payment heavyweights have barreled forward with plans to reward stablecoin holders with yields between 3% and 5% on deposits.
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That indignant sputtering sound you hear is the bank trade associations, which made a prohibition on yield-bearing stablecoins a key priority in their lobbying efforts on the GENIUS Act.
So, how is it that Coinbase and PayPal feel comfortable moving forward?
The story continues:
On quarterly earnings calls late last week, leadership at Coinbase and PayPal promised shareholders that both companies will remain committed to offering enticing “rewards programs” to stablecoin holders, despite prohibitions against stablecoin yield in the GENIUS Act.
When pressed on the issue by a shareholder during Coinbase’s earnings call Thursday, CEO Brian Armstrong doubled down on plans to offer holders stablecoin rewards long into the future, stating the program is a key reason customers choose Coinbase over competitors.
“In the GENIUS Act, there is a prohibition by the issuer of stablecoins on paying interest and yield,” Armstrong said. “First, we are not the issuer. And second, we don’t pay interest in yield, we pay rewards,” he continued.
Armstrong’s explanation touches on two of the three likely workarounds that companies will use to offer yield on stablecoins:
- Partnering with stablecoin issuers. As he said, Coinbase isn’t technically the issuer of USDC. Never mind the fact that Coinbase owns an equity stake in the company that issues USDC (Circle) and has a distribution partnership that is so lucrative that Coinbase actually makes more money on USDC than Circle does. Or, as my kids would say, “not touching, can’t get mad!”
- Not using the words “yield” or “interest”. These are “rewards,” which are a completely different thing and aren’t subject to this rule. My eldest son tried out a version of this strategy with me the other day, when he said I was acting like a “jark” rather than a “jerk” in order to express his feelings without getting in trouble. (Editor’s Note — I knew teaching him to spell would come back to bite me in the ass.)
The third approach, which I suspect we will also see, is enabling consumers to earn yield on stablecoins by staking those stablecoins with third parties (which are not subject to the GENIUS Act).
This is particularly dangerous as it may lead to consumer confusion about the risks that they are taking with their funds. The experience will likely appear integrated (move your stablecoins from your ‘operating account’ to your ‘yield account’), in a similar fashion to how checking and savings accounts are often integrated into a single digital banking app. However, unlike traditional banking, where it’s all just regulated, FDIC-insured deposits moving behind the scenes, the movement of funds from regulated stablecoins to unregulated third-party staking services may involve taking on significant risk (depending on what those third parties are doing to generate yield). Simon Taylor and I talked about one such third-party service provider (OpenTrade) in a recent edition of Not Fintech Investment Advice.
I should note that it is possible that the regulators who write the rules implementing the GENIUS Act (primarily the OCC) could take an aggressive stance on the question of yield. For example, the regulations could spell out that any remuneration tied to balance size, duration of holding, or mere retention — including “rewards,” “cashback,” “rebates,” points convertible to cash, or tiered perks — counts as prohibited yield when offered by or through the issuer or its affiliates. The regulations could also adopt an anti-evasion standard that treats yield offered by affiliates, program managers, or white-label partners as the issuer’s activity “by or through” a third party.
This is theoretically possible, but I suspect that we won’t see this type of hardline stance from the OCC (or other regulators), given the significant influence that the crypto lobby wields with the Trump Administration. Furthermore, any excessive ‘coloring outside the lines’ by regulators in the rulemaking process would be easily challengeable in court, thanks to Loper Bright.
#3: Groundhog Day Copy anchor linkCopied
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The Wall Street Journal won’t stop writing about BNPL and the credit bureaus:
Credit scores are supposed to start incorporating “buy now, pay later” loans this fall. The plans may already be hitting a speed bump.
Klarna, one of the biggest providers of the popular loans, said it wouldn’t share data about the bulk of its loans with credit bureaus until it gets assurances that its customers won’t be unfairly penalized for using its payment options. BNPL provider Afterpay has also said it plans to withhold data until it has proof its customers won’t be harmed.
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I feel like Phil Connors, right as he starts to get really desperate halfway through the movie Groundhog Day:
Once again, the eyes of the nation have turned here to this ... tiny village in Western Pennsylvania. Blah, blah, blah, blah! Look, there is no way that this winter is *ever* going to end as long as this groundhog keeps seeing his shadow. I don't see any other way out. He's gotta be stopped. And I have to stop him.
When will the Wall Street Journal stop misreporting on the topic of BNPL providers furnishing data to the credit bureaus? What will it take to stop that from happening? How do I break this timeloop that I’m trapped in?
I mean, look at the lede from this most recent article: “Credit scores are supposed to start incorporating 'buy now, pay later' loans this fall.”
The Journal’s evidence for that claim is this earlier article that it published, when FICO announced its new BNPL credit score, in which the Journal wrote, “In April, Affirm began reporting all new loans—including its “pay in four” plans—to Experian and TransUnion, a move other providers are expected to follow.”
Let me be as clear as I can: There has never been any evidence to suggest that Klarna and Afterpay (which are the big pay-in-4 BNPL providers in the U.S.) have any interest in furnishing their data to the credit bureaus.
I’m not sure who has been telling the Wall Street Journal otherwise (FICO? The credit bureaus?), but it is not going to happen anytime soon. And it would be great if reporters who insist on covering this story could apply some basic logic rather than simply believing everything they’re told.
For example, the big pay-in-4 BNPL providers used to explain their unwillingness to furnish data to the bureaus by claiming that the bureaus weren’t ready, technically, to accept the data. This was true a couple of years ago, but no longer.
So, now the goal posts have moved. Now the BNPL providers say that they won’t furnish data until they are guaranteed that the data won’t harm their customers’ credit scores:
Klarna says sharing its customer data widely leaves it open to interpretation.
Klarna said that it supports credit reporting but that the U.S. system isn’t yet equipped to accurately evaluate BNPL data. Klarna said it wants assurances from credit-reporting companies that BNPL use will be interpreted fairly, with on-time payments rewarded.
To be frank, this is bullshit.
Of course, sharing data widely leaves it open to interpretation. That’s the whole point of the credit reporting system! It provides each lender with the opportunity to evaluate the data independently and draw their own conclusions. The credit bureaus are just the aggregators of the data. They can’t provide assurances on how lenders will choose to evaluate it. That’s not how any of this works!!!
The reality, which hasn’t changed, is that the pay-in-4 BNPL companies view their repayment data as a competitive advantage, and they don’t want to incur costs (furnishing data is an investment) to share it with their competitors. Additionally, one of the primary appeals of pay-in-4 BNPL is the promise that it won’t hurt users’ credit scores. That benefit attracts a lot of risky but profitable customers for Klarna and Afterpay, and they are not interested in any arrangement that might compromise it.
This has nothing to do with consumer fairness. It’s just a cold, calculated business strategy.
You would think the business paper of record would be able to figure that out.
2 READING RECOMMENDATIONS
#1: The American Dream Isn't Dead, It Just Outgrew the 30-Year Mortgage (by Marisa Calderon, Open Banker) 📚Copy anchor linkCopied
This is a really good piece on the need for continued evolution in home financing (especially with the support of the FHFA and other policymakers) to support innovative and responsible new models of homeownership, which may look very different from a conventional 30-year mortgage.
I also appreciated Marisa’s warning about predatory products in this area, which have been raising some alarm bells for me over the last few years.
#2: In "Debanking 2.0," Trump Sees Himself As A Victim of Discrimination (by Jason Mikula, Fintech Business Weekly) 📚Copy anchor linkCopied
Tons of goodness in here, including debanking, a possible light at the end of the Synapse tunnel, Chime, and open banking.
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.
What’s the best policy approach to preventing debanking while allowing banks the appropriate amount of space to run their own businesses and take reasonable risks?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
INPUT REQUESTED!
I’m working with Dilly Labs and the wise and powerful Tom Johnson on a little research project and I am looking for folks who work at a consumer lending company (bank, credit union, non-bank lenders, etc.) and who have experience buying/implementing/working with credit decision engines to fill out a quick survey.
Credit Decision Engine Vendor Survey
I promise it won’t take long! And it will be extremely helpful! So …
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
