It Always Feels Worse When It Happens to You
By Alex Johnson
3 Fintech News Stories
#1: It Always Feels Worse When It Happens to You
Digit, a fintech company focused on helping consumers save money, got into trouble with the CFPB:
The Consumer Financial Protection Bureau (CFPB) is taking action against Hello Digit, LLC, a financial technology company that used a faulty algorithm that caused overdrafts and overdraft penalties for customers. Hello Digit was meant to save people money, but instead the company falsely guaranteed no overdrafts with its product, broke its promises to make amends on its mistakes, and pocketed a portion of the interest that should have gone to consumers. Today’s order requires Hello Digit to pay redress to its harmed customers. It also fines the company $2.7 million for its actions.
This one seemed to rile up the fintech Twitter community, with observers arguing that A.) the language used by the CFPB in its press release was overly harsh and B.) the penalty imposed by the CFPB was out of proportion to the actual harm caused by Digit (Digit caused 1,947 customer overdrafts, which according to Digit equates to approximately 0.008% of the total number of transactions it facilitated, meaning that more than 99.99% of transfers didn’t cause an overdraft).
This seems to me like a case of the “it always feels worse when it happens to you” phenomenon, like when one of my kids is absolutely convinced that I’m unfairly punishing them compared to how I treat their sibling.
Here’s the reality: A.) the language the CFPB used in the Digit release was harsh because that’s what Chopra does … with everyone. Go back and look at the language used in press releases announcing enforcement actions against banks or specialty finance companies or the credit bureaus. It’s all brutal. B.) Digit’s argument that it delivered better than four nines of ‘uptime’ sounds great, until you compare it to other service failures in financial services. It was recently reported that Equifax provided inaccurate credit scores on millions of U.S. consumers seeking loans during a three-week period earlier this year. Now, the material impact of these mistaken score calculations appears to have been fairly small, but that didn’t stop widespread condemnation from pouring in from all sides, including Maxine Waters (chairwoman of the House Financial Services Committee) asking the CFPB to stop Equifax from selling credit scores to lenders until the credit-reporting firm can prove it has the controls in place to ensure its scores are correct. And yet, proportionally, I am confident that Equifax has delivered a better uptime than Digit during the time period that Digit got in trouble for. I haven’t seen any of the folks that jumped to Digit’s defense arguing that the CFPB should go easy on Equifax.
The CFPB shouldn’t go easy on anyone. We’re dealing with people’s money here. There should be consequences when you screw up and if you can’t handle a strongly-worded press release, switch to an easier industry.
#2: If Anyone Can Do It …
Starbucks is getting into NFTs:
Starbucks will unveil its web3 initiative, which includes coffee-themed NFTs, at next month’s Investor Day event. The company earlier this year announced its plans to enter the web3 space, noting its NFTs wouldn’t just serve as digital collectibles, but would provide their owners with access to exclusive content and other perks.
The idea that NFTs can boost customer loyalty by unlocking exclusive content, events, and other perks has been around for a while.
The only reason that I can tell for why this loyalty functionality needs to be enabled by a blockchain rather than a good old-fashioned web2 database is that an NFT can retain its value after it’s used and become a tradable asset. This seems like a rather dubious value proposition to me (maybe Gary Vee can convince you otherwise).
That said, Starbucks is one of the few companies out there that I actually trust with this stuff. The company built an incredibly successful digital wallet to enable its mobile order and pay functionality. And it seems to be taking a similarly thoughtful approach with this initiative:
While some companies jumped on the NFT bandwagon without much thought as to how their investments would fit in with their larger business goals, Starbucks seems to be attempting a different approach. It sees the collectibles as an extension of customer loyalty. The company brought in Adam Brotman, the architect of its Mobile Order & Pay system and the Starbucks app, to help serve as a special advisor on the project.
I’m skeptical, but if anyone can do it, it’s Starbucks.
#3: How to Do Bank-led BaaS
Central Bank in Kansas City is spinning off Central Payments:
Central Payments, a payments-tech and card-issuing platform, today announced it has raised $30 million in growth equity financing that will spin it out from Central Bank of Kansas City.
“Since inception, we have remained steadfast in our belief that new technology and the stability of a bank charter create opportunity for banks in fintech and embedded finance when others may have perceived a threat,” Central Payments Founder and President Trent Sorbe said in a prepared statement.
Most community banks that I speak with have absolutely no idea how to get into BaaS. They know they want to, but they have no idea how to do it. A lot of them end up defaulting to a partner-with-a-BaaS-platform strategy, without really considering any alternatives.
Central Payments is a useful case study for these banks to look at.
Create a technology platform to facilitate fintech partners, in a specific niche that you know well and can specialize in (e.g. payments). Build an accelerator program (Central Payments’ program is called Falls Fintech) in order to give yourself an advantage in acquiring fintech startups as customers. And when the business is sufficiently mature, raise capital and spin it off from the bank so that it can move at ‘fintech speed’ and continue growing.
2 Fintech Content Recommendations
#1: Your Data Science Problems are Engineering Problems (by Francisco Javier Arceo, Chaos Engineering)
The best thing about the internet is when people who are nice and smart and knowledgable about important things that I don’t understand very well start writing about those important things and giving their writing away for free.
His first post is about the futility of hiring data scientists or trying to wring value out of machine learning if you have bad engineering or systems that are outputting bad data. I found it fascinating.
#2: Where Money Meets Feelings: Financial Therapy Finds Its Footing (by Charlotte Cowles, The New York Times)
It’s very gratifying to write about something in my newsletter – like why personal financial management (PFM) just won’t die – and then see a mainstream news story about a related topic.
This NYT story delves into the emergence of financial therapy, which is a very specific and increasingly popular branch off of financial advising and therapy that deals with the emotional impacts of money and helps people understand how money impacts their happiness and wellbeing.
Financial therapy is inspiring a lot of the innovation happening in PFM right now and, as such, it’s a worthy topic to learn more about.
1 Question to Ponder
I feel like a lot of fintech innovation – income sharing agreements, neobanks for low-income consumers, etc. – fills the role that government could and (arguably should) be playing in helping provide basic services and opportunities to citizens.
If you could wave a magic wand and make one public policy proposal – caps on college tuition, baby bonds, a higher minimum wage, etc – a reality, which one do you think would have the biggest positive effect on accelerating fintech’s mission to improve financial access and outcomes for underserved consumers?