Marketers’ Dark Arts
By Alex Johnson
3 Fintech News Stories
#1: Marketers’ Dark Arts
Credit Karma got in some trouble with the FTC:
The Federal Trade Commission has taken action against credit services company Credit Karma for deploying dark patterns to misrepresent that consumers were “pre-approved” for credit card offers. The FTC alleges that the company used claims that consumers were “pre-approved” and had “90% odds” to entice them to apply for offers that, in many instances, they ultimately did not qualify for. The agency’s order requires the company to pay $3 million that will be sent to consumers who wasted time applying for these credit cards and to stop making these types of deceptive claims.
Three things here.
1.) One of the easiest ways to get into regulatory trouble in fintech is to use overly optimistic marketing language that can be reasonably seen as deceptive. This is example number 12,287,907,456 of this being true.
2.) This line from the FTC’s press release is a bit concerning (h/t: Jonathan Joshua):
According to the FTC’s complaint, Credit Karma knew that its purported “pre-approvals” conveyed false “certainty” to consumers, based on the results of experiments, also known as A/B testing, showing that consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved. When user interfaces are designed, including with the aid of A/B testing, to trick consumers into taking actions in a company’s interest and that lead to consumer harm, such design tricks have been described as “dark patterns.”
The purpose of A/B testing is to figure out which designs, marketing language, graphics, etc. will be most effective in getting a customer to do something. A/B testing is a foundational best practice in marketing, UX design, product management, and many other fields. I’m not sure if the FTC intended to convey the message that all A/B testing should be considered “dark patterns”, but that is certainly the implication.
3.) More broadly, the way that Credit Karma (and most companies that do customer acquisition in consumer banking) does pre-qualification needs to change. The default model for pre-qualification in the U.S. today is to get a consumer’s permission to “see if they qualify” for a lending product and then soft pull their credit file and evaluate it using the lender’s qualification criteria, and then letting them know if they are pre-qualified. This process isn’t ideal from the consumer’s perspective because it’s not a guarantee. They still have to officially apply for the lending product that they are pre-qualified for and face the possibility that they won’t actually be approved.
There is a better way. It’s not common these days, but instead of “consumer-initiated prequalification”, lenders (and third parties like Credit Karma) can do “instant prescreen”, in which a consumer’s credit file is soft pulled without their knowledge and if (and only if) they pass the lender’s qualification criteria, they are presented with a firm offer of credit. No need to apply or face the possibility of being declined. There are certain constraints on how you can do “instant prescreen”, but it is absolutely possible and I’m honestly a bit confused as to why more companies don’t do it this way and avoid the problems Credit Karma just ran into.
#2: Bank of America Helping Black and Hispanic Americans
Bank of America Corp. started a trial program aimed at helping first-time homebuyers in Black and Hispanic neighborhoods by offering mortgages that don’t require down payments, closing costs or minimum credit scores, all considered longtime obstacles to narrowing the gap between White and minority ownership.
This is part of a larger wave of innovation, some of it driven by the government and some of it driven by private companies, to close the racial homeownership gap, which is one of the most important drivers of the racial wealth gap.
An important part of this initiative by Bank of America is the caution it is exhibiting in not getting Black and Hispanic consumers into financial situations they won’t be able to handle:
Customers using the program will be evaluated for a home loan not by credit scores, but rather factors such as their history of making rent, utility, phone and auto-insurance payments on time, BofA said in a statement Tuesday.
Under the BofA program, the lender is giving homebuyers down-payment grants of $10,000 to $15,000 so they have immediate equity in their homes.
The Bank of America offering requires borrowers to have certification from the US Department of Housing and Urban Development and counseling to qualify
#3: Originating Credit Cards Without Credit Scores
Related to the Bank of America news above, Citi is joining Project REACh:
Citigroup is joining a government-sponsored effort to expand access to credit in underserved communities.
The bank is launching two pilot programs early next year under the Office of the Comptroller of the Currency’s Project REACh, or Roundtable for Economic Access and Change. One program will issue credit cards to people without credit scores
Banks including JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp are already working with Project REACh, sharing bank-account data to help approve a wider swath of borrowers for credit cards.
This is the critical part of the story:
bankers say loans issued through Project REACh, though small in number, are performing as well as those issued outside the program. They expect the volume to increase in the coming year.
Fintech companies like Petal have been saying for a while that you can safely originate credit invisible consumers for credit cards – regular old credit cards, not those funky credit builder cards – using cash flow-based underwriting.
With a nudge from the OCC, the big banks are discovering that yes, indeed you can.
It would be just lovely if this became the default approach to origination for all entry-level credit card products – use cash flow-based underwriting to approve applicants and then use the resulting performance to approve or decline them for more premium cards down the line.
2 Fintech Content Recommendations
#1: The optimal amount of fraud is non-zero
Patrick McKenzie has a wonderful habit, in writing his blog – Bits Amount Money, of saying the quiet parts out loud. Financial services is built on all kinds of assumptions and unspoken agreements, which tend to have significant downstream impacts on financial services companies, businesses, and consumers. Those impacts are not always well understood.
In this post, Patrick explains why fraud (unique among all other types of crime) is the result of policy choices made by non-state actors (read: companies) and what those choices tell us about the priorities of those actors.
#2: With Blue Ridge’s OCC Agreement, BaaS ‘Rumors’ Spill Into Public View
The intersection of BaaS and regulation is Jason Mikula’s sweet spot. After reporting on some rumors swirling about regulatory headwinds starting to impact BaaS banks and platforms, Jason’s most recent newsletter breaks down the news that Blue Ridge Bank and the OCC have entered into an agreement that will govern how Blue Ridge manages compliance and risk in its growing banking-as-a-service business.
This is a must-read for everyone in fintech.
1 Question to Ponder
If you could wave a magic wand and instantly change one thing in fintech or in the broader financial services industry, what would you change?
I asked Michael Sindicich of TripActions this question in Episode 1 of The Fintech Factor (my new podcast, which you should absolutely subscribe to!) and I thought he had a GREAT answer. I’m curious – how would you answer this question?
Hit me up on Twitter or LinkedIn and let me know!