04 March 2024 | FinTech
BaaS. So Much BaaS.
By Alex Johnson
3 FINTECH NEWS STORIES
#1: BaaS. So Much BaaS.
What happened?
A lot! So much drama on BaaS Island!
Treasury Prime made a strategic pivot (and, unfortunately, laid off roughly 50% of its staff):
We are launching a new Bank-Direct product, which will empower banks to support the entire lifecycle of a direct relationship with a fintech customer, including the sales, onboarding, management, and support of that partnership. This is leading to some significant changes to ensure our company is best positioned to help our customers succeed.
Piermont Bank is exiting its relationship with Unit:
Piermont Bank will be exiting its relationship with Unit, though all fintech clients the two share will have the option to remain on Piermont.
And Green Dot became the latest BaaS-focused bank to announce a consent order with a federal regulator:
Green Dot has received a proposed consent order from the Federal Reserve Board relating principally to various aspects of compliance risk management, including consumer compliance and compliance with anti-money laundering regulations.
So what?
There’s not much to say about Green Dot until the actual consent order from the Fed is released, but it seems to be another BSA/AML-focused crackdown on a BaaS bank by a prudential regulator.
The more interesting news is Treasury Prime and Piermont.
I think the best way to understand those two stories is to consider the evolving answer to this question (the most important question in BaaS) – who is the customer?
During the salad days of 2019, 2020, and 2021, it was difficult to work in BaaS and not think that the fintech companies were the customer. After all, they were the ones raising obscene amounts of money from VCs. They were the ones buying access to banks’ charters. They were the ones demanding that everything be done their way, and done fast.
In that environment, it was really quite rational to buy into the notion that fintech companies were the customer. For banks, that meant acquiescing to the fintech companies’ demands (on pricing, technology, operating model, etc.) or risk losing their business. And for BaaS platforms, that meant building solutions for fintech companies that promised to minimize, in as many ways as possible, the headaches associated with working directly with banks.
During these years, no one really worried about regulators all that much. It was as if everyone in the ecosystem thought that, as long as BaaS was producing value for consumers and businesses (and it certainly was), regulatory concerns could be mostly shouldered aside, the same way that Uber shouldered aside city transportation regulators as it scaled up.
Yeah, no, not so much.
Financial services isn’t the taxi industry. In financial services, the regulators are much more powerful and they will shut you down, sometimes under rather thin pretenses, if they don’t like what you’re doing.
It took a few years, but it’s now crystal clear that there are some models for BaaS that the prudential regulators just don’t like. Everyone in the space is adapting, and a common line you now hear from all BaaS platform providers is “the bank is our customer.”
#2: Open Banking for Fighting First-Party Fraud
What happened?
Prism Data released a new tool for detecting first-party fraud:
Because first-party fraud involves a legitimate consumer that is not lying about their identity, it can be far harder to detect. Typical processes like verifying a consumer’s address, phone number, and Social Security number are not effective in catching first-party fraudsters. By the time many lenders identify first-party fraud, it’s already too late—the loan is out the door and the damage has been done. Banks and other lenders need new, innovative approaches to keep up with this insidious and increasingly prevalent form of fraud.
That’s why our team at Prism Data is excited to announce a first-of-its-kind tool to help financial providers identify and stop first-party fraud. We call it CashScore FirstDetect.
So what?
First-party fraud is a scourge, and its growing acceptance among younger consumers who view it as a “hack” or a way to “get back at the system” is one of the most worrying long-term trends in financial services.
So I am always thrilled when someone introduces a new tool to fight it.
And the concept of using consumer-permissioned bank account data to help detect it makes sense to me in theory. This data, properly analyzed, can reveal some very subtle behavioral patterns regarding how someone manages their cash flow, including (I’m guessing) their need and/or propensity to rely on first-party fraud “hacks”.
I have a few open questions:
- Can lenders use this tool to take adverse action? First-party fraud is in the middle of the Venn Diagram between fraud and credit risk. When you decline someone because you suspect they will commit first-party fraud against you, are you required to tell them that in the adverse action notice? How is that traditionally handled? And how will the CFPB want it to be handled moving forward?
- Does this tool just work for consumer lending, or could it be used to screen out consumers who may be planning to abuse checking accounts as well? How generalizable are the insights produced by this tool?
- How will aspiring first-party fraudsters react to the use of open banking data that is used against them? Will they start to refuse to share their bank account data during the account opening process?
#3: Furnish BNPL Data!
What happened?
Experian announced that Apple will begin furnishing repayment data for its pay-in-4 BNPL product:
Experian is committed to driving transparency in the BNPL industry and doing so in a way that does not inadvertently negatively impact consumers. Given this, Apple Pay Later loans borrowed today onward will appear on a consumer’s Experian credit report with a BNPL designation starting March 1. While consumers will be able to see their Apple Pay Later loan information on their Experian credit report, the information will not be factored into existing traditional credit scores but may in the future as new credit scoring models are developed.
So what?
OK, three quick takes from me on this:
- This is great. Well done, Experian and Apple.
- It kinda sounds like Apple’s BNPL data is just going into Experian’s regular old credit files, rather than into the special BNPL Bureau that Experian announced back in 2022. As you’ll recall, the idea then was to start capturing BNPL repayment data for lenders but to segment it away from consumers’ regular credit files, so as not to damage them. I guess we’re not doing that now?
- From what I understand, Apple is the first major pay-in-4 BNPL provider to furnish loan info and repayment history to one of the credit bureaus (Affirm has been doing this for a while with its longer-term installment loans). Assuming that’s true, I have a quick rant (warning, caps lock is coming) – WHAT THE ACTUAL FUCK? IT HAS BEEN MORE THAN TWO YEARS SINCE THE BUREAUS SET OUT TO INCORPORATE PAY-IN-4 DATA. WHY ISN’T THIS DONE YET? GIVEN THE INCENTIVES, I HAVE TO IMAGINE THAT IT’S THE BNPL PROVIDERS WHO AREN’T PLAYING BALL. WHY NOT? RESPONSIBLE LENDING REQUIRES DATA SHARING! DON’T BE SELFISH OR SHORTSIGHTED. SHARE YOUR DATA!
2 FINTECH CONTENT RECOMMENDATIONS
#1: Moody’s the 115 Year Old Growth Fintech Company (by Simon Taylor, Fintech Brainfood) 📚
I love it when Simon gets weird in his newsletter, and writing about a 115-year-old “fintech” company is WEIRD. Read this and then read it again.
#2: Do Credit Card Shoppers Need A New Comparison Site? (by Ron Shevlin, Forbes) 📚
Figures that Ron would get to this topic first. I’m glad he did. The CFPB’s circular on comparison-shopping tools was strange on many levels, especially the bureau’s plan to release its own credit card comparison-shopping tool. As Ron points out in his piece, the CFPB’s focus on pricing misses a lot of other reasons why consumers select credit cards, and it will be interesting to see if the bureau attempts to reckon with that reality through its tool.