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Happy Monday, Fintech Fans!
The Montana State University football team defeated the University of Montana football team this weekend, 31-28. The game was … intense, with quick scoring, tough defensive stops, and special teams excitement.
As is often the case in the Brawl of the Wild, the outcome of the game hinged on a couple of weird plays that could have gone either way. Specifically, the Bobcats had a pick-six off a weird bounce (Caden Dowler!) and a blocked field goal that would have tied the game for the Grizzlies if it had gone in.
Even a couple of days later, I am in an absolutely delightful mood. As my grandmother used to say (while living in Missoula), poor Grizzlies!
Now, let’s get into some fintech!
- Alex
P.S. — I understand the irony of this intro, combined with the subject line (and the third story in the newsletter). I love sports, which is why I don’t bet on them.
First, CNBC reported that JPMorgan Chase (JPMC) has struck some deals with other data aggregators to be paid for access to their customers’ data:
JPMorgan Chase has secured deals ensuring it will get paid by the fintech firms responsible for nearly all the data requests made by third-party apps connected to customer bank accounts, CNBC has learned.
The bank has signed updated contracts with the fintech middlemen that make up more than 95% of the data pulls on its systems, including Plaid, Yodlee, Morningstar and Akoya, according to JPMorgan spokesman Drew Pusateri.
And our friend Evan Weinberger at Bloomberg Law is reporting that the CFPB is planning to get its revised open banking rule done by the end of the year:
The Consumer Financial Protection Bureau is rushing to put out a revised open banking rule that would allow lenders to charge fintechs limited fees for customer data access, as it aims to finish the contentious rewrite before the end of the year.
So what?
OK! Well, that’s a lot to process.
Let’s start with Evan’s reporting and work backwards. According to his sources, the CFPB is planning to have something — A proposed rule? A final interim rule? — within the next three weeks.
To put it bluntly, that’s insane. The Administrative Procedures Act (APA) requires a great many more steps between the Advanced Notice of Proposed Rulemaking (ANPR), which (from what I hear) the CFPB used generative AI to write, and a finalized rule, including giving small businesses that would be significantly impacted by the rule an opportunity to weigh in. According to Evan’s reporting, the CFPB is planning to shorten this SBREFA process or skip it entirely:
The CFPB is weighing whether to skip the small business review entirely or work with the Small Business Administration for a potentially less intensive review of the coming rule’s effect on small banks, credit unions, and fintechs, people familiar with the plans said.
Now, to be fair, the second Trump Administration has shown very little interest in adhering to the APA, so I guess I shouldn’t be too surprised. However, if you skip steps in the APA process, you open yourself up to being sued by parties that are unhappy with the final rule. As Evan notes, that’s exactly what happened last time:
All 10 counts in a revised lawsuit filed by the Bank Policy Institute, the Kentucky Bankers Association, and a small Kentucky bank challenging the CFPB’s October 2024 open banking rule alleged violations of the APA.
It seems likely, simply based on the process that the CFPB is reportedly planning to follow, that it will be sued again once the rule is finished.
(Editor’s Note — I would guess that the Bank Policy Institute, if it gets what it wants in the revised rule, won’t be the one to sue over APA violations. Isn’t it strange how bad process only bothers trade associations some of the time?!?)
But this CFPB is apparently not all that concerned with getting sued because, in addition to rushing the rulemaking process, it’s also reportedly planning to allow banks to charge fees for access to their customers’ data:
The CFPB plans to allow banks to charge data aggregators and other financial technology companies for accessing customer deposit and credit card account data, the people in the industry familiar with the matter said. However, the CFPB is expected to put in place guardrails that would only allow banks and other data providers to recover costs for maintaining application programming interfaces and other tools for allowing data sharing, they said.
Given that courts no longer have to give deference to regulators regarding rules written to implement vague legal statutes (thank you, Loper Bright!), this approach seems highly likely to result in a lawsuit from fintech companies, data aggregators, and their various trade associations. Remember, the actual statute (Section 1033 of Dodd-Frank) does not say anything, either way, about data providers being able to charge for access to the data.
Additionally, the CFPB’s plan for fees — to allow them but only for cost recovery — will be ridiculously hard to operationalize.
JPMC is planning to spend $18 billion on technology this year. How much of that $18 billion is, in some way, being spent to support secure APIs for customer-permissioned data sharing?
Well, it depends on who you ask and what kind of mood they’re in when they answer!
When JPMC initially proposed its pricing to the data aggregators back in July, the pricing was quite high (prohibitively so). After a few months of negotiating, it agreed to a much lower price with Plaid in September. That agreement also included commitments from the bank to make technical improvements to the way that its integration with Plaid functions. In other words, its fees went down even though its costs went up!
And now CNBC is reporting that JPMC has struck deals with Yodlee, Morningstar, and Akoya. Are the terms of those deals the same as the terms of the Plaid deal? Are they based strictly on the costs that JPMC has to recoup in integrating with and supporting those aggregators? Will those aggregators get access to the technical improvements that Plaid negotiated in its agreement? What about the aggregators that haven’t yet signed on? Will Finicity, MX, Trustly, Stripe, and others get the same deal, even if they’ve continued to play hardball with JPMC?
Is anything that’s happening on the ground right now in open banking based on costs?
This quote from a JPMC representative in the CNBC story suggests no (emphasis mine):
We’ve come to agreements that will make the open banking ecosystem safer and more sustainable and allow customers to continue reliably and securely accessing their favorite financial products. The free market worked.
Yes, indeed. The free market. This is what unfettered free market capitalism looks like.
I’m surprised the CFPB is reportedly trying to put guardrails around a set of negotiations that are already happening, and that have (from my vantage point) little to do with cost recovery.
FICO today announced a strategic partnership with Plaid, a leading financial data network, to deliver the next generation of the cash flow UltraFICO Score. This innovative solution will combine the proven reliability of the FICO Score, used by 90% of top US lenders, with real time cash-flow data from Plaid to provide lenders with a single, enhanced credit score that delivers superior consumer risk assessment without operational complexity.
So what?
Let’s tackle this news from a few different perspectives.
For Plaid, this is a big win.
The company already has partnerships with Experian and Prism Data, both of which have built their own proprietary cash flow underwriting scores. In both of those cases, Plaid would act as the data provider and Consumer Reporting Agency (CRA) under FCRA. It also recently launched its own cash flow underwriting score — LendScore — which combines bank transaction data with proprietary “network insights” from the Plaid data network. Those network insights require that lenders wanting to use LendScore also pull the bank transaction data from Plaid, rather than from a different data aggregator.
And now we have this partnership with FICO, which doesn’t appear to be exclusive for Plaid, but gives them a big leg up over others in the ecosystem, given FICO’s existing relationships with big banks and non-bank lenders.
For FICO, this strikes me as an attempt (along with its experiments with language models) at diversification away from the core FICO Score, which has lost its most important competitive moat, thanks to the Credit Score Competition Act and the fervor of Bill Pulte.
Remember, this is a relaunch for FICO. The company originally launched UltraFICO with Experian and Finicity in 2018, back when cash flow underwriting had far less momentum in the market, and FICO had far less need for diversification in its scores business. UltraFICO didn’t go anywhere back then, but was that because the market for cash flow underwriting was less mature, and FICO didn’t choose to make it a sales priority? Or was it because FICO had (and continues to have) much less control over lenders’ adoption of new analytic models than it likes to pretend?
I don’t know, but from what I can tell, FICO is doing everything it can to make adoption of UltraFICO as easy as possible this time around:
The new score will offer lenders three key advantages in addition to enhanced credit risk performance: alignment to the flagship FICO Score to enable confident cash flow adoption without introducing lengthy testing or added risk; streamlined implementation for lenders, minimizing operational complexity and accelerating onboarding; and universal compatibility, giving lenders flexibility to use a cash flow model with the traditional FICO Score irrespective of the channel they use for the FICO Score.
For Experian, this is clearly a new era. The days of cooperating with FICO to launch new scores are over.
The bureaus are pressing their advantage with the VantageScore, and Experian is trying to grow its footprint in the cash flow underwriting space on its own (while avoiding any CRA responsibilities). I would expect to see similar (albeit slower) moves from the other two bureaus in this space as well (Equifax is already working with Prism Data).
And for Finicity, this is a DISASTER. It was the data aggregator working with FICO on this before anybody really cared about cash flow underwriting. And now that cash flow underwriting has become one of the hottest trends in fintech (and perhaps the only truly sustainable use case in open banking), Finicity is nowhere to be seen.
This is yet another example of why Plaid was lucky the Justice Department stopped Visa from acquiring it. Mastercard, seemingly beset by the torpor that infects all large companies and uninterested in anything open banking-related that doesn’t revolve around payments, has given away Finicity’s lead in cash flow underwriting, which is now looking like a massive strategic error.
(Editor’s Note — Related to that last point, I do not understand why MX isn’t jumping into cash flow underwriting with both feet. It has good coverage and connectivity. It has excellent data cleansing and categorization. All it needs to do is stand up a CRA, and it can start giving Plaid some good competition in this space. Not doing so is just cutting a hole in its own pocket.)
#3: Sports Betting May Make It Harder for Borrowers to Pay Back Their Loans
What happened?
Well, I for one am shocked (shocked I say!) to discover this:
BofA Securities says the rapid rise of mobile betting and prediction platforms has lenders on edge. These apps make betting effortless and impulsive, pushing some users toward bigger debts and more late payments. Lenders focused on subprime borrowers, like Bread Financial, Upstart, and OneMain, face higher exposure since their customers are more likely to struggle with both gambling and financial stress. Student loan servicers such as Sallie Mae and Navient could feel the impact too, as college students and recent grads are frequent targets of app promotions. The analysis found young men in low-income areas are especially at risk – with social media hype, promotional offers, and limited financial know-how making betting all the more tempting.
So what?
I’ll try not to lose my cool, but a couple of quick points here:
This is precisely why I wrote this essay last month. As gambling has become more prevalent in the U.S. over the last seven years, banks have continued to take the position that what their customers do with their money is none of their business. This anti-paternalistic attitude, while admirable (I guess?) in an abstract way, is also really fucking stupid. Gambling companies compete with banks. They siphon deposits and assets under management away from them. And, as this warning from BofA Securities notes, they put borrowers (especially borrowers who are young, male, and subprime) in a worse position to pay back their loans. Many large credit card issuers do not allow their customers to pay off BNPL loans with their cards. You could plausibly say that this is paternalistic, but it’s also common sense! Stacking up debt is bad for the consumer, and it's bad for the lender. It’s OK to prohibit! Why lenders don’t take a similar approach to managing their risk exposure based on their customers’ gambling behaviors is beyond me.
It’s hilarious that this warning is coming from BofA Securities, rather than Bank of America. The big banks’ investment banking arms often appear, at least publicly, to be well out ahead of their retail banking peers when it comes to emerging trends like this, even when those peers are owned by the same holding companies that own them! I wonder if Bank of America’s consumer banking division has done any internal analysis to see how gambling behavior impacts its lending, deposit, and wealth management businesses?
It’s important to remind ourselves that the most severe downsides of gambling and sports betting are not borne by the investors in Bread Financial, Upstart, OneMain, Sallie Mae, and Navient. They are borne by the gamblers and their families, especially when the gambling behavior becomes problematic. This is a societal issue, first and foremost, but I do believe that banks and fintech companies have a role to play in addressing it.
It’s nice when nothing insane happens with Evolve and Jason gets to write about other topics. His coverage of Apple’s ongoing work in the digital identity space has been great.
I freaking love this newsletter (and this edition in particular). You should subscribe to The Free Toaster, and you should be sure to pay attention to the Fintech Takes podcast feed on Wednesday!
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.
How did the recent crypto market collapse impact the yields available through DeFi lending protocols like Aave?
I would think the impact would have been fairly significant (and immediate), but I’m curious if anyone has seen any data on how price swings actually impact yield.
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
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