Well hello there, and welcome to Protocol Fintech. This Monday: fintechs try to improve the secured credit card, Gary G. takes on Kim K., and a surprising new field for “buy now, pay later.”
Off the chain
It’s a strange thing for the overseer of commodities trading in the U.S. to weigh in on the price of a commodity, but that happened recently. CFTC chair Rostin Behnam told an audience at the NYU School of Law last week that “bitcoin might double in price if there’s a CFTC-regulated market.” His argument is that institutional investors could enter the market in a big way if there’s regulatory clarity, something the CFTC has been pushing for if it means that the agency gets to oversee bitcoin and potentially other digital assets. But it still seems like an odd straying across the line of market watchdog to market cheerleader.
— Owen Thomas (email | twitter)Credit where it’s due
About one in six Americans has a subprime credit score, according to the CFPB. Another 23% have too thin a credit file to score, or no file at all. That puts them in a credit trap: To build credit, these consumers need someone to give them a line of credit with which they can demonstrate good financial habits. But with scores that low, few lenders are prepared to offer them anything.
Neobanks say they can solve the problem through a new twist on secured credit cards. But regulators are already scrutinizing their offerings.
- Secured credit cards have been an answer to the thin-credit problem for decades because they allow subprime borrowers to open a line of credit when they otherwise can’t by depositing cash upfront. Most require several hundred dollars as a deposit and impose hefty interest rates and fees, which low-income borrowers struggle to afford.
- Neobanks like Chime, Varo, and GO2bank say they can avoid those problems with cards that allow customers to repay their credit balance directly using their deposited cash, rather than keeping that money set aside.
Some in the industry see red flags. “They are, functionally, prepaid credit cards,” fintech analyst Alex Johnson told Protocol.
- That raises the concern that neobanks may be helping users increase their credit scores with a tool that doesn't actually indicate their ability to repay. “If I was a lender, I’d be pissed about having to untangle the trade lines in these consumers’ credit files in order to make sure I wasn’t mistakenly granting credit to high-risk applicants,” Johnson said.
- Chime, Varo, and GO2bank’s secured credit cards each have similar mechanics: A user moves money from a checking account into a separate credit-builder account, and the amount they move determines their credit limit. Users can then pay off their credit card balances with the money they’ve deposited.
- Varo and GO2bank told Protocol that it’s that third step — having to pay off the credit card at the end of the payment period — that makes the cards credit cards, not prepaid debit cards. Late payment or failure to repay can damage users’ credit scores. GO2bank additionally charges up to $39 for a late payment. Chime declined to answer any questions for this story.
The CFPB may be eyeing such cards. The agency acknowledged Varo’s and Chime’s secured credit-builder products in its 2021 Consumer Credit Card Market Report without mentioning whether the products might deserve further scrutiny.
- Protocol asked the bureau for an update on its views. A spokesperson said that “the CFPB is aware of this market development, and we are monitoring this issue closely.”
- For consumer advocates, the ambiguity around such programs is a symptom of a larger problem: The CFPB has yet to bring neobanks fully under its regulatory purview. Under the law that created it, the bureau can supervise participants in consumer financial markets that work in consumer reporting, debt collection, or the servicing of some loans. The bureau invoked a dormant authority to investigate nonbank fintechs in April.
A crucial question is whether consumers understand what they’re getting into. Abhijit Chaudhary, chief product officer at GO2bank parent Green Dot, said the company overcommunicates, if anything. “At times we get annoying, but it’s extremely important to ensure our customers know when the bill is due, at what time they need to make a payment, and that we do everything we can do so that they can at least make a minimum payment and not fall delinquent,” he said. Consumer advocates are wary, and the CFPB is watching.
— Veronica Irwin (email | twitter)
A version of this story appeared on Protocol.com. Read it here.A MESSAGE FROM ALIBABA
Alibaba — a leading global ecommerce company — is a particularly powerful engine in helping American businesses of every size sell goods to more than 1 billion consumers on its digital marketplaces in China. In 2020, U.S. companies completed more than $54 billion of sales to consumers in China through Alibaba’s online platforms.
On the money
Celsius Network founder Alex Mashinsky withdrew $10 million from the crypto lender weeks before the company froze customer accounts and then filed for bankruptcy, the Financial Times reports.
A glitch left Coinbase unable to process transactions with U.S. bank accounts.The crypto exchange said it fixed the glitch on Sunday following a roughly five-hour outage.
Economic indicators update: Household spending increased in August, and so did inflation. Meanwhile, the Federal Reserve isn't backing away from interest rate hikes.
Crypto complaints are on the rise. More than 1,800 of the 2,734 complaints the CFPB has received about digital asset companies since 2020 have come in the past calendar year.
Fintech firms are offering financing for costly fertility treatments. Startups that offer options such as “buy now, pay later” for fertility services are garnering more attention from venture investors.
Gary G. vs. Kim K.
Kim Kardashian broke the internet, and according to the Securities and Exchange Commission, she also broke the securities laws.
The SEC announced Monday that the mega-influencer, reality TV star, and billionaire businesswoman will pay $1.26 million to resolve allegations she touted EMAX tokens on Instagram without disclosing she was being paid for it. Kardashian, who the SEC said “also agreed to not promote any crypto asset securities for three years,” did not admit wrongdoing.
The SEC also said she had received $250,000 for her post on the token from EthereumMax. Her fine represents the payment, plus interest and a $1 million penalty.
SEC chair Gary Gensler took the settlement announcement as an opportunity to tweet that the case showed “when celebrities/influencers endorse investment opps, including crypto asset securities, it doesn’t mean those investment products are right for all investors.”
— Ben Brody (email | twitter)Coming up
American Banker’s Small Biz Banking event returns in person this year on Monday and Tuesday. The Nashville conference includes speakers from U.S. Bank and Wells Fargo.
The London RegTech Summit is Tuesday. The summit gathers executives in charge of operations, data, and regulatory compliance to network and discuss how technology can support regulatory change.
TET Events’ Fintech Gala is this Thursday in San Francisco. Keynote speeches will cover financial crimes, crypto, payments, and fintech funding.
Special report
In today’s global landscape, cybersecurity threats are something that every business operating on the internet must face — not just enormous tech companies. Our latest Protocol special report examines the best practices for securing both enterprises and small to medium-sized businesses, providing readers with a true threat landscape and information they can use to make decisions about the strategy that best supports their business goals. Read the full report here.
A MESSAGE FROM ALIBABA
Using economic multipliers published by the U.S. Bureau of Economic Analysis, NDP estimates that the ripple effect of this Alibaba-fueled consumption in 2020 supported more than 256,000 U.S. jobs and $21 billion in wages. These American sales to Chinese consumers also added $39 billion to U.S. GDP.
Thanks for reading — see you tomorrow!