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Consumer finance cops eye fintech after meltdown

THE NEWS

Relationships between fintech apps and the banks to which they offload the nettlesome work of safeguarding customers’ money need closer scrutiny, the top US consumer-finance regulator told Semafor.

“There is a ‘move fast and break things’ mentality” in a fintech industry that generally emphasizes the tech over the fin, said Rohit Chopra, director of the Consumer Financial Protection Bureau. “In some circumstances, that’s OK. In other circumstances … it’s just catastrophic.”

The catastrophe Chopra was talking about, at a Semafor event Wednesday in Washington, is the recent collapse of a software company that played an invisible but crucial role in the booming world of financial apps. Startups with names like Yotta, Hopscotch, and Dwolla have exploded over the past decade, funded by venture capital and promising to make banking easier, faster, and even fun.

They offer banking products like deposit accounts and paycheck advances, but aren’t banks themselves. Instead, they send customers’ money to small banks that actually hold the cash. Sitting in the middle is — was — Synapse Financial, keeping track of whose money was where.

When Synapse filed for bankruptcy in April, it shut off a critical system, freezing hundreds of millions of dollars in deposits. Courtroom finger-pointing has done little to clear up the situation. Synapse says its partner bank, a small Arkansas lender called Evolve, owes its customers $50 million. Evolve has questioned the accuracy of Synapse’s ledgers. Customers — most of whom have never heard of either company — are left hanging.

Chopra said the CFPB has “long had an issue with rent-a-bank” models. He declined to say whether the agency was investigating Synapse’s collapse, but called it an “obvious and serious lapse of judgment.”

LIZ’S VIEW

What happened at Synapse is a feature, not a bug, of this system. That makes it a tough problem for regulators like Chopra: Bugs can be fixed, but stamping out features kills the entire business model.

Yotta, the app that’s been most caught up in the mess, is basically an online lottery. But like other companies, ranging from Starbucks to Venmo, it knows that one way to keep users coming back is to have them put money into a digital wallet. Thus: YottaCash. (“You can play YottaCash in any games including Moonshot and Mines where you have the chance to win more YottaCash,” the company’s FAQ page explains.)

But Yotta isn’t a bank — venture capital firms don’t invest in banks; they invest in addictive apps — and so it needs someone else to hold that cash. Giants like JPMorgan can’t be bothered. So the money ends up at small banks like Evolve that don’t have big compliance and vendor-management budgets. They have few branches, and have made an entire business model of providing white-labeled accounts for fintech firms.

And its pathway to those banks is Synapse, which bills itself as “the largest banking as a service platform” (“X as a service” is the 2020s version of “Uber but for…” the great scourge of the 2010s startup scene.) Its online pitch asks “Is it possible to launch deposit or credit products in a matter of weeks?” Maybe it shouldn’t be!

Evolve may end up in the clear here, but this is a bank whose website today greets visitors with this:

Synapse, too, may ultimately be blameless of anything more than a messy bankruptcy. But its contract with one of its biggest partners seemingly allowed it to shut off systems with little notice. Its CEO signed off on the company’s bankruptcy filing from Santorini, which doesn’t inspire a ton of confidence.

FDIC board member Jonathan McKernan told my colleague Gina Chon at yesterday’s event that this combination of scrappy banks and growth-hungry tech companies is concerning. He said the agency — which fired its own warning shot to fintech-bank partnerships last year when it dinged a popular app partner, Cross River Bank, for its lending practices — should consider “some black and white rules of the road.”

“It’s not enough for a bank to have in their contract a provision that says the partner is going to perform actions X, Y, and Z,” McKernan said. “The bank has to actually monitor that the partner is performing steps X, Y, and Z, and then they have to have the risk management expertise within the bank to kind of think more globally, big picture …. And that doesn’t happen a lot, candidly.”

I think we’ll see more fintech companies opt out of this system and become banks themselves — either by buying one, as Lending Club and SoFi have done, or applying for their own charters like Varo did. Robinhood CEO Vlad Tenev hinted that that’s in the cards when we spoke in February.

“Certainly we’re not ideologically opposed,” he said. “As we get more and more into lending, obviously, the calculus behind the business changes.”

It’s not easy (regulators are skeptical) or cheap (Varo’s CEO told Banking Dive that the process cost $100 million and took three years) but it nixes the risks that come from relying on unreliable partners.

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That’s how more than three dozen pharmacy chains, drug-pricing middlemen, and insurers turned into the three largest healthcare conglomerates in America, which are now in the crosshairs of antitrust regulators.

It comes from the Federal Trade Commission’s scathing 71-page report this week, which blames that consolidation for soaring drug prices, and is likely a prelude to a lawsuit. It’s focused on obscure but powerful middlemen, known as pharmacy benefit managers, which sit between insurers, drugmakers, and pharmacies.

The largest of them have been acquired in recent decades by one camp or the other: Caremark by CVS, Express Scripts by Cigna, and Optum by insurer United Health. Critics say that’s allowed them to squeeze smaller pharmacies and push up drug prices. (For their part, the companies blame drugmakers.) Profits at independent pharmacies fell to their lowest level in at least a decade in 2022, according to a national trade group.

It’s part of a broader antitrust push against corporate middlemen, which, depending whom you ask, are either crucial lubricants in the economy or toll-taking barnacles. For years, administrations of both parties allowed them to merge, preferring to focus their efforts on household names that sold directly to consumers. Now, the government is trying to break up LiveNation, which takes a cut of ticket sales, and is said to be investigating the maker of software used by landlords.

Three’s company: Pfizer is moving ahead with its weight-loss pill, a needle-free alternative to the blockbuster drugs from Novo Nordisk and Eli Lilly. It’s Pfizer’s second stab (sorry) at a competitor to Ozempic and Wegovy, after pulling an earlier pill with unpleasant side effects. The company was coy about results of early tests of four formulations, leading one analyst to suggest it was “likely buying some time” and investors are taking a wait-and-see approach. The stock price is little changed today.

That may be ok with CEO Albert Bourla: When we spoke last month about the frenzy, he said Wall Street had gotten a bit overenthusiastic. “Right now it is almost a duopoly, so it’s very lucrative,” he said. “But there are dozens of companies that are preparing competing products, so when all of this hits the market, probably the price will go down.”

Loan ranger: When big banks post their quarterly numbers over the next week — JPMorgan kicks things off tomorrow —, watch their loan books. Business lending is a pretty good sign of where the economy is heading. Nearly every drop that lasted at least a year has predicted a recession, going back to 1948, and the US is on a five-quarter losing streak. That’s been somewhat less true since the 2000s, and other economic indicators remain healthy. And it may be that bank loans don’t capture the corporate zeitgeist like they used to: Private credit funds are doing a lot more corporate lending, and the bond market, an alternative to bank loans, has been on fire this year.

But that does little for banks, for whom this period of peak rates should be a golden stretch. “Loan growth is a dogfight right now,” Bank of America CEO Brian Moynihan said earlier this year, saying that geopolitics and supply-chain hiccups had made companies skittish about taking on long-term debt.

Elsewhere in bank earnings, Citi has some explaining to do. The bank was fined $136 million this week by federal regulators for not fixing the problems for which it was fined $400 million in 2020 — namely, that its risk-management systems are a mess. Citi’s fix-it CEO, Jane Fraser, has been trying to clean up a sprawling bank built over decades of consolidation, but repeat offenses make it harder to get released from bank jail: Citi essentially can’t make any acquisitions, likely a key step in its efforts to compete in wealth management, until the government’s rebukes are formally rescinded.

— Republican Sen. Cynthia Lummis, on the Supreme Court’s decision overruling a decades-old precedent that deferred to regulators to interpret vague laws.

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