CFPB fines fintech Digit $2.7 million over “flawed” savings algorithm

Dive card:

• The Consumer Financial Protection Bureau (CFPB) fined fintech Digit $2.7 million on Wednesday over allegations that the company used an “incorrect algorithm” that caused overdrafts and overdraft penalties for customers.
• Digit “falsely guaranteed no overdrafts with its product, broke promises to correct its errors, and pocketed a portion of the interest that should have gone to consumers,” the CFPB alleged.
• In addition to the fine, the agency will demand that Digit create damaged customers. Oportun, a small dollar lending company that bought fintech last yearsaid Digit owes 1,947 customers about $35 each, for a total of $68,145, according to a statement Wednesday.

Diving Insights:

Digit “positioned itself as a savings tool for consumers who have trouble saving on their own. But instead, consumers ended up paying unnecessary overdraft fees,” CFPB Director Rohit Chopra said in a statement. “Companies have long been held accountable when they engage in false advertising, and regulators must do the same when it comes to false algorithms.”

The fintech uses a proprietary algorithm to make automatic transfers, called automatic deposits, from the consumer’s checking account to a separate account held in Digit’s name, the CFPB said.

Digit’s algorithm analyzes consumers’ checking account data to determine when and how much to save for each consumer. The company charges a monthly subscription fee of $5 for the service.

The CFPB said Digit routinely caused consumers’ checking accounts to incur overdraft fees charged by their banks, despite claims that they “never transfer more than you can afford.” Digit received overdraft complaints daily, the CFPB said.

“The company also represented that if it was an overdraft, it would refund consumers. But the company often denied customers who tried to get their money back,” the CFPB said, adding that Digit had received nearly 70,000 overdraft refund requests since 2017.

The CFPB alleges the fintech also deceived consumers by keeping a significant amount of the interest earned on consumer funds, after it had promised not to.

“Had Hello Digit kept its promise not to retain interest on consumers’ funds, consumers could have deposited the additional savings,” the CFPB said.

Oportun said in a statement Wednesday that it disagrees with the CFPB on the matter, but is “pleased to have it settled.”

Digit received a civil investigative demand from the CFPB in 2020, with the intent to determine whether the company misrepresented its products or services in a manner that is unfair, deceptive or abusive, Oportun said.

The survey found that Digit’s success rate was better than 99.99%, “meaning that a Digit Save transaction caused an overdraft fee for one of our members less than 0.008% of the time,” Oportun said.