Chime, Varo, GO2bank secured credit cards: Is there a catch?
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 “buy now, pay later” field.
Off the chain
It’s a strange thing for the US commodity watchdog to weigh in on the price of a commodity, but it happened recently. CFTC Chairman Rostin Behnam told an audience at the NYU School of Law last week that “bitcoin could double in price if it’s a CFTC-regulated market.” His argument is that institutional investors can enter the market in a big way if there is regulatory clarity, something the CFTC has pushed for if it means the agency gets to monitor bitcoin and potentially other digital assets. But it still seems odd to cross the line of marketing watchdog to marketing cheerleader.
– Owen Thomas (e-mail | 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. It 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 such low scores, few lenders are prepared to offer them anything.
Neobanks says it can solve the problem through a new twist on secure credit cards. But regulators are already scrutinizing their offerings.
- Secured credit cards have been an answer to the problem of thin credit for decades because they allow subprime borrowers to open a line of credit when they otherwise could not by putting up cash up front. Most require several hundred dollars as a deposit and charge high interest rates and fees, which low-income borrowers struggle to afford.
- Neobanks such as Chime, Varo and GO2bank say they can avoid these problems with cards that allow customers to pay back credit balances directly using the deposited cash, rather than keeping the money set aside.
Some in the industry see red flags. “They are, functionally speaking, prepaid credit cards,” fintech analyst Alex Johnson told Protocol.
- It raises concerns that neobanks could help users boost their credit scores with a tool that doesn’t actually indicate their ability to repay. “If I were a lender, I’d be pissed off to have to resolve the trade lines in these consumers’ credit files to make sure I wasn’t mistakenly extending 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 to a separate credit-building account, and the amount they move determines their credit limit. Users can then pay off their credit card balances with the money they have deposited.
- Varo and GO2bank told Protocol that it is the third step – having to pay off the credit card at the end of the payment period – that makes the card a credit card, not a prepaid debit card. Late payment or non-repayment can damage users’ credit scores. GO2bank additionally charges up to $39 for a late payment. Chime declined to respond to questions for this story.
The CFPB can view such cards. The agency acknowledged Varo’s and Chime’s secured credit building products in its 2021 consumer credit card market report without mentioning whether the products might merit further scrutiny.
- Protocol asked the agency for an update on its views. A spokesperson said that “the CFPB is aware of these market developments and we are monitoring this issue closely.”
- To consumer advocates, the ambiguity surrounding such programs is symptomatic of a larger problem: The CFPB has yet to fully bring neobanks under its regulatory purview. Under the law that created it, the agency can supervise participants in consumer financial markets who work in consumer reporting, collection or servicing of certain loans. The agency invoked a dormant authority to investigate non-bank fintechs in April.
A crucial question is whether consumers understand what they are getting into. Abhijit Chaudhary, head of product at GO2bank’s parent Green Dot, said the company is over-communicating, if anything. “Sometimes we get annoying, but it’s extremely important to make sure our customers know when their bill is due, when they need to pay, and that we do everything we can to ensure they can at least make the minimum payment and not become delinquent ,” he said. Consumer advocates are on alert, and the CFPB is watching.
— Veronica Irwin (e-mail | twitter)
A version of this story appeared on Protocol.com. Read it here.
A MESSAGE FROM ALIBABA
Alibaba—a leading global e-commerce company—is a particularly powerful engine for helping American businesses of all sizes sell goods to more than 1 billion consumers on its digital marketplaces in China. In 2020, US companies completed more than $54 billion in sales to consumers in China through Alibaba’s online platforms.
Learn more
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, reports the Financial Times.
A bug prevented Coinbase from processing transactions with US bank accounts. The cryptocurrency exchange said it fixed the glitch on Sunday after a roughly five-hour power outage.
Update of economic indicators: Household consumption increased in August, and so did inflation. Meanwhile, the Federal Reserve is not backing down 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 offer financing for expensive fertility treatments. Startups that offer “buy now, pay later” options for fertility services are getting 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 securities laws.
The SEC announced Monday that the mega-influencer, reality TV star and billionaire businesswoman will pay $1.26 million to resolve allegations that she claimed EMAX tokens on Instagram without disclosing that she was paid for it. Kardashian, who the SEC said “also agreed not to market 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 Chairman Gary Gensler took the settlement announcement as another opportunity chirping that the case showed “when celebrities/influencers endorse investment settlements, including crypto-asset securities, it does not mean that these investment products are right for all investors.”
— Ben Brody (e-mail | 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 US Bank and Wells Fargo.
The London RegTech Summit is Tuesday. The summit brings together leaders responsible for 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 crime, crypto, payments and fintech funding.
Special report
In today’s global landscape, cyber security threats are something that all businesses operating on the internet must face – not just huge technology companies. Our latest Special Report for the Protocol examines best practices for securing both enterprises and SMBs, providing readers with a real 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 US Bureau of Economic Analysis, the NDP estimates that the ripple effect of this Alibaba-driven spending in 2020 supported more than 256,000 American jobs and $21 billion in wages. These US sales to Chinese consumers also added $39 billion to US GDP.
Learn more
Thanks for reading – see you tomorrow!
