Regulation

Amex’s Next Chapter, Dwolla’s Fun With Fines And Lending Club’s Anxiety

Whether you believe Donald Trump will win the GOP nomination is a matter of taste, politics and opinion. What is unarguable is that The Donald has won The News Cycle. The initial caps there are not an indication we have fired the copyeditors, but given his eight consecutive months of monopoly over all news cycles across all media, The Donald has recast the very notion of The News Cycle.

Which has turned out to be great news for people particularly interested in politics, infotainment or SNL skits. Everyone else has had to get a bit more creative about getting their news fix, especially if they want to know about the real stuff, like what’s going on in the economy, commerce or technology. All critically important, but absent the intrigue of fistfights and ad hominem attacks over body parts.

In fairness, our friend Apple and the DoJ do deserve at least an honorable mention here for keeping it interesting.

The shame of it all is that it was a pretty dramatic week all around in the financial technology ecosystem: The CFPB came down on Dwolla, Amex continued its efforts to claw its way back and Lending Club course-corrected.

So, what’s worth taking another look at?

 

The CFPB Didn’t Like Dwolla’s Security

Dwolla, an online payments platform, found itself on the wrong side of the Consumer Financial Protection Bureau last week; though, on the upside, it was only a six-figure fine, which, for the CFPB, is actually pretty moderate.

Dwolla, according to the regulator, deceived consumers about the firm’s data security and the safety of its payment platform. The issue specifically seems to be around encryption and some data not being encrypted, despite claims to the contrary by the company.

Apart from the fine, Dwolla has also been ordered to train its employees on data security and on how to fix security flaws in its Web and mobile apps, as well as maintain accurate and consistent risk assessments alongside audits.

The penalty itself is being paid to the CFPB’s Civil Penalty Fund.

“Consumers entrust digital payment companies with significant amounts of sensitive personal information. With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices,” CFPB Director Richard Cordray noted.

Dwolla has a response to the CFPB’s fine, which it sent to PYMNTS shortly after the news broke.

“Dwolla is glad to have come to a resolution with the CFPB regarding its investigation. The investigation covers a snapshot in time that ended almost two years ago, and the claim focuses on practices that trace to 2011 and 2012. Dwolla understands the bureau’s concerns regarding the protection of consumer data and representations about data security standards, and Dwolla’s current data security practices meet industry standards.”

“The CFPB has not found that Dwolla caused any consumer harm or created the likelihood of any consumer harm through its data security practices. This is consistent with the fact that, since its launch over five years ago, Dwolla has not detected any evidence or indicators of a data breach, nor has Dwolla received a notification or complaint of such an event. During this time, Dwolla had many other layers of data security practices and technologies in place that were not found to be deficient, which we believe helped to prevent harm to consumers.”

The company’s bank account is still shy $100,000.

 

The Amex/Costco Billion-Dollar Farewell Party

The long-anticipated sale of American Express’ Costco cobrand card portfolio to Citibank has officially kicked off.

Amex announced last week that an agreement has officially been reached, and its card portfolio will be sold off as of June 2016. As of then, eligible Costco American Express Card cobranded accounts will become Citi Visa customers.

The estimated buy price is around $1 billion but remains TBD based on the value of the assets at the time of sale.

“Given that the close is still several months away and the cardmember borrowing and paydown trends are difficult to predict in this type of transition, the final gain could differ from the estimate,” according to Amex’s release about the news.

Citigroup was, expectedly perhaps, pretty chipper on the news.

“We are immensely pleased to have entered into an agreement to acquire the Costco portfolio,” Jud Linville, head of Citigroup’s card operations, told Bloomberg, noting that Costco has 51 million members in the U.S.

For Amex, the sale is less a time for celebration as a capstone on what has been a rather rough road the firm has been on since 2015.

The decision of Amex and Costco to end a 16-year deal set off something of downward spiral for American Express, which has left the firm’s market cap depleted and market-watchers worried.

This sale comes during a period of management reorganization, as it looks to shave $1 billion in operating costs over the next couple of years.

“To get ahead of the changes that are altering the dynamics of the payments business, we need to readjust our expense base. This is a big task. It essentially means that we must transform the way the company works.” There will be job cuts in the offing, said CEO Ken Chenault. “At this time, we do not know what the magnitude of those reductions will be, as decisions on specific positions affected are yet to be made.”

Cardholders will receive more details on the Citi switchover as the actual sale date nears.

The Amex market cap perked up a bit last week to about $57 billion. Earlier in the year, it was kissing $50 billion.

 

Lending Club’s Revamped Fees

What to do when regulators make the future uncertain? Well, if you’re Lending Club, you try to remove uncertainty from your existence by modifying your fee structure.

According to recent reports, Lending Club has a problem: It makes loans in some states that are above that state’s regulatory cap, often in tandem with bank agreements.

That practice is now facing a legal challenge, as the U.S. Second Circuit Court of Appeals ruling in the case of Madden v. Midland Funding LLC could radically change the framework that Lending Club — and firms like it — operate under.

The court has ruled that a debt collector cannot collect payment on loans it bought from a bank that stood above a state cap. The debt collector, Midland Funding, has appealed the case all the way up to the United States Supreme Court, where it has yet to be decided if the case will be heard.

In the meantime, the ruling could pose a large problem for firms like Lending Club who operate in the sort of grey area that has not been fully adjudicated by the courts. So, while it waits, it is making some changes so as not to be disastrously affected no matter how the ruling comes down.

Lending Club will increase the fees paid to WebBank, which is owned by Steel Partners Holdings. According to The Wall Street Journal, WebBank will “have its financial interests tied more to the repayment of the loan” because the fee gets paid out in installments that would end if the loan is not repaid on time.

The company has also been raising rates it charges to borrowers. Servicing fees have averaged about 66 basis points on loans, with 10 percent of its loans made in jurisdictions tied to the Madden case and 12.5 percent of its loan portfolio operating above state usury limits.

Of course, this is just one of the many headwinds facing marketplace lending. These platforms could become quite precarious as they reduce the standards for borrowing and increase the risk for their investors, without the ability to increase the returns on those investments. As MPD CEO Karen Webster pointed out in her piece a few weeks ago, that could trigger a platform “death spiral” of sorts over time, as investors pull back, making funds to borrowers less accessible. Fewer funds to lend means fewer origination dollars to collect, which means, potentially, less good news to report to investors.

 

So, what did we learn this week? It was a good time to start a new chapter. Amex — inch by hard-won inch — is trying to close the book on the dark Costco period or, at least, get the page turned to anything else with a billion dollars more in its bank account. Dwolla is also looking to close a book called “Angry CFPB,” hoping to never open it again. Lending Club is trying to avoid opening that book at all but keep the positive marketplace lending story alive, in which everyone all lived happily ever after.

Stay tuned. Plot twists ahead are most assured.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The September 2019 AML/KYC Tracker Report provides an in-depth examination of current efforts to stop money laundering, fight fraud and improve customer identity authentication in the financial services space.

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