September 30, 2016  |    Leave a comment

It has been three weeks since the CFPB fined Wells Fargo for illegal sales practices, but the drama is still in the early innings. CEO John Stumpf was in front of the House yesterday, testifying for some four hours. While much of the Congressional hearings have an undercurrent of political posturing, there are some more serious suits and allegations that will take years to unfold.

Among the more vivid displays was a screen that listed all of the fines Wells Fargo has paid in recent years, amounting to over $10 billion for discrimination against African-Americans and Hispanics, foreclosure violations, illegal student loan servicing practices, violating the ADA, and more.Here are a few of the effects of the more recent scandal:

  1. Wells Fargo stock is down 12% since the CFPB fine was announced, erasing around $30 billion of market cap.
  2. CEO Stumpf is forfeiting $41MM of his pay, and former consumer banking head Carrie Tolstedt is giving up $19MM (Congress says it is still not enough and wants him to resign – not likely).
  3. Wells Fargo accelerated plans to eliminate product sales goals from January 1 to October 1.
  4. The State of California has suspended all business dealings with Wells Fargo, who had led multiple municipal bond offerings for the state, for at least one year.
  5. Former employees who were allegedly fired for not meeting sales quotes are seeking $2.6 billion in damages in a California lawsuit. They claim they were not willing to engage in unethical behavior and then were fired. In addition, multiple former employees have come forward saying they were fired when they reported the illegal activities to their managers and the firm’s compliance hotline.
  6. Class action law suit from investors (while these types of lawsuits are typically from legal bottom feeders, there is a strong case to be made that Wells Fargo intentionally refused to disclose material information – see #1)
  7. In addition, yesterday the OCC levied a new $20MM fine on Wells Fargo for violating lending practices to military members.
However, it is clear that the CFPB does not discriminate against big banks. On Tuesday, the agency fined LendUp, a digital payday lender backed by A16Z, Kleiner Perkins, and Google Ventures. In total, LendUp will have to pay more than $6 million in fines and refunds for practices such as miscalculating interest rates, not reporting the loans to credit agencies as promised, and incorrect advertising. LendUp raised nearly $50MM a few months ago, so they should be fine. The CFPB is just trying to make the point that regulations apply even if you are a “fintech” company.To some extent, the success of fintech over the last few years has been a consequence of regulatory arbitrage. Startups did not really create new products, but new ways to deliver the products (front-end) that bypassed or took advantage of existing regulations. Given that fintech companies are becoming more mainstream and becoming a larger part of the market, I see two trends playing out.

First, regulators will continue to scrutinize and put pressure on fintech business models and regulatory conformance. Lending is the easiest place to get started, as one of the largest segments of fintech with a more fully-developed consumer protection precedent. Originator relationships with funding sources like industrial banks will specifically be put under the microscope.

Second, and as a result of the above, regtech will become a much larger segment of fintech. This fits the narrative of startups pivoting from “destroying the banks” to “partnering with banks.” As regulation becomes more complex and expensive, there should be plenty of opportunity for startups to build new technology to bring the cost down and make it easier for banks and fintech startups to comply. Of course, that assumes the CFPB doesn’t catch regtech firms breaking the law as well…

 

SoFi continues to rebundle banking
After adding Wealth Management/ETFs to its platform last year, SoFi is looking to expand again, this time into insurance.  SoFi is expected to launch a term insurance offering by the end of the year. It is unclear if this is in additional to or instead of its plans for some sort of a deposit/stored value product. Regardless, with this new product SoFi is taking another step closer to offering a full suite of consumer products.

The sky is the limit for GreenSky
The third most valuable fintech company is not in Silicon Valley or New York. Sporting a $3.6 billion valuation following a $50MM investment from Fifth Third Bank, Atlanta-based GreenSky has not been as splashy as, say SoFi. GreenSky facilitates loans between its merchant partners (including Home Depot) and about a dozen large banks who fund its billions in loans. The new valuation is a major upround from the 2014 round which valued the firm at $2 billion. Bloomberg recently penned a great article on the company and its founder who sold his first business while attending Auburn… at the age of 14.

Innovation from the incumbents
This (long form) podcast from the 11:FS team is great is you have 2.5 hours of listening time available. The conversation is wide ranging but very insightful, including: why recent opportunity in fintech international currency remittances will be arbitraged away, how Santander InnoVentures leverages the bank to validate investment ideas (and its PR policy), how you should pitch your startup to corporate VCs, and how BBVA views and builds its API platform.

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