Archive for 2020
One Of The Most Devastating Court Decisions Against Merchant Cash Advances Has Been Overturned
January 29, 2020
Merchant Cash Advances have sat on comfortable legal footing in New York ever since an appellate court ruled in favor of Pearl Beta Funding, LLC against Champion Auto Sales, LLC in 2018, but even so, it hasn’t stopped lawyers from trying to invalidate merchant cash advance (MCA) contracts on behalf of aggrieved customers.
That’s because an MCA provided by New York-based Merchant Funding Services LLC to a business known as Volunteer Pharmacy in 2016 was ruled by New York Supreme Court Judge David F Everett to be so “criminally usurious on its face” that the normal process required to vacate a Confession of Judgment could simply be bypassed without even having to evaluate the merits of each side’s arguments and the matter automatically won in favor of Volunteer Pharmacy. The judge’s written decision, which voided the MCA contract ab initio, was replete with a scathing opinion of MFS’s business model.
The decision quietly stunned the merchant cash advance industry. MFS understandably appealed.
Dozens of lawsuits against MCA companies in the ensuing years went on to cite Judge Everett’s decision in Volunteer Pharmacy with limited success. And while the industry sat around to find out what would happen in that case, Pearl Beta Funding, a rival to Merchant Funding Services, won an appeal of its own, the landmark usury case in March 2018 that seemingly solidified once and for all the commonly held understanding that such MCA agreements were not usurious.
Despite this, the uncertainty of Volunteer Pharmacy still lingered in the background, that is until now.
On January 29th, 2020 the Appellate Division, 2nd Department, of the Supreme Court of New York, overturned Judge Everett’s decision and ruled in favor of Merchant Funding Services. The panel of judges said they need not even weigh a lot of Everett’s contentions because he was wrong on the underlying procedural issue, that a judgment by confession could be vacated in such an instance without having to go through the normal legal process.
The ruling ultimately provides clarity on the process that determines how a judgment by confession can be vacated. One major impact is that lawyers seeking to invalidate merchant cash advance agreements will no longer have Volunteer Pharmacy as a crutch to rely on.
Former Wells Fargo CEO Fined $17.5 Million
January 27, 2020
Last week the Office of the Comptroller of the Currency released a 100-page report on the Wells Fargo fake accounts scandal that came to light three years ago. Accompanying the document with a fine against the CEO who oversaw the controversy, John Stumpf, for $17.5 million.
Stumpf, whose personal wealth was estimated to be roughly $200 million prior to the scandal, also had all of his stock options rescinded by Wells Fargo, totaling $69 million that was returned to the bank.
Being the largest ever fine to be levied against an individual by the OCC, the news contrasts regulators’ reactions to previous outrages, such as JPMorgan Chase’s London Whale fiasco as well as the ’08 financial crisis, both of which saw executives escape personal scrutiny in lieu of the institutions themselves being subject to penalties. And while Stumpf’s fine breaks records, it may not hold the top spot for long, with the OCC eyeing a follow-up charge against Carrie Tolstedt, who ran the division of Wells Fargo most involved in the scandal, for $25 million.
Stumpf was charged alongside seven others who were implicated in 2016 for opening millions of allegedly fake accounts to meet sales targets. Such goals being set by higher-ups in the 168-years-old bank were passed down to mid- and low-level employees, fostering a culture that promoted the idea of cheating or being fired, according to the OCC’s report.
Employee testimonies allege that one branch manager threatened to transfer those workers who did not meet targets to “a store where someone had been shot and killed,” whereas another employee and Gulf War veteran wrote to Stumpf noting that working for Wells Fargo proved to be more stressful than a war zone.
The filings also described an atmosphere of surveillance, mentioning that “The bank had better tools and systems to detect employees who did not meet unreasonable sales goals than it did to catch employees who engaged in sales practices misconduct.”
Reactions to the scandal have been scathing, with Congress having drilled Stumpf’s replacement, Tim Sloan, during hearings last year. Democratic presidential nominee candidate Elizabeth Warren came out during the week with guns blazing for the bank. “Giant banks like Wells Fargo only clean up their act when their executives know they’ll face handcuffs when they preside over massive fraud,” the Massachusetts Senator said in a statement on Thursday. “Tomorrow morning, former Wells Fargo CEO John Stumpf will wake up to his cushy retirement while the thousands of low-level branch employees who took the fall for him – and the hundreds of thousands of consumers who were cheated on his watch – continue to deal with the repercussions of his scams.”
Sloan ended up taking a forced retirement in March 2019, with Charles Scharf stepping in as CEO. Speaking on his first earnings call since assuming leadership of the bank, Scharf addressed the scandal, keeping the book open on investigations into wrongdoing. “I just want to be clear, I’m not suggesting here that any of these public issues will be closed this year.”
New Jersey Tries Again With a Small Business Finance Disclosure Bill
January 26, 2020
For the third year in a row, New Jersey has a small business finance disclosure bill on the table. S233 is the latest iteration of S2262 from prior years.
Introduced by State Senator Troy Singleton, the proposed law would impose disclosures on loans, factoring, and merchant cash advances on transactions less than $500,000.
In addition to APR requirements, brokers who arrange such financing would be required to disclose their fee to prospective applicants separately from the financing contract and prior to the consummation of the transaction.
Singleton is a Democrat. The Democrats in New Jersey control the Senate, Assembly, and Governor’s office.
The Scoop Behind Sprout Funding’s Acquisition of Jet Capital
January 25, 2020
News from North Texas this month as Dallas-based Sprout Funding announced its acquisition of Jet Capital. The move comes as Sprout seeks to expand its technical operations.
“Sprout built a reputation as a group that funds a lot of its own internal deals, and Jet had spent a lot of time, energy, and money on their tech platforms,” Sprout’s CEO and Founder Brad Woy told deBanked. “So while we were really good on the sales and marketing side, they seemed to be a little bit more advanced in their tech and reporting, and we brought those two things together.”
Almost all of Jet’s employees will be joining Sprout, with the exception of one person who chose to go their separate way following the merger.
Jet’s COO Allan Thompson spoke kindly of the purchase, saying in a statement that “There is a great cultural alignment in addition to the obvious benefits of combining our technology, processes and people. The result will provide increased capabilities for Sprout and opportunity for all of our customers and partners.”
The financial terms of the acquisition were not disclosed.
Sun Shines on deBanked CONNECT MIAMI for Another Year
January 24, 2020
Two blocks back from where the waves were washing up on Miami Beach, attendees flocked into the halls of the Loews Miami Beach Hotel. A mix of brokers, funders, lawyers, and anyone else attracted to alternative finance made up the crowd of the 2020 outing of deBanked Connect Miami.
They had come for the speakers and talks, the networking opportunities, and, of course, the weather; the first of these being a mix of topics and characters from across the industry. But before the talks could properly kick off, deBanked’s President and Founder Sean Murray took to the stage to welcome attendees and announced the publication’s latest news: the utility of www.seekingfin.com and the administration of two large social media groups, Merchant Cash Advance on Facebook and Merchant Cash Advance Resource on LinkedIn.
Following on from Murray’s introduction, Brian Holloway, former Patriots Offensive Lineman, opened the show with an impassioned speech alongside his son on how to translate your passions and determination into sales maximization, citing the mantra of “Let’s move as the champions move.” A collection of industry figures including United Capital Source’s Jared Weitz, Elevate’s Heather Francis, and alternative finance veteran David Goldin discussed the challenges and changes that businesses are likely to face when making money in 2020 – including what to be aware of when considering syndication and how to build a book. And closing the show were Gunes Kulaligil from Methodical Management alongside Hans Thomas of 10X Capital, who broke down how to accurately value yourself and your company’s worth.
Running throughout these talks, just off from the general session room, the sponsors hall was abuzz with deals and networking. With business cards exchanged, rumors swapped, and trends discussed, the hall served for the day as a focal point for the industry.
And as the sun set on South Beach, the speakers wrapped up and the sponsors wound down their tables. The audience billowed out into the courtyard, where the lasting Miami heat accompanied food, cocktails, and conversation, as deBanked Connect Miami closed for another year.
Study Claims Canadian Market Needs to Improve Financial Literacy
January 24, 2020
This week Loans Canada, a lead generation company, released a study documenting the disparities between perceived financial literacy and actual financial well-being. Surveying 1,665 Canadians, the report asserts that those individuals who claim to have a firm grasp of their financial situation may in fact be out of touch.
This being highlighted by major misunderstandings about how to budget for the future as well as a lack of education regarding loan repayments. 72% of the respondents said that they did not save for emergencies, 43% did not track their spending, and 66% do not stick to a monthly budget. Such budgetary omissions outline the potential for a large portion of the Canadian market to be in trouble should unforeseen expenses arise, and the fact that two thirds of the market aren’t even drawing up budgets is a cause for concern.
Such factors are made worse by the community’s seeming misinterpretations of loan terms. With 40% of the survey stating that they didn’t know payday loans were one of the most expensive ways to borrow money, 30% not understanding that paying the minimum amount of a credit card charge still meant you had to pay interest, and just over half of those surveyed were not able to identify the factors which affect the cost of loans, there appears to be a problem surrounding financial literacy and education of individuals regarding loans.
As well as these issues, there is the case of stacking loans, with the study indicating that the practice is not fully understood by Canadians and that the two top reasons for taking on multiple loans are for emergency costs (25%) and making ends meet (43%). Interestingly, the respondents who claimed to have the most confidence in their capacity to make financially sound decisions are more likely to be individuals who stack loans, leading them, inevitably, to have similar or more debt than those surveyed who said they were not confident in their financial decision-making ability.
Altogether, the study paints the picture of Canada as a market in need of further education. While financial literacy isn’t in crisis, the report points towards vulnerable sectors, such as such as those individuals with poor knowledge of loans and interest rates, as well as budgeting, are groups that need to develop a better understanding.
Open Banking: Canada Might Not Be Able to Make Up for Lost Time
January 22, 2020
Over the last two years, open banking has become a matter of public conversation in Canada. Most would agree there is overwhelming support for the implementation of an open banking regime. So why has nothing concrete happened yet?
2019 turned out to be an exciting, yet painfully underwhelming year for open banking in Canada. The news media finally caught on to the movement and started publishing stories on the rise of robo-advisor apps, or how small and medium-sized businesses would be impacted, and so forth. Experts and industry leaders pitched in with a massive volume of op-eds, most of which were in support of open banking, and with many deploring Canada’s slowness. Some came to our podcast to discuss their perspective (spoiler: customer-centricity is a very big theme.)
Another telling sign of the importance of open banking is the fact that at the federal level, both the legislative and executive arms of the government have become actively engaged in the public conversation. The Senate of Canada’s committee on Banking, Trade and Commerce produced a well-researched report — perhaps the most valuable contribution to the conversation. This report calls for swift action on the part of the federal government to advance a regulatory framework for open banking. In parallel, the Department of Finance’s appointed advisory committee on open banking held a consultation with key stakeholders and should publish its own report in the near future.
Even to a casual observer, there was an obvious sense that Canada is ready to embrace open banking.
But here’s the thing: despite all this work and evidence of widespread support, Canada didn’t move the needle on open banking in any concrete way.
Who’s leading?
The UK has already implemented a comprehensive open banking regime, and continental Europe is close behind. Dozens more countries are working toward their own versions. Among the various geographies moving in this direction, some are opting for a government-led approach, the UK probably being the best example. Others, like the US, tend to be more market-driven. In Canada, the main stakeholders are still largely hesitant about where to strike the balance between the two approaches — and the result is that so far, both have failed to provide the leadership that would allow open banking to move forward.
The Department of Finance’s advisory committee was tasked to study the “merits of open banking”. This line of inquiry feels very old, and for good reason: to question whether we should have open banking or not is a false debate, and a time-wasting rabbit hole. The real question Canada should be asking itself when it comes to open banking is, “what is the objective we want to achieve here?”
Let’s take a few steps back to realize just how important this question is.
The UK had a very clear vision for their open banking regime. The Competition and Markets Authority had assessed that the oligopolistic dynamics of the banking sector were putting consumers at a disadvantage. Thus, the UK set on their open banking journey with a very precise objective in mind: make it easier for consumers to switch providers. While some take great pride in criticizing the UK’s implementation — stating that its objective was either wrong, too narrow, or poorly executed — the fact remains that they are ahead of the pack. And the UK’s leadership in this area still persists, with the Financial Conduct Authority now studying the question of extending the current open banking regime into a holistic open finance regime.
Meanwhile, in Canada, the government is trying to wrap its head around the big questions, such as the liability framework that should be put in place for an open banking regime to be viable. (In other words, in a system where financial services are decentralized, how do we go about making the consumer whole when something goes wrong?) However, without a decision on what end state we are looking to achieve with open banking, these conversations are doomed to keep looking exactly like they’re looking now: a bunch of market actors with conflicting interests pretending they know what’s best for consumers. Conversations happening in industry groups aren’t much more productive, with the “trench war” dynamics being the trend there as well.
The irony is that the technical aspects of open banking can be dealt with easily. From a technical standpoint, financial data-sharing APIs have proven their effectiveness, and coming up with a shared technical standard should not be too difficult. The real challenge is coming up with a framework everyone — incumbents and new entrants alike — can rally behind, something industry groups have largely been ineffective at.
Canada’s highly concentrated financial services sector is a stable one, but incumbents are not likely to open themselves up to disruption. This is the part where bold political leadership is required.
The clock is ticking
Data sharing is nevertheless picking up, as 4 million Canadians (and counting) have made fintech apps a part of their financial lives. Consumers and businesses who want the benefits of on-demand data sharing must rely on the current generation of financial aggregators, like Flinks. This system may work as a de facto connectivity layer, but the lack of standards results in a clumsy patchwork of bilateral deals between aggregators and banks. It just isn’t a viable way to achieve an open banking regime that levels the playing field when it comes to data portability.
In its report, the Senate’s Committee on Banking, Trade and Commerce states that Canada “risks falling behind” if it fails to implement open banking, and that “without swift action, Canada may become an importer of financial technology rather than an exporter.” It is true that if we keep delaying open banking, our slowness will prove to be a very stingy and lasting price to pay for the Canadian society; this is why we need bold action now. We can’t afford the comfort of waiting until we’ve figured out the 100% perfect solution.
There’s nothing like a real-world example: 2020 opened with a seismic shift when financial giant Visa acquired Plaid, one of the largest US financial aggregators, for over five billion USD. This is hinting at a new phase where markets will consolidate around a few large players; Canada can either ride the tide or get towed under.
It’s time to be bold
In the end, what needs to happen for Canada to move forward with open banking?
Our financial services sector can be compared to those of the UK and Australia, where a few powerful banks control a very large portion of the market. In those two countries, open banking was designed to stimulate competition, and government action was necessary to get things moving.
Right now, the question politicians ought to ask shouldn’t be if — or even how — but why. A why will pave the way and provide a natural direction to sort out the how. In 2019, discussions around open banking lacked this fundamental feature: political leadership centered on a bold, ambitious, consumer-centric mission statement. A why.
So here’s one for 2020: open banking will increase consumers’ choice when it comes to financial services. That would be a good start — and while good is not perfect, it still beats nothing by a landslide.
Quarterspot is Shifting Its Business Focus
January 22, 2020Last week, several industry insiders reported receiving an email from NY-based company Quarterspot that said their agreement had been terminated.
The contents stated that the company is “shifting its business focus and will no longer be originating loans, but will continue to service currently outstanding loans.”
deBanked has confirmed that to be true. More information may be reported as it becomes available.
