Beam Financial vanishing act a cautionary tale for partners of fintechs

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Beam Financial, which launched a consumer banking app in September 2019, had a familiar pitch: It would give consumers a better deal than banks do.

"Beam’s vision is to make high-interest bank accounts accessible to all Americans, regardless of wealth status, account balance, or whether they would be eligible for cross-selling of other financial products,” the San Francisco company said in a July 2020 petition to the Federal Trade Commission, which at the time was investigating consumer complaints about the fintech.

On its website, Beam boasts that it provides up to 4% interest on federally insured savings (originally it offered 4% to 8%), whereas traditional banks pay an average of 0.01% a year. Customers can increase the interest rate they receive by referring other people to Beam.

If it sounds too good to be true, that's because it may have been.

In a report CNBC published Thursday, several Beam customers told of realizing the app was down temporarily and unsuccessfully trying to withdraw their money. The report jibes with the Better Business Bureau’s entry on Beam, which says the bureau has received "a pattern of complaints" from customers about delays in receiving funds when closing accounts and issues when contacting customer services. The Beam iOS App Store page contains dozens of complaints from users who couldn’t withdraw their funds.

Beam’s founder, who goes by the names Yinan Du and Aaron Du, did not respond to emails and phone calls seeking comment. A call to the main number at Beam yielded a recorded message, “We’re closed right now.” The company’s law firm, Hudson Cook in New York, also did not respond to emails and phone calls.

Pointing fingers

In March, Beam told customers in the app store that transaction delays were occurring “due to higher transaction volumes that our banking partners are handling (due to the coronavirus).”

It made a similar statement to the Better Business Bureau in September. "Settlements of withdrawal transactions have, in some cases, been delayed because of a bank partner," according to a statement the bureau posted on its website that was attributed to Beam. "We are both working with this partner and evaluating new bank partnerships to prevent any delays in the future."

But the complaints kept coming, and they began to affect its partners.

In September, Beam customers complained on Twitter about not being able to withdraw money, and the complaints were partly aimed at Dwolla, Beam’s automated clearinghouse transaction software provider.

A Dwolla spokeswoman said that the company reached out to Beam and its financial institution partner, Huntington National Bank. As a result of that discussion, Dwolla “suspected activity on the Beam application might harm consumers and immediately shut down services to Beam with the consumers’ best interest in mind,” the company said.

In an email exchange with American Banker, the spokeswoman said Dwolla was simply a vendor to Beam and had no direct relationship with Huntington.

She also said Dwolla’s termination of its service agreement with Beam on Oct. 1 did not cause Beam’s problems. There were concerns from Beam customers that they were unable to withdraw funds before Dwolla made the decision to suspend services, she said, and Dwolla did not and does not hold the funds collected by Beam.

“Beam has, at this point, had several weeks to find another ACH provider but that does not prevent them from returning funds to their customers,” she said.

Some customers told CNBC that Beam blamed Huntington for its problems returning money to customers and said it was looking for new bank partners.

But a spokeswoman for Huntington said in an email to American Banker that the bank is only a custody provider to Beam.

“We are not Beam’s partner and have no relationship with Beam’s customers or knowledge of any underlying Beam customer accounts,” she said. “Huntington stands ready to cooperate with the appropriate parties to resolve these questions.”

Beam also works with the deposit network provider Reich & Tang, which recently rebranded itself R&T. The company did not grant an interview, but in a recent letter to its bank partners R&T said Beam places deposits in R&T's Demand Deposit Marketplace Program through a custodian bank and that the balance related to Beam was $2.4 million as of Oct. 22. The company said it would return funds to the custodian bank "as soon as R&T receives the appropriate instructions."

R&T's letter also said that it would terminate its agreement with Beam on Oct. 31.

It’s hard to say at this point whether Beam is a bad actor or a well-intentioned startup overwhelmed with technical problems or other misfortune.

In a letter Beam sent to customers last week, it said a few customers had committed fraud through the automated clearinghouse. It did not say what kind of fraud was committed.

"We are actively liaising with our intermediaries to release the hold on your deposit and withdrawal transactions so that we can issue customer deposit balances back to our members," the letter stated. "This cannot happen fast enough, and we are on it." The company said it expected all requested withdrawals to be made to customers' linked bank accounts within the next two weeks.

The ongoing problems are not a good look for Beam’s partners.

Red flags

Stephen Greer, senior analyst at Celent, said he had looked into the company in 2018 and was unsurprised when he heard recently that Beam was having problems.

“One of the big question marks for me two years ago was, what's the business model here?” he recalled. “How can they make money off of collecting interest at their partner bank and then paying out more interest to customers, unless they're doing something really fancy and potentially risky with money behind the scenes that's not being communicated?”

The Angry Retail Banker blog in 2017 also raised questions about Beam’s business model. The author interviewed Du (who was calling himself Yinan Du at the time), and asked him directly how Beam makes money.

“We make money by acting as a technology service provider to financial institution partners (managing depository operations for them) and earning a service fee from doing so,” Du said.

The blog also said that Du previously ran a Groupon-like discount site in China, 24Quan, that went out of business and was accused by merchants and employees of theft.

The FTC has had its eye on Beam for a couple of years. The agency declined a request for an interview, but pointed to public documents on the matter. In July 2018, the FTC began an investigation into whether consumers were receiving the advertised interest rates on their deposits. It asked Beam for information and documents that the company eventually provided, and the inquiry was closed.

In May 2020, the FTC opened an investigation into “whether Beam has engaged in deceptive or unfair practices related to its financial products or services, including the accessibility of consumer funds, the advertised rates of return and interest, and the functionality of the company’s mobile apps.” This time, the company said it could not provide additional information and documents because of the COVID-19 pandemic. Beam petitioned for the demand to be quashed. The FTC did not quash it but extended the deadline for the requested information to Oct. 30.

Sizing up fintech partners

Is one of the morals of this story that banks need to conduct stricter due diligence of potential fintech partners?

“There's a certain amount of risk,” Greer said. “What happens when the organization or the fintech you're partnering with or taking deposits for ends up doing something that's not in the best interest of its customers. How does that reflect on the bank’s brand? Because it can be pulled into the impropriety.”

Consumers see a federal deposit insurance logo and assume they’re shielded from any wrongdoing by the fintech, Greer pointed out.

“But they're not, really,” he said. “That in and of itself is a little worrisome. You could have consumers that don't quite know what they're exposed to.”

At a minimum, banks want to look at a company founder’s track record, Greer said. On the other hand, a company could be well capitalized and look great on paper, but still have problems or fail.

The banker who writes the Angry Retail Banker blog (who agreed to an interview but not to the use of his real name), pointed out that what look like red flags now could be explained away.

For instance, if partners entered into relationships with Beam before the FTC began its investigations, “Beam Financial might have been clean as a whistle,” he said. “My due diligence just showed he had a failed business venture. Savings account apps were fairly new at the time. This might have been something Huntington saw as an opportunity.”

Ron Shevlin, managing director of fintech research at Cornerstone Advisors, also said Huntington may have done all the due diligence it needed to before the partnership.

“This sounds more like a case of fraud than technical issues,” Shevlin said. “If that’s true, then there's only so much a bank can do in the evaluation stage. The lesson here might be that banks have to put themselves in the shoes of the customer, by setting up test accounts and periodically taking money out of and closing those accounts.”

There’s no guarantee any fintech partner or other partner will succeed.

“You can do all your due diligence. The messaging can be right,” Greer said. "You can say, this fintech looks good. Its values align. The founder's compelling, but there's still unforeseen risks down the road that you might have to deal with.”

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