Key takeaways:
- What are the major implications of CFPB's report on BNPL solutions
- How does this impact consumers and their relationship with their trusted financial institutions
- What can financial institutions do to get ahead of the changes that are coming in the marketplace
Patrick Haggerty (00:10):
Thank you all for sticking around for another BNPL session if you were here for the one that preceded us and if you weren't, thank you for coming to this one. So the panel before spoke a lot about the massive growth in find out pay later products and kind of the different variants of the product category and how those things have evolved with the market landscape looks like today. And our panel is really going to try to dive more into the future and look at what we see potentially coming down the pike, looking at the crystal ball as much as we can and try to think through implications of some of the regulatory actions, some of the market environment developments, challenging economic times that were sort of staring in the face at the moment. But I think before we dive in, I found it valuable to hear on prior panels kind of not necessarily a bio, but just kind of have Rob introduce what his role with US Bank is and how he came to be wrapped into the wooly world of Buy now pay later.
Rob Sideman (01:28):
I appreciate that. Rob Sideman, I'm the chief product officer for Buy now pay later in poise South landing at US Bank. Been doing it guess about five years now, a FinTech startup in healthcare that led to a buy now pay later stint that led to this 25 years in banking before that. So yeah, it's been a whirlwind the last five years for sure.
Patrick Haggerty (01:57):
And what kind of products does US Bank offer today?
Rob Sideman (02:01):
We will be offering products in the near future. So I think Mia talked about in the last panel about we'll be offering regulated products not paying for as a starting point for us. Got it. We just think it's a better space for us. We fit better in that space.
Patrick Haggerty (02:20):
Yes, Makes sense. So somebody alluded, Maybe Gaurav on the last panel alluded to the fact that when we talk about the regulatory environment, a lot of what you read in the news and hear from consumer advocates and others is that it's really more related I think to the paying for products that are operating kind of more like credit cards that check out. But so we're going to kind of bleed back and forth I suppose and may be unfair to ask you about the pay and force stuff since you're not as deeply involved in it. So I did kind of want to start by looking at the regulatory environment. As Kate mentioned earlier, the CFPB has been very active in looking at the space with any great success comes great scrutiny. And so this is not a surprising reaction. Consumers seem to have really taken to buy now pay later products. And so with massive user adoption, it's natural for the consumer protection folks to take an interest. So there's been a series of reports that the CFBs put out. They've given some sort of short treatment to the benefits of buy now pay later products. But maybe I'll start there and talk about some of the benefits that they seem to agree with flexibility for the consumer, the lack of interest payments, things like that. Do you think that the regulators are really understanding that point at this stage in their inquiry?
Rob Sideman (03:59):
Yeah, I think part of it is understood really well. I'll go back to definitions for a sec. I think buy now pay later, we euphemistically call every refinance product, buy now pay later now. So I just do want to set some definitions before we get into the CFPB report. So CFPB covered paying four providers, meaning four payments over six weeks, paid biweekly, no credit check and generally capped at $2,500 or less. Some most are a thousand or less. The average ticket's about 115 bucks and very big in apparel. We hear about it a lot in the news. I think that is the paying for and the BNPL covered in the report more than anything else. Right now it does acknowledge that the other side of BNPL, what is also called BNPL are installment based or credit card or line of credit based longer installment loans for larger tickets that are pure installment loans. Rexi, udap like fully compliant with any other regulatory product in lending. So when we talk about the sector buy now pay later instead of this broad brush, I do want to be really special when talk reg regulators and outputs of regulatory reports. So for me, I would just want to hone in on the paying four side. I do have some experience. I worked for a paying four shop for a while, which I was very proud of. It's a great space. And just one correction from the last one. There are paying four guys that do report to the bureau, just FYI, Cecil has says a lot, they've been reporting for several years. It's an opt-in product. There are others that are starting to, so I don't want to, broad brushes are very tough for me and the nuance matters in this case. But he, here's my general view is that the reason why paying four exploded because fundamentally served a need that banks, we as bankers did not serve. They got it. They got, in my opinion three things. One is the customer experience was phenomenal, crazy fast. It served a need for credit for people who, didn't have access to credit. And third is help merchants do what merchants do, which is sell their product and make it affordable. It's served in need mean. So if you look at the numbers and that report, 250%, three year kegers are from the time period. I mean it's extraordinary growth. I think they stopped in 21 or 20 was the last period they were, but it was like 35 billion in receivables, which is a crazy amount of purchase volume for a product that's eight years old, nine years old in its current form, whatever you want to call it. Whatever you can say was out in market from the guys that citizens pay or a firm or whatever it might be. So I do think there's insane value to a consumer to have to be able to access credit at the point of sale in time of need. That's the kind of moment of truth for a consumer. And when you're there with a crazy good experience, really slick, really fast, frictionless and you know have to put down payment method at the same time, it's not like you walk away and you don't put down payment method, you pay 25% now and then you have three more payments. They got some stuff really right on the merchant side of things. They got the integrations. So kudos to the FinTech that built out beautiful developer platforms that made embedded financing really easy to do for an IT department at a retailer that may not be fully staffed all the time. They did some things really right.
(07:45)
So point on the last panel where it got a little tough is the unit economics weren't great when you got free money. It's really not overly hard if you charge a fee of merchants and low penalty fees to the consumer, you can bounce along at that kind of unit, economic break even number, maybe even make a little bit of profit. When interest rates rise and defaults rise, it gets a lot tougher. So this is where I think that regulation is actually pretty helpful because it sets parameters and card rails for companies to operate within a prudential system that's been proven to work. So while I've done it is just my opinion, but I've done certain things exceptionally well. There is a framework and some parameters and some rules and regulations that matter to both protect consumers and the FinTechs themselves. So mixed bag. But to this, the CFPB report specifically they did, I thought they actually did a pretty decent job being as fair as they could. I think that it's short shrift to say that the fintechs got it wrong or they're creating systemic risk without asking what truly is the consumers need that they're solving that others were not. That to me is the first question that you should ask. Why aren't banks solving this problem? Why haven't we done a good job at it? Yeah, that's an interesting starting point versus seven years later, Hey is this safe? Is this a good to me it's a little bit late to the party but it's just me.
Patrick Haggerty (09:26):
Yeah. So the report spent most of the balance focusing on risks, what they saw as risks to consumers and there was a companion report that came out last month I believe that focused on the credit profile of the typical buy now pay later pure later paying full I think is still what they were looking at customer. So kind of using that as the backdrop for any policymaking that they may be doing. I thought it may be nice, I don't want to ask you to predict what the bureau's going to do, but maybe I can play that role and supply some what if questions. And so I think the first area there is rulemaking. So if the CFPB has basically hinted, not just hinted, they've stated pretty explicitly that they are of the view that these buy now pay later products should be treated essentially the same as credit cards when it comes to consumer protection. So if we think about the consumer protection rules that are in place for credit cards, particularly with the 2010 card act, there's things like ability to pay where you are required to assess the outstanding debt obligations of the consumer. There's pretty substantially consumer friendly dispute procedures that are in place. There's a very consistent disclosure regime. There's some fee restrictions. So that's kind of a big point right now for credit card shops with CFPB looking to cut back on those. So if you think about those as being the likely ingredients that would be put into a rulemaking and maybe thinking back on your time dealing with more with the pay and for product, how big of a sea change do you think that would be? Is this an existential situation or are those business models robust enough to handle that type of rule making?
Rob Sideman (11:19):
That's a good question. I'd say 90 plus percent of the investment for paying four guys are on tech, right? Because more than anything it's a tech platform, an experiential platform. So where I think their trouble could crop up is dispute management, which is more unfortunately manual as all bankers in the room will know. So disputes in my opinion, are probably where they have the most to gain from in terms of consumer protections. I think that's legit argument, right? It's hard if you go through fintechs now, the dispute process is not as robust. They basically send you back to the merchant, which isn't necessarily a bad thing, but banks being arbiters between two parties is a common place for a bank to be. It is not overly common for a FinTech to be an arbiter between two parties that disagree. That's not like their strength. So from that perspective, I do think there's legitimate, that's pretty legitimate set of concerns on the ability to pay.
Patrick Haggerty (12:29):
Just real quick on the dispute process. I mean there are countless fintechs that have successfully launched debit products and many have issued credit card products as well. Yeah. So they've managed to solve the sort of dispute's role, but I'm just trying to make sure I understand. Are you saying that the learning curve is going to be much higher for these folks who have built a business model around to buy a paying for product?
Rob Sideman (12:58):
I think it's more around operational efficiencies of dispute management and handling and claims adjudication. It's not easy. And so if you ride card rails because you issued virtual card or a debit card off your FinTech platform, it's not that you will necessarily not follow the Visa, MasterCard, discover regimes or whatever it might be. It's that when you get to scale and you have disputes, then that's a different story. And a huge chunk of them, by the way, are direct integration. They're not card rail. So you don't run on card rails, you don't run on the card adjudication process, you run on whatever's in your merchant agreement. It's direct counterparty conversations. So you're not adhering to any given set of regs necessarily, right? I mean you're kind of like outside of a reg regime, you know what I mean? With direct integration and outside the card networks. So I do it, it's going to be about scale efficiency, operational efficiency does not come overnight. That's learned in the hard way unfortunately. And I think some are learning it really, really hard. So just to, that would be my take. It's not that they don't do it or they do it poorly, it's that at scale. And by the way, when you have a virtual card settlement or a debit card product, you're then taken on multiple dispute regimes. You have a direct integration which is merchant to FinTech to bank, it mean it's like tri-party almost. And then you take on the card schemes on top, then you have two different adjudication methods. Then you have to resolve which one you're going to use for which I mean that's not a work. So I think gaining efficiency in learning how to do that at massive scale is a big deal.
Patrick Haggerty (14:45):
So I cut you off on the ability to pay question, but just to set that up, one of the stats that gets thrown around a lot on this when talking about ability to pay with final pay later products is that the approval rates for BNPL products apparently according to the CFPB is something like 2.5 x higher than credit cards. And so one my question is that driven because they're not assessing the credit profile of the customer or is there perhaps something different about the product that would explain why there's higher approval rates?
Rob Sideman (15:19):
I might argue that they're more sophisticated credit modelers than we are at times. They're very sophisticated. The models are not based on guesswork. It's highly sophisticated work. They control losses for the most part. I mean they have spikes, but there is a huge body of data science that goes into credit modeling for buy now pay later paying for as well as installment and line of credit based products within the FinTech space. And they're quite good at it. And by the way, they use bureau data. I mean it's not like you totally issued that stuff. It still comes into the modeling. So their loss rates are actually within range. It's when cost of sales spikes or you have a spike in repayment losses that all of a sudden becomes into harsh focus. But they definitely, they definitely are smart credit modelers and managers, meaning the FinTech crowd. And I'd say the interaction between them and the bureaus probably needs to be redefined over time and I think they're both working pretty hard to do it from my experience of both sides actually.
Patrick Haggerty (16:44):
Yeah, it's a good segue cause I was going to ask you about credit reporting. Yeah. So this CFPB and another thing that they've pointed out, they're sort of bemoaning the slowness with which the bureaus have addressed this issue that pretty much all three of them have said that, they're doing something, they're all kind of taking different approaches. What do you think is causing it to take so long and what are the biggest pain points and challenges for that?
Rob Sideman (17:12):
I mean, think of how long it took to build FICO or Beacon, it's pretty hard. You're soaking in millions and millions and millions of data points nearly daily. I just think it's going to take time to model it out and they also have to, I'm going to say this nicely. So bureaus need to come to the table with a value prop that matters to the fintechs and fintechs need to come to the table with the value they can bring to the bureaus. I think once they kind of a symbiosis, the product will actually be quite good. I think the pathway right now is for them to carve out buy now pay later as a product type versus lumping it into a FICO because I think it has different repayment characteristics to it. It really has different risk profiles that it adds to a consumer that I'm not sure the bureaus know how to layer into what they already do every day with normal installing credit card and other products that they use for the bureau. So I do think there is just time to season out data to know how it's going to impact an individual's consumer's ability to repay and depending on what they're repaying, I think Gaurav had said it in the last session and I think he's right, which is we as banks, anybody who grants credit in any way Apple or doesn't matter who it is, we don't want to see the total picture. We don't want to be blinded to total liabilities out there when we start lending money to consumers. So I think it will behoove all of us to have those two parties work it out so we can all partake to be honest.
Patrick Haggerty (19:00):
Cool. So I want to shift now to another regulatory topic, which is supervision. So the CFPB has said that they are potentially, I'm trying to advance around this. It seems pretty clear to me that they're going to eventually be supervising the non-bank BMPL providers. So there's that sort of the threat of direct supervision for some of the FinTechs. There's also the partner banking model, which most of these non-bank lenders are reliant on, is also under a bit of a threat at the moment. All have to do is look at the enforcement action notifications that the regulators are putting out these days and the T leaves kind of show that it's going to be a challenging environment for partner banking in general. So I just want to get your sense for with that as the backdrop, how might that shift market structure and market activities?
Rob Sideman (20:02):
So I've been on both sides of that. I've been the partner bank ABS balance sheet side and a bank balance sheet side and banking as a service, lending as a service, rent a charter, industrial charters, whatever name you give it. That definitely has advantages to get to market fast, to have a pretty flexible infrastructure and to allow for a tech led experience driven FinTechs to get to market quickly without having to build the infrastructure, without having to have bank licenses and a balance sheet. There's real value in that model to me that enabled the innovation to take place in the first place. There's beauty in that model that is simple and fast and efficient. Where a FinTech does what they do well, which is experience technology integration, and a bank does what it does well, which is compliance or at least you hope they do it well. The compliance part, risk management and the core asset liability management of what they're supposed to do, whether it's true lender or if they're warehousing or whatever. However the model's going to work. I think where things got interesting from my perspective is when maybe some of the industrial charters got a bit aggressive in how who they would sponsor and how they go to market. Some of the FinTechs got a little overly aggressive in how much they wanted to skirt around basic protections and rules and you lead to just over consumption of good that it's like when you eat too much dessert, it's just kind of bad. You know what I mean? After a while, the first couple bites are good, then you have a diminishing returns very quickly. So regardless of whether what the CFPB action is, just good stewardship of risk management, compliance is always good. It's always good to have rules and parameters within reason. Within reason with the regulators in the room within reason. But I would say that the model evolve, I think, right? So I don't know whether it's consolidation based or whether it's regressed to the mean of what the regulatory regime would look like around paying for, does it look like an installment loan? Does it look like instant line of credit access? So I'm not exactly sure the right way to go about it, but I think if the general objective is consistent consumer protections, consistent prudential risk management routines of anyone who has asset liability duties, that's not a bad approach. So one could argue that you could see it all looking like bank because that's a model that's been proven out in terms of consumer protection. But I don't know. This is where banks sit in a unique position in that. I think to Mia's point earlier is we already are there. That's what we do every day. So that's good.
Patrick Haggerty (23:24):
So a lot of the FinTech providers have partnered with relatively small institutions that have gotten very good at this over the years. They were the ones that were willing to take the risk and take on the FinTech partnerships that a lot of the large banks wouldn't. Curious if you think that given where we are now and the evolution of these things, whether some of the large banks may be more interested in partnering with the FinTech brands and getting into the sort of banking as a service or partner banking model.
Rob Sideman (23:59):
I don't know if more, it's a lot of work to partner. If you're a bank and you want to partner with anyone, it doesn't matter what it is. Whether you're a vendor, it doesn't matter. It's a decent amount of work, right? Third party risk management systems. In every bank that I've ever been a part of, I've been at a lot of banks, you have to really want it. So if big banks can be nimble enough and they want that asset class and they are ready to take on third party distribution in a way that is fits into their model and how they go to business, it could be a great business. If you're not really ready for that, you don't know how to do that. I think it'd be very tough. I think it'd be very tough. And FinTechs, they move fast. We shipped, I'm a product guy, we deployed code every day, every day. We were shipping features every two weeks like clockwork, even faster on occasion. So when data came in that said we weren't doing a good job at X, we changed it to Y immediately. So banks don't do that. That's not a bank thing. No. So I think the clash of cultures is also one of those things where just the way FinTechs go to market because they own the experience where they want and need you to go with them at their speed. That's where banks I think have some interesting questions to ask themselves. Can they do it? Are they really ready for this? But again, if you want the asset class and you know, think it has good returns and you think they could live by your compliance and risk standards, yeah, I think it has real upside.
Patrick Haggerty (25:51):
Is there credence to, I think it was Max who tweeted out something in the wake of SVB that buy now pay later can help regional banks with their duration problem because it's a short duration.
Rob Sideman (26:05):
I wouldn't go that far on my personal, but then again, I'm not Max. But yeah.
Patrick Haggerty (26:11):
So we're either at or just about at time. But I do want to at least get a little bit to the very quickly to the market context here. And I was going to talk about competition, but I think the last panel did a pretty good job with that. Maybe just turning to the macro environment. So interest rates are sharply up. You have the fed's quantitative tapering is driving deposits out a system as well. So the funding environment is just kind of wacky right now. Yeah. Curious to your perspective on what does a funding environment look like for BNPL and what could folks do about it?
Rob Sideman (26:51):
Yeah, I think about valuation first is what multiple people are willing to pay for this. It used to be based on how fast you could acquire customers. Because B2B, B2C is an acquisition, is a consumer acquisition machine. It acquires a lot of customers very fast at a low CAC. So if you're in need of that and you're willing to pay a multiple for it, yes, I think the funding model still works. But on a unit economic basis, I think everyone covered it in the last panel. It's a tougher gig, but I don't buy now pay later. Again, going back to the definitions, it depends on what you're really trying to do. I just think if you do a good job of serving the customer's needs, you're a smart risk manager. There's good returns to be had in the space and I think good market participants that consistently deliver will get fun. Now, I mean venture world right now is licking their wounds and they're going to be, lots of those funds are going to be underwater for ages just because they took 80, 90% cuts to their portfolio. But I don't know.
Patrick Haggerty (28:11):
Does that present opportunities for banks that may be interested in doing M and A?
Rob Sideman (28:17):
We think so. Yeah, I think so. I think it presents a unique opportunity for us to us as bankers to think about how we can play in the market for sure. I don't think it cuts off fintechs for new fintechs for entering the space right now. We we're kind of hyper focused on this kind of BNPL point of sale thing. But I think there's lots of versions of embedded finance that over time, whether it be the B2B side, whether it be Insure Tech, there's not areas of specialty, but there's lots of other places. There's also an infrastructure layer we haven't really talked about that goes with B2B that we touched on, whether it be risk management lending as a service. There's lots of component pieces that I think do have a real value in the future and real good valuations because the sector's still growing. Consumers still need, the demand is still there, the growth is still there. So from that perspective, I don't think the venture world is shut down from the space, but I think they may pivot away from a straight out a firm model or my old shop at says or other places.
Patrick Haggerty (29:28):
So final question, and only because I'd be remiss not to ask it cause it's in the news virtually every single day there's a new article pointing out that groceries is the number one fastest growing category for Buy now, pay later. My question for you is really just, is that a troubling sign for the industry, especially where we are in the credit cycle? Or is that just not that big a deal?
Rob Sideman (29:59):
I am not personally a fan of it. I think it's a tough match for buy now pay later if you are trying to be a good steward, both for the consumers and for the bank's own return dynamics. I just think it's a tough gig. That's my personal point of view that is not, I don't know, I don't speak for the industry, but that is not a place I think we want to play.
Patrick Haggerty (30:38):
All right. Well, as one of my favorite podcasts would say, I think we'll leave it there.
Rob Sideman (30:43):
Sounds great. Thank you.