More Americans Tap 401ks; Another BaaS Bankruptcy; FDIC Wants More De Novos

Due to holiday closures, we're in your inboxes early this week, with the next Cross River IQ edition arriving on Friday, 4/18.

Fed dissent about QT. More Americans tapping 401ks. Senator revives FICO fight. Acting FDIC Chair wants more de novos. Rain raises $75Mn. Ripple acquires prime brokerage Hidden Road. Another BaaS bankruptcy.

BNPL continues to shift -- from consolidation and integration to the impacts of more innovation, go through this quick read by Cross River's EVP, Head of Fintech Banking, Adam Goller, to learn more about what we can all expect to see in the near future.

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FOMC Minutes

Minutes of the most recent FOMC meeting released earlier this week show there was some internal dissent about the recent decision to decelerate the shrinking of its balance sheet, popularly known as “quantitative tightening.” Part of the reason, according to the minutes, was uncertainty about how and when Congress will raise the debt ceiling. At its March policy meeting, the Fed lowered its cap on how many Treasury securities it would allow to roll off its balance sheet to $5Bn per month from the previous cap of $25Bn. The Fed left the cap on mortgage securities, which it has been struggling to meet, at $35Bn per month.

Meanwhile, financial stress has more Americans tapping retirement savings. Hardship withdrawals from 401(k) plans are up about 15%-20% vs. the historical norm, Empower CEO Ed Murphy told Bloomberg in an interview earlier this week. Hardship withdrawals are taxed and, for those under the age 59 ½, typically come with a 10% penalty. Vanguard reported a similar trend earlier this year, with a record 4.8% of customers initiating a hardship withdrawal, vs. 3.6% in 2023.

Senator Revives Fight Against FICO

Missouri Republican Senator Josh Hawley is calling on the Trump administration to initiate an antitrust investigation into FICO, over what Hawley describes as the company’s “monopoly power” and “anticompetitive behavior.” Hawleys letter to the Department of Justice argues, “FICO dominates the business-to-business credit scoring market with a roughly 90% market share. It enjoys a sweetheart deal from the federal government wherein its credit scores are required for loans originated with multiple government entities.” Hawley says FICO has exploited this market power to raise prices, harming consumers, particularly in the mortgage underwriting market. FICO pushes back on Hawley’s characterizations, arguing that approximately 99% of FICO scores are used for decisioning non-mortgage consumer credit and that credit score costs represent a tiny portion of the closing costs of a typical mortgage. “The royalty collected by FICO remains a small percentage of the cost of the tri-merge credit report and score bundle (on average approximately 15% of the $80 to well over $100 tri-merge bundle cost), which is itself an exceedingly small share of overall mortgage closing costs,” FICO said in a statement.

Acting FDIC Chair Lays Out Policies to Promote De Novos

Travis Hill, the acting Chairman of the FDIC, provided an update on a number of policy priorities in remarks he gave at the American Bankers Association Washington Summit earlier this week. Most notably, acting Chairman Hill spoke about the lack of de novo bank formation post-2008 Global Financial Crisis. While many have pointed to bank M&A activity for contribution to an overall declining number of chartered institutions, Hill argues the lack of de novo activity is a bigger contributor. In his remarks, Hill proposed a number of policy reforms designed to boost new bank creation. Hill suggested some bank applicants, specifically “non-complex community banks” in areas that lack them, could have lower upfront and ongoing capital requirements. Hill also floated the idea of re-evaluating the application process for “innovative” banks, noting that a non-bank fintech with a large number of deposit accounts could be less risky if it became a bank itself, vs. relying on multiple bank partners (a not-so-subtle reference to the Synapse collapse, presumably.) Finally, Hill discussed industrial loan companies (ILCs), which seemingly have become a highly partisan issue, with Republicans generally supporting the concept, while Democrats often disapprove. Hill said the FDIC is working to issue a Request for Information related to industrial loan company charter applications.

Rain Raises $75Mn

Speaking of earned wage access… Rain, a startup that offers employer-integrated earned wage access and “financial wellness” services, announced it has raised a $75Mn Series B. The round was led by Prosus, with participation from new investors Spark Growth Ventures and Nextalia Ventures, as well as existing investors QED, Invus Opportunities, and others. Rain cofounder and CEO Alex Bradford said of the news, “Rain is building the employee engagement app of the future centered around financial wellness. Rain makes it easy for employers to give their employees the freedom to access and manage their earnings on their own terms. Thanks to the support from Prosus, Nextalia and other investors participating in this round, Rain is in a strong position to scale to thousands of new employers and millions of new employees across the U.S.” Rain expects to use the additional funding to scale its go-to-market function and develop additional financial wellness features and capabilities.

Ripple Acquires Prime Brokerage Hidden Road

Crypto firm Ripple announced this week that it would acquire prime brokerage Hidden Road for $1.25Bn. Hidden Road offers clearing, financing, and prime brokerage for foreign exchange, digital assets, swaps, derivatives, and fixed income. It currently clears more than $3Tr a year and boasts more than 300 institutional customers. Ripple said the plan, once the transaction closes, is for Hidden Road to use Ripple’s recently launched RLUSD stablecoin as collateral across Hidden Road’s prime brokerage products. The deal will close subject to customary regulatory approvals, which Ripple said it expects no later than the third quarter of this year.

Another BaaS Bankruptcy

In a not totally surprising move, banking-as-a-service platform Solid has filed for Chapter 11 bankruptcy, Fintech Business Weekly’s Jason Mikula was the first to report on Wednesday. Solid had partnered with Evolve Bank & Trust, CBW, and Lewis & Clark at various points and, per Mikula, appears to still have live and running programs. The news of the bankruptcy isn’t entirely a surprise, given that Solid has faced numerous legal and operational challenges. It was sued by its own investors, FTV, who alleged the company manipulated revenue numbers used to raise its Series B. The matter ultimately settled with Solid buying back FTV’s shares at a sharp discount. Solid and Evolve have also been named in multiple civil suits, alleging they violated fiduciary duties and facilitated fraud. Fintech Business Weekly had reported in February that the middleware platform would wind down, as one of its bank partners, Lewis & Clark, planned to exit the banking-as-a-service space.