Regular readers might, with some justification, accuse your humble industry insider of being harsh on financial services media outlet the American Banker. In my defence, when presented with such an inept and slow moving target, it is difficult to resist taking potshots at it. And snarkyness aside, there is a point to be made about the challenges which conventional media faces in generating sufficient volumes of copy at a sufficiently low cost to be able to stay in business. It is difficult to resist – as American Banker is apparently determined to prove – not resorting to thinly re-treading press releases and trying to call that original reporting.
Today’s object lesson is the in of the term “Fintech” to provide an aura of sophistication (the 21st Century “New and Improved”) for services that are anything but. And before you conclude that I am being a reflexive skeptic, Georgetown law professor Adam Levitin weighed in via e-mail:
First, Fintech is a meaningless term. The consumer-facing stuff is mainly (1) gussied up payday lenders (see, e.g., Think Financial and their tribal lending alliances), (2) money transmitters, and (3) BitCoin Bros. The money transmitters are probably harmless enough, but the first group are just trying to escape state usury laws and rollover restrictions, while the third group are grab bag of fools and con artists who think they are much more clever than they actually are. People on the Hill go ga-ga for Fintech without having any real knowledge of what they are and assuming that a digital platform represents a material (and better) transformation of a product.
Nevertheless, American Banker at it again this week with a piece about an allegedly new “Fintech” product brought to you by Lyric Financial.
While that enterprise’s name gives an air of whimsical jollity – and readers are advised to keep that sense of music and poetry in mind for tougher times below – nothing could be further from the truth.
The reason for the alarm is that this particular example of financial services industry cheerleading is for a product that looks especially dubious. Personally, I rate it as just horrid. The Lyric Financial website is remarkably content-free, particularly for specific product features and details of terms and conditions. Apart from the cloying trendiness which it is far too early in the morning to stomach, it’s very hard to find out what the deal really is. But I did suss out what was afoot – I’ll cover that in a moment. First, though, a little more about what sort of operation we’re dealing with here.
The “Terms” page shows they are operating in the US jurisdiction (even that basic point was hard to determine) although the ownership structure isn’t mentioned at all. You’re subjected to mandatory binding arbitration, which for a sophisticated product aimed at financially unsophisticated customers is a very bad sign. The arbitrator is the “American Arbitrations Association (AAA)” and – get this – you have to pay your own fees! (which are, of course, AAA’s fees, and they can charge what they like). There is a prohibition on class action type of complaints, you have to arbitrate as an individual. This almost sounds more like Richard Smith’s territory than mine in regards to being a con, but I’ll return to adding some further observations about Lyric’s service.
In terms of the product design, you get nada from the website. You have to leave your contact details and, presumably someone will get on the phone and talk you into something. You’ll have to get some form of contract or other paperwork, but you don’t get to see that until, presumably, you sign up. Goodness knows what happens during the sales process, what, if any, regulator governs the product or the selling of it and whether there is any cooling off period allowed.
The actual product/service provided is your basic common-or-garden variety factoring. What is factoring?
Well, put simply, it is invoice discounting. Let’s say for the sake of example Yves does some work for me. When finished, she invoices me $1000 for what had been completed. In a factoring arrangement, Yves then takes the invoice to the factoring services provider who “discounts” her invoice and gives her a percentage of the face value, let’s say 90 cents on the dollar or $900 in cash. This might help Yves’ cash flow as she can meet expenses which are due now rather than waiting for me to settle the invoice by sending her the original $1000.
For the factoring services provider, so long as I settle the invoice within the terms (usually 30 days or some other specific date in the future) they get to make a nice profit. Of course, if I won’t or can’t make payment, they may have to take a loss.
My TBTF makes a big thing of getting factoring sign ups. And that should tell anyone all they need to know about whether it should be used. It is rarely – very, very, rarely – a good idea. Only very specific businesses in a narrow set of circumstances should ever consider it. It is most certainly *not* a suitable product to market to retail customers (and Lyric Financial is in effect making it a retail offer to self-employed or (literally!) “gigging” musicians).
The main problem is it is a classic bait-and-switch scam if mis-sold to inappropriate customers. You sign up on the basis that the invoice discount rate seems low. But if the contract is written – and it invariably is written this way – so as to allow the discount level to be increased on whatever basis the factor determines (and it can be as little as one unpaid invoice or an invoice which is outstanding for a few weeks overdue), then you get trapped in a higher level of invoice discounting rates but still are contractually bound to hand over all your invoices to the factor who can then merrily fee gouge you.
It gets worse. In the bowels of their T’s and C’s I found this:
These Terms & Conditions, as well as any claims arising from or related thereto, whether in tort, contract or otherwise, are governed by, and are to be interpreted and enforced in accordance with, the laws of the State of Tennessee, without regard to New York’s conflicts of laws principles.
Which sounds suspect – my take is that they are under Tennessee’s statutes (don’t know if that signifies anything noteworthy, either good or bad) but they don’t want to be liable under an aspect of NY law (which I’m guessing is much better settled and consumer-friendly than TN’s)
Finally, I did ask a friend who vaguely qualifies as a musician (she does the odd stint playing piano at shopping malls and welcoming receptions on cruise ships) to fill in the enquiry form. No reply received by my friend in 2 days (not even an auto-acknowledgement). So Lyric’s customer service seems just as bad as their product proposition.
And this story also illustrated how many fintech business models are merely well-worn conventional financial products or services gussied up to look like a new invention.
Perhaps the American Banker could consider having a go at some basic, old-fashioned, investigative journalism next time? If even I can do it, it can’t be that hard, can it?