Fintech Puts Payday Lending Old Wine in New Bottles

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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:

Governing Law

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?

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  1. Fiery Hunt

    Jesus. ..Who looks at “gigging ” musicans and thinks “Now there’s a lucrative financial market to exploit!”

    Sounds like someone with too much money and certain guitar envy…

    1. Bunk McNulty

      Yeah, that’s pretty funny. I sent this link around to all the people I play with. The responses were, to put it politely, incredulous. Partly because the idea of targeting them is so goofy, partly because (Thanks, Clive!) it is such an obvious scam.

      1. Clive Post author

        Thanks for the confirmation Bunk. My piano playing friend was similarly dubious. Unless you’re a pro who does the tour circuit as backing or a member of a company (e.g. an orchestra) you’re going to limit your bookings to a reasonably small and near geographical area. So you soon get to know who is going to put performances or session work your way. And you’ll be part of a fairly close-knit community. Therefore word soon gets round who are slow payers and who are no payers. Performers then decide either to turn down work as it isn’t worth the agro of getting paid or insisting on cash up-front.

        Anything pro or even semi-pro and you’ll have an agent. The agent, if they’re any good, will take care of getting payments in.

        1. Bunk McNulty

          I’m at the weekend warrior level, typically 50-60 gigs a year; we’re mostly paid in cash, and even when we aren’t, our bandleader takes a check and either gives us cash the next day or writes us checks on her personal account. So there’s no reason at all for us to get involved. But it is a tight community (central Connecticut and Massachusetts) and everybody’s in everyone else’s business. I play with a guy who is also a symphony musician and makes his living doing solo gigs at retirement communities, and even he thought it was a dumb idea.

    2. Clive Post author

      I agree. When starting a business theoretical market size is one of the factors which it is essential to quantify. If your market is small, as here, you’d better have high margins to compensate. Which is another reason to be skeptics — and suspicious.

    3. Si

      Bottom fishing imho. When you run out of people who have some chance of paying you back, you have to turn to those who have no chance, and charge rates which make it look profitable in the short term. Sell a bunch then slice and dice.

      There are plenty of YouTube bedroom jockeys out who just think they are a loan away from stardom. Given than many kids are living in their parents basement (and when I say “kid” that includes those who are up to 35) the gamble may seem worth it to them (gamble is the wrong word because it implies some chance of winning – there isn’t)

  2. Anonymous Coward

    Appears to me as if someone read about how lucrative advances to unwitting musicians have been to the big music labels over the years and wanted to get a piece of that action. The picture in American Banker of the snaggletoothed greaseball behind this scam really says it all.

    For that matter, was this a paid PR piece in American Banker or just what passes for journalism there? Why no mention of crowd funding? Seems that Kickstarter and the like are the real competition for Lyric Financial, not banks.

  3. craazyman

    I don’ t think Yves would work for $1000. That doesn’t seem plausible to me. Maybe $100,000 — just to get going, just as a retainer payment. Are you sure about that Clive?

    What if I decide to open up a strip club and CB agrees to supply me with the dancers. Then he sends me an invoice and he decides to “factor” it through Lyrical immediately. That would be pretty funny because I’m way to lazy to open a strip club and CB is too busy messing with his drone to hunt up any thing but beers. This could be a Richard Smith situation writ small.

    This could be bad news for Lyrical. It sounds like the grifting could go in both directions with a business like this. I’ve noticed in my life that grifting is like an arc that bends down to touch the lives of everyone associated with very big and the very small. It’s only in the middle, at the point where — if the scale of observation is small enough — that the bending of the arc approximates a straightforward honesty.

    1. Clive Post author

      I think it was $1000 just to answer the phone.

      But seriously, there is a valid point in there, if Lyric aren’t super-careful about customer selection and the decision matrix for the discount percentage, factoring can bite the factor on the bum pretty hard. You really have to know what you’re doing if you’re not to end up burning through your capital at a ferocious rate of knots.

      That’s why the factors are permitted to have such wide latitude in their contacts though, they can use any excuse to impose humongous haircuts. Like the casino, the house can almost always win.

    2. PKMKII

      Best grift would be to play both ends: Send out your invoice to the client, go to factoring company and get money from them, get the money from the client, and then disappear into the ether.

      1. Clive Post author

        If we had our wits about us — and we were prepared to go over to the dark side — we could come up with the perfect “scam the scammers” scheme. The basis could be we set up a variety entertainment troupe “The Naked Capitalism Solid Gold Dancers” featuring Craazyman, Craazyboy, Fresno Dan, Lambert and maybe my good self if we can fund my airfare. Get a few bookings in the seedier parts of Atlantic City and it would pretty much run exactly as you describe.

  4. JustAnObserver

    Are we seeing “fintech” hitting its,, synthetic CDO^2 moment when the scam goes to the max ?

    The American Banker article is one for the bezzle section of Water Cooler ?

  5. Enquiring Mind

    Two points:

    The so-called business press beyond the American Banker has a lot more of that shared journalism where the advertiser, ahem, helps out with the content. There isn’t much transparency about that obvious conflict of interest beyond the occasional blurb by the editor about how they are developing some exciting new platform. See what that ole Internet did to the once-proud and distinguished honest journalism business model? Something had to give, along with integrity.

    The Tennessee theme makes me think about new businesses sprouting around Nashville to exploit, er, serve, an under-served market. Next there will be a new batch of country songs about the Suits, now expanded beyond those music industry creeps to the finance industry creeps. Bonus, add Warren Buffett’s Clayton Homes predatory sellers to that growing list.

  6. grayslady

    Actually, factoring is a very specific product wherein the factor receives ownership of the receivable. By contrast, typical bank receivable financing involves only a security interest as defined by a signed, UCC document. Although both involve paying a discounted value for the receivable, in one case the lender is actually responsible for collecting the receivable while, in the other case, the borrower is still responsible for collecting the receivable (at least, so long as the business remains viable). Consequently, I don’t see how Lyric can be factoring when no real “sale” has taken place. I can’t imagine even payday lenders advancing against a job “possibility”–they would probably insist on pledging a hard asset, such as title to a car, rather than laying out money for something on the come.

    The real scam seems to come from packaging this idea as FinTech. A legitimate financial proposal would involve Lyric financing the distribution company, not the individual musicians. Financing the musicians by virtue of a sales draw (sales draws being common in companies with employees that work on 100% commission), should be a cost of doing business for the music distribution company.

    1. Clive Post author

      Yes, the details of the offer are so sketchy, it is impossible to tell what the eligibility criteria are, who is responsible for the billing, the recoveries or the debt ownership.

      Any reputable financial services provider would make these Key Facts abundantly clear from the get-go. If only to avoid having to deal with potential customers for whom the product is clearly unsuitable or whose business you don’t want at all. Craazyman’s above would-be stripe club was only a minor exaggeration, which shows how flaky this outfit is that it doesn’t do anything to provide basic clarification on what is supposed to be the deal here.

    2. Yves Smith

      This was one reason for the frustration is the inability to locate terms. The underlying article discusses it as some sort of advance against a receivable (without using the word receivable). But I thought it was inconceivable that anyone would advance against musician payments. I thus wonder if this is really an effort, for musicians who are performing original work, to claim an interest in their composition. Given the need for a UCC to have an actual security interest, is it possible for Lyrical to obtain a direct interest (more like the deed of trust concept for residential mortgages, where the bank actually is the owner of the property until the mortgage is paid off) without a UCC document?

      1. grayslady

        As you say, without seeing Lyric’s agreement, it’s impossible to know how they anticipate being repaid. In order to have a perfected security interest, Lyric must have a UCC that is both signed and filed with the state which governs the laws of the agreement. I don’t know anything about intellectual property law, but I have a feeling that an interest in the artist’s composition isn’t part of the package, since the artist may not be performing original works. The only possible way I can see Lyric being repaid is to file a lien on wages, except I don’t see “wages,” as traditionally defined, coming into this. Besides, I think any allowed filings on earnings might have to be reported to the credit agencies–not something that would help the musician’s credit rating. Also, is this a term loan or a revolving line of credit? The whole thing sounds very shady to me.

        1. Yves Smith

          Lyrical specifically says they screen musicians somehow. I am thinking they might be fishing for musicians that are performing their own work. And then the interest would be copyright, which is way easier to get someone clueless to transfer via small print. Wouldn’t take a UCC. Then Lyrical would have leverage because the musician would attribute a lot of value to the composition whether it was not really there (the “hostage” factor often described in installment, where people are willing to pay way more for a couch than it is worth basically because it is in their living room).

          1. Clive

            That would of certainly explain why my ad-hoc gig piano playing friend didn’t get any response to her (entirely legitimate) enquiry form submission — still nothing and it’s been four days now. She made it clear what the nature of her work was, recitals with no original composition and public performances with no possibility of residuals.

            It is strongly suggestive that Lyric’s business model is to try to get their hooks into copyrights and/or advances or even YouTube ad revenue-sharing (with the latter maybe being factored).

            1. dimmsdale

              Ah, now THIS makes a little more sense. They’re not after bar-band giggers or shopping-mall pianists, they’re after copyright. I know more than a few musicians who are actively pursuing composing/scoring work because the gigs have dried up or pay less than they did 5 years ago. Particularly when you’re starting out, or trying to get a foothold in the business, you’re doing free (or almost-free) work for people who may or may not pay you. Still not quite sure how the business model would work, but if I’m doing scoring work for an indie filmmaker or a game developer and invoice them $X for a month of work, I may indeed need the money right now rather than being able to wait for them to pay. Whether I’m a big musical talent may not matter as much as whether I’m invoicing producers at a certain level that makes it worth Lyric’s while to exploit me (if indeed that’s what’s going on here). No shortage of slybootses in in Fintech!

              1. Alex Morfesis

                Recording of mortgage on copyright (17 usc 205) along with form dcs(document cover sheet) to the copyright office…form dcs is not “required” but apparently makes it easier to track…

  7. Stan

    So it’s basically a loan against “projected” earnings – at 5% interest? That rings a warning bell right there. Musicians are not generally known for their great financial sense, but even I would balk at such a proposal. And looking at the guy’s mug… count my band right out.

    1. Clive

      It’s tricky to tell if it is some form of securitisation for projected royalties (which again is not new; securitisation goes back to when Fannie and Freddie were glints in the FHA’s eye) or discounted invoices. These are variations on the same theme, broadly, upmarket payday loans. If it is more along the securitisation model, this is blatantly unsuitable for amateur / as-a-sideline artists. Even big names have come unstuck because fame is, to use a cliche, fickle.

      Heartening that so many musicians are very savvy — I guess you have to be as there’s too many con artists operating in the business — and know enough to steer clear.

      1. Stan

        Thanks, Clive. I’m learning something from your comments. The vagaries and “instruments” of the banking industry are not what artists should be concerned with. To quote Ludwig van Beethoven: “As it is, one has to be half a merchant on top of everything else, and how badly one goes about it.” What if The Beatles had been astute enough not to employ a predator like Allen Klein? – But that’s another story…

  8. Mr. Vandalay

    I don’t think we can entirely discount the possibility that part of the reason Lyric’s details are sketchy is because they have no or insufficient understanding of the financial services business and associated regulatory requirements in the first place.

    With a fairly long career providing legal services to tech companies, I am continually amazed by the extent to which young, (narrowly) smart, enthusiastic tech folks believe that – because they know about tech – they necessarily must know about everything else. Experience, regulations, etc. are old thinking. Tech is a new paradigm; if they can conceive of a way to do something, then that way is inherently OK . . . because tech and brilliance. And then VC’s — who often grew up in the same mindset — shovel money at these folks. All part of the Bezzle.

    tl;dr – do not ascribe solely to malevolence that which can reasonably be attributed to naivete combined with $$.

  9. Alex Morfesis

    I think if you start from tunecore website and work your way over to lyric it becomes a bit more obvious…tunecore manages indie recording artists financial stream and sales revenue…the deal it seems is one needs to have been big enough to have streaming income to be managed…only tunecore associated acts need apply…

    don’t see this as factoring for johnny in the Acapulco lounge on das luvboatboot looking to pay his rent…

    Not that fintech is not another name for smash and grab…

    And if one does look at the tunecore blog on the partnership it does rhyme with the article in am/ba

    The music and entertainment biz is ugly…the good folks at spinal tap are fighting over the strange number of zeros that disappeared from their cut of the proceeds these past decades…

    Good luck with that sir harry…

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