Algorithmic Action - UDAAPs and a Fine for Hello Digit
Raise your hand if you have ever been personally victimized by an algorithm. Whether it’s YouTube showing the same “recommended” videos over and over again that I don’t want to watch, TikTok knowing me better than I know myself by showing me things I can’t stop watching, or a cool new app built to help me save money, I know there have got to be others who feel this way.
It’s that last one that has caused some trouble for Hello Digit, LLC (Digit), a fintech that was designed to help people save money “effortlessly” and “without thinking about it,” via the use of an algorithm that purported to transfer the “perfect” amount of money out of consumer’s checking accounts and into a savings account, and all but guaranteed that the app would not cause overdrafts. On August 10th, the CFPB announced a consent order against Digit for UDAAP violations under the Consumer Financial Protection Act of 2010 which requires the fintech to reimburse customers for overdraft requests that were denied and pay a $2.7 million fine to the bureau.
In its findings, the CFPB explains Digit’s business model, and how the service was supposed to work:
“Digit has offered and provided a personal-finance-management application to consumers since February 2015. Since its inception, Digit’s core offering is an automated-savings tool, which Digit markets as an ‘effortless way’ for consumers to ‘save money without thinking about it.’ As part of the sign-up process, Digit requires consumers to grant Digit access to their checking accounts. Digit partners with a fintech platform to link to consumers’ checking accounts, and then Digit uses its own proprietary algorithm to analyze consumers’ checking-account data to determine when and how much to save for each consumer.
Based on its algorithm, Digit initiates automated electronic-fund transfers, called ‘autosaves,’ to move money from consumers’ checking accounts to interest-bearing, ‘for the benefit of’ accounts held in Digit’s name at third-party institutions (“Digit Savings Accounts”). The money transferred by Digit into Digit Savings Accounts goes toward goals set by the consumer (e.g., vacations) or a default ‘Rainy Day Fund.’”
Deceptive Marketing that Digit Would Cover All Overdraft Fees
Despite Digit’s marketing materials and website, which include language such as “Save Money. Pay off Debt. No Overdrafts,” and “the fee is on us if Digit saves too much,” as a result of some of the “autosaves,” Digit’s algorithm nonetheless has regularly caused users’ checking accounts to become negative and incur overdraft fees charged by their banks. Digit continued to assert that “in the unlikely event that it caused an overdraft, the company would reimburse all overdraft fees incurred by Digit users,” and that “it has a ‘no-overdraft guarantee. . . we believe [so] strongly in our ability to safely identify money you don’t need that if we overdraft your account, we’ll pay the fee.”
Regardless, the consent order outlines that Digit “has received nearly 70,000 overdraft-reimbursement requests since 2017,” which averages over 10,000 reimbursement requests each year. Moreover, internal Digit customer support documentation relied on by the CFPB references multiple complaint about users feeling “misled by the ‘no overdraft guarantee’ language at sign up.” However, Digit had an internal policy of only reimbursing users “for no more than two instances of overdrafts caused by Digit autosaves.” The fintech also only approved reimbursements for consumers who maintained an active Digit account with a connected checking account, and denied claims for users who disconnected their accounts or canceled their subscription as a result of an overdraft. The consent order provides a breakdown of the denied reimbursement claims.
Misrepresentation of How Digit Earned Interest on Consumer Funds
The Digit Savings Accounts set up by Digit at its partner banks earn interest. These “for the benefit of” (FBO) accounts are not titled individually, but are pooled, which allows for the accrual of more interest than would likely accrue on individual accounts. At inception, Digit returned some of the interest to its users on a fixed-percentage basis of each user’s Digit Savings Account balance, but kept any interest above the “savings bonus” percentage as revenue.
In April 2017, after moving to a monthly subscription-fee model, Digit notified members that “it would no longer make money off interest earned on consumers’ funds,” announcing to members that it would not keep their interest, and it would instead be added to users’ quarterly savings bonus. However, the CFPB found that Digit “has retained significant net interest income from consumer funds held in Digit Savings Accounts after paying out savings bonuses to users,” and that this constitutes a deceptive act or practice under the CFPA.
Check out the consent order for the full picture, including the conduct provisions that Digit must undertake, including the establishment and submission of a compliance plan to ensure the fintech “complies with all applicable Federal consumer financial laws” and the other terms of the consent order.