How to build or invest in a startup without paying capital gains tax

Founders, entrepreneurs, and tech executives in the know realize they may be able to avoid paying tax on all or part of the gain from the sale of stock in their companies — assuming they qualify.

If you’re a founder who’s interested in exploring this opportunity, put careful consideration put into the formation, operation and selling of your company.

Qualified Small Business Stock (QSBS) presents a significant tax savings opportunity for people who create and invest in small businesses. It allows you to potentially exclude up to $10 million, or 10 times your tax basis, whichever is greater, from taxation. For example, if you invested $2 million in QSBS in 2012, and sell that stock after five years for $20 million (10x basis) you could pay zero federal capital gains tax on that gain. 

What is QSBS, and why is it important?

These tax savings can be so significant, that it’s one of a handful of high-priority items we’ll first discuss, when working with a founder or tech executive client. Surprisingly, most people in general either:

  1. Know a few basics about QSBS;
  2. Know they may have it, but don’t explore ways to leverage or protect it;
  3. Don’t know about it at all.

Founders who are scaling their companies usually have a lot on their minds, and tax savings and personal finance usually falls to the bottom of the list. For example, I recently met with someone who will walk away from their upcoming liquidity event with between $30-40 million. He qualifies for QSBS, but until our conversation, he hadn’t even considered leveraging it. 

Instead of paying long-term capital gains taxes, how does 0% sound? That’s right — you may be able to exclude up to 100% of your federal capital gains taxes from selling the stake in your company. If your company is a venture-backed tech startup (or was at one point), there’s a good chance you could qualify.

In this guide I speak specifically to QSBS on a federal tax level, however it’s important to note that many states such as New York follow the federal treatment of QSBS, while states such as California and Pennsylvania completely disallow the exclusion. There is a third group of states, including Massachusetts and New Jersey, that have their own modifications to the exclusion. Like everything else I speak about here, this should be reviewed with your legal and tax advisors.

My team and I recently spoke with a founder whose company was being acquired. She wanted to do some financial planning to understand how her personal balance sheet would look post-acquisition, which is a savvy move. 

We worked with her corporate counsel and accountant to obtain a QSBS representation from the company and modeled out the founder’s effective tax rate. She owned equity in the form of company shares, which met the criteria for qualifying as Section 1202 stock (QSBS). When she acquired the shares in 2012, her cost basis was basically zero. 

A few months after satisfying the five-year holding period, a public company acquired her business. Her company shares, first acquired for basically zero, were now worth $15 million. When she was able to sell her shares, the first $10 million of her capital gains were completely excluded from federal taxation — the remainder of her gain was taxed at long-term capital gains.

This founder saved millions of dollars in capital gains taxes after her liquidity event, and she’s not the exception! Most founders who run a venture-backed C Corporation tech company can qualify for QSBS if they acquire their stock early on. There are some exceptions. 

qsbs tax savings example

Do I have QSBS?

A frequently asked question as we start to discuss QSBS with our clients is: how do I know if I qualify? In general, you need to meet the following requirements:

  1. Your company is a Domestic C Corporation.
  2. Stock is acquired directly from the company.
  3. Stock has been held for over 5 years.
  4. Stock was issued after August 10th, 1993, and ideally, after September 27th, 2010 for a full 100% exclusion.qsbs stock acquired
  5. Aggregate gross assets of the company must have been $50 million or less when the stock was acquired.
  6. The business must be active, with 80% of its assets being used to run the business. It cannot be an investment entity. 
  7. The business cannot be an excluded business type such as, but not limited to: finance, professional services, mining/natural resources, hotel/restaurants, farming or any other business where the business reputation is a skill of one or more of the employees.

When in doubt, follow this flowchart to see if you qualify:

Where top VCs are investing in fintech

Over the past several years, ‘fintech’ has quietly become the unsung darling of venture.

A rapidly swelling pool of new startups is taking aim at the large incumbent institutions, complex processes and outdated unfriendly interfaces that mar billion dollar financial services verticals, such as insurtech, consumer lending, personal finance, or otherwise.  

In just the past summer, the startup community saw a multitude of hundred-million dollar fintech fundraises. In 2018, fintech companies were the source of close to 1,300 venture deals worth over $15 billion in North America and Europe alone according to data from Pitchbook. Over the same period, KPMG estimates that over $52 billion in investment pour into fintech initiatives globally. 

With the non-stop stream of venture capital flowing into the never-ending list of spaces that fall under the ‘fintech’ umbrella, we asked 12 leading fintech VCs who work at firms that span early to growth stages to share where they see the most opportunity and how they see the market evolving over the long-term.

The participants touched on a number of key trends in the space, including rapid innovation in fintech infrastructure, fintech companies embedding themselves in specific verticals and platforms, rebundling and unbundling of financial services offerings, the rise of challenger banks and the state of fintech valuations into 2020.

Charles Birnbaum, Partner, Bessemer Venture Partners

The great ‘rebundling’ of fintech innovation is in full swing. The emerging consumer leaders in fintech — Chime, SoFi, Robinhood, Credit Karma, and Bessemer portfolio company Betterment — are moving quickly to increase their share of wallet with their valuable customers and become a one-stop-shop for people’s financial lives.

In 2020, we anticipate continued entrepreneurial activity and investor enthusiasm around the infrastructure and middleware layers within the fintech ecosystem that are enabling further rebundling and a rapid convergence of product themes and business models across the consumer fintech landscape.

Many players now look like potential challenger bank models more akin to what we have seen unfold in Europe the past few years. Within consumer fintech, we at Bessemer are more focused on demographically-specific product offerings that tap into underserved themes, whether that be the financial problems facing the aging population in the US or new models to serve the underbanked or underserved population of consumers and small businesses.

Ian Sigalow, Co-founder & Partner, Greycroft

What trends are you most excited in fintech from an investing perspective? 

I suspect that many enterprise software companies become fintech companies over time — collecting payments on behalf of customers and growing revenues as your customers grow. We have seen this trend in many industries over the past few years. Business owners generally prefer a model that moves IT expenditures from Operating Expenses into Cost of Goods Sold, because they can increase prices and pass their entire budget onto the customer.

On the consumer side, we have already made investments in branchless banking, insurance (auto, home, health, workers comp), cross-border payments, alternative investments, loyalty cards/services, and roboadvisor services. The companies we funded are already a few years old, and I think we will have some interesting follow-on activity there over the next few years. We have been picking spots where we think we have an unfair competitive advantage.

Our fintech portfolio is also more global than other sectors we invest in. This is because there are opportunities to achieve billion dollar outcomes in fintech, even in countries that are much smaller than the United States. That is not true in many other sectors.

We have also seen trends emerge in the US and move abroad. As an example we seeded Flutterwave, which is similar to Stripe, and they have expanded across Africa. We were also the lead investor in Yeahka, which is similar to Square in China. These products are heavily localized —tin for instance Yeahka is the largest processor of QR code payments in the world, but QR code payments are not popular in the US yet.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

Fintech is about a quarter of my time right now. We continue to see interesting new ideas and the valuations have been more or less consistent over time. The broader market doesn’t impact us very much because we tend to have a 10 year holding period.

Are there startups that you wish you would see in the industry but don’t?

Patch Homes locks in $5M Series A to give homeowners financial freedom without debt

Home ownership has long been touted as the American dream. But rising rates of mortgage debt and student loan debt are making the pursuit of home ownership a nightmare. Debt-burdened individuals or those with inconsistent or tight cash flow can not only struggle to get credit loan approval when buying a home but also struggle to satisfy monthly mortgage payments even after purchase. 

Patch Homes is hoping to keep the proverbial American dream alive. Patch looks to provide homeowners with cash flow and liquidity by allowing them to monetize their homes without taking on debt, interest or burdensome monthly payments. 

Today, Patch took another big step in making its vision a far-reaching reality. The company has announced it has raised a $5 million Series A round led by Union Square Ventures (USV), with participation by from Tribe Capital and previous investors Techstars Ventures, Breega Capital and Greg Schroy.

Patch Home looks to partner with homeowners by investing up to $250,000 (with an average investment of ~$100,000) for an equity stake in the home’s value, generally in the 5% to 20% range. Homeowners aren’t subject to any interest or recurring payments and have 10 years to pay back Patch’s investment. Upon doing so, the only incremental money Patch receives is its portion of the change in the home’s value over the course of the 10-year period. If the value of the home goes down in value, Patch willingly takes a loss on its investment.

According to Patch Homes CEO and co-founder Sahil Gupta, one of the major motivations behind the company’s model is to align Patch’s incentives with the homeowners’, allowing both parties to think of each other as trusted partners even after financing. After Patch’s investment, the company provides a number of ancillary services to homeowners, such as credit score monitoring, as well as home value and property tax tracking.

In one instance recounted by Gupta in an interview with TechCrunch, Patch even covered three months of an owner’s mortgage during a liquidity crunch for his small business, allowing him to maintain his home and credit score. Patch is incentivized to provide all services that can help ensure an increase in home value, benefiting both Patch and the homeowner, with the homeowner earning the majority of the asset’s appreciated value.  

Additionally, since Patch’s model isn’t focused on a homeowner’s ability to pay back a loan, interest or periodic payments, Patch is able to provide financing to more people. Patch is able to help those with more variable qualifications that struggle to get traditional loans — such as a 1099 contracted worker — monetize their illiquid assets with less harsh or restrictive terms and without increasing their debt burden. Gupta described this as solving the core problem of providing liquidity to asset-rich but cash-flow sensitive people. 

Patch is not only looking to provide easier liquidity to more homeowners, but they’re trying to do so faster than traditional lenders. Interested customers can first receive a free estimate of whether Patch will invest in their home or not, how much it’s willing to invest and what percentage equity it will take — primarily based on Patch’s machine learning models that focus on asset, market and location-level attributes. 

After the initial estimate, a Patch home advisor will educate the customer on the product and start a formal application process, which includes your standard income and credit score verification, which takes 5-10 days. All-in, homeowners have the ability to get money in as little as 14 days, a significantly shorter timeline than your standard home credit process. Once the investment is made, owners have full freedom with how they use the money.

According to Patch, while its customers come from a diverse set of backgrounds, many either with accumulated debt have to pay down the net or may struggle making monthly payments. The average Patch homeowner uses 40% of the investment to eliminate debt, adds 40% to their savings account or passive income and invests 20% into home improvements.

To date, Patch has raised a total of $6 million and believes the latest round of funding will help scale its operations as they team up with advisors like USV that have experience scaling fintech companies (such as a Lending Club or Carta). The funds will be used to invest in product and Patch’s clearing technology in order to further expedite Patch’s lending process.

Patch also hopes to use the investment to help them gradually expand their footprint, with the goal of eventually having a presence all 50 states. (Patch is currently available in 11 regional markets within California and Washington and expects to be in 18 regional markets by the end of the year including those in Utah, Colorado and Oregon.)

Patch Homes Co Founders Sundeep Ambati L and Sahil Gupta R

Image via Patch Homes

What makes home ownership so galvanizing for the Patch team? Patch CEO Sahil Gupta spent years putting his Carnegie Mellon financial engineering degree to work in banking and finance, as well as in financial products and strategy positions at fintech startups backed by heavy hitters such as YC and Goldman Sachs.

After realizing the majority of the U.S. population are homeowners, but were struggling to make monthly payments or save for the future, Sahil wanted to figure out to take an illiquid asset like a home and make it easily accessible. 

Around the same time, Sahil’s co-founder Sundeep Ambati was working as a contractor on a new business venture of his and was struggling to get a home equity loan. While these circumstances ultimately led Sahil and Sundeep to found Patch Homes in 2016 out of the Techstars New York accelerator program, the deeper motivation behind Patch can be traced back nearly 30 years when Sahil’s father made an equity-sharing agreement with his brother as they were building his family’s home in India.

With a growing family and a pregnant wife, Sunil’s father was adamant about living debt-free, so his brother provided an investment in exchange for an equity stake in the house. According to Sahil, the home is still in the family and has appreciated substantially in value to the benefit of both Sahil’s father and his brother. Longer-term, Patch wants to be the preferred partner for home ownership, helping reduce cash-tight owners’ financial anxiety without the debilitating weight of debt. 

“Some companies want to help people buy or sell homes, but home ownership really begins after that point. Patch is built to be inside the home with you and everything that comes thereafter,” Gupta told TechCrunch.

“Patch was created to partner with homeowners to help them unlock their home equity so they can achieve their financial goals along every step of their home ownership journey.

Launching out of YC, Blair is aiming to reshape the financing of college tuition

It’s generally agreed that Higher Education in the United States has gradually become more and more unaffordable. Students are dependent on external financial resources for which many of them do not even qualify. Students that are able to secure a loan, often have to take on debts they can’t really afford. And if they don’t eventually land a job with enough income, they are saddled with debt for a very long time.

Much of the problem is that most student loan companies are not concerned with the overall financial well-being of their students, who often feel stuck, trying to repay a loan they cannot afford, without a backup organization that will help them figure it all out. We can see that in the figures. The student loan debt in the US has just reached $1.6 trillion dollars and more than quadrupled in the last 15 years.

With the student debt crisis getting out of hand, the topic has become a semi-permanent issue in the news.

Launching next week is a new startup under the Ycombinator accelerator called Blair which aims to address this seemingly intractable problem.

Blair finances college students through what’s called “Income Share Agreements” (ISA). Students receive funding for their tuition or costs of living and in turn pay back a percentage of their income for a fixed period of time after they graduate. Repayments adjust to individual income circumstances and by deferring payments in times of low income we protect the downside of the students.

It thus provides students with an alternative to debt which is tailored to their individual circumstances to ensure affordability. Blair’s underwriting process is based on the future potential of a student and not their credit score or co-signer, which could be a deal-breaker in traditional settings. Blair’s competitors are traditional student lenders: Sallie Mae, Sofi, Earnest, Wells Fargo, Citizen Bank, other banks. ISA companies include Vemo Education, Leif, Almapact, Lumni and Defynance.

In contrast to traditional student loan companies, Blair relies on being more aligned with the financial incentives of students, the idea being that it supports students in improving their employability by placing them in internships early, giving them access to industry mentors and coaching them individually on their career prospects.

The founders came up with the idea from personal experience. Constantin, one of the co-founders, is on an ISA himself, as are a lot of the company’s friends. They stumbled across the problem of student debt over and over again while studying in the US and noticed a stark difference between their friends in the US and their friends in Germany. The main reason is that 40% of the students at their alma maters in Germany use Income Share Agreements to finance their studies. They plan to use their experience from Europe and make ISAs more widespread in the US.

Students apply for funding on the website, and within minutes and get a personal quote shortly after. If they accept the quote, they receive their funding within a couple of days which they can use to pay for their tuition or cost of living. Once Blair issues the funding, it crafts a holistic career plan for each individual student and starts supporting them in landing the internships and jobs they want. This includes, for example, optimizing their application documents, preparing them for interviews or connecting them to mentors in their target industry. For context, they batch students together in funds and let external investors invest in the funds.

It receives a cut of the student repayments and carried interest if a student fund performs better than the target return. Additionally, it partners with companies that hire talent through the platform.

Blair has raised the first fund for 50 students and disbursed money for the first ten. The rest of the students will receive their money within the next weeks. After YC’s Demo Day the company will deploy a larger fund that will support 200 additional students.

“Our underwriting model is unique since we have based it on data from concluded ISA funds in European countries,” says cofounder Mike Mahlkow.

“In the last two weeks, we received applications for funding totaling over 4 million dollars. Many of our students come from underprivileged backgrounds, often without any support network. Our goal is to build a human capital platform where individuals can access capital based on their future potential instead of their past and investors can participate in the upside potential of individuals in an ethical way” he adds.

Credit Karma glitch exposed users to other people’s accounts

Users of credit monitoring site Credit Karma have complained that they were served other people’s account information when they logged in.

Many took to a Reddit thread and complained on Twitter about the apparent security lapse.

“First time logging in it gave me my information, but as soon as I refreshed the screen, it gave me someone else’s info,” said one Reddit user. “Refreshed again and bam! someone else’s info — it’s like roulette.” Another user said they logged in and out several times and each time they had “full access to a different random person’s credit file,” they said.

One user told TechCrunch that after they were served another person’s full credit report, they messaged the user on LinkedIn “to let him know his data was compromised.”

Another user told us this:

The reports are split into two sections: Credit Factors — things like number of accounts, inquiries, utilization; and Credit Reports — personal information like name, address, etc.. The Credit Reports section was my own information, but the Credit Factors section definitely wasn’t. It listed four credit card accounts (I have more like 20 on my report), a missed payment (I’m 100% on time with payments), a Honda auto loan (never had one with Honda), student loan financing (mine are paid off and too old to appear on my report), and cards with an issuer that I have no relationship with (Discover).

Several screenshots seen by TechCrunch show other people’s accounts, including details about their credit card accounts and their current balance.

Another user who was affected said they could read another person’s Credit Factors — including derogatory credit marks — but that the Credit Report tab with that user’s personal information, like names and addresses, was blank.

One user said that the login page was pulled offline for a brief period. “We’ll be right back,” the login page read instead.

Credit Karma spokesperson Emily Donohue denied there was a data breach, but when asked would not say how many customers were affected.

“What our members experienced this morning was a technical malfunction that has now been fixed. There is no evidence of a data breach,” the statement said.

The company didn’t say for how long customers were experiencing issues.

Credit Karma offers customers free credit score monitoring and reports. The company allows users to check their scores against several major credit agencies, including Equifax, which last month was fined at least $575 million for a 2017 data breach.

Mobile messaging financial advisory service, Stackin, adds banking features and raises cash

When Stackin initially pitched itself as part of Techstars Los Angeles accelerator program two years ago, the company was a video platform for financial advice targeting a millennial audience too savvy for traditional advisory services.

Now, nearly two years later, the company has pivoted from video to text-based financial advice for its millennial audience and is offering a new spin on lead generation for digital banks.

The company has launched a new, no-fee, checking and savings account feature in partnership with Radius Bank, which offers users a 1% annual percentage yield on deposits.

And Stackin has raised $4 million in new cash from Experian Ventures, Dig Ventures and Cherry Tree Investments, along with supplemental commitments from new and previous investors including Social Leverage, Wavemaker Partners, and Mucker Capital.

“Stackin’ has a unique and highly effective approach to connect and communicate with an entire generation of younger consumers around finance,” said Ty Taylor, Group President of Global Consumer Services at Experian, in a statement.

Founded two years ago by Scott Grimes, the former founder of Uproxx Media, and Kyle Arbaugh, who served as a senior vice president at Uproxx, Stackin initially billed itself as the Uproxx of personal finance.

It turns out that consumers didn’t want another video platform.

“Stackin’ is fundamentally changing the shape and context of what a financial relationship means by creating a fun, inclusive and judgement free environment that empowers our users to learn and take action through messaging,” said Scott Grimes, CEO and co-founder of Stackin’, in a statement. “This funding allows us to build out new features around banking and investing that will enhance the relationship with our customers.”

Later this fall the company said it would launch a new investment feature that will encourage Stackin users to participate in the stock market. It’s likely that this feature will look something like the Acorns model, which encourages users to invest in diversified financial vehicles to get them acquainted with the stock market before enabling individual trades on stocks.

According to Grimes, the company made the switch from video to text in March 2018 and built a custom messaging platform on Twilio to service the company’s 500,000 users.

“In a short time, we have built a large customer base with a demographic that is typically hard to reach. Having financial institutions like Experian come on board as an investor is a testament that this model is working,” Grimes wrote in an email.

Mobile messaging financial advisory service, Stackin, adds banking features and raises cash

When Stackin initially pitched itself as part of Techstars Los Angeles accelerator program two years ago, the company was a video platform for financial advice targeting a millennial audience too savvy for traditional advisory services.

Now, nearly two years later, the company has pivoted from video to text-based financial advice for its millennial audience and is offering a new spin on lead generation for digital banks.

The company has launched a new, no-fee, checking and savings account feature in partnership with Radius Bank, which offers users a 1% annual percentage yield on deposits.

And Stackin has raised $4 million in new cash from Experian Ventures, Dig Ventures and Cherry Tree Investments, along with supplemental commitments from new and previous investors including Social Leverage, Wavemaker Partners, and Mucker Capital.

“Stackin’ has a unique and highly effective approach to connect and communicate with an entire generation of younger consumers around finance,” said Ty Taylor, Group President of Global Consumer Services at Experian, in a statement.

Founded two years ago by Scott Grimes, the former founder of Uproxx Media, and Kyle Arbaugh, who served as a senior vice president at Uproxx, Stackin initially billed itself as the Uproxx of personal finance.

It turns out that consumers didn’t want another video platform.

“Stackin’ is fundamentally changing the shape and context of what a financial relationship means by creating a fun, inclusive and judgement free environment that empowers our users to learn and take action through messaging,” said Scott Grimes, CEO and co-founder of Stackin’, in a statement. “This funding allows us to build out new features around banking and investing that will enhance the relationship with our customers.”

Later this fall the company said it would launch a new investment feature that will encourage Stackin users to participate in the stock market. It’s likely that this feature will look something like the Acorns model, which encourages users to invest in diversified financial vehicles to get them acquainted with the stock market before enabling individual trades on stocks.

According to Grimes, the company made the switch from video to text in March 2018 and built a custom messaging platform on Twilio to service the company’s 500,000 users.

“In a short time, we have built a large customer base with a demographic that is typically hard to reach. Having financial institutions like Experian come on board as an investor is a testament that this model is working,” Grimes wrote in an email.

Using Spotify and Netflix payments to build your credit score? Grow Credit has a service for that.

Can subscriptions and everyday payments be used to help build or rebuild a credit score? The Los Angeles-based Grow Credit thinks so.

The service, which launched earlier this month, is one of the slew of new ideas coming from businesses that are angling to help build up credit scores for folks who can’t (or won’t) get a credit card, or who are rebuilding their credit.

The company is the latest evolution of a credit-based approach to financial services from the LA-based serial entrepreneur, Joe Bayen.

Bayen’s last startup was Lenny, a credit monitoring and lending service that was aimed at helping people better manage their payments to avoid damaging their credit scores.

Bayen scrapped the Lenny business model after realizing that he’d have a hard time finding a debt financing partner. So Bayen resolved to be more of a sourcing partner for new customers rather than developing a credit and lending business hmimself.

Hatch Bank, the new business arm for FirstTrust Bank, is acting as the lender of record for Grow Credit’s secured Mastercard credit business.

Bayen has always been focused on helping the under-banked make better decisions and in-between Grow Credit and Lenny there was still another business model that Bayen wanted to try.

it would have been a platform called LennyBike, which would have been a subscription service for customers to get access to a bicycle for $30 a month and those payments would then count toward building credit.

However, it’s a much simpler proposition to get people to use their existing subscription services as a credit building device than trying to get folks to pay for something new… thus, Grow Credit was born. (It also didn’t help that Bird raised $300 million and Line another $250 million around the time that Lenny Bike was trying to get to market.)

The company uses a virtual Mastercard that allows for consumers to pay for online subscriptions only. “We have been able to transform a healthy, positive, habit, which is making subscription payments, and we have turned that into a credit building opportunity,” says Bayen.

It’s a pretty elegant way to solve a problem that’s a real barrier to entry for a large number of financial services. Credit scores can impact mortgages, the ability to receive small business loans and a host of other services that are ways to boost economic opportunity.

The company has even brought on board experienced executives like Nick Roberts, the former chief marketing officer of Acorns to help get their messaging out.

There are two main competitors to a service like Grow Credit in the market for providing opportunities to build up a credit score, Roberts says. One is forced savings programs, the other is using fixed limit credit cards with massive fees. A host of new services that would use reporting utility, rental, mobile phone payments and other monthly expenditures toward credit scoring have yet to gain traction.

Grow Credit offers 0% APR financing for its service but has two tiers. A free tier for an unlimited $25 revolving credit line and a subscription service which charges $4.99 for a 12-month service offering periodic credit limit increases of up to $300. Both the free and subscription versions offer free FICO scores and automatic subscription detection.

The company makes money by giving subscription services the chance to upsell customers using the credit lines. ClassPass has already signed on as a partner, according to Bayen.

“This is establishing a small dollar loan and a line of credit,” says Roberts. “People on debit cards and stored value cards that are out there… they’re  using debit cards so the money is immediately debited from their account. What we’re doing is paying the bill and establishing the line of credit and getting paid back at the end of the month.”

The idea of using more data sources and alternative data to how credit bureaus determine credit scores is one that’s already resonating with a few Democratic contenders for the Presidential nomination.

Senator Kamala Harris has called for amending the Fair Credit Reporting Act to require credit agencies to include rent payments, cellphone bills and things like utility payments in their credit score calculations.

Roughly 26 million people are invisible to credit ratings and another 19 million have files that are unscorable, according to the Consumer Financial Protection Bureau . These are people who lack enough bank or credit-uninon accounts to have a credit score — and they’re a group that’s more likely to include African American and Latinx consumers.

Roughly 15% of African American and Latinx consumers are unable to receive a credit rating, according to data from the Consumer Financial Protection Bureau, as cited by MarketWatch.

“Expanding the calculation of credit scores to include payments made on rent, phone bills, and other utilities will increase access to credit for those with a limited or ‘invisible’ credit history or poor credit scores,” according to the Harris website.

 

After Equifax breach, US watchdog says agencies aren’t properly verifying identities

A federal watchdog says the government should stop relying on the credit agencies to verify the identifies of those using government services.

In a report out this week, the the Government Accountability Office said several government departments still rely on the credit agencies — Equifax, Experian and TransUnion — to check if a person is who they say they are before they can access their services online.

Agencies like the U.S. Postal Service, the Social Security Administration, Veterans Affairs, and the Centers for Medicare and Medicaid Services ask several questions of a new user and match their answers to information held in an individual’s credit file. The logic is that these credit files have information only the person signing up for services can know.

But following the Equifax breach in 2017 those answers are no longer safe, the watchdog said.

The Equifax breach resulted in the theft of 148 million consumers. Much of the consumer financial data had been collected without the explicit permission of those whose data it held. An investigation later found the breach was “entirely preventable” had the credit agency employed basic security measures.

“The risk that an attacker could obtain and use an individual’s personal information to answer knowledge-based verification questions and impersonate that individual led the National Institute of Standards and Technology (NIST) to issue guidance in 2017 that effectively prohibits agencies from using knowledge-based verification for sensitive applications,” wrote the watchdog.

In response, the named agencies said the cost of new verification systems are too high and may exclude certain demographics from the population.

Only Veterans Affairs implemented a new system but still relies on knowledge-based verification in some cases.

The other downside is that if you have no credit, you simply don’t show up in these systems. You need a credit card or some kind of loan in order to “appear” in the eyes of credit agencies. That’s a major problem for the millions who have no credit file, like foreign nationals working in the U.S. on a visa. In 2015, some 26 million people were estimated to be “credit invisible.”

“Nevertheless, until these agencies take steps to eliminate their use of knowledge-based verification, the individuals they serve will remain at increased risk of identity fraud,” wrote the watchdog.

Student loan refinancing startup Splash Financial raises $4.3 million

Splash Financial, a Cleveland-based startup that has partnered with the Pentagon Federal Credit Union to refinance student loans, has raised $4.3 million in a round of venture financing.

The round was led by CUNA Mutual Group, a PenFed partner, and Northwestern Mutual Future Ventures, the corporate investment arm of Northwestern Mutual.

As student loan debt skyrockets, more financial services companies are looking for ways to cash in on the growing national problem.

Splash Financial provides an easy, online way for PenFed to originate loans that folks can use to consolidate their student loan payments.

Terms Splash Financial offers aren’t terrible, according to NerdWallet. Through Splash Financial, borrowers can get loans with fixed interest rates ranging between 3.87% and 7.03% and variable interest rate loans ranging between 3.05% and 7.79%.

“Through this funding round, Splash has gained not only new investors but also strong partners in CUNA Mutual Group and Northwestern Mutual,” said Steven Muszynski, founder and chief executive of  Splash Financial, in a statement.

The company said it would use the money to bring on additional banks and credit unions as lending partners and expand its national footprint.

It’s worth noting that while CUNA is a PenFed partner, Northwestern Mutual does not appear to be. As insurers look for ways to market other home, life, and health insurance products to younger generations that are not buying, student loans are a opportunity, these companies said.

“We believe in the power of financial innovation to change lives, shape futures, and build a better tomorrow,” said Brian Kaas, president and managing director, CMFG Ventures. “Student loan refinancing is an important area of opportunity for financial institutions, so we’re glad to invest in this innovative loan refinancing platform. It’ll help millions of college students tackle student loan debt and connect them with financial institutions for long-term success.”