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The US Consumer Financial Protection Bureau (CFPB) has fined Hello Digit $2.7m after finding that a faulty algorithm in the savings app left its users paying overdraft penalties.
The CFPB found that Digit, a California-based fintech that helps people manage and save their money, caused many of its consumers to pay overdraft fees as a result of flaws in its algorithm, despite assurances that consumers would never incur such fees.
“Hello Digit was meant to save people money, but instead the company falsely guaranteed no overdrafts with its product, broke its promises to make amends on its mistakes, and pocketed a portion of the interest that should have gone to consumers,” the agency said.
Digit uses a proprietary algorithm to make automatic transfers from the consumer’s checking account to an account held in Digit’s name for the benefit of the consumers.
When consumers sign up to Digit, they must grant the company access to their checking accounts. Digit then uses its algorithm to analyse the checking account data to determine when and how much to save for each consumer, for which it charges a $5 monthly subscription fee.
Digit promoted itself as an app that helps “save money, without thinking about it”.
It also said it “never transfers more than you can afford” and it provided a “no overdraft guarantee”.
In the unlikely event that it caused an overdraft, the company said it would reimburse all overdraft fees incurred by its users.
Despite these assurances, the CFPB said Digit routinely caused consumers’ checking accounts to incur overdraft fees charged by their banks.
Digit was aware of the issue and that its algorithm did not work as intended. The company received complaints about overdrafts on a daily basis, according to the consent order, and the firm estimated that around 1-2 percent of its users experience overdrafts as a result of using the service.
Digit received nearly 70,000 overdraft reimbursement requests since 2017 but it denied many of those because it had the policy, until at least mid-2020, that it reimburses consumers for no more than two instances of overdrafts.
In addition, the agency found that Digit misled its users about interests earned on their savings.
The company deposits consumer savings in pooled accounts at partner banks and earns interest revenue on these accounts. In the early years, Digit returned a part of this interest to consumers as a 0.1 to 1 percent savings bonus. But in 2017, when the company introduced a subscription fee, it justified the move with the fact that it would no longer make money off the interest earned on consumers’ funds.
“We don’t keep your interest. Saving with Digit now earns you 1% cash back annually,” the company said at the time.
The CFPB said Digit “misrepresented” how it earned interest and in fact has pocketed significant net interest income from consumer funds since 2017.
The consent order requires Digit to pay $2.7m to the CFPB and pay reimbursement requests for overdraft charges that it previously denied.
According to Digit’s website, the fintech app saved more than “$7.6bn towards more than 14m savings goals” since 2015. Last December, when Digit was acquired by digital banking platform Oportun, the company was valued at $205.3m.
