3 FINTECH NEWS STORIES
#1: I Don’t Understand Mercury
What happened?
In the wake of the Synapse/Evolve catastrophe, it’s becoming clear that Mercury – the B2B neobank – was an active participant, and often the instigator, of many of the compliance problems that dogged the bank and the BaaS middleware provider. Here’s the latest from Jason Mikula:
Synapse had concerns about higher-risk jurisdictions, like Turkey, or those with sanctions in place, like Russia.
But Mercury wanted to facilitate users and transactions in those countries, and, when Synapse wasn’t sufficiently cooperative, Mercury sought Evolve’s signoff on adding certain users to a so-called “whitelist,” former Synapse staffers said. Being added to the whitelist would enable those accountholders to make transactions in amounts and with counterparties that they otherwise would not be able to make.
Despite higher risk ratings for certain countries or accounts, some users would be “grandfathered in” to enable them to continue using their accounts without interruption, the former Synapse employees said. For example, some users who had opened an account before sanctions were put in place in a given jurisdiction would be whitelisted and allowed to continue using their accounts, the staffers said.
So what?
I don’t understand this.
I don’t understand Mercury actively choosing not to do the very bare minimum when it comes to anti-money laundering, like transaction monitoring:
The risk of allowing users in higher-risk jurisdictions was exacerbated by what the former Mercury compliance staffer described as no transaction monitoring “at all.”
And then backtracking when that transaction monitoring told them what they already should have fucking known:
When Mercury did deploy a transaction monitoring vendor, the system “started throwing off a bunch of alerts. It created so much noise… they shut it off,” the former Mercury staffer said.
Because here’s the thing about Mercury – it has a GREAT product. It’s designed to be the perfect solution for VC-backed startups and their founders, and, from everything I can tell, it is. Its customers rave about it, and it has picked up a lot of traction in the market in the wake of SVB’s failure.
It didn’t need to cut corners on compliance to win. It just needed to lead with its product, run a tight ship, and preserve its optionality.
Instead, now that amazing product is handcuffed to two banks – Choice Bank and Evolve Bank & Trust – that are both operating under regulatory consent orders, which will severely limit what Mercury can do for the foreseeable future.
It didn’t need to be this way.
Building a world-class banking product and running a competent compliance operation aren’t mutually exclusive. In this day and age, if you do one and not the other, it’s because you consciously chose to do so.
On a recent podcast, the co-founder and CEO of Mercury Immad Akhundn, said:
Fintech is way more complicated than a software startup. I really wanted to do something really meaty that I could for like 10-20 years. And I came to this realization that banking, apart from being a big problem that is unsolved, it is also a platform that you can build other things on top of.
Fintech is, indeed, way more complicated than a software startup. It would have been nice if Mercury has fully understood the truth of that statement a bit sooner.
#2: Combining The Right Jobs to Be Done
What happened?
Bill Harris won’t stop launching fintech companies. His newest is Evergreen Money:
Evergreen Money’s account comes with a debit card issued by Everett, Washington-based Coastal Community Bank. Customers also have access to ATMs, the ability to make wire transfers and payments on the automated clearing house, or ACH, network and the opportunity to set up direct deposits of their paychecks.
Indeed, Harris is advising consumers to use Liquid Treasuries as a replacement for their checking accounts — in order to earn yields of 5.31%, as of late June, on as much of their wealth as possible. “It’s as easy as a checking account,” he said. “It’s as accessible as a checking account.”
Here’s the complicated part: The bulk of customers’ funds will not be held at Coastal in Federal Deposit Insurance Corp.-insured deposit accounts. Instead, the money will largely be invested in Treasury bills housed in brokerage accounts that are insured by the Securities Investor Protection Corp.
So what?
I like this a lot.
Fintech has a delightful habit of blending together different jobs to be done within financial services – jobs that have traditionally been handled by distinct bank products – into new solutions, which are often more useful and engaging for customers.
In the realm of deposits, the jobs to be done include:
The trick is picking the right combination of jobs and combining them together in a way that makes sense and that responsibly delivers the most value to customers.
When that goes wrong, you get crypto neobanks like BlockFi and Juno, which rose to prominence in 2021 by promising to combine the convenience of checking with the WAGMI upside of crypto.
When it goes right, you get something like Evergreen – the convenience of checking with the safe and highly predicable upside of T-Bills.
The challenge for Evergreen will be capitalizing on this innovative combination while rates are high and then (I assume) cross-selling their way into a broader multi-product relationship with customers once rates start coming down.
#3: Color Me Cynical
What happened?
JPMorgan Chase has informed its credit card customers that soon they will no longer be able to pay their BNPL loans back with their cards:
JPMorgan Chase plans to block consumers from using credit cards to pay for buy now/pay later loans from third parties, drawing fresh attention to a group of lenders that has grown rapidly in recent years while attracting regulatory heat and credit risk worries.
As of October 10, the bank will no longer allow Chase credit cards to pay for installment loans from non-Chase apps, including firms like Klarna, Affirm, Afterpay and dozens of others.
So what?
It’s tough not to be cynical about this.
There are two reasons why issuers wouldn’t want their customers to pay their BNPL loans with their credit cards.
The first is that paying down debt with debt is generally not a financially healthy thing to do (outside of straetgic debt refinance). There’s a reason why credit card issuers don’t let you pay your credit card bill with another credit card. Stacking debt is risky and it can get out of hand quickly.
The second reason is that you (the credit card issuer) don’t want your customers using a third-party BNPL service to buy stuff. You want them using your card – with its built-in installment lending functionality – instead.
If Chase cared about keeping its customers from stacking debt and taking on too much risk by paying for BNPL loans with its credit cards, it would have banned the practice years ago (as Capital One did).
However, if Chase cared about driving more usage of its own credit cards (and built-in BNPL functionality), it would, I think, do something exactly like this.
2 FINTECH CONTENT RECOMMENDATIONS
#1: Why Discover is no American Express (by Jevgenijs Kazanins, Popular Fintech) 📚
The reason I enjoy Jev’s newsletter (and tweets!) so much is because he’s unafraid to ask simple questions, challenge himself to answer them rigorously using data, and then share his conclusions and how he arrived at them.
It’s easy to extol the virtues of learning in public. It’s more difficult to live them.
#2: The E.U. Goes Too Far (by Ben Thompson, Stratechery) 📚
Western Europe is proving to be an excellent case study in overregulation and Ben, a tech analyst who I always find to be fair and balanced in his analysis, does an excellent job explaining why.
I learned a lot from this one.
1 QUESTION TO PONDER
I mentioned in last week’s essay that I have recently been spending some time (and will be continuing to) thinking about how banks and fintech companies can do more to protect customers from scams (instances where they incur economic harm as the result of a trick, like phishing).
What are the best ideas, products, best practices you’ve seen for reducing the effectiveness of scams? What things would you like to see happen, if they could be accomplished through greater industry coordination?
