Allow me to empty my notebook of all the good ideas, interesting observations, and whispered rumors I heard during my week in Washington, D.C.
A Fintech Call Report
On Wednesday, I participated in a mini TechSprint hosted by the Alliance for Innovative Regulation. The participants were split into teams and given a couple of hours to develop ideas for creating more visibility for regulators into bank-fintech partnerships and the fintech ecosystem more broadly.
The idea generated by my team was selected as one of the two winning ideas (go Team Oof!), and I wanted to outline it in today’s newsletter because I am genuinely very excited about it, and I believe it has a lot of potential — a fintech call report.
As you likely know, every national bank and state bank that is a member of the Federal Reserve or insured by the FDIC (which covers almost every bank in the U.S.) is required to file a quarterly report — the Consolidated Report of Condition and Income, also known as a call report — with federal regulators. The data provided in these reports is foundationally important for understanding the financial condition of individual banks and for identifying and managing risks within the banking system.
We don’t have an equivalent to the call report in fintech.
We should.
Today, fintech companies supply a ton of information about themselves to the banks they partner with to deliver their products and services. This includes information on their company, financials, and policies and procedures (required as a part of the onboarding process), as well as ongoing visibility into all program and product-level data (which the bank uses to monitor for performance and compliance and to conduct account and customer-level reconciliation).
The problem is that none of it is standardized.
This is inefficient for the fintech companies (especially if they have multiple bank partners), and it makes it extremely difficult for banks to develop a comprehensive view of the overall health and risks of their fintech programs.
Most importantly, none of this data can flow up to regulators in a format that allows them to analyze the size, composition, benefits, and risks of the fintech ecosystem as a whole.
This is bad for everyone. Without this ecosystem-level dataset, regulators are forced to play whack-a-mole when it comes to the supervision of bank-fintech partnerships. The result is that regulators are often too late to stop bad things from happening (e.g., Synapse) and overly punitive in the resulting rulemaking and enforcement, which raises the costs of compliance for everyone and prices out good actors that can’t afford fancy lawyers.
A fintech call report wouldn’t give regulators perfect visibility into the fintech ecosystem (any standardized report is, by definition, an imperfect representation of the thing it’s reporting on). But that’s OK. Something is significantly better than nothing, which is what we have today.
A fintech call report would give the core system and intermediate platform providers that work in BaaS a specification to code to so that the data could be generated in the proper format automatically. And it would give federal banking regulators a much more comprehensive, bottom-up approach to understanding the fintech ecosystem, which could be enormously helpful in revitalizing antiquated supervision mechanisms like the Bank Service Company Act.
All of the fintech companies, banks, and regulators I shared this idea with were enthusiastic about it.
Let’s make it happen!
Banks Can’t Agree on Deposit Insurance Reform
In Monday’s newsletter, I asked, “Should we eliminate deposit insurance limits?” This question was in response to some public commentary from CFPB Director Rohit Chopra on the inherent unfairness in how the FDIC handled the failures of Silicon Valley Bank and First National Bank of Lindsay.
This question provoked a large and passionate number of replies, which I appreciated!
I asked this same question — should we eliminate or otherwise reform deposit insurance limits in the U.S.? — to various folks I met with this week.
The answer I got was consistent and rather depressing — yes, we should, but no one can agree on how.
After the failure of SVB, the FDIC published a fascinating report on reforming deposit insurance. The report outlined a number of different options, including raising insurance limits, raising or eliminating limits for certain account types, and eliminating limits altogether.
My personal belief is that we should develop a more targeted approach to deposit insurance coverage that eliminates the limits for business payment accounts (i.e., payroll) but keeps limits (perhaps higher limits) in place for other types of accounts. Other countries like Japan already do this, and it seems to work well.
Unfortunately, banks can’t agree on which option they prefer. Big banks like JPMorgan Chase, in particular, aren’t big fans of any deposit insurance reform because it would raise their costs (higher assessment fees) without providing them with any benefits (the government would never allow them to fail, and the market knows that).
And without united support from all banks on deposit insurance reform, the effort stands no chance of advancing through Congress.
Bummer.
Don’t Say the “L” Word
Speaking of getting (and keeping) banks on the same page, I have heard through the grapevine that the efforts that have quietly been happening this year to bring various stakeholders — banks, fintechs, regulators, law enforcement, telcos, tech companies — together to reduce the incidence rate and impact of scams are continuing to move forward.
I was happy to hear this! My fear was that these efforts would fizzle out now that the political and regulatory winds (which were a big motivating factor on the issue of scams over the last couple of years) have shifted.
One interesting note on these efforts — they tend to work a lot better when all the stakeholders come to the table with the intent to reduce the overall volume of scams rather than to fight over the assignment of liability for the scams that still happen.
As soon as you say “liability,” that spirit of collaboration vanishes. Indeed, we’ve seen this exact dynamic playing out in the UK, where the fight over liability has bitterly divided banks, fintech companies, and big tech companies.
Eventually, we will need to talk about liability for scams in the U.S. However, the longer we can hold off that conversation, the more space we give the industry to collaborate on fixing the problem.
Charter Time?
It hasn’t been easy to get a bank charter over the last four years. The expectation is that it will become a lot easier over the next four.
This will manifest in a few different ways.
First, if you are a fintech company or a wealthy fintech individual and you want to buy a bank, your odds of success are about to become a lot higher. This could be very good for certain large, later-stage private or public companies that have a business model that depends on bank partnerships (Chime, Affirm, Klarna, Ramp, etc.) It could also be good for individuals with innovative ideas that depend on bank charters (I could see Darragh Buckley at Increase giving it another go).
Second, we are going to see a surge of interest in the acquisition of special-purpose state-level charters. These aren’t full bank charters, but they can be very useful for enabling companies to gain certain bank-like privileges without having to be subject to all of the requirements that come with being a traditional bank. Two to watch are Connecticut’s Uninsured Bank Charter and Georgia’s Merchant Acquirer Limited Purpose Bank Charter, both of which have garnered significant interest from non-bank service providers over the last couple of years. The viability of this path will depend on a greater level of harmonization between the states offering these special purpose charters and the organizations that ultimately control the rails that these charters promise direct access to (the Federal Reserve and Visa and Mastercard), which seems likely over the next four years.
The CSBS is Going to Have a Hard Job Over the Next Four Years
Related to the point above, I think the Conference of State Bank Supervisors will have a hard job over the next four years.
The CSBS exists to promote and defend the U.S.’s dual banking system and to improve the quality and effectiveness of state-level supervision of banks and non-bank financial services providers. It attempts to do this by fostering supervisory coordination across states and encouraging more consistent state laws regulating non-bank providers, among many other initiatives.
Logically, these efforts are easier when there is more alignment between the states regarding bank and non-bank regulation and consumer protection.
My guess is that this alignment is going to decrease significantly over the next four years.
Some states (like Georgia, Connecticut, and aspiring crypto capital Wyoming) will aggressively court banks and fintech companies with special purpose charters and the promise of streamlined supervision. Other states (like California, New York, and Illinois) will go in the other direction, ramping up their consumer protection and anti-evasion efforts in response to the actual or perceived slackening of consumer protection regulation and enforcement at the federal level.
Should We Allow Banks to Charge for Open Banking?
Folks I spoke with this week generally agreed with both of the following statements: 1.) The CFPB took its time crafting the Personal Financial Data Rights Rule and carefully running it through the standard administrative procedures process. 2.) The statutory authority granted to the CFPB under section 1033 of the Dodd-Frank Act to create the rule is vague and thus easy to challenge on legal grounds.
Obviously, the Bank Policy Institute has already filed a lawsuit against the CFPB over the rule, and as my bank nerd friend Evan Weinberger pointed out to me, the lawsuit makes it fairly clear what the big banks represented by the BPI really want:
The Bureau does not have authority to prohibit banks from charging reasonable fees to third parties or data aggregators to access banks’ APIs. … Nor does Section 1033 implicitly delegate to the Bureau the authority to ban banks from charging reasonable access fees, thus providing a windfall to fintechs and data aggregators.
As I’ve written about multiple times recently, big banks don’t actually dislike the concept of open banking. They just dislike an open banking regime that stops them from fully exploiting consumer-permissioned data sharing to their advantage.
I’m personally not a fan of banks being able to charge fees for accessing their open banking APIs, but I wonder if the combination of a leadership change at the CFPB and the BPI lawsuit might result in a modified rule that allows banks to do just that.
A Cool Use Case for Generative AI
Max Levchin, CEO of Affirm, spoke at the FinRegLab AI Symposium yesterday. During his panel, Levchin was asked to provide a specific example of how Affirm uses generative AI.
He described an internal tool that the Affirm team developed during a hackathon that scrapes the internet looking for merchants that list Affirm as a payment option on their websites (Affirm currently partners with 375,000 merchants). The tool then leverages a large language model to analyze the text on the merchants’ websites to ensure compliance with the Reg Z requirements that govern how lending products (like Affirm loans) are described.
According to Levchin, the tool has saved Affirm a tremendous amount of money, which makes sense when you consider just how expensive it would be to have humans manually review all of the product pages on 375,000 websites.
I wonder if he’d be willing to license it to the FDIC to help them better monitor the usage of their name and logo?
