The Debanking Debate

3 FINTECH NEWS STORIES

#1: The Debanking Debate

What happened?

Marc Andreessen, in an attempt (I believe) to ruin my weekend, went on Joe Rogan’s podcast and said a bunch of stuff about banking, fintech, and regulation:

This thing called the Consumer Finance Protection Bureau (CFPB), which is Elizabeth Warren’s personal agency that she gets to control. And it’s an “independent” agency that just gets to run and do whatever it wants … it terrorizes financial institutions, prevents new competition, new startups that want to compete with the big banks … by terrorizing anybody who tries to do anything new in financial services.

This is where a lot of the debanking comes from … under current banking regulations, after all the reforms of the last 20 years, there’s now a category called a “politically exposed person” (PEP). And if you are a PEP, you are required by financial regulators to kick them off, out of your bank.

So what?     

He then goes on to explain, in a rambling fashion, how PEP is a designation that the Biden administration has exclusively used to kick disfavored companies and individuals on the right out of the banking system.

This interview ignited a firestorm of debate on Twitter this weekend over the phenomenon of debanking and the role of regulators and independent supervision in financial services.  

Let me start here because this is important and should be stated clearly — almost none of what Marc Andreessen said in this portion of the Rogan interview is true.

The CFPB is indeed an independent agency, which was created by Congress through the Dodd-Frank Act. It is led by an independent director (Rohit Chopra, currently) who serves a five-year term. Initially, the Director of the CFPB could be removed only for malfeasance, inefficiency, or neglect of duty. However, the Supreme Court recently ruled that the president can replace the CFPB director at will.

Elizabeth Warren, while influential in the creation of the CFPB, does not, in any sense, control it.

The CFPB also does not prevent startups from competing with big banks. In fact, between its statutory focus on financial institutions over $10 billion in assets and its more recent focus on big tech companies (to say nothing of rules like the Personal Financial Data Rights Rule), the CFPB is arguably the most sympathetic ally to “little tech” that a16z has among federal regulators.

Finally, the CFPB has nothing to do with debanking, which we can loosely define as the practice of refusing to open accounts or closing existing accounts of consumers or businesses that are deemed too risky.

In fact, as folks on Twitter have pointed out, and as Andreessen himself later acknowledged, the CFPB has been actively pushing back on the trend of debanking as a part of its mission to stand up for the rights of financial services customers.

It’s probably worth talking for a quick second about the broader trend of debanking because it has become a hot (and very misunderstood) concept in recent years (and especially over the last few days).

As Jason Mikula wrote on Sunday, non-CFPB federal banking regulators (the Federal Reserve, FDIC, OCC, NCUA, FinCEN) have repeatedly stressed to the financial institutions that they oversee that no specific customer type presents a uniform level of risk and that financial institutions must undertake a risk-based approach to conducting customer due diligence.

This risk-based approach doesn’t say that financial institutions can’t work with specific industries, companies, or consumers (don’t get me started on Andreessen’s gross misrepresentation of PEP). It just requires that financial institutions invest in the appropriate controls to ensure that they are safely and compliantly working with industries, companies, and consumers who are higher risk.

A lot of the folks who chimed in on Twitter this weekend with personal stories of how they were “debanked” work in high-risk industries like crypto, online gaming, adult content, and cannabis.

I know the experience of getting debanked feels personal. I can understand, from the end customer’s perspective, why they might assume it’s the result of some vast, shadowy conspiracy. 

However, in most cases, the answer is much more straightforward — risk management is difficult and expensive, and many banks are some combination of conservative, cheap, and lazy.

It’s possible to bank an industry like cannabis, which is legal in many states but illegal at a federal level. It’s possible to bank an industry like crypto, which is highly volatile and overflowing with scams. It’s possible … but it takes a lot of time and money to do it right. 

The juice has to be worth the squeeze.

Sometimes it is. OnlyFans, which is one of the fastest-growing subscription services on the planet, was able to avoid being debanked after briefly flirting with the idea of banning sexually explicit content from its platform at the behest of some financial services companies.

Sometimes it’s not, as was the case during the last crypto winter when Andreessen probably saw many of his portfolio companies personally struggle with this issue.

The real problem we need to wrestle with, as an industry, is how risk in financial services is defined. Specifically, reputation risk.

Reputation risk — the notion that certain activities or associations might negatively impact the perceptions of a bank’s stakeholders — is a comparatively new phenomenon in bank regulation (though it far predates the Biden or Obama Administrations). As Professor Julie Hill explains in this excellent paper, reputation risk has become troublingly popular as a tool for regulators to weigh in on politically sensitive industries (guns, oil and gas, etc.) without a clear, data-driven tie back to safety and soundness.

If Marc Andreessen actually knew what the fuck he was talking about (or, more cynically, if he wasn’t always talking his book), he wouldn’t have mentioned the CFPB or PEP, and he would have spent his time talking about reputation risk instead.

Alas. 

#2: Cashback Is Popular Right Now

What happened?

Lots of new fundraises and product launches relating to cashback and discounts.

StoreCash raised a $3.7M seed round:

StoreCash [is] a mobile payment solution that lets users pay for items and earn maximum cash-back rewards.

The app is quite simple: StoreCash integrates its API into fintech partners and alerts users when stores like H&M, Gap, or AMC Theatres offer cash back. When in person, customers scan a QR code generated by the app that applies the cash-back savings to their purchase. Online, a consumer simply opens the StoreCash app and selects the store they want to shop at, manually typing in the serial number and barcode to complete the transaction. 

Kalder raised a $7M seed round:

Kalder’s platform enables brands to launch loyalty and rewards programs for their end users.

Those brands can offer cashback programs on their website or app, allowing customers to earn rewards when shopping at partner stores. Kalder’s customers include sports teams, airlines, tech consumer apps and high-frequency retailers like grocers and gas stations.

To join a brand’s partner program, end users link their preferred credit or debit card to qualify for rewards purchases at partner retailers. Brands receive commissions for sales made at partner sites, providing an additional revenue stream and insights into customer spending while boosting customer engagement.

And Charlie launched a discount discovery service for seniors:

Charlie … launched CharlieSaver, the most comprehensive source for senior discounts nationwide. CharlieSaver has scoured stores all across America to identify over 20,000 senior discounts across 1,000 shopping centers. CharlieSaver is free to use and available to all older Americans, not just Charlie customers. 

So what?     

These companies and products are all a bit different, but they’re built around the same basic idea — integrated incentives to shop can be a powerful and profitable customer engagement tool.

A few thoughts on these specific announcements:

• It’s depressing that all of these products are being positioned (accurately) as financial management products that will help consumers save money. The affordability crisis is real.
• Cashback rewards and discounts are significantly more helpful (to consumers and merchants) when integrated into the places where consumers already are. This is one of my critiques of StoreCash. You have to open the app, search for the merchant, and then generate a digital gift card to make your payment to earn the reward (which can then only be spent on future purchases through StoreCash).
• It’s interesting that Kalder positions its solution primarily for non-finance brands with high levels of customer engagement (sports teams, airlines, gas and grocery stores) rather than banks, credit unions, and B2C fintech companies (which they also sell to). It makes me wonder what the most logical home is for these integrated rewards offers long term. Especially if Kalder can make the mechanics work using any linked debit or credit card (which they appear to do using Plaid) rather than requiring the brand to have issued the card itself.
• The most strategically defensible approach to this product category, in my opinion, is focusing on going deeper into a specific customer segment than anyone else is willing to. This is why I like what Charlie is doing, even though it doesn’t seem to be directly monetizing CharlieSaver yet. If you can be the digital home for senior discount discovery (a much more attainable goal than being the home for all cashback rewards generally), monetization opportunities will follow.        

#3: Moody’s Next Step Into Commercial Lending

What happened?

Moody’s is acquiring a fintech infrastructure company:

Moody’s announced today that it has acquired Numerated Growth Technologies, a loan origination platform for financial institutions. The transaction further expands Moody’s Lending Suite capabilities across the credit lifecycle, providing banking customers with a powerful end-to-end loan origination and monitoring solution.

The acquisition builds on a partnership announced in January 2024 that integrated Numerated’s front office, decisioning, and loan operation technologies with Moody’s credit assessment, underwriting, and monitoring expertise. Numerated will be integrated into Moody’s Lending Suite, creating a full loan origination workflow.

Numerated uses data and artificial intelligence to streamline and enhance bank lending – improving the application, decision-making, and closing processes through enhanced data integrity. Financial institutions with a combined $3 trillion in assets use Numerated, and since its inception, over 500,000 businesses and 30,000 financial institution associates have used its platform to process over $65 billion in lending.

So what?

If this news caught you by surprise, that’s because you (like me) haven’t been paying attention to what Moody’s has been up to over the last 15 years.

Primarily known as one of the big three rating agencies responsible for evaluating corporate bonds and other securities for investors, Moody’s has (since 2007) quietly been building out an analytics business for commercial lenders using it’s 100-year-old commercial dataset as the foundation. Most of the recent acquisitions made by Moody’s in this space have focused on expanding that foundation, growing the amount of data that Moody’s has on large companies (for example — Cortera, acquired in 2021, provides business credit information).

However, data and analytics, by themselves, are only so useful to lenders. The real value is in helping lenders operationalize those data and analytic products. 

In the old days of commercial lending, that operationalization process was entirely manual and paper-based. In today’s world, it’s (slowly) becoming digitized. Hence Moody’s acquisition of Numerated, a provider of digital loan origination systems for commercial lenders.   

(Editor’s Note — If you’d like to learn more about Moody’s fascinating history and current fintech growth trajectory, read this excellent piece by Simon Taylor.) 

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2 FINTECH CONTENT RECOMMENDATIONS

#1: Synapse Investor Marc Andreessen Says CFPB “Terrorizes” Fintech, Crypto To Protect Big Banks (by Jason Mikula, Fintech Business Weekly) 📚  

I know I linked to this article earlier in this newsletter, but I wanted to ensure you saw it and were encouraged to read it. Jason has put together the best and most comprehensive summary of this current debanking debate (and its roots) that I have come across.

#2: Three Cheers for Normal Bank Failure (by Aaron Klein, Open Banker) 📚

I don’t necessarily agree with the conclusions in this piece (I favor some targeted reform to deposit insurance limits), but the analysis is top-notch. Read it!

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1 QUESTION TO PONDER

I think the biggest bottleneck in the U.S. financial services industry right now is the inefficiency of regulators.

So, my question is … how do we make regulators (particularly those focused on proactive supervision) more efficient?

All ideas (no matter how crazy) are welcome. Bonus points if you’ve worked as a bank regulator or closely with bank regulators as part of the supervision process.

As always, all replies to this newsletter are off the record!