3 Fintech News Stories
#1: This is Why Big Banks Have Consortiums
What happened?
The big banks are discussing the possibility of jointly issuing a stablecoin:
The nation’s biggest banks are exploring whether to team up to issue a joint stablecoin, a step intended to fend off escalating competition from the cryptocurrency industry.
The conversations have so far involved companies co-owned by JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and other large commercial banks, according to people familiar with the matter. Those include Early Warning Services, the operator of the peer-to-peer payment system Zelle, and the Clearing House, the real-time payment network.
So what?
This always goes roughly the same way — someone in the market finds a way to offer a thing that works, functionally, like a deposit account and payment instrument, but with some new twist. Often, the new thing exploits some regulatory loophole, of which there are many in the U.S.
The new thing sees significant customer adoption, which threatens banks’ existing deposit and payments franchises.
So, the big banks respond by teaming up and launching a competitive thing. Theirs is usually good enough, but not best-in-class. As a standalone business, it’s usually a breakeven proposition (at best).
But that’s fine.
The big banks’ massive advantages in institutional trust and distribution give them enough of a leg up to win in the market, or at least to become a significant competitor. And the thing doesn’t need to make money, as long as it preserves or strengthens the banks’ existing competitive moats.
This is what big bank-owned consortiums like Early Warning Services and The Clearing House do. They identify and neutralize threats to the big banks’ dominant market position through cooperative (and, you could argue, anti-competitive) initiatives.
Traditionally, the big banks have to see significant disruption in their core businesses before they mount a response through their consortiums (this was the case with P2P payments apps built on top of state MTLs, which eventually led to Zelle).
However, with stablecoins, they appear to be trying to get ahead of the curve.
And as has been the case with prior examples, this big bank consortium initiative would be really bad for smaller banks, which is a fact they seem to recognize:
Some regional and community banks have also considered whether to pursue a separate stablecoin consortium, according to people familiar with the matter. Such a venture would be much more difficult for smaller banks.
#2: You Can Only Scrape the Bottom of the Barrel So Much
What happened?
Pagaya’s partnership with Klarna is ramping up:
Pagaya Technologies, the AI-powered consumer-lending firm, is issuing its first bond backed by loans made to online shoppers, part of a surge in financial engineering by Wall Street that is accelerating the flow of credit to U.S. consumers.
Pagaya is set to issue $300 million of bonds Thursday that will be used to fund “buy now, pay later,” or point-of-sale, loans offered by Klarna.
So what?
I’ve written about Pagaya multiple times over the last 12-18 months (long before it was cool to do so, Wall Street Journal!)
The TL;DR is that it is an embedded second-look lending network, which seamlessly allows lenders (including U.S. Bank, SoFi, and OneMain Financial) to approve customers for loans whom they otherwise would have rejected. Pagaya owns the paper, but the lender keeps the servicing rights. The end customer is never the wiser.
This partnership is a big deal for Pagaya, as BNPL is one of the fastest-growing segments in the consumer lending market (and Pagaya has already grabbed a lot of the market share available in other segments like subprime auto lending).
It’s also a big deal for Klarna, which has been trying to go public for a while now. Unlike other late-stage fintech companies (like eToro and Chime) that have proceeded down that path (economic uncerntainty be damned!) Klarna put its IPO on hold. And since then, the company has reported worsening losses on its loans:
Klarna’s customers are having a harder time paying back the installment loans they take out with the popular “buy now, pay later” service.
The Swedish company’s net losses doubled in the first quarter even as its user base and revenue grew, Klarna reported Monday, weeks after pausing its plans to go public over concerns about tariffs and economic uncertainty. Klarna’s consumer credit losses swelled 17% in the first quarter from the same period a year earlier, hitting $136 million.
It’s important to note that this surge in losses comes as part of a surge in lending volume as well. As a share of total gross merchandise volume, Klarna’s credit loss rate jumped from 0.51% to 0.54%. Meaningful, but less alarming when put in the proper context.
Still, it’s hard not to draw connections between the company’s delayed IPO, increasing credit losses, and growing dependence on Pagaya. It feels like they are trying to lend their way out of a tough spot, which is never a good idea.
#3: Banks Opened Pandora’s Box
What happened?
CFPB Acting Director Russell Vought just told the United States District Court for the Eastern District of Kentucky that he agrees with the Bank Policy Institute:
After reviewing the Rule and considering the issues that this case presents, Bureau leadership has determined that the Rule is unlawful and should be set aside. To that end, Defendants intend to file a motion for summary judgment.
So what?
Well, we knew this was where things were headed, so it’s not exactly a surprise. And it’s by no means a done deal. The Financial Technology Association has been granted the right to intervene in the case, so there will be someone to argue the other side (assuming the court does not grant the CFPB’s request for summary judgment).
Still, this isn’t great news for those of us who believe that open banking will work better in the U.S. under a defined regulatory framework.
I’m not sure how many bankers would consider themselves a part of that club, but I’m here to tell them that all of them should.
Resetting the U.S. open banking ecosystem to a pre-regulatory state would be REALLY BAD for banks.
Why?
Two reasons.
First, I think the industry was ready to accept changes to the open banking rule, including allowing banks to charge for access to the data. This is a key objection that banks have to the rule as currently written, and if the CFPB had opted to reopen the rule and make changes to it, this likely would have been one of the changes!
Now, for the moment, that’s off the table.
Some big banks will have the scale and leverage to negotiate individual data access agreements, which could include commercial terms. But fintech companies and data aggregators aren’t going to go any further than they have to, which means that most banks aren’t going to get paid to facilitate access to their customers’ data.
Put simply, by attempting to vacate the rule, the CFPB is taking money out of most banks’ pockets.
Second, we had just started moving the industry away from screen scraping and towards APIs, which is both a more secure and more performant option. Scrapping the rule will incentivize fintech companies and data aggregators to return to screen scraping to ensure maximum data coverage and connectivity, especially if some banks and data aggregators choose not to play nicely with each other (which I fully expect).
This would be bad under normal circumstances, but now that we live in the age of agentic AI, where individuals and companies have cheap access to intelligent and inexhaustible virtual assistants, it will likely be catastrophically bad for banks’ IT teams.
Matt Janiga sums it up well with this tweet:
Maybe JPMorgan Chase, with its $18 billion tech budget, can keep up. Most banks will be overwhelmed.
Open banking in the U.S. isn’t going away, no matter what banks or the CFPB do. If the rule gets vacated, it’ll just make everyone’s lives harder, including banks.
2 Reading Recommendations
#1: The checkout page is dead. (by Simon Taylor, Fintech Brainfood) 📚
Simon has been doing a good job reporting back from the wild frontier of agentic AI and telling us fintech nerds what’s happening and what it all means.
This piece on the (possible) death of the e-commerce checkout page got my wheels turning.
#2: The Supreme Court Is Just Making Stuff Up About the Fed (by Adam Levitin, Credit Slips) 📚
This article does a good job explaining the motivated reasoning behind the Supreme Court’s recent opinion on President Trump’s removal of a member of the National Labor Relations Board and of the Merit Systems Protection Board, both of which are supposed to require cause.
The concern with these firings (you may remember President Trump also firing two members of the NCUA Board recently) is that they lay the groundwork for the President to also fire members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee.
In this opinion, the Supreme Court basically said that the NLRB and MSPB firings are OK, but firing anyone at the Federal Reserve would not be OK because … reasons!
1 Question to Ponder
There are a TON of interesting questions being asked in the Fintech Takes Network. I’ll share one question, sourced from the Network, each week. However, if you’d like to join the conversation, please apply to join the Fintech Takes Network.
How will stablecoins, as a standalone business, survive once interest rates (eventually) go down? Or will they get absorbed into other businesses (PayPal, banks, Coinbase, etc.)?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
