Bad For You ≠ Bad For Your Customers
Happy Friday, Fintech Takers!
I am delighted to be back home after a very productive trip to Washington, D.C.
My thanks to the folks at the Federal Reserve for inviting me to participate on a panel about the future of financial inclusion. I learned a great deal at the event, as well as in the numerous one-on-one meetings I was able to fit in during the remainder of my trip.
And yes, it was hot and humid, but honestly? I expected it to be worse.
It’s all about managing your expectations, which is thematically relevant to today’s essay.
- Alex
P.S. — Sorry for the late email today. It was one hell of a week!
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Was the Durbin Amendment a success?
This question was briefly raised during my panel discussion this week, but we didn’t get to fully hash it out (somehow, 90 minutes still wasn’t enough time?). So let’s do it right now.
Was it a success?
In a narrow sense, no. Capping debit card interchange fees for banks with over $10 billion in assets essentially just shifted a pile of money from those banks (especially the biggest banks) to merchants (especially the biggest merchants). Very little of the fee revenue was rerouted into consumers’ pockets.
But in a broader sense, was the Durbin Amendment a net benefit for financial services consumers?
Jamie Dimon, long-time CEO of JPMorgan Chase, would argue no. Since its passage in 2010, Dimon has been a consistent critic of the Amendment, calling it “ill-conceived” and making the case at an event last year that it has made banking less accessible:
JPMorgan estimates that the first implementation of the Durbin amendment caused five million to 10 million people to become unbanked, Dimon said.
I’m not sure what methodology the bank is using to come up with that estimate, but it’s difficult to square with the most recent data from the FDIC’s National Survey of Unbanked and Underbanked Households:
The percentage of unbanked households in the U.S. has, in fact, dropped to roughly half of what it was back in 2010, when the Durbin Amendment was passed. It’s at an all-time low right now.
That’s pretty weird, right?
If the Durbin Amendment made it essentially impossible for banks to profitably offer fee-free checking accounts to low-balance deposit customers (which is what JPMC and other banks have argued), why has the unbanked rate in the U.S. steadily gone down since it was signed into law?
Is it possible that fintech companies, which Dimon famously said his bank should be “scared shitless” about, have something to do with it? Here’s Dimon:
We are now facing a whole generation of newer, tougher, faster competitors who, if they don't ride the rails of JPMorgan, they can ride the rails of someone else.
When he says “ride the rails,” what he’s referring to is banking-as-a-service (BaaS), in which non-bank service providers offer financial services on top of a regulated bank’s infrastructure.
And if it’s not JPMC providing the rails, who is? Here’s Dimon:
There are examples of unfair competition, which we will do something about eventually … People who will make a lot more on debit because they operate under certain things. The only reason they compete is because of that.
What Dimon is saying here is that the only reason that fintech companies can compete with big banks is that they are partnered with banks that “operate under certain things” (i.e., have less than $10 billion in assets and are thus exempt from the Durbin Amendment).
This is a rhetorical pattern with Dimon. He will criticize regulation as being bad for consumers and competitively unfair, without acknowledging that A) his bank being so big as to be systemically important to the global economy is a tremendously unfair competitive advantage, and B) competition created through regulation (even if it feels unfair or wasn’t the original intent of the regulation) can be net positive for consumers.
And I don’t blame him for this, incidentally.
You don’t get to be the CEO of a massive and successful company like JPMorgan Chase (and you certainly don’t stay in that position for nearly 20 years) without the ironclad conviction that what you do is good for your customers. That makes it extremely difficult to imagine a scenario in which regulations that are bad for you and good for your competitors can also be good for your customers … even if that is the case.
Capital requirements are another good example.
Responding to a question about the impact of higher capital requirements (as proposed under Basel III endgame), Dimon said it would be bad for consumers:
If they want to put all mortgages and small business loans out of the banking system, so be it, but they should tell that to the American public. They’ll have a real effect on consumers.
And, in a separate interview on the same topic, he bemoaned how these changes would unfairly benefit competitors:
This is great news for hedge funds, private equity, private credit, Apollo, Blackstone … They’re dancing in the streets.
Could both things be true? Could it be that higher capital requirements will benefit JPMC’s competitors and harm consumers?
Maybe!
Or maybe not.
Take mortgage lending as an example. Banks have certainly been displaced by non-bank lenders in this market since the Great Recession and the introduction of tougher capital requirements. In 2010, banks originated roughly three-quarters of all consumer mortgages in the U.S. In 2023, that was down to about one-third of all consumer mortgages, with non-bank lenders providing the rest.
But have mortgages, as a product, gotten worse for consumers during that time?
No.
There hasn’t been some massive decrease in the availability of mortgage loans over the last 15 years (apart from a dip in demand due to higher interest rates, which is outside of all lenders’ control), and thanks to the work done by leading originators like Rocket, they are much easier and more convenient to obtain than they used to be. Shit, mortgage servicing is even starting to get interesting, which I thought was never going to happen!
Non-bank competition in mortgage lending has made mortgage lending better for consumers. That wasn’t the intent behind tougher capital requirements, and it hasn’t been great for big banks like JPMC, but that doesn’t mean it’s a bad thing overall.
Open Banking
The reason this entire discussion is relevant, right now, is open banking and JPMorgan Chase’s recent decision to start charging fees for access to its APIs.
As Evan Weinberger and Paige Smith at Bloomberg reported last week, JPMC has informed data aggregators that it will exercise a clause in its data access agreements with them, allowing the bank to charge for access to the data. The pricing that JPMC has given the aggregators is, reportedly, very high (10x or more what aggregators currently charge their customers), and it’s unclear, at this stage, how willing the bank will be to negotiate lower prices (or what it will want in exchange for lower prices).
While JPMC’s move on pricing is much more aggressive than what I would have anticipated, it’s not altogether unexpected.
Jamie Dimon has never been a fan of open banking. Back in 2016, the focus of his disapproval was screen scraping, which, in his defense, is a legitimately risky and operationally unsound way for consumers to share their data with third parties. From JPMC’s 2016 letter to shareholders:
For years, we have been describing the risks – to banks and customers – that arise when customers freely give away their bank passcodes to third-party services, allowing virtually unlimited access to their data. Customers often do not know the liability this may create for them, if their passcode is misused, and, in many cases, they do not realize how their data are being used. For example, access to the data may continue for years after customers have stopped using the third-party services.
That’s a perfectly fair concern! And JPMC developed a solution — data access agreements with data aggregators — which it went on to describe favorably:
We recently completed a new arrangement with Intuit, which we think represents an important step forward. In addition to protecting the bank, the customers and even the third party (in this case, Intuit), it allows customers to share data – how and when they want. Under this arrangement, customers can choose whatever they would like to share and opting to turn these selections on or off as they see fit. The data will be “pushed” to Intuit, eliminating the need for sharing bank passcodes, which protects the bank and our customers and reduces potential liabilities on Intuit’s part as well. We are hoping this sets a new standard for data-sharing relationships.
It did, indeed, set a new standard. And the proliferation of data access agreements between banks and data aggregators (along with the standard-setting work done by the Financial Data Exchange) meaningfully moved the market away from screen scraping and towards APIs.
However, as the fintech industry continued to grow (and the big data aggregators grew with it) and the CFPB ramped up its rulemaking around open banking, Dimon shifted his rhetorical focus to emphasizing how unfair the entire arrangement is. From JPMC’s 2024 letter to shareholders:
Third parties want full access to banks’ customer data so they can exploit it for their own purposes and profits.
Again, notice the framing here: access customer data to “exploit it for their own purposes and profits”.
He makes it sound like data aggregators are stealing customers’ data and selling it without their permission to the highest bidder!
That, obviously, is not accurate. The data is accessed at the customer’s direction and with their explicit permission to enable products and services that the customer values and is willing to pay for.
That’s not great for JPMorgan Chase, which controls more U.S. consumer deposits (and thus more bank transaction data) than any other bank in the market, but it’s hard to argue that it’s not a legitimate choice on the part of consumers. And unlike Durbin and Basel III, competition is the explicit purpose of open banking regulation.
Indeed, the more I study JPMC’s words and actions regarding open banking (especially this latest move to charge for data access), the more I become convinced that it is primarily motivated by a profound sense of entitlement, as this quote from JPMorgan Chase spokesperson Trish Wexler illustrates (emphasis mine):
Having a charging structure will ensure that data is provided only when customers request it, and that data middlemen are contributing to the system we built and maintain—and that their entire industry was built upon.
The Greatest Trick Jamie Dimon Ever Pulled …
Reading quotes from Jamie Dimon, you’d be tempted to think that JPMorgan Chase is always mere inches from defeat:
“All of our major bank competitors are back growing and expanding, you have the fintech folks who are quite capable and quite smart who want to take big chunks of your business,” Dimon said Tuesday on the firm’s earnings call. “We’re quite cautious to just declare victory, like somehow we’re entitled to these returns forever.”
This is a very smart messaging strategy. It keeps your employees motivated. It reassures stock market analysts that you aren’t resting on your laurels. And it lends weight to your arguments about the unfairness of regulations that disadvantage market incumbents and put consumers at risk.
The only problem is that it’s often not true:
JPMorgan Chase & Co. keeps putting more distance between itself and key rivals.
The first half saw the bank’s market value surpass that of its three largest competitors — BofA, Citigroup and Wells Fargo — combined. It racked up $30 billion of profit in that period, more than double its closest rival, and widened its lead over Goldman Sachs Group Inc. and Morgan Stanley in investment-banking revenue.
It’s extremely difficult to predict all of the effects that regulations will have. However, we should be more skeptical when the biggest and most profitable banks warn us that regulatory changes will hurt consumers and harm their business.
Often, when one is true, the other is not.
MORE QUESTIONS TO PONDER TOGETHER
Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis.
What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen.
One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.
Drop your question here, whenever inspiration strikes!
INPUT REQUESTED!
I’m working with Dilly Labs and the wise and powerful Tom Johnson on a little research project and I am looking for folks who work at a consumer lending company (bank, credit union, non-bank lenders, etc.) and who have experience buying/implementing/working with credit decision engines to fill out a quick survey.
Credit Decision Engine Vendor Survey
I promise it won’t take long! And it will be extremely helpful! So …
(Editor’s Note — If you work at a technology company that sells a credit decision engine, feel free to pass the link to the survey on to your clients. That’s perfectly fine. However, if you attempt to fill out the survey yourself, a terrible curse will befall you and your company. This isn’t a joke. The curse is real.)
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
