Happy Wednesday, Fintech Listeners!

I apologize for being in your inboxes three days in a row! I hope you’ve enjoyed the content (yesterday’s essay was apparently triggering for frequent business travelers). I promise that you shall not see me tomorrow!

For today, I have a new podcast to share with you.

— Alex 

3 BIG IDEAS FROM THE PODCAST

This week on Fintech Recap, Jason Mikula joined me from his usual perch in the Netherlands where he was sweating through an unusual heat wave.

We covered the collapse of a fintech company neither of us had heard of before, a prediction market platform that paid influencers to film fake wins on fake websites, a proposed CFTC rule that appears to permit betting on murder convictions, a debanking discussion that Jason and I have both written a lot about, and a forthcoming credit card that’s basically a slot machine.

Tune in for the full conversation here

And read on below for my three big ideas...

#1: Fintech Failure Needs a PlaybookCopy anchor linkCopied

Fintech companies don't have to be big to create big problems. Parker Card was small (and neither Jason nor I had heard of it before it shut down). The $21 million in disputed receivables is not, in absolute terms, an enormous number. But Parker’s great unraveling comes with a lesson the industry apparently needs to keep learning.

Namely, that we built modular fintech infrastructure with no mechanism for failing safely, and we keep rediscovering that fact in the worst way possible for end customers.

The story is complicated, which is itself part of the problem. There was a warehouse debt facility from SVB and a junior debt partner called Värde Partners. There was a bank issuing partner, Patriot. There was a failed acquisition that appears to have collapsed around the week of April 19th. There was a reserve account that Parker had renegotiated down from roughly $6 million to $8 million to $600,000; a change it didn’t disclose to SVB.

And then there was a Friday in May when Patriot swept Parker's remaining accounts entirely, leaving Parker with $0 available there. By Sunday, Parker had emailed partners saying it was over. By Tuesday, Patriot, not Parker, was emailing Parker's customers directly, telling them to send payment to Patriot, and not to Parker, not to SVB, not to the backup servicer.

Customers were left with conflicting directions about where to send money they owed. The receivables probably weren’t considered especially high risk before Parker’s failure, but they were after, because people who owed the money were confused about where to send it.

It’s an unmerry-go-round that keeps repeating. All the parties in the fintech-partner bank-credit facility stack are on the same page, until they’re not. And when they’re not, everyone instantly and aggressively takes action to protect their own interests, which makes a bad situation worse for the customer.

We’ve spent nearly a century engineering how banks can fail safely. The FDIC has it down to a science; there are processes that activate on a Friday afternoon and have customers’ cards working smoothly on the following Monday morning. Fintech infrastructure has none of that. So here we are, adding Parker to the tottering example pile, still without a playbook for how fintech companies could fail more safely.

#2: The Word That Cried BankCopy anchor linkCopied

Jason’s framing of “debanking” is really useful: The word has become a Rorschach test. What you see in it tells us more about where you sit in the world than it does about the underlying facts.

Depending on who wields the term and in what context, “debanking” can describe the historical practice of redlining, which cut off access to credit on the basis of race; the historical exclusion of women from opening bank accounts or holding credit cards in their own names; account closures driven by the nature of a customer’s income (whether said customer was a sex worker or an international charity with elevated money laundering risk); the risk management posture large banks took toward crypto companies during the Biden administration …. or a coordinated, top-down government conspiracy to cut off entire industries from the U.S. banking system. 

Some of these things are related. One of these things are manifestations of persecution complexes. The word “debanking” treats them as interchangeable, which is how the word itself became useless.

My own working taxonomy goes like this:

Debanking with a capital “D”, the conspiracy version, does not (as far as I have seen) have substantial evidence behind it. The House Financial Services Committee made a detailed effort to find it. What it found instead were anecdotal accounts of account closures. The OCC’s review of large bank practices turned up internal policies expressing higher levels of risk consideration for certain industries; not a coordinated government campaign.

Debanking with a lowercase “d” is an important critique grounded in reality. It’s about whether reputation risk, which we can roughly track back to 1990s-era changes to the OCC’s supervision framework, became a way for regulators to transmit their own subjective views about industries to the banks they supervise, without transparency or accountability.

Jason brought up a great point, which is that our debanking framework is being normalized as a way for both parties to use government influence over financial institutions to disadvantage political opponents.

That road does not end well, regardless of which side holds the lever. And the people most excited about the current debanking conversation might want to think carefully about what it looks like when the lever changes hands.

#3: Beware of the Design PatternCopy anchor linkCopied

The legal and regulatory fights over prediction markets will eventually resolve, as all such fights do. Some version of the CFTC's proposed rule on event contracts will be finalized and then, likely, get reworked by a future administration. The real-money event contract window will open wider or it will close. Kalshi and Polymarket may IPO before the window closes, or not.

That said, I keep thinking about Meta’s prediction market app, Arena, since it points to something that won’t resolve if and when the legal and regulatory questions do.

Meta is reportedly building a standalone prediction market app where users receive a daily allotment of play money to bet on real-world events. Llama, Meta's large language model, will generate the questions from trending topics. It will make personalized market recommendations, and then resolve the markets. Meta tried something similar in 2020 with an app called Forecast, which it wound down two years later because curating human questions was too expensive. Now AI fixes that problem.

Arena might be another Meta social experiment that doesn't capture the moment. But the instinct behind it, that wagering on outcomes is an effective user engagement mechanism, isn’t going away regardless of whether Arena succeeds.

Would it be plausible that my sons, when they’re in middle school, have a teacher who uses the Arena app (or something similar … Kalshi for kids?!?) to get them engaged in a discussion about current events?

If that happens, then the prediction market wagering interface becomes the lens through which a generation relates to information about the world. Indeed, the CEO of Kalshi made the case for this versus the status quo of young people rotting their brains on Instagram in a recent interview.

This is what’s missing from the regulatory conversation. The CFTC is focused on event contracts and enumerated activities. The bigger question is what happens to consumer behavior and product design when the largest social network in the world decides that betting on outcomes is the best way to make people pay attention?

WHAT I'M LISTENING TO

#1: The Walt Disney Company (Acquired) 🎧Copy anchor linkCopied

Sink your teeth into this one.

#2: What comes after smartphones, with Snap CEO Evan Spiegel (Cheeky Pint) 🎧Copy anchor linkCopied

I had never listened to an interview with Spiegel before, but I came away from this one impressed. I don’t have any desire to buy Spectacles, but I enjoyed listening to him talk about them (and the wearables product category more broadly).

Thanks for the read! Let me know what you thought by replying back to this email. 

— Alex