Everyone (but the lawyers) Just Lost
Happy Monday, Fintech Takers!
After spending a few days with my extended family in Hamilton, MT, at the annual Celtic Festival (Bagpipes! Mead! Caber tossing!), the question was which route to take back to Bozeman.
Door A: Interstate 90
Door B: Montana Highway 38
On the surface, these two options might seem somewhat equivalent. You might figure that the interstate is a little faster, while the highway is slower and more scenic. But, overall, pretty similar.
You’d be wrong.
Montana Highway 38 is better known as Skalkaho Highway, taking its name from a Salish word meaning “many trails”. The road, which is mostly gravel and barely wide enough for two cars to drive by each other, is closed for the majority of the year. This is because it traverses the Sapphire Mountains, which are exactly as beautiful as they sound, but receive a lot of snow.
After a brief, safety-oriented discussion, my family chose to take Skalkaho Highway, and I’m glad we did. The interstate just doesn’t have scenery like that (see below).
Montana is amazing (but please don’t tell anyone).
- Alex
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3 FINTECH NEWS STORIES
#1: Get Points by Paying Your Mortgage Copy anchor linkCopied
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Mesa, a provider of credit cards for homeowners, raised some additional debt and equity capital:
Mesa, a membership platform built for homeowners, announced on Wednesday a funding round of $24 million in debt and equity from partners in the housing, lending and home improvement space, bringing its total raised to over $33 million to date.
Lowe’s and Paramount Residential Mortgage Group (PRMG) participated in the round, as well as Trinity Capital, an alternative asset manager.
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Anything that adds value to the mortgage servicing experience is a good thing in my book.
A couple of thoughts on this:
- Mesa violated the Mikula Rule by not disclosing how much money they raised by issuing equity versus how much they raised by taking on debt. Shame!
- Bilt, which is beginning to reach into the mortgage servicing space, has been very successful in convincing its ecosystem partners to sign up for questionable economic arrangements by getting them entangled with Bilt’s business (Wells Fargo, which signed up for a famously bad deal to issue the Bilt card, was also an investor in Bilt). Mesa has wisely taken a page out of Bilt’s book, getting Paramount Residential Mortgage Group (PRMG) to invest in the company after already signing up as a distribution partner back in May.
- Lowe’s was another investor in this latest round of funding for Mesa, which makes sense because, in addition to rewarding cardholders when they pay their mortgage, Mesa also rewards cardholders for home-related expenses. Lowe’s (like most big retailers) already offers its own co-brand credit card, but I wonder if this signals an increasing interest on the part of retailers in participating in larger loyalty and rewards ecosystems, rather than just going it alone.
- Perhaps the biggest current competitor to Mesa is Rocket, which already offers a co-brand credit card whose points are redeemable toward Rocket mortgage down payments or principal. With Rocket getting deeper into the mortgage servicing space (through its acquisition of Mr. Cooper), I wonder if we might see Rocket attempt to extend its card (and overall loyalty/rewards offering) into the broader servicing market for mortgages not originated by Rocket.
#2: Everyone (but the lawyers) Just LostCopy anchor linkCopied
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The Durbin Amendment remains a source of controversy. Here’s the latest:
A North Dakota judge has fired the starting gun on what could become the biggest reset of U.S. debit card economics since the Durbin Amendment itself, 14 years on — as an order came down vacating the Federal Reserve’s 2011 swipe fee cap.
At a high level, U.S. District Judge Daniel M. Traynor tossed the Fed’s Regulation II — rules that since 2011 have limited debit interchange to 21 cents plus 0.05% per transaction — finding the central bank “exceeded its authority” when it let issuers recover fraud prevention and other costs. He stayed the action to give the Federal Reserve time to appeal, but retailers nonetheless celebrated a “major win.” Banks, on the other hand, are taking issue with the ruling, contending that the net impact may be that the funding of innovation, for new products and services, and data security, may be curtailed.
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Here are two interrelated things that have happened in the last 18 months:
- In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, the Supreme Court ruled that plaintiffs can sue regulators within six years of being harmed by a regulatory rule, rather than within six years of the rule's implementation. This essentially removed any statute of limitations for harm caused by regulatory rules, meaning that any rule is now subject to challenge in perpetuity. This ruling, along with Loper Bright, severely weakened the administrative state in the U.S.
- After the Supreme Court’s ruling gave Corner Post (a truck stop in Watford City, North Dakota that was opened in 2018) the right to sue the Federal Reserve over the Durbin Amendment, the case returned to the United States District Court for the District of North Dakota, and the judge tossed out the Fed’s Regulation II, which was the implementing regulation for the Durbin Amendment’s debit card interchange price cap.
So, what happens now?
The court vacated the rule but stayed the order, meaning that the current interchange cap remains in place until the Eighth Circuit (and possibly the Supreme Court) weighs in. The court also said that the Fed could proceed with an effort, already underway, to modify the cap based on an updated cost study (which is required under the Durbin Amendment).
Long-term, I think the cap will go down (the Fed is already headed in that direction), unless Congress decides to intervene and clarify the statutory language around the Durbin Amendment (which seems unlikely).
More broadly, I have a few reactions to this news:
- This is a win for merchants, not consumers. The cost savings that resulted from the Durbin Amendment were (mostly) not passed on to consumers. They were pocketed by the merchants. As I have written about numerous times, this was entirely predictable, and it was naive for anyone to believe otherwise. This remains true.
- I have zero sympathy for banks. The big banks and bank trade associations are pissed, but you know what? You can’t have it both ways. You can’t argue for a robust administrative state and deference for regulators when it suits you, and then turn around and argue for a constrained administrative state and strict statutory interpretations when that suits you. And spare me the arguments about how this decision will lead to more U.S. consumers getting debanked. The rate of unbanked households in the U.S. has gone down since the Durbin Amendment was implemented.
- What’s good for lawyers is not good for the rest of us. The only consistent winners in the aftermath of the Corner Post decision will be lawyers, who now have endless opportunities to argue for and against settled regulatory rules. This ties into a broader policy discussion currently underway about the virtues of having a government by and for lawyers, which is a discussion that is (in my estimation) very much worth having.
#3: Circle and Stripe Are Outflanking Coinbase and BlockCopy anchor linkCopied
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Circle launched its own Layer-1 (L1) network called Arc:
Circle, the issuer of the U.S. Dollar Coin (USDC), has launched Arc, a new Layer-1 blockchain specifically designed for stablecoin-based financial infrastructure. This marks a pivotal step in Circle’s vision to build a full-stack internet financial system, leveraging USDC as both the native gas token and a key utility for facilitating payments, foreign exchange, and capital market activities. Arc is EVM-compatible and features a built-in stablecoin foreign exchange engine, enabling sub-second settlements and opt-in privacy controls. The platform is intended to offer a scalable and secure environment for developers and institutions to build stablecoin-powered applications.
And Stripe is reportedly working on its own L1 network called Tempo:
The fintech giant Stripe is developing a new blockchain, according to a recent job posting on a site for the crypto lobby group Blockchain Association. “Tempo is a high-performance, payments-focused blockchain,” reads the job advertisement, which is for a product marketing position and dated August 3.
The blockchain is a layer 1, or not built on top of other protocols, and it’s compatible with the coding language used on the blockchain Ethereum, according to four sources briefed on the matter.
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I should start by admitting that I’m a bit over my skis on this particular topic. While I’ve spent quite a bit of time writing, learning, and talking about stablecoins, the infrastructure underlying stablecoins and other tokens is still a new area for me. If you want to get smarter in this area, I would recommend reading Simon Taylor’s latest newsletter, as well as this article by Christian Catalini.
That said, you can’t learn about a subject if you don’t write about it, so here we go.
The foundational computing networks that validate and settle crypto transactions are blockchains (often shortened to “chains”). With chains, there is generally a trade-off between security/decentralization (How broad and independent is the validator set? How resistant is the system to censorship or downtime?) and performance/UX (How fast can the network process transactions? How much throughput can it handle? How cheap and predictable are fees?).
The original large Layer-1 (L1) networks — Bitcoin and Ethereum — are widely perceived as highly secure and decentralized; however, they can be slower and more expensive during peak demand. To get better performance, companies will pursue one of two different strategies:
- Build a Layer-2 network on top of a Layer-1 network. This is what Coinbase did with Base (an Ethereum L2) and what Block is doing with Lightning (a Bitcoin L2). L2s offload most transaction processing from the base chain to improve scalability and then periodically post data/proofs back to the L1 for settlement and security anchoring.
- Build your own Layer 1 network. Solana (launched in 2020) is an L1 designed for speed, throughput, and low fees. Its design choices — parallel execution, higher hardware requirements, and (historically) limited client diversity — optimize performance but raise ongoing debates about decentralization and security relative to older L1s.
What Circle and Stripe are betting is that they can build L1s that can outperform both purpose-built L2s and more generic L1s specifically for payments use cases, where compliance, FX, predictable dollar-denominated fees, and fast, deterministic finality matter.
Plus, by owning the foundational network, Stripe and Circle can set the rules (allowing them to steer network usage in directions that are more profitable for them) and to capture a greater percentage of the unit economics (L2 operators often pay Ethereum for data availability and may share revenue with their stack provider, which can compress margins).
Obviously, we will need to wait and see how this plays out.
Arc has been announced, but it is not yet live. Tempo hasn’t even been formally announced yet. There’s a lot we don’t know. And just because a company launches its own L1 doesn’t mean that it will be successful in convincing others to adopt it.
That said, my immediate take on this news is that Circle and Stripe have chosen the correct path forward. In his piece, Simon used the term “decentralization theatre,” and that seems, to me, to be the exact right term to describe L2s.
Base and Lightning will, at best, be as performant for payments use cases as Arc and Tempo, but with significantly less economic upside for Coinbase and Block. And the only advantage of building an L2 — trust and credibility with the crypto community — may not end up mattering for the vast majority of users if stablecoins are successful in bringing a large portion of the global payments market on-chain (as many observers predict that they will be).
Fidelity to the philosophy of decentralization sounds nice in theory (and it’s clearly personally important to Jack Dorsey), but it might not be the best business strategy.
2 READING RECOMMENDATIONS
#1: One Threshold Doesn’t Fit All: Tailoring Machine Learning Predictions of Consumer Default for Lower-Income Areas (by Meursault, Moulton, Santucci, & Schor) 📚Copy anchor linkCopied
I’ve got some nerdy academic content recommendations for you today!
First, this paper from researchers at the Philadelphia Fed, which focuses on the gains that can be made by combining fairness objectives with machine learning-powered credit risk assessment.
It’s interesting what we can do to benefit all stakeholders when we make fair lending a business goal, rather than simply a regulatory obligation.
#2: Governmental Debanking (by Julie Hill) 📚Copy anchor linkCopied
Professor Hill is the best resource I have found for a rational take on this very hot (and frequently misunderstood) topic.
In this paper, she attempts to answer a question that I am incredibly passionate about: How can we stop the debate over debanking?
God, yes. Please let the debate stop. I can’t keep typing the word “debanking”. I can’t do it.
1 QUESTION FROM THE FINTECH TAKES NETWORK
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 many payments-focused L1 networks are we ultimately going to end up with? It seems likely that many companies will attempt to create their own L1. How many will the market ultimately need?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
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 …
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Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
