Honor Some Cards?
Happy Monday, Fintech Takers!
I hope you had a wonderful weekend.
Today’s newsletter comes to you from Washington, D.C., where I am delighted to be attending (and moderating a panel) at the American Fintech Council’s annual Policy Summit. Then it’s off to Miami for Fintech Nerdcon.
If you’ll be at either event, let me know. This is my final week of travel, and it’d be lovely to say hi in person before I go into winter hibernation!
- Alex
Wheeler & Wilson's High-Arm New Number Nine is the only perfect sewing machine for family use (1870–1900)
3 FINTECH NEWS STORIES
#1: Colorado Copy anchor linkCopied
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The Tenth Circuit Court of Appeals reversed a lower court’s preliminary injunction in an interesting case:
On November 10, the Tenth Circuit reversed the district court’s preliminary injunction in the challenge to Colorado’s H.B. 23‑1229, holding that Colorado may enforce its Uniform Consumer Credit Code (UCCC) interest‑rate caps for loans to Colorado borrowers even when originated by out‑of‑state, state‑chartered banks. Interpreting the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) § 525’s opt‑out phrase “loans made in such State,” the court concluded it encompasses loans in which either the lender or the borrower is located in the opt‑out state.
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OK, I know that’s a bit technical. Here’s what’s really going on (and why it matters):
- In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). The Act was primarily designed to level the playing field between state-chartered banks, national banks, and non-bank competitors (such as money market funds) and to give the Federal Reserve more control to conduct monetary policy across the banking system. Among other things, the DIDMCA gave state-chartered banks the ability to charge interest rates comparable to those of national banks, which effectively allowed them to "export" their interest rates across state lines. However, the law includes an opt-out, allowing individual states to say that the DIDMCA’s federal rate export preemption does not apply to “loans made in such State.”
- In 2023, Colorado passed a law formally opting out of DIDMCA for consumer credit transactions “made in Colorado.” The law says that for consumer loans to Colorado residents, Colorado’s own interest-rate caps apply — even if the lender is an out-of-state, state-chartered bank. The stated goal was to stop fintech and non-bank lenders, which partnered with banks chartered in more permissive states like Utah, from providing loans that Colorado had determined were not in the best interests of its citizens.
- In 2024, Colorado was sued by the National Association of Industrial Bankers (NAIB), the American Financial Services Association (AFSA), and the American Fintech Council (AFC). These are the organizations that most closely represent the interests of fintech and non-bank lenders and their state-chartered bank partners. They were granted a preliminary injunction by the Colorado federal district court, which agreed with their argument that “loans made in such state” refers to loans made where the originating bank is located.
- Colorado appealed the decision to the Tenth Circuit, which reversed the lower court’s preliminary injunction. The Tenth Circuit sided with Colorado’s argument that “loans made in such state” can include not just the location of the state where the originating bank is located, but also the location of the borrower who is taking out the loan. Therefore, Colorado can restrict the ability of out-of-state state-chartered banks from making loans to its citizens under the DIDMCA.
Phew!
With that background out of the way, here are a couple of takes on this specific fight and the broader issues of national preemption and so-called “rent-a-bank” partnership models:
- From a policy perspective, I think this is the correct decision. The whole point of a dual banking system is that each state gets to decide, for itself, what’s in the best interests of its citizens. Some (like Utah) may decide to prioritize the health and profitability of their state-chartered banks by setting interest rate caps high (or not setting explicit caps at all) and allowing them to compete aggressively across state lines. However, others (like Colorado) may decide that certain loan structures and terms are bad for their citizens and should not be allowed. As a matter of federal law, it doesn’t make sense to set the priorities of Utah over the priorities of Colorado. Congress included the opt-out in the DIDMCA for a reason.
- Interestingly, Colorado is actually not the most aggressive state when it comes to capping interest rates. Its caps (supervised loans under $1,000 range up to roughly 36%, and loans over $1,000 are generally capped around 21%) are middle-of-the-road compared to other states. Assuming the Supreme Court doesn’t get involved (unclear at this point), will some of those other states choose to opt out as well? Yes! In fact, the state legislatures in Oregon, Minnesota, and Rhode Island are all actively working on bills to do just that. Additionally, Florida, Maryland, and Washington have a history with true-lender or anti-evasion bills targeting this same general issue, so they could be candidates for DIDMCA opt-outs as well.
- Will these opt-outs actually keep “predatory” loans out of Colorado (and other states, if they follow Colorado’s lead)? Probably not! As others have astutely pointed out, the National Bank Act allows nationally chartered banks (supervised by the OCC) to export the interest rate caps of their home states and preempt the interest rate caps of the states where their customers are located. This national preemption power was confirmed by the Supreme Court case Marquette National Bank of Minneapolis v. First of Omaha Service Corp., which is why, in the decades since, many major consumer-lending banks — especially credit-card issuers — have located their national bank charters in permissive states like South Dakota or Delaware. Given that the window to get a national bank charter (either a de novo or converting from a state charter) is WIDE OPEN right now, I would expect that this decision will push more companies in that direction, and national banks will become bigger players in the fintech partnerships business.
- This is one of those issues where the Conference of State Bank Supervisors (CSBS) — the trade association-like entity that represents the state banking regulators — is between a rock and a hard place. It has generally been supportive of the rights of individual states to set their own usury and true-lender laws (and strongly opposed to the OCC overriding the states via its preemption powers). However, if this DIDMCA opt-out thing sticks, more states follow Colorado’s lead, and state-chartered banks convert to national charters, it would mean fewer institutions supervised by state regulators and less assessment revenue for state banking departments.
#2: Cash App, ShippingCopy anchor linkCopied
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In keeping with its new “ship constantly” philosophy, Cash App released a bunch of new stuff:
Cash App announced a slate of new features designed to match the ways millions of people manage their financial lives today. The first-ever Cash App Release, which marks the brand’s most significant product expansion-to-date, includes innovations across Cash App’s banking*, bitcoin**, commerce, and peer-to-peer offerings along with a first look at the future of AI and automation on the platform.
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Let’s quickly run through the most notable updates (and my Quick Takes):
- Cash App Green — a new version of Cash App’s banking benefits program (offering things like no in-network ATM fees, higher lending limits, overdraft coverage, better savings APY, weekly discounts, and priority phone support), which users can now qualify for by depositing at least $300/month *or* spending at least $500/month with Cash App Card and/or Cash App Pay. Quick Take: This seems aimed at Chime, which has made a big bet on capturing direct deposits by offering similar premium features. The (possible) downside for Cash App would be if payments volume ends up being a less predictive metric by which to measure (and reward) customer loyalty.
- Expansion of Cash App Borrow and a more integrated Afterpay — Borrow (Cash App’s small-dollar lending product) is now available to eligible customers in 48 states, and Afterpay BNPL features have now been embedded directly within the Cash App interface. Quick Take: The continued growth of Borrow is impressive, and Afterpay being embedded is a good step. However, it still feels like Block doesn’t have a cohesive strategy around Afterpay.
- Moneybot — an AI assistant, embedded within Cash App, that helps users navigate the app, surface account info, and get personalized insights on income, spending, and savings goals. Quick Take: Cash App appears to be (rightly) nervous about being disintermediated by ChatGPT and other standalone AI assistants.
And because Jack is Jack (and also, maybe, Satoshi Nakamoto?!?), there was also this very weird Bitcoin feature:
Using the Lightning Network, eligible customers can pay with bitcoin for free and in seconds on Cash App. Starting later this month, eligible customers will be able to select US Dollars as a currency option after scanning a Lightning QR Code, allowing them to make fast, low-cost payments using their Cash USD balance - without having to spend or hold actual bitcoin.
So … I can pay with bitcoin without ever buying bitcoin because when I pay with my regular dollars, Cash App will automatically convert those dollars into bitcoin before giving them to the merchant?
Yay, I guess?
Cash App is like that Uncle you have who is fun and non-judgmental and super helpful, but you have to endure his lectures about the virtues of decentralization over Thanksgiving dinner every year.
#3: Honor Some Cards?Copy anchor linkCopied
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Visa and Mastercard have proposed a new settlement with merchants:
Visa and Mastercard have proposed a settlement in their long-running legal dispute with merchants and retailers over how much they charge merchants to accept their cards.
The most important part of the settlement could directly impact how customers use their Visa- and Mastercard-issued credit cards, and may result in some consumers getting denied at the point-of-sale for purchases
Visa and Mastercard have been in litigation with a class-action group of merchants for nearly 20 years over the costs they impose on merchants to use their payment networks, known as interchange. A previous settlement was rejected by the judge overseeing the case last this year, requiring Visa and Mastercard’s lawyers to go back to the drawing board on the scope and size of the settlement.
The new part of the settlement announced Monday addresses the “honor all cards” rule, a cornerstone of how credit and debit cards work in the U.S.
The “honor all cards” rule states that if a merchant accepts Visa or Mastercard as a form of payment, they are required to accept all iterations of Visa and Mastercard products, regardless of who issues it and the cost to the merchant.
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The deal still needs to be accepted by the court, which isn’t a guarantee, given that the court rejected the last one (and all the big merchant trade associations aren’t happy with this new proposed settlement).
However, if it’s accepted, the end of the “honor all cards” rule could create some interesting questions.
Remember, credit cards come in many different flavors, ranging from standard to premium (e.g., Visa Signature, Visa Infinite, Mastercard World/World Elite). And they can be used in different ways (swiped vs. dipped, in-store vs. online), which present different risks to issuers. Each card type and usage pattern comes with different costs for merchants, which creates a lot of different permutations.
Consumers don’t know or care about any of that.
Shit, most merchants probably don’t either. They know that credit cards are more expensive to accept than debit cards (many consumers, on some level, understand this too). And they know that many of their customers prefer using credit cards to pay for stuff.
It’s risky, but operationally straightforward for a merchant to implement a blanket ban on all payment cards or even on credit cards, but not debit cards. You post a couple of signs, give your employees some basic training, and away you go.
By contrast, implementing a ban on specific credit cards or categories of credit cards (such as Visa Infinite and Mastercard World Elite) would be extremely difficult to operationalize. It would make employees’ day-to-day lives more difficult and awkward. And, most importantly, it would have the potential to piss off merchants’ most affluent and valuable customers (many of whom like and use premium rewards credit cards).
I could see someone like Walmart (which harbors a deep-seated, quasi-religious hatred of Visa and Mastercard) giving it a try, but your average merchant?
Probably not.
2 READING RECOMMENDATIONS
#1: The Ultrarich Are Spending a Fortune to Live in Extreme Privacy (The Wall Street Journal) 📚Copy anchor linkCopied
Both of today’s content recommendations are based on themes raised during last week’s magnificent Fintech Takes: Builders Summit.
This one, about privacy becoming a luxury good, echoes many of the themes given in Jane Barratt’s presentation on the future of the data economy.
#2: Are Young People Screwed? (by Derek Thompson) 📚Copy anchor linkCopied
This was a major theme in Frank Rotman’s presentation at the Builders Summit, which focused on the growth (especially among young people) of financial nihilism.
*Bonus: The End of the Back Office (by me, with BILL) 📚Copy anchor linkCopied
Small businesses don’t need faster workflows. They need fewer. AI isn’t only speeding up the back office for SMBs; it may eventually be erasing it. Here’s how “do it for you” software is pulling entrepreneurs out of their workflows and back to their craft. Read it here.
*this read is brought to you by one of our fantastic brand partners
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.
Assuming that national preemption via the DIDMCA is further weakened, what advantages (if any) would state-chartered banks have over national banks in partnering with fintech lenders?
If you have any thoughts on this question, reply to this email or DM me in the Fintech Takes Network!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
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