Trust vs. Data
Happy Monday, Fintech Takers!
My family and I have now seen the new Superman movie and the new Fantastic Four movie in theaters, and … I gotta say … they were excellent.
Not perfect. They were silly and (at times) somewhat confusing, but, like, that’s comic book movies! The whole point is for them to be somewhat goofy and to occasionally strain credulity. That’s the price of admission.
What comic book movies have been lacking, in recent years, is a strong aesthetic. A vibe. Comic books feature bright colors and visually stunning settings. And yet, many comic book movies in recent years have looked and felt drab and lifeless (Zack Snyder had his fingerprints all over this trend). They have been too realistic.
That’s what made Superman and Fantastic Four so enjoyable. Great casting + bright color palettes and fun-looking sets = a strong comic book movie.
When in doubt, keep it simple.
- Alex
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Land Title and Trust Building with Addition, Philadelphia, Pennsylvania by D.H. Burnham & Co.
3 FINTECH NEWS STORIES
#1: To a Woman With a Hammer… Copy anchor linkCopied
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The fight between JPMorgan Chase and the data aggregators over open banking continues.
Melissa Feldsher, Head of Consumer Payments for Chase, recently published an op-ed outlining the bank’s reasoning for introducing fees:
As innovation has shifted the landscape of digital banking, Chase has continuously partnered with data aggregators because we understand the importance of secure and robust data-sharing that supports consumer experiences. We’ve made significant direct investment in building and maintaining an industry-leading data sharing tool that safeguards our customers’ privacy while ensuring seamless access to their favorite services. It allows consumers to control what they share, with whom, and for how long.
But for nearly a decade – as we’ve heavily invested in building a Secure API, the pipes that data aggregators use to securely access customer-permissioned data – these aggregators have, in turn, built businesses off of our data infrastructure investments while charging others – fintechs, financial apps, and even other banks – to use the system that they access for free.
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The challenge in trying to analyze JPMC’s decision to charge fees for access to its open banking APIs is that the bank isn’t trying to solve just one problem with the fees. It’s trying to solve multiple problems at the same time.
It’s like if you were building a deck and just as you were about to hammer in a nail, a big bug crawled up next to the nail. The best thing to do would be to hit the nail with a moderate amount of well-directed force, and then, separately, to hit the bug or shoo it away (depending on your personal preferences).
That would be the logical move.
The more emotional (though certainly understandable) move would be to yell, “arrrgghhhhhhh!!!!” and swing that hammer as hard as you can at both the nail and the bug.
It’s very reasonable for banks to want to recoup the costs of standing up and operating open banking APIs, which is something that JPMC (and other banks) have been arguing for a while. In fact, the more I’ve thought about it, the more convinced I’ve become that the CFPB erred in not allowing data providers to charge a modest cost-recovery fee under its final rule. I know it would have been tricky for the bureau to do that (and unpopular with fintech companies and data aggregators), but evidence from other countries that have implemented regulated open banking suggests that the fee-free model doesn’t work particularly well.
(Editor’s Note — Despite what you may have read in other publications, the CFPB’s final Personal Financial Data Rights rule does not allow data providers to charge aggregators or authorized third parties fees, no matter how reasonable they are.)
However, the bug crawling up next to the nail in this analogy is secondary use. JPMC clearly believes that data aggregators and fintech companies are misusing its data in ways not authorized by its customers:
This free access has led to excessive data pulls by aggregators, putting consumer data at risk and undermining the security and trust we strive to maintain. In fact, monthly API calls to Chase's secure platform by aggregators have more than doubled in just the last two years to nearly 2 billion – that’s a jump of over 1 billion more calls per month.
For roughly 90% of our data pulls, there is no customer actively requesting the data, which highlights a critical issue: consumers are not fully aware of how – and how often – their data is being accessed and used. This also raises the question: why do the data middlemen need to pull this frequently? And what are they doing with this excessive amount of data?
If we want secure data practices for consumers, we need data middlemen to treat customer data – and access to that data – responsibly. Imagine a customer who downloads a budgeting app to get a better handle on their finances. After a few weeks, they stop using the app. What they may not realize is that the connection lives on – often even if they have deleted the app from their phone – and data middlemen continue to pull their banking data in the background, typically every single day, to build their products and services.
A study by The Clearinghouse shows that 78% of consumers didn’t know that data brokers regularly access personal data even when the app is closed and deleted. That's why we've decided to disincentivize overuse and push for aggregators to share the cost to maintain this security infrastructure. This will help ensure data middlemen are accessing customer data only when necessary and the data-sharing infrastructure that aggregators rely on remains secure and robust.
This is a difficult one to parse from the outside.
I would guess that there is some truth to the bank’s argument that fintech companies and data aggregators have been accessing more data than necessary to fulfill the tasks that consumers authorized them to perform. And some of that data has undoubtedly been used to develop new products and services that don’t directly benefit the consumers who supplied it.
However, it’s also likely that many of the batch data pulls that occur without the customer's active involvement are legitimate and easily explainable. For example, I can say from personal experience that many PFM apps, such as Rocket Money, will proactively notify you of upcoming expenses (like subscriptions), which requires the app to access customers’ bank transaction data passively in the background. Just because the customer isn’t actively logged into an app doesn’t mean that the app is misusing its access to their data.
More broadly, if JPMorgan Chase is concerned about inappropriate secondary use, perhaps it shouldn’t have sued the CFPB (through the Bank Policy Institute) over the rule, which went to great lengths to heavily restrict secondary use (over the objections of fintech companies and data aggregators).
JPMC likely didn’t expect Russell Vought to try to toss out the rule altogether in response to the lawsuit, but that’s a bit like me saying that I didn’t mean to smash my finger when I swung at both the nail and the bug. It wasn’t what I intended, but I probably shouldn’t have tried to solve multiple problems with one swing.
#2: Trust vs. DataCopy anchor linkCopied
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SOLO is launching a customer data clearinghouse:
Financial data collection and reporting startup Solo is launching a bank-led consumer data sharing network, founder Georgina Merhom tells Axios exclusively.
Solo's customer data clearinghouse allows financial institutions to securely share consumer-consented identity, financial, compliance and contextual data.
Institutions verifying customer data can charge third parties for its reuse.
The system taps into banks' internal files, customer-uploaded documents, partner banks on the network, and third-party APIs.
Data includes verified identity and income documents, real-time account details and compliance records.
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Coming on the heels of JPMorgan Chase’s decision to charge aggregators for access to their customers’ data, this consortium approach from SOLO is fascinating.
The company’s founder, Georgina Merhom, agrees that banks like JPMC should be compensated for the data that they provide:
"Banks are stepping up to say, 'We incur the costs. Why should third parties set the price?'" Merhom says.
However, in a statement introducing SOLO’s customer data clearinghouse, Merhom frames the argument in a much more compelling way:
Customer data isn’t the asset. Institutional trust is. And trust, by definition, cannot be solely owned by anyone. It has to be shared, verified, and recognized by others.
This is an argument I can get behind.
Open banking focuses on consumers’ transactional data, which is always going to be a contentious area. One could argue that raw bank transaction data isn’t, by itself, all that valuable. It’s the ‘exhaust’ that comes out of banks’ primary product (the deposit account), and it requires significant cleaning and categorization before it becomes useful. That’s why it’s tricky to figure out who should get paid in open banking and how much.
On the other hand, verified underwriting data on consumers and businesses is quite valuable. Banks go to great lengths to verify information about prospective customers, especially for larger or more complex loans, such as mortgages and small business loans. It makes perfect sense to me to create the infrastructure that allows banks to save, reuse, and monetize those data assets.
This model is actually much more similar to the traditional credit bureaus — a common infrastructure for collaboratively sharing verified customer data for loan underwriting — but with more aligned economic incentives and more granular customer permissioning.
#3: Come On, Man!Copy anchor linkCopied
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More “reporting” from the Wall Street Journal on the BNPL industry:
Banks don’t want you bingeing on “buy now, pay later” plans, and they say it might actually hurt your chances of getting approved for a mortgage or credit card.
Some of the popular point-of-sale loans from companies such as Affirm and Klarna will be factored into credit scores later this year when FICO rolls out its new scoring model. Using a loan to pay for a couch or a pair of pants in installments might improve your score if you keep up with payments, according to Fair Isaac Corp., the company behind the most widely used U.S. credit score.
Lenders are more wary.
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The title of this article — “Banks Hate ‘Buy Now, Pay Later’—and May Penalize Its Users” — is terrible and deeply misleading. And the article itself isn’t much better.
The WSJ’s evidence that banks “hate” BNPL is the fact that JPMorgan Chase and Capital One do not allow their customers to use their credit cards to pay off BNPL loans (this development is not new nor is it indicative of banks’ overall feelings about BNPL … it’s just common sense) and interviews with one community bank and one credit union about BNPL.
Two interviews!
And the financial institutions that were interviewed don’t sound terribly sophisticated when it comes to the topic of digital lending.
Here’s the first one:
“[BNPL use] would definitely be a red flag that you would look into,” said Gay Dempsey, chief executive of Tennessee-based Bank of Lincoln County. She said all loan applications are reviewed manually at her bank, and heavy BNPL use “would not factor in positively.”
And here’s the second one:
At Michigan Legacy Credit Union, where more customers have been using BNPL, staff scans transaction data for names such as Klarna and Affirm, because BNPL data isn’t yet widely reported in credit reports. If they see frequent BNPL usage in a member’s account, they call to counsel them against it.
“We do view that as risky,” [the CEO] said. “My concern is that when you go through anything automated like that, you do not get that personal financial coaching experience.”
You can’t claim that banks “hate” BNPL and may be penalizing users for it when your only sources are a bank and credit union that don’t believe in the concept of automated credit underwriting.
Come on, man!
The truth is that your average bank doesn’t hate BNPL any more than any other fintech product, and banks, as a group, aren’t penalizing their customers for using BNPL because they don’t (yet) know enough about how their customers are using it.
Until that meaningfully changes, the Wall Street Journal should stop publishing articles like this.
2 READING RECOMMENDATIONS
#1: JP Morgan Repeats History And Breaks From The Pack On Data Access (by Scott Harkey, Forbes) 📚Copy anchor linkCopied
A wonderfully nuanced take from Scott (who should publish his thoughts more frequently!!)
#2: Millions Stolen, Death Threats: Should Banks Do More to Fight ‘Pig Butchering’? (by Dylan Tokar, Wall Street Journal 📚Copy anchor linkCopied
Yes. Yes, they should.
(This is a devastating and important story. Please take some time to read 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.
What drives companies in financial services to embrace interoperability over closed-loop networks? Closed-loop networks are more valuable for the companies that operate them, and yet, I’m seeing an increased trend in financial services lately towards interoperability. What could be behind that trend?
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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(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
