Fintech in Chains
johnhcochrane.blogspot.com
johnhcochrane.blogspot.com
> But fintech doesn't take deposits. The one central problem with banking is gone.
All banking regulations are due solely to the fact that banks take deposits? There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated? All financial crises are runs on deposits?
Pretty undeveloped and unconvincing reasoning. If you think for a few seconds it’s easy to imagine other situations that led to necessary regulations in banking.
Interesting question. I'm thinking he means more than just folks withdrawing their cash at the teller when he says "run". I found this:
https://johnhcochrane.blogspot.com/2014/04/toward-run-free-f...
"At its core, our financial crisis was a systemic run. The run started in the shadow banking system of overnight repurchase agreements, asset-backed securities, broker-dealer relationships, and investment banks. Arguably, it was about to spread to the large commercial banks when the Treasury Department and the Federal Reserve Board stepped in with a blanket debt guarantee and TARP (Troubled Asset Relief Program) recapitalization. But the basic economic structure of our financial crisis was the same as that of the panics and runs on demand deposits that we have seen many times before.
"The run defines the event as a crisis. People lost a lot of money in the 2000 tech stock bust. But there was no run, there was no crisis, and only a mild recession. Our financial system and economy could easily have handled the decline in home values and mortgage-backed security (MBS) values—which might also have been a lot smaller—had there not been a run.
Note how none of these things are consumer deposits. Fintech and shadow banking are two names for the same thing, and the same risk of runs and need for regulation applies.
Banking crises can come from any form of leverage. It doesn't matter what the original collateral is, whether it's deposits or private investment. All you need is for losses to exceed collateral at a large scale. In 2008, this came from a chain reaction, which is the main point of broad limits on leverage, and that risk absolutely applies to fintech.
> All banking regulations are due solely to the fact that banks take deposits? There is no other reason one could imagine for why banks, FinTech, or other financial services providers need to be regulated? All financial crises are runs on deposits?
FWIW, the way I interpreted this was “crises are caused by over-leveraged systems becoming insolvent”, which sounds less wacky.
Having worked in Financial Services for 20 years (both Banks and Fintech), and being aware any broad generalization is unfair, I can tell you a lot of the flack Banks get it’s due to regulations they would shed on a snap, while fin techs choose to skip them altogether.
Lending to unbanked, unprivileged minorities sounds great on The brochure and is hard to argue against. The part they leave out is the money they are lending belongs are the lifelong savings of a 80-year old couple snared on the promise of safe, 2% returns, and then tell them than most micro-loans defaulted and their lost their capital.
Rules are there for a reason. They are cumbersome, archaic and way too many, but If you remove them, consumers will end up hurt.
And the US Banking system is not a great benchmark as it is borked.
He boils it all down to crises, but that's not the sum total of what can go wrong with this kind of thing. Look at something that another kind of "fintech" has been doing for years: predatory lending via payday loans. Usury is real, and usurers prey upon those with the least financial literacy in stressful times when they are vulnerable. Credit cards and lines of credit similarly can be extended to people who may not realize truly what they're getting themselves into, or who may have no choice given their circumstances.
It is for these situations and these people that we need additional regulation in order to save people from terrible crushing debt.
How come non of the anti-payroll loan advocates ever propose a way to provide these customers with better loans?
Whether OCC specifically is well suited to do this work is more of an open question.
Yes! Ability to take deposits is pretty much the definition of a bank[0]. So, by definition, all banking regulations are due to banks' ability to take deposits.
There are other financial regulations that apply to wider ranges of financial businesses (e.g. those related to detecting and preventing money laundering), but these are not specific to banks. Given that they apply to businesses that aren't banks, they can't be considered 'banking regulations'.
[0] I'm not from the US, so this UK reference was easier to find than a US equivalent: https://www.bankofengland.co.uk/statistics/data-collection/i... If you want a list of banks in the UK, you will look at the Monetary Financial Institutions (MFI) list, which lists 'all banks and building societies who have permission to accept deposits in the UK.'
Financial regulation is a giant headache here and in many of the countries we've worked in. Looser regulation should be beneficial to most consumers. But what about consumers or businesses that sign themselves into bad deals or get purposefully taken advantage of? Which is really the heart of a lot of politics, how much do we protect people from their own poor choices.
Protecting the stability of the banking system, which is inherently unstable (borrowing short, lending long) is a requirement for defending the value of a nation's currency and national debt.
Protecting consumers from predatory financial practices is not the same sort of regulatory requirement and shouldn't be regulated by the same people.
The CFPB is similar to the FDA, it protects consumers from predatory producers. That's completely different to the Fed/OCC protecting the banking system.
For the OCC to say that part of their scope is "providing fair access to financial services" is regulatory overreach and scope creep. There's a reason they're called the Comptroller of the Currency.
Consumers do things not in their own best interest all the time. Think MLMs, rent-to-own appliances and furniture, upside down leases, etc.
For me the point of regulation is when some of these fintech companies start to hold deposits, which some of them represent themselves as doing even though the actual account is with a traditional institution. The consumer doesn’t necessarily know that though.
It’s sort of like regulating hotdog stands that are everywhere at once. There has to be something keeping those hot dog stands clean and the steam trays warm and full, and it apparently isn’t the operator’s good manners and sense of fair play.
But every coin has its flipside. Consumer protection many of these regulations also include consumer protection. This is what most people I discuss this with forget....
Does the same entity that handles all other consumer protection not work in this case? Why, what makes it unique?
I don't see it as any different than the mortgage brokers of the 2008's: stripping fees off transactions with ZERO value add to the consumer...
If you want to really fix things start with the national market system. At this point between dark pools, HFT and non-public company markets it is an unqualified effing disaster from both a price discovery and accessibility perspective.
#justsayin
Prior to fintechs getting into the remittance space, fees were as much as 20% on average of transactions.
Prior to microfinance institutions and then true fintechs such as Tala, Branch, GoPay, Ant, etc. there were 10 of millions of merchants who could get no access to credit.
Prior to fintechs, you needed to physically go to a bank to become eligible for a loan and fill out paper forms. This may not seem like a high barrier to you.
Short of it is, heavy regulation leads to: * High compliance costs * Low appetite for risk * Slow to little innovation
There are regulations that don't make sense for small merchants: Anti-money laundering laws for instance which are generally good, but impose a completely undue burden on merchants that want to borrow $500.
Or a risk modeling team at a bank that has dozens of staff may make sense cost-wise for loans of $100k+, but they don't make sense for < $10k loans and their risk models also don't work at those levels.
This also isn't just Silicon Valley. It's a common problem in most countries of the world, speaking from experience.
The explosion of online shops made possible by companies like Stripe enabling secure credit card processing without imposing PCI DSS compliance on small businesses would disagree with you on whether there’s value to the consumer. If nothing else, greater variety of shops available means greater choice, which is generally considered good for the consumer.
Or PayPal, which allows the unbanked population to load funds to a widely-accepted online wallet and actually participate in online marketplaces, which they might otherwise be unable to do.
Or Affirm, which provides on-demand credit to consumers and lets them amortize large one-time costs over a few months, enabling them to afford, e.g., tuition when they otherwise might not be able to. (Tuition is maybe a bad example since most universities already offer tuition financing options; but online education services frequently don’t)
One of the most annoying issues I have with the Fed and the OCC are the denial of charters for narrow banks to prevent competition against legacy banks. I am very pro consumer finance regulation but very anti regulatory capture enabling regulation. You can, in a very straightforward way, protect consumers from predatory financial business practices while supporting financial innovation (which, at this point, is cannibalization of inefficient banking goliaths and necessary evolutionary pressure).
Most definitely, remove the chains from innovators and let them build more efficient platforms for their customers on open protocols and existing derisked primitives.
In the absence of regulation, the incentives for management would be to invest customer deposits in high-yield, and therefore high risk and/or illiquid, assets. Customers need to be protected against losing their deposits because management invested everything in junk bonds or real estate.
There's also the risk of embezzlement to consider. Non-bank accounting controls might not be adequate to protect large volumes of consumer deposits from theft.
The fragility of (unregulated) cryptocurrency exchanges paints a very clear picture of what would happen if deposit-only institutions were allowed to operate without any supervision.
Disclosure: I work in financial infrastructure. Thoughts, opinions, and rants are my own.
- money transfers within seconds, rather than day(s)
- wire fees measured in pennies or dimes, rather than double digit dollars
This is higher risk - what if the money transfer was part of a scam/fraud or criminal activity? The bank might be liable in these cases. At best, the convenience comes at the cost of (hidden) higher risk for both sender and receiver.
I think this article gives a better understanding of what’s actually happening: https://www.kilpatricktownsend.com/Blog/fintech/2020/8/Banki...
In brief, if you want to set up a fintech company now, you may need to comply with 50 states laws. That isn’t just being basically law-abiding, but involves serious compliance work. I started looking up licenses for Square as an example and got bored after the first few as state web sites are all different and inconvenient:
https://dbo.ca.gov/2018/04/02/square-inc/
https://www.dob.texas.gov/entity-search/entity-detail?bid=10...
http://www.dora.state.co.us/pls/real/BIDS_Search.Individual_...
Each of those, and also for all the other states, involved satisfying a state agency that Square was adequately solvent and would comply with a host of laws. You may notice that the first two have license numbers and the numbers are small. That says something about how easy it is to get the licenses. This is a meaningful part of these companies’ moats.
The OCC action that New York is challenging is to provide a federal alternative structure in which companies would get one federal license and receive nationwide permission to engage in a host of banking-like activities. They would still be able to get state licenses instead, if they wanted. This system (of picking between a state and federal regulator) is called dual chartering and has existed in the banking industry for a long time; it establishes a check on both state and federal regulators by allowing the regulated entity to switch to an alternative regulator.
Classical money transfer companies like Western Union don't hold money very long, days at most. But PayPal, Venmo, etc. do.
This is true. But PayPal's terms say that customer money is ringfenced: "These pooled amounts are held apart from PayPal’s corporate funds, and PayPal will neither use these funds for its operating expenses or any other corporate purposes"
> There's no deposit insurance.
This is not exactly true. As I understand it, some PayPal USD balances have FDIC insurance because the funds are stored at Wells Fargo in the customer's name: "If you have a PayPal Cash Card debit card as part of a Cash Account, have enrolled in Direct Deposit, or have established Goals in PayPal, such funds will have pass-through FDIC insurance as further detailed in the PayPal Cash and PayPal Cash Plus Account Terms and Conditions."
Should the US say, start a literal war with Russia because Schulman stole $20M? You could say "economic sanctions", but what economic sanctions hasn't Congress already enacted against Russia?
There are a lot of countries that don't have extradition treaties with the United State, and many more than that which don't mind seeing American customers ripped off.
> For banking there is a reason for regulation, and it is precisely deposits. Deposits are open to runs.
I don't agree that this is the sole reason for banking regulation. For instance, Glass–Steagall was not a regulation designed to prevent "runs."
Glass-Steagall prevented many of the activities that led to bank runs, and its passage greatly increased the safety of a saver’s deposits.
This should be a pretty reliable source: https://fas.org/sgp/crs/misc/R44349.pdf
> Banks had a habit of losing money on the investment side, which was commingled with deposits side
Not the bank runs themselves.
What Glass-Steagall did[0] was separate the investments from the deposits, thereby eliminating one of the ways a commercial bank could lose capital.
My apologies if my use of the word “commingled” caused any ambiguity. For anybody who has ever worked on Wall Street or in investments, rumors run like the Mississippi during a spring flood through the community. Those same rumors can take down an investment house (e.g. Bear Stevens with the repo rumors) or a pre-Glass-Steagall bank. Hence the importance of eliminating the source of those rumors and the accompanying bank runs.
[0] The law did more than that of course. I’m merely showing one key piece of it.
For most of history the reason to do illegal things was because it was profitable but I have personally witnessed self described "fintech" companies do illegal (or at the very least questionably legal) things that anyone with a brain would say "wait, that will clearly lose more money than it makes"
Of course the trouble is that no regulatory bodies can actually enforce the majority of the regulations they are supposed to. If the government had the staff to enforce the regulations they are responsible for half of the CEOs doing fintech work would be in prison.
"bubble" doesn't even come close to describing the situation we're in.
(not affiliated with stripe, just a happy customer)
What do you think is happening? How are consumers getting screwed?
No, why would it? Convenience and cost are two completely separate things.
This is especially relevant if "I" am a small business rather than an individual. Then the person whose time is saved can do something else with the time that can make money for the business. Or the business can run with fewer people, which saves money.
Many HN readers run or work for businesses that take these kinds of risks (with money from VC funds). But those businesses (along with fintech companies) are different from banks: banks can take retail deposits.
If a bank fails then, in the absence of a government-run deposit guarantee scheme, regular people can lose their entire life savings.
If a business other than a bank fails, it's unlikely anyone other than the owner(s) will lose a large percentage of their wealth.
But if you have someone who is able to understand the risks, fully informed of what they are, and invests for a payback that is proportional to the risk... I don't see a problem with letting them do so. Just don't make the little guy take that risk, especially when he doesn't know he's doing so.
If a city burned down because all firefighters were drunk, noone would be arguing that we don't need firefighters.
Those have a word, don't they?
https://satwcomic.com/how-the-north-works
https://soulofsweden-blog.tumblr.com/post/47742341547
Roughly, Scandinavian refers to mainland Europeans who speak a language derived from Norse. Scandinavians are the majority in Denmark, Sweden, and Norway, so those are Scandinavian countries, and a minority in Finland, so that is not. Tove Jansson, Linus Torvalds, and Michael Widenius are all Finnish Scandinavians, apparently.
Nordtech sounds right, though. I imagine that various places have already been dubbed Silicon Fjord, Silicon Sauna, etc.
That would only happen if fintech didn't change their behavior in response to such a tax. I do not find that to be a reasonable assumption.
Your claim is of a piece with claims that raising the minimum wage would destroy jobs, and people on minimum wage would be out of work. Guess what, we tried it anyway, jobs didn't vanish at all, poor people have more money to spend on necessities, and everyone is better off.
US Financial Sector profits: $422 billion
>It would still be worth conducting fintechy business. It would barely affect bonuses.
It is absurd and blatantly false to claim the entire burden of the U.S. healthcare system could be placed on a single industry with little effect.