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Comment by lifeisstillgood | Hacker News Reader

There is a vast gulf between "finance company" and "regulated bank".

The levels of regulation is huge, and basically culture changing.

Coinbase is basically trying to avoid becoming a bank. If it finds it have to then, hey great more competition, but really I think the idea that "startup attitude" will be allowed by regulators or (because regulators basically follow what society has decided it wants from its banks over decades of scandals and abuse) what the market actually wants

As an example, there are loads of (US) fintech startups that let you store some money and pay at a shop. Because these are not banks and debit cards, they charge the customer nothing but can scalp the merchant who can do nothing. The fintechs are just playing regulatory arbitrage. It might end soon in which case dozens will drop out and the biggest get bought by real banks for their brand name and cool factor.

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This isn't really true. In the US, if someone is "letting you store money", and it's real, actual money, the deposit has to be held at a bank or a credit union. Thus, the way many fintechs work right now is that they have a partner bank, which holds the bank charter, that keeps FDIC insured deposits.

Down the road, though, I think you'll see some big fintechs buy up one of the many small, regional banks just to get their bank charter. Most of the underlying tech at a bank runs on a "Core Banking" system from one of a couple of players (FIS, Fiserv, etc), but down the road I could easily see more modern core banking tech come out from a fintech so they could then control everything from backend to frontend experience and take all of the profits.

Oh wow, ok, for curiosity, when I have a Shell Gas Gift Card, or balance in Starbucks app, or walmart or dominos gift card, somehow that money is being held in a real bank? Just asking.

Gift card balances do not have to be held by a bank. If it were held by a bank you’d need to provide ID for purchasing one and there would be more regulation around _gifting_ them. You can’t just _give_ someone a bank account.

However, balances held by PayPal or Venmo? Yeah those are backed by a bank.

you may find this useful: https://whyisthisinteresting.substack.com/p/the-gift-card-ec...

Yes and no. In your examples, there card has been sold by an individual merchant and there is not an individual account at a bank for your gift card. There is certainly money in Shell's bank, and a liability on Shell's balance sheet labelled "unused gift cards". If Shell were to go bankrupt, it would be quite difficult for you to recover the gift card balance.

On the other hand, there are "universal gift cards" that work as a debit card and can be used anywhere (that supports that type of debit card). These would require a bank to hold the balance; when the card is used the money would go from that bank to the merchant's bank.

The term is "brokered deposits" -- Starbucks has a bank backing the app (not sure they publicize which one). But the bank doesn't declare those deposits under their control, can't loan it out, etc.

If they buy up the bank charter, doesn't that mean the whole company then becomes regulated like a bank charter? Wouldn't it make more sense to just continue using their services?

> If they buy up the bank charter, doesn't that mean the whole company then becomes regulated like a bank charter? Wouldn't it make more sense to just continue using their services?

It likely would remain its own entity, similar to how banking and credit services are provided by different subsidiaries at places like Capital One.

Well, the point is, right now, when a fintech partners with a bank, they still have to go through an extensive due diligence process and conform to all the regulations that are relevant to them because the bank is still on the hook from a regulatory viewpoint.

For example, let's say you're a fintech like Chime, which partners with The Bancorp Bank and Stride Bank to actually store deposits. When you open an account at Chime, Chime is responsible for just as much required KYC (Know Your Customer regulations) for account holders as if you opened directly with a bank. The partner banks demand periodic audits of the KYC processes because if anything is deficient, it's the bank's charter that is on the line.

For exactly this reason, US financial regulators recognize Bank Holding Company (BHC) as a separate category from chartered banks. BHCs are subject to a more limited form of the examination banks receive, in order to ensure that they are not in danger of going insolvent (leading to the insolvency of their bank subsidiary). But the examination for BHCs is nonetheless much lighterweight.

Interestingly, all BHCs are regulated by the Federal Reserve (which is not true of banks proper, which may "choose" their regulator within certain limits from the FRS, OCC, and FDIC, occasionally others). There are some advantages that come from the FRS's approach to BHCs, including better access to FRS lending. As a result, many "banks" today, in terms of consumer branding, are actually BHCs that do all of their actual banking (depository financial institution/DFI) within a subsidiary.

"Bancorp" is a somewhat informal term for BHCs, so "banks" with bancorp in the name are often (but not always, the term has older uses) actually BHCs.

So I should have been clear - afaik the fintechs are "banks" but as "small banks" are regulated more lightly. One such issue is the amount they can charge the merchant in a debit card transaction. There in lies the arbitrage.

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