Community Banking and Fintech | Hacker News Reader

Community Banking and Fintech

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120 pointsOzzie_osman42 comments

> Community banks mostly don’t have programmers on staff, and are reliant on the so-called “core processors” like Fiserv, Jack Henry & Associates and Fidelity National Information Services. These companies specialize in extremely expensive SaaS that their customers literally can't operate without.

The complexity in this space is difficult to overstate. We've been working on building solutions that integrate all of the disparate legacy banking technology into 1 logical application the bankers can use. Been going at this for almost a decade now.

Success in this space is extremely unlikely. We failed ~4 times but were encouraged by how close we got on that 4th try to give it a final go. Seems we have some traction this time. Watching other vendors (with far more resources than us) try to break into this space is quite amusing at this point.

The key to winning in banking with technology is to listen to the business. There is a LOT of contradictory bullshit in banking, and if you just use your developer intuition to build the domain model in isolation, you will fail as soon as the business gets involved. Outsourcing development of these integration products to a 3rd party is a guaranteed fail when working with these kinds of customers.

Expert mode is building a product that can work at 3+ banks at the same time. Darksouls mode is building one that can handle more than 5 jurisdictions.

Are you building a product that competes with these core processors? Or are you building a complimentary product?

As a software developer with a degree in finance, I'm always interested in the new projects out there.

Yes, would like to hear more details from bob1029.

We are starting with the 2nd thing - a complementary product that wraps the core (among other things) with a better UI/UX.

We have sarcastically remarked about writing our own core after struggling with the APIs for the existing vendors. This is becoming a more serious proposition with each passing week.

You mention Fiserv, Jack Henry, Fidelity, but not Thought Machine. Care to share why?

https://thoughtmachine.net/building-a-bank

Is there a way to know which CBs or CUs use which processors?

We have been accumulating a database of this information since the 90s. Not aware of any public sources out there.

We are looking to eventually cover all the core processors.

Let me know if there's any way to contact you about this! I'm quite curious from an academic perspective and would love to hear your thoughts (even if it's just a brief phone call or email)!

While Patrick is right that community banks have provided an important role in the explosion of fintech in the United States over the last 10 years, that role is unique to a small subset (~100) of community banks that have become heavily involved in Banking-as-a-Service (BaaS).

The other 9,900 community banks and credit unions largely continue to operate with vanilla retail and/or business banking models. I'm biased, but the importance of these financial institutions cannot be understated to the success of the American economy. Obviously a homogenous credit underwriting and decisioning process is a negative for society. While some do heavily rely upon the traditional credit bureaus in their decisioning, many do not. Access to responsible credit is one of the best ways to lift a group of individuals and/or businesses up. There is no surprise then that these organizations receive bi-partisan support.

As @patio11 points out this long tail often best serves their communities. There are a lot of reasons, but these are not purely because they happen to serve a specific geographic area or because they use different underwriting methods. Credit unions especially tend to be extremely diverse. For example, the majority of credit union CEOs are women[0].

I highly recommend supporting these community banks and credit unions by moving your loans and deposits to them. If you need a recommendation for one that has better digital experiences, please feel free to reach out to me.

[0] https://news.cuna.org/articles/119415-cuna-study-finds-51-of...

> Obviously a homogenous credit underwriting and decisioning process is a negative for society.

No, this is not obvious at all. Given a fixed risk tolerance (or risk/payoff curve), you can only do certain amount of lending, so either you lend to the best prospects ("fairly", in some abstract sense), or you lend less efficiently and give less overall social benefit (but direct the social benefit to some particular subgroup). Having a bunch of different ways of assessing credit just ends up as a time tax that forces people on the margin to apply a bunch of different times, which ultimately benefits no-one.

Where I live there's a single standard formula that every lender uses, which seems a lot more efficient.

You're describing a system in which the subgroups that have been historically advantaged remain those with ongoing access to capital.

The more opaque and subjective a system is, the more it will favour advantaged groups (principally those of high social class) - in my experience this is especially true of systems that are nominally intended to help historically disadvantaged groups (which tend to benefit high-class members of those groups). Objective standards, consistently applied and enforced, are disadvantaged peoples' strongest weapon against discrimination.

"The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread."

The only way to equalize the playing field between someone with access to capital and someone without access to capital is to redistribute it from those with the capital to those without.

Any other solution will just result in inflation or some other problem. If the root cause is not addresses, then the problem will persist (as reality shows).

If you only promote the standard formula winners, you risk failing to find the losers that can be eventually better when given the chance.

In other words, if the formula isn't perfect, it isn't good to apply it strictly. Some randomization of the low end threshold / lottery for the losers seems to be a good idea.

> Obviously a homogenous credit underwriting and decisioning process is a negative for society.

I think you will find that many community banks and credit unions still use the same ~2 vendors for id verification checks and credit history. That said, you are much more likely to be able to negotiate around an adverse finding at a smaller institution.

If HN has any requests for future topics in intersection of tech and finance, let me know. (I just kicked off this newsletter last Friday.)

Just going to say this was a great read (I'm working on something in the fintech space). I originally submitted it and was surprised it didn't make the HN front page, but happy to see it got a chance from the second-chance pool!

This was a super interesting and digestible read. I especially liked the angle of how public policy influences trends in fintech. I'd love to learn more from examples over the past few decades.

My interest in the large companies could be summarised by saying that it seems that after the GFC, Goldman had their balls cut off by the US government, and the question is what they do to work around the regulations and how other companies filled the gaps (and what those gaps were/are). It seems to me that Goldman’s push to retail is less motivated by magic massively large edge and more by the fact that they can’t do the trades they used to do (though maybe Goldman is a particularly bad example here and a more traditional IB+retail bank would be better to talk about).

I’m sure there are lots of quirky things going on in the US financial infra but I think I just don’t know what they are. A simple question is what actually happens when money is wired (internationally) and how does that line up with the legal and intuitive concepts of owning the money, but I don’t know if that is actually an interesting question.

I think it would be fascinating to take a deep dive into transaction settlement, especially in securities markets.

would be interesting to hear about the 'big unsolved problems' in fintech as of 2021.

HN readers might care to know that this newsletter comes recommend by HN-favorite Matt Levine: https://twitter.com/matt_levine/status/1451586620872867842

And was written by HN mini-deity patio11. He’s been quiet for a while but has added enormous value in the past.

https://news.ycombinator.com/user?id=patio11

Maybe how international wires work and on what ways providers like Wise or CurrencyCloud are different

Maybe European banking API standards vs Plaid?

Different banking charters, like ILCs. Maybe talking about what tech startups are doing which license?

OnlyFans and banking issues, especially what their CEO said blaming a bank for not processing their wires (iirc)

You’ve tweeted before about a future where tech companies enable a “bank for Beyoncé fans” and such. Maybe that? (I am still skeptical of this)

Maybe different ways tech companies comply with laws vs traditional banks? How much is it taking on extra risk vs improved KYC tech and such?

This is probably a challenge unless you're in the industry, but I'm curious about how the specific details of a payment for order flow arrangement works. How does a brokerage choose which provider they route an order to (since they have relationships with multiple)? Does a provider have to execute an order if it is routed to them? Etc.

Origin of SWIFT. Not the official version, but an actual history.

Couple ideas:

1) what happens when I transfer money to someone in another country (eg SWIFT).

2) if you had to design a business model for financial institions from scratch, that was aligned with customers, what would it look like?

Good article. My wife and I use two local credit union banks. It feels good to do so and also diversifying is a good idea. I applied to be a director in one of them, but didn’t get the position. Someone wise once said to know your local banker, your county sheriff, and if possible local food growers. Maybe I take diversification and preferring local businesses too far, but it just seems like the right thing to do.

I’m wondering if postal banking in other countries serves a similar role to community banking in the US, at least as far as having local branches in rural areas is concerned?

The US Post Office is starting a pilot program, but it’s unclear if it will get anywhere.

You have more info about the pilot program?

https://prospect.org/economy/usps-begins-postal-banking-pilo...

They will need to significantly lower fees and expand services if their ambition is greater than competing with check-cashing outfits.

Australia Post (which is owned by the Australian government but operated mostly independently) does this.

https://auspost.com.au/money-insurance/banking-and-payments/...

Historically the US Post office used to do this too

Indian Postal Service provides a variety of financial savings schemes.

https://www.indiapost.gov.in/Financial/pages/content/post-of...

Time to stop pandering to the exurb-barfing petit bougieoisie and do Fed Reserve accounts at the Post Office.

Lending can still be franchised out, but there's nothing interesting about running a big RMDBS that it shouldn't be a state monopoly.

As far as analytics go, there is no reason we can't simply have interfaces to plug your fed account data into whatever 3rd party service one likes.

The Biden administration’s OCC nominee agrees with you, so hopefully they’ll get some traction.

Yeah, quite stoked about her. She's not being nominated to a position to make it happen, but it's a great reason for excitement nonetheless.

>Lending can still be franchised out, but there's nothing interesting about running a big RMDBS that it shouldn't be a state monopoly

I don't want the government to own all banking. The government would know even more about our transactions. They already have a massive amount of information when it comes to banking, let's not give them everything.

The government at least has some accountability - FOIA, anti-discrimination laws, and the like. Better them than the likes of Experian.

Then you should look up https://mronline.org/2021/07/01/digital-money-beyond-blockch....

Putting our transaction data in a gazillion different RMDBs run by private companies looking to curry favor with law enforcement is no solution. In fact, State accounts are better because the Federal Reserve has far less reason to give a fuck what the goons in the FBI think.

But if you really want privacy, than any sort of money as persistent-account-balances is a red flag, and you want something like that instead.

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