Edit: Apparently Mercury was using Evolve as their banking partner. I know this is super common w/ online neobanks, but I'm really confused as to why they always choose the most random obscure bank. Why not partner with a major bank, or Column?
Since then, every fintech has had essentially the same business model:
- Come up with some kind of "innovative" thing to sell consumers on that results in them generating debit card transactions. (Online bank account, instant international money transfer, loan, etc.) - the trick is that to get the money, you swipe that debit card.
- Partner with some small bank so that they are one the one providing the debit card. The law essentially has a loophole on it allowing this.
- The fintech company sets up essentially everything, with all the small bank does is have automated accounts created for cardholders when the fintech's software says so. No money is kept in the customer account until the moment of that debit card swipe - then it is instantly transferred in and instantly transferred back out for the payment.
- This requires reserves, but the fintechs and small banks collaborate on how to get good interest on the reserves involved.
There are now fintechs which offer "fintech as a service" which will set all of this up for a tiny bank who can then offer this to any other fintech with almost no involvement from the tiny bank. All they have to do is sign a few papers.
The definition of a big or small bank is based on the amount on deposit, so they are careful to not actually have any money on deposit.
Congress needs to correct this abuse, immediately, and only allow the larger debit card fees for traditional checking accounts held by consumers where the money involved is held on deposit at that bank.
Edit: one of the major problems here is that small banks are often not staffed for adequate cybersecurity for global operations like these; they do just fine doing hometown community banking, but are very vulnerable to being cracked like this. Yet another reason small banks that are providing big-bank services should be regulated like big banks.
Why are regulators still attacking stablecoins, for example, when they represent one type of innovation that could actually lower transaction costs? Creating a legislative framework that encourages innovation rather than stifles it would make a lot more sense than trying to micromanage fees.
https://www.frbservices.org/financial-services/fednow/organi...
https://explore.fednow.org/explore-the-city?id=3&building=ne...
$25/month to plug into FedNow instant payment rails, 5 cents to move up to $100k in value (initial limit, max is $500k), 20 second settlement SLA.
I remember reading a really nice screed from walmart last year pushing the fed to turn the screws on rent seekers, but without RFP and ubiquitous participation that isnt going to come about.
bit of a conspiracy here but IMO banks have been observing the fraud rates with zelle, venmo, etc and only tolerating it because an external party gets to be the bogeyman.
You should expect to see instant payment functionality that runs on FedNow rails within banking apps in the next 6-12 months. I cannot share more detail publicly unfortunately, my apologies.
(contribute at a fintech, thoughts and opinions always my own)
Contactless cards in the US for example, first rolled out in 2007.
source: have worked in the industry consulting and doing technical design and implementation
I work in a firm very closely associated with CC and ACH processors, and I feel like the only time FedNow ever came up was when I mentioned it.
The low cost of acceptance and fast response times would seem to appeal to any merchant who's already begrudgingly accepting ACH, even if it's not a direct replacement for card payments.
Another aspect are all the cartel-like programs of banks overall (and the banking regulators) to keep even well-capitalized fintechs from offering these services directly. For e.g. Mercury they could probably be entirely fine without the high debit card fees.
Of course, some fintechs actually are providing a legitimate service. I’d like to see them partnering with a legitimate bank directly instead of using an intermediary like Synapse which just dumped all the money in one FBO account.
Exactly — people are responding to me with comments about how SVB failed, or how the Goldman partnership isn't going well, but like... looking at Evolve's website I know for a fact they aren't hiring solid SWEs for cybersecurity.
I understand nobody's perfect, but this is the "Nobody got fired for buying IBM" ideology at work. If you chose Goldman and they got hacked, sure, I'll say "well you couldn't have known" — but if you choose a random bank based in Memphis I've never heard of, I'll naturally be more like "wtf."
1. There are lots of regulations that say only banks can do certain actions, like lend in all 50 states under the rules of a single state. Or open a FDIC insured checking account. Or have a unique account+routing number for each user to send ACH funds to (various reasons this could be preferred to everyone ACH to one single global account). These are valuable services without any debit card issued by the fintech.
2. It is basically impossible to become a bank. The government only approves a handful a year. Square (block) actually got approval recently but it is very difficult to do.
As a result of (1) + (2) is that if your company needs any banking products at all you need to partner with a bank because there is just no reasonable way to legally build that functionality yourself.
(This data dump exposes lots of customers that should have triggered KYC issues, like an American dog-walking startup remotely operated from Pakistan )
(2) - well, it isn’t that hard to become a bank, but it is hard to become a bank when your business plan is “we want to operate well outside of established regulation and norms”. (Starting a state chartered bank is particularly straightforward.)
There are many small banks that would like to be acquired and they are generally profitable. A VC-funded fintech would not have a terribly difficult time acquiring a bank, particularly one that wants to offer BaaS, like Synapse did.
Also not a viable option for a Fintech which aspires to having customers in all 56 US states and territories.
You really need a national bank for a sponsor, and Evolve was the most startup-friendly, for many years.
[1] It is not hard to find my work history but I politely ask you do not post it here.
So when you open an account with mercury, under the hood they’re opening an bank account with a bank and sending transactions through it.
There’s a lot of kyc/kyb regulation around financial services. Eg banks can’t provide services to certain people. So the underlying bank needs to know who you are.
> Why not partner with a major bank, or Column?
Column didn’t exist when mercury was founded. And it’s not that easy to secure a banking partner. Its not like signing up for a free checking account.
Because major banks won't support startups looking to compete with them. Why would JPM, BoA, etc. service Mercury who is going after their SMB business banking vertical? Banking is a cartel in the US. The bank lobby makes it as hard as possible to compete with them.
US has more banks than any other country by a factor of 10.
https://www.helgilibrary.com/charts/what-country-has-the-mos...
And #4 for branches per capita: https://www.theglobaleconomy.com/rankings/bank_branches/
7x as many branches per person as Canada
Sure, those data sources are a bit sus, but I'm sure they're relatively correct. And dunno how credit unions play into it.
Looking that up on Google Maps and Street View, it appeared to be a small branch in Brooklyn, on a street that looked immediately familiar to me as the starting area in Grand Theft Auto IV.
The major banks don't get into this game because the regulations on banks get much stricter the larger you get. So the fintechs are incentives to partner with "small" (this means sub $50 Billion in AUM) banks to deal with the minimum amount of necessary compliance (still a LOT of compliance working with small banks)
https://stripe.com/newsroom/news/treasury
> With Stripe Treasury, platforms can offer their users interest-earning accounts eligible for FDIC insurance in minutes, enabled by Evolve Bank & Trust.
Yeah, why didn't Mercury partner with a well-established, vetted, and recognized bank like SVB?