Nasty Truths About U.S. Fintech | Hacker News Reader

Nasty Truths About U.S. Fintech

venturebeat.com

131 pointsrumayor87 comments

The article seems to overlook the main obstacle: the banking cartel. The big bankers in the U.S. are among its most powerful lobbyists. The current system benefits them plenty. They like it the way it is. They'll sure push to streamline red tape where possible but a near-zero barrier to entry would eat into their profits.

So, they'll continue paying politicians to ensure the status quo and collecting all kinds of fees/interest. Changing the situation will require Congress or courts to go in a different direction. That usually doesn't happen if big, banks' profits are concerned. The voters pushed against the banks in 2008 and the banks (mostly Goldman) won. I'm not getting my hopes up on this.

Now that's a conspiracy theory.

Or just another example of https://en.wikipedia.org/wiki/Regulatory_capture.

Do you realize "conspiracy theory" doesn't mean "false"?

Just like the NSA spying on US citizens, right?

Oh, don't believe me that banks pay off politicians. Look at their own records:

http://www.opensecrets.org/lobby/clientsum.php?id=D000000090

It's rather the excess of regulation due to anti-bank sentiment that creates these barriers to entry. Banks are rather calling for less regulations, and when they got it their way in the 90s, it is what happened.

But it is true that the excess of regulation is reenforcing the position of the incumbents. Banks have to staff full time employees just to read the amount of draft regulations and consultation papers published every day. A start up stands no chance in that environment.

I don't think these are the regulations that I read about banks trying to have removed.

They fight the regulations that eat into their profits and back those that help them. During that same time in 90's, they fought for stronger regulations on credit unions and still do. The also push against the alternative, local currencies because it's less money in their control. Their best ones, though, are in court where they push for low security of ACH and for liability to be on consumer when banks screw up.

Fighting entrenched bankers is one of the hardest uphill battles one can get into. Not so smart.

It is not a binary "banks always want less regulation". Banks, like other entrenched interests, will be for or against regulations, depending on if they advance their interests or not.

You see this in every industry. The energy industry hates environmental regulations, but they like more regulations when it serves to diminish the viability of alternatives like solar.

"So, they'll continue paying politicians to ensure the status quo and collecting all kinds of fees/interest."

I'm waiting for a politician to really go after the banks on this his very issue. Yes, we have other problems, but capping/eliminating fees would get my attention.

There's only one Elisabeth Warren, and the Bankers are making her out to be out of touch with the way the system works? Could anyone imagine if the government let the banks suffocate in 2008? Sure Jamie Diamond's bank would have magically survived--according to that ego?

The innovative competition that would have arose from the ashes might have been interesting? We will never know. Why do I feel these banks are in conclusion with fees?

There is little wrong with fees, let alone interest. Considering how many banks and credit unions exist there is little excuse for not finding one that provides the services you want with a fee structure you accept. Credit unions usually provide the best value and membership rules are very flexible.

Regulation on any industry cost that industry money. It also does not help when your in an industry which gets investigated for not providing services to many who cost you money to serve.

The only concerns I have with fees is that they need to be always out front so that the customer is not caught unawares.

> Considering how many banks and credit unions exist there is little excuse for not finding one that provides the services you want with a fee structure you accept.

While it'd be great if that were true, it's by no means guaranteed. We have a choice in wireless carrier here in the US but still most folks aren't terribly pleased with theirs.

Just because there are a lot of players it does not follow that you'll find one you like. There can be many players but other forces which prevent what you want from existing at all. Government regulations, "generally accepted practices", uncreative management, etc.

>> Could anyone imagine if the government let the banks suffocate in 2008?

I've heard from multiple sources that Iceland let their banks fail, and they're actually doing better than most now.

http://www.washingtonsblog.com/2011/11/key-lesson-from-icela...

Thanks, I've bookmarked that link. It's actually very interesting, and I'm surprised is hasn't been more widely discussed, or used as an example.

Another link (from that article) straight from the IMF, with some more info: http://www.imf.org/external/pubs/ft/survey/so/2011/Surveyart...

That's very different; Iceland's total debt was tiny (compared) as it is a very small island (Iceland's debt was perhaps 1/12 the size of the debt held by Lehman Brothers). Very annoying if you had money stored in Iceland, but otherwise not a huge problem.

The US letting its banks fail would possibly have brought down the entire economy, leading to a far, far more severe crisis. That's what the parent is speculating about.

Iceland did a combination of things. They put dirty politicians in jail, got better ones in office, seized the banking system, re-focused it on stable growth rather than greed, and knocked out fraudulent debts with laws. The U.S. could've done quite a bit of that. We could've even pitted Wall St's geniuses against each other by talking the companies and then offering financial incentives to those that help ensure bailout dollars only go to right place.

And so on and so forth. Instead, here's hundreds of billions, don't tell us what you do with it, and criminal immunity. Some kind of "democracy" the U.S. is these days...

these fraudulent debts would be those UK pensioners and UK local government who had savings with the Icelandic banks.

Possible. I was talking about the debt on the side of Icelandic bankers working with dirty politicians to make their banks money and take people's homes with predatory practices. The same crap they did over here.

Sorry to hear it if people in UK got caught up in the mess.

Seems like another example of "Baptists and bootleggers" [0]. Well-intentioned people trying to protect citizens from financial malfeasance support the same regulations that the big financial players use to keep competition out of the market.

[0]: https://en.wikipedia.org/wiki/Bootleggers_and_Baptists

Call me cynical, but I think most of the legislation introduced is driven by lobbyists from the start anyway.

General public may have the illusion that these regulations are in the interest of citizens, because of clever wording and names used, etc. The "Freedom Act" is SO not about freedom, it is almost funny.

EDIT: I am not cynical - this is a well recognized practice (thanks to cfreeman for his post below):

https://en.wikipedia.org/wiki/Regulatory_capture

The main problem here is the fact that states can regulate banking instead of having one license you need 52.

But that would require a huge reform of the USA's political system which is never going to happen.

That is a significant problem. However, the corruption problem remains on top of the list. Just look at the description of the New York system. That's a racket and worse than many I've read about. Didn't happen accidentally.

So, you have the corruption-driven blockades at federal and state-levels along with the natural regulation that will exist at either level. Quite a pain to deal with.

That's something that I noticed when looking through Standard Treasury's Series A deck yesterday [1]. Their cost allocation for "Regulatory work" will cost almost $3mm over the next 2 years, pre-lauch.

And it looks like they're going to become a bank in the UK rather than in the US. It must have been even more costly to do the work in the US for them.

[1] http://www.slideshare.net/linhir/standard-treasury-series-a-...

Screenshot of slide: http://gyazo.com/f2a23c97e1ef652ddbe6cdb5fadbf737

Costly and simply not possible with the current regulatory environment (Slide 31 - De Novo Charters)

Ripple consented to pay a fine and restructure their operation, to settle civil charges related to Ripple's failure file a SAR on the aborted purchase of xrp by Roger Ver (who by the way was a Ripple investor). The underlying behavior that drew the attention of regulators was that their compliance program was basically a sham during the period in question. The transaction was not "suspicious" in any conventional sense of the word -- Ver was a Ripple investor and well known to the company; his prior criminal history relates to selling fireworks by mail or something, when he was 18 or so. But technically, yes, this is a transaction that Ripple should have reported. People make a big deal of this, but keep in mind that BSA compliance, FinCEN registration, and filing SARs is the EASY part of compliance. Just file SARs on every transaction that meets the definition, that's easy. If that were the only requirement, the US would be a bastion for fintech startups. The hard part is complying with 50 state laws, many of which are non-standard and contradict each other. It is a joke that we don't have a preemptive federal regime to set a consistent rule for compliance.

At the same time, on a real level, any payment provider has to be aware that a convenient and privacy-promoting platform inevitably becomes a sort of honeypot for people who are shut out of the conventional system. This is true of any data hosting company, whether financial or otherwise. We would like to think that there's no responsibility on the part of the platform provider to police content, b/c that seems a violation of freedom. On the other hand, if you look into the activity on your platform, and realize that a significant portion of it, in terms of usage, or money, relates to illegal and immoral activities that hurt other people...well, it's a hard question to balance that with notions of freedom and innovation. Unfortunately I don't think the answer is as easy as just letting providers self-police, or following a European model where banks have historically turned a blind eye toward (or even actively courted) criminal clientele.

following a European model where banks have historically turned a blind eye toward (or even actively courted) criminal clientele

I don't think this is particularly a US/EU distinction. Switzerland's history of banking privacy and neutrality, possibly.

I guess my statement is more accurate in recent history, post-2001. US-chartered banks are getting extremely vigilant about AML. The attitude of US bankers I've worked with is much more cooperative than Europeans, who view this AML focus as the Yankees trying to impose US law where it doesn't belong (a fair criticism).

(Yes, I know UK != Europe, but presume it's indicative)

This popped up on the BBC a couple days ago: "Foreigners must not be able to buy UK homes with 'plundered or laundered cash' as part a global effort to defeat corruption, David Cameron has said." http://www.bbc.com/news/uk-politics-33684098

I assume the takeaway is that it's enough of a problem that it needs to be focused on. The article cites $1tn/year being taken out of poorer countries by corruption, and $190bn worth of property in England and Wales owned by offshore companies.

Unfortunately I don't think the answer is as easy as just letting providers self-police, or following a European model where banks have historically turned a blind eye toward (or even actively courted) criminal clientele.

They should follow transportation/telephone/common-carrier rules, because they're just as necessary to life in modern society.

I testified before Congress on this issue.

http://www.aarongreenspan.com/writing/20131118.hsgacstatemen...

CFPB comment (mostly the same, some exhibits also) here:

http://www.thinkcomputer.com/20140214.cfpbcomment.pdf

Nothing has changed, and Y Combinator certainly hasn't helped. In fact, they and just about every VC-backed portfolio company have made the situation far worse by convincing legislators that everything is fine. After all, look at the proliferation of innovating startups (who are all breaking multiple federal and state laws so numerous that no one in political office can keep track)!

Also, the article contains an error (really, two) regarding California: the law has been amended so that it is basically moot, and the theoretical surety bond is now $250K, not $500K.

What is YC's involvement in this? What are you referring to?

I think he means that YC literally has not helped: they haven't made things any worse, but neither have they tried to make things better.

No, I mean what I wrote:

"In fact, they and just about every VC-backed portfolio company have made the situation far worse..."

A little bit of (somewhat relevant) context: https://news.ycombinator.com/item?id=7718034

The title should be "4 nasty truths about becoming a money transmitter in the U.S." ... FinTech is much larger than just payments and transmission.

I honestly didn't know the word "FinTech" was a thing—this is the first time I've seen it.

I thought it was the name of a startup!

Come to the London startup scene, it's well known.

Having worked in banking/finance/technology for a decade+, the first time I remember registering hearing the term was around 3 months ago, from a lawyer I contacted regarding opening an office in the UK, who was quite proud to say "technology in finance is called FinTech, which is becoming a big thing".

This led me to conclude it is a fad/scene word.

I heard it 4 years ago. You've been living under a rock. :p

Fintech term is years old, but trend spiking recently

https://www.google.com/trends/explore#q=fintech

Perhaps. Living in China. In terms of finance, similar :)

Term adoption probably related to HTFs and the only ~5 year ago widespread recognition they started to get. Gotta call it something. Established players jump on the term to show they're relevant.

There have been FinTech meetups in Boston and NYC going on for a while now. Predictably popular (given the two cities' role in finance)

Will not comment on whether it is a fad/scene word :-)

Common parlance. My consulting company even has fintech in its domain name, and I've been using it for a few years.

Agreed. Or "How We Took On the Impossible and What We Learned From It". I passed on attempting to create a niche credit card a several years ago.

The other posters on this page show the scars--and many possibilities as well.

> To perform due diligence in New York, you need: audited financial statements, a certificate of good standing, bank account details, background checks, credit checks, and criminal records from each and every single executive. Essentially, getting a license in New York means a two-year financial colonoscopy in the 10th circle of hell.

I'm not a fan of overzealous regulation, and there is plenty of regulation in financial services that is ridiculously overzealous, but it would be interesting if the author provided specific proposals.

I mean, is he really complaining that folks running a company handling customer money need to have background checks?

> What’s worse is that the actions being penalized are rarely flagrant in nature — we’re not talking money laundering for cartels here but administrative oversights. For example, the failure to file an SAR, failure to train, or failure to implement policy.

Does the author believe a customer is going to be relieved that his or her money has been put at risk (or lost) only because of "administrative oversights"?

Again, there's a lot of overzealous regulation in financial services, but there are also a lot of people trying to "innovate" in the market who clearly don't fully recognize the responsibilities they have to their customers.

The problem isn't due diligence requirements. It's that you have to do it 47-48 separate times at a cost of $2-$20 million in such a manner that no one is actually protected anyway.

The inefficiencies of federalism comprise one of the inherent trade-offs in the U.S. system, and it is worth remembering that you can't actually transfer value over a wire: you can only transfer a promise. The value of promises is based on the integrity of the entities making them, and so the barriers to entry into the business of moving money are high, as they were high 150 years ago when the only mechanism available was letters of credit exchanged between well-known international bankers. I'm not sure you want those barriers lowered.

Hawala [1] presents an interesting case study here. Through Hawala, individuals can transfer value without the use of promissory notes; it is a scheme based entirely upon trust, and it works well in the regions and cultures in which it has been established.

The CIA estimates that around $1.6bn is transferred yearly in Africa through this scheme.

The takeaway in my opinion, is that the barriers to entry are high and rising because we are promoting a culture of venomous distrust in the US. Honor is not a value that is rewarded by our current system. Thievery and manipulation of the justice system are. This increases the amount of regulation required around the fintech industry, ultimately hurting a large portion of the end users who simply want to get money from point A to point B.

[1] https://en.wikipedia.org/wiki/Hawala

The Hawala system, which I had not heard of by the name, seems identical to the system of letters of credit that prevailed before the evolution of formal payment networks. In the Hawala case the password replaces the physical letter from one trusted agent to another, but otherwise it seems identical. This sort of system was the historical precursor to banking as we know it today.

If you haven't seen it already (was posted yesterday I think), check out Standard Treasury's Series A deck: http://slideshare.net/linhir/standard-treasury-series-a-pitc...

They explain why they decided to start their bank in the UK instead of the US. For once, the USA seem to have no competitive advantage.

> For once, the USA seem to have no competitive advantage.

For some businesses maybe, but given that in the past week or so, Square filed to IPO and Stripe raised several more tens of millions, it seems there's plenty of 'gravity' here too.

The global reserve currency will always act as a dramatic inherent advantage; it acts as a massive force of gravity. As will having the world's largest economy, the largest government, the largest bond and debt markets, the largest tax base, ~40% of all global private wealth, the largest real estate market, and by far the largest stock market. It also has by far the best business / financial news, and financial information systems. Add all of that together, under one integrated market, and the US will continue to have remarkable advantages in fintech.

And the most majestic eagles.

The US has the largest local markets, but London is larger for international transactions and many markets such as foreign exchange and derivatives.

And the UK government is actively encouraging challenger banks.

`New York’s banking department defines money transfer as the “business of selling or issuing payment instruments, such as checks, or engag[ing] in the business of receiving money for transmission.”`

I don't see how this could be mistaken to be applied to "any website that receives commerce" - the important part here is transmission - i.e. only sites that receive money for the purpose of transferring it to a different location.

Here's how state regulators define money transmission: A pays B, and B pays C. If that is true, B is a money transmitter.

Does that cover practically all commercial activity? Yes. Does it make any sense to use that interpretation? No. Do regulators anyway? Yes.

Good piece, but more specific to money licensing companies.

One more thing: Unlike most regulated industries, this is not a space where you "do and ask for forgiveness later". You have to be super aggressive when it comes to compliance. Otherwise you will get shut down. Think of it as "preventative health" to the extreme :)

This is sort of easy to explain, the United States makes the processes difficult because it wants the money kept here.

What interest are you to the United States if you work here and then don't spend any of the money in the economy? If a majority of your paycheck is being spent in other markets, then you're actually running against the US economy.

This is just a short lay-man's terms explanation of how I see the situation, but it seems to be somewhat true.

It's understandable that there are some hurdles involved in businesses that handle customer money like this. But obviously the current situation is far from ideal.

I know there's at least one company (Precash) where you can sort of rent their licenses. I'm not familiar with how forward thinking they are or how onerous/costly their service are.

Venmo and a few other companies have benefitted from Precash's oversight, but asymmetric agency relationships are no longer a viable option.

I'm OK with all of the fees as long as they go towards enforcement and regulation. If they exist just to increase the price of entry, then they need to be lowered. 2008 was a great reminder of how a lack of oversight and enforcement can cause huge problems for everyone. I hope we have not already forgot that.

Many of us remain unconvinced of the notion that a "lack of oversight and enforcement" caused the great recession.[1][2][3][4]

[1] http://mercatus.org/sites/default/files/GrowthofFinancialReg...

[2] http://dailysignal.com/wp-content/uploads/BL-SEC-budget-char...

[3] http://media.economist.com/sites/default/files/imagecache/29...

[4] http://www.yalelawjournal.org/mht_files/98/SteinwayforWebsit...

What specific sort of oversight/enforcement/regulation do you believe would have prevented 2008?

Glass Steagall did an excellent job - until it started being ignored, and before it was repealed.

Would preventing WaMu and Countrywide Financial from running prop desks (which they didn't do anyway) have somehow prevented the crisis? Or would preventing Bear Stearns from issuing mortgages (which they didn't do anyway) have somehow prevented them from going bust?

Please be specific on what would have happened differently if Glass Steagall were still in force.

With something like GS regulators would have been able to say "Wait, you're doing lots of securitisation? That's not a good idea, is it?"

It's not always the specific regulatory details that matter, so much as the culture they create.

As long as GS was taken seriously, the culture remained "If you're a bank, don't do really stupid shit just because you think you can make a quick buck."

Once it started being eroded the culture became "Wheee!" - and unsurprisingly everything exploded and the wheels came off.

IMO anyone who would argue for less regulation after that isn't living at an address in the reliable side of town.

The important arguments have to do with quality of oversight and the culture of people who will consistently try to be as irresponsible as they can be if they're not regulated.

Regulation is a means to that end, not an end in itself.

tl;dr; GS wouldn't have done anything, but it might magically change the "culture" and cause regulators to do other unspecified things which would have done something.

Um, ok.

Also, the main "make a quick buck" bank was Goldman. They did just fine. It was the "make long term safe bets" banks that had problems, e.g. Countrywide, WaMu, Citi. Also, there is nothing inherently wrong with securitization. The underlying problem was the mortgages themselves; securitization merely shifts the risk around.

Regulation isn't just a magic lever that you can switch to "more" or "less". Your post is as clueless as a PHB saying "we need more code, lets switch to J2EE so we'll have lots more lines of code!"

Incorrect. GS and worthy oversight would have nipped most of this in the bud. Just look at what these banks had on their balance sheets at the time, and it would make anyone with a modicum of banking background recoil in horror.

I'm not trying to sound ageist, but judging from the comments on this thread, it appears as if this generation has not learned from 2008 and is bound to repeat the same mistakes. I went through this before with the S&L crisis, one that was largely the fault of lax oversight. We didn't have another blowup until 2008; I guess that was long enough for everyone to forget the early 80's.

Guess it's time to start buying Swiss Francs.

GS and worthy oversight would have nipped most of this in the bud.

Again, please explain how - i.e., concrete mechanisms, not vague "if we passed this law that didn't really change anything, maybe culture would have been different".

Just look at what these banks had on their balance sheets at the time...

Please be specific. Which banks are you referring to, and how would GS have significantly affected things? As far as I'm aware, the main banks which significantly mixed IB and S&L activity were JPM and Citi, hardly the epicenters of the crisis.

Also, it's odd how the S&L crisis happened before GS was repealed - why didn't the magical culture change of GS cause regulators to magically crank regulation up to 11 and prevent it?

> Also, it's odd how the S&L crisis happened before GS was repealed

Not really. The 2000s banking crisis happened not long after banking regulations were repealede, the S&L crisis happened after S&L regulations were repealed. (In both cases, the repeals were justified on the basis that the increased freedom would strengthen the deregulated industry and the broader economy.)

Scroll up. TheOtherHobbes claimed: With something like GS regulators would have been able to...It's not always the specific regulatory details that matter, so much as the culture they create.

Apparently the existence of GS did not actually allow regulators to have this magic culture and prevent the S&L crisis. But you do have even more vague generalities that don't mention any specific mechanism.

Tomorrow I'm going to my boss and telling him "we need more code!" I'll refuse to say what the code should do, but I'll point out that Homejoy refactored their codebase before dying of a bad business model.

> Apparently the existence of GS did not actually allow regulators to have this magic culture and prevent the S&L crisis.

Banking and S&L regulations were two separate structures, with different regulatory organizations, and, presumably therefore, somewhat isolated organizational cultures in those organizations. Even if GS had an effect on regulatory culture in banking regulation outside of its specific restrictions, there's no reason it would have had the same effect on S&L regulatory culture.

There are lots of legitimate arguments that might be marshaled against the proposition that eliminating GS enabled the 2000s banking crisis through its effect on the relevant regulatory culture rather than its specific rules, but "the 1980s S&L crisis happened with GS in place" isn't among them.

In fact my argument is that the industry set itself up for meltdowns as soon as regulation stopped having teeth, and meltdowns duly happened when regulations were formally repealed.

Your argument seems to be that the two were unconnected, because regulation cannot possibly be relevant, therefore reasons.

You'll have to ask your boss which argument he finds more convincing.

Try to pay attention. I'm saying that the specific regulation you cite had nothing whatsoever to do with the crisis since the main culprits in 2008 were already obeying GS. I.e., telling Bear not to issue mortgages and telling WaMu not to do IPOs would not have changed anything since they already didn't do those things.

I'm also saying that your magic culture theory of regulation, if true, should have prevented the S&L crisis (since GS was in force then). But I guess you were wrong, and GS isn't actually the magic regulatory pixie dust that causes regulators to solve all the problems? If so, what is?

(Yes, that's a dangerous question, because the minute you mention a law I'll just find a financial crisis from before that law was repealed.)

You're not understanding the concept of enforcement and regulation: it is supposed to be a barrier of entry.

http://www.cnbc.com/id/100431660

Is it possible to argue that these hurdles are in place for some systemic or historically-shaped reasons? Would be curious to hear someone explain the regulation and high cost of entry outside of banking cartel and government incompetence.

Do those challenges apply to bitcoin startups?

Yes. They mention one in the article. I don't understand why people think that Bitcoin is some magical thing that is somehow exempt from regulation.

Venmo seems to be doing fine though?

Life is grand when you sell out to one of the largest money transmitters in the nation (in this case, PayPal).

Venmo was saved by being acquired by Braintree, which was acquired by Paypal, who is licensed.

Venmo received both of CA and NY licenses itself while it was an agent to a money transmitter license for the rest of the states before it was acquired.

It's not really a fair comparison is it? The U.S. is 50 semi-independent sovereigns covering 315 million people. What's the cost of registering to become a money transmitter in all the Eurozone countries (which have a similar aggregate population)?

Either you didn't read the article, or you know something I don't...

Europe has similar laws, but the European Union has a “passport” system that allows a registered payments company in one E.U. country to get permission to do business in another E.U. country.

There is nothing comparable in the U.S. Some have called for a single national license that could take the place of multiple state licenses

Reply on news.ycombinator.com