Random Thoughts on Fintech, Lobbying, and Regulation
This initially was a blurb for the Fintech Today newsletter, but I realized I had more to say on the topic, so here’s a mini-essay.
A short summary of the Politico article that prompted this: essentially, banks are using their extremely powerful lobbying firms to influence Congress towards preventing tech companies from getting more into financial services.
The regulatory moat banks enjoy has been well documented and discussed, but I don’t think we talk enough about the lobbying moat they also employ as well. Politico highlighted a number of ways banks plan on using their lobbying capabilities in DC to stave off tech disruption too.
Politico wrote about how a lot of banks have concerns around Libra, which it seems like everyone does. Others seem more worried about big tech companies like Amazon, Apple, Google, etc tapping into the Federal Reserve-led realtime payments network.
The most pressing issue seems to be around tech companies leveraging the ILC charter (industrial loan charter). Politico cited banks’ concerns around e-commerce company Rakuten’s application for a bank charter, which I find pretty interesting.
Before we dive into Rakuten, here’s why the ILC charter is so interesting for tech companies: In the US, non-financial institutions can’t own banks, but an ILC charter allows them the ability to develop financial products without a bank partner — that leads to fatter margins, since you no longer need split the revenue with a bank partner (like how the interchange revenue for digital banks with debit cards are split for instance.)
Rakuten’s a Japanese company and their e-commerce product focuses on providing cashback for its 13 million monthly active users. They’re honesty massive and weirdly pretty popular in the US (they have a ton of ads on TV, especially during sports games. Steph Curry is a spokesperson too.), and banks are attempting to convince Congress to block their application based on, among other arguments, the US’s historical separation of commerce and banking. That argument kinda worked 15 years ago when Walmart and Home Depot attempted to get similar bank charters.
I wonder if the concern around Rakuten getting a bank charter is that it’ll open the door for other e-commerce companies (cough Amazon) to get a bank charter. Banks would be really pissed about that, not to mention the antitrust crowd that already thinks Amazon is too big and monopolistic.
What’s weird is that Politico didn’t really mention anything about fintech startups looking into using the same ILC charter. Square’s been leading the charge on this — it first filed for an ILC in Utah in 2017, then refiled in December 2018 and only focused on getting a license for its Square Capital division.
Bank charters is something I’ve been spending lot of time researching. Not just ILC, but charters in general — the US market is particularly antiquated when it comes to that. In Europe, its way easier for fintech startups to get a charter — companies like N26 and Klarna have them. For startups, a charter not only allows you create financial products on your own without using a partner bank, but also lets you have bigger margins too.
In the US, there hasn’t been a bank charter that’s been granted in years. Through the grapevine, I’ve been hearing that startups are exploring different ways to get charters themselves. It’ll cost a lot of money, which is part of the reason a lot of companies are currently or have raised massive amounts of money recently.
The ILC route is one avenue that seems doable, if regulators allow it. But it seems like banks can use their lobbying clout to prevent that.
Which brings me to my next point: how can fintech startups level the playing field? It’s becoming increasingly clear that once you reach a certain scale, you need to decrease your dependency on external partner, if only to increase your margins (there are a number of technical reasons to do so too, but that’s a different story.) But you can only do so much of that in fintech until you run into the brick wall that is financial regulation in the United States.
Even smaller fintech startups are really screwed here — there’s no way tech companies will represent fintech startups in their lobbying efforts, and they’re just being left on the side of the road here.
Some people and companies I’ve been chatting with have been thinking about this deeply. There are some potential solutions people are exploring, namely, the idea of a pro-fintech startup lobbying firm or a consortium to advocate for startups. Its still a few years off by my estimate, but still, its something that needs to be discussed and explored deeply. Otherwise, the full potential of fintech startups won’t be realized.
