Did you read the article? It's very clearly about one specific bank (Cross River).
You might be trying to say that the forbes article is exaggerating with the headline, but your comment is implying that there is literally no specific subject of this story.
The amount invested in startup type projects is nothing compared to normal business costs. Without adopting a startup like mentality when appropriate, a bank will spend 100M to put a webpage on the internet.
Sometimes I wonder if the current state of fintech is nothing but lipstick on a pig.
Maybe I'm being too cynical, but as someone who follows this industry fairly closely I haven't seen many companies do something actually that innovative or new. Most of it just seems to be a difference in distribution channel e.g. a website.
At least in my few months in fintech I would say yeah thats what it felt like. Some of it was overkill and there were vendors with awful APIs so of course we were the make up for their pig APIs as well.
I am not sure what the current state of fintech is but it is fairly obvious to observe that there is a ton of cost in the industry that probably doesn't need to exist anymore (and btw, we aren't even in the first innings of this).
This has happened before: for example, insurance used to be sold in-person, then over the phone, now online. And that is innovation. Selling it in-person was very expensive.
But it is also true that none of the companies mentioned in the OP have really innovated anything. The innovation was finding a new way to justify massive volume growth that would later turn out to be unprofitable. This happens every cycle.
The distribution method wasn't really novel either afaik. Maybe having an app makes your product a bit cheaper but it isn't really going to be a massive difference to selling over the phone. In particular, with high-interest loans analysing credit quality is probably going to be more important. But idk (I have looked at these businesses and it isn't something I would ever get involved with: high-interest, P2P, all scams).
I can call Chase/Amex/Etc and have someone pick up in seconds or minutes.
I have signed up for some neobank accounts out of curiosity and there’s no phone number just email and chat, and when I’ve asked a question it’s taken at least 2-3 days to get a reply on average.
Reducing cost might be good for the business but as a customer I get no additional benefit (my Chase account is free) and reduced quality of service. Why would I want that?
I had the opposite experience, I needed a refund on a purchase. Revolut was immediately on the case and issued a refund (in BTC, moreover) in less than 48 hours including the time required to check what I was arguing about.
And with the support chat I never really had issues thus far, with neither Revolut or N26.
Similar situation with UniCredit (of the largest banks in Italy) and it took me ages, was really close to give up. On top of that, their email support is pretty trash...
Big American banks have decent customer service IMO. I’ve had particularly good experiences with Chase, Amex, and Capital One. And those ones have invested heavily in their IT/digital experience. Might not be true elsewhere, in which case the case for a neobank is probably stronger.
Also I signed up for Revolut in the US and not sure why it’s better from a fee perspective. It charges a percentage fee for ATM withdrawals which I’ve never seen before and frankly insane.
I wonder how much of this is a direct result of the massive regulation around the banking industry.
I'm not saying regulation is necessarily bad, but the law of unintended consequences can be a beast. The large amounts of regulations make the barriers of entry very high, and make it impractical without preexisting economies of scale. Perhaps we need to reexamine regulations and their potential hampering of creative destruction.
Source: worked at a fintech startup and had to review and implement a lot of this regulation. Some is really important for protecting consumers, but some is hellishly onerous and makes automation difficult to impossible.
If your only concern is investor return then banking regs are pointless, it’s no different than the privacy laws impeding Facebook and Google. Fuck over the consumer, fuck over the public.
I’ve worked at a very large financial institution, I helped to start their credit card division, I helped to start their banking division, and I’ve been recruited to a number of “innovative” fintech startups. The only “innovation” I ever saw was how they interpreted regulations so they could exploit their customers and transfer the firm’s financial risk in the short term so that the principles could make as much money as possible in the shortest amount of time.
This is kind of what I'm talking about. Only the established players are able to do this sort of thing, because of high barriers to entry. If you and I wanted to start a bank that didn't do slimy things, we'd have a really hard time.
That's not to say it's impossible, but I wouldn't try it again unless there was a team of people willing to work for equity that were already experts at compliance.
> Regulations aren't forcing pseudobanks to repackage shitty loans, nor are they causing massive overvaluation.
Agree.
> How much of what?
Why there's so little competition in the banking/loan space. It's simply very hard to stand up a new organization because complying with existing regulations requires an army of people (from engineers to lawyers, etc).
The article is light (and confusing) on details, so it's hard to take it seriously or draw conclusions from it. For example:
"State-chartered banks like his have the regulatory and compliance framework in place and the lending licenses necessary to originate loans. Most fintechs do not and thus rely on banks for funding."
If the fintechs have a lack of cash money then they might need to rely on banks for funding. But there's no reason a lack of licences or processes would require them to rely on banks for funding.
Also, I'm not sure why the need to mention 'FDIC-insured' a couple of times. FDIC insurance has nothing to do with consumer lending (the subject of this article). FDIC insurance protects retail deposits, but these fintechs aren't generally offering current/savings accounts.
I wish the article would explain why it's difficult to become a lender in the US. It mentions LendingClub many times, but a quick online search showed me that LC has dozens of state consumer credit licences: https://www.lendingclub.com/legal/licenses
So why don't the other fintechs apply for these licences? Is it hard to be approved? Are the regulations very difficult to implement?
The FDIC is a confidence game. Mentioning it just gives a reminder of its existence and confidence in the system.
I just like to imagine the enterprisers in 1930 that convinced Congress to insure their private company deposits with public money in order to more easily convince people to make deposits.
Worried about the viability of a new market because there is no recourse if you lose your money? Make enough money to lobby Congress to insure it with non-participant's money! Now there is more confidence in your market
FDIC insurance, and similar deposit guarantee schemes in other countries, aren't primarily a way to socialise private risks.
A bank run is caused by the perception that a bank may have insufficient liquidity. But once a bank run starts, this is a self-fulfilling prophecy. The bank may have held enough of its assets as cash/near-cash for normal times, but of course many of its assets are illiquid things like mortgage loans.
The main purpose of deposit guarantee/insurance schemes is to prevent this vicious cycle from starting in the first place. If the scheme succeeds in instilling confidence, then there will never be a run, and the scheme will never result in a costly bail-out.
Just to reinforce one point: the bank in question could even have MORE of a cushion than other banks, but if the rumor mill hits them instead of other banks, they are the one who goes under. So, it's not even a case of rough justice from the market, it's death by rumor mill. Of all the stupid laws and regulations regarding finance, this is not one of them.
The FDIC isn’t public money and there is no congressional appropriation for it. FDIC is funded by bank premiums. Sure if the FDIC goes bust in a massive financial implosion the feds will backstop it, but in such a disaster almost no private orgs have the resources to backstop it.
First you absolutely need a license. You can’t just go making consumer loans without the proper license to do so. If that wasn’t the case there would be rampant abuse / predatory schemes as there was before.
The problem is not getting a license so to speak, the problem is that it’s not worth it. Not only do you need to get 50 of them and follow a cluster-fuck of 50 different state laws, you need to follow the ongoing compliance procedures of all 50 state to maintain said licenses.
Why would any sane company do that if there is a bank that has already done that, and willing to lend in your name, if they get a little piece of the action? Your whole value prop is in marketing and underwriting, not legal compliance. So outsource that shit and focus your resources on what is going to differentiate you.
So what you see is that lendingclub tried to get their own licenses, realized it was fucking stupid for above reasons, and then outsourced it. They still have the licenses to either keep servicing some existing loans or perhaps for some other business reason (eg perhaps a particular kind of product is actually easier to license themselves than thru third party for a particular state), but that’s definitely less common than outsourcing.
I co-founded a consumer loan business in the UK back when Consumer Credit Licences were administered by the Office of Fair Trading. The regulations seemed reasonable and not overly-onerous. But I can understand that, even if the corresponding regulations in the US are no more complex than those in the UK, having to register with and deal with 50 different regulators might be 10x or 20x the effort of dealing with just one regulator.
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[ 4.4 ms ] story [ 69.3 ms ] threadClickbait, thy name is Forbes.
You might be trying to say that the forbes article is exaggerating with the headline, but your comment is implying that there is literally no specific subject of this story.
(Also, the original title said "The".)
Maybe I'm being too cynical, but as someone who follows this industry fairly closely I haven't seen many companies do something actually that innovative or new. Most of it just seems to be a difference in distribution channel e.g. a website.
This has happened before: for example, insurance used to be sold in-person, then over the phone, now online. And that is innovation. Selling it in-person was very expensive.
But it is also true that none of the companies mentioned in the OP have really innovated anything. The innovation was finding a new way to justify massive volume growth that would later turn out to be unprofitable. This happens every cycle.
The distribution method wasn't really novel either afaik. Maybe having an app makes your product a bit cheaper but it isn't really going to be a massive difference to selling over the phone. In particular, with high-interest loans analysing credit quality is probably going to be more important. But idk (I have looked at these businesses and it isn't something I would ever get involved with: high-interest, P2P, all scams).
I have signed up for some neobank accounts out of curiosity and there’s no phone number just email and chat, and when I’ve asked a question it’s taken at least 2-3 days to get a reply on average.
Reducing cost might be good for the business but as a customer I get no additional benefit (my Chase account is free) and reduced quality of service. Why would I want that?
Similar situation with UniCredit (of the largest banks in Italy) and it took me ages, was really close to give up. On top of that, their email support is pretty trash...
Also I signed up for Revolut in the US and not sure why it’s better from a fee perspective. It charges a percentage fee for ATM withdrawals which I’ve never seen before and frankly insane.
I'm not saying regulation is necessarily bad, but the law of unintended consequences can be a beast. The large amounts of regulations make the barriers of entry very high, and make it impractical without preexisting economies of scale. Perhaps we need to reexamine regulations and their potential hampering of creative destruction.
Source: worked at a fintech startup and had to review and implement a lot of this regulation. Some is really important for protecting consumers, but some is hellishly onerous and makes automation difficult to impossible.
If your only concern is investor return then banking regs are pointless, it’s no different than the privacy laws impeding Facebook and Google. Fuck over the consumer, fuck over the public.
I’ve worked at a very large financial institution, I helped to start their credit card division, I helped to start their banking division, and I’ve been recruited to a number of “innovative” fintech startups. The only “innovation” I ever saw was how they interpreted regulations so they could exploit their customers and transfer the firm’s financial risk in the short term so that the principles could make as much money as possible in the shortest amount of time.
That's not to say it's impossible, but I wouldn't try it again unless there was a team of people willing to work for equity that were already experts at compliance.
How much of what? Regulations aren't forcing pseudobanks to repackage shitty loans, nor are they causing massive overvaluation.
Agree.
> How much of what?
Why there's so little competition in the banking/loan space. It's simply very hard to stand up a new organization because complying with existing regulations requires an army of people (from engineers to lawyers, etc).
"State-chartered banks like his have the regulatory and compliance framework in place and the lending licenses necessary to originate loans. Most fintechs do not and thus rely on banks for funding."
If the fintechs have a lack of cash money then they might need to rely on banks for funding. But there's no reason a lack of licences or processes would require them to rely on banks for funding.
Also, I'm not sure why the need to mention 'FDIC-insured' a couple of times. FDIC insurance has nothing to do with consumer lending (the subject of this article). FDIC insurance protects retail deposits, but these fintechs aren't generally offering current/savings accounts.
I wish the article would explain why it's difficult to become a lender in the US. It mentions LendingClub many times, but a quick online search showed me that LC has dozens of state consumer credit licences: https://www.lendingclub.com/legal/licenses
So why don't the other fintechs apply for these licences? Is it hard to be approved? Are the regulations very difficult to implement?
I just like to imagine the enterprisers in 1930 that convinced Congress to insure their private company deposits with public money in order to more easily convince people to make deposits.
Worried about the viability of a new market because there is no recourse if you lose your money? Make enough money to lobby Congress to insure it with non-participant's money! Now there is more confidence in your market
A bank run is caused by the perception that a bank may have insufficient liquidity. But once a bank run starts, this is a self-fulfilling prophecy. The bank may have held enough of its assets as cash/near-cash for normal times, but of course many of its assets are illiquid things like mortgage loans.
The main purpose of deposit guarantee/insurance schemes is to prevent this vicious cycle from starting in the first place. If the scheme succeeds in instilling confidence, then there will never be a run, and the scheme will never result in a costly bail-out.
This sounds like an uninformed libertarian rant.
First you absolutely need a license. You can’t just go making consumer loans without the proper license to do so. If that wasn’t the case there would be rampant abuse / predatory schemes as there was before.
The problem is not getting a license so to speak, the problem is that it’s not worth it. Not only do you need to get 50 of them and follow a cluster-fuck of 50 different state laws, you need to follow the ongoing compliance procedures of all 50 state to maintain said licenses.
Why would any sane company do that if there is a bank that has already done that, and willing to lend in your name, if they get a little piece of the action? Your whole value prop is in marketing and underwriting, not legal compliance. So outsource that shit and focus your resources on what is going to differentiate you.
So what you see is that lendingclub tried to get their own licenses, realized it was fucking stupid for above reasons, and then outsourced it. They still have the licenses to either keep servicing some existing loans or perhaps for some other business reason (eg perhaps a particular kind of product is actually easier to license themselves than thru third party for a particular state), but that’s definitely less common than outsourcing.
I co-founded a consumer loan business in the UK back when Consumer Credit Licences were administered by the Office of Fair Trading. The regulations seemed reasonable and not overly-onerous. But I can understand that, even if the corresponding regulations in the US are no more complex than those in the UK, having to register with and deal with 50 different regulators might be 10x or 20x the effort of dealing with just one regulator.