Weekly Briefing No. 157 | A fintech regulatory battle is brewing


Welcome to The FR. Always at the cutting edge.

In this edition:

  • A regulatory battle over fintech

  • Fiserv’s big acquisition

  • Iceland’s tech innovation

  • Our sell rating on Facebook

  • The power of comparison sites

  • How banks get personal


A regulatory battle over fintech.

The idea of fintechs becoming full-service banks is one that’s been long debated, and it’s come to the forefront since the Office of the Comptroller of the Currency last year began taking applications for a national bank charter from fintech companies. Since that time, there has been much debate on the nature of the charter or whether it’s even necessary. But comments this week from the Federal Reserve may scupper the dreams of fintechs becoming banks.

As reported by Reuters, the central bank is wary of giving fintech firms access to the country’s financial infrastructure. Among those quoted include St. Louis Fed President James Bullard, who said, somewhat ominously, “I am concerned that fintech will be the source of the next crisis.” This could be a big roadblock because without the ability to provide FDIC insurance or payment system access, a fintech charter is effectively no more than a national lending license, says Josh Siegel, CEO of StoneCastle, a financial technology company managing over $14 billion on behalf of its clients. “That still gives fintechs the option to apply for a traditional OCC charter,” Siegel adds, “but the restrictions on growth rates, permission to change business plans or strategies, and source of strength from the parent company would remain items to strongly consider.”

While the Fed’s concern is understandable, it’s also true that the U.S. lags behind other geographies in giving fintechs bank licenses — specifically the U.K. and Germany, where regulators have overseen and guided the process for tech firms to become full-fledged banks, and have seen the explosion of so-called challenger banks. It remains to be seen if the Fed’s concerns will derail a similar scenario from playing out here.

A coming together of fintech giants.

There’s often M&A among the smaller fintechs, but sometimes giants want to get together, too. Big news broke this week that entrenched financial technology vendor Fiserv is purchasing e-commerce payments powerhouse First Data in a $22-billion, all-stock deal.

What’s the big deal about this momentous merger? According to TechCrunch, it’s all about providing a one-stop shop for clients as the financial services ecosystem takes steps to build more integrated services. The result, say experts, will hopefully be about creating products that allow the merged behemoth to better compete in the financial services landscape, while also saving a boatload of Benjamins in cost and revenue synergies.

But in an analysis by Reuters, what seems like a strategic no-brainer, to bring Fiserv’s bank payment and processing software together with First Data’s credit card payments and services for banks and merchants, could also be risky. Could a web of dysfunction be woven post-deal? What happens if economic expansion comes to a screeching halt? Late-cycle mergers, says author Robert Cyran, “can bring surprises.”

We’ll certainly be watching closely how these two two giants integrate their offerings.

Iceland’s unique insight into identity verification.

“Then there are trolls. This is a race of giants who with their giant animals lumber over the rocky and snowy face of Iceland. But trolls, mighty as they are, are night beings, highly susceptible to the Sun. In dark winter they must revel without fear, for at the dawning of the day a troll creature will turn to stone if caught by a ray of Sun.”

This delightful passage reminded us that the rich traditions of Icelandic folklore – replete with elves and trolls – are deeply embedded into the island nation’s psyche. And maybe it speaks to a future where Icelandic tech companies will be on the forefront of trying to stamp out another kind of troll: internet trolls that have deeply damaged many of the world's most popular web sites.

A case in point is Authenteq, a Reykjavik-based identity management start-up that is using blockchain to try to keep trolls from causing trouble on online marketplaces, betting platforms and financial services sites. This week, the company announced that it closed the first tranche of a Series A that was led by Draper Associates and Capital300. With this capital, we hope that the company will be able to scale those rays of sun in a hurry.


Our “eternal sell” rating on Facebook.

We don’t issue buy or sell ratings on companies, but if we did, conventional equity ratings wouldn't suffice to describe just how and why we think Facebook is the most overvalued stock since eToys.

Some on Wall Street believe that bad news is now “baked” into the stock and have a buy or strong buy on the name. We disagree for one foundational reason: The company’s founder has been scaling back on the number of shares he’s selling in order to ensure that he can remain the Genghis Khan of the company. With full control, Genghis will still have access to his limitless bag of mulligans on hand every time that his misguided bid to connect the world’s people gores democratic institutions, upends privacy or facilitates civil strife. Eventually, those things will catch up with the company (See what Germany’s Bundeskartellamt is fixing to do to Facebook). Moreover, the recent devaluation of Facebook has been driven by ESG factors impacting fundamentals and raising questions over the long-term viability of the business model, according to a recent research report from Truvalue Labs, a provider of ESG data.

But if those factors don’t sway you, we’d recommend that you check out the phenomenal article from The Outline below, which points to a different reason to become bearish on Facebook: Its products are getting really bad. Or to put it in the words of author Joe Veix, “Navigating their apps feels sort of like trying to watch a sitcom on an illegal Russian streaming site circa 2007.”

Finance comparison sites — hiding in plain sight.

When banks and tech vendors talk about marketing, they rarely mention comparison sites. Which is odd when you look at the numbers.

Credit Karma claims 85 million members in the U.S. and Canada and almost half of all millennials. NerdWallet has three million members and 100 million visitors a year. There are many others, including MagnifyMoney and Bankrate. The sites, which rate bank accounts, credit cards and other financial products, generally promise unbiased reviews and collect a commission if a consumer signs up for a banking product through the site.

The comparison sites can rank high in search results. Jack Simpson at Econsultancy said, “NerdWallet has an incredible 22.3% share of all organic search traffic for personal finance keywords.” Bank of America has a 6.1% share.

Tim Chen, founder and CEO of NerdWallet, said comparison shopping has become the norm, especially among millennials.  

“Millennials are just used to comparing things. Even college professors. That's the one that really strikes me as an older millennial. Yeah, people don't really take college courses anymore without reading the ratings on their professors and figuring out which ones are good and which ones to avoid. Kind of mind-blowing.”

The sites have different coverage and some different results, but it takes only a few minutes to check a product, such as a credit card, across several of them.

At MagnifyMoney, Nick Clements writes, “When you visit our product pages, you will see names that you haven’t seen before. Not surprisingly, some of the best deals come from small, new and innovative companies that can’t match the marketing budgets of big banks…Banking is too expensive and too complicated. We want to make it easier and more rewarding.”

How banks get personal.

Mark Schwanhausser says a bank could use its digital interaction with customers to encourage them to build a rainy day fund, and when that is done, think about investing. Chase Finn and Wells Fargo’s Greenhouse provide ways, virtual envelopes, to create savings goals such as a vacation or a house. For years now, Simple and Moven have provided similar tools, which understand how much a customer earns and their regular expenses such as rent and student loans, to show how much is safe to spend. It’s pretty basic, unobtrusive, helpful and not especially profitable.

But just maybe that’s all most people want from a bank. People are more likely to get divorced than to move their checking accounts; Bankrate says the average U.S. adult has used the same primary checking account for about 16 years.

They may be paying too much in monthly fees and missing higher interest elsewhere. Greg McBride, Bankrate’s chief financial analyst, says people who do want to switch should ask for a switch kit from the bank where they want to open an account, to make it easier.

But many can’t be bothered to move just to save the average $14 a month, roughly the price of two trips to Starbucks. That may change as banks slowly begin raising the interest on deposit accounts. But for now, what comes through from Bankrate is that for many customers, their bank is hardly top of mind.

Maybe bankers just have to get used to it.

Quote of the Week

“A dream doesn’t become reality through magic; it takes sweat, determination and hard work.”

--Colin Powell