
Nasty Truths About U.S. Fintech - rumayor
http://venturebeat.com/2015/07/29/dream-killer-4-nasty-truths-about-u-s-fintech/
======
nickpsecurity
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.

~~~
read-eval-prt
Now that's a conspiracy theory.

~~~
cfreeman
Or just another example of
[https://en.wikipedia.org/wiki/Regulatory_capture](https://en.wikipedia.org/wiki/Regulatory_capture).

------
hkmurakami
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-...](http://www.slideshare.net/linhir/standard-treasury-series-a-
pitch-deck?ref=http://blog.zactownsend.com/standard-treasurys-series-a-pitch-
deck)

Screenshot of slide:
[http://gyazo.com/f2a23c97e1ef652ddbe6cdb5fadbf737](http://gyazo.com/f2a23c97e1ef652ddbe6cdb5fadbf737)

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

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zekevermillion
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.

~~~
pjc50
_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.

~~~
zekevermillion
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).

------
thinkcomp
I testified before Congress on this issue.

[http://www.aarongreenspan.com/writing/20131118.hsgacstatemen...](http://www.aarongreenspan.com/writing/20131118.hsgacstatement.pdf)

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

[http://www.thinkcomputer.com/20140214.cfpbcomment.pdf](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.

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

~~~
saucetenuto
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.

~~~
thinkcomp
No, I mean what I wrote:

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

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deet
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.

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

~~~
zhte415
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.

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

~~~
zhte415
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.

------
7Figures2Commas
> 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.

~~~
thinkcomp
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.

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markbnj
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.

~~~
roymurdock
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](https://en.wikipedia.org/wiki/Hawala)

~~~
markbnj
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.

------
hermanmerman
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...](http://slideshare.net/linhir/standard-treasury-
series-a-pitch-deck)

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.

~~~
adventured
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.

~~~
toehead2000
And the most majestic eagles.

------
Illniyar
`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.

~~~
thinkcomp
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.

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skhatri11
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 :)

------
condescendence
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.

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pbreit
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.

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

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scurvy
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.

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

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

~~~
yummyfajitas
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.

~~~
TheOtherHobbes
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.

~~~
yummyfajitas
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!"

~~~
scurvy
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.

~~~
yummyfajitas
_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?

~~~
dragonwriter
> 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.)

~~~
yummyfajitas
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.

~~~
TheOtherHobbes
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.

~~~
yummyfajitas
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.)

------
boskonyc
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.

------
devy
Do those challenges apply to bitcoin startups?

~~~
s73v3r
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.

------
toephu2
Venmo seems to be doing fine though?

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

------
rayiner
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)?

~~~
mehwoot
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_

