
Fintech in Chains - avoidboringppl
https://johnhcochrane.blogspot.com/2020/09/fintech-in-chains.html
======
et2o
> For banking there is a reason for regulation, and it is precisely deposits.
> Deposits are open to runs. Runs are bad for all sorts of reasons. Financial
> crises are runs. Hence we have banking regulations. That's not a defense of
> current banking regulation. But there is a problem and a reason for some
> regulation.

> But fintech doesn't take deposits. The one central problem with banking is
> gone.

All banking regulations are due solely to the fact that banks take deposits?
There is no other reason one could imagine for why banks, FinTech, or other
financial services providers need to be regulated? All financial crises are
runs on deposits?

Pretty undeveloped and unconvincing reasoning. If you think for a few seconds
it’s easy to imagine other situations that led to necessary regulations in
banking.

~~~
unishark
> All financial crises are runs on deposits?

Interesting question. I'm thinking he means more than just folks withdrawing
their cash at the teller when he says "run". I found this:

[https://johnhcochrane.blogspot.com/2014/04/toward-run-
free-f...](https://johnhcochrane.blogspot.com/2014/04/toward-run-free-
financial-system.html)

"At its core, our financial crisis was a systemic run. The run started in the
shadow banking system of overnight repurchase agreements, asset-backed
securities, broker-dealer relationships, and investment banks. Arguably, it
was about to spread to the large commercial banks when the Treasury Department
and the Federal Reserve Board stepped in with a blanket debt guarantee and
TARP (Troubled Asset Relief Program) recapitalization. But the basic economic
structure of our financial crisis was the same as that of the panics and runs
on demand deposits that we have seen many times before.

"The run defines the event as a crisis. People lost a lot of money in the 2000
tech stock bust. But there was no run, there was no crisis, and only a mild
recession. Our financial system and economy could easily have handled the
decline in home values and mortgage-backed security (MBS) values—which might
also have been a lot smaller—had there not been a run.

~~~
lmm
> At its core, our financial crisis was a systemic run. The run started in the
> shadow banking system of overnight repurchase agreements, asset-backed
> securities, broker-dealer relationships, and investment banks.

Note how none of these things are consumer deposits. Fintech and shadow
banking are two names for the same thing, and the same risk of runs and need
for regulation applies.

~~~
mathattack
Shadow banking isn’t fintech. It’s non-bank lenders like hedge funds.

~~~
lmm
I should've said fintech is a subset of shadow banking, because not all shadow
banks are tech-oriented. But a fintech company is more-or-less by definition a
non-bank doing bank-like things, which is the definition of a shadow bank.

~~~
mathattack
FinTech is more than that though. Fintech is also advanced analytics for
helping banks price derivatives. And for auto-pricing real estate.

~~~
lmm
Derivatives pricing and real estate pricing were major causal factors in the
last financial crisis. A lot of the banking regulations regarding reporting,
data integrity etc. are if anything even more important when the data analysis
is being done by a separate entity from the one that's performing the
transactions.

------
coderintherye
In general, I'm in agreement with this thesis, but it ignores consumer
protection. What entity should handle consumer protection in respect to
fintechs? Should it fall under state and local laws? Then, what if Jonny in
California (which has strong protections) takes a loan from Fintech X in South
Dakota. Can Jonny apply California regulations to his loan, placing a cap on
interest that he has to pay Fintech X? Can Fintech X take Jonny's house that
he signed over as collateral, ignoring California's regulations?

Financial regulation is a giant headache here and in many of the countries
we've worked in. Looser regulation should be beneficial to most consumers. But
what about consumers or businesses that sign themselves into bad deals or get
purposefully taken advantage of? Which is really the heart of a lot of
politics, how much do we protect people from their own poor choices.

~~~
rdxm
How in the world is looser regulation of opaque (at best) SV bullshit CO's a
good idea? The more relevant question to ask is what exactly is the value prop
of fintech?

I don't see it as any different than the mortgage brokers of the 2008's:
stripping fees off transactions with ZERO value add to the consumer...

If you want to really fix things start with the national market system. At
this point between dark pools, HFT and non-public company markets it is an
unqualified effing disaster from both a price discovery and accessibility
perspective.

#justsayin

~~~
dathanb82
> stripping fees off transactions with ZERO value add to the consumer...

The explosion of online shops made possible by companies like Stripe enabling
secure credit card processing without imposing PCI DSS compliance on small
businesses would disagree with you on whether there’s value to the consumer.
If nothing else, greater variety of shops available means greater choice,
which is generally considered good for the consumer.

Or PayPal, which allows the unbanked population to load funds to a widely-
accepted online wallet and actually participate in online marketplaces, which
they might otherwise be unable to do.

Or Affirm, which provides on-demand credit to consumers and lets them amortize
large one-time costs over a few months, enabling them to afford, e.g., tuition
when they otherwise might not be able to. (Tuition is maybe a bad example
since most universities already offer tuition financing options; but online
education services frequently don’t)

------
toomuchtodo
As this blog bluntly points out, deposits are subject to runs when used for
lending and reserve requirements must be met. If you don’t lend against
deposits, runs are of no consequence (hold deposits in a Treasuries money
market fund, implicitly guaranteed by the Fed and the Treasury, no different
then a brokerage core account). If you want to lend, originate it, securitize
it, and sell it on the bond market (last point the blog makes about FinTech
doing most mortgage origination volume now). The Fed is working on providing
instant payment infra, which minimizes the need for domestic wires and Zelle
(bank consortium instant payment platform) long term.

One of the most annoying issues I have with the Fed and the OCC are the denial
of charters for narrow banks to prevent competition against legacy banks. I am
very pro consumer finance regulation but very anti regulatory capture enabling
regulation. You can, in a very straightforward way, protect consumers from
predatory financial business practices while supporting financial innovation
(which, at this point, is cannibalization of inefficient banking goliaths and
necessary evolutionary pressure).

Most definitely, remove the chains from innovators and let them build more
efficient platforms for their customers on open protocols and existing
derisked primitives.

~~~
bleepblorp
There's still a need for some degree of attentive supervision for deposit-only
institutions to make sure that they're actually investing their customers'
money in liquid, secure, assets.

In the absence of regulation, the incentives for management would be to invest
customer deposits in high-yield, and therefore high risk and/or illiquid,
assets. Customers need to be protected against losing their deposits because
management invested everything in junk bonds or real estate.

There's also the risk of embezzlement to consider. Non-bank accounting
controls might not be adequate to protect large volumes of consumer deposits
from theft.

The fragility of (unregulated) cryptocurrency exchanges paints a very clear
picture of what would happen if deposit-only institutions were allowed to
operate without any supervision.

~~~
toomuchtodo
Yes! I agree, but this is exactly what these regulators are for, and systems
should be required to be built to attest to and meet continuous compliance
requirements as it relates to monies management. When deviations are detected
via instrumentation and telemetry, triage is triggered to ensure controls
haven’t been breached (and if they have been breached, regulators assume
control to provide an orderly transition for the benefit of the financial
consumers in question) (ie Don’t be Citi risk management)

Disclosure: I work in financial infrastructure. Thoughts, opinions, and rants
are my own.

------
ghancock
Cochrane seriously misconstrues what the WSJ op-ed is about, which I think is
understandable since it adopts a pro-regulatory tone while in the underlying
Second Circuit appeal that the op-ed is about the OCC is adopting a (sort of)
deregulatory position.

I think this article gives a better understanding of what’s actually
happening:
[https://www.kilpatricktownsend.com/Blog/fintech/2020/8/Banki...](https://www.kilpatricktownsend.com/Blog/fintech/2020/8/Banking-
on-the-Business-of-Banking-How-the-2nd-Circuits-Ruling-in-Lacewell-v-OCC-
Could-Change-the-Future-of-Fintech-Regulation)

In brief, if you want to set up a fintech company now, you may need to comply
with 50 states laws. That isn’t just being basically law-abiding, but involves
serious compliance work. I started looking up licenses for Square as an
example and got bored after the first few as state web sites are all different
and inconvenient:

[https://dbo.ca.gov/2018/04/02/square-
inc/](https://dbo.ca.gov/2018/04/02/square-inc/)

[https://www.dob.texas.gov/entity-search/entity-
detail?bid=10...](https://www.dob.texas.gov/entity-search/entity-
detail?bid=10417&eid=26&bn=0)

[http://www.dora.state.co.us/pls/real/BIDS_Search.Individual_...](http://www.dora.state.co.us/pls/real/BIDS_Search.Individual_Information?p_institution_id=9183&p_facility_id=NULL&p_PD=)

Each of those, and also for all the other states, involved satisfying a state
agency that Square was adequately solvent and would comply with a host of
laws. You may notice that the first two have license numbers and the numbers
are small. That says something about how easy it is to get the licenses. This
is a meaningful part of these companies’ moats.

The OCC action that New York is challenging is to provide a federal
alternative structure in which companies would get one federal license and
receive nationwide permission to engage in a host of banking-like activities.
They would still be able to get state licenses instead, if they wanted. This
system (of picking between a state and federal regulator) is called dual
chartering and has existed in the banking industry for a long time; it
establishes a check on both state and federal regulators by allowing the
regulated entity to switch to an alternative regulator.

------
Animats
Fintech companies often do take deposits in the short term. People have
balances with PayPal, which could potentially go bust or be looted. There's no
deposit insurance.

Classical money transfer companies like Western Union don't hold money very
long, days at most. But PayPal, Venmo, etc. do.

~~~
unishark
Seems like this should be just a theft issue. If Fedex goes bankrupt while my
package is in transit, I wouldn't expect them to be allowed to auction it to
pay off their debt.

~~~
sbierwagen
Money is a lot more portable than parcels. If Daniel H. Schulman wires all
paypal customer deposits to a bank account in a hostile jurisdiction, then
flies his private jet to that country, what should the US do?

Should the US say, start a literal war with Russia because Schulman stole
$20M? You could say "economic sanctions", but what economic sanctions hasn't
Congress already enacted against Russia?

There are a lot of countries that don't have extradition treaties with the
United State, and many more than that which don't mind seeing American
customers ripped off.

------
MiroF
Can't read the WSJ article linked, but

> For banking there is a reason for regulation, and it is precisely deposits.
> Deposits are open to runs.

I don't agree that this is the sole reason for banking regulation. For
instance, Glass–Steagall was not a regulation designed to prevent "runs."

~~~
MR4D
Actually, that is exactly the reason it was put in place. Banks had a habit of
losing money on the investment side, which was commingled with deposits side,
leading to rumors and the resulting bank runs.

Glass-Steagall prevented many of the activities that led to bank runs, and its
passage greatly increased the safety of a saver’s deposits.

This should be a pretty reliable source:
[https://fas.org/sgp/crs/misc/R44349.pdf](https://fas.org/sgp/crs/misc/R44349.pdf)

~~~
xg15
Yes, it was about the _activities that led to bank runs_ , in particular:

> _Banks had a habit of losing money on the investment side, which was
> commingled with deposits side_

Not the bank runs themselves.

~~~
MR4D
By definition, bank capital is commingled. If you and I both have an account
at a bank and the bank loses enough money, then _we_ lose money.

What Glass-Steagall did[0] was separate the investments from the deposits,
thereby eliminating one of the ways a commercial bank could lose capital.

My apologies if my use of the word “commingled” caused any ambiguity. For
anybody who has ever worked on Wall Street or in investments, rumors run like
the Mississippi during a spring flood through the community. Those same rumors
can take down an investment house (e.g. Bear Stevens with the repo rumors) or
a pre-Glass-Steagall bank. Hence the importance of eliminating the source of
those rumors and the accompanying bank runs.

[0] The law did more than that of course. I’m merely showing one key piece of
it.

------
baron_harkonnen
Fintech can be summed up as "companies doing illegal things to lose money".
It's seriously the thing that made me realize there is something very, very
wrong with tech today.

For most of history the reason to do illegal things was because it was
profitable but I have personally witnessed self described "fintech" companies
do illegal (or at the very least questionably legal) things that anyone with a
brain would say "wait, that will clearly lose more money than it makes"

Of course the trouble is that no regulatory bodies can actually enforce the
majority of the regulations they are supposed to. If the government had the
staff to enforce the regulations they are responsible for half of the CEOs
doing fintech work would be in prison.

"bubble" doesn't even come close to describing the situation we're in.

~~~
flerchin
Square and stripe are doing illegal things to lose money?

------
projektfu
Stripe and Square are more expensive than the prior regime. They’re more
convenient but more expensive. It’s not clear there’s a benefit to consumers.

~~~
jrvarela56
Convenience implies a reduction in cost. These businesses are doing well and
their customers are happy.

What do you think is happening? How are consumers getting screwed?

~~~
xg15
> _Convenience implies a reduction in cost._

No, why would it? Convenience and cost are two completely separate things.

~~~
nickff
Cost is not purely monetary (price); transaction costs also factor in
convenience, risk, and other factors.

~~~
xg15
I'm pretty sure GP was talking about monetary cost. This is moving the
goalposts.

~~~
AnimalMuppet
Disagree. Consider the phrase "time is money". That is, if Stripe costs more
money, but saves me time, and I can do other things with my time, and some of
those things make me money, then... is Stripe actually more expensive?

This is especially relevant if "I" am a small business rather than an
individual. Then the person whose time is saved can do something else with the
time that can make money for the business. Or the business can run with fewer
people, which saves money.

------
sn41
The reason for banking regulation is so that banks do not take high-risk-high-
reward-huge-losses types of risks with other people's money. If fintech does
the same behavior with indirect or direct leverage of other people's money,
then they should be subjected to regulation as well.

~~~
rahimnathwani
> high-risk-high-reward-huge-losses > types of risks with other people's money

Many HN readers run or work for businesses that take these kinds of risks
(with money from VC funds). But those businesses (along with fintech
companies) are different from banks: banks can take retail deposits.

If a bank fails then, in the absence of a government-run deposit guarantee
scheme, regular people can lose their entire life savings.

If a business other than a bank fails, it's unlikely anyone other than the
owner(s) will lose a large percentage of their wealth.

~~~
AnimalMuppet
Then maybe the relevant distinction is "big boy investors", "fully informed of
the risks", or "sharing in the rewards". Retail depositors think banks are
safe places to put their money, are not equipped to parse complicated
financial statements, and are not going to reap the benefits if the bank's
financial wizardry pays off.

But if you have someone who is able to understand the risks, fully informed of
what they are, and invests for a payback that is proportional to the risk... I
don't see a problem with letting them do so. Just don't make the little guy
take that risk, _especially_ when he doesn't know he's doing so.

------
soco
I see fintech companies promoting and using heavily cryptocurrencies and
ledgers. A strong use case for them is the fact that in certain jurisdictions
they witness a high level of trust thanks to strong financial regulations,
while in others there's too much room for transaction fraud. So a distributed
ledger works actually to provide a level of trust otherwise brought by
regulations.

------
classified
Those poor gamblers, if only they were allowed to show all the recklessness
they're capable of. What a disgrace.

------
croes
Why regulation of fintechs? Wirecard

~~~
andylynch
That's an interesting example; Wirecard is a case of regulatory failure in
that it before its collapse, the German financial regulator BaFin had been
instead filing criminal complaints against reporters and short seller covering
the firm.

~~~
ClumsyPilot
Sure that proves that Wirecard was not regulated properly, and needs
regulation.

If a city burned down because all firefighters were drunk, noone would be
arguing that we don't need firefighters.

~~~
andylynch
Quite right - in that case, wirecard _bank_ was (poorly?) but the parent
company is a more ordinary but prominent public company and they were clearly
more concerned about potential market abuse in the stock then what the company
itself was up to.

------
war1025
Off topic, but for the longest time I thought "Fintech" referred to tech
companies based in Finland or Scandinavia more broadly.

Those have a word, don't they?

~~~
twic
As an aside, Finland is not in Scandinavia, as it is usually defined:

[https://satwcomic.com/how-the-north-works](https://satwcomic.com/how-the-
north-works)

[https://soulofsweden-blog.tumblr.com/post/47742341547](https://soulofsweden-
blog.tumblr.com/post/47742341547)

Roughly, Scandinavian refers to mainland Europeans who speak a language
derived from Norse. Scandinavians are the majority in Denmark, Sweden, and
Norway, so those are Scandinavian countries, and a minority in Finland, so
that is not. Tove Jansson, Linus Torvalds, and Michael Widenius are all
Finnish Scandinavians, apparently.

Nordtech sounds right, though. I imagine that various places have already been
dubbed Silicon Fjord, Silicon Sauna, etc.

------
ncmncm
Only one thing could possibly improve the travesty that is fintech: a per-
transaction tax. Even a $.0001 tax per trasaction would buy universal college
education and universal medical care, with plenty left over to replace all
coal and oil-fired power with renewables and storage and replace the air fleet
with hydrogen-powered craft.

~~~
nordsieck
> Only one thing could possibly improve the travesty that is fintech: a per-
> transaction tax. Even a $.0001 tax per trasaction would buy universal
> college education and universal medical care, with plenty left over to
> replace all coal and oil-fired power with renewables and storage and replace
> the air fleet with hydrogen-powered craft.

That would only happen if fintech didn't change their behavior in response to
such a tax. I do not find that to be a reasonable assumption.

~~~
ncmncm
It would still be worth conducting fintechy business. It would barely affect
bonuses. It would still buy all that stuff after behavior adapted to the
change.

Your claim is of a piece with claims that raising the minimum wage would
destroy jobs, and people on minimum wage would be out of work. Guess what, we
tried it anyway, jobs didn't vanish at all, poor people have more money to
spend on necessities, and everyone is better off.

~~~
mrfredward
US healthcare spending in 2019: $3.6 Trillion

US Financial Sector profits: $422 billion

>It would still be worth conducting fintechy business. It would barely affect
bonuses.

It is absurd and blatantly false to claim the entire burden of the U.S.
healthcare system could be placed on a single industry with little effect.

~~~
ncmncm
Still it's worth a try.

