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An act of Congress (I believe it was Dodd-Frank) capped debit card fees at a very low amount (fractions of a precent). An exception was left in for small banks

An act of Congress (I believe it was Dodd-Frank) capped debit card fees at a very low amount (fractions of a precent). An exception was left in for small banks to continue to charge credit-card-like rates for debit cards, around 2%. Since then, every fintech has had essentially the same business model: - Come up with some kind of "innovative" thing to sell consumers on that results in them generating debit card transactions. (Online bank account, instant international money transfer, loan, etc.) - the trick is that to get the money, you swipe that debit card. - Partner with some small bank so that they are one the one providing the debit card. The law essentially has a loophole on it allowing this. - The fintech company sets up essentially everything, with all the small bank does is have automated accounts created for cardholders when the fintech's software says so. No money is kept in the customer account until the moment of that debit card swipe - then it is instantly transferred in and instantly transferred back out for the payment. - This requires reserves, but the fintechs and small banks collaborate on how to get good interest on the reserves involved. There are now fintechs which offer "fintech as a service" which will set all of this up for a tiny bank who can then offer this to any other fintech with almost no involvement from the tiny bank. All they have to do is sign a few papers. The definition of a big or small bank is based on the amount on deposit, so they are careful to not actually have any money on deposit. Congress needs to correct this abuse, immediately, and only allow the larger debit card fees for traditional checking accounts held by consumers where the money involved is held on deposit at that bank. Edit: one of the major problems here is that small banks are often not staffed for adequate cybersecurity for global operations like these; they do just fine doing hometown community banking, but are very vulnerable to being cracked like this. Yet another reason small banks that are providing big-bank services should be regulated like big banks.

cal5k 2y ago
The key to keeping debit card fees down isn't to legislate a fee cap, it's to make payment rails more open and competitive. Why are regulators still attacking stablecoins, for example, when they represent one type of innovation that could actually lower transaction costs? Creating a legislative framework that encourages innovation rather than stifles it would make a lot more sense than trying to micromanage fees.
- toomuchtodo 2y ago
  https://news.ycombinator.com/item?id=36801491 https://news.ycombinator.com/item?id=36801491 ("HN: FedNow Is Live") https://www.frbservices.org/financial-services/fednow/organizations https://www.frbservices.org/financial-services/fednow/organi... https://explore.fednow.org/explore-the-city?id=3&building=news-center&postId=47&postTitle=2024-fednow-service-pricing-now-available https://explore.fednow.org/explore-the-city?id=3&building=ne... $25/month to plug into FedNow instant payment rails, 5 cents to move up to $100k in value (initial limit, max is $500k), 20 second settlement SLA.
  - jabroni_salad 2y ago
    This technically exists but can you actually use it? It seems like there are no articles about it in the 2024 calendar year. I remember reading a really nice screed from walmart last year pushing the fed to turn the screws on rent seekers, but without RFP and ubiquitous participation that isnt going to come about. bit of a conspiracy here but IMO banks have been observing the fraud rates with zelle, venmo, etc and only tolerating it because an external party gets to be the bogeyman.
    - toomuchtodo 2y ago
      In cases of unauthorized Zelle payments, consumers have legal rights and protections under the Electronic Funds Transfer Act (also known as "Reg E”). This also applies to FedNow instant payments, which has fraud management services available and includes a closed loop reporting requirement. You should expect to see instant payment functionality that runs on FedNow rails within banking apps in the next 6-12 months. I cannot share more detail publicly unfortunately, my apologies. (contribute at a fintech, thoughts and opinions always my own)
      - FireBeyond 2y ago
        One of the bigger product goals for Zelle, I thought (though perhaps not the most publicized), was "moving liability away from banks more to consumers" (not exclusively, but moreso), I thought? I believe there had even been leaked internal presentations on that liability reduction.
rdl 2y ago
That is one of the more clear (and opinionated, but IMO correct) summaries of how we got here that I've seen -- thank you! Another aspect are all the cartel-like programs of banks overall (and the banking regulators) to keep even well-capitalized fintechs from offering these services directly. For e.g. Mercury they could probably be entirely fine without the high debit card fees.
Eridrus 2y ago
This doesn't seem to describe either Wise (international transfers, not an account) or Mercury (business banking where you can get your money out in a bunch of ways that do not involve debit cards).
- trollbridge 2y ago
  Now that rates are higher, another fintech “opportunity” is anything that lets you sit on a large amount of money for a few days and collect 5% on it. Of course, some fintechs actually are providing a legitimate service. I’d like to see them partnering with a legitimate bank directly instead of using an intermediary like Synapse which just dumped all the money in one FBO account.
lowkey_ 2y ago
> one of the major problems here is that small banks are often not staffed for adequate cybersecurity for global operations like these; they do just fine doing hometown community banking, but are very vulnerable to being cracked like this. Yet another reason small banks that are providing big-bank services should be regulated like big banks. Exactly — people are responding to me with comments about how SVB failed, or how the Goldman partnership isn't going well, but like... looking at Evolve's website I know for a fact they aren't hiring solid SWEs for cybersecurity. I understand nobody's perfect, but this is the "Nobody got fired for buying IBM" ideology at work. If you chose Goldman and they got hacked, sure, I'll say "well you couldn't have known" — but if you choose a random bank based in Memphis I've never heard of, I'll naturally be more like "wtf."
- aketchum 2y ago
  but Goldman wont take your call if you are sub $100MM in revenue (probably need way more than that). So you set up your partnership early in your company life then if the relationship is working fine why would you pay hundreds of thousands or millions of dollars and rebuild your integrations just to have a larger bank partner that none of your users will ever know you are using
- trollbridge 2y ago
  Or in this case, a bank based in West Memphis, _Arkansas_ that you’ve never heard of.
aketchum 2y ago
There are plenty of reasons to partner with a bank as a fintech other than to drive debit card revenue. 1. There are lots of regulations that say only banks can do certain actions, like lend in all 50 states under the rules of a single state. Or open a FDIC insured checking account. Or have a unique account+routing number for each user to send ACH funds to (various reasons this could be preferred to everyone ACH to one single global account). These are valuable services without any debit card issued by the fintech. 2. It is basically impossible to become a bank. The government only approves a handful a year. Square (block) actually got approval recently but it is very difficult to do. As a result of (1) + (2) is that if your company needs any banking products at all you need to partner with a bank because there is just no reasonable way to legally build that functionality yourself.
- iudqnolq 2y ago
  3. Smaller banks might be worse at preventing you from breaking the law. (This data dump exposes lots of customers that should have triggered KYC issues, like an American dog-walking startup remotely operated from Pakistan )
- trollbridge 2y ago
  (1) is absolutely true. (2) - well, it isn’t that hard to become a bank, but it is hard to become a bank when your business plan is “we want to operate well outside of established regulation and norms”. (Starting a state chartered bank is particularly straightforward.) There are many small banks that would like to be acquired and they are generally profitable. A VC-funded fintech would not have a terribly difficult time acquiring a bank, particularly one that wants to offer BaaS, like Synapse did.
  - aketchum 2y ago
    Sure - but that is buying a bank not forming a new bank. I do agree that in practice this is how well funded companies become banks.
  - 0x3444ac53 2y ago
    Currently working at a state chartered credit union. Although it is "easy" to start one, most states regulations are very strict and lag significantly behind federal ones. Hell, where I work we aren't even allowed to serve businesses, loans, deposits, or otherwise.

cal5k 2y ago

The key to keeping debit card fees down isn't to legislate a fee cap, it's to make payment rails more open and competitive. Why are regulators still attacking stablecoins, for example, when they represent one type of innovation that could actually lower transaction costs? Creating a legislative framework that encourages innovation rather than stifles it would make a lot more sense than trying to micromanage fees.

toomuchtodo 2y ago
https://news.ycombinator.com/item?id=36801491 https://news.ycombinator.com/item?id=36801491 ("HN: FedNow Is Live") https://www.frbservices.org/financial-services/fednow/organizations https://www.frbservices.org/financial-services/fednow/organi... https://explore.fednow.org/explore-the-city?id=3&building=news-center&postId=47&postTitle=2024-fednow-service-pricing-now-available https://explore.fednow.org/explore-the-city?id=3&building=ne... $25/month to plug into FedNow instant payment rails, 5 cents to move up to $100k in value (initial limit, max is $500k), 20 second settlement SLA.
- jabroni_salad 2y ago
  This technically exists but can you actually use it? It seems like there are no articles about it in the 2024 calendar year. I remember reading a really nice screed from walmart last year pushing the fed to turn the screws on rent seekers, but without RFP and ubiquitous participation that isnt going to come about. bit of a conspiracy here but IMO banks have been observing the fraud rates with zelle, venmo, etc and only tolerating it because an external party gets to be the bogeyman.
  - toomuchtodo 2y ago
    In cases of unauthorized Zelle payments, consumers have legal rights and protections under the Electronic Funds Transfer Act (also known as "Reg E”). This also applies to FedNow instant payments, which has fraud management services available and includes a closed loop reporting requirement. You should expect to see instant payment functionality that runs on FedNow rails within banking apps in the next 6-12 months. I cannot share more detail publicly unfortunately, my apologies. (contribute at a fintech, thoughts and opinions always my own)
    - FireBeyond 2y ago
      One of the bigger product goals for Zelle, I thought (though perhaps not the most publicized), was "moving liability away from banks more to consumers" (not exclusively, but moreso), I thought? I believe there had even been leaked internal presentations on that liability reduction.

rdl 2y ago

That is one of the more clear (and opinionated, but IMO correct) summaries of how we got here that I've seen -- thank you! Another aspect are all the cartel-like programs of banks overall (and the banking regulators) to keep even well-capitalized fintechs from offering these services directly. For e.g. Mercury they could probably be entirely fine without the high debit card fees.

Eridrus 2y ago

This doesn't seem to describe either Wise (international transfers, not an account) or Mercury (business banking where you can get your money out in a bunch of ways that do not involve debit cards).

trollbridge 2y ago
Now that rates are higher, another fintech “opportunity” is anything that lets you sit on a large amount of money for a few days and collect 5% on it. Of course, some fintechs actually are providing a legitimate service. I’d like to see them partnering with a legitimate bank directly instead of using an intermediary like Synapse which just dumped all the money in one FBO account.

lowkey_ 2y ago

> one of the major problems here is that small banks are often not staffed for adequate cybersecurity for global operations like these; they do just fine doing hometown community banking, but are very vulnerable to being cracked like this. Yet another reason small banks that are providing big-bank services should be regulated like big banks. Exactly — people are responding to me with comments about how SVB failed, or how the Goldman partnership isn't going well, but like... looking at Evolve's website I know for a fact they aren't hiring solid SWEs for cybersecurity. I understand nobody's perfect, but this is the "Nobody got fired for buying IBM" ideology at work. If you chose Goldman and they got hacked, sure, I'll say "well you couldn't have known" — but if you choose a random bank based in Memphis I've never heard of, I'll naturally be more like "wtf."

aketchum 2y ago
but Goldman wont take your call if you are sub $100MM in revenue (probably need way more than that). So you set up your partnership early in your company life then if the relationship is working fine why would you pay hundreds of thousands or millions of dollars and rebuild your integrations just to have a larger bank partner that none of your users will ever know you are using
trollbridge 2y ago
Or in this case, a bank based in West Memphis, _Arkansas_ that you’ve never heard of.

aketchum 2y ago

There are plenty of reasons to partner with a bank as a fintech other than to drive debit card revenue. 1. There are lots of regulations that say only banks can do certain actions, like lend in all 50 states under the rules of a single state. Or open a FDIC insured checking account. Or have a unique account+routing number for each user to send ACH funds to (various reasons this could be preferred to everyone ACH to one single global account). These are valuable services without any debit card issued by the fintech. 2. It is basically impossible to become a bank. The government only approves a handful a year. Square (block) actually got approval recently but it is very difficult to do. As a result of (1) + (2) is that if your company needs any banking products at all you need to partner with a bank because there is just no reasonable way to legally build that functionality yourself.

iudqnolq 2y ago
3. Smaller banks might be worse at preventing you from breaking the law. (This data dump exposes lots of customers that should have triggered KYC issues, like an American dog-walking startup remotely operated from Pakistan )
trollbridge 2y ago
(1) is absolutely true. (2) - well, it isn’t that hard to become a bank, but it is hard to become a bank when your business plan is “we want to operate well outside of established regulation and norms”. (Starting a state chartered bank is particularly straightforward.) There are many small banks that would like to be acquired and they are generally profitable. A VC-funded fintech would not have a terribly difficult time acquiring a bank, particularly one that wants to offer BaaS, like Synapse did.
- aketchum 2y ago
  Sure - but that is buying a bank not forming a new bank. I do agree that in practice this is how well funded companies become banks.
- 0x3444ac53 2y ago
  Currently working at a state chartered credit union. Although it is "easy" to start one, most states regulations are very strict and lag significantly behind federal ones. Hell, where I work we aren't even allowed to serve businesses, loans, deposits, or otherwise.