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Nasty Truths About U.S. Fintech
- hermanmerman 11y agoIf 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-pitch-deck http://slideshare.net/linhir/standard-treasury-series-a-pitc... 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.
- mikeyouse 11y ago> For once, the USA seem to have no competitive advantage. For some businesses maybe, but given that in the past week or so, Square filed to IPO and Stripe raised several more tens of millions, it seems there's plenty of 'gravity' here too.
- adventured 11y agoThe 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 11y agoAnd the most majestic eagles.
- justincormack 11y agoThe US has the largest local markets, but London is larger for international transactions and many markets such as foreign exchange and derivatives.
- spacecowboy_lon 11y agoAnd the UK government is actively encouraging challenger banks.
- deet 11y agoThe 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 11y agoI honestly didn't know the word "FinTech" was a thing—this is the first time I've seen it.
- prawn 11y agoI thought it was the name of a startup!
- dublinclontarf 11y agoCome to the London startup scene, it's well known.
- zhte415 11y agoHaving 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 11y agoI heard it 4 years ago. You've been living under a rock. :p
- zhte415 11y agoPerhaps. 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.
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- scurvy 11y agoI'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.
- nickff 11y agoMany of us remain unconvinced of the notion that a "lack of oversight and enforcement" caused the great recession.[1][2][3][4] [1] http://mercatus.org/sites/default/files/GrowthofFinancialRegulations580v2.png http://mercatus.org/sites/default/files/GrowthofFinancialReg... [2] http://dailysignal.com/wp-content/uploads/BL-SEC-budget-chart1.jpg http://dailysignal.com/wp-content/uploads/BL-SEC-budget-char... [3] http://media.economist.com/sites/default/files/imagecache/290-width/images/2012/04/blogs/free-exchange/CFTC%20chart.gif http://media.economist.com/sites/default/files/imagecache/29... [4] http://www.yalelawjournal.org/mht_files/98/SteinwayforWebsite_zo611my2_files/image004.gif http://www.yalelawjournal.org/mht_files/98/SteinwayforWebsit...
- yummyfajitas 11y agoWhat specific sort of oversight/enforcement/regulation do you believe would have prevented 2008?
- TheOtherHobbes 11y agoGlass Steagall did an excellent job - until it started being ignored, and before it was repealed.
- yummyfajitas 11y agoWould 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.
- hkmurakami 11y agoThat'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-pitch-deck?ref=http://blog.zactownsend.com/standard-treasurys-series-a-pitch-deck http://www.slideshare.net/linhir/standard-treasury-series-a-... Screenshot of slide: http://gyazo.com/f2a23c97e1ef652ddbe6cdb5fadbf737 http://gyazo.com/f2a23c97e1ef652ddbe6cdb5fadbf737
- baseballmerpeak 11y agoCostly and simply not possible with the current regulatory environment (Slide 31 - De Novo Charters)
- rayiner 11y agoIt'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 11y agoEither 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
- thinkcomp 11y agoI testified before Congress on this issue. http://www.aarongreenspan.com/writing/20131118.hsgacstatement.pdf http://www.aarongreenspan.com/writing/20131118.hsgacstatemen... 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 11y agoWhat is YC's involvement in this? What are you referring to?
- saucetenuto 11y agoI 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 11y agoNo, I mean what I wrote: "In fact, they and just about every VC-backed portfolio company have made the situation far worse..."
- Cederfjard 11y agoA little bit of (somewhat relevant) context: https://news.ycombinator.com/item?id=7718034 https://news.ycombinator.com/item?id=7718034
- pbreit 11y agoIt'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 11y agoVenmo and a few other companies have benefitted from Precash's oversight, but asymmetric agency relationships are no longer a viable option.
- nickpsecurity 11y agoThe 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 11y agoNow that's a conspiracy theory.
- cfreeman 11y agoOr just another example of https://en.wikipedia.org/wiki/Regulatory_capture https://en.wikipedia.org/wiki/Regulatory_capture.
- jafaku 11y agoDo you realize "conspiracy theory" doesn't mean "false"?
- jazzyk 11y agoJust like the NSA spying on US citizens, right?
- nickpsecurity 11y agoOh, don't believe me that banks pay off politicians. Look at their own records: http://www.opensecrets.org/lobby/clientsum.php?id=D000000090 http://www.opensecrets.org/lobby/clientsum.php?id=D000000090
- cm2187 11y agoIt's rather the excess of regulation due to anti-bank sentiment that creates these barriers to entry. Banks are rather calling for less regulations, and when they got it their way in the 90s, it is what happened. But it is true that the excess of regulation is reenforcing the position of the incumbents. Banks have to staff full time employees just to read the amount of draft regulations and consultation papers published every day. A start up stands no chance in that environment.
- 7Figures2Commas 11y ago> 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 11y agoThe 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.
- toephu2 11y agoVenmo seems to be doing fine though?
- thinkcomp 11y agoLife is grand when you sell out to one of the largest money transmitters in the nation (in this case, PayPal).
- rumayor 11y agoVenmo was saved by being acquired by Braintree, which was acquired by Paypal, who is licensed.
- reviseddamage 11y agoVenmo received both of CA and NY licenses itself while it was an agent to a money transmitter license for the rest of the states before it was acquired.
- Illniyar 11y ago`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 11y agoHere'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.
- condescendence 11y agoThis 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.
- zekevermillion 11y agoRipple 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.
- tbrownaw 11y agoUnfortunately 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. They should follow transportation/telephone/common-carrier rules, because they're just as necessary to life in modern society.
- pjc50 11y ago
- boskonyc 11y agoIs 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.
- markbnj 11y agoThe 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 11y agoHawala [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 11y agoThe 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.
- skhatri11 11y agoGood 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 :)
- devy 11y agoDo those challenges apply to bitcoin startups?
- s73v3r 11y agoYes. 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.