CFPB vs FDIC; Chase Trims Overdrafts
Monzo Valuation Bounces Back, Affirm "Pay Now" Cash Back, Crypto Goes to Washington
Hey all, Jason here.
After two weeks traveling in Mexico and the US, I’m just now back home in the Netherlands. Overall, a fantastic trip, but international travel in the time of COVID is (and is likely to continue to be) not particularly pleasant!
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Power Struggle: CFPB vs FDIC on the Bank Merger Act
There are two stories here. First, the one grabbing most of the headlines: dueling statements released by the CFPB and the FDIC on Thursday.
Rohit Chopra, recently confirmed Director of the CFPB, and Martin Gruenberg, both of whom sit on the FDIC’s board, released a statement that the FDIC had approved a request for public comment on policy governing bank merger transactions (emphasis added):
“The Board of the Federal Deposit Insurance Corporation (FDIC) has approved a Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions. This marks the beginning of a careful review of the effectiveness of the existing regulatory framework in meeting the requirements of the Bank Merger Act. Effective implementation of the Bank Merger Act has deep implications for the safety and soundness, financial stability, community accountability, and competitiveness of the banking system. We strongly support this Request for Comment.”
Notably, the statement was released on the CFPB’s website rather than the FDIC’s.
The FDIC quickly fired back with its own statement (emphasis added):
“Earlier today, the Consumer Financial Protection Bureau (CFPB) posted on its website a document, purportedly approved by the FDIC, requesting comment on bank mergers. No such document has been approved by the FDIC.
The FDIC has longstanding internal policies and procedures for circulating and conducting votes of its Board of Directors, and for issuing documents for publication in the Federal Register. In this case, there was no valid vote by the Board, and no such request for information and comment has been approved by the agency for publication in the Federal Register.
The FDIC has a proud 88-year history of Board members working together in a collegial manner. This history has spanned many Presidential administrations, and countless philosophical differences on substantive issues among Board members over the years. Notwithstanding the actions taken today, the FDIC expects this time-honored tradition of collegiality and comity to continue.”
So what’s going on here?
The FDIC is governed by a five member board, which, by law, can have no more than three board members appointed by the same political party.
Currently, it consists of Chair Jelena McWilliams, a Trump appointee; Michael Hsu, the Acting Comptroller of the Currency; Rohit Chopra, the Director of the CFPB; and Martin Gruenberg, former Chair of the FDIC and current FDIC director; the fifth slot is vacant.
That makes the math 3-1 in favor of Democrats. McWilliams’ term as Chair runs through 2023.
While both sides have yet to make their legal arguments clear, what appears to have happened is that the Democratic appointees voted to approve the request for information, while Chair McWilliams seems to be arguing that, as Chair, she controls the agenda for FDIC board meetings, and thus the vote was illegitimate. According to Adam Levitin in Credit Slips (emphasis added):
“If that’s the argument, it is plainly wrong. The FDIC is governed first and foremost by federal statute and then secondarily by its own bylaws. Federal law vests management of the FDIC in its board of directors. Federal law also gives the FDIC the power to adopt bylaws. There is nothing in federal statute specifically empowering the FDIC chair to set agendas. Indeed, there is very little that federal statutes prescribe for the FDIC chair.”
While it appears the law is on the side of the Democratic appointees, if Chair McWilliams decides to fight, she could drag out the process, thus delaying the Democratic appointees’ agenda.
What’s in the Request for Information?
The second story: the power struggle drama seems to have overshadowed the substance of the request for public comment — how bank mergers are considered for approval by federal regulators.
The RFI argues that a review and potential update of regulators’ framework for assessing proposed bank mergers is needed in light of continued consolidation in the sector, in order for regulators to fulfill their responsibilities to promote public confidence in the banking system and to ensure financial stability.
Data included in the RFI show that the number of banks, particularly those with less than $10 billion in assets, have declined, while concentration of assets in the largest institutions has increased (emphasis added):
“Consolidation also has materially altered the economic landscape of insured depository institutions with assets less than $100 billion. Over the same 30-year period, the number of institutions with assets less than $10 billion has declined drastically from 15,099 in 1990 to 4,851 in 2020, a reduction of approximately 68 percent.
The declining number of smaller insured depository institutions may limit access to financial services and credit in communities, potentially adversely affecting the welfare of the communities’ workers, farmers, small businesses, startups, and consumers.”
While Chopra and Gruenberg’s arguments are primarily grounded in financial stability concerns, they also make reference to potential negative consequences on consumer access to financial services and credit from increased consolidation in the banking sector.
They highlight the shrinking number of smaller banks and branch closures as risks and position increased scrutiny of bank mergers as a potential antidote.
One doesn’t have to look too far back to confirm there are risks that stem from the increasing size and complexity of financial institutions; 2008 wasn’t that long ago.
Still, focusing regulatory efforts on throwing up barriers to bank mergers feels like an effort to freeze time to preserve a banking world as it used to be, rather that focusing on creating forward looking regulation and policy to foster competition in the banking world of today and tomorrow.
Banking is no longer a geographically-bound business. Banks’ branch networks have been a depreciating asset for decades and, despite progressive regulators’ best efforts, that is unlikely to change.
The absence of physical, geographic constraints makes banking even more of a scale game than it was in the days of branch banking. The companies that can afford to invest in tech and operate at a national scale are likely to continue to grow — a paradigm that doesn’t favor small, local banks.
If federal banking regulators are keen to encourage competition, creating a streamlined path for de novo bank licensing and a new non-depository “fintech” license may be a better approach than trying to turn back the clock by making bank mergers more arduous.
JPMorgan Chase Begrudgingly Trims Overdrafts, Allows 2-Day Early Direct Deposit
Fresh off the news that Capital One will eliminate overdraft and NSF fees altogether, JPMorgan Chase, America’s largest bank by assets, has decided to… give its customers a one business day grace period before assessing an overdraft fee.
Okay, okay, to be fair, earlier this year, Chase expanded its fee-free overdraft amount from $5 to $50, meaning users can overdraft by up to $50 without incurring a fee. The bank also eliminated NSFs, which were incurred when a transaction was attempted that Chase didn’t pay on the users’ behalf.
Now, Chase is giving its customers a one day grace period to bring their account below the $50 threshold to avoid an overdraft fee; according to the press release:
“Continuing with the enhancements made this year, in 2022 the bank will provide more ways for consumers to avoid overdraft fees by enhancing its services to include:
Providing a day to catch up. Customers will have until the end of the next business day to bring their balance back to $50 overdrawn or less to avoid overdraft service fees from the previous day.”
Chase will also make payroll direct deposits available up to two days early, a feature popularized by neobank Chime.
About 1% of Chase’s revenue is derived from overdraft fees. According to CNBC, the latest changes together with those made earlier this year may have a material impact on Chase’s financials (emphasis added):
“The moves, together with changes the bank initiated in August, will have a ‘not insignificant’ impact on bank revenue, said Jenn Piepszak, co-CEO of the Chase segment of JPMorgan, who declined to be more specific in an interview.”
Monzo Valuation Bounces Back in $500m Fundraise
Monzo, which saw its valuation slashed in a fundraising down round during the early days of the pandemic, seems to be back. The UK neobank confirmed it has raised a fresh $500m at a valuation of $4.5 billion — a sharp increase from its previous ~$1.66 billion valuation. The round included new investors Abu Dhabi Growth Fund, Coatue, and Alpha Wave Ventures.
It’s possible recent raises and increasing valuations for fellow neobanks like Revolut, N26, Chime, and Varo made Monzo look like a comparative bargain.
Prior to this raise, Monzo was valued at considerable discount vs. its peers on a per user basis:
Monzo also struggled with executive turn over, with founder/CEO Tom Blomfield stepping away at the beginning of 2021, citing mental health issues amidst the pandemic. Still, with growing customers and revenues and a string of product expansions, the company seems to have turned a corner, at least in its home market.
According to the FT, 25% of revenues came from new products launched during the pandemic, like premium consumer and business accounts; the company has reportedly reached 5m users with approximately 100,000 joining each month.
The change in fortunes may not translate to Monzo’s fledgling attempt to enter the US market, however. Its banking license application was quickly rebuffed by banking regulators. Its offering via partner Sutton Bank is largely undifferentiated and has yet to launch publicly.
Affirm Launches “Pay Now” Option with Cash Back Rewards
Lately, it seems like every buy now, pay later player is launching a “Pay Now” option.
At first blush, this seems like a confusing move.
Isn’t the whole point of BNPL that you’re paying later? But as you consider possible longer term strategies of BNPL companies, the reasoning behind a “pay now” option begins to make sense.
If the financing component of BNPL is becoming a commodity, providers are seeking to differentiate up funnel in order to own the customer relationship. This strategy is evident in the metastasization of BNPL across the shopping landscape: what started as an option at checkout is now available as a virtual card, physical card, at the point-of-sale in bricks and mortar locations, as a browser extension, as a shopping app, and so on.
But to be relevant to all of a consumers’ potential purchases, not just the ones they are looking to finance, requires a pay-in-full option. Thus, the “Pay Now” button.
It doesn’t hurt that providing the pay-in-full option helps BNPL providers like Affirm to rebut consumer advocates’ argument that the companies encourage consumers to make purchases they otherwise couldn’t afford.
Why would a user choose to pay via an Affirm button vs. an existing debit or credit payment card? Potentially, convenience: if Affirm already has stored payment credentials for a user, it compresses the payment experience to a single button, much like PayPal, Fast, and fellow BNPL Klarna’s “Pay Now” option.
The bigger draw may be the cash back rewards Affirm is promising — though the perk is limited to participating merchants:
“When shopping in the Affirm App at a participating merchant — labeled throughout the Affirm App with a cash back offer or found in the ‘Cash Back with Affirm’ page — consumers will select the option to choose their debit or credit card and enter their information to pay in full at checkout.”
In Affirm’s case, the cash back promotion serves an additional purpose: to drive users towards its savings account, offered though bank partner Cross River Bank. In order to receive the cash back offer, users must have an Affirm savings account.
Together with Affirm’s yet-to-launch decoupled debit offering, you can see the outline of how the company can offer a synthetic full stack of spending, financing, and savings products — all without owning or operating many of the underlying pieces itself.
Crypto Execs Testify in House Financial Services Committee Hearing
Crypto seems to be one of Congress’ favorite topics lately. Next week, the Senate Banking Committee will hold a hearing about stablecoins. Last week, the House Financial Services Committee hosted execs from crypto companies.
The House hearing, titled “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States,” included representatives from Circle, FTX, Bitfury, Paxos, Stellar Development Foundation, and Coinbase — a group that included former Acting Comptroller Brian Brooks, now the CEO of Bitfury. Two more contentious companies, Meta (Facebook) and Tether, were not represented at the hearing.
According to the New York Times (emphasis added):
“The hearing was called by Representative Maxine Waters, the California Democrat who leads the committee, as part of an effort to understand fast-growing digital assets — and how to regulate them. It followed familiar partisan patterns, with Democrats expressing concern about crypto’s risks as Republicans emphasized innovation and said that strict regulation would drive the industry away from the United States.”
And according to Bloomberg (emphasis added):
“Notably absent from the hearing were executives from Tether, the world’s biggest stablecoin with an estimated market value of about $76 billion. Plenty of allusions to Tether were made, however, as participants talked about the need for greater transparency of stablecoin reserves.”
While Congress has shown a keen interest in crypto lately, legislative action seems unlikely to move quickly, barring a major blowup in the sector, particularly given the 50-50 split in the Senate.
Instead, any increased regulation of the sector is likely to stem from authority already held by the SEC, CFTC, and banking regulators.
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Other Good Reads
Americans’ Pandemic-Era ‘Excess Savings’ Are Dwindling for Many (NYTimes)
Overdraft Scrutiny Can Be Opportunity for Lenders (WSJ)
Networks in Finance (Net Interest)
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