Chime Is Not A Bank

Goldman Launches Crypto Desk (again), Gensler Testifies, Fifth Third Low Cost Accounts

Hey all, Jason here!

Happy Mother’s Day! If you’re wondering why this week’s issue is a little later (and shorter) than normal, it’s due to me making the hop across the pond. After over a year without leaving the Netherlands, I double masked upped and, with COVID test in hand, flew back to Chicago. I headed straight from the airport to a nearly deserted mass vaccination site in Lake County, and can happily say I’m en route to being fully vaccinated!

Mark your calendar — I’m also excited to announce I’ll be moderating a panel on “Buy Now, Pay Later and Point of Sale lending: Protecting Consumers & the Industry” at the COMPLY Summit on May 20th. You can check out the full agenda here and register (it’s free!).

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Chime Is Not a Bank

In late March, Chime agreed to a settlement with the California Department of Financial Protection and Innovation, the state’s financial services regulator, regarding Chime’s practices of describe itself as a “bank” and that it offered “banking” products and services.

Specifically, the Commissioner found:

“1. That Chime’s use of the URL address of ‘chimebank.com’ prior to February 2020 was in violation of Cal. Fin. Code § 561 in California.

2. That Chime’s usage of the words ‘bank’ and ‘banking’ in certain other aspects of Chime’s business violated Cal. Fin. Code § 561 in California.”

The settlement agreement requires Chime to cease using the URL chimebank.com unless and until it becomes licensed or otherwise authorized to provide banking services in California.

Chime further agreed, where it uses “banking” terminology on its site, in its app, in user testimonials, and in advertisements, to include a conspicuous and prominent disclaimer that Chime is not itself a bank, and that banking services are provided by its partners, Bancorp or Stride (emphasis added):

“Where ‘banking’ terminology is used, Chime shall place a disclosure stating that Chime is not a bank and banking services are provided by its Bank Partner(s). The disclosure shall be in bold and/or increased font size in a clear and conspicuous manner proximate to the use of the banking terminology.”

Biggest Impact May be On Other Fintechs, Not Consumers

It’s not immediately clear what impact, if any, these kinds of consumer-facing disclosures have on a user’s decision making process.

While the California DFPI’s specific case is quite straightforward — describing yourself as a “bank” when you aren’t is, on its face, problematic — the current solutions may meet the letter of the law, while doing little to reduce consumer confusion.

For instance, as of this writing, numerous fintechs operating under the same partnership model as Chime prominently use “banking” language without conspicuous and proximate disclosures, for instance Current and Dave, pictured below:

On the other hand, Revolut, SoFI, Unifimoney, Cash App, and others offer largely similar services while avoiding describing themselves or their products as “banking.”

Perhaps rather than focusing on enforcing the distinction between “bank” and not a bank, which, while legally important, may be lost on the average consumer, regulators should focus on updating licensing categories and processes to reflect the evolving consumer financial services landscape.

Goldman Sachs Launches Crypto Desk

This is actually Goldman’s second go around at a running a crypto trading desk. The firm originally launched the project in 2018, but quietly wound it down amid bitcoin’s dramatic price crash that year.

The investment bank’s re-launched trading desk will focus on crypto derivatives, including trade futures and non-deliverable forwards, as the regulatory environment for banks on trading in spot cryptoassets remains unclear.

According to the FT, at launch, the services will be available only to Goldman’s prime brokerage and private banking clients.

Fifth Third Latest to Launch Low Cost Accounts

Fifth Third is the latest “legacy” bank to hit back at fintech challengers by announcing a low-cost deposit account designed to help customers avoid overdraft fees and get access to their paychecks sooner.

But, as Alex Johnson points out in the somewhat tongue-in-cheek tweet below, the responses of firms like Fifth Third and PNC end up feeling a bit “too little, too late.”

Rather than respond to consumer challenges by innovating and developing better products, many banks spent decades profiting off of punitive fee revenue from overdrafts and minimum balance fees.

Now that those sources of revenue are at risk, banks are (finally) responding, but it leaves them on the defensive — trying to prevent more customers from leaving, rather than attracting new ones by offering better products.

Gensler Testifies on Meme Stocks, Robinhood, Archegos Debacle

Also last week, Gary Gensler, now the confirmed Chair of the Securities and Exchange Commission, testified in front of the House Committee on Financial Services.

While he made clear he was speaking on his own behalf, rather than for the other commissioners or SEC staff, his testimony is a good guide on topics that will be up for further scrutiny and, potentially, new rulemaking or regulation.

His prepared testimony touched on seven key themes:

  • Gamification and User Experience

  • Payment for Order Flow

  • Equity Market Structure

  • Short Selling and Market Transparency

  • Social Media

  • Market “Plumbing”: Clearance and Settlement

  • System-Wide Risks

On gamification and the user experience of popular trading apps, like Robinhood, Gensler said (emphasis added):

“Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position. A big loss could have immediate implications for the app user’s ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement.

Many of these features encourage investors to trade more. Some academic studies suggest more active trading or even day trading results in lower returns for the average trader.”

He further hinted at the connection between apps that encourage active, frequent trading and payment for order flow, which potentially presents a conflict of interest for how retail customers’ orders are routed for execution.

Gensler stated (emphasis added):

“…certain principal trading firms seeking to attract Robinhood’s order flow told them that there was a tradeoff between payment for order flow and price improvement for customers. Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself.

As a result, many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they’d gotten from a zero commission.”

Other Good Reads This Week

Marc Ruby on Other People’s Money

Aika Ussenova on Revolut’s Puzzle

Simon Taylor’s Fintech 🧠 Food, on Marqeta’s IPO price, Wealthsimple’s raise, and core banking

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