Observations From Money 20/20

Let me start by sharing my Money 20/20 stats:

• 3 Days
• 73,804 Steps
• 30 Meetings
• 3 Speaking Engagements
• 2 Meetups
• 1 Live Recording of Fintech Recap (drops next Wednesday!)
• 1 Visit to the Sphere (thanks for the invite Nova Credit!)
• 1 Pickup Basketball Game

I’m not going to share my stats from the basketball game because, honestly, I’m just happy I didn’t sprain an ankle or have a heart attack running up and down the court, chasing after everyone. There are some serious hoopers working in fintech!

(BTW – pickup basketball was a delight, and we are absolutely doing it again next year. I’m thinking maybe a sponsored 3×3 tournament at the Thomas & Mack Center, with proceeds going to charity? LMK if you have thoughts or would like to be involved in the planning!)

And here are a few observations from my time meeting with folks, walking around the exhibit hall, and speaking on panels.

The Value of Working in High-Risk Industries 

On Sunday afternoon, I hosted the Crypto Banking Summit at Money 20/20.

I was thrilled to sit in on these sessions, as cannabis banking is a topic where my curiosity greatly outstrips my knowledge.

A few interesting things I heard:

• The SAFER Banking Act, like the SAFE Banking Act before it, seems unlikely to become law, which is unfortunate. Until cannabis becomes legal or decriminalized on the federal level, banks and other financial services providers need a safe harbor to support businesses and consumers in states where it is legal.
• “Too much cash in our community is a problem.” This quote from a community bank in the cannabis space caught my attention. I’ve never heard it expressed this way before, but the basic idea here is that when you cut off access for cannabis businesses and their customers to traditional bank products, you push them to use much more cash, which is inconvenient, expensive, and often dangerous. Solving this problem was one of the motivations driving community banks to get involved in cannabis.
• One benefit to working in the messy and high-risk world that is cannabis banking right now is that it helps you develop stronger and more sophisticated compliance, governance, and risk management controls (powered by both people and technology). This theme was touched on by multiple bank speakers, many of whom have since pushed their banks to expand into adjacent high-risk industries like online gaming and crypto.   

Two Visions of the Future

I was also delighted to co-host (along with the marvelous Nicole Casperson) a meetup on Sunday evening sponsored by Data Zoo. Along with the drinks and food and networking, which were all lovely, we also spent a few minutes chatting about the future of open banking and digital identity with our friends Erin Allard (President of Prism Data) and Jeff Tijssen (Partner at Bain & Company).

One key takeaway from our discussion – the future of digital identity (which we’ve been talking about forever but have made frustratingly little progress towards) is likely to be controlled either by Apple (or a similarly omnipresent tech company) or by an integrated ecosystem of providers working together (banks, startups, government agencies).

I know which future I would prefer, and I hope non-Apple companies prioritize interoperability in developing their digital identity initiatives.   

Compliance, Not Crypto

The biggest difference, by far, between this year’s Money 20/20 and the Money 20/20s of the recent past was crypto.

In 2021, crypto was EVERYWHERE. In some ways, it was a very natural fit. Money 20/20 is a spendy show, and crypto companies dropped insane amounts of money on booths and side events. It was gambling everywhere you looked.

In 2023, there was hardly any crypto to be found, and the stuff I did find was intentionally buttoned up and boring:

What took crypto’s place this year?

Compliance. 

Compliance was a theme in most sessions that I saw or heard about, and financial services regulators, former regulators, and lawmakers (including Michael Hsu, Jelena McWilliams, Wiley Nickel, Hester Peirce, Randal Quarles, Mark Warner, and Jo Ann Barefoot) were well-represented on the various stages.

Drama-as-a-Service

If you think banking-as-a-service (BaaS) is overflowing with drama at the moment, well then A.) I expect you read Jason Mikula’s Fintech Business Weekly newsletter, and B.) you don’t know the half of it!

Here are a few things I heard being whispered about:

• There are a lot of non-public consent orders and other regulatory actions being taken right now against BaaS banks. Expect more to become public in the next 3-6 months.
• Fintech companies are being offboarded by their partner banks at an accelerated rate, and many are struggling to find replacement banks. The BaaS banks that still can take on new programs are being extremely picky about the ones they say yes to. And bigger, more established fintech companies are working to establish back-up partner banks in case their primaries run into trouble.
• The latest round of exams with prudential regulators are much more intense for banks that are doing BaaS or have fintech partners (tons of new and very difficult-to-answer questions).
• There seems to be a belief among regulators that any BaaS middleware model that includes significant program management or that attempts to obfuscate the relationship between the bank and the non-bank partner is fundamentally flawed and incompatible with satisfactory third-party risk management. Put simply, Synapse and Solid seem to have ruined it for everyone.     

Lean BaaS

Building on that last point, I think you can divide the jobs that BaaS middleware platforms do into three basic buckets:

1. Technology – helping solve the integration and product development challenges that fintech companies and banks have when working together.
2. Acquisition – helping banks and fintech companies find each other.
3. Program Management / Compliance – helping banks efficiently oversee and manage their fintech programs and helping fintech companies minimize the time they spend dealing with their bank partners.

As we just discussed, bucket #3 seems likely (to me!) to go away. Regulators really don’t like what they’re seeing in this model.

Bucket #2 might survive, but there is an adverse selection problem. The best BaaS banks increasingly don’t need help finding fintech programs, and the best fintech programs don’t need help attracting interest from BaaS banks.

Bucket #1 seems most likely to endure, although I think it’ll evolve to become more efficient. For example, rather than providing an integration layer that brings together banks and other required service providers (card processors, servicing systems, etc.), we are likely to see more of these middleware platforms building (or acquiring) the capabilities to provide more of these value-added services directly, thus cutting out costs.

I’m calling this Lean BaaS.  

A Core Problem

The idea that the big core banking vendors (FIS, Fiserv, and Jack Henry) are inhibitors to bank innovation is not a new one. Community bankers have complained about these companies for far longer than I’ve been alive.

However, I did definitely hear some new wrinkles to this long-standing complaint. Open banking and BaaS were areas where folks raised concerns (a lot of community banks are entirely dependent on the cores to benefit from these two trends), and the role of the cores in banks’ innovation initiatives is starting to appear, in a more meaningful way, on regulators’ radar screens.   

Turns Out You Can Spell Generative AI Without H-Y-P-E

With little to no crypto represented at the show, I assumed that generative AI would replace it as the overhyped trend du jour.

Not so!

The conversations around generative AI I heard at the conference were remarkably sober and down-to-earth. Folks were excited about the promise of the technology (and how fast it’s evolving), but they were also extremely cognizant of its flaws and the danger those flaws may pose to consumers.

Is this … what learning from the past looks like?

Catalyzing Wealth Building

I had the opportunity to moderate a panel – Time to Money: Instant Access to Earned Wages Isn’t Optional – with Gil Akos (CEO of Astra and a very good basketball player), Hali Mo (Product Manager at Cloud Trucks), and Erin Pursell (VP at Visa) and it really got my brain spinning on the true value of instant access to wages.

I think for a lot of folks who are privileged to have a full-time salary and some level of pre-existing wealth, the benefits of earned wage access are a bit theoretical. It’s hard to appreciate fully.

But as Hali, Erin, and Gil pointed out during our discussion, the financial path up (towards wealth) or down (towards out-of-control debt) for consumers and small business owners is often first decided when they have a cashflow crunch that they need to deal with. Earned wage access can help solve these cashflow crunches in a much less expensive and perilous way than alternatives like payday loans, and can thus help catalyze wealth building opportunities for those who need it most. 

Pay by Bank

I saw this everywhere at the conference this year. I even tried a demo at the Trustly booth (shoutout to Matt Janiga!) JPMC and Mastercard announced a pay-by-bank solution for billers with recurring payments last week.

Pay by Bank is scorching hot, apparently.

I’ll be curious to see how much adoption it gets. We like our credit cards in the U.S., and the vast majority of merchants out there don’t obsess over payment acceptance costs like Walmart and Amazon do.

But maybe for recurring billers, where it’s a game of set it and forget it, pay by bank can take hold.

Building Quietly

Another area that stood out to me – small business fintech.

I met with numerous companies focused on building better solutions for solopreneurs and small business owners. Everything from lending marketplaces to liability insurance to financial management and accounting.

Interestingly, most of these companies weren’t new and had been quietly building for the last few years. None of them were really on my radar, which makes me wonder if small business fintech – which appeared, to me, to slow down in the last 12-18 months – has been more resilient in the post-2021 era than I thought.    

The Four Numbers on Everyone’s Minds

1033 was, as you might imagine, in the water supply. Everyone was talking about it. Everyone was speculating on what might happen next.

Here are a couple of interesting bits of scuttlebutt:

• The period to submit comments to the CFPB on the proposed rules runs between now and the end of the calendar year. That’s a tight window, so if you don’t get prompt email replies from your favorite open banking policy people in November and December, you’ll know why.
• Banks aren’t thrilled with the proposed rules requiring them to share pricing information like APRs, APYs, and fees. This has long been considered proprietary, as it can be an indicator of how banks’ underwriting models work. I don’t expect the CFPB to budge on this though, as its primary mission with these rules seems to be encouraging customers to shop around.
• Most big banks already have APIs (though they may need to change to meet the final industry specifications). Most small banks will meet the requirement to provide an API for developers through their core banking vendors. It’s the large regional and super-regional banks that are going to have some work to do. These banks don’t have APIs today (many of the most strident voices opposed to open banking work at these banks), and they will likely choose to build them themselves. Watch this space for shenanigans.
• It’s almost assured that FDX will become the standard-setting organization for open banking under 1033. It’s logical. They’re really the only game in town. However, they will likely need to make some changes. For example, the current FDX API specification is built around use cases – you tell the data provider what use case you are using the data for, and that determines which specific data elements get returned to you. The proposed rules from the CFPB flip this on its head. The rules say that the authorized third party requesting the data gets to decide what data elements it needs to fulfill its use case, and the data provider must provide them.
• It’s possible that big tech companies like Apple and fintech companies with more than $10 billion in annual revenue (Block) will try to drag their feet a bit on compliance. The current proposed deadlines would require these companies to be in compliance within six months of the rules being finalized. However, these companies may interpret the rules differently for covered products they own directly (digital wallets) and covered products offered by their community bank partners (debit cards), which don’t need to be in compliance until 4 years after the rules are finalized.

Learning to Share

The most interesting company to have a booth at Money 20/20 was … not a company.

It was the Federal Reserve!

The Fed was there to promote its new payments service – FedNow, which, you may have heard, recently went live.

This, if I am being honest, caught me by surprise at first. 

However, if you think about it, it makes sense. FedNow is the first new payments rail that the Fed has launched in 50 years. It hasn’t had to sell its services in a long time!

Well, it does now. 

From everything I’ve heard, banks are signing up for FedNow, but they’re mostly only signing up to receive payments, not to send them.

That’s not good! This only works if everyone signs up to receive and send! 

It’s the same thing with open banking. Fintech companies want to be able to receive data as authorized third parties, but they don’t want to share data. Only a handful of the big fintech companies have built APIs, and I’m guessing many will drag their feet after the new rules are finalized.  

I’m not a fan of this. Networks are only networks if they have enough nodes. Pick a different place to build your moats!