25 March 2024 | FinTech
I Can’t Figure Figure Out
By Alex Johnson
3 FINTECH NEWS STORIES
#1: You Can’t Democratize Private Banking
What happened?
Onyx Private, a neobank and wealth management platform for rich young people, is pivoting:
Miami-based Onyx Private, a Y Combinator-backed digital bank that provided banking and investment services for high-earning Millennials and Gen Zers, is terminating its bank operations.
Co-founder and CEO Victor Santos confirmed to TechCrunch that the company was “moving away from the B2C model” but said that it was changing its business model, not shutting down.
He said Onyx will be shifting to a “B2B white-label platform-as-a-service model for community banks, regional banks, and credit unions” that want to launch digital apps built for young affluent consumers. Santos claimed that Onyx had been exploring the idea over the past year and had made developments with some partners.
So what?
A couple of points to make on this story.
First, the company’s partner bank for its B2C business was Piermont Bank, which recently made the decision to focus solely on direct fintech partnerships (rather than working through BaaS middleware platforms). Given the timing (and the fact that a source told TechCrunch that regulatory issues may have played a factor in this decision), one wonders if the two pivots are related.
Second, Onyx originally set out with the goal, “to build a more modern, more accessible private bank and democratize the tools that today are only available to the ‘ultra rich.’” That sounds great (Y Combinator, in particular, seems to love this type of pitch from fintech founders), but here’s the reality – everybody wants to bank rich people, and what rich people (of all ages) want from their bank is for everyone who works at the bank to kiss their ass. That’s not something you can democratize with technology.
#2: I Can’t Figure Figure Out
What happened?
Figure, the blockchain-based lending company founded by former SoFi CEO Mike Cagney, is launching a securities exchange:
Called Figure Markets, the new exchange seeks to use the Provenance blockchain — which Figure helped develop — to be a marketplace for a range of securities, including equities, fixed income, alternatives and crypto assets.
Jump Crypto, Pantera Capital and Lightspeed Faction led the $60 million Series A funding round.
Figure CEO Mike Cagney acknowledged that many exchanges have launched without much success in usurping the two titans in the segment.
“Coinbase and Binance have dominated, so we take that with pragmatism as we’re coming into this,” Cagney told Blockworks. “But I think we’re in a situation to do something really differentiated.”
So what?
It’s been six years, and I still don’t understand Figure.
The company has raised roughly $500 million in equity funding (and more than $1 billion in debt funding). It has, supposedly, leveraged blockchain technology to significantly streamline the process of getting a home equity line of credit (HELOC) digitally, and, at some point over the last six years, become the largest non-bank originator of HELOCs. It has created numerous partnerships with bank and non-bank lenders and launched a lending-as-a-service (LaaS) business and a wholesale lending platform. And now it’s getting into securities, with the goal of directly competing with Binance and Coinbase (among others).
And yet, I do not understand anything about this company.
I don’t understand how its blockchain-based lending and securitization technology works. I don’t understand what happened to its plans to expand into other lending product categories like mortgage and student loan refinance. I don’t understand Figure Pay, Figure’s shortlived banking-as-a-service business unit. I don’t understand why the company pulled its application for a bank charter (or what the OCC might have seen that gave them pause). I don’t understand how Figure Markets is going to compete with Coinbase and Binance by decentralizing a task (buying and selling crypto) that the market has very much made clear it prefers to have centralized. I don’t understand why it is planning to launch an interest-bearing, SEC-registered stablecoin alternative or what possible value such a product would have to Figure and its broader ecosystem of blockchain-based financial services.
I don’t understand any of it. If someone can help me understand it better, I would be grateful to them because, truly, I can’t figure Figure out.
#3: The CFPB Thinks Bigger is Never Better
What happened?
The FDIC proposed updates to its policy on bank merger transactions. Then Rohit Chopra, Director of the CFPB and a member of the FDIC’s board of directors, delivered a speech on bank mergers. You’ll be surprised to hear this, but he’s generally not a fan of big banks getting bigger:
While the agencies have generally shied away from conducting retrospective analyses of mergers in the banking sector, third-party analyses suggest that many of the purported efficiency gains are not passed through to customers. In fact, the cost of products often increases, and quality of service tends to erode following mergers. For example, recent CFPB research shows that larger depository institutions, which includes many that have engaged in serial acquisitions, are offering materially higher interest rates on credit card loans compared to their smaller competitors. The largest banks are also offering lower interest rates on deposit accounts than small banks. Mergers can also lead to abandonment of relationship banking, difficulties with accessing small business credit, and more. This is in addition to the costs the public bears by providing implicit subsidies to the largest financial firms by virtue of being too big to fail.
So what?
In the course of his speech, Director Chopra made several rather surprising claims, including an assertion (without any evidence) that banks are likely to sabotage their competitors if they’re allowed to make required divestitures after the completion of a merger (as they are today) rather than before it (as they would under the FDIC’s proposed updates) (h/t: Bank Reg Blog):
Finally, the banking agencies rely on remedial provisions and conditions that fail to remedy harm. For example, when ordering divestitures, agencies have frequently permitted merging parties to divest assets many months after the transaction’s closing. This gives plenty of time for the merging parties to sabotage their future competitor.
He also argued that the prudential regulators (the Fed, FDIC, & the OCC) have been doing a bad job assessing merger applications because of their conflicting incentives:
I was persuaded by the views of various stakeholders that the distinct institutional incentives of the banking agencies have affected their approach to merger review. For example, the issue of “charter flipping,” whereby regulators seeking to attract a charter and the associated fees, and supervisory expansion, may lead to a race to the bottom. In addition, other agency responsibilities, such as the conduct of monetary policy, may be a higher priority or otherwise be in tension with requirements to carefully assess merger applications.
I know that quote is a bit dry, but trust me – that’s a WILD thing for the head of a bank regulatory agency to say about his fellow agencies, especially when you consider that the CFPB has no formal role in bank M&A regulation and very little statutory relevance to the topic, apart from a broad concern over market competition.
And that’s the part that really bugs me – this belief that the only way to preserve and strengthen market competition is to prevent bank mergers and keep banks small.
First, there are plenty of examples in financial services of both market consolidation leading to better outcomes for consumers (credit cards, which the Director cites in his remarks, are actually a good example of consolidation leading to better outcomes for consumers, IMHO) and smaller banks and credit unions screwing over their customers and members (see some credit unions’ abuse of overdraft fees, for just one example).
And second, where competition does improve outcomes for consumers (and there are certainly many many instances where this is true), why is the Director focused on protecting smaller incumbents rather than encouraging new market entrants? Where is the speech from Director Chopra singing the praises of BaaS or pushing for a modernized approach to the de novo charter process? If he is intent on pissing off his prudential regulator peers, I’d prefer he do it that way.
2 FINTECH CONTENT RECOMMENDATIONS
#1: The Economics of Points (by Matthew Goldman, CardsFTW) 📚
I’m really just using this specific recommendation to illustrate a broader point – you should subscribe to CardsFTW. There is no better resource for all things cards and payments. Matthew knows this stuff backward, forward, and inside out.
(Also, this specific post on Mastercard’s HealthLock solution and the economics of rewards points rules.)
#2: Plentiful, high-paying jobs in the age of AI (by Noah Smith, Noahpinion) 📚
Not fintech content per se, but this article is about a very important and relevant question – will AI kill jobs?
Noah’s take, which I agree with, is that it won’t – in the age of AI, the vast majority of humans will have good-paying jobs, and many of those jobs will look pretty similar to the jobs of 2024.
1 QUESTION TO PONDER
I’m going to try to get the authors of fintech, banking, and finance books to come on as guests on the Fintech Takes podcast.