WORKWEEK

A lot of my recent writing and podcasting has been focused on regulation.

It’s easy to understand why. Whether it’s the prudential regulators’ crackdown on BaaS, the CFPB’s war on junk fees, or Senator Durbin’s relentless assault on interchange, the laws and regulations that govern the financial services industry play an enormous role in shaping the incentives and strategies of banks and fintech companies.

That said, most of my analysis has focused on what legislators and regulators have been doing. One important group, which I haven’t paid as much direct attention to in my work, is the policy advocates representing the banks and fintech companies (“industry”). These are the trade associations, lobbyists, and legal firms that work to educate, persuade, and push back on the legislators and regulators who are shaping financial services policy.

The work that these folks do is critical but often unseen and under-analyzed

So, I thought we’d fix that in today’s newsletter!

I have created an entirely fake, highly subjective, and deeply silly award – The Fintech Takes Advocacy Award (the ‘Adie’) – to recognize the best, worst, and weirdest work being done by public policy advocates and lobbyists in financial services.

It is my hope that by bestowing a few of these awards — applauding the good work and gently mocking some of the less good work — I can shine a little light on the people and groups operating in this space and, more importantly, the issues that they are advocating for.     

I have ten awards to hand out today. For each, I will briefly explain the issue being argued over, who the award-winning advocate is, what argument(s) they made, and my quick take on it.

Here we go!

#1: The ‘Stop repeating everything I say. No, seriously. Stop it.’ Award for the best use of someone’s own words against them goes to … the Consumer Bankers Association (CBA). 

The Issue

How competitive is the U.S. credit card market?

The CFPB, which is required by law to produce a research report on the state of the U.S. credit card market every two years, believes that it is becoming increasingly noncompetitive, which has motivated the bureau to take aggressive action in the credit card space, including the recent rule to cap credit card late fees. 

The Advocate

The Consumer Bankers Association (CBA) disagrees.

The Argument

CBA’s new tactic for pushing back against regulators, particularly the CFPB, which is known for its aggressive public comms strategy, is to use their own data against them.

In this case, that means utilizing the CFPB’s bi-annual Consumer Credit Card Market Report to illustrate some of the inconsistencies and biases in the bureau’s comments on the credit card market. Here’s a sample from CBA’s press release:

The CARD Act Report flatly states that market shares of the top 10 credit card issuers declined by four percent from 2016 to 2022, contrary to the stark language of the CFPB’s press release about “a market consistently dominated by the top 10 credit card companies,”3 According to the CARD Act Report, market share for the next 20 issuers grew by the same percentage in that time frame.   

Alex’s Take

This is a very smart strategy, and (from what I hear) a deeply annoying one to the CFPB. Kelvin Chen, the new Head of Policy at CBA and a former regulator, deserves a raise.

#2: The ‘Let Them Eat Cake’ Award for the most out-of-touch advocacy effort goes to … The Points Guy (TPG) & Electronic Payments Coalition (EPC)

The Issue

The Credit Card Competition Act (AKA Durbin 2.0)!

As a refresher, if passed, the law would require large banks to allow merchants to process transactions involving their credit cards on networks other than the network selected by the issuer. This would, theoretically, allow merchants to route transactions over less expensive networks, although, in all likelihood, only the largest merchants would leverage this capability to meaningfully reduce their payment acceptance costs. 

The Advocate

The Points Guy (an affiliate marketing website that works with the issuers of rewards credit cards) and the Electronic Payments Coalition (a group of banks, credit unions, and payment networks) are working hard to convince the public to oppose this bill.

The Argument

TPG and EPC created a website – handsoffmyrewards.com – to help educate consumers on the dangers of this bill. They are encouraging consumers to call Congress and make sure they don’t “take off with your credit card rewards.”

They point out that this is really a bill designed to put more money in the pockets of big-box retailers. They warn that, if this bill passes, credit cards will become less safe (because they are being processed over less secure networks). And they argue that credit card rewards are essential for helping “working class families pay for groceries and back to school shopping.” 

Alex’s Take

The only part of the TPG/EPC argument that I agree with is that the beneficiaries of this bill will be big merchants like Walmart and Target. Savings on interchange will not be passed to consumers. That is, as always, bullshit.

The rest of the argument is nonsense. I’ve seen no evidence to suggest that alternative routing would lead to less secure credit card transactions. And when Brian Kelly (the OG Points Guy) talks about the importance of credit card reward points for working-class families, he sounds like Marie Antoinette. 

#3: The ‘Wow, that touched a nerve.’ Award for the touchiest response to a non-problem goes to … the Independent Community Bankers of America (ICBA)

The Issue

Navy Federal Credit Union has started operating a set of Military Banking Facilities (MBF) overseas. These MBFs are part of the Department of Defense (DoD) Overseas Military Banking Program. The MBFs are apparently referred to as “Community Bank,” but now they will be rebranded as “Community Bank, Operated by Navy Federal Credit Union.”

The Advocate

The Independent Community Bankers of America (ICBA) are PISSED about this.

The Argument

I’ll let the ICBA make its case:

The Federal Deposit Insurance Corp. and National Credit Union Administration should immediately issue cease-and-desist orders directing the $168 billion-asset institution not to refer to itself as a bank.

Imitation is the sincerest form of flattery, but Navy Federal — which has been subject to multiple congressional inquiries following CNN’s reporting of racial disparities in the lender’s mortgage approval rates — appears to be trying to mask the fact that it is a global financial institution that does not pay taxes or meet the same level of regulatory standards as real community banks.

Alex’s Take

This is just so incredibly petty, I kinda can’t believe it’s real.

It reminds me of the end of Season One of The Good Place, when they all find out that they’re actually in the bad place, and Michael gets so mad that he dramatically tips over a potted plant.

#4: The ‘Single-issue Voter’ Award for the most overwhelmingly passionate and focused influence campaign goes to … Propel 

The Issue

Should the CFPB’s final rule on 1033, which will govern open banking data access in the U.S., include electronic benefit transfer (EBT) accounts?

EBT accounts were not included as covered data in the CFPB’s draft 1033 rule.

The Advocate

Propel, which offers a mobile banking app that allows low-income consumers to monitor their benefits balances and transactions, did a lot of work during the comment period for 1033 rulemaking. In addition to submitting its own comment, it also organized a write-in campaign in which hundreds of consumers submitted their own comments, urging the CFPB to include these government benefit accounts within the final rule’s scope.

The Argument

Here’s Jimmy Chen, Founder and CEO of Propel, making the case:

For the tens of millions of Americans who rely on SNAP and TANF, EBT cards are functionally no different than debit cards. They enable low-income Americans to make frequent, if not daily, purchases, put food on their tables, and manage their finances each month. But, as the Bureau noted … many consumers encounter issues when trying to electronically check their EBT account balance or view their recent transactions. To rectify this dire situation, we urge the Bureau to include EBT accounts under a final Section 1033 rulemaking

Alex’s Take

EBT should be included in the final rule for 1033, and I am very impressed by Propel’s work to put this issue as close to the top of the CFPB’s priority list as possible.

#5: The ‘Three-legged Race’ Award for the most awkward combination of conflicting goals goes to … The American Fintech Council (AFC)

The Issue

Should earned wage access (EWA) be regulated as a credit product?

This question is the subject of a fierce debate that is playing itself in every U.S. state. Maryland, for instance, issued guidance on EWA last year. The guidance cautioned EWA providers that their product would likely be considered a loan under Maryland law if they (rather than the employer) were the ones bearing the economic risk of non-repayment, interacting with the employee, and benefiting from any fees or tips paid by the employee.

The Advocate

The American Fintech Council (AFC), which counts several of the large EWA providers as members, has been actively lobbying states to adopt a regulatory framework for EWA that classifies it as being distinct from a loan.

The Argument

Among other attributes, AFC argues that EWA should not be considered a loan as long as the EWA provider offers a “voluntary no cost free option” for all users.

Alex’s Take

The phrase “voluntary no cost free option” is quite a mouthful, but the reason that AFC is putting it that way is because that phrase covers a lot of different models.

Some EWA providers don’t charge consumers fees or charge only a nominal fee for instant transfers (but also offer a free standard ACH transfer). In this model, EWA is a benefit provided and paid for by employers. State policymakers generally don’t have a problem with this model.

Other EWA providers operate more of a consumer-facing business (or hybrid consumer-facing and embedded employer business). These providers usually ask consumers for a voluntary tip after each transaction. State policymakers (and this newsletter writer) have serious concerns with this model.

AFC’s challenge is that it has both types of EWA providers as members, which means they’re all awkwardly tied together in any lobbying that AFC does on the topic.

#6: The ‘Only We Are Allowed to Help Our Customers’ Award for the most transparently gatekeeping lobbying effort goes to … the National Association of Government Guaranteed Lenders (NAGGL)

The Issue

Last year, the Small Business Administration (SBA) undertook some rulemaking to expand access to its flagship guaranteed lending program – SBA 7(a).

The first big change was to open up access for more non-bank lenders to become Small Business Lending Companies (SBLCs). 

While banks and credit unions have always been able to originate 7(a) loans for qualified small businesses, non-bank lenders have not, with the exception of the 14 non-bank lenders that held SBLC licenses from the SBA. For some absolutely bizarre reason, the SBA has had a moratorium on issuing new SBLC licenses in place since 1982, meaning that to get an SBLC, a non-bank lender had to buy it from one of the existing 14 license holders. The SBA proposed lifting that moratorium and issuing a small number of new SBLC licenses.

The second big change was to streamline the underwriting process for 7(a) loans – granting lenders additional flexibility for loans under $150,000, reducing paperwork requirements, simplifying and clarifying the qualification standards – in order to expand the number of credit-worthy business owners (particularly minority business owners).   

The Advocate

The National Association of Government Guaranteed Lenders (NAGGL), which represents the interests of banks and credit unions that make SBA loans, as well as the existing SBLC license holders, took the lead in opposing these changes. 

The Argument

This letter, written by NAGGL and all of the big bank and credit union trade associations, hits all the key points, including:

• The SBA is not equipped to supervise more than the 14 non-bank lenders that currently have SBLC licenses.
• Non-bank lenders that may be granted new SBLC licenses are not subject to the same rigorous federal regulations that banks and credit unions are subject to.
• The streamlining of 7(a) underwriting processes will lead to riskier lending.
• Fintech companies can’t be trusted to administer SBA lending programs given the amount of fraud they facilitated as part of the Paycheck Protection Program (PPP). 

Alex’s Take

Well, first of all, NAGGL (and the other bank and credit union trade associations) lost this one. The SBA finalized these new rules last year, and new SBLC licenses have already been granted.

More broadly, this just wasn’t a good argument. There are already 14 non-bank lenders making 7(a) loans. Why are those 14 companies exempt from the concerns that NAGGL raises about prudential regulation and risk management? Doesn’t their participation in SBA lending prove that adding more non-bank lenders won’t cause anything cataclysmic to happen?

And on the PPP point, let’s just remember the context – we thought the world was ending. The goal was to get as much money into small business owners’ hands as quickly as possible. That mission was accomplished, and fintech lenders played a big role in that. Let it go. 

#7: The ‘Fintech Nerd Twitter’ Award for the best nerdy and narrowly-targeted lobbying effort goes to … Matt Janiga and Max Levchin

The Issue

The Financial Crimes Enforcement Network (FinCEN), the Treasury Department bureau responsible for fighting financial crime, issued a request for comment on how financial services providers leverage social security numbers (SSNs) during their onboarding processes to identify their customers and confirm that they are allowed to do business with them.

Today, this is done by collecting only the last four digits of an SSN (along with other identifying information like name and address) and then using a third-party service (typically a credit bureau) to match it to the full nine-digit SSN.

FinCEN’s request for comment suggests that it is considering requiring providers to collect the full nine-digit SSN upfront during the customer onboarding process.   

The Advocate

This isn’t (yet) the subject of some large-scale industry lobbying effort. Instead, a few fintech nerds have been urging banks, fintech companies, and other interested parties to respond to FinCEN’s request.

Two of the more prominent examples I saw on Twitter were Max Levchin (CEO of Affirm) and Matt Janiga (Director of Regulatory and Public Affairs at Trustly). 

The Argument

Max, Matt, and a slew of other fintech nerds on Twitter all seem to be on the same page – the current approach, which regulators have given the green light to for years, works well, and requiring the upfront collection of all nine digits would degrade consumers’ onboarding experiences and endanger their privacy. 

Alex’s Take

I agree with the consensus! The current approach works well enough, and if we’re going to make changes, let’s move in the direction of more substantive and systemic changes (like creating a regulatory framework for true digital identity).

#8: The ‘I contradict myself (I am large, I contain multitudes)’ Award for the most hypocritical public policy stance goes to … JPMorgan Chase   

The Issue

Should the CFPB’s final rule on 1033 include the information necessary to initiate payment to or from a Reg E account?

If it does end up in the final rule, its inclusion will help accelerate the growth of pay-by-bank solutions, which are a direct threat to credit and debit cards.

The Advocate

JPMorgan Chase, in its comment letter to the CFPB on 1033, said no!

The Argument

JPMC’s argument basically boils down to “you haven’t thought this through, and you should just scrap this crazy payments idea”:

The payments ecosystem is complex with significant nuances across networks, types of transactions and constituents. The CFPB’s proposal ventures into regulating the payments ecosystem without proper consideration of the costs, interactions among participants, and significant risks this proposal would create. Requiring the sharing of payment initiation information will be a catalyst for significant growth of “pay-by-bank” models, a payment method that is ill suited, yet is increasingly being adopted, for many types of transactions like eCommerce purchases. The CFPB should drop the requirement to enable payments from the final rule and take steps to separately consider these complexities and nuances before embarking on regulating the payments space through its section 1033 rulemaking.

Alex’s Take

My expectation is that payment initiation information will stay in the final rule.

And I think JPMC thinks so too, which is probably why, despite their protests to the CFPB, they have been working on building their own pay-by-bank solution, in partnership with Finicity/Mastercard:

J.P. Morgan Payments’ Pay-by-bank solution, which provides billers with the ability to allow their customers to pay bills directly from their bank account, is now live. Leveraging Mastercard’s open banking technology to enhance J.P. Morgan Payments’ ACH capabilities, Pay-by-bank offers payment choice and provides a simple, secure and frictionless experience for billers to offer to their customers.

“We are dedicated to enabling our clients to offer their customers a variety of payment options,” says Max Neukirchen, Head of Payments & Commerce Solutions, J.P. Morgan.

Indeed.

#9: The ‘You Don’t Mess With Texas’ Award for bad legal strategy goes to … the Chamber of Commerce, the American Bankers Association (ABA), and the Consumer Bankers Association (CBA)

The Issue

The Chamber of Commerce, ABA, and CBA sued the CFPB over its recently released credit card late fee rule. 

The lawsuit was filed in Fort Worth, Texas, a common legal strategy by trade groups seeking a friendly judge. This case ended up with Judge Mark Pittman, a Trump appointee who recently vacated the Biden Administration’s plan to forgive approximately $400 billion in federal student loans.

The CFPB argued that the case should be moved to Washington, D.C. because there is no logical reason for it to be in Fort Worth. 

The Advocate

The Chamber, ABA, and CBA argued that it should remain in Fort Worth because of … reasons!

The Argument

Interestingly, Judge Pittman agreed with the CFPB. Here’s what he wrote in his ruling to relocate the case to Washington:

In fact, as far as this Court can discern, not one of the banks or credit card companies directly affected by the future (CFPB regulations) is located in the Fort Worth Division.

Venue is not a continental breakfast; you cannot pick and choose on a Plaintiff’s whim where and how a lawsuit is filed.

Alex’s Take

I’m not a lawyer, so I have no opinion on this specific ruling (or the case, more broadly). I just wanted to mention this specific setback for the Chamber, ABA, and CBA because it’s hilarious.

#10: The ‘Enemy of My Enemy is My Friend’ Award for best trade association team-up goes to … the American Bankers Association (ABA), America’s Credit Unions, American Fintech Council (AFC), Consumer Data Industry Association (CDIA), Electronic Transaction Association (ETA), Financial Technology Association (FTA), Innovative Lending Platform Association (ILPA), Independent Community Bankers Association (ICBA), Mortgage Bankers Association (MBA), Responsible Business Lending Coalition (RBLC), and the Small Business Finance Association (SBFA)   

The Issue

The Internal Revenue Service (IRS) operates a service called the Income Verification Express Service (IVES). Through this service, consumers can request their tax returns or income to be shared with third parties like lenders. The experience is a bit clunky – borrowers have to create IRS accounts and verify their identities with the agency before they can request that a transcript be delivered to a lender – but it works, and lenders (particularly in mortgage and small business lending) rely on it.

Earlier this year, the IRS published a bulletin stating that “the IRS will only provide IVES transcripts to mortgage lending firms for the sole purpose of obtaining a mortgage on residential or commercial real property (land and buildings).”

The Advocate

Eleven different industry trade groups, representing banks, credit unions, and fintech companies, sent the IRS some strongly-worded feedback on their plan.

The Argument

In their joint comment, the trade groups emphasized the value of this data to lenders:

The Income Verification Express Service (IVES) program is currently used by consumer and commercial lenders and government agencies such as the Small Business Administration (SBA) to confirm the income of a borrower during the processing of a loan application, an important tool to combat fraud and for decreasing the costs and increasing the speed of underwriting a loan.

Alex’s Take

I just love seeing everybody – banks, credit unions, fintech companies – pulling on the same oar!

And it worked! The IRS backed off:

We acknowledge the concerns raised and are assessing our ability to provide return information when necessary while keeping taxpayer information confidential and protected from disclosure. Although IRS announced the policy change on January 2, 2024, we are suspending that change as we seek input from you and other stakeholders on possible changes and impacts to the program.