#payment-system

8 07, 2024

Karen Petrou: What MAGA Republicans and Rohit Chopra Both Want

2024-07-08T13:20:21-04:00July 8th, 2024|The Vault|

Following last week’s celebration of American independence, my thoughts turned to the confluence of concern from both sides of the political spectrum about an issue at the heart of the Bill of Rights:  “financial censorship.”  When Florida Gov. Ron DeSantis and CFPB Director Chopra agree – as they do – on a hot-button point such as freedom of thought as it may be expressed in financial transactions, a new framework is upon us no matter who wins in November.  Virtuous as this ideal is, putting it into practice is fraught with consequences, more than a few unintended.

That Mr. Chopra chose to address the Federalist Society is notable in and of itself.  I’ve done this more than a few times and emerged not only unscathed, but often enlightened.  But that was before Democrats viewed the Society as a cabal meant to subvert rules such as those Mr. Chopra is fond of issuing.  But the CFPB director knew his crowd – he and even super-MAGA conservatives fear that powerful financial companies threaten freedom of thought because giant platforms have undue control over each of our wallets.  This may not be true, but at least one such company gave it a try and those taking aim at financial censorships think that once is enough, and they are right.

However, the focus on financial censorship goes beyond what payment companies allow us to express via what we purchase.  The debate is over a decade old, beginning as it did when Obama Administration banking …

5 03, 2024

FedFin on: Consumer-Financial Product Marketing Practices

2024-03-05T16:34:22-05:00March 5th, 2024|The Vault|

The CFPB has issued a circular essentially banning digital and perhaps all other consumer-finance comparison-shopping and lead-generation tools for credit cards and other products not covered by prior orders.  These activities could continue, but only as long as the comparison or lead is completely objective as the Bureau may come to judge it under complex and sometimes conflicting standards.  The circular follows similar CFPB actions outside the Administrative Procedure Act even though the agency clearly intends to enforce its new approach both directly and in concert with other state and federal agencies….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

26 02, 2024

Karen Petrou: The Unintended Consequences of Blocking the Credit-Card Merger

2024-04-12T09:46:02-04:00February 26th, 2024|The Vault|

There is no doubt that the banking agencies have approved all too many dubious merger applications along with charter conversions of convenience.  However, the debate roiling over the Capital One/Discover merger harkens to an earlier age of thousands more prosperous small banks all operating strictly within a perimeter guarded by top-notch consumer, community, and prudential regulators.  Whether this ever existed is at best uncertain.  What is for sure is that all this nostalgia for a halcyon past will hasten a future dominated by GSIBs and systemic-scale nonbanks still operating outside flimsy regulatory guardrails.

The best way to demonstrate this awkward certainty is to run a counter-factual – that is, think about what the world would look like if opponents of the Capital One/Discover deal get their way.  Would we quickly see a return to card competition housed firmly within a tightly-regulated system?  Would the payment system be loosed from Visa and Mastercard’s grip?  Would merchants see the dawn of a new era of itsy-bitsy interchange fees?  Would card rates plummet and rewards stay splendiferous?  I very much doubt it.  Space here does not permit a detailed assessment of the analytics underlying my conclusions, so let’s go straight to each of them.  

First, banning the CapOne/Discover deal would not ensure robust card competition under strict bank regulation.  JPMorgan’s and American Express’ formidable stakes could grow because credit-card lending is a business dependent on economies of scale and scope vital to capital-efficiency through the secondary market.  However, large banks will

1 02, 2023

FedFin on: State Member Bank Powers

2023-02-01T16:54:12-05:00February 1st, 2023|The Vault|

In conjunction with rejecting an uninsured crypto bank’s application for Federal Reserve membership, the Federal Reserve issued a policy statement conforming state member bank powers only to those authorized for national banks even if the state member is an uninsured depository institution. While it is possible for state member banks to gain greater powers following Fed deliberations, the new approach sharply limits the ability of states to empower uninsured charters not only focused on cryptoasset activities, but….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

5 12, 2022

Karen Petrou: Bank Canaries in the Crypto Mineshaft

2022-12-05T16:34:33-05:00December 5th, 2022|The Vault|

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes.  We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies.  These would have been proverbial dead canaries had anyone looked down the mineshaft.  And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages.  So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time.  However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb.  No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

The most tantalizing bit of banking wreckage is a super-tiny Washington State bank which FTX appears to have surreptitiously acquired.  As the New York Times reported, one of FTX’s affiliates last March invested more than double all the capital previously held in Farmington State Bank, doing so in a carefully-structured way to avoid triggering legal control thresholds.  The bank is the nation’s 26th smallest and, after this generous investment, it deposits went up about 600 percent from its initial $10 million level via four new accounts.  Sill more intriguingly, Farmington’s crypto ties via shadow owners appear to go back to …

31 10, 2022

FedFin on: “Surprise” Fee Restrictions

2022-11-01T16:55:42-04:00October 31st, 2022|The Vault|

In conjunction with a Presidential speech and new White House initiative against “junk fees,” the CFPB has accelerated its own efforts in this arena with two new policy directives.  As with many other recent Bureau actions, the new circular and bulletin do not take the form of notice-and-comment rulemakings, but rather are directives with express enforcement implications unless or until the courts overturn them, the General Accounting Office intervenes to bar guidance outside the rulemaking process as it did years ago related to inter-agency leveraged-loan standards, or new law reconfigures the agency.  The most immediate implication of these edicts is a ban on blanket rejected deposit fees and further constraints on overdraft fees.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

26 09, 2022

Karen Petrou: Nonbanks Win Big

2022-09-27T10:49:12-04:00September 26th, 2022|The Vault|

As our in-depth reports detailed, Treasury took the President’s policy edicts to heart when crafting a new digital-finance policy for the U.S.  Treasury could have ducked some hard decisions via laudatory rhetoric, but it chose instead to recommend specific policies that cut a new path to a U.S. CBDC and crypto regulation.  Our reports detail key policy decisions and what’s soon to be done with them, but one warrants even more immediate attention:  Treasury’s decision to adhere not just to the President’s executive order on crypto-finance, but also to another on increasing financial sector competition.  This puts banks on notice that not all have yet taken.

Overlooked in much analysis of Treasury’s sweeping reports is its call to break up what Treasury clearly sees as the monopoly banks have long enjoyed over payment-system access.  Treasury for example argues that many banks have exited retail remittances even though these are critical to financial inclusion and leaves the market ill-served.  Indeed, it wants nonbanks to obtain overall instant-payment access, saying:

Network effects support the adoption of instant payment systems: Widespread use makes it more likely that a payor can use an instant payment system to make a payment to a payee, increasing the system’s value. …  Broadening the range of financial institutions that are eligible to participate in instant payment systems, as certain foreign jurisdictions have done, could help to enhance speed and efficiency, competition, and inclusion in payments, including for cross-border payments.

The problem with Treasury’s call for payment-system …

18 08, 2022

FedFin on: Payment System Access

2023-01-04T11:31:21-05:00August 18th, 2022|The Vault|

Following considerable controversy surrounding how Federal Reserve Banks grant master accounts, it has finalized a somewhat more explicit set of guidelines along lines proposed the second time the Fed attempted to set guidelines via a “supplemental” proposal earlier this year amending its 2021 effort.3 Doubtless expecting the controversy which followed these final guidelines, the Fed was at pains in both the preamble and release to emphasize that the new standards are “transparent and equitable.” However, as noted below, some changes to the supplemental in fact increase…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

14 06, 2022

FedFin On: U.S. Digital-Asset Framework

2023-01-27T15:30:30-05:00June 14th, 2022|The Vault|

After protracted negotiations and much public attention, bipartisan senators have introduced a far-reaching bill designed to encourage digital-asset use without undue risk to consumers, investors, or the financial system.  The bill decides most, if not all, of the outstanding regulatory barriers to digital-asset use in favor of digital assets and their providers.  Provisions in many cases go farther than public discussion has so far noted – for example, the measure not only expands the ability of digital-asset providers to reach retail and wholesale customers, but also gives them access to FDIC resolution without the cost of paying insurance premiums or coming under many of the rules that govern insured depositories…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

15 04, 2022

FedFin: BIS Finds Ways to Give Nonbanks Payment-System Access, Increase CBDC’s Inclusion Impact

2023-03-02T10:53:48-05:00April 15th, 2022|Uncategorized|

As promised, we turn here to an in-depth analysis of a paper from global regulators on whether CBDC contributes to financial inclusion – one of the most vital arguments from those advocating CBDC in the U.S. and in many other nations.  The paper is not analytical, as it is based on interviews with nine central banks exploring retail CBDC, but all of those interviewed view CBDC as an effective tool to promote inclusion if designed to do so and the paper also surveys research to back up its findings.  It details numerous ways CBDC could prove inclusive, including a first-time assessment of how making certain CBDC aspects programmable and how regtech could permit nonbanks to enter the CBDC payment system without undue risk…

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

Go to Top