Start-ups Love Protectionism Too!

For all the entirely justified hang-wringing about Trump’s protectionist inclinations, it’s not like he invented this stuff. Indeed, one of the best arguments for protectionist policies is “what about us?” Conversely, one of the most effective rejoinders to academic economists is “you give up your protectionism first.”

Consider the Fintech crowd – free market disruptors, patriots against Trump and . . . protectionists? Well, at least when it comes to free access to personal banking data.

Telis Demos (WSJ) reports on Fintech’s hope to save at least one part of Dodd-Frank:

Consider Section 1033: While much attention around Dodd-Frank has focused on its proprietary-trading provisions or the consumer-protection agency it created, this one-page, 342-word provision has garnered the attention of startup venture-backed companies . . .

Section 1033 says that banks must “make available to a consumer, upon request…information relating to any transaction, series of transactions, or to the account” and “in an electronic form that can be used by computer applications.”

Fintech startups argue this language enshrines their right to pull data from customers’ bank accounts when the customers give them permission. Companies such as Betterment LLC, an online investment manager, say that accessing bank-account data helps them make it easier for consumers to use investing apps, borrow money or move dollars between accounts.

Got it? So Dodd-Frank forces banks to hand over the personal banking information that is the life-blood for consumer finance apps. The Fintech companies are concerned about “their right[s]!”

The banks, however, say “not so fast.”

Banks, on the other hand, say that while they support customers’ right to share their account data, there should be certain restrictions as well. These are needed, they add, to protect consumers from third parties accessing more data than is authorized, or to track how data is used.

Kindly banks. They’re concerned about their customers. That seems reasonable enough. I mean, that’s what regulation is all about, the consumers. Right?

Fintech certainly agrees:

Already, Betterment and a group of well-funded fintech startups have created an industry group, called the Consumer Financial Data Rights group, in hope of protecting Section 1033 and pushing for broad implementation of it. The group, formed in January, said it would work with policy makers to promote “consumer choice and access.”

See! It’s the consumers! But wait, there’s more:

The fintech firms argue they need a provision like Section 1033, on which the Consumer Financial Protection Bureau has been gathering industry input as it considers potential rules, to ensure access for their apps and services. Because they aren’t typically set up as banks, they don’t have direct access to users’ checking and savings accounts.

“The most important issue is access to customers’ own financial data,” said Jon Stein, chief executive of Betterment, in an interview. “Customers have a right to manage their own.”

The data is good for Fintech and Fintech is good for their customers, so what’s good for Fintech is good for America, right? But, if you think about it, the banks have the same customers, so it follows that what’s good for the banks is good for their customers . . . nevermind.

Anyway. In the end, goodness prevails such that Fintech and the CFPB are working together “to ensure access for [Fintech’s] apps and services.” Now that’s a business development consumer protection partner I’d love to have.

Just to recap: the banks collect, store, audit and protect transactional data from their customers. Fintech companies use this data to run their apps. Fintech currently gets free access to that data under an obscure provision of Dodd-Frank that may get repealed as part of a broader Dodd-Frank repeal. Fintech has organized a trade group and allied with a federal agency to prevent the repeal of that specific provision “because the consumers!” The banks, for their part, say “au contraire, it must be repealed, also because the consumers!”

The consumers? They declined to comment.

With all do respect to Mr. Stein of Betterment, I call bullshit. If you want access to customer data, then buy it. Or convince your customers to insist upon it. Or better yet: start your own bank that gives data away for free, Mr. Disruption Guy. Customers have no “right to manage their own [data]” unless they bargain for it. [Just to be clear, the same argument goes for the Justice Department as well: you shouldn’t be allowed to freely subpoena highly confidential and private (and heavily regulated) information, just because a third-party vendor (e.g. google) happens to host the “hard drive.”]

I mean, why should the banks bear all the fixed costs and increasing risks of collecting and storing data just so the Fintech folks can build their beautiful products (while maintaining extremely low fixed costs, e.g. little or no compliance – inspections, audits – typically associated with the collection and storage of banking data)? Plus, the banks may have a point when it comes to data security: can you imagine the reaction if some fintech app was pilfering data to sell on the black market? In those circumstances, it’s definitely not going to be Betterment that takes the blame for “open access.”

To be clear, I don’t see the banks necessarily as “victims” here. It wouldn’t surprise me at all if fintech companies have, in fact, tried to shoulder some part of this burden:

Upstarts and banks have discussed compromise proposals, such as creating new ways to create anonymous passwords. Some banks also plan to submit comments to the CFPB on data-safety guidelines for sharing.

“We know customers love sharing their data, and banks are working hard to make sure they can share their data regardless of whether there’s a law or not,” said Robert Morgan, vice president for emerging technologies at the American Bankers Association, a banking industry group.

Banks and fintech companies have managed to reach some accommodations. J.P. Morgan Chase recently struck a deal with Intuit Inc., which owns the service, to enable the bank’s customers to share data without giving up their password to Mint and other Intuit services.

Wait, so firms are solving this data problem through a combination of innovation and deal-making? But certain competitors, like Betterment et al., are either getting frozen out or holding out? Goodness, this will be interesting. Let’s see how these savvy executives sort things out.

Or let’s just have regulators tell them what to do . . . because that is how regulation works. It takes an ordinary commercial dispute and turns it into a political battle over who benefits most suffers least from the one-size-fits-all settlement the regulator will impose. [Think bankruptcy proceedings, without all the rule of law.]

What you can’t get by negotiation, regulation gets you by force. Why deal/innovate, if you can lobby government officials to give you what you want for free because “the consumers”? Political actors are surely going to undervalue whatever rights are being redistributed, and the consumer-beneficiaries are going to get far less bang for their buck. Simply put, it’s not good when regulators force consumers to buy things.

The bigger issue though (and I’m speculating a bit) is that this whole fight in some ways reflect the high fixed costs of banking imposed by regulation (and not, e.g. capital requirements). Part of the banks’ gripe (I suspect) is that they could do this Fintech stuff too, but they have so many other fixed costs related to banking that non-banking firms don’t have. Their nuts and bolts work, though, is critical to the success of start ups that are poaching some of the banks’ higher margin financial services: “You take our expensive dirty work for free and then you skim off the upside. Not cool, Fintech.” Again, the banks are not innocent. Keeping out low-cost competitors through regulation is part of the compromise that large financial institutions make to shoulder the burden of regulation. Otherwise, they might not waste time picking this fight, but regulation begets more regulation. Fair is fair.

At some point the argument is that these barriers to entry and fixed costs (compliance, lobbying, lawyers, etc.) are worth it for the consumer. The government’s bet is that it’s a better shopper than consumers themselves, even without knowing the actual cost of what it’s buying.

So it’s weird that this highly informative article from a sophisticated and thoughtful source doesn’t even attempt to raise that question (let alone address it).

This is, instead, an article about how the fintech startups are fighting Trump and fighting for financial regulation (against the big bad banks). Those are popular things to fight for (and against). That’s a more compelling story than the difficult question of whether consumers are actually benefited by these rights the government bargains for on the consumers’ dime. That’s how protectionism is made.


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