Financial reform: Friend or foe to fintech startups?

Financial services companies have been buzzing with equal parts fear and excitement about Donald Trump’s plans to unravel the financial reforms put in place after the 2008 financial meltdown.

As expected, Trump signed an executive order two weeks into his presidency to begin undoing the Dodd-Frank Act, a 2,000-page policy so overbearing to many legacy banks that it’s been blamed for the decline of community banks and business lending.

While banks eagerly await a rollback, its implications for fintech startups have been less certain.  Loosening the rules should make banks better able to partner with fintech startups, but consumer protection and access to data could still be at risk. And there’s been buzz about the possibility scrapping the Consumer Financial Protection Bureau, which was created under Dodd-Frank, but Trump hasn’t made that order yet.

We asked attendees at the LendIt USA conference in New York to share their views and concerns with the current administration’s proposed regulatory reform — and whether it’ll be a friend or foe to the fintech industry.

Rob Frohwein, CEO, Kabbage
A change in Dodd-Frank will be a boon to the fintech industry. There are two major blockers for banks getting into this industry. One is regulatory. The other is technology. If you remove the regulatory challenges — or at least the perceptional regulatory challenges — you put them in a position to start thinking about product in the space. We are a provider of technologies. We would love to work with banks and provide them a better service and product for small businesses.

Leslie Smith, managing director, Silver Hill Funding
I don’t think it’ll impact the tech per se. It’ll impact how people use technology. Most of these companies do things automatically. There are no people in many processes. The biggest impact to this space would be that they do need people in order to check off the box that says they’re in compliance. People continue to innovate and create really awesome tools through technology. The regulations will drive whether they can do that without people.

Rohit Arora, CEO, Biz2Credit
There’s a lot of optimism among banks, especially the small- and mid-sized ones who have been most impacted by deregulation in the last eight years. 1. As banks get more aggressive, there will more opportunity for more bank-fintech partnerships. 2. With the proposed [Office of the Comptroller of the Currency] fintech charter, fintech companies can become limited-purpose banks without having to get a charter. It’s pretty positive, but the administration has to follow through. They say a lot of things, but we haven’t seen any action. They’ve raised expectations now.

Melissa Goldberg, senior innovation strategist, Commonwealth
We’re particularly concerned about consumer protection and making sure all the work that’s been done to protect consumers doesn’t get undone. When you think about our organization, that’s half of it. The other half is around promoting innovation because fintech for financially vulnerable consumers is a great opportunity to reach people outside the traditional banking sector. Right now, we’re trying to figure out the balance between the two that allows people to innovate and think in a new way that doesn’t go against rules there to protect the interest of consumers.

Lenore Kantor, president, Launch Warrior
It means uncertainty and unpredictability, which equals volatility. That will be good for trading but not so good for fintech startups or anyone looking to launch a new initiative. All businesses should be preparing multiple scenarios for how to adapt in a rapidly changing environment.

Colin Darke, general counsel and chief compliance officer, RocketLoans
Smart regulation is important for the industry. If that involves deregulation in the sense that there are overlapping regulations or regulations no longer applicable to the modern age, then that’s good. But you still need to balance it so you have responsible innovation — you always need to protect consumers. There’s definitely room where deregulation amounts to smart regulation that would help this industry. There are a lot of misconceptions and confusion in fintech.

‘A bitch to build’: How new rewards technology makes banks and retailers into better partners

Rewards programs for credit and debit cards have dramatically shifted this decade. Moving away from category-type rewards (think a percent cash back on all gas or grocery purchases), rewards programs have turned into direct partnerships between banks and retailers.

The idea started with getting merchants directly involved in rewards programs. Banks pitched retailers on turning cardholder rewards programs into a marketing vehicle, advertising rewards deals through their websites or email lists, with retailers paying the cardholders back.

Banks love the model because they don’t have to pay for rewards out of pocket anymore. For retailers, even if a card-exclusive deal pushes one person to buy his groceries at Kroger instead of Albertsons, it’s still a win. Marketing campaigns where the retailer only has to pay when a customer makes a purchase are a dream, since the campaign ends up with a positive ROI.

Tracking marketing’s effect on customers online is pretty simple with UTM codes, but is a daunting task when it comes to in-store retail locations. Unless you want to be stuck clipping coupons out of newspapers (do they still exist?), fintech companies were going to have to figure out how to develop a way to digitally track marketing campaigns in the real world.

One company with an interesting model is Linkable Networks, a Boston-based company founded in 2010. Backed by Bain Capital and Citi Ventures, it has partnerships with over 40 national retailers, and is available at over 25,000 retail locations.

“It was a bitch to build,” said Tom Burgess, CEO of Linkable Networks about his solution. “Everyone can track website trafficking data, but a majority of transactions still take place in retail locations. Our goal was to be able to track that data. It’s a problem we saw and something we needed to attack.”

Without getting too computer sciency, Linkable Networks developed a solution for card-linking. Customers can “link” advertising deals to their bank account or credit/debit card. Once the card is linked, they can head on over to a participating store, buy the items, and when they swipe their card, the advertising deal is automatically triggered, instantly crediting the customer.

Burgess credits changes in regulation to banks deciding to revamp their rewards programs, with fintech companies there to help facilitate alternative models.

“Durbin changed large banks because most of their loyalty programs were powered by interchange fees,” said Tom Burgess, CEO of Linkable Networks. “Banks saw their loyalty programs tank and had to go to an alternative model.”

Durbin refers to the Durbin Amendment, a bill tacked on last minute to the massive Dodd-Frank Wall Street Reform Act of 2010, one of the biggest changes in regulation since the Great Depression.

The Durbin Amendment capped interchange fees paid by merchants to banks for accepting debit cards. These fees have been a thorn in merchants’ sides for some time and have been the underlying cause of many fights between banks and merchants. The Durbin Amendment cut interchange fees from $0.44 a transaction to around $0.24.

When Durbin went into effect in late 2011, banks saw their quarterly interchange fees plummet. Even though banks still took in around $30 billion in fees, there was a sizable dip in Q4 interchange fees. Bank of America saw a drop of $441 million quarter over quarter. JP Morgan said the fee cap would lead to a net income hit of $600 million. Wells Fargo lost $337 million in fees that quarter as well.


Rewards programs were bankrolled by interchange fees now had to be reworked, and the new direct partnership between banks and retailers was born.

“Instead of taking a larger interchange fee from merchants, funds were going to come from a retailer’s marketing dollars,” remarked Burgess. “Retailers are totally fine with marketing dollars going into rewards as long as it drives people to stores.”

There have been opportunities for companies specializing in online tracking, as well.

Keeping track of online shopping is a lot easier than the retail, but the process of redeeming rewards is still a work in process. Online shoppers need to go through their bank portal to browse and find rewards, making sure to click through on specially-coded links with UTM codes that tell online retailers a customer deserves a reward.

“The fact that there’s no good way of notifying customers of the deals they have shows that the current system is broken,” said Sasha Herman, marketing director for Kard, a digital solution to alert customers about card rewards. “People don’t log into their banking portal, browse around their bank site, and then decide to buy a sweater. That’s crazy — if you want a sweater, go to JCrew.”

Kard is trying to fix the system by creating notifications for shoppers to take advantage of deals they don’t even know existed. Users first select a credit card they own on the Kard website, then can browse the site for deals on their credit card. If they want, they can install a Google Chrome extension that alerts them at checkout when they have a rewards deal.

Like Linkable Networks, Herman cites Durbin as one of the reasons why Kard was created. Without the amendment, banks may not have even thought about revamping their rewards programs.

“The Durbin Amendment may have shifted the banks’ perspective on how to earn money on debit cards. We feel strongly that if banks simply had a way to alert users when they could save money, people would do it,” he said.

Kard users still have to travel through the tricky bank portals to redeem rewards, something not everyone is comfortable with with. But Herman hopes to develop secure APIs with banks in order to allow one-click processing.

If you look at the numbers, interchange fees are back up, and merchants are complaining again about high fees. On the other side, banks and financial institutions are calling to repeal Durbin and take the cap off interchange fees. But even if Durbin is repealed, both Burgess and Herman think the rewards system is here to stay. The industry has now created a better model for rewards that are better aligned with the cost-benefit of a marketing campaign. Even though banks and merchants are at each others throats when it comes to fees, they can agree that the new rewards format is a win-win situation.