Hi 5! The five fintech stories we’re following this week

top fintech stories

Insurtech’s rising star

Insurtech continues to shine on with the hope and possibility of youth. Tradestreaming’s Gidon Belmaker examines how insurers are increasingly offering IoT-enabled policies for different lines of insurance that calculate the risk for each person, digitally. In a world where a house is smart enough to know what room temperature its owners prefer, IoT-enabled policies make a lot of sense. The challenge for insurers looking to get into the IoT game will be filtering, processing, and reacting to really big data in real time.

In the spirit of being hopeful, insurtech’s top women execs spoke with Tradestreaming to share their career advice for women looking to enter this fast-growing field.

Fintech’s murky waters

It’s been a hard couple of weeks at Wells Fargo. After the firm’s pamphlet for Teen Day 2016 angered the theater community by implying that the arts were merely a childhood pastime, scandal struck one of America’s biggest banks yet again, on a much larger scale. After discovering that over 2 million fake bank and credit card accounts had been opened at the bank, Wells Fargo fired 5,300 employees.

Twitter did not approve. Analysts lambasted the bank for trying to shift a top-tier management problem onto hapless employees facing unrealistic sales goals. And while Wells Fargo has since eliminated product sales goals, Carrie Tolstedt, the unit leader in charge of those 5,300 ex-WF employees, walked away with about $125 million in stock and options.

Speaking of crime and payment, Tradestreaming’s Josh Liggett’s in-depth reporting on the shady world of prison payments showed that justice – and fintech – are not always accessible to inmates.

While the financial industry is experiencing a surge in growing transparency and lower fees thanks to growing competition, the prison payment industry isn’t undergoing a similar renaissance. Instead, inmates are held prisoner to high fees and limited services within an old system masquerading as innovative fintech.

Fintech real-estate companies are getting creative

Ok, yes. A fraudulent mortgage market did cause the Great Recession of 2008. But the mortgage market is getting innovative with online offerings that seem to have the consumer – not just profit – in mind. Digital lender Point, which enables homeowners to sell a percentage of their home to investors, is putting borrowers and lenders on more even turf by better aligning incentives between them. Last week, the company raised $8.4 million, bringing total fundraising to $15.4 million.

Real-estate crowdfunding platform Roofstock is also out to change the digital real-estate market, by simplifying the process of buying or investing fractionally in occupied singly family housing. According to Roofstock’s chairman and co-founder, Gregor Watson, Roofstock recently signed a deal with an Asian group that wants to invest a whopping $250 million on the platform.

Work and play

The fintech interview process can be daunting for interviewees. Potential candidates can take solace and solid tips from Tradestreaming’s interview advice from top fintech execs. Keyword takeaways: passion, motivation, openness. Oh, and don’t ask about salary.

Of course, young fintech wannabes might have other things on their minds. Like beer. On last week’s ESPN College Gameday show, a student put up a sign with his Venmo number and a request that his mother send beer money. Instead, over two thousand complete strangers donated to his beer fund. Here’s a selection of what fintech companies’ signs might look like come next College Gameday.

Prophets of Wall Street

No one knows exactly what the future has in store – but people are making some educated guesses. Aon estimates that self-driving cars will cut U.S. insurance premiums by 40%, though automation will carry its own unique risks. Chinese ecommerce giant Alibaba thinks the future of identify verification lies in the red veins of your eyeballs.

And because your week wouldn’t be complete without a blockchain update, Goldman Sachs filed a patent for blockchain-enabled forex, in the hope of speeding up and reducing cost of trading currencies.

Prison payments: An old system incarcerating financial choice

Earlier this month, J.P.Morgan was forced to pay over $400,000 to former prisoners for charging high fees on prison-issued debit cards. The suit and payout shined some light on the shady payments world that prisoners and their families are forced to deal with daily. As the financial industry experiences a renaissance of growing transparency and lower fees that comes with more competition, the captive market consisting of roughly 2.3 million U.S. prisoners has seen its rates get worse with technological advances.

The JPM case had to do with release debit cards, stored value cards issued to prisoners when they’re discharged, loaded with the cash they brought with them into jail. Digitizing prisoner money may stymie theft, but ends up being complicated and expensive when used in practice. Regarding JPM, ex-convicts were charged $10 for withdrawals at teller windows and $2 non-network ATM fees

This isn’t the only release debit card company facing a lawsuit. The Human Rights Defense Center, a 501(c)(3) that advocates human rights for U.S. prisoners, is currently litigating a class action lawsuit against Numi, another release debit card provider with high fees.

The leader of the case is Danica Brown, who was arrested protesting the shooting death of Michael Brown, and experienced Numi’s high fees in the brief time she was held. After being moved from a local police station to a justice center, Brown found herself stranded at 2:30 A.M. without her wallet, cellphone or keys — just 30 bucks on a prepaid debit card. Brown was eventually acquitted of all charges, but the Numi transaction history reports she paid 22% of her funds to fees.

Alex Friedmann, associate director of HRDC, says the issue with Numi is that inmates are forced to use debit cards, allowing service providers to charge whatever they want.

“It’s like going to the teller at the bank and asking for $100, but the teller says you need to pay $10 to get your hundred,” said Friedmann. “You would normally say ‘you’re out of your mind, I’m going to a different bank.’ But in this case, you can’t go to a different bank.”

Fees for prisoner financial and communication services aren’t exclusive to release debit cards. In the digital age, private companies have entered into prisons and profited by providing financial and communication services to prisoners. But the private companies aren’t the only ones who profit. Prisons take a commission on most services provided in jails. Commissions then need to be factored into pricing, leading to rates that are higher than normal.

The HRDC and mainstream media sources have done a good job revealing the exorbitant fees that plague prisoners and their families. It’s not uncommon for a prisoner to pay an interstate phone rate of $1.15 a minute with a 48 percent commission kickbacked to prisons.

JPay, the 800 pound gorilla of prison money transfers, exemplifies the consequences of for profit prisons. JPay facilitates money transfers into most state prisons to be used for things like commissary items. On transactions between $20 and $40, families of prisoners have to pay between 17 and 39 percent fees for online and phone transfers, netting prisons a $0.50 commission on each transfer.

According to Friedmann, prisoners’ families usually don’t have the financial ability to send larger transfers to take advantage of a sliding fee schedule and end up transferring $20 to $40 at a time.

“Prisoners’ families tend to be somewhat impoverished, and can’t send a bunch of money at a time,” he said. “They have to break fund transfers up into smaller amounts when available, and those smaller amounts incur a larger percentage fee.”

JPay does offer free transfer services through money orders from Western Union or MoneyGram. Although the firm claims funds are transferred quickly, the HRDC has evidence of the opposite. In 2014, the HRDC sent eight checks to various prisoners. It took between 8 and 18 days for cash to be received, significantly longer than the seven days JPay claims it takes to process money orders.

Although much attention has been given to the high fees that prisoners and their families deal with, fees aren’t the real issue, just symptoms of a systemic illness. Companies like JPay and Numi fit the bill of fintech upstart; they took a market that was large and archaic, utilized technological advances, and created a business out of nothing.

But really they’re just putting lipstick on a pig, disguising old school business practices as fintech upstarts with catchy marketing slogans and putting a bunch of lower case e’s in front of their products. For customers to see the real changes that has come with the digital age, markets need competition. The lack of competition stifles innovation and leads to what we have in prisons today: An old system masquerading as innovative fintech.

And JPay isn’t even the most egregious of violators. At least they had to win bids with state prisons for their business. On the federal level, Bank of America has an agreement with the U.S. Treasury to provide financial services to prison inmates. J.P.Morgan provides release debit cards to the federal system. The deal had no bid process and has been amended 22 times since it was signed in 2000.

Financial details are vague, as both JPM and BofA have declined to release their fee schedules. The only document available is a redacted contract between the Department of Treasury and BofA. Some reports put the minimum annual payout of $18 million for BofA.

$50 gets you $100 that the first deal put together between the U.S. Treasury and BofA took place at an upscale restaurant in Manhattan. The lack of a selection process other than ‘Hey, our granddads went to college together, so I might as well throw $18 million your way’ is everything that the new world of finance is trying to change.

While monopoly contracts and high fees may upset people, capitalism is still our system of choice. The founding beliefs of ‘Murica still pulse through our veins: baseball, apple pie, and the idea that if you can figure out a niche to create a new service, you can charge whatever the hell you want. Free markets, laissez faire, and the invisible hand of the marketplace will always be preferred to increased regulation.

But regulation is there for situations like prisons, to protect customers who can’t protect themselves from price gouging and high fees associated with captive markets, where monopolies need to be broken and allow fintech innovators to come in and do what they do best: give new options to under-optioned markets.

Phone companies are the farthest ahead in terms of reform. The Federal Communications Commission put into effect caps on phone rates in prisons last year, and after a year long legal battle that included counter suits and stays, finalized new rate caps were issued earlier this month.

Regulating and reforming the prison payment system is a complex equation with multiple variables. Taking commissions straight out of prisons might be an answer, but the ramifications of the financial loss to the system are difficult to predict. Without these streams of revenues, prisons could end up increasing margins on other items, like commissary, to make up for the loss of commission fees.

According to Friedmann, regulation is the only option out of the monopoly contracts that exist in prisons. The issue that organizations like the HRDC run into is that governmental bodies are the same people benefiting from monopoly contracts, making the battle even tougher. Lobbying for improved financial conditions for prisoners is also a tough sell, because the issue just isn’t on the radar screen of most decision makers.

“Most federal officials that enter into monopoly contracts, or lawmakers that restrict what goes on in prisons don’t care much about the life and well being of prisoners. That’s the reality of the situation,” concluded Friedmann.