A close up of the Marriner S. Eccles building
Photo: Federal Reserve System

An aging banking law gets an internet overhaul

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Monday: rethinking the Community Reinvestment Act, Stripe vs. Plaid, and the earnings to watch, including Coinbase and Marqeta.

Off the chain

The oddest investor in Elon Musk’s bid for Twitter may be Binance. Sure, Twitter’s been dabbling with crypto tips and payouts, but it seems far afield from Binance’s core business. Does Binance just have more money than it knows what to do with? I’m reminded of its recent investment in Forbes. Maybe we should get worried when the decentralized firm starts buying up real estate.

Also, some news on our team! Veronica Irwin has joined Protocol Fintech. She’ll be contributing to the newsletter, writing about fintech and a bit of VC, and overseeing our weekly “Deal flow” section. Enjoy her look at the Community Reinvestment Act in today’s edition.

— Owen Thomas (email | twitter)

An aging law gets an internet overhaul

Since 1995, the internet, smartphones and even social media have upended the way we save, spend and invest. That’s also the year the Community Reinvestment Act, which is meant to encourage fair lending in low- and middle-income communities and was first passed in 1977, was last updated. Finance looks a lot different today.

The OCC, Federal Reserve and FDIC issued a joint proposal Thursday for revamping the law, which was structured around the idea of banks with branches, to take into account new realities like mobile and internet banking. People are already starting to ask how it will affect neobanks — and the small banks that have a thriving business catering to them.

The CRA has been a charged issue for decades. Critics say it limits financial institutions without bringing forth the equity it promises, while supporters say it’s essential in making sure all Americans can generate wealth over time.

  • The act primarily targets redlining, or the systemic denial of financial services to people of color and low-income households. Most of the time, the term “redlining” is used in the context of home mortgages.
  • Some banks and academics say that the act requires banks to engage in risky lending practices. Under the Trump administration, the OCC unilaterally changed its rules to allow banks to qualify for the CRA by investing in broad community initiatives like road- and bridge-building projects, but the agency rescinded those rules in early 2021 before they took effect.
  • Some studies show the CRA reduced economic and racial residential segregation in American cities, while others suggest it’s been a vehicle for gentrification.

The OCC tried to go it alone, but now agencies are showing a coordinated front to force CRA regulations on neobanks and fintechs. CRA as it currently stands regulates banks by where their physical branches are located, which doesn’t make a lot of sense in the internet age.

  • 34% of people used their phones as a primary method of accessing financial services in 2019, according to the FDIC, while another 22.8% primarily used the computer.
  • The OCC has been approving fintechs to pursue national banking charters since late last year, while companies like Better.com and LendingClub allow people to apply for mortgage loans online. Block, SoFi and LendingClub are among the fintechs that have added bank charters, putting them directly under the CRA, rather than relying on bank partners for compliance.
  • Whether these companies need to comply with the CRA has been a legal gray area, with many fintechs saying that they, like credit unions, already serve low- and moderate-income households. Most follow requirements for “strategic plans,” which are vague and which critics say allow them to set their own metrics for success.
  • Block got a bank charter for an industrial loan company. Critics have called the FDIC’s recently revised CRA compliance rules for industrial loan companies inadequate, only requiring lending in the ILC’s headquarters city. That’s just one example of the ways CRA rules don’t fit well with the modern way financial firms operate.
  • The proposal suggests that lenders should face increased scrutiny, particularly in cases of auto lending. Previously, most of the focus was on mortgages and small business loans.
  • The reforms promise to prioritize small loans with high impact, with clear definitions of other potential programs. Consumer Bankers Association president and CEO Richard Hunt said he appreciated that the proposal offered more “clarity” in a statement.

It’s still early days, but some people have begun to weigh in. Fellow regulators support the proposal (no shock there), while some think tanks and fintechs are concerned that added regulation could either be too restrictive or encourage risky loans.

  • Consumer Financial Protection Bureau director Rohit Chopra thinks it’s common sense. “Banks receive a range of benefits from the public. In exchange, they are obligated to adequately serve the banking and credit needs of their community,” he said in a tweet.
  • But others aren’t so happy. “The Community Reinvestment Act for independent mortgage bankers is nonsensical and a solution in search of a problem,” Mortgage Bankers Association CEO Robert Broeksmit told the Wall Street Journal.
  • Fintech analyst Alex Johnson points out that banks with under $10 million in assets, including a lot of the banks fintechs work with, might be exempt from the CRA updates. “I'd like to see a revised CRA that requires banks that provide banking-as-a-service to fintech companies to report on how those fintech companies' activities are supporting CRA objectives,” he said.
  • It’s also safe to assume that conservative policy analysts will continue to worry about banks granting people loans that customers simply can’t afford in the name of compliance. “Empirical research also shows that banks’ risk-taking increases ahead of their CRA evaluations,” reads a 2019 Cato Institute report.

Whatever the outcome, it looks like the country’s top banking regulators will be exerting more control over an area of the industry that has, up until this point, been mostly free to roam. The agencies are accepting comments on the proposal until August 5.

Veronica Irwin (email | twitter)


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On the money

Mining Capital Coin’s CEO was indicted in a $62 million crypto fraud scheme. Luiz Capuci Jr. allegedly misled investors, and pocketed investor funds instead of mining crypto as promised.

Argentina’s central bank banned banks from offering crypto services. The central bank said that banks cannot offer services for unregulated assets, and since digital assets are not regulated in the country, that includes crypto.

OpenSea’s Discord was hacked, with hackers promoting a fake project. The attackers sent links in the Discord servers pointing to an NFT minting project, which in reality led to a phishing site. Fewer than 10 wallets were compromised, and all NFTs stolen were valued under 10 ether.

Robinhood added two Grayscale crypto trusts. Users of the app can now buy and sell Grayscale Bitcoin Trust and Grayscale Ethereum Trust, a move by Robinhood to further establish itself in the crypto world.

A very special Overheard with Zach Perret

The Stripe vs. Plaid fintech feud may have been short-lived, but it sure was juicy. After Stripe Financial Connections launched on Wednesday, offering direct competition to Plaid’s core product, Plaid CEO Zach Perret accused Stripe’s Jay Shah of using meetings and interviews with Plaid to help build the new tool.

Of course, Bolt co-founder Ryan Breslow (of “Stripe is the mafia of Silicon Valley” fame) couldn’t help but chime in. “Bummed that this happened to you Zach. Thank you for speaking up. Stripe does this because they can; most are too afraid to call it out. But the tide is turning,” he tweeted.

Breslow may have tweeted too soon. Perret removed his original tweet, saying it all might have been a crazy mixup! “Deleted tweet. Misunderstanding or different styles perhaps. Presuming positive intent,” he tweeted. (Which is exactly what you’d say if an actual mafia were threatening you. Blink twice if this is a hostage situation, Zach.)

Stripe CEO Patrick Collison sent an internal email noting that Shah interviewed with Plaid before working for Stripe, and met with Plaid only at Perret’s request.

“We should certainly be open to the possibility that we could have handled things better… We’ll try to learn what we can by reaching out to the people at Plaid and will retro this week,” Collison said in the email.

Coming up

Coinbase’s earnings call is set for Tuesday. COIN’s average estimated EPS is at $0.17, down 95% from last quarter.

Marqeta’s earnings call is on Wednesday. MQ’s average estimated EPS is at -$0.09, down 29% from last quarter.

The Fintech Talents North America conference is on Thursday. The conference will feature speakers from Revolut, J.P. Morgan, Marqeta and others. Marqeta is also the headline sponsor for the event.

Affirm’s earnings call is scheduled for Thursday. AFRM’s average estimated EPS is at -$0.54, up about 5% from last quarter.

A U.S. House hearing on the use of AI for regtech is happening on Friday. The U.S. House Committee on Financial Services will discuss the usefulness of artificial intelligence for effective automated regulation.

Nubank’s earnings call is set for next Monday, May 16. NU’s average estimated EPS is at -$0.01, down 200% from last quarter’s average estimated EPS.

The Payments Forum conference also starts next Monday. The three-day conference in Phoenix, Arizona, will feature speakers from Visa, Mastercard, Walmart, Santander Bank and others.


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Thanks for reading — see you tomorrow!

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