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Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
Photo: Daniel Acker/Bloomberg via Getty Images

The pandemic and fintech might put an end to overdraft fees

Senator Elizabeth Warren

Hello and welcome to Protocol | Fintech! This Friday: Ally Bank drops overdraft fees, neobanks might be underrated for small-business lending, and Ant Group gets back on track.

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The Big Story

Why overdraft fees might be over

Ally Bank, the biggest all-digital bank in the U.S., is getting rid of overdraft fees. It's a big move for a major U.S. financial institution, which highlights the new pressures on traditional banking.

The pincers are coming from Washington and Silicon Valley. Congressional critics of Wall Street, particularly Sen. Elizabeth Warren, have made overdraft fees a populist punching bag. But challenger banks like Chime have also wooed consumers with accounts that don't charge for overdrafts.

  • Warren has railed about overdraft fees for years, but the pandemic has made her critiques newly resonant. She zinged JPMorgan Chase CEO Jamie Dimon at a recent hearing about the $1.5 billion his bank made from overdraft fees during a time of unprecedented job loss and economic upheaval.
  • "Overdraft fees are a pain point for many consumers," Ally CEO Jeffrey Brown said, announcing the change.
  • Many banks, including Ally, waived or suspended overdraft fees due to the pandemic. Ally's making that permanent. Brown said: "It is time to end them."

Pro-overdraft bankers argue the fees encourage responsible behavior. But the reality is that they punish the most vulnerable consumers, critics say.

  • Consumers paid $12.4 billion in overdraft fees in 2020, according to the 2021 FinHealth Spend Report.
  • Regional banks make an average of 9% of their profits on overdraft fees, a Brookings analysis found. But some small banks make far more. The report's authors found six institutions whose overdraft revenue made up more than half their net income.
  • As Warren pointed out, JPMorgan Chase could easily afford to give up the profit it makes from overdrafts. For smaller banks, it might be harder.

The pressure from fintech is growing. Overdraft fees have been a significant money-maker for banks for decades. But fintechs have demonstrated that "penalizing someone for being short on cash by taking even more money from them" is "a ridiculous notion," Moor Insights & Strategy analyst Melody Brue told Protocol.

  • Jason Brown, CEO of Tally, a consumer debt management app, said banks "propagated this lie" that overdraft fees are meant to help consumers "do the right thing." But these penalties "actually make it worse and don't help people pay on time."
  • Fintechs blazed a new trail, introducing consumer-friendly ways of doing business which have radically changed consumer expectations, he said.
  • Brue said other banks are likely to follow Ally Bank's lead "or lose to more consumer-friendly fintech options."

Will Congress force big banks to act — or will competition? It's more likely that lawmakers will roast banks than regulate them.

  • An overdraft reform bill died in committee in 2019, and an outright ban on overdraft charges would likely do more harm to small banks than to big ones.
  • Many large banks already offer no-overdraft accounts, where transactions that would overdraw an account are automatically declined without a fee. But banks make them hard to find, Consumer Reports found.
  • Traditional banks are in a catch-22, with expensive branch infrastructure that the pandemic has proven consumers need less and less, and fees to support that infrastructure that are unconnected to the value they deliver.
  • Challenger banks have thrived by offering services like early access to direct deposits — the opposite of the overdraft-fee philosophy.

There's one more tech-driven reason why banks might want to rethink their reliance on overdraft fees: Real-time payments are coming. With faster access to deposits and a clearer view of balances, consumers might be less likely to overdraw their accounts in the first place.

—Ben Pimentel

A MESSAGE FROM BLOCKCHAIN.COM

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From Protocol | Fintech

Robinhood bets on free crypto orders. The trading app sees fee-free digital currency trades giving it stronger momentum as it prepares to go public.

SoFi's impressive debut. The personal finance company's stock jumped 12% as it began trading on the Nasdaq.

Shopify's game plan. Kaz Nejatian, the company's vice president of product for merchant services, explains how Shopify is taking on on rival Amazon.

Robinhood's new directors. The trading app, which is expected to go public soon, named veteran execs from Apple, PwC and the World Bank to its board.

Banks watch your every move online. How financial institutions are using AI-powered behavioral analytics to battle fraud.

Overheard

  • "Ransomware is hitting everywhere and they're all collecting it in bitcoin because there's no way they're going to get caught. So you're also enabling it." John Reed Stark, founder of the SEC's internet enforcement office, talking about crypto's role in ransomware.
  • "Everything in crypto is rehypothecation. Everything. Including the collateral." Alex Mashinsky, founder of DeFi firm Celsius Network, discussing the opaque practice of lending and re-lending in the DeFi sector.
  • "We believe that 'FinTech' will be built into all types of services, and we want to help bring to life a network of innovators and a rich set of new payment, identity, open banking, and embedded finance capabilities to make it happen." —Joel Yarbrough, managing director of Rapyd Ventures, a new fintech venture fund from payments startup Rapyd.

3 Questions With...

Kirk Simpson, CEO, Wave

What fintech trend is most troubling for you?

I think we want to be wary of small-business lending becoming predatory. What's most important is helping small businesses keep their cash flow moving properly in the first place, and ensuring they get paid faster for work they've done. That way, they don't have to turn to loans as frequently, which can oftentimes impose high interest payments. Over 80% of small businesses fail because of cash flow issues, and it's a major pain point we're focused on solving for our customers.

What's been your biggest professional blunder, and how did it help you?

When my co-founder James Lochrie and I started Wave in 2009, we fell into the trap of hiring people much like us from our networks — essentially, white and male. It led us down a path similar to a lot of tech companies which feels unwelcoming to diverse employees. In 2015, we purposefully set out to change the culture of Wave and that has led to a far more diverse workforce and a much stronger culture by all measures. This has had a significant impact on business performance, employee satisfaction and engagement.

What fintech sector or company is most underrated and overrated right now?

I believe neobanks are still very much underrated in North America, especially in the small business sector. We are only scratching the surface of innovation in a multi-hundred-billion-dollar industry. For years, the industry wondered what would happen to small business lenders during a down cycle. We found out last March, and I don't think it was pretty for many players.

Need to Know

  • The OCC won a fintech charter ruling. An appeals court ruled in favor of the Office of the Comptroller of the Currency against state regulators over the National Bank Act and what defines "banking."
  • Ant Group got approval for a new consumer finance entity. Ant will own 50% of Chongqing Ant Consumer Finance Co., which can do consumer lending, among other things.
  • The EU is planning a digital-ID wallet. The mobile app would enable the bloc's 450 million people to store and use digital IDs and other documents.
  • NFT volume has dropped 90%. Is the crash in NFTs the result of crypto prices tanking?
  • Two CFPB officials are leaving. Bryan Schneider and Peggy Twohig led enforcement and supervision efforts. Meanwhile, Rohit Chopra, Biden's nominee to lead the agency,, is still awaiting a confirmation hearing.

Deal Flow

  • DLocal's IPO popped. The Uruguay-based payments company began trading on the Nasdaq.
  • Prosa is seeking a buyer at over $1 billion. The payments network, which facilitates more than half of Mexico's payments and also does business elsewhere in Latin America, is owned by banks including Grupo Financiero Banorte, HSBC and Banco Santander.
  • JPMorgan wants full ownership of its China JV. The bank, which already owns 71%, is seeking approval from regulators. Goldman and Morgan Stanley have moved to take majority stakes in similar ventures.
  • Synctera raised $33 million. The startup's platform connects community banks and fintech companies.

A MESSAGE FROM BLOCKCHAIN.COM

Trusted since 2011, there are over 73M Blockchain.com Wallets that have transacted nearly $1T in crypto.

Whether you want to trade, earn, custody, or access full-stack institutional solutions, Blockchain.com is a market leader in retail and institutional crypto products.

Learn more

Data Point

350,000

That's the number of New York City households considered unbanked. Mayoral candidate Andrew Yang has proposed a nonprofit People's Bank.

Thanks for reading — see you Tuesday.

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