What's really going on with debanking? (TWIF 12/6)

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💬 One Big Thought: What is going on with debanking?

Unless you are completely offline (in which case I envy you), you've probably seen the recent debates about de-banking.

The catalyst for the conversation was an interview of Marc Andreessen by Joe Rogan where he claimed that banks were targeting accountholders for their political beliefs by closing down their accounts, under pressure from regulators. This inspired other founders like Libra founder David Marcus, to come forward with their own stories of being debanked, or otherwise having nascent projects shut down by financial regulators.

Others are skeptical that 'debanking' – ie, capricious account closures to serve political vendettas – is really happening, and that these stories are just the BAU of bank compliance programs at work:

So what's really going on here?

The word debanking is like socialism: it means 1 million different things to different people. I personally know a good number of founders who have struggled to get bank support for their companies – whether looking for bank sponsors, partners, or service providers. I've invested in some of them. I also know of many projects which were debanked and shouldn't have been banked to start with.

What is frustrating to founders and accountholders is that banks do not, in most cases, provide explanations for their decisions.

This makes it hard to differentiate between the two ends of the spectrum: a startup that flagrantly violates the rules on one end – vs. a startup that tries to do everything right, with a well-staffed compliance department, which submits two years' worth of paperwork, interviews with agencies, and then still gets denied with no feedback, on the other.

Patrick McKenzie previously wrote that, in payments systems, the optimal amount of fraud is non-zero. Bank compliance is similar. The optimal amount of risk in the system is not zero. Banks have to take risk by default. "Crossing the road is a risk." However, in the US, banks are not purely creatures of the market but are also deputized, quasi-instruments of public policy. They are heavily regulated, they are backstopped, and they have an alphabet soup of agencies who set policy priorities that they enact through banks.

In theory, bank compliance frameworks are a simple 1:1 application of clear regulatory regimes. The FDIC, OCC, CFPB Treasury, Fed, etc. make the rules, and the banks apply them. In reality, compliance is probabilistic. (But no CCO will ever say that.) While some regulators issue guidance, some use rulemaking, and some use enforcement to make their preferences known. And their preferences change with each administration. So bank compliance departments are left to read the tea leaves when it comes to how much program risk they can defensibly take on without subjecting themselves to fines, asset caps, and arrests.

So why have stories of debanking accelerated in recent years?

Charlie Munger famously said, "show me the incentive, I'll show you the outcome."

The presidential administration of 2016-2020 turned over to an administration from 2020-2024 with different policy priorities. This cascaded down into leadership turnover at each regulatory agency, and a transition from dovish to hawkish enforcement practices. We will never a smoking-gun memo from the FDIC or SEC chair to a bank CEO about debanking a specific startup, but bank executives, anticipating a hawkish regulatory climate, will be incentivized to be conservative in their choices of which programs to work with. And that will lead to more debanking.

More hawkish regulators -> more conservative banks -> more debanking.

And yet...

The people who stand to profit the most from the narrative that banks are arbitrarily debanking customers are the ones who are trying to build alternate financial systems. Many founders and VCs are in the marketing business. And if you want to build a better payments or savings or investing product that circumvents the banking system and maybe skirts some federal laws here and there, a narrative that banks are capricious and politically-motivated is great marketing for you. (Andreessen later walked back some of his claims about the CFPB.)

The reality is more boring than the story. Some of these debanking stories are likely just banks using regulatory pressure as an excuse to make prosaic business decisions they would have made anyway:

But that doesn't mean that we should settle for BAU.

Financial innovation is where the opportunity lies. You will never build a better financial system by just rehashing the same products and business model.

But innovation carries risk, which requires oversight and rulemaking. Oversight and rulemaking are how financial systems avoid scenarios like FTX's misappropriation of $8 billion in deposits or Synapse losing nearly $109 million in accountholder savings (Andreessen notably invested in Synapse).

The dial should never be turned up all the way to ‘no innovation,’ but neither should it be turned down to ‘no regulation.’

I would love to see,

Let's see what the next few years bring.

Please enjoy another week of fintech and banking news below.

(👍👎 Have feedback for us? Let us know! Find me at @nikmilanovic, @twifintech, and @ndm)

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“We are what we pretend to be, so we must be careful about what we pretend to be.” – Kurt Vonnegut

HSBC launched the HSBC Merchant Box, a multicurrency digital payment platform, to support small and medium enterprises in Hong Kong pursuing international growth.

The Bank of Canada released the applicants’ list for retail payment service providers, marking a step in its regulatory framework for payment services. The list includes entities seeking registration under Canada's Retail Payment Activities Act, which aims to enhance oversight and protect consumers​.

Businesses gained the ability to pay bills of up to $10 million instantly using the US' RTP payments network.

Wells Fargo announced plans to sell its San Francisco headquarters and focus on the U.S. East Coast as part of a strategic move to reallocate resources​.

The Monetary Authority of Singapore fined JPMorgan $24 million for misconduct by relationship managers, who allegedly breached ethical standards in handling client portfolios​. Mastercard agreed to a $200 million settlement addressing claims of overcharging fees, settling a significant legal dispute with merchants​.

TD Bank missed earnings expectations due to weak U.S. performance and suspended growth guidance amidst challenging conditions​.

The London Stock Market shrank at its fastest pace in over a decade due to a wave of takeovers, reflecting shifts in global market dynamics and investor interest.

BitGo launched a retail platform designed to streamline digital asset services for retail investors. This platform combines custody, wallets, staking, and tax tools.

Middesk introduced "Address Risk Insights," a tool aimed at reducing business risk and enhancing Know Your Business compliance. This feature provides detailed address-level data to help businesses identify potential issues and ensure regulatory compliance​.

MyTU launched a business Visa debit card with advanced API integration, enabling businesses to manage expenses efficiently and access tailored financial solutions.

Crypto.com announced a cryptocurrency card in Bahrain and expand its operations across the GCC region.

FV Bank expanded its stablecoin services by integrating real-time USD conversions for USDT.

Nuvei introduced blockchain-based payment solutions in Latin America, allowing businesses to transact using cryptocurrencies.

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M-KOPA achieved $400 million in ARR, driven by its focus on financial inclusion. The company expanded its product offerings, including solar energy systems, smartphones, and electric motorcycles, targeting underserved communities in Africa.

Coinbase integrated Apple Pay into its fiat-to-crypto onramp platform.

Adyen partnered with Intuit to enhance payment capabilities for businesses using Intuit’s software. The collaboration focuses on improving efficiency in managing transactions and financial operations .

The fallout from the collapse of Synapse continues, with several partner banks facing a lawsuit alleging mishandling of customer funds, and one of those banks insisting that end user funds it once held were moved by the BaaS platform before it went bankrupt.