[chatmasta]

The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them.

The reason the banks are scared is not because "banks" are not involved. They're scared because these apps have successfully vertically integrated to become banks. This is the logical next step for Apple / Google Pay and I'm sure it has consumer banks shaking in their boots, because there's no way they can outcompete those companies in tech. So instead they focus on regulatory capture and making it as difficult as possible for tech companies to play in their sandbox without banker supervision.

One only needs to look at the adoption rate of Apple Pay outside the US to see this system at work. In parts of Europe and the UK it's extremely popular because the banking systems have much friendlier regulations and fewer integration points. In the US the uptake has been slow because the integration is so cumbersome and the banks / payment networks control the entire cycle from point-of-sale to deposit.

[stcredzero]

The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them.

My wife works in banking, for a small local bank. The regulations are heavily skewed against smaller banks. Regulations around consumer mortgages seem to be designed to keep smaller banks out. Unless you have the resources to engage in sizeable software projects, you will have to write your own software, spend a lot of money on software licensing, or engage in a lot of manual work while risking draconian penalties for little mistakes.

So regulatory capture doesn't just mean rigging the game for banks. It's only the large corporations that do the rigging and gain the benefit.

Tech needs to figure out how to combine the power of small community banks. Small community banks can only survive through having superior local intelligence. That superior local intelligence is worth a heck of a lot in aggregate.

[AmericanChopper]

All regulations are skewed against smaller companies. There's a reason the US has a vibrant startup culture, and Europe doesn't.

[dzonga]

smaller banks also provide protection against 'too big to fail' syndrome. They won't over leverage risk.

[vkou]

If they don't actually own the mortgages that they issue, and instead sell them on the credit markets, then neither big nor small banks overleverage risk.

As I understand it, it doesn't matter if they are Chase, or BECU - most banks don't actually own any of the mortgages they issue.

The problem in 2008 was the fraud, the irrational exuberance, and really dumb investments by the investment branches of a few investment banks. The retail arm of, say, Wells Fargo, which issued a whole bunch of shitty mortgages was fine.

Whether or not you think that investment branches of banks deserve to be bailed out is an exercise for the reader.

[jsmith99]

Not exactly. The savings and loans crises of the 80's was driven by a sector of traditionally small, community banks, fueled by deregulation.

[apocrypher]

Specifically, what you explained stoked the fire, but what poured gas on it and simultaneously kicked the embers about the room, was Rudolf Guiliani taking RICO to make his case against Mike Milken, actually first of all Mike's far more vulnerable brother was indicted, but that aside Guiliani forced Drexel to shut it's trading desks, which drained the market for the junk bonds which had allowed so many tiny thrifts to engorge themselves, and without any mark to market -the whole market consisting of Drexel making two ways all on it's lonesome (who else had a clue what was in those bonds?) - the multitude of vastly bloated regional S&L's couldn't post their accounts, and simultaneously all went belly up.

Not being funny, but Guiliani forced the whole mortgage banking business into insolvency to make a point that some still think was Vendetta. Whatever the case, Guiliani forced a vast capital market to halt, for no reason I've ever learned, and handed a four trillion dollar bill to the taxpayer, for kicks. No wonder Trump likes his advice.

[fauigerzigerk]

>They're scared because these apps have successfully vertically integrated to become banks.

I'm not sure tech companies really want the core banking business, which is to lend money (taking on credit risk in the process) funded by deposits.

I can imagine Amazon doing it for smaller consumer purchases as they know their customers well. But who will make loans to SMEs and larger retail loans? Google and Apple? I doubt it.

Eventually interest rates will rise and then bad loans will increase, and tech companies will start to wonder if that's really the business they want to be in (like GE has been "wondering" for many years now).

And then there's the regulatory aspect. Do tech companies really want to be regulated as banks? I get the impression that they have daily run-ins with all sorts of regulators already and they're running scared.

[zodiac]

I wonder if the roles of "payment network operator" and "credit provider" need to be as entwined as they are now

[fauigerzigerk]

That's a good point. I think they are not nearly as entwined as they used to be (before Paypal) and that trend is going to continue.

[forkLding]

Its still a doable business though, presumably its what Paypal and any payment processor wants to be, because getting paid mainly to do transactions is still not the biggest money earner and customers will appreciate a wholly integrated process instead of one fraught with different vendors and regulations.

Also presumably Alibaba and Tencent are earning quite a bit off their payments/banking and customers love it because they dont have to carry cash and do all the other steps etc. (talked to Chinese people about it).

[westiseast]

Also, aside from traditional lending, Alipay and Wechat are both competing to basically own all social and consumption data - in a sense I’d agree they don’t want to become traditional banks: they want to create closed payment/purchasing/social systems where they can take cuts from every step of the process.

[charleslmunger]

It's not really the core banking business in the US - interest is only about 50% of income for large banks.

http://money.cnn.com/2017/02/22/investing/atm-overdraft-fees...

And check out page 38 of BoA's annual report: http://media.corporate-ir.net/media_files/IROL/71/71595/BOAM...

Interest income was $44.7 billion, non interest income (aka fees, trading, and services) was 42.6 billion.

[fauigerzigerk]

Lending is still the biggest segment by far and some of the fees and charges are closely related to the lending business.

Also, most of the other segments are not exactly what I imagine tech companies will want to do either. In the case of BoA that includes the entire business of the former Merrill Lynch.

[westiseast]

FYI Alibaba/Alipay has a range of loan and financial products. My wife’s Taobao business does well, and so she’s eligible for huge, insane loans on Alipay. On the other side, micro-loans to fund consumer purchases are also available.

[commandlinefan]

It makes sense. We're seeing more and more "middle men" being removed from the economy (travel agents, publishers, broadcasters, retailers); banks are about as pure "middle men" as you can imagine. Whether this is good or bad isn't as relevant as whether or not it's inevitable and, long term, I think it is.

[pishpash]

Everybody is a middleman when the robots take over, so yes.

[s73v3r_]

"The critical difference is that in China, the apps effectively are the banks, whereas in the US, regulatory capture ensures that the banks stay the banks and it's the app's problem to figure out how to interface with them."

Are you sure it's that? Or is it that the apps don't want to have the responsibility of safeguarding people's money? Cause really, payments and money are things where you really do not want to "move fast and break things".

[abakker]

This all depends whether you can shift the risk. It is fine to break things if you have managed to get insurance to cover the downside.

[s73v3r_]

I would phrase that another way. It's fine to break things if you can make whole the people who are negatively affected by breaking things. Someone getting their money returned after it was stolen from your startup bank is one thing, but that person missing their car payment and having their car repo'ed because of that missing money, and thus not being able to make it to work and getting fired is another.

[abakker]

Exactly- I was trying, dryly, to be tongue in cheek. As the example you gave illustrates well, covering risk almost never includes second order consequences, it is part of the “limited liability” that companies get. Unfortunately, customers tend not to be informed well enough to reason through these possibilities up front. We never know exactly what will break, or how we might be effected by that breakage.

[jbob2000]

I'm not sure about the US, but in Canada, these companies would not be allowed to accept deposits or facilitate withdrawals; they could never "become banks". Our banking act and recent revisions are in place to protect a foreign entity from holding Canadian citizen's money hostage and shielding them from exterior economic impact (We fared very well in 2008 because of these regulations!).

The most they could do is be a fancy wrapper around the bank's own software.

[clairity]

as i understand it second-hand, you can effectively no longer get a federal charter to be a bank if that’s not your sole purpose, because of the high regulatory burden that comes with it.

nordstrom, for example, is/owns a bank (until recently, it seems it’s been sold to charles schwab) but that’s because they got their charter in the 90’s before the regulatory burden became prohibitive (and was grandfathered in).

so i’m not sure tech companies can easily verticalize into banking.

[nicoburns]

Anecdotally, I've only seen a few people using apple pay in the UK. Everyone now has contactless card (which you just tap on the machine to pay almost instantly), which as very popular.

A lot of places seem to support apple pay, but it's much less convenient than contactless (obviously some people disagree).

[sametmax]

Another advantage is that you don't add yet another entity knowing what you do with your life in the mix. The bank already has the information, and the shop. I don't really want apple/google/whatever to append to the stock pile of stuff they know about me: my consumption habits, the money I got and the places I visit despite the fact my geoloc is off.

The massive centralization of our life is a huge problem.

Like we said "don't give everything to facebook" 10 years ago and people only wake up now, I wish people realized it's not about a particular brand. It's a general advice.

The worst part is that the power you give to them is invisible, so it doesn't seem that much. It feels harmless. But the potential for controlling ones life is huge.

[yardstick]

I’m one of those that disagree :)

I prefer Apple Pay over contactless as you can often go over the £30 limit of contactless. Eg I’ve spent £80+ at Waitrose and paid using Apple Pay. Plus it is more secure- you must authenticate to use it- and that added security doesn’t take long at all (under 1 second to Touch ID). I’ve got 3 cards (two debit, one credit) linked to Apple Pay.

I only have one contactless card, which is just to replace my Oyster card for tube/public transport travel, and that’s only because it’s quicker to pay with when going through the gates. I explicitly called the banks and told them to send me non-contactless versions of all my other cards.

Oh, and Apple Pay doesn’t suffer from card clash. Which is one of the other reasons why I only have one contactless card in my wallet.

[fzzzy]

Huh? Apple Pay uses the exact same NFC tech as contactless.

[raverbashing]

Why would I want to pull my phone, unlock it, if I can just tap my card instead?

[westiseast]

The beauty of China-style massive adoption of mobile payments is leaving the house without taking your cards or wallet or cash with you.

So kind of agreeing with you - Apple Pay is great because then I don’t need to take my card (whereas I’ll always take my phone) and it has added security of Face Recognition.

However, the poor adoption (ie, all those places that don’t have contactless, don’t take cards, money transfers to friends, parking meters....). Contactless vs ApplePay is 50:50.

[yardstick]

If you have more than one contactless card, you’ll need to remove it from your wallet to pay. That’s slower (at least for me) than pulling out my phone, thumb primed on Touch ID so it’s already authenticated before I tap.

Plus, if my card is stolen, it can’t be abused on multiple cheap contactless purchases. Sure the bank will refund, but it’s still a pain of a process to go through, especially if the bank pushes back at all.

[joncrane]

I think you've nailed the way Richard Fairbanks (CEO of Capital One) thinks with this part:

>it has consumer banks shaking in their boots, because there's no way they can outcompete those companies in tech. So instead they focus on regulatory capture

That's why COF is doing the whole "we're a tech company that also happens to be a bank" spiel. They are doing their best to back that up, as well. Lots of modern practices and of course they're all in on Cloud.

[forgottenpass]

>This is the logical next step for Apple / Google Pay and I'm sure it has consumer banks shaking in their boots, because there's no way they can outcompete those companies in tech.

Google and Apple don't have to (and the banks won't get to) compete on tech if they enter the space. They'll compete on their ability to vertically integrate. Good news for google and apple, they're already in every pocket.

[amrx101]

From India here. Same can be said for India. I do my all banking transactions from my phone. Also there are couple of banks who are only app based like DBS. I rarely visit bank.