Fintech Recap: Charters, BaaS & the Fed

Hello, and welcome back to the Fintech Takes podcast. It's June, which means that we have another episode of Fintech recap with our friend Jason Mekula, publisher of Fintech Business Weekly. Jason and I had a lot to catch up on in this episode. We talked about the accelerating trend of Fintech companies becoming banks and the impact that that might have on their valuations and the way investors feel about them. We made a return trip to Bass Island, if you can believe it. Don't worry, we're not going to get stranded there, at least not yet, but we did make a brief return trip, which felt good. It felt a little bit like going back home. For me, at least Jason might have been experiencing some sort of traumas we were doing that, but a lot of fun was had. And we also talked about some executive orders that have come out recently from the White House and what they mean for Fintech, what they mean for the different regulatory agencies, what they mean for banks. And we end as we always do with some rants on some subjects that we can't let go. I will give you an ear muffs warning if you're listening to this in the car with kids. You might want to turn it off before it gets to the cant let it go section because I do black out at the end on a subject that makes me quite angry, but nonetheless, it was fun. It was therapeutic, as always, a delight to have Jason on the podcast. Without further ado, here's another episode of Fintech Recap. (upbeat music) This is Fintech Takes, the podcast keeping you in the loop on all the latest Fintech trends, news and ideas. I'm Alex Johnson, creator of the Fintech Takes newsletter, your host and self-confessed Fintech nerd. Let's go. Okay, Jason, how are you, sir? I have survived a 90 degree Fahrenheit day in the Netherlands, which for me is about 30 degrees above average and no, I don't have air conditioning. So if there's a video of this and I look sweaty, that's why. That's totally fair. That's totally fair. I have moved into a new office, so you'll notice different decorations. I believe I have. Yeah, where's my book? It's right there. It's right there on the shelf, banking as a service by Jason Mickula. You can all see it right there. You're right next to Kyla Scanlon, so I know, pretty big deal. So very happy to be here, but I will say that similarly, the building I'm in, I'm on the third floor, the windows don't open, and they're like, yeah, there's a chance the air conditioning doesn't work. And it's like, oh, okay, great, fantastic. So we've not quite gotten as hot as you're describing, but we will. And when that happens, I may be red faced and sweating on some of these future podcasts. What does like a peak summer temperature in normal times? Like set aside the global warming, like crazy spikes, but like a normal Montana summer, like growing up, what would be like a peak high? Yeah, I mean, it was, I guess what I would say is it was notable when it got into the '90s, was how I experienced a notable. So notable. So like in like August, we would have like, it'd be in the '80s, you know, you get into the '90s occasionally, but like into the hundreds was like very unusual. And for the most part, it still is. So I would say like, our baseline is probably now closer like upper '80s, lower '90s as the high during the summer. But still nothing to complain about. My younger brother's matter of fact just moved from Montana to Phoenix. And so now I don't get to complain about hot weather because he's living in like a literal hellscape surrounded by scorpions and 120 degree weather. So it's a different sort of vibe. Yeah, no, thank you. I don't need anything that's triple digits. I do not need my life. Well, you're a Chicago guy. So like, I imagine you grew up like more cold than hot, right? It's pretty extreme in both directions, to be honest. I mean, the, you know, the just finished undergrad living in your first adult apartment, but like you have no money. So there is no air conditioning because the building is like a hundred years old. Oh yeah. Like you regret that decision when Chicago summer rolls along because it's hot and then in the city, it stays hot at night. Oh, I hate that guy. You get extremes in both directions in Chicago. Yeah, the thing I'll never trade now that I realize what I have is waking up when it is cold at night or it's cold in the morning. Even if it's going to get hotter in the day again, like that is just a great way to reset my nervous system. I can't give that up now that I have it. Oh, speaking of resetting systems should we dive into the latest changes, drama, enforcement actions of the FinTech and banking world? Oh my gosh, there's so much to cover. So allow me if I can to go first. This is a story I know you've been paying attention to. I have been paying attention to. It's been happening for a while, but I think it's crescendo in a way that's kind of interesting right now. Everyone wants to be a bank. And, you know, in particular, what we are seeing is sort of another wave of what I would consider to be sort of your classic neo banks that are becoming banks or are on the path to becoming banks. Reminding me, I guess of like the what late 2010s in early 2020s when we saw a wave of this happen in in neo banking world. So the latest news is that Chime, co-founder and CEO Chris Britt did an interview where he teased the idea that Chime will become a bank. And it's a question of when, not if, which if you've paid attention to the history of Chime, you will know that is very different than the way he used to talk about Chime when he would pitch it in the Halcyon days of 2020 and 2021 as a software company and not a bank. My how times change. So it sounds like Chime will become a bank. And we don't know exactly what the timing is, but that is something that they are planning for. And similarly, Mercury, who we've talked about many times on the show, has just received conditional approval on their national bank charter from the OCC and timed that with a new fundraise of $200 million at a $5.2 billion valuation, which is an up-round relative to their last fundraising. So, Mika, the question I have about this sort of trend is what is the thinking driving this? And in particular, how might a move to become a bank impact these companies' valuations? And just to put a little bit of detail around that second question, I did a little bit of research on sort of neo-bank versus bank valuations. And if you look at Chime as one example, Chime went from having a 30X revenue multiple so price per sales in 2021, which is very high. That was when he was saying, "Borsofore company, not a bank." Of course, we're a software company. To about a 7X revenue multiple when Chime went public last year to a 3X multiple today. So, it's been compressed in a pretty significant way. Mercury, similarly, has had its ups and downs over time. It's most recent revenue multiple after this latest fundraising round is 8X. And I think it's an interesting sort of progression, if you will, because you go from being a privately held non-bank banking service provider to, at some point, going through two different gates. One is going from a private company to a public company. Obviously, Chime did that last year. Mercury has not done that yet. And then the second gate that you go through is becoming a bank. Obviously, Mercury has gone through that gate now while still being a private company. Chime, it sounds like will at some point go through that gate. And when you go through both of those gates, my observation is your valuation and the multiple that you get on your sort of core revenue assets, that gets compressed as you go through each one of these gates. And there are some lessons from the past that I think we can draw from. We saw this with SoFi. SoFi over the years has had a much, much higher revenue multiple, but when it went public and then when it became a bank, you saw those things start to compress. And today, switching from like fintech valuation metrics to bank valuation metrics, banks are valued by something called Price per Tangible Book Value, which is, I guess the shorthand way of saying it is, Tangible Book Value, what are we worth if we just sell everything tomorrow that isn't nailed down? Like all of our liquid assets, our loan book, our real estate that's easy to liquidate. If we just get rid of everything, what are we worth? And then your multiple is anything beyond one X that you're worth, meaning anything beyond what you can be liquidated for. SoFi currently is trading at a 2.2 X price per Tangible Book, and that is bad from a fintech lens, like 2.2, that's pretty good. That is like JP Morgan Chase level really good if you're a bank, which is kind of this strange sort of contradiction with SoFi. And then Lending Club is the other example, obviously, another sort of Neo bank that acquired a bank, became a bank, had a bank charter, and has gone public. They are currently hovering around a 1.2. 5, XP to TBV multiple. And that is, I guess you'd say, good for a bank, but in no way exceptional. So I'm curious what your perspective on this is because it does seem as though the end journey of all of these companies is to become a bank and then to just sort of fight against gravity as much as you can to prevent your valuation from getting compressed by these very pessimistic bank analysts that just won't be chill about it. So I think the first question is, why are these companies pursuing a charter, or perhaps more specifically, why are they doing it now? And I think the, you know, the reasonably obvious answer to that question is, because they can do it now, right? I mean, you know, we went through basically, since the financial crisis of very, very few denovo charters, a bit more activity on the M&A side. So, you know, you mentioned lending cloud which acquired radius. Of course, we've had some other so-fi acquired. I think it was golden-specific, column acquired, Chico State Bank or something like that. You just enable the bank they acquired. So there's some more activity on the M&A side. The mentality, as I read it, seems to be now's the time when we can do it. And if we think we might want it, we should do it now. I do think that it is worth pausing to ask the question, might some of these companies regret that decision? Now, I haven't actually had the opportunity to speak with anyone in senior management at Vero because I understand that they don't like me very much. I wonder why. I do wonder. It's been fair. It's been fair coverage to be fair. Facts are facts even in 2026. I do wonder if that is an example where I was like, hey, we really thought, like we legitimately and sincerely thought as we went through that process that getting this charter would to use Goldman speak be a creative to the business model. And for various reasons, whether that was choice of technology stack, whether it was difficulty executing, whether it was overly optimistic projections, I would argue based on the data that we have that having the charter has not particularly been accretive to their business model. Now, time is a different company, larger, positive net income per most recently quarterly earnings, so just in a very, very different position, can time leverage a bank charter successfully to enhance its business in a way that Vero didn't? I entirely think that is a possibility. Again, it does involve actually being a bit of execute, which I think time has a significantly better track record than using Vero as a comp. But that said, we are seeing a flood of quote unquote traditional or full service charters, deposit taking charters, as well as all the national trust bank charters, which we should probably set aside for this conversation, because I'm assuming the math on valuing that is substantially different than the price to book ratio that you mentioned or that we're discussing, I would be surprised if Coinbase ends up getting valued based on price-detangible book value. Yeah, it's like, okay, the windows open. If I think I might want a charter, even if I don't really want it today, maybe I think I'm ready for it in four or five years, like I don't know who's going to be president or who's going to be comptroller or who's going to be the FDIC. The year is 2030. It's president AOC. I don't know. Rohit Chopra is the control of the currency. So it's kind of like, okay, now that if you want it, if you think you want it, now's the time to do it. And that's what we're seeing. So I think the next question is, what is the narrative that you can plausibly sell to Quentinville Wall Street? And I also think, and I think you mentioned this when you're talking about SoFi, it is worth distinguishing between those cranky analysts who are churning out the research reports and the retail investors or in the SoFi case, like the SoFi bros on Twitter. So if I were public via SPAC, like we have to remember that like, they SPAC man and they carry over that SPAC enthusiasm even to this day. If you say mean things on Twitter and use the tag for SoFi, they will find you and they will make your life unpleasant. You look at and I don't mean to pick on these companies specifically, it's just the examples that come to mind. Figure publicly traded. Yeah, it is figures business fundamentally. It's primarily a Helok lender, but it's not really valued the way that a traditional Helok lender is valued. And figure has done a good job, like props to their comms and PR and investor relations and marketing team, basically saying like, you know, we're a blockchain company, we're a technology company, we're probably now saying we're a tokenization company because that's like the cool, you know, the cool word to use. Similarly, upstart, like what is upstart? Upstart is a non-bank lender, but they've done a very good job of constructing a narrative that like, no, no, no, we're actually an AI company. And so even though they're both, you know, they are both publicly traded, neither of them are banks, but the point I'm making is like they have done a good job of intentionally constructing a narrative to separate themselves from what are arguably very fair market comms. And so I've been able to sustain valuations and valuation multiples that if they were compared like for like with a Helok company or with a NBFI, like a non-bank lender, like say one main financial or something for all started. Yeah, yeah, yeah. That those multiples frankly are probably not super defensible. And so I guess like my TLDR here is like, okay, if you think about the charter, get it now, some of these companies will regret it. And then as far as like the valuation story, I've I always caveat neither of us are equity analysts. I am just routinely surprised, and I guess I shouldn't be anymore at how powerful storytelling is in what is ostensibly like a ruthlessly competitive, efficient market like the stock market, with a wild card being, I guess if you can attract a dedicated base of like retail fanboys and fangirls, that can support a valuation that is untethered to reality and not to go too far afield, but like Tesla is like a classic extreme example of that where it's like, hey, like the fundamentals of this business are like part of my language, they're kind of shitty. But the stock price and evaluation are just untethered from the reality of what the business is because you have a very powerful storyteller in the form of Elon Musk who is attracted a following that can sort of sustain that price. Yeah, I mean, I think that's right. You like use SoFi as an example, right? So they have the the SPAC energy that carries them forward to this day. And it is funny because you look at SoFi and it's like the core business is pretty strong, right? Like it's a fairly big bank. They've done a pretty good job of getting a large base of obviously lending customers, converting them into kind of full bank customers, trying to like increase the attach rate for additional products. It's a fairly strong consumer banking business, but they also own Galileo and technosus. And I don't know if you saw they recently bought Peach, which is like a loan servicing platform. And yeah, it's funny because I just looking at the business, I would say, hey, maybe we should just like cut bait on all of this stuff, kind of going back to Goldman Sachs. Like maybe this Marcus idea is just a bad idea. And let's just like cut bait on all of this. Like it's not going very well. Galileo lost its biggest customer when Chime switched off of Galileo to using its own proprietary platform that it built itself. You know, like I don't think the business really justifies making an acquisition and got buying Peach and like rounding out those capabilities. But I do think there is an element of retail storytelling built into that where like part of the reason SPAC rows are very still excited about Sofai is this AWS AffinTech story that they sort of spun up around Galileo and technosus and what they were doing there. And to degree, you have to kind of feed that part of your investor base. Even if the fundamentals of the business don't justify it, I also think Sofai just sort of released their own stablecoin that now all Sofai users can buy and sell and hold. And it was funny because I read the press release. And at no part of the press release was I like reading an explanation for why Sofai member would want the so-called stablecoin. But they're like we have it and you're like, okay, great. But what that really just suggests to me is they need the retail component of the their investor base to be like, so if I take stablecoin seriously, they're not gonna get disrupted by crypto. They're the first bank to issue their own stablecoin, blah, blah, blah, blah, blah. And so I do think there are a number of things that so if I does that aren't really in the best interest of the business, but are, and I think Anthony Notos, the CEO, does a wonderful job sort of staying in touch with how retail investors are feeling about so if I, I can't throw them a bone consistently so that they stay engaged. And I think that's a large part of why they are valued where they are relative to, I always find the comparison between Sofie and Lending Club pretty fascinating because very similar businesses, Lending Club is a little smaller than Sofie's, but very, very similar in a lot of respects. And I think in some ways you could make the argument that Lending Club is a better run business. I'm not wild about the new branding for Happen Bank, but that's like a separate issue. But like it's interesting because as an example, for a very long time, Lending Club has reported their numbers using sort of reserve accounting, right? Because that's what's required under CISOL and that's what all banks do and that's what bank analysts expect. And Sofie by contrast does not. They use fair value accounting where they mark to market their loans over time and they don't have to realize all the losses up front. And it's utterly perplexing to bank analysts, right? They look at Sofie and they're like, "Oh, this seems weird. How do we know how to value this company?" But Sofie just does it and they've done it for so long and have gotten away with it for so long. The Lending Club actually recently changed from reserve accounting to fair value accounting. And so they are moving towards Sofie and what that tells me is they're just tired of getting punished as a bank stock when like their business, I think, from their perspective, is the same as Sofie's, but they're not getting that same premium. So there is this sort of inherent like irrational component to how all of this works. And I will say to end this, I worry about time having their valuation multiple compressed even further because obviously they went from 30 down to seven, now down to three. It's funny 'cause like, there's no reason why being a bank, having a bank charter should make it go down any further. Like it really shouldn't go down any further, right? Like having a bank charter at this point for someone like time just improves their unity can on. So it just makes them more profitable. Like there's, it's nothing but good for time. And yet, I think the reason that Chris Britt is saying, yeah, at some point we'll become a bank, but we haven't done it yet. But hey man, like the window's kind of closing, you never know like when charters aren't gonna be available anymore, I think the reason they're kind of delaying a little bit is they know like those bank analysts are annoying and like unless you have some Sofie, like superpower to keep your, your multiple high, you're gonna get compressed even more, even though it doesn't really make sense. - I mean, my last comment on that is, there's also just like a fundamentally, or there should be a fundamentally different lens that you view risk through when you're a bank versus a non-bank, right? So part of what justifies those high multiples for tech companies, it's not just that, you know, oh, it's tech, it tends to be that they are extremely fast growing, and that's why investors are willing to essentially pay more because they believe it is gonna grow and return in the future. When you're a bank, as you and I and Kia and Henrik and a bunch of other people have discussed ad nauseam, really rapid growth, at least in my opinion, is inherently a sign of risk, whether it's on the, you know, both on the deposit side and on the asset side, particularly if the asset side is doing your own lending as opposed to deploying those deposits into other assets, buying securities, parking them at the Fed, whatever. And so, you know, you can see a world where it's like, okay, if the pressure is reward shareholders by trying to maintain a higher multiple, I need to keep growing really fast. Oh, but now I'm a bank, but how am I gonna do that? You know, take on a bunch of accounts and deposits that like, yeah, maybe otherwise I wouldn't really want to, you know, and/or, you know, deploy funds more quickly or into assets with higher yield that maybe otherwise you wouldn't. And not that, to be clear, not that chime is SVB, but it's like, that is the kind of decision making where it's like, okay, we're reaching for yield. And, you know, all of the incentive structure, whether it was the executives, somehow I've hijacked this intern to SVB, I apologize. Whether whether it's like the executives bonus or the share price incentives them to do that. And, you know, the end result was, you know, it blew up the bank and wiped out all equity holders. So I do think like banks are a very special kind of business and it's not irrational to look at them and value them potentially using different metrics or different kind of multiples. And it will be interesting to see how some of these companies and chime explicitly, explicitly described itself as a tech company, how they try to navigate or thread that needle of, well, we want the charter, but we don't want to be treated, we don't want to be valued like a bank. Like, it will be interesting to watch how they try to do that. - Yeah, I think that's exactly right. And, you know, it's just a timing in your life thing too, right? Like, this is my high growth phase. I probably shouldn't be a bank because it's not really compatible with the way that they think. This is my middle-aged slowing down a little bit phase. Maybe a bank charter is a better thing, but again, the challenge is the window for getting a bank charter is not always open. And so you have to time, when is it right for me? With when will regulators allow me to have this thing and those two things don't always match up as we've seen? Um, Jason, I am delighted to get to say this, delighted. I'm so thrilled. Can we go back to Bass Island? - I can't tell if you're being sincere or some cast make. So I'm just gonna-- - I am being sincere only because I know that this will actually be a three-hour tour and we won't get marooned on Bass Island and have to make a coconut phone. So, please, take us back. - Okay. - So, brief tour, brief tour. So, Synapse and Evol trash fires still smoldering. - Yeah. - The segment is not about that, thankfully. Thank God. - I really thought we had left Bass Island behind us. (laughing) But as our friend and industry colleague, Kia Haslet, recently discussed in her Fintech Takes banking newsletter, we've seen a pretty significant slowdown in enforcement actions from the federal bank regulators. And that really shouldn't come as a surprise, right? It was expected that whoever Trump appointed to the relevant regulators, so controller-gold at OCC, my Travis Hill at FDIC, I'm more recently Kevin Worsh at the Fed, although the Fed is like a little bit of an outlier for reasons that should be obvious to listeners. It was clear that the priority was gonna be a deregulatory one. And we've certainly seen that on the rulemaking side. We've also seen it on the enforcement side. So, a lot of what we've seen, I'm signed up for the OCC press release emails and there were far, far, far more terminations of consent orders than there were new enforcement actions, new orders. So, I'll admit, I was a bit surprised when I saw the monthly OCC enforcement action press release in my inbox and it includes that they consent order with his community, federal savings bank, more commonly known as CFSB. For those that are not familiar with sort of like the actual business of the bank, I find this kind of hilarious because I actually know where this is. CFSB is a single branch bank located underneath the elevated train tracks. So, it feels, you can't call it a subway because it's above ground in New York. So, it's like the elevated train tracks. Across from a beauty salon and a liquor store in the Woodhaven neighborhood of Queens in New York, that is highly specific, Michelin. - Hey. - You're a storyteller. You had another-- - I'm nothing if not detail-oriented. (laughing) But in addition to, I guess like legacy business or historic business of being, what's essentially, I mean, literally the word community is in the name of the bank, it also has become a very significant player in the part our banking space, including quite a number of what I would consider higher risk programs like those that are focused on cross-border and those that sort of consumers and businesses outside of the United States. So, I mean, there's more than a dozen programs, but some of the higher profile ones include air wallets, wise, formerly known as transfer wise, pay-and-ear, Chipper Cash, which is an African sort of neo-bank/P2P type service, no-mad, which dedicated listeners will remember was on Synapse at one point, a Brazilian banking startup. Those programs powered a very rapid growth in CFSB's deposits and assets. So at the end of 2017, the bank had less than 140 million in assets, and that grew to 900 million, or about 900 million at the end of 2024. Although, I think that's a big problem. So the bank's assets did shrink slightly in 2025, which I'm guessing was like aside that there was enforcement activity brewing behind the scenes. I actually flagged these risks in a story I published almost two years ago. So maybe I'm doing some programming notes for the OCC. But this is all to say basically, you know, the risks seem to have finally caught up with CFSB given that the consent order focuses squarely, though narrowly on BSA AML issues. So very quickly, for folks who want to read all the details, like I would recommend either my newsletter on this topic or just go read the actual consent order on the OCC's website. But the TLDR is basically CFSB grew its payment processing business line far faster than its BSA AML controls for this business line to quote the consent order this resulted in systemic internal controls breakdowns, weak independent testing and weak BSA staffing. And quote, some of the deficiencies that were spelled out in the consent order. I mean, I can tell I'm a real nerd because like, I've read enough of these that's like, oh, wow, that's weird. Some of the deficiencies included a transaction monitoring system with flawed data, logic and methodology that resulted in quote, a very high percentage, unquote, of transaction monitoring alerts that were just automatically closed with no investigation, which seems like a problem. Also CFSB failed to determine whether it had correspondent accounts for foreign financial institutions. Like, that is technical speak for CFSB did not know if some of the accounts it had were for foreign banks. And that is alarming. Yeah. Those are much higher risk because those accounts can be used to facilitate wire transfers and international payments for that foreign banks customers. Right. So if you're engaged in correspondent banking, like you kind of want to know what you are engaged in it. Then you are engaged in that business so that you can monitor those accounts for signs of suspicious activity. The consent order basically calls for a comprehensive end-to-end review assessment of BSAAML program and basically like remediate these problems. I do think it's notable what is not in this consent order specifically anything else other than these BSAAML topics. So during our wave of bass enforcement actions in 2022 to say 2025, BSAAML was a very common theme. But it was far from the only topic area covered in the approximately 20-ish consent orders that were entered into during that time. You often saw adjacent areas specifically board governance and my personal favorite TPRM, third party risk management, cited alongside those BSAAML concerns and a fair number of those consent orders also included business restrictions. So for example, if you want to onboard a new program, you need to get supervisory non-objection before you do so. This consent order had none of that. It was just the BSAAML stuff. So Alex, my question to you and I'll admit this calls for speculation. Why do we think the OCC felt the need to act in this case despite the general change in regulatory and enforcement posture? Well, I think the obvious answer, OJURD hinted at is that CFSB is a tire-fire. They couldn't ignore it. Seems like the most reasonable answer. I didn't even mention the various pig buttering schemes linked to a couple of these companies or pay-in-ears. I think it was a huge OFAC issue that they had. Yeah. So I mean, it does seem like tiny little bank courted a very high-risk category of customers in an attempt to grow very, very fast and to generate profit, which it did, which is good for them. But I mean, the colorful example you gave from the consent order about they didn't know that they were doing correspondent banking, but they were. That's the kind of thing where you're like, oh, you don't even know the scope of the risks that are in your way or that you're facing. You're not even aware of how much danger you're in. I think that level of mismanagement would be probably what required the OCC to act. I will also say in my experience watching regulation and deregulation cycle back and forth, there's always counter-cyclical examples that are chosen to illustrate. We're also pro. If you're highly regulated in giving all these consent orders, you also want to give a signal that like, no, we're open innovation. We're not the bad guys. If you are deregulating everything, you send the opposite messages. Mostly we deregulate. We're still doing our job and making sure that we flag these things. You see that right now actually in prediction market land with the CFTC making a big deal about the four insider trading cases that they've busted. Look, we're cracking down on this. It's like, okay, probably not, but you want to send that message and make that clear. I think it serves that goal as well. I think the thing I'm most surprised by is the thing you were saying about the narrowness of the order. I'll just pick on restrictions on programs. You have a super deficient BSA AML program. You don't even know if you're in correspondent banking. Clearly your transaction monitoring system does not work, but you are not in any way restricted from bringing on new programs. That's weird, right? That's strange. It makes sense to me, even if you don't want to flag other areas like board governance or TPRM. I'm not terribly surprised that those areas weren't included in this because I do get the sense from the current regulatory leadership that they felt prior versions of the agencies were too expansive in the way that they would like whack banks like reputation risk, TPRM, like all these other areas. I think they are trying to be much more tailored in their enforcement and supervision. This I think is an example of that. In this particular case, it feels too narrow because you do have a TPRM problem. If you have all these counterparties that you're working with and you don't even really know what they're doing, that is in addition to BSA AML. That is a third party risk management problem. Also no restrictions on bringing on additional programs. You don't have to get a non-objection. That's kind of crazy. I feel like this is probably a little bit more performative, picking on a really egregious ly bad example than it is an indicator of no, we're still trying to hold it line here and stop this happening. This ties into our next story, which we'll get to in a second, but I do just generally get the sense that the direction from the top right now is, hey, we want banks to take risks. We want them to innovate. We want them to partner with Fintech companies. This is designed to not get in the way of any of those larger goals. That is a great point that I will admit did not occur to me as I was writing the newsletter or preparing our notes for today that like, oh, this is like a nice piece of window dressing that if somebody gets hold before the Senate banking committee and asked questions, they can say no, no, no, no, look, we're still doing financial crimes compliance enforcement. Look at this example. Like Senator Warren, I don't know what you're talking about because we do blah, blah, blah, blah, blah. Right. Yeah. The bank with the hand sanitizer monitoring problem. We got a consent order for them. Right. No, that's a good point. I mean, it, I'm at least somewhat sympathetic to the positions expressed by the regulators of like, hey, maybe the pendulum swung too far. And we should refocus on material financial risks and not process risks. Did you check all the checkboxes? Well, and you remember the, you remember the Blue Ridge one. That was the famous one for me where it was like two consent orders within like whatever was 18 months within 18 months for sure. Yeah. And like that was, I mean, even like I tend to be fairly sympathetic to like, we should be careful in banking as a service. Obviously for reasons that we've discussed ad nauseam on this show. But even that, I was like, whoa, boy, that is, that is excessive. So I get where you're coming from. Yeah. But then it's also a matter of like, okay, that's what you're saying. What are you doing or not doing behind the scenes as far as the supervisory practice? And what signal is that sending to the banks that you regulate? And what I get worried about and this will not be a surprise to anyone who knows me or follows my work is like, are we flashing a green light for crime? Because sometimes it really does feel that way. And my, my unsolicited advice to anyone in the space would be like, remember, regulation is backward booking. And there will be other people at OCC, at the FDIC, at FinSEN in the future. looking back at what is happening now. And there are still state regulators and state AGs, depending on exactly what the situation is. And so I do understand the impulse that it's like, "Hey, the current climate is all systems go risk-on." But we've seen this story before, right? And it was not a happy ending for at least some of the banks that decided to go risk-on in that sort of first wave of of bass stuff in 2020, closer to minus. So should we get off bass island? Should we go somewhere else? That was three hours. Let's get the hell out of here. Turn the ship around. OK. I will take us by a different island that is maybe somewhat related, which is deregulation focused. There were two interesting executive orders from President Trump that were signed recently. That I wanted to run through, because I think they speak to exactly that point about the regulatory environment that we're in right now. So I will give you the highlights of each. I will give you the full actual real names of the orders, which are always like so fluffily named. That doesn't really tell you anything. But the first one is integrating financial technology innovation into regulatory frameworks. This executive order does a couple of things. First, it gives federal financial regulators-- so the ones we've been talking about-- 90 days to review existing guidelines, guidance, and application processes to eliminate overly fragmented or burdensome rules that shield incumbent mega banks. Interesting. Two, it directs those same agencies to lower friction and establish smoother pathways for collaboration between traditional banks and independent fentech platforms. So make bass, great again, Jason. And then, finally, it requests-- and the word request is very important, because the administration, despite its desires, can't tell the Federal Reserve what to do-- request the Federal Reserve Board evaluate granting fentech and digital asset firms access to central reserve bank payment services and master accounts. And it specifically goes out of its way to ask the board, if there's anything they can do, to rein in the actions of the independent reserve banks individually who've been making a wild number of interesting decisions as it relates to master accounts and access to payments infrastructure. So that is the first executive order. Let's pause on that one before getting to the second one. Jason, I know you read this one. Obviously, it relates to areas that are very core to what you cover. What were your takeaways from, again, to be clear, an executive order that doesn't necessarily have a tremendous amount of teeth? Certainly isn't a law, but is directing agencies and asking for things in this sort of fentech innovation realm. So I do not actually want to go down this route, but I will point out that this executive order potentially has a direct impact on companies that Trump and his family control. It's just we would be remiss if we didn't mention. Yeah, it feels a little conflict of interest to me, to the extent that still I think. As you alluded to in the nature of the EO, right? The agency's that would fall under this executive order. So the CFPB, the SEC, the NCUA, so the Credit Union administrator, the CFTC, the FDIC and OCC and Fed are all, at least theoretically, independent agencies. I also think it's worth pointing out the NCUA, and I have to give credit to Matt Janica, because I read this in his post over at Modern Treasury. I will put that in my show notes. The NCUA doesn't even have enough directors to pass rulemaking. So like, they don't have a board. Like the EO is essentially like a sternly worded letter and it's a sternly worded letter saying, hey, regulatory agencies, like this is the direction I want you to go. And then it's up to this alphabet soup of financial regulators to then promulgate, but potentially promulgate rules to try to implement or further that agenda. As you pointed out, the Fed is still ostensibly really is independent. The rest of those alphabet soup agencies are directly or indirectly controlled by Trump appointees that generally have been a menace to advancing the policy goals of the administration. I will say that I'm interested to see both the speed and there's no other way to put this, the competence with which these agencies pursue any action based on what's in this executive order. So for example, like the OC at least in my mind, and please feel free to push back or if you think differently, I'd love to hear. Sure. In my mind, the OCC and Comptroller Guild have been sort of the most forceful, invisible in pushing, both the sort of deep, like the deregulatory slash pro-innovation agenda. And that's shown up in his public remarks in hanging out and doing photo ops with the founders of Arabor. Yeah, vote at CFPB. At least basically. He's got his own project. He's working on it. He definitely has his own agenda. It's not necessarily clear to me that his agenda is like innovation. So much as taking care of innovation. Innovation, yeah. So much as taking a weed whacker to the entire government. Right, right. Which I guess, like by extension, a deregulatory agenda, I suppose, could foster innovation. But that doesn't seem to be what his, that's not why he wakes up in the morning. You know, it's not what gets him out of it. It's not what gets him out of it. From some of the remarks he made, what gets him up in the morning is trying to make government employees like cry and be terrorized. Sturves. I'm paraphrasing. For the, no, no, no, I think that's not that far off. Yeah. Destroying all woke ideology, I think is what motivates him. Yeah. Travis Hill, chairman of FDIC, seems to have maintained like a relatively lower profile. And he was a board member at FDIC under the prior administration. So he may be more of like an institutionalist and or has enough long term thinking to wonder, what is my career after this administration and how do I sort of navigate the current climate so that I'm still employable potentially in government, whoever comes next. Yeah, yeah. And then the Fed, you know, Worsh has been sworn in as chair now. But as you mentioned, we have 12 independent quasi, independent regional Fed banks, which I'd actually love to hear you unpack the timeline you laid out in your newsletter a little bit more. Because some of that was news to me. I as far as like some of these decisions about master accounts actually happening, they're happening at the regional Fed level. And so you can have like a very different read at whatever, the Richmond Fed versus the Chicago or Atlanta or the Minneapolis Fed, which does seem kind of problematic to me. Like it feels like you would want that to be consistent regardless of which regional Fed is processing an application. Yeah. Well, let me run through the timeline 'cause it is kind of wild. So I did a little research into sort of history of master account access. And obviously it goes back even further than this. But the modern history, you could start in 2017. And that was when the Kansas City Fed, who will feature prominently in this timeline, denied a master account application from Reserve Trust, which was a Colorado chartered non-depository trust company. Then in 2018, the Kansas City Fed reverse course, grants Reserve Trust a master account. 2020, Castodia Bank, who's come up a time or two on this podcast, a Wyoming special purpose depository institution, files for a master account application again, with the Kansas City Fed. Kansas City just gets all the fun stuff. In 2022, it is reported, it is alleged that former Fed governor Sarah Bloomrask and helped Reserve Trust get its master account while serving on the company's board. This is actually something of a pattern with people who used to work at the Fed lobbying, the Fed for master accounts for companies that are on the board of. Shortly thereafter, the Kansas City Fed revoked Reserve Trust master account after determining that the company is, quote, no longer eligible for reasons that are a little unclear. Also, in 2022, the Federal Reserve Board, and an attempt to try to get a little bit of control over this process, adopted guidelines for reviewing master account applications, which defined three different tiers for applicants, depending on whether they are federally regulated, whether they are state regulated, if they are uninsured or insured, and essentially the types of applications we're talking about coming from these like Wyoming or Colorado's speech. harder non-depository institutions, those are tier three, meaning the highest risk and the ones that require the most evaluation. 2023, the Kansas City Fed denies officially Castodia's master account application after just letting it linger for many, many years. Castodia sues over the decision and loses and loses on appeal and loses on appeal again. And the losses for those appeals, basically stem from the fact that the courts recognized according to the law, the Fed can do whatever it wants here, it doesn't have to answer to anybody else or even have a very transparent or understandable process. Fast forward to 2025, Fed Governor Waller, who's one of those sort of innovation forward, public officials, publicly floats the idea of a skinny master account, which would give more limited powers for high-risk depository institutions. So, you know, the types that we're talking about who fit into that tier three category. December of 2025, the Fed Reserve Board publishes an RFI to ask for feedback from the industry on the skinny master account idea. March of this year, the Kansas City Fed grants Kraken, which is a different Wyoming special purpose depository institution, obviously a crypto-oriented company, a master account. The account is described as being limited or restricted in several ways that are functionally similar to this proposed skinny master account idea. Later, Vice Chair for Supervision Michelle Bowman clarifies that the approval is a one-year pilot and representative Maxine Waters asks the Kansas City Fed to explain what it's doing granting a skinny charter, a skinny master account, excuse me, before the Fed Reserve Board had actually figured out what a skinny master account actually is, which brings us to the current month in which President Trump obviously signs this executive order among other things, kind of asking the Fed to figure it shit out. And the Federal Reserve Board publishing a formal proposal for a skinny master account. And in that same proposal, encouraging the individual reserve banks to pause evaluating all tier three applications until they can finalize this proposed new account type. And you'll notice throughout many, many, many of those descriptions of that timeline, the words request, the words, you know, lawsuit denied, appeal denied. Basically what that tells us is the reserve banks can do whatever they want here, not even the Federal Reserve Board, which is densely as sort of the body in charge of regulating the Federal Reserve system can stop the reserve banks. And that has led to the mess that we find ourselves in. So I know that this is not the specific topic that we're talking about, but it's adjacent, so indulge me. Yeah. The lack of accountability from the Fed here, accountability to the public, the political process, as well as the entities that are applying for these master accounts. I actually find like a really quite troubling. And I'll admit, like this is not something I spent frankly any time thinking about until, yes, my FOIA lawsuit related to Synapse. And then this master account topic. And it's like, okay, I fully understand and 100% agree that monetary policy should and needs to be independent and insulated from political pressure. There are plenty of historical examples, Turkey under Erdogan, Argentina under forever of what happens when you do not have independent monetary policy making. That said, there's a bunch of other stuff the Fed does that apparently there's just like no accountability for. And I just, that seems, this is cliche and probably like controversial at this point, but like that just seems un-American. It's like you have this like an entity that I do understand the regional Fed Reserve banks are technically owned by their members. And so it is a very strange like kind of government but also kind of not government structure. They're like private public quasi-hybrid weird companies, but yeah, they're very strange in the way they're organized. But if I were, if I were custodia and you look at that, and I should really go and read all the lawsuit filings the next time I'm on vacation for fun. Or sorry, the next time I'm on a long flight, I'll print those out and bring them along. But if I were one of those entities that was applying for a master account and either being denied or being denied without or just being sort of strong along with that explanation, it's like, okay, well, who are the member banks that own the Fed? Oh, like incumbent banks. Are they keeping me out because they think this is a bonafide risk to the financial system? Or they keeping me out because they want to preserve the privilege of being inside this regulatory barrier. And I don't want to go to like two tinfoil hat world because if you spend time on Twitter in this topic area, there's a lot of tinfoil hat world. But I do think that's a fair question. I think it's a fair question to ask. And with the nature of the current structure, like the Fed and the 12 Fed regional banks have been largely insulated from having to explain or provide any accountability. And I do find that troubling. Yeah, I feel the same. I mean, I think that what it ultimately comes down to is a lot of times for reasons that are just pure sort of historical accidents, we end up with these institutions that are not really optimally designed. And I think the Fed is a good example where it's like, dual state federal banking. Oh, God. Yeah, I mean, CSBS is going to come after us. I know. I know. Yeah, they're not going to be happy. The dual banking system is stupid and badly designed. The Federal Reserve, I think we can pretty confidently say, is stupid and badly designed. Like it has three different jobs that it does in combination. One is it operates a payment system, which is really important in every sort of country with like a modern financial system has some public infrastructure that's used to facilitate payments because it's important for economic activity. And you and I have talked to folks who work in that part of the Fed and like they just think about how do I run a good payments business, right? Like my job is to just make sure all the rails work and make sure the transactions all clear. Includes physical cash. In physical cash checks. Like, you know, we had Mark Old from the Federal Reserve on the podcast a while back and he was like, our job is to be there when the last check gets written and it needs to get like processed. Like we will be doing that until the heat death of the universe. And so I think that like that's one really important job. Second job, which I'm not really sure why the Fed has this job to be totally honest is as a like potential regulator of the situation. They should not be a regulator. They should not make sense, right? Like like the OCC can do it for nationals. The FDIC can do it for state ones that are insured. Like we don't need this. So I don't really understand why the Fed does that. You have tried to get information from that part of the Fed about why they do what they do relating to evolve or other ones that fall under their jurisdiction and you don't get clear answers. So like they probably just shouldn't have that job. And then there's the monetary policy part, which is like really important, desperately need independence from the executive branch. So like to me, we should be splitting up these jobs and like have different agencies doing them. It's kind of absurd. And I will also going back to an earlier thing you mentioned about the agency's all being kind of independent but led by political appointees. I think the other thing you're gonna see you didn't mention Jonathan McCurnen at Treasury. But I think that he might be the one who actually really tries to implement whatever comes out of this executive order as it relates to what the OCC and the FDIC and others do. I've noticed, and I think you probably noticed the same. Treasury's played a much more active role in sort of trying to steer what all the different agencies are doing. Much more so I think than previous administrations. And so in some ways I kind of read this as a coordinating document for what Treasury is going to do and it's gonna sort of roll down to a degree to get to the OCC, the FDIC and CUA and others. So we'll see what happens. Briefly I will just mention the other executive order that got signed at the same time is one called Restoring Integrity to America's financial system or whatever we mean when we say that. This was sort of the watered down version of a thing that had been reported on earlier about potentially the administration making a change to require banks to collect citizenship information from their customers. This executive order is the watered down version of the seemingly in response to heavy lobbying from the banking industry saying like you cannot require us to collect verified citizenship information from every customer like we can't, that's insane. I mean, A, again using the word un-American, like probably not really American, but also just operationally. like this is insane, we can't do this. Instead, it instructs banks to evaluate whether an account holder has legal residency status when calculating that customer's financial credit and AML risk profile. It specifically orders agencies to reassess and flag risks associated with customers using foreign consular ID cards or non-work authorized profiles to open up accounts and secure credit. And it requires the Department of Treasury to release updated red flag guidance within 60 days, propose adjustments to BSA within 90 days and introduce a joint overhaul to the customer identification program within 180 days. So we may still see some changes come out in rulemaking and in guidance, but it seems like they are stopping short of what they had initially been proposing, which the entire banking lobby, I think quietly through their body in front of. - Yeah, I did also read this executive order. I interpreted it basically exactly as you are, right? Like regardless of the partisan politics of the specific topic, just like logistically implementing this would be a nightmare, not just for immigrants, documented or undocumented, but for everybody. Oh, I will, I will trot out my favorite alarming stat, which is only 50% of Americans have a passport. - That's right, that is a record high. I mean, that's much higher than it was even 10 or 20 years ago. And so it's like, what, you're gonna ask every random person to bring in their birth certificate and then build, I mean, hey, I got a great Fintech infrastructure play very far like processing birth certificates to verify citizenship. It just, I think it's a lot of like IDV vendors who are like licking their chops at this, but not gonna have somebody's cooking up a pitch deck or I mean, just utterly, I think anyone who works in the space and has any knowledge of how account opening processes or IDV identity verification works saw this and was like, yeah, this is like entirely unworkable. - Yeah. - With the infrastructure that exists in the United States today, I don't wanna know what sort of like creepy dystopian Palantir future we're headed for, but like, to require an FI to verify citizenship status at onboarding is just the US is not equipped to require banks or other FIs to do that. Yeah, I think that's right. And I think that ultimately that sort of operational reality one out which, hey man, if you're looking for little wins, things you can be optimistic about, I guess there's one for you. Speaking of which, Jason, anything you can't let go of before I let you go. - Yeah, so I was debating what I wanted to talk about. I actually, I have a question, Alex, are you excited for the SpaceX IPO? (laughing) Yeah, I feel as if I have not gotten access to the wealth building opportunities that I need by being excluded from private markets in this way, so I could not be more excited. - Okay, but so you would voluntarily choose to buy SpaceX stock once it begins trading and you're able to. - Yeah, I mean, I don't know anything about it, but Elon is doing it and he tells me we're gonna build like an interplanetary species, but there's also like data centers orbiting the earth in space, I'm not totally clear on it. I don't know, I don't know what the details are, but I trust in Elon. - Yeah, well, even if you didn't wanna buy it, you're probably gonna end up with it. - Oh good. I don't know if you've caught any of this sort of controversy. I mean, very specific, but I actually find it very interesting that because of a change in listing and indexing requirements, specifically the NASDAQ 100 index methodology, SpaceX could become part of that index within 15 trading days of going public. Why does that matter, you might ask? Many Americans, probably most Americans actually, who hold stocks do so through ETFs, the popular ETFs often are designed to track an index. So S&P 500 or the NASDAQ on the 100, what have you. The end result being retail investors are likely to end up holding SpaceX stock through ETFs essentially without any say in the matter, right? If and when SpaceX is added to various indices, so not just NASDAQ, but if it joins the S&P 500 index, have you, it's gonna be in your portfolio, it's gonna be in my portfolio, it's gonna be in my portfolio who holds ETFs that track those benchmark indices. And I mean, there's like a longer discussion about, hey, like there are some pretty crazy governance problems in that I think Elon Musk holds like 86% of the voting stock. And so is it really appropriate to be essentially forcing this investment on people when the governance of the company potentially is very bad? - Yeah. - I think the cynical take that is floating around Twitter, which frankly I don't disagree with, is that this is basically retail as exit liquidity. So you have a bunch of early investors in SpaceX that they wanna cash out at that whatever, two trillion, one and a half trillion valuation. - But is that a number, by the way? - Oh yeah, it's just like a netted number. - If you look at analysts who've done a discount cash flow analysis, they put a reasonable valuation at like 150 billion. - Right, right, right. - Not 1.5 trillion. - Yeah. - But it's more a early investor that wants to cash out at that luxurious 1.5 trillion valuation. Yeah, you need somebody to buy those shares. And at the end of the day, like this gambit with the NASDAQ index, what it's facilitating is, your ETF, my ETF, whoever has 401K invested in ETFs as exit liquidity for investors in SpaceX. And I don't know. I guess I'm channeling my inner Susan Collins, 'cause I just call everything troublesome and like I'm worried about everything. But it's like, when you're gonna vote against it, Jason got damn it. - I don't get a vote. - Apparently corporations get to vote in Delaware now. That's a different day. - That's fun. - So yes, that is what I cannot go of. SpaceX dumping on retail investors as exit liquidity for their VCs. - Well, when I saw your notes on that, I assumed you meant people buying it explicitly to be bad enough, but like yeah, if it's built into my ETFs, that's a whole other level of problem. It does also remind me of the just general alarm or concern that so much of the stock markets value with hinges on three companies and two people or whatever, it is another example of just how enmeshed with a very small number of companies and people the global economy is, which is concerning on a whole other level. My cantletico is one that I think we've at least texted about, if not talked about, which is PayPal's settlement with the Department of Justice over a, let me see if I can get this right, a fair lending investigation regarding an investment program. So this was a program to invest in black and minority owned businesses that PayPal announced and launched in 2020, kind of right in the wake of the George Floyd protest and the program just to be totally clear was not in any way connected to loans. There were no loans. No one was loaning any money. PayPal didn't make any loans. And yet the Department of Justice investigated them for violating fair lending laws. And as a part of the settlement that PayPal has agreed to, not only are they going to be giving away sort of discounted payment processing for different categories of business, which while not explicitly coded to any one demographic group are overwhelmingly going to go to white men. But in addition to that, PayPal has also agreed to stand up an internal program where among other things they will train their employees on fair lending laws so that they don't violate them in the future, even though they didn't violate them in the past. This is one of those ones Jason, where like, I'm just never going to let this go. I'm like, he is going to haunt me forever that PayPal agreed to settle an investigation into violating fair lending laws when they didn't loan any money. Like I'm just going to lose my shit about this forever. Yeah, I think we both wrote about that in our respective newsletters. And I remember seeing like the headline and then like actually reading the DOJ press release. And then like googling back to the original PayPal announcement of the program and I think it was like 2021. And then like being like, am I stupid? - Right. - I don't see any loans here. And I'm pretty sure that Ikoa, RegB, apply to credit, because credit is in the name equal credit opportunity opt. What, what, what fear, what? Yeah. How, how, why, what? This is bizarre. It's, I mean, I know we don't live in this world. I know we don't. But I wish that the new CEO of PayPal, who had nothing to do with this program, and the program had already ended. So it's not even happening now. And again, has nothing to do with lending. I wish the CEO had just gone to the Department of Justice and went, you know what? This wasn't against the law then. It's not against the law now. It's certainly not against the equal credit opportunity act, which again, regulates the granting of credit, go fuck yourself. Like that would have been lovely if they had done that. And maybe in an alternate universe somewhere, that's what happened, and this universe and man, that's disappointed. Yeah, that was, that was a pretty disheartening one to read. Yeah, it wasn't, wasn't wild about that. So I'll probably talk about this forever on the podcast from now on. So just as a heads up, I'll just be constantly referencing this 'cause I'll never be able to let it go. Jason, thank you for letting me get that off my chest. That was very therapeutic. As always, a delight, sir. Enjoy the summer. Enjoy. I'm well, like, I'm sure very cool temperatures. And like, you'll, you won't need air conditioning. You'll be fine. It is gonna be a great summer. Okay, I love it. I'll talk to you soon.