> Our product was not in any sort of legal gray area (e.g. crypto) and fit within the bounds of existing law. From the day we started until the day we shut down, we’d spend millions of dollars to build a best-in-class compliance program to sit alongside our offering.
I worked in AML for a short time, and this:
> There were myriad buckets of n users who loved having a financial account designed just for them. A few examples from our own data: coparents, houses, art collectives, extended families who get along, teams, people who share livestock, churches, punk bands, weekend hustles, extended families who don’t get along, wiccans, and our team’s personal favorite, firehouses.
sounds like a compliance nightmare. Who is the beneficial owner of the wiccans collective bank account? What happens when one of the punk band member turns out to be an Iranian national? If three art collective members all deposit 5000 in one day, is that "smurfing" (splitting transactions so that they are under reportable thresholds)?
I think there is a good argument to be made that our current regulatory regime is bad, I'm not defending it. In this current regulatory environment though, "business style accounts but for informal small groups of individuals" cannot possibly make sense as a product. Their sponsor bank obviously didn't care when they were pulling minuscule numbers (10mm in monthly volume on a business account is really not very much to most banks.) Once Compliance finally decides to look at that Braid account, I'm sure it makes perfect business sense to offboard it for risk reasons. I'm shocked they didn't realize this.
ETA: If you are going to build a Fintech, please go listen to The Dark Money Files podcast first,
Maybe hire them to tell you if your product makes sense. You can't "move fast, break things" with FINRA, it's NOT easier to ask for forgiveness from OFAC, etc.
Hey there - I'm the author of the essay, happy to weigh in.
First, your initial reaction makes sense, and we spent many years (and as noted in the piece, millions of dollars) creating a structure that stayed within the bounds of every reg. That's why we didn't have many competitors.
To address your points:
1. The ownership of funds is mapped pro-rata to every user's contribution. If three people contribute $10, $10 and $20 dollars, and then the pool gets spent down to $10 total, the technical per-dollar ownership is $2.50, $2.50, $5. It was critical to have a down-to-the-cent mapping of individual ownership of every dollar in our system at all times. While funds availability is dictated by Federal Law (Reg CC), funds ownership was something we were allowed to establish in our own Terms of Service. It's still live and available to read here (Section 4): https://braid.co/legal/tos if you'd like. Funds ownership was not related to spending permissions, which could be decided by the pool admin (for example, maybe you want all users to be able to spend all available funds, that's up to you).
2. Every individual who signed up for Braid went through our KYC/CIP process. We had a very robust (and expensive) waterfall to verify every indiviual, and screened the entire customer base every time the OFAC list was updated. I was never on board with concept of "treat the group as a single entity" for exactly this reason. For consumers, a group is not a business or an entity, it is a group of individuals and should be treated as such. There are always false negatives and these systems aren't perfect, but if you're on the OFAC list you wouldn't be able to simply sign up for Braid and slosh money around. That's illegal.
3. We built from-scratch internal anti-money-laundering software that was designed to catch exactly the kind of money laundering that could only happen in a pooled account structure, in addition to all the standard money laundering tactics (circular transfers, flow-through, structuring, transaction frequency, and more)
4. From my perspective, a product like this makes sense within the existing regulatory environment IFF the startup (us) was willing to do the hard work to figure it out. We absolutely were and had the time and money to get it right. But yes, it was very complex and at times infuriating.
5. As noted in the piece, the bank off-boarded every fintech they had -- debit cards for college kids, small business banking apps, neobanks for different consumer groups. I know this because we had a phone chain/support group by the end of it. It wasn't about our business model, it was about getting out of fintech sponsorship entirely.
6. We've gone through detailed compliance reviews with multiple banks, and worked with a handful of well-known legal experts (at least that's how they billed). Especially by the end, we had a good sense of the regulatory constraints and what the regulators care about these days. I've met with the OCC personally a couple times and gotten their perspective as well. FINRA regulates investment products, not deposit accounts.
In sum, while there is no such thing "move fast, break things" in fintech, the idea that we shouldn't fight for what consumers want and do the hard regulatory work to make it happen is too depressing for me. I have to believe new products are possible, and still do.
Thanks for the very in depth reply! That was a very interesting read, especially how you managed beneficial ownership. It does sound like hard work, and expensive. I guess I'm convinced it's possible, but it does sound like it would be hard to make it profitable.
Was the business model mainly going to be fee-based?
I've been thinking about writing some sort of white paper on this, because a lot of what we did was relatively unknown and may benefit the larger financial community. "I guess I'm convinced it's possible" is a great first step! I'll take it!
We had four revenue streams (interchange, instant send, credit card loads, and float on deposits) but IMO to really make this work it needs to have a subscription fee as well. That's a whole OTHER controversial topic in payments, but outside the scope of this discussion thread :)
I worked in AML for a short time, and this:
> There were myriad buckets of n users who loved having a financial account designed just for them. A few examples from our own data: coparents, houses, art collectives, extended families who get along, teams, people who share livestock, churches, punk bands, weekend hustles, extended families who don’t get along, wiccans, and our team’s personal favorite, firehouses.
sounds like a compliance nightmare. Who is the beneficial owner of the wiccans collective bank account? What happens when one of the punk band member turns out to be an Iranian national? If three art collective members all deposit 5000 in one day, is that "smurfing" (splitting transactions so that they are under reportable thresholds)?
I think there is a good argument to be made that our current regulatory regime is bad, I'm not defending it. In this current regulatory environment though, "business style accounts but for informal small groups of individuals" cannot possibly make sense as a product. Their sponsor bank obviously didn't care when they were pulling minuscule numbers (10mm in monthly volume on a business account is really not very much to most banks.) Once Compliance finally decides to look at that Braid account, I'm sure it makes perfect business sense to offboard it for risk reasons. I'm shocked they didn't realize this.
ETA: If you are going to build a Fintech, please go listen to The Dark Money Files podcast first,
https://www.thedarkmoneyfiles.com/
Maybe hire them to tell you if your product makes sense. You can't "move fast, break things" with FINRA, it's NOT easier to ask for forgiveness from OFAC, etc.