This is the fifth post in a long series. I've gotten a lot of complaints about cliffhangers and hidden agendas so I'm going to cut to the chase here and then go back in later posts to fill in some details. And I should probably say this up-front too: there is no "big reveal" at the end of this story. I spent three years getting the runaround from various banks, and I don't know why.
However, there are some things that I did learn as a result of this experience. I'm going to just lay them out here without a whole lot of support because there's a deadline looming. For now I hope you will give me the benefit of the doubt that these are things that I have come to believe are true as a result of firsthand experience and some fairly extensive research. If you want some of the gory details, you can find them here. (Note: this is a very long document, well over 200 pages. And it was not compiled by me.)
1. The financial system in the U.S. is horribly inefficient. Retail transactions conducted with credit cards cost 2-3%, which is a ridiculously high cost given today's technology. Retail transactions (actually, any money transfer transaction) could be profitably brokered at 0.1% or less.
2. In a normal free market, competitors would arise to undercut the credit card companies and drive costs down. This is not happening. There are a lot of new payment companies out there, but they are all (as far as I can tell) UI veneers over the existing inefficient and expensive infrastructure. This is not to say that these companies aren't adding value; they are. But none of them (again AFAICT) are addressing the really fundamental problem, which is that moving money costs much more than it should.
3. One of the principal reasons that startups don't address this problem is that it is essentially illegal. The regulatory framework in the U.S. makes it all but impossible for a startup to move money legally except by using the existing, broken, inefficient, expensive infrastructure. (Just today, Square was hit with a cease-and-desist order in Illinois.)
A prime example of the regulatory framework that makes it impossible for startups to tackle this problem on their own is the California Money Transmission Act (MTA). The MTA was enacted last year, and it put the final nail in an already pretty sturdy coffin for financial startups.
Why was this innovation-killing law passed? Because a coalition of existing money transmission businesses formed a coalition called the Money Services Roundtable and convinced the California legislature that this law was needed in order to protect consumers. It's a plausible theory (which is how they were able to bamboozle the legislature into passing it) but it is wrong. The theory is that by requiring businesses that move money around on behalf of third parties to get licenses and post large bonds, that this will cut down on fraud. This theory was almost immediately falsified by the discovery that Moneygram, a licensed money transfer agent, had engaged in a massive fraud. And this was not an isolated incident. So the MTA clearly does nothing to prevent fraud. The only actual effect of the MTA is to make it all but impossible for new competition to enter the market.
My goal in writing all this is to try to enlist your help in getting the MTA repealed. The California legislature is right now considering modifying the MTA. Unfortunately, the draft legislation currently on the table is a total sham, and will likely end up making the situation worse. The good news is that because this legislation is on the table there is a public hearing that will be held on March 11 in Sacramento, and so it is possible to get the draft legislation changed before it is voted on. You don't have to attend this hearing to have your voice heard, you can submit written comments for the record as well. I urge you, especially if you are a resident of California, to do so.
You can send your comments via email to Mark Farouk: Mark.Farouk@asm.ca.gov. Here's some sample verbiage, but you should write it in your own words:
Dear Mr. Farouk:
I would like to have the following comments entered into the record for the March 11 hearing on the California Money Transmission Act. I believe that this act does nothing to protect me as a consumer. To the contrary, it erects barriers to entry that favor existing players, suppress competition, and thus ultimately hurt consumers such as myself. I urge the legislature to repeal the MTA.Written input for the hearings is due on March 6.
If you want additional information please feel free to contact me: email@example.com. And if you do write a letter to Mr. Farouk, if you cc me and give me permission, I will also forward it to the relevant legislators and their staffers on your behalf.