Breaking Banks

In this episode Brett King catches up with Ali Paterson, Editor-in-Chief, FF News about … fintech and banking!

Having been part of the architecture, or rather furniture, of the industry for many years, these two leaders, writers and influencers look at fintech — through rearview mirrors and what’s on the road ahead — in a lighthearted discussion from respective vantage points. There are standout moments (does anyone remember the literal payments race?), personalities, culture, and some favorite stories.

Read the entire transcript here.

Brett King and Ali Patterson introduce the episode, sharing stories about their long-standing relationship and Ali’s role in fintech journalism.

Ali discusses his early days in fintech reporting, founding FF News at Finnovate London 2015, and covering industry-shaping events.

Memorable moments with fintech pioneers like Anne Boden and Nick Storonsky, highlighting how Starling and Revolut emerged from humble beginnings.

A look back at the rise and fall of standout fintechs like Loot and Wirecard, and the lessons they provide for the industry.

Ali shares how FF News thrives through resilience, client relationships, and unconventional solutions to deliver value.

How fintech media has shifted to focus on targeted engagement over vanity metrics, including strategies for TikTok and content delivery.

Discussion on the Caribbean as an untapped fintech hub, with opportunities for challenger banks and financial innovation.

Ali recounts the entertaining and logistically challenging Payments Race events that highlighted global payments evolution.

Ali shares stories of his most memorable interviews, including thought-provoking conversations with fintech leaders and unexpected challenges.

Tips for fintech entrepreneurs on creating impactful stories, standing out in media, and building a strong, unique brand presence.

Brett King connects with industry leaders and influencers Joao Bezerra Leite, 2W Ecobank and former CTO, Banco Itau, and Bruno Diniz, fintech advisor, author, professor, speaker and top 10 influencer in Ibero America for another engaging episode of Breaking Banks about the fintech / payments boom in Brazil and Latin America. The trio focus on several success stories to include Pix pay; NuBank, the reasons NuBank has been so successful; Creditas, and other companies to watch. Can these successes be replicated elsewhere? How might the market react if / when NuBank becomes the largest market cap bank in LatAm? These are just some of the questions the industry veterans tackle in this episode.

Read the entire transcript here.

The hosts introduce the episode and highlight the focus on Latin America’s fintech landscape, with a special emphasis on Brazil. They welcome experts Bruno Diniz and João Bezerra Letty to discuss fintech innovations, payments, and regulations shaping the region.

A deep dive into Nubank’s meteoric growth, achieving 100 million customers, and its strategies that revolutionized the Brazilian banking sector. Discussion includes user experience, regulatory support, and its positioning as a mobile-first digital bank.

João Bezerra Letty outlines the role of Brazil’s Central Bank in creating an enabling environment for fintech innovation, including key regulations like payment institution guidelines and the success of PIX, the instant payments platform.

Discussion about PIX’s massive adoption in Brazil and its role in redefining payment systems. The conversation compares PIX’s success to the slow adoption of FedNow in the United States.

Exploration of other notable fintechs in Brazil, including Creditas and Cloudwalk, highlighting their innovative approaches to digital lending, DeFi, and payment systems.

The challenges traditional banks face in adapting to a digital-first economy and the opportunities for fintechs to address underserved segments. Discussion includes embedded finance and AI’s role in the ecosystem.

The experts discuss Brazil’s leadership in fintech innovation, the potential for exportable fintech models, and the next steps in tokenized economies and AI integration.

Final reflections on the future of fintech in Latin America, how listeners can stay updated on industry trends, and expert resources shared by the guests.

It’s another engaging episode from Breaking Banks’ new series, Killing It. Host Jason Henrichs shares a candid conversation with Sankaet Pathak, Synapse CEO and Co-Founder, about Synapse’s just completed, very public bankruptcy and acquisition that came with highly opinionated social media commentary. Listen as Sankaet shares his personal story as well as a behind the scenes narrative of Synapse’s journey, the challenges faced, and what ultimately brought him to the decision to kill Synapse as a stand-alone entity. Sequencing is important.

Read the entire transcript here.

The hosts introduce the episode, diving into Synapse’s public bankruptcy and acquisition by TabaPay. Sankat Pathak, Synapse’s founder and CEO, joins to share insights on the process and misconceptions surrounding the events.

Pathak clarifies the misconceptions about Synapse’s journey, emphasizing the deliberate decision for Chapter 11 to enable a strategic asset acquisition.

Discussion on the $100 million term sheet veto and the strategic move to acquire a bank charter, highlighting the internal disagreements that sealed Synapse’s fate.

Pathak reflects on Synapse’s growth journey, the challenges of creating a middleware-focused company, and lessons learned about culture, market selection, and business scaling.

In-depth exploration of the complexities of banking-as-a-service models, the role of FBO accounts, and predictions for the evolution of the BaaS ecosystem in the next five years.

Discussion on the role of regulation in shaping financial services, differences between tech and bank cultures, and how these elements influence business success.

Speculation on the future interplay between banks and fintechs, including trends toward fintechs acquiring bank charters and banks adapting to technological DNA.

Pathak shares his personal takeaways, his future plans, and how the lessons from Synapse’s journey will shape his next endeavors.

Full Show Transcription

[00:00:00] Welcome to Breaking Banks. The number one. Killing it. Killing it.

There’s often a story behind this story. The explosion of social media, private Slack and WhatsApp groups, newsletters, make it difficult not only to decipher fact, but even put together a cohesive story. Synapse is just completing a very public bankruptcy and acquisition with highly opinionated social media commentary.

Sankat Pathak, Synapse’s founder and CEO, joins me on this episode to share his side of the story and the journey that brought him to the decision to kill Synapse as a standalone entity.

Well, thanks for agreeing to have a difficult if not painful conversation about the last chapters of Synapse’s journey as a standalone entity. [00:01:00] Building in public is hard and, you know, finding a soft landing is admirable and difficult enough without public commentary. I guess I should be thankful Twitter didn’t have the reach and vitriol in 2014 when we like tried to crash land, you know, Perk Street, same maneuver.

I sometimes tell people it’s like, we landed the plane. People were definitely on fire. But no one died, right? Um, I’m going to start with, you know, there are some of the experts on X saying, you know, all sorts of things, here’s what went wrong. Why don’t we start with, what are people getting wrong about the narrative in what transpired with Synapse and the TabaPay acquisition?

I think the biggest thing that people don’t realize is that We didn’t file for bankruptcy, and then somebody bought our assets. Uh, we filed for Chapter 11 because that’s what Tapupe wanted, uh, as a safe way to be able to acquire the [00:02:00] asset. Um, because of all the noise around the company, specifically with one of our, uh, Ex customers.

Um, uh, It starts with a capital M, maybe? Yeah, Mercury. Yeah. Yeah. Um, that was the core of the reason, but I think a lot of people, uh, and again, like on Twitter, I think the mob mentality is vicious and it’s fine. Um, uh, sometimes it’s fun. Mostly it’s painful, but that’s okay. Um, their whole narrative was bankrupt Synapse has its Assets being acquired by TabaPay, but it’s kind of the opposite.

It’s more so the liability piece and sequencing is important, but that’s the piece that people missed. Yeah, well, I mean you did have two million dollars of cash still on the balance sheet It’s not like you were out of runway, you know There are other maneuvers that you could have executed and I don’t think that people really understand That asset purchase agreements are the way that a lot of tech companies are acquired [00:03:00] Just because the acquirers don’t want any lurking, you know, calm the iceberg liabilities that you don’t even know what they are.

And you have some that are above the surface, let alone below the surface, not lurking there in court papers that that’s actually way more common to do an asset purchase than people would think. Not always bankruptcy. Right. Yeah. Um, but I think that’s an important part of the narrative. Anything else that you’d add that you’re like, they’re just getting that it’s wrong.

Well, I think, uh, the piece that people don’t ask is why did have to, uh, why did we even have to sell? Yeah. Um, and what is the reason, because of which Synapse had to sell? Is it the market? Is it the bank partners? Is it customer churn? Is it reality? Yeah. You’re reading my cheat sheet. I don’t share questions with guests in advance, but yes, everything you just said, let’s go start talking about.

Yeah. Except all of those are not accurate. [00:04:00] It’s very plain vanilla. Uh, it is that We had a term sheet that we vetoed. It’s that simple. Like we had a hundred million dollar term sheet that, uh, the business plan going forward was going to going to be, we were going to acquire a bank charter. Uh, and we’re going to get in now, we were going to take control of our destiny because I was convinced that I could not make this into a billions of dollars of revenue company without owning a bank, because I was not touching the customer, the end users.

And then I was sitting in the middle and I wasn’t really like touching my own destiny with the regulator. So I wanted to be able to own that end to end, which was approved by the board, presented by me and vetoed by some investors. And as soon as that happened, the fate was sealed. The only thing we could have done at that point is sell nothing else.

It was, was the a hundred million dollar term sheet tied to like specific use of funds was to acquire a bank. And so there was no other taking the money [00:05:00] and move on. Or was it, you recognize strategically Like don’t continue down, take a hundred million dollars, you know, worth of capital that you in good faith, don’t believe you can generate a return on because of what you just outlined around controlling destiny.

No. So the capital was just like an equity investment, right? That was pretty, pretty straightforward. Uh, uh, in full disclosure, my desire to acquire bank charter at that point was, was seen as a controversial move by my existing investors and new investors. So they were like, are you sure you really want to do it?

And I was like, I’m absolutely convinced this is the only way to make this into a company that can be publicly traded. Otherwise it’s not going to happen. Uh, so they would have, at the end of the day, my sense was would have let me do what I wanted to do, which is get a bank charter because I had one lined up.

Um, but the, but the term sheet was straight up for like, it was an equity investment. That’s [00:06:00] it. But it sounds like. Had you actually gone forward, it’s the opposite of what I surmise, which is, had you gone forward to try and acquire a bank charter, they would have been upset because they were more enthralled with, you know, the dance that SoFi has trying to look like a tech company versus a bank, you know, does acquiring a bank make you actually look and get valued like a bank?

Yeah, I don’t, I don’t, I don’t know. Like, um, I don’t know what would have been, yeah, Because we never went on that path, right? Like, I had a bank charter lined up, I had a term sheet lined up. I was open and transparent with everyone that we were going to try to acquire a bank charter. Um, and I also, uh, uh, uh, the board was not investor controlled.

It was, it was, it was Uh, uh, common control. So me and other seed investors were on the board. So I feel like I would have been able to get this through, uh, regardless. Yeah. But it’s kind of like the path [00:07:00] never walked. So hard to tell. So you then started a lengthy journey to like, where do we land this?

Cause it seems like what I hear you saying is synapse is a standalone entity without a bank charter. Wasn’t going to make sense. I don’t think so. Yes. I don’t think so. So when did you start the journey and can you, I’m really curious, like how did it start? Cause you know, having experienced this both as a VC and as an entrepreneur, the best accents are the ones when you’re bought, not sold is like that edge, right?

Going out to sell without acting like you’re desperately, you know, looking to sell. That’s lengthy. And like, when did that start? Because I, I started hearing rumors of it like 2020 already. Is that accurate? No, uh, that didn’t start until last year. Okay. Yeah. So sometime last year, I, I don’t know the exact date.

[00:08:00] Um, that’s when we really started the conversation. Um, and you’re absolutely right. Like, uh, if you really want to make a high return on investment, you, you need to be bought, not sold. Um, but, uh, do you care about making a high return on investment when you vetoed a hundred million dollar term sheet? I, I don’t know.

I don’t think so. Because you made that decision. So at that point, um, uh, your only path has self or whatever. But even that, right there, because of incentives, when you are for sale, the buyer immediately begins to question what, if anything, is it worth, particularly when you have liabilities, very public ones, it’s the team and the technology and the licenses, right?

That’s what’s worth something. Um, but the rest of it. Not really, like, because they don’t, they don’t care about it as much. Uh, some, some acquirers care about the customers, in our case, the dude, right? So, um, uh, so your [00:09:00] customers, your licenses, your technology, your people, those are the pieces you’re selling at that point.

So as you reflect on the journey, You know, this is my Adam Grant question that I love when he asks this on the Rethink podcast. Are there mental models or assumptions you’ve made that, you know, given the nine years of this journey that you would go through and rethink? Yeah, that is, that is like a million dollar question.

Uh, and I have some answers for that and I think the rest of it I would have over time. If we completely eliminate the fact that I started Synapse when I was in college and let’s just assume that that was not the case, um, I would have started with buying a bag first. Okay. That’s what, that’s what I, that’s what I would have done.

Uh, I always wanted to buy a bank charter, even back then, uh, but obviously I couldn’t afford one. Um, uh, so [00:10:00] I think that is the first big thing. Um, uh, the other things are, that’s like the more strategy focused thing. I, uh, I still think there is a lot that can be improved and built in financial services that I think fundamentally transforms humanity is exciting.

Um, but you cannot do that without owning a bank. That’s just the, that’s my analysis, uh, at the end of the day. Um, so from a strategy perspective that I would have done differently, uh, from everything else, uh, It’s, it’s, it’s the learnings you would expect any founder to have, uh, the importance of culture, um, uh, learning more about who you are, what, what, what are your skills, what are your strengths.

And based on that, knowing exactly who to surround yourself with, uh, what kinds of people you work best with, what kinds of people you don’t work as well with, uh, how do you know if somebody’s [00:11:00] doing a good job? How can you tell if somebody’s in for the right reasons? Uh, so all of those things are, uh, painful lessons over time that you learn.

Um, and one thing that I’ve actually realized coming out of at least my experience with Synapse and seeing some of my other friends, um, Go through similar experiences, even though probably less painful and less public, it is that the most important thing in a startup is the rate at which your product is improving.

Nothing else. It’s how fast are you getting better? And all the other stuff, people really try to control like the bottom line. People really try to control, uh, uh, maximizing revenue, et cetera. The reality is if you just get the right team and the right culture and they’re in it for the right reasons, uh, by the time your strategy is sound, everything works out.

Um, now in case of synapse, I think there were a couple of [00:12:00] interesting things. Uh, I don’t think the middleware strategy is right. Having said that, we were going to pivot and change that anyways in 2020. Uh, so that’s kind of like the wrong premise. I found myself, uh, feeling on a constant basis that I was trying to rip open a market, which is I could only grow as fast as the market was growing.

Um, in hindsight. I, I should have picked a vertical that had a massive market from the get go, but the solutions were not optimal or ideal because then you’re not trying to rip open a market trade like everything that is That I can think of that is, that is a massive, massive company today. Tesla cars, already a market computers, already a market, um, gaming already a market, Airbnb, hospitality, already a market, Uber taxis, already a market, et cetera, et cetera.

Um, so do you think not indexing on [00:13:00] that, which is being very cognizant of how large the market is, is also probably, I’d be more mindful of going forward. Well, especially. In an environment with so much venture capital, it was a growing market that quickly became very crowded, right? Like you couldn’t just take the incremental growth and share you were competing with others.

So I think B2B businesses, I think should be divided in three different buckets. Uh, the first one is, uh, SMB B2B. Uh, which behaves more like consumer. Uh, the second one is enterprise B2B. That behaves at a much more different predictable rate. The third one that’s the most noisy one is the venture backed B2B in which mostly all of your customers are venture backed companies.

That has a couple of additional complexities to it. The first complexity is for you to be successful, you’re really relying on your customer to [00:14:00] be successful as well. Yes, because they’re not already successful. Um, uh, and then second, you’re really relying on the dry powder is still being available so that you can keep on growing without disruption.

Uh, it’s not that you cannot build a great business in that segment. Stripe has, for instance, they’ve made, they’ve built a phenomenal business in that segment. It’s just, those are additional risks to be mindful of, which is when you’re heavily reliant on a venture backed. Ecosystem, uh, actually, I would argue Stripe is not whole wholly reliant on a venture backed ecosystem, but I was going to say the same thing, right?

They have enough small businesses that also need to be successful, but don’t, I think, have the same demands that a venture business does, right? If I decide to start selling, you know, homemade soy candles out of the garage, yeah, I don’t, I’m going to keep at it even if it’s only working. So, so For much longer than if I have to explain once a quarter to my [00:15:00] VCs, why I’m not putting up, you know, 30 percent growth month on month.

Well, and there’s another additional complexity with, uh, having VC backed businesses as your primary customers. Um, it’s very vicious and mob like. AKA, if you’re in, you’re in. If you’re out, you’re out. There’s nothing in the middle, which is if, uh, you’re too hard to touch, uh, VCs are going to pressure their portfolio companies to not work with you.

And if they love you, they’re going to force, uh, they’re going to push their companies, portfolio companies to work with you. So it’s more so relationships driven, which isn’t something that I spend a lot of time on. I get to business pretty much right away, uh, not as much technology driven. At the beginning, it was very technology driven because, uh, you could not underwrite customers online adequately at a low cost.

So we have to be able to solve for that. All the payment processing was [00:16:00] outdated. We had to be able to solve for that. Uh, but then it turned into kind of a. More so a political business, not really like technical execution, which is what I’m good at. So let’s talk about the venture backed business for a second.

I think one of the greatest examples of this is the SVB failure, right? Yeah. As soon as, you know, that presentation went out, right. Yeah. Doing after hours, but no public commentary from SVB and social channels, but the Slack channels, and I’m guessing you and I are in some of the same ones, we’re on fire.

About, you know, we’re going to move. And when you saw people racking up, like we’re going to move our deposits. Yeah. Right. You know, exactly the mob mentality. Right. The in, but then it also became a self fulfilling prophecy. You’re like, you know, one of the Slack channels I looked at, I’m like, that’s close to 400 million.

If you just took the totality of their rounds of, you know, they’ve raised recently coming out of the [00:17:00] bank, no bank balance sheet can withstand that. Right. But it raises the question is we think of banking as a service and you, you know, I’m going to dig into the FBO account issue because that’s what we always borrow about, you know, does it work?

Like, should these deposits be counted for the banks as core deposits or brokered deposits? Yeah, I don’t think that’s the right question or paradigm in my opinion. Uh, the right question or paradigm is, are we going to move into an economy of faster payments? Or do we want to, do we think it’s better from an economy perspective to stay in a batch settlement windows, slower payments, liquidity moves a little slowly, which one’s the right and adequate thing for the civilization?

That’s the bigger question because it doesn’t matter if you get banked by a fintech or if you get banked by svb [00:18:00] if you can move money fast you can move money fast and then you have the same thing which is all money is hot money it’s not really it’s not really stable deposits you know i would say at a 50 000 feet point of view completely agree right and it fast gets faster the question becomes And it isn’t just banking as a service.

It isn’t just startups that are all in Slack and Telegram communities and WhatsApp communities together. Right? Like even if you think, you know, Kia Haslett from bank director and I had a whole episode called deposits hot or not. One of the things I look at is you could actually have the same concentration phenomenon around a community.

If you think of about a tight knit community bank. Where it is several families make up the majority of the wealth, small business and deposits. Right. And they all talk, right. Like, yeah. Yeah. They’re on the PTA together and right. You know, they go to the same coffee shop, right. They suddenly begin to feel like the bank’s unstable or [00:19:00] unhappy could see the same thing, but specific to Baz, right.

Like, cause I think that’s where it comes in and faster payments is, you know, just gas on that fire in terms of like money movement. Yep. If the banks can’t make use this as a way to solve their deposit problem, actually two questions out of this, if we can’t solve their deposit problem, one, do the economics and banking as a service make sense?

Yeah, second part of it is let’s talk about how do banks need to actually start thinking about the deposit problem? Because that’s part of where you started. Yeah, well, here’s what I’ll tell you. I don’t think this question is just about banking as a service. I think this is a question that’s more holistic of, um, our deposits really sticky.

And I’m not convinced that they’re really sticky unless the customer sentiment desires it to be sticky, which would apply to a FinTech or a bank like SVB. If the country, uh, if the customer [00:20:00] sentiment is, I don’t want to put my money here for whatever reason, uh, they can move money. pretty quickly. And that puts at risk, to your point, the bank’s viability on how can they monetize these deposits.

And I don’t, I think that’s an open question. Like, I don’t, I don’t think the answer is as straightforward. Uh, I think we have to answer some very basic questions first. Uh, the first one is, We want banking to behave dynamically as other products and services do. What I mean by that is, uh, do you really wanna hold banks accountable for providing quality service that customers want to use AKA If they’re not providing a high quality service, the customer leaves.

And if that dynamic is acceptable, which I think in a free market should be acceptable. So then it goes to the second question, okay? Uh, if, if, if our goal is to build the best inclusive products for everybody. A. K. A. they can access them easily. They can move money [00:21:00] easily. They can pay bills easily. It might be some customers have large deposits.

Some customers might have small deposits, but they get equally good service. Now, what does that do in terms of deposit reliability for the bank? Historically, the way deposit, uh, Reliability had worked with three things. One, you had really close relationships with large depositors and you felt comfortable that they were going to stick around.

It’s just client relationship management. Second, uh, it was very difficult to open up a new bank account. So the cost was very high. And third money moved slowly. So if If you’re going to remove the second and third pillars, then you’re only relying on the first pillar for money to be sticky. And I don’t think that’s an option for everybody.

Now, uh, I do still think FinTech and Bass. provides some kind of predictability and reliability. They behave like a large depositor, right? So if you have a good [00:22:00] relationship, your regulators are not giving you trouble or grief over the partnership. Uh, the company is growing and it’s mature, right? Not a startup, but something that is like chime for instance, or, uh, uh, a firm or somebody like that.

Then that is no different than you holding the balance sheet of Apple or you holding a large, like, net worth individual. And then the playbook for that is pretty much straightforward. It’s client management, making sure the customer is happy, making sure they can do what they need to do and the regulators are not unhappy with that relationship as well.

Right now, the issue in the industry has been that the regulators are unhappy with the relationship. Which is causing a lot of movement, AKA fintechs are getting fired. Fast providers are getting fired. Lots of churn and just cycling around that. At some point that would settle down. And then the question would just be relationship management.

And then the other two [00:23:00] questions, which is accessibility and speed. So let’s talk about accessibility and speed, and then we’ll come back to the regulation piece of this. Shouldn’t the free market stalled? Accessibility at some point, or if the market can solve it, shouldn’t it be a government service, you know, we’re back to the postal bank account or others.

Yeah, absolutely. That is absolutely true. I, uh, I do think free market has solved for large portions of accessibility issues. Um, the fact that when I came to the U. S. and I could not open up a bank account while I was, um, I could not open up a bank account online. I had to be in person in a bank branch to now I can open up a bank account pretty much with any fintech anywhere.

I still have to go to a bank branch for banks in some cases, right? So, um, that tells you that at least free market, uh, is working. In that sense, now [00:24:00] where I hesitate about banking being a fully free market enterprise is customer safety. which is people’s money, their health, even their education, I would argue, uh, those things are the very fabric of our society.

So when you shake one of them, uh, it creates a lot of unravel. Uh, so I do go back and forth, which is, should there be a postal service type bank account? Uh, and the whole industry around monetizing these deposits should be disincentivized. Um, Uh, I don’t know the answer to that, but I do see free market making good progress.

I would actually argue that regulators getting more active is a good thing, net net. Um, so maybe there is an equilibrium that gets established that works quite well for most people. Uh, so barring any major disasters. That have high customer harm. I think the free market might look just fine. [00:25:00] This show is brought to you by Alloy Labs.

As much as we love talking on the show, we believe that action is more valuable than talk. Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at AlloyLabs.

com. Alloy Labs, banking unbound. So let’s talk about the speed piece, right? Because that impact on the interrelated impact, Jennifer Tescher, and I talk about this all the time from financial health network, right? The reason they rebranded for financial service innovation to financial health is health in your financial situation are largely tied together in your educational system can have such a profound impact on that.

Yeah, regulation was created in each of those three things [00:26:00] independently for that very reason. And maybe they shouldn’t be independent since they’re intertwined, so intertwined, but that process tends to move very slowly. Which then also, tying back to your second pillar, also means, are we, because it’s moving slowly, because we care about safety, we’re not actually delivering at the pace to really solve the inclusion gap?

Yeah, I think that is very fair. Um, I do think we have long ways to go in the inclusion gap, even now, even though we’ve made progress. We still have a long ways to go. And the biggest hindrance to that are two things, technology and regulation, right? So being able to do something safely makes total sense, but being able to do it at all is also an open question.

And you always have that trade off. I don’t, I don’t think that’s necessarily a bad thing. By the time it does follow like free market [00:27:00] principles. With, um, sound regulation, uh, you, you slowly nip at that problem. You won’t solve it tomorrow, but you’ll solve it in a couple of decades. You used a great phrase that regulators are being more active some others on social media have been saying Oh, they’ve changed the rule book or there was no rule book to me having been at this You know perksry was 2008 as we’re trying to figure out what the rule book was the rule book feels pretty consistent It just wasn’t being enforced I’m curious about that turn of phrase that you picked in terms of do you feel like the rules were changed?

I don’t think it’s black and white. I do think some rules have changed, which they should because you learn more about the market and how it’s behaving. But the other things were always in, in the rule books and regulators just decided to get more active on it. But it’s, it’s both. It’s, it’s not just one or the other.

Uh, I don’t think any of it [00:28:00] is necessarily bad. I think all of it makes total sense. Uh, I. I have not stumbled upon something that I would call, uh, regressive. I think everything is fair. That’s a fair criticism of the industry. That’s a fair question to ask. Are these products safe? Are these sound for the bank and also for the consumers and also for national security interests?

All those things make total sense, but I would say yes Majority is regulators getting more active minority is Uh, definitely some more clarification and distillation in how they want to see these partnerships be supervised by bank partners. Thus, the OCC memo, OC wrote a new memo precisely for that reason.

So it is, some of it just crystallizing our thoughts as to we we’re, I feel like the regulators are starting to understand how they want to regulate this space, which was not the case before, which would come with some [00:29:00] changes and that’s okay. Changes in a lot of it is clarification. Now, what’s your take on, I’d say, you know, all three of the bank licensing agencies have different views on how this should be enforced.

Is that creating a problem for the industry or is that bifurcation allow specialization? In last few years, I do think all three agencies have made a higher concerted effort to be more aligned on the big picture items. Which is helpful because they’ve also had this inner agency like the OCC memo had alignment with all three, right?

Wasn’t just the OCC. Um, so that piece is good. One thing that is, that I think, and this is probably a controversial opinion, uh, um, or contrarian opinion. I personally think having these three different regulatory bodies with slight dysfunction between them is a good thing. Here’s why [00:30:00] we can test out different hypotheses and see exactly what works well.

And then globalize it and build it central. That’s why having a Republic is great to state by state decisions on things to see how it really plays out, uh, for the welfare of the people is a good thing. And anything that works well, you turn them to a federal rule. So having a couple of different agencies trying slightly different things, not drastically different things, but slightly different things and slightly different mandates, I don’t think is a bad thing.

By the time you learn from it. Uh, and then based on that, figure out what needs to become a global mandate and what needs to still be an experiment that a regulator is running. Well, there is the, uh, poster statement from the conference of state bank supervisors on how they can act as mini incubators for these things.

Next controversial discussion, FBOs. Right. There’s, there are some issues that you are painfully aware of [00:31:00] that tally up to several tens of millions of dollars related to it. Yeah. Does it, do they work? And it might be actually worth, because I don’t think everyone nerds out as much on this topic as you and I do.

Why don’t we talk first about when did you make the decision to start using an FBO? You had six FBOs, you know, what was the problem you were solving? So FBO is a common account structure in the FinTech industry where the bank designates an account to either one, FinTech or to the BAS provider where all the activity habits, uh, uh, activity for the users, right?

So not, not corporate banking, but everything. Um, the issue isn’t as much with. The FBO structure and construct. It makes total sense. The issue is with, um, executing on an FBO account, like how you would. [00:32:00] with a checking account that is provided to a business. And what I really mean by that is, um, it, it gets into the same core banking system, it’s the same portal, it’s the same terminal, similar reporting that a business would get, et cetera, et cetera.

That makes reconciliation quite difficult. So the issue is less so the FBO account structure, more so the technology behind the continuous reconciliation process. Because what you’re really trying to do are a couple of different things. You’re trying to make sure that you have the right ledger of record based on the transactions you receive.

And then you’re trying to make sure that there are no more transactions on that GL, except the ones you received that you impacted on the ledger. And that’s where all of the reconciliation manual work and effort comes in. And some banks have done a better job at that than others. But that isn’t the core of the issue, less so the FBO account structure, in my opinion.

Well, in for those [00:33:00] who are wondering why you would take on this level of complexity, part of our demise at perk street is we were required by the O. C. C. And F. D. I. C. Back in perk street, ancient history. We had a one for one account on at the time. Metavon day, eventually open solutions, eventually five serve for everyone who opened an account, had an account and the economics killed us.

Particularly of inactive accounts. And so the clever move next was, Hey, what if you opened a single account or in your case, six accounts for account fees, and you had a second ledger, call it a meta ledger to capture all of this, to plug it into the archaic technology that Fiserv is charging you way too much money for.

Well, that and throughput, right? Like, uh, I’m pretty convinced because we tried to do cards at the beginning through the individual DDA setup. And the throughput was so poor that we would not have been able to scale that service altogether. So by definition, they’re like technology constraints and [00:34:00] using existing legacy core banking systems to be able to do some of these things at scale, because they’re not meant for scale.

They’re more so meant for community banks with the exception of. A couple of large banks that have seen real scale. This then, you know, begins to call into question, is the bank is a service industry with kind of the complexity of FBO. The questions about how the deposits work. What is your prediction about what banking as a service looks like?

Three to five years from now, both were in the, I’d love to hear from the program. Is there a middleware? What does that look like? And the bank? I think net two things are going to happen. Some banking as a service providers will become purely technology providers to banks, which is, Hey, we’re, it’s like a more customized core banking system.

We’re going to give you a solution. Then you run it. FinTech customers are your customers, cetera. Um, there are some people who claim [00:35:00] they do that, but they don’t actually do that. Like, they don’t actually just sell the software to banks. They sell software to banks and then bring FinTechs and then manage that relationship, which is the Synapse playbook.

Like, I built it, so I think I get it. That’s what people did. Um, and still do even though they call technically you have an agreement between the bank and the fintech. It doesn’t matter like the agreements less relevant. What’s really relevant is operationally what’s going on and what’s going on operationally is the best providers in most cases are managing all the complexity with the bank and all the fintechs are managing is onboarding.

Marketing, things like that. Uh, so I do think there’s going to be a shift where, uh, the BaaS tool will become more so a tool of the bank. So the bank will shop for a vendor and then FinTechs will engage directly with the bank and then use that software and essentially build out this integration, but it’ll be all like bank centric.

The second thing, which I am a [00:36:00] bigger fan of, which is what, uh, William from Plaid has done is getting a bank charter. Which is you have to get a bank charter and build the technology. Um, and that’s not for the faint of heart. You have to essentially be. a stoic person who’s like, I don’t care how much pain this gives, because this is the right thing to do.

And it is the right thing to do. The whole software angle is, is a less painful way of solving the problem. But it’s also an indirect way of solving the problem. If you really want to have the true impact of digitizing banking for everybody, so that it works for everyone, that is going to require, Regulatory oversight and modern technology and the modern technology being questioned directly by the regulators on a constant basis, if it’s adequate or not.

And that thing is painful and it’s not for everybody, but that is the right way to build it. But those are the two models that I think. Yeah. Well, and the question becomes, is it easier [00:37:00] to become a, be a FinTech that becomes a bank or acquires or a bank? Or is it a bank that basically changes out all of its DNA with a CRISPR to understand being tech?

Or is there a hybrid? Like, is there a way to solve this? Right? Because those are two very different animals. Yeah, those are two very different animals. And I think you’re going to see examples in both. I think you’re going to see some banks be really good at technology execution because that’s a function of the culture.

They’re willing to embrace and change the culture and make it more tech forward. Um, I do think the default state is a technology company getting a bank charter seems more adequate and ideal. So something like Column makes more sense. Something like Square buying a bank charter makes a whole lot more sense.

Um, uh, eventually maybe, uh, somebody like Chime buys the bank charter. Those things make more sense, uh, which is a technology [00:38:00] company acquiring a charter, uh, because now you have a modern technology that has, that you’ve been running in production for a while, it’s been slightly de risked because you’ve gone through a bunch of cycles of permutation and scrutiny, uh, and you survived the test of time.

So now being able to vertically integrate your backend with getting your own bank charter would make a whole lot more sense. The only complexity on the latter model is, uh, VCs not wanting to be beneficial owners of a bank holding company, because that opens them up. So it could be that you don’t see it, but not because it’s not academically the right thing.

It’s more so, uh, the politics of it makes it much harder to execute on. Oh, let me tell you, trying to get our venture backers when the regulators actually wanted the individual financial statements of the GPs of the funds. Right. Exactly. Went over [00:39:00] real well. Wow. So you, you brought up culture and I think this is a good spot for us to land because when we talk about.

Tech culture versus bank culture. They’re very different. And I think part of the value of middleware is actually is a bridge culturally between those two things. You can under one roof have people who talk bank and others who talk tech. How do in this world that you described where, you know, call it a FinTech becoming a bank, how do they manage those two very different worldviews into a single culture?

So I do think being this middleware is like having two divorced parents that never talk to each other, right? So, uh, I like where you’re going with this analogy. I haven’t heard it, but it’s like already resonates. Uh, it can be double the fun or double the pay and it’s mostly double the pay. What I mean by that is your customers.

Uh, which are your fintechs, want you to [00:40:00] move fast, solve problems much, much sooner and faster, expand the solution and offering, while the bank wants you to not move as fast and move slow, and they’re slow to make decisions. And the worst thing it did, and it does, is it impacts the NPS and customer sentiment for you.

For the bass provider, because at the end of the day, uh, especially when synapse got started because people weren’t as sophisticated in the middleware technology stack, um, um, we inherited all the problems. Right? Like, aka, we were the upholstery child of, oh, this payment didn’t process. Doesn’t matter if it didn’t process because bank, something happened on the bank side or our side.

It’s still our fault regardless. So, um, that did create, I think, that does continue to create, uh, this very weird divorced parent, double the pain. type scenario. Now you can change that if the fintech is working directly with the bank [00:41:00] and then the BaaS provider is just more so technology solution and then they’re talking to each other more and then the no’s are coming from the bank directly to the fintech and the yeses are coming from the bank directly to the fintech.

Um, and that’s the piece that really, really makes it less painful for the whole ecosystem. But obviously like I, I wasn’t doing that at Synapse, like I did the middleware piece, which is trying to solve for making these services easy and abstracting complexity away so that more and more people could become, more and more companies could become fintech companies.

And I think right now where we said that model still works, but I think it’s a little different. You have to be more no code. So you have to be more SDK is driven and people can plug in place things. And, uh, everything’s handled behind the scenes by you, including support and underwriting. Um, but putting that aside, because I call that more embedded finance, not bass, uh, for [00:42:00] embedded finance, I do think the ongoing model is going to be, uh, not even a tripartite relationship.

It’s going to be the bank and FinTech, uh, working. Together and using a middleware as a tool to be able to effectively work together. Just like compliance solutions, right? So just like, uh, unit 21, just like hummingbird. This is no different. It’s going to play the same role. Well, and it’s very clear. It is a vendor relationship, as opposed, as you said, it’s not a tri party.

It is a vendor to one side used to deliver the value. So you brought up culture and what you’ve learned about culture nine years in, you know, I’d say we, you can’t really attend a conference in banking or fintech or startup land where culture, culture, culture, doesn’t get thrown about. Yeah, it’s hard to define and it means different things to different organizations as it [00:43:00] should, right?

There’s not one universal culture. What would you say is the biggest learning that you had? And also, how did you get that learning? Because I’m gonna guess part of it is through some painful experiences You learn the hard way what culture should and shouldn’t be Yeah, I think what culture shouldn’t, should and shouldn’t be for me, right?

Like, because it’s different if you’re a different person. It’s very much so how I am. And for me, what is the right culture? There are a couple of basic things that are not controversial. They’re for everybody, right? Like have a caring, kind team that’s respectful to each other. Uh, have a team first mindset, uh, focus on few things that really matter.

Move fast, right? Um, by, by moving fast, I mean, make decisions fast, right? So being able to do those pieces, I think that’s non controversial. And I think that by and large works for everybody. [00:44:00] Here are a couple of things that are unique to me. And I realized that I need to surround myself and only hire people that thrive in that environment versus not.

The first one is, uh, I am on a constant lookout for what, what’s not working, so I’m just giving feedback and sometimes people think feedback means they’re not doing a good job while other people feedback, they thrive in feedback. So to me, it’s feedback first. I’m I, if something’s being done well, you’ll get praised less.

If something needs to be improved, we’re going to talk about that more, right? So like that’s, that’s kind of like a big thing that happens with me. Uh, second, uh, I, I really have a pet peeve against tribalism. So if you’re not thinking about the whole company or in not in it for the right reasons, It’s not ideal for me.

I don’t, I don’t enjoy working with you. Um, and the third one that I [00:45:00] think I had to, I struggled with a lot and I learned over time that I should just embrace it is I, for me, work is intense and fast paced and, um, I should only work with people for whom like the work is as important as their family. Not something you just do.

And that’s a big thing to ask for everyone. But that’s a very honest thing, which is like, I really, really care about highly dedicated teams that are working exceptionally hard and that’s. That’s the kind of culture that I thrive in because that’s how I function. I work mostly all the time. Can you scale that into a big business, right?

Like there are some Oh, totally. There are some roles where it can be really hard to find someone who like does FBO reconciliation, right? And like, That’s a job and they want to do it well, but they also aren’t going to start doing it at 10 p. m. Because, you know, a file failed. [00:46:00] Totally. I think it’s very possible to do this at scale.

Um, and I think the person who’s really demonstrated that it’s possible to do this at scale is probably Ilan. One thing that is common across all of his companies is hardworking culture. He’s very transparent about it. He’s, you know, He’s reformed, like he’s completely ripped open and reformed Twitter into X into a company that ships things fast.

And it’s his smaller team, but it’s a very dedicated team. And I do think it’s possible. I think most of the best work, you know, they, they say this about big companies, like most of the work is being done by like one out of the hundred people, right? Like it’s, so it’s, it’s a function of identifying those one out of hundred and really kind of like, Making sure they feel seen and making a culture of people that are, by and large, just them.

Now, to your point, there are some roles where you don’t have to work at 10 p. m. HR is probably one [00:47:00] of them. I don’t know what an HR emergency at 10 p. m. even looks like. Um, but there are some roles, like support. Like engineering and product, where if you’re on a deadline, you have two options. It’s just like, this is the hypothetical scenario that I put in front of people, right?

And this is one of my most, most telling questions at this point. Let’s assume you have said something you’re going to do by Monday. It’s Friday evening. You have not done it. It’s not done yet. What do you do? You finish it over the weekend or do you come on Monday and say, ah, it’s going to be a few more days before I do it.

And I want people who are in the formal bucket, not the batter bucket, which is again, not for everybody, but that’s a personal cultural preference. That’s fair. So what’s next for you? Going to help with the transition and integration. [00:48:00] So I will do that and, uh, explore more, more to come on that. All right.

Well, when you start the next Company will have you back on to one in retrospect lessons learned with more distance and two. How are you applying those but you know painful journey Appreciate you being willing to share some of the the hard and personal stories related to it. Thank you so much. Jason Thanks for having me That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks.

This episode was produced by our US based production team, including producer Lisbeth Severins, audio engineer Kevin Hirsham, with social media support from Carlo Navarro and Sylvie Johnson. If you liked this episode, don’t forget to tweet it out or post a comment. Posted on your favorite social media will leave us a five star review on iTunes, Google podcasts, Facebook, or wherever it is that you listen to our show.[00:49:00] 

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Pay by bank is gaining momentum in the U.S., it’s a natural evolution of how we pay with funds from our bank accounts. What will it take to get more people to use it and what about readiness for different use cases? Listen as host Brett King, Eric Sager, Plaid’s COO and Trevor Nies, Adyen’s SVP, Global Head of Digital discuss the state of pay by bank, what is driving it in the U.S., the value it delivers, the next segments to adopt, and how key challenges are being overcome to make it good for consumers and for businesses. Will we start seeing pay-by-bank in everyday e-commerce experiences? Listen to our latest episode of Breaking Banks to find out!

Read the entire transcript here.

The hosts introduce the episode and explore the growing momentum of pay-by-bank systems worldwide, focusing on their adoption in emerging markets like Brazil and India.

Eric Sager from Plaid and Trevor Neece from Adyen discuss their roles and share insights into the complexities and opportunities in the U.S. payments ecosystem.

Exploration of real-time payments systems such as PIX in Brazil and UPI in India. Insights into how these systems could shape the future of payments in the U.S. and Europe.

Deep dive into the benefits of pay-by-bank for consumers and merchants, including lower costs, reduced churn, and access to underserved populations.

Details on the strategic collaboration between Plaid and Adyen, its objectives, and how it simplifies merchant integration while offering value to consumers.

Discussion on the challenges of implementing pay-by-bank in the U.S., including consumer trust, branding, and incentives, and how to drive adoption across generations.

Speculation on how AI will transform payments, from contextual credit to automated personal finance management, and its potential integration with pay-by-bank systems.

Guests reflect on the potential for pay-by-bank to reshape the payments landscape, their plans for the partnership, and their excitement for the future.

Embedded banking is reshaping the industry for those with the right approach. To succeed, banks of all sizes will need a strategy, tools, and technology.

Listen as host Brett King connects with Booshan Rengachari, CEO of Finzly, pioneering provider of modern money movement systems to financial institutions, as they uncover the opportunities and keys to success in embedded banking.

Attract more corporate banking customers with new advanced features, learn how to handle KYC & KYCC compliance for fintech partnerships, and how open APIs, virtual accounts and ISO 20022 nativity enable embedded banking.

Todays’ Breaking Banks spotlights sister podcast Finovate, featuring host Greg Palmer’s recent interviews on the Future of Real-Time Payments with The Clearing House’s, Jim Colassano, SVP Product Development & Strategy and a new report on Cost of Living, Lending and Insights from Tink with Jack Spiers, Banking & Lending Director, UK & Ireland.

Finovate Spring is around the corner, May 21 – 23, 2024 in San Francisco, CA. Check it out!