Becoming a fintech is no easy task. There’s the foundational idea, there’s the team, the market opportunity, macroeconomic conditions, and the necessary skills of running a business. Never easy and today it’s even tougher for new fintechs given rising interest rates, consumer hesitation, and the uncertain global economy. 

There’s also the make-or-break concern of regulatory compliance. 

In this Payments on Fire® episode, Cameron Peake, partner at VC firm Restive Ventures (recently renamed from Financial Venture Studio) joins Glenbrook’s Yvette Bohanan and George Peabody in a discussion on the regulatory and contractual issues fintechs face. 

Cameron’s firm takes a hands-on approach in helping their fintech investments navigate those complexities. And in these conditions, a guiding hand has to be a welcome value-add for a fintech looking for a VC partner. Smart money is always better than the clueless variety.

On Regulation and the Fintech

The fintech phenomenon has utterly changed how many of us interact with financial services. Some fintechs are built on UX innovations. Others on payment and reporting automation. 

But most fintechs ultimately are about moving money and in the U.S. that capability requires a relationship with a direct member of one or more payment systems. A financial institution is required to sponsors a fintech’s access to the card system or to the ACH. 

In this Payments on Fire® episode we drill down, in particular, on this sponsor bank model. 

If you’ve attended a Glenbrook Payments Boot Camp®, you know that the bulk of federal financial regulation falls on financial institutions. 

Compliance requirements come from a range of agencies including the Federal Reserve, the Consumer Finance Protection Bureau (CFPB), and FinCEN, the Financial Crimes Enforcement Network. Regulations include:

• Bank Secrecy Act (BSA)
• Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
• Regulation E
• Requirements regarding Know Your Customer (KYC) and Anti-Money Laundering (AML) 
• and many more…

Sponsorship obligates a bank to manage the regulatory compliance of its downstream fintech customers. So, there are risks for the sponsoring bank. If the fintech customer fails in its compliance obligations, the hammer comes down on the sponsor bank first. If the sponsor cuts ties with the fintech, it could be, literally, out of business.

This is a two-sided partnership that the fintech has to consider carefully. The fintech start-up must partner with a sponsoring bank that can provide the basic services but also has the flexibility to support the fintech’s changing needs. Sponsorship may be a new line of business for the bank. Big incumbent banks may have vast experience with sponsoring but they also may be especially risk averse. 

For the fintech, choosing the right sponsor bank is a partnership exercise with multiple moving parts. 

It is also an exercise in internal operational excellence. Failure to file a SAR (suspicious activity report) in a timely manner can’t happen. BSA compliance is non-optional. The level of diligence and attention to detail required means the fintech must staff up for that function.

So, take a listen to Cameron Peake’s observations. While we call it fintech, it isn’t all about the tech. At all.

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George Peabody:

Welcome to Payments on Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution. I’m George Peabody, co-host of Payments on Fire, and I’m lucky and fortunate to have again my co-host Yvette Bohanan with me today. Yvette, how are you?

Yvette Bohanan:

I’m very well George, and I hope you are too. It’s great to be hosting this podcast with you today. I’m very excited about our guest.

George Peabody:

Well, let’s carry on then. So, our guest is Cameron Peake, who’s a Partner at Financial Venture Studio. Yvette, we haven’t typically really dipped our toes too far into the world of venture capital and the financing of FinTechs, and so really excited to have Cameron here.

There’s a lot of synergy between what her firm, Financial Venture Studios does, and what we observe and we’re working with our FinTech clients and we’ll be digging into that a bit in this podcast. But Cameron, first, just want to welcome you to the show. Welcome to Payments on Fire.

Cameron Peake:

Great to be here. Thanks for having me.

George Peabody:

Great. Well, before joining Financial Venture Studios, and Cameron, we’re going to ask you a lot about that, just wanted to tell folks that Cameron comes with a tremendous amount of experience here. She was Co-Founder of Azlo, a digital bank for entrepreneurs and freelancers.

And she was also on BBVA’s new ventures team and also with international experience and mobile money. Really interesting topic. Big favorite of mine. So, wonderful that you’re here and looking forward to today’s conversation.

Yvette Bohanan:

Can you start, Cameron, by just giving us a little more commentary on your background. No one just wakes up in the morning and says, “Oh, I’m going to go into payments. I’m going to go solve mobile money issues in country X, Y, Z.” So, maybe for our listeners, just a little bit of background on your journey and how you arrived at where you are today.

Cameron Peake:

Sure. Most of my career, and I’ll tell you the entry point, but most has been focused on using technology to expand or improve access to financial services in some way for consumers. As you mentioned, it started out in the international development realm.

So, I had been doing international development, came in as the assistant to a president at a big organization, thought it’d be a great opportunity to really understand the landscape. And I realized pretty quickly that my brain thought in more of a business and technology way.

And then, fairly soon after I joined, the earthquake in Haiti happened. And that was a really big turning point in using mobile money and digital technologies within the broader international aid sphere.

So, M-Pesa in Kenya had really recently taken off and there was a belief that you could use aid dollars to spur a lot of these technology systems with the goal of them being able to better provide financial services, digital payments to underserved markets.

Most of your listeners probably know bank service, the top 1%, the 2% of many of these emerging market countries. And the real innovation at the time was coming from telcos or non-traditional models that were expanding their footprints there.And so, I saw firsthand in Haiti where we actually reoriented, you know often see things like cash for work where people get paid some money to clean up after a disaster. We actually used those dollars to do that but created a mobile commerce ecosystem in Haiti.

And so, we established what I think was one of the first mobile payment ecosystems in the Western Hemisphere and worked in rural Haiti to develop an agent network. And I was just hooked. I mean, I saw that people who had been keeping their money under mattresses or buying goats that would then die all of a sudden, had an opportunity to more securely store their money, more immediately move it around.

And then I saw that again and again. We ended up launching a wholesale microfinance bank in Indonesia, mobile money in Zimbabwe, and saw a lot of those benefits happen again and again and continue to see that fruit to today. As George mentioned, I went to start Azlo.

At the time, I could open an account for a farmer in Zimbabwe faster than I could for an entrepreneur in the US, so that was a pretty crazy juxtaposition. Grew the company to about 150 employees, nearly a billion dollars in deposits. And then, from there, I decided to focus more on a broader portfolio of impact, which is why I moved to Venture.

I realized I loved working with FinTech founders. I had learned a ton about the financial service’s ecosystem, how to launch a company within the US and within the FinTech space and wanted to be able to do that for others. And so, joined FVS, Financial Venture Studio, from there.

Yvette Bohanan:

What a journey. I love listening to the journeys because everyone has their own way, and then there’s always that moment when you get hooked. And then, you start to see problems. And then, you start to say, “I can solve these problems because I’ve seen this enough.”

And what really caught my attention in all of that, which is an amazing career path so far, and I can’t even imagine what you’re being exposed to now with your work that you’re currently doing.

But a lot of this has to do with FinTechs and how they… the fact that when you said you observed that someone in Zimbabwe could get an account faster than an entrepreneur in the US and that resulted in you launching a FinTech effectively with Azlo.

And FinTechs have utterly changed how we interact with financial services, looking at the UX, looking at what’s gone on even just in the last three years with COVID. These sea changes like an earthquake in Haiti, a pandemic that’s global is changing behavior, it’s showing where there’s problems and then FinTechs come in and they start to try to figure out how to solve them.

When we’re talking about financial services though of any type and payment certainly falls into that category and banking, we have to look at what you have to be able to do over and above just being entrepreneurial and using technology in new ways. You have to really look at taking things very seriously when moving and touching people’s money.

Cameron Peake:

Totally, yeah.

Yvette Bohanan:

What have you observed in your experiences going through all of those different pivots in your career and developing things? What is the technology that’s actually helped FinTechs create all of this innovation? What do you think are the big things that have really changed the way we can do financial services?

Cameron Peake:

I think the big thing even above and beyond the technology has been breaking the whole financial services stack into its component parts and thinking about who is great where. And so, you mentioned FinTech is being great at UX. I think they’re also great at customer acquisition, at thinking through product innovation, particularly as it relates to more specific customer segments.

I think of the infrastructure and technology layers being great at abstracting a way financial service’s complexity, so you narrow it all into a basic API, essentially extracted, I don’t know how many workflows within a bank. What you’ve also seen them do is be able to modularize a lot of services.

And so, at this point, I can go and I can just run a debit card program or I can just issue one payments flow. I can just have one DDA. And so, there’s this modular innovation that a lot of the banking as a service technology platform have been able to provide.

I think they’ve also done a great job at abstracting the operations layer as well. And so, you think about a lot of the frontline compliance work will sit there in some capacity in some models. The program management side will, where again, the FinTechs might not be great at that, at least at the outset.

And then, you think about the bank layer. And banks are great at operating within regulated environments and really understanding how to appropriately execute within that environment. They obviously have a core role in terms of plugging into any chartered action that may occur the regulated networks.

And that’s resulted in the sponsor bank model as well where you’ve thought about breaking the component parts of a bank out and really fundamentally changing what that stack looks like. But to me, it really originates from thinking about all of the players there, all of the historical functions that a bank has played and thinking about which player is great at different parts there.

Yvette Bohanan:

No, I would agree. I think figuring out who’s strong where and how you put things together differently, and then how all that technology and know-how enables it. In our workshops, we’re always talking about FinTechs have a different point of view.

They come at this whole space. They just think about things differently than the incumbents have. The incumbents are starting to catch on, I will say. There’s a lot of action and activity going on out there with processors, with payment service providers, with the banks themselves that have been around.

One of the things you brought up is sponsorship and a bank sponsor, incredibly important area. And George, we always talk about this. I think maybe talking a little bit about what a sponsor bank is and how they work in this environment would be helpful to listeners who maybe don’t use these terms or terminologies.

Or, maybe they’re listening from a part of the world where it’s more of the telco stepping in besides in addition to sponsor banks. So, let’s just recap what a sponsor bank is. So, we’re talking about a chartered bank, a member of some payment system.

Oftentimes, it’s a card system but it could be any system. They’re providing compliance oversight for the FinTech. And that means that they’re responsible. The sponsored bank directly is responsible for everything the FinTech is doing as their customer and making sure sanction screening is working, reports are filed.

They take on all of the risk of transactions performed by the FinTech customer. And this is a model that’s getting a lot of scrutiny. I mean, there’s a lot of responsibility. There’s a lot of skills that maybe the sponsor bank doesn’t actually have in their toolkit yet or they’re developing out or they’re trying to get comfortable with.

What have you seen that’s gone right and that’s gone wrong in this partnership? What’s a good partnership with the sponsor bank in a FinTech? What does that look like? And when have you seen it go off the rails?

Cameron Peake:

I mean, I’ll start with the alarmist view.

Yvette Bohanan:

Okay, perfect.

Let’s get everyone’s attention.

Cameron Peake:

The off the rails view is, you as a FinTech, your sponsor bank can effectively kick you off. And you can lose the ability to service all of those accounts. And you have to look for a separate home for them and you effectively can’t grow or service them.

I mean, it’s pretty dire. And that’s absolutely happened before. That could happen either on the part of the sponsor bank or, in some cases, a regulator, and think of everything down the line from there. You can lose the ability to grow. You can require approval for every new small iteration of your product.

I mean, there’s a ton of things that can go wrong under the hood. And so, I think that’s why going back to what you previously mentioned, it’s important to recognize that you’re operating within a regulated environment and that’s a very important part of the bank’s ability to operate.

And so, you need to recognize that you fit into a program and be responsible about it. But in terms of when things go well, I mean, I like to think that there’s two main things that you’re participating in when you engage with a sponsor bank.

And one that we’ve already touched on, I’m sure we’ll touch on more, is that compliance program. And so, every bank maintains one. And whether you know it or not, you are part of it. There is a digital program that fits into a broader strategy.

There’s a number of actions that you are undertaking that will feed into it in some capacity, again, whether you know it or not. And I think a great example is every bank needs to maintain a SARS program. And you may, via your API, close an account for fraud and that may be part of a SAR that is filed at some point.

And again, you may not recognize that you fit within that program, but you do play a role in there. And so, enabling a bank to effectively maintain that compliance program and operating within a compliant way a manner is an important part of that engagement.

And then, the second piece is on the business side. I mean, banks are running businesses. And understanding what that strategy is really important. So, is the bank banking money off of fees? Are they making money off of deposits?

Do they want to just capture your treasury management capabilities if you’re a big enough company and subsidize everything else, there are different strategies. And so, understanding what there is and how you fit into it is a really important aspect of any engagement, ideally optimizing for that as well.

And I think the most successful engagements are when that strategy really aligns. And so, the more that you successfully execute, the happier your bank partner is. And you take compliance seriously and make them look great. I mean, those two things when they go right, I think it’s an example of a really successful relationship.

George Peabody:

Clearly, FinTechs have different sizes, there’s startups, there’s ones that are more mature. I suspect, please tell me if I’m wrong, that there are sponsor banks that really specialize in the startup and managing their particular needs. Is it the case that once they’re successful, they might move to another sponsor? Do they outgrow their original sponsors? Have you seen that?

Cameron Peake:

I’ve seen that. And I’ve also seen… I actually think a lot of times a more effective strategy. When you get big enough, like any good larger institution, you want to diversify risk. And so, what I’ve also seen happen is that you’ll just bring on additional sponsor banks or bank partners for redundancy purposes, for risk management purposes and you’ll start to split traffic or optimize.

One may provide better pricing for ACH. Another may be much better at… you may have better interchange rates and so you’ll split in some way. And so, I actually have seen it be less disruptive when you’re looking at it from a risk mitigation layered approach, but absolutely some… outgrow those models and you need to search for someone bigger to help manage that program as well.

George Peabody:

Well, I hadn’t thought of sponsor banks a redundancy is, but we see that on the merchant processing side, when you get big enough, got to have another require to keep operations going.

Cameron Peake:

100%.

I remember at one point with Azlo, we had a major vendor go down for two weeks, it was brutal. And again, we were small enough at that point where conceptually it didn’t necessarily make sense to have redundancy. But at that point, I would’ve killed a second provider. And so, I think at a certain point, you reach enough volume that, one, multiple sponsor banks will talk to you.

Because they’re not going to talk to you if you don’t have enough volume or you can’t afford the minimums. But once you reach that point, it’s totally prudent to have two. Speaking from a hard learned experience of I definitely recommend everyone does after a certain scale.

George Peabody:

Rewind a little bit to the compliance question. And from the startup founder’s perspective, actually. When you sign one of these contracts with a sponsor bank, well, at least I haven’t done that, but I’ve certainly founded companies before. And boy, those banking relationships, they’re talking about George, you’re personally liable for this stuff. That language is in the contracts that you see for these FinTech startups too?

Cameron Peake:

I mean, I’ll say every contract is different. And so, I’ve seen a range of things. But I think to me, the important thing goes back to what I mentioned before, one is understand the business of the bank and how you fit into that. Because I’ve seen a lot go sour where maybe the bank actually cares about optimizing deposits.

And you’re all about low value growth and there starts to be a lot of tension there, and it gets really easy to kick you off if you are optimizing for different business objectives. And so, really making sure that you align with that is critical. On the flip side, I know some that really fit within that strategy and your sponsor bank is going to do whatever they can to fight for your business.

And so, really aligning with that is important. And then, the compliance program is critical. And as I mentioned, understanding that you are operating within a broader compliance program, whether you know it or not, is another really critical part of these contracts. But the personal liability side gets really scary.

George Peabody:

I’ll read the contract.

Yvette Bohanan:

Read the contract before you sign and make sure you understand it. Have a good attorney who understands the space. People think, well, I signed the agreement, I implemented some technology to handle screening or transaction analysis, whatever aspect of the industry their business is focused on.

What I think people miss, whether it’s through a sponsor bank relationship or if they have to go out and get money services, businesses, licenses in a country, a region, every state here in the US, requires it. Once they have all of that in place, it gets down to perfect execution.

This isn’t a lot of pretty words on paper when you’re talking about being implicated in this program. I found that people are surprised at that. Have you seen that? Where people go, “Well wait a minute, you mean every Monday, Tuesday, Wednesday, Thursday, Friday we have to do this stuff?”

How do you help educate people like that are coming through and talking with you about what their great idea is that there’s stuff that’s not quite as attractive that they have to pay attention to?

Cameron Peake:

I mean, I think one really important role that we play is that translator role. At our VC fund, everyone’s been a FinTech Founder, CEO, or Senior Operator. We’ve either deeply engaged or all worked within banks in the past. And so, playing that translator role between FinTechs and banks and vice versa is really important.

And I think I remember talking with my husband at one point who was in the education technology space and talking to him about the level at which banks and regulators engage on business strategy, and it was just mind blowing to him.

And so, coming from a world where startup founders think about moving fast and iterating and failure is an important part of the process, that translator role becomes really important. So, I mean, I think everyone conceptually understands that they’re operating within a regulated environment.

But when it gets down to what you said the brass tacks of these are the product review standups that are occurring. This is the detail that we’d recommend having in your policies and procedures and how those are actually displayed and what that both means for your own operations and its connections to regulation, that really needs a guide a lot of the time.

If you’re doing it yourself, it becomes… it just either surprising or head banging or challenging. And I think having that translator role to understand how it fits within the worldview of the banks and regulation makes it a lot easier. But there is always worlds colliding issues going on anytime you’re plugging in to the broader landscape.

George Peabody:

That innovation ethos really has to confront that, hey, you’ve got to staff up for checking those boxes every day and not letting any of that fall through the cracks.

Yvette Bohanan:

And the guide and translation, that’s unique. I mean, I don’t hear very often a VC firm getting involved at that level of detail to provide that guidance to a FinTech, but that’s important work.

Cameron Peake:

Being FinTech specialist, regulation is a key part of engaging within the FinTech ecosystem. And so, playing one that translation role and helping to understand the regulated environment, and what… a lot of ambiguous regulation things like UDAP actually mean at the micro level as you’re thinking about account closure.

I mean, all of that’s just context and perspective that take years to build up. And if you’re a founder coming from either a function within a FinTech that didn’t have direct exposure for them, much less a totally different industry, it’s just very subtle context that can be missing.

And so, either it’s bringing on someone like yourselves to help educate them or engaging with lawyers or compliance folks or just working with your VC network, VC partner to help at least with some of the initial phases of it, it takes a lot of time to build up those capabilities. And it’s not something that a lot of FinTech founders have coming in on day one.

George Peabody:

Sure. Well, and you say that there’s a regulatory environment that while it may not change at the pace of technology itself, it is changing. I’m wondering what you’re seeing this year, is there new regulation? Are there older ones that are where there’s more of a focus today from the regulators in terms of enforcement?

Cameron Peake:

Absolutely. And I think I was in DC two weeks ago now. And one thing we do is, every year, bring our portfolio companies to meet with regulators and start. But hopefully, it will be a long-standing dialogue between the two. But it allowed a unique insight into how the regulators are thinking.

But from a headline perspective, there’s been a lot more scrutiny on the sponsor bank model, particularly by the Fed. And we saw recent action with Blue Ridge Bank, and I think we’ve seen a lot of statements come out about it. And it makes sense.

If you think about that sponsor bank model, a lot of that’s been governed by the view that banks are consuming services from third-party vendors. But that sponsor bank has flipped that model in its head. What we’ve seen is that a lot of the third-party risk management framework haven’t accounted for services flowing in the other direction.

And at the same time, the sponsor bank landscape has really picked up over the last few years. And so, there’s a lot more regulatory scrutiny within the Fed around that.

And I’ll say when we went to visit them, a decent portion probably half of the time was actually spent understanding the macro landscape from us, understanding the micro landscape from a lot of our entrepreneurs, about how that sponsor big model is working.

And more broadly, I think the encouraging part for me was that there’s a lot of interest on behalf of the Fed in the model, but there wasn’t any existential questioning of it. I think there’s an understanding that it’s all opening up a lot of new and important channels, especially for community banks and smaller banks.

So, it’s just about how do we understand this? How do we make sure that there’s no existential risk to this system around it? But I didn’t hear anything about should this exist, which I think is actually pretty encouraging. So, I do think we’ll see a lot more continued focus and scrutiny of that sponsor bank model going forward.

And UDAP has always been an issue. So, I don’t think there’s anything new there aside from the fact that we learned a few weeks ago about the longstanding CFPB digit issue. And I think we’ll continue to see focus there from the CFPB. But we did get some interesting inquiry from the CFPB just current around the role of big tech in this space and so we may see more focus there.

And then, the third area where we’ve heard more rumblings about investigation is just around data security and privacy. I know, anecdotally, ATO is obviously…. account takeover is obviously a big issue. What I’ve seen at a micro level is decent account takeover capabilities as you think about onboarding and origination, but the full life cycle may not be fully accounted for.

Again, I’d expect to see more inquiry and investigation around data security and privacy that I think it has broader AML fraud KYC issues as it bubbles up to that sponsor bank in a more macro level. But definitely the hot topic at this point is the sponsor bank model.

Yvette Bohanan:

I think risk management and security in general is becoming an increasingly hotter topic. Having been in this industry for a while myself and going through several startups, nobody ever wanted to talk about compliance programs, risk management, and security was a touch and go thing.

And what we’re seeing is we’re seeing a confluence of those three areas, a lot of times. And no matter who you are in that stakeholder value chain, you have to be carrying your water here when it comes to these areas or you’re not going to have adoption, you’re not going to have scale.

And I think people are starting to realize that. And the point you’re making about full life cycle, it used to be the thinking was, oh, we validated you, we did your identity verification, we did our customer due diligence, KYC, whatever you want to call it. You’re good, you have your account and we’re done. And what we’re finding out is-

Cameron Peake:

It’s not-

Yvette Bohanan:

… organized fraud, it’s not sufficient anymore at all. And you have to have that end-to-end perspective and a renewal of that verification in the right time and place. But there’s a lot of navigation we’re talking about here. Because you’re talking about risk management best practices. You’re talking about trying to get a startup off the ground to do whatever great thing this startup is going to do, and then you have regulation.

So, you could say how do you navigate between the two poles of innovation and regulation? How do you help people balance things so they’re not skewed to one way or skewed the other way to where they’re never going to be able to launch because they’re so caught up in this compliance mindset?

Cameron Peake:

I mean, I think a couple of things. One is there are certain areas where startups should put in energy and be innovative. And there’s certain areas where you could totally reinvent the wheel. And I think a lot of the risk management stuff, especially in the early stages, you don’t have to be clever in every case, there’s certain things that you just have to do.

And so, for example, every time we have a new startup come through that has a transactional component to it, often, it’s a neo bank but it may not be. I always tell them, you need to make sure that you aren’t validating not just the applicant’s information, but that it is actually the person in front of the computer.

And that’s protecting against third-party fraud and synthetic identity stuff. And oftentimes, that loop is not all the way closed. And so, again, there’s a checklist of those things where there are very easy ways to do it, you just got to make sure you have it in. And it’s incrementally a little bit more work but you’re typically saving money on fraud costs.

And again, maybe it’s not in day one, maybe it’s in day 30 or something like that, but it’s on your short-term roadmap, but you don’t have to reinvent the wheel, you just got to make sure it’s in place. So, that’s often how I like to think about it.

And again, this very real, tradeoff between I will lose money on fraud dollars because these FinTechs ultimately are responsible for fraud losses. And I can make sure there’s one extra piece of validation in my flow. And so, it becomes at a certain level an economic argument there.

Yvette Bohanan:

And I think it all gets down to reputation. You want to create and preserve a reputation so that people are going to adopt the product and potentially change behavior in order to adopt and use your product.

Cameron Peake:

And that’s where I think the account takeover stuff starts to be a real concern for me, because a lot of the reputation like fraud loss, the FinTech may cover it and it is under the hood. If at the end of the day, as a consumer, I’m not really out this money, I don’t care, maybe.

But I know that as account takeover volumes increase, there’s some policies where that’s not being covered. And that to me, it starts to become a bigger consumer issue that may butt up against and may catch regulators ears more broadly, and it starts to be a reputational risk as that gets out there.

But I think there’s this interesting dynamic that is set up with sponsor banks and FinTechs were. Because of FinTech owns those losses, if it’s not actually an AML issue, it’s the FinTech’s responsibility. And that’s where it either becomes a financial issue.

At this today, it either becomes a financial issue or a reputational issue. But again, I wouldn’t be surprised if we’re seeing a reduction in coverage for those fraud bosses, it really hits the regularities radar in a way that it hasn’t yet. Because we’re seeing the same fraudsters come in again and again across all of these companies on a portfolio. And there has to be better way to do it.

Yvette Bohanan:

Yes, absolutely. And you’re raising several good points there. I think we want to switch gears just a little bit because while we’re sitting here talking, we are seeing a lot of macroeconomic shifts going on right now. We’re seeing layoffs in tech that we haven’t seen in quite some time.

I won’t say never because I do remember when that happened back in the day. We’re seeing some macro-economic uncertainty. We’re seeing inflation. We’re seeing all sorts of stuff. So, when you’re sitting here from your vantage point and you are looking at investment opportunities, where are you looking? And what are you watching that’s shaping the market today?

Cameron Peake:

It’s been interesting. I joined Venture in January and I’ve had a front row seat to the complete shift in valuation. So, I joined at the tail end of the party, saw some of the crazy valuation and then seed has come back down to earth. Although, seed typically takes a little bit longer than some of the later stages.

The benefit that we have is that at the seed stage, we’re looking seven, eight, 10, 12 years out, and there is an expectation that that cycle will shift. And so, I actually think from an innovation standpoint, some of these layoffs are going to produce really interesting new innovation.

And I’ll give you my experience at as during COVID, we saw an explosion in new account creation in new small businesses being created as a result of the layoffs. And although they were unfortunate, what we actually saw when we pulled our users were that something like 97% or something very, very high of people had always wanted to start their own company and they had just not had the impetus to do so.

And so, there was this amazing release of entrepreneurial talent that had always been bottled up. And I actually think that these layoffs, although unfortunate and are going to have broader macro impacts, we’re going to see a ton of aspiring entrepreneurs come out as a result.

And so, I’m actually really excited to see what emerges at the seed stages, people who maybe have been in the trenches for tenure and then have an idea about how to do things better, put that to practice and go out and build great companies. So, I’m very bullish on that.

As I think about your other question around what I’m excited about in looking at beyond that macro trend, one thing, you all probably have a perspective on this as well, but I’m really excited about, what I call, the verticalization of FinTech. There’s all of these industries that have been hesitant to innovation or to change and I think are ready to digitize.

And so, there’s a couple of examples in our portfolio where I see that one is a company that is in the education space and is actually digitizing paper check payments between school districts and their vendors. Again, very deep industry that hasn’t historically been receptive to these innovations and is ready to change.

We have another that’s digitizing equipment finance and trade finance, again, very pen and paper industry. And so, some of those that just haven’t been caught up with the FinTech wave over the last few years, I think that’s really cool, especially as you think about people that have been in it for a while.

Obviously, there’s a lot going on and Web3 and crypto and we’re engaged in the area of mainstreaming it, but I think that’ll be interesting to continue to watch, especially given the talent that is coming. But mostly I’m just really excited to see what innovation, all of the new entrepreneurs come up with.

George Peabody:

To those new entrepreneurs, are there particular characteristics of those entrepreneurs that you look for that invite you to at least be more curious about what they’re pitching?

Cameron Peake:

Yeah. What we look for is we’re early. So, we do pre seed and seed stage FinTech investing, broad aperture to what that is, but it’s very early. And so, often pre-pre-product, sometimes it’s just at an idea stage. And so, it’s really a bet on the team.

And so, we’ll look for people who have an interesting background and interesting… again, the equipment finance group, this woman had come from equipment finance previously, so she knew that industry really well. So, people that have that background ability, conviction have a strong vision about what they’re able to achieve.

We can thread the needle with the believability that this team can reach that vision, that’s the fundamental layer. And then, beyond that, we’ll look at traction and those de-risks the question mark, can this team get there? So, if they do have a product, what have they built? How quickly have they built it?

Do they have initial partners in place, sales traction, customer traction? We’ll look at that roadmap of work that’s been completed to date to help us inform whether they’ll be able to reach that in vision or not. So, that’s what we look for at the fundamental level.

George Peabody:

Great. Thanks. Well, Cameron, we’re going to have to leave it there. Thank you very much. It’s been really, really interesting. And that tension between regulation, compliance, and innovation is those folks are coming to you, it sounds like they’re lucky to have you as a translator in between the… that navigate those between those two polls.

Cameron Peake:

Well, I’m always happy to help. It is a weird passion of mine, but it’s a fun one. So, happy to be on this journey.

I’m in good company, clearly.

George Peabody:

No one’s born saying they want to get into payments. But what I’ve observed is that once you’re in payments, it’s really hard to leave.

Cameron Peake:

Totally.

George Peabody:

This is the Hotel California of careers.

Cameron Peake:

Totally.

George Peabody:

If anybody remembers that old song.

Cameron Peake:

Totally. Well, thanks for having me.

Yvette Bohanan:

Thank you for joining us.

George Peabody:

So, that was really cool. Great conversation with Cameron.

Yvette Bohanan:

Well, first of all, I have to say I love the arc that we’re seeing with venture capital firms. You’ve done startups. I’ve done startups. I know very early in my career, to get the attention of someone to fund you in a seed stage or pre seed or whatever you want to call it round.

When you were a hope, a prayer, an idea, a band of worthy individuals with… you’re going to change the world. First startup I was involved in. Second one, we were in St. Louis, Missouri, and you had to go local to get your funding. You had to find people in your city who believed in you.

And then, if you got any traction at all, you were going regional. And then, if you got some more traction a few years later, some folks in New York might get interested in you. So, there was this huge arc. And now, we’re talking to someone whose firm is focused on a much broader net that they’re casting.

It’s a national perspective. And they’re taking it a step further and saying, and we’re going to help you do the pull through of what’s going on here so that you have awareness and you know what to do when we invest in you to increase your success. And they have all these people with operations background in this space.

George Peabody:

That’s really cool.

Yvette Bohanan:

And in the span of 25 years, what a transformation in the VC community. To me, this is very smart on their part.

George Peabody:

We’ve seen a lot of VCs and PE companies who look at bringing firms into their broad portfolio and then basically turning their portfolio into marketplace. So, I want you to be selling services to my other portfolio companies. That’s not the help that Cameron is talking about at all.

Yvette Bohanan:

No, it they’re doing something very different and very meaningful here in a very… roll up your sleeves, do whatever it takes, get your fingernails dirty way. It’s not just an introduction or whatever, which introductions are important. They can be helpful.

George Peabody:

Always.

Yvette Bohanan:

We’re not saying that. But this is just a different level of engagement and-

George Peabody:

And necessary in that, well, as we spoke a lot in this conversation about the sponsor bank model. And the number of risks that are out there, just even misalignment around business goals of what happens if the FinTech who signs up has a relationship with an individual sponsor bank that partnership has happened.

Which it is the case, a lot of FinTechs will get out there and say, I need to pivot over in this direction. Well, then, there could be a misalignment with that first sponsor bank.

Yvette Bohanan:

And maybe you pivot and you don’t even realize you’ve misaligned. I mean, I liked Cameron’s point about before you get into this relationship, make sure what their goals and strategies are, make sure you really understand that and it’s great advice. It’s really hard to do that actually.

It’s hard to know that and it’s not an intuitive thing. You really have to spend time there and put yourself in their shoes to really understand their objectives and then figure out if that alignment exists.

George Peabody:

And the sponsor bank model, of course, it’s been around forever. But at this level, it’s a new line of business for these financial institutions.

Yvette Bohanan:

To a very large degree. And it doesn’t matter. We work with FinTechs quite a bit too in our consulting practice. And I don’t think it matters if you’re talking to a larger financial institution or a smaller institution that’s focused in this space or is a community level bank that’s getting into this space.

A risk appetite is a risk appetite. And a lot of times, it’s no longer connected to size of bank. You can have really large institutions, financial institutions who because they’re so big, their risk appetite is just very conservative compared to maybe a smaller financial institution that’s really out there focused on finding those FinTechs they want to support and really going gung-ho after this model. And they may have a much healthier risk appetite when it comes to working with-

George Peabody:

Great point.

Yvette Bohanan:

… companies. And even sometimes more contemporary technology, not always, but sometimes. And so, it’s like don’t confuse assets, assets in the bank, with risk appetite. They can be completely separate and often are.

George Peabody:

We could have a great deal with how quickly you can put a deal together.

Yvette Bohanan:

It could have a tremendous amount. And yet, you have to remember too that common sense has to prevail here, that you really have to know what you’re responsible for. And you have to be able to commit to doing your part when it comes to all of the compliance work and regulatory work that the sponsor is going to rely on.

So, sometimes, things can feel real breezy and easy when you’re talking. And then, when you get down to actually running beta transactions through a system, suddenly, somebody puts the brakes on what you’re doing. Or, a regulatory circular comes out from one of the government agencies and suddenly the bank changes the risk appetite on you. That can happen.

So, you can pivot as the company. You can pivot it as the financial institution and what your risk appetite is. And they can go through their portfolio and say, “We’re sorry. We’re not doing this anymore. This the way you’re doing it anymore.”

So, her point about having that backup strategy in place where you have a second provider was a really great point. I don’t think people think of there’s so much to think about when you’re starting a company. It’s pretty overwhelming no matter what industry you’re in. But I think it’s a good point to keep in mind.

You can’t have a single source partner for anything anymore.

George Peabody:

I want to have dual homes to sponsor banks, for you old internet geeks.

Yvette Bohanan:

Yeah, exactly.

George Peabody:

Having someone to help you ask the right questions at the right time, that’s the bottom line here. Because this is a thicket and that can get pretty dark on you pretty quickly if you don’t know what you’re doing.

Yvette Bohanan:

We’ve seen that happen more often than we’d like to-

George Peabody:

I know your phone’s been ringing along those lines lately.

Yvette Bohanan:

Yeah.

George Peabody:

All right, well let’s leave it there.

Yvette Bohanan:

So, thanks everyone for listening. We always appreciate your comments. You can contact us at paymentsonfire@glenbrook.com. And until next time.

George Peabody:

Hope all is well. Do good work and I will see you the next time.

Yvette Bohanan:

Take care.