Episode 201 – Fintechs, Banks, and the Companies Joining Them Together – In Conversation with Tarun Gupta, Jump Capital, and Chris Uriarte, Glenbrook Partners

Yvette Bohanan

May 17, 2023

POF Podcast

“When everything is done within a bank, we know exactly who is accountable when things break. When you start chopping these things up … and the business models are different, that’s when risk can get lost.” Those were the words of Michael Hsu, Acting Comptroller of the Currency, during an interview with Reuters in October 2022.

In this episode, we are taking a closer look at the relationship underpinning much fintech innovation in payments – the fintech, bank, and BaaS trilogy. These 3-way partnerships have spurred innovation, increased access to financial services, and created offerings that appeal to a broad range of businesses and consumers. But in the context of these 3-way partnerships, new and existing risks abound, and relationships between counterparties are not well-established – making this a perfect haven for bad actors.

Yvette Bohanan and Chris Uriarte are joined by Tarun Gupta of Jump Capital to explore the current state of payments risk management across these alliances, and discuss the opportunities to make this new landscape safe, strong, and sustainable.

Yvette Bohanan:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution. Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for Payments on Fire. We have been experiencing a flanking maneuver around payments innovation for over two decades. On one side, countries are leading large-scale, five-to-10-year modernization plans, revising or creating new regulations, and launching at scale. You might think of UPI in India or Pix in Brazil as terrific examples of this type of work. These ambitious initiatives are starting to transform payments in countries where the groundwork has been laid.

While regulators at central banks often lead modernization efforts, it’s the fintechs, the tech-driven, scrappy startups looking to address inefficiencies and other gaps in customer experience that are on the other side of the maneuver. Regulators often rely on banks, commercial banks to ensure fintechs properly manage risks and maintain compliance on this side. While both sides of the landscape are important and capable of creating meaningful improvements for commerce and financial inclusion, the reality is also complicated, increasingly ambiguous, and rapidly evolving.

In this episode, we are taking a closer look at the relationship underpinning much fintech innovation in payments, the fintech, the bank, and the banking as a service, or BaaS trilogy. In this context of these three-way partnerships, new and existing risks abound, and relationships between counterparties are not necessarily well established. All of this is a perfect haven for bad actors. Michael Hsu, the Acting Comptroller of the Currency, at the OCC addressed this in his opening remarks at the Federal Reserve Bank’s Fifth Annual Fintech Conference in 2022, where he discussed these partnerships which he defined as synthetic banking.

Michael Hsu (recorded clip):

“Given the growth of the fintech industry, I believe we are rapidly approaching the point where we need to define what synthetic banking is. Because you do, you are. What exactly constitutes doing? Where should that line be drawn? By providing that clarity ex-ante, we can hopefully avoid having to define it ex-post, after a crisis or failure, which is what drives most evolutions of the reg perimeter.

To answer these questions, we cannot just focus on activities. We also have to take into account the nature of bank-fintech partnerships. These arrangements enable fintechs to offer banking services to customers, facilitating payments, holding deposits, offering credit, and often, customers are unable to distinguish between providers. Of course, not all arrangements are equal. To some, banking as a service is a harbinger of the future with a comparative advantage of technology firms to amass users, shifts the bank business model away from consumer interaction towards facilitation. To others, these are simply rent-a-charter arrangements which allow fintechs to skirt a host of rules at the expense of customer protection and bank safety and soundness. Thus, modernizing the bank regulatory perimeter cannot be accomplished by simply defining the activities that constitute doing banking, but will also likely require determining what is acceptable in a bank-fintech partnership.”

Yvette Bohanan:

Joining me for the discussion today are Chris Uriarte, a partner at Glenbrook, who focuses on our commercial and risk management practices, and Tarun Gupta, a partner at Jump Capital. Tarun, Chris, welcome to Payments on Fire.

Chris Uriarte:

Hey, Yvette, good to be back. Thanks.

Tarun Gupta:

Thanks so much for having me.

Yvette Bohanan:

Tarun, I am so excited to have you on the show with us today. This topic is something that we bat around at Glenbrook quite a bit, so really appreciate you joining us. Let’s start by laying out the roles here. The banking as a service, or BaaS, providers and the fintechs, how are they tied together?

Chris Uriarte:

For sure. I think the first thing I’ll say that is that this can be a bit confusing. We often speak about banks, and BaaS providers, and fintechs as being three very distinct type of entities, but the reality is that there’s a bit of a Venn diagram there between each of those entities and there’s little bit of an overlap as to what they do and what type of role that they play in the world of fintech. So you do have scenarios where sometimes BaaS providers, or we’ll use that term, but BaaS stands for banking as a service providers, are actually fintechs in and of themselves in regards to the type of services that they’re offering, whether it’s merchants or other fintechs get access to their services, et cetera.

You might have scenarios where fintechs, and we often think of fintechs as being maybe more on the technology side of banking, but fintechs can actually be a bank themselves. So you do have scenarios where you have entities that will consider themselves to be fintechs, but under the hood, they actually do have some type of banking license in and of themselves. So you see a little bit of overlap there. Sometimes banks look a little bit more like fintechs than they do look like traditional commercial and consumer banks. If you look at banks such as Cross River Bank, for example, while they do function in many ways like a typical commercial bank, is they very much look like a fintech in regard to the types of services they offer and how they go to market with those different services. So sort of an interesting set of multiple roles that each of those entities could potentially play, right?

But, what do they actually do? I think we could get very, very deep into what the difference is between all them, but I think we could also distill it down into a very simple explanation of what roles these types of organizations play. In a nutshell, they really exist to provide access to regulated banking activities that require some type of licensing to be in place, and that might be moving money across state lines here in the U.S., issuing credit creditor, debit cards, holding funds on behalf of customers. These banks provide sponsorship, if you will, into a regulated banking system and essentially allow their corporate customers, such as other fintechs, technology companies, et cetera, to use their banking license to help facilitate these regulated banking activities.

The other two types of entities that we mentioned, fintechs and banking as a service providers, have more broad definition as to what they do. But again, at the same time, their goal is to really have their customers be able to gain access to certain things like as being able to move funds between different accounts, hold funds on behalf of customers, issue cards, et cetera. So not quite straightforward in regard to the definition of what all those different functions are or how different organizations will bring things to market, but nonetheless, they’re certainly intertwined.

Tarun Gupta:

And maybe just to quickly layer on to Chris’s point, which I totally agree with, is if I were to oversimplify my view of it, BaaS providers were effectively created to obfuscate and abstract the complexity, how difficult it is to actually connect to old-school banks, leverage their charter for traditional banking payments-related activities. And the fintechs are effectively digital-first versions, tech-forward products that are trying to leverage digital channels to acquire consumers in a new way compared to legacy financial institutions, and they’re leveraging these BaaS providers, as Chris mentioned, to connect to underlying banking charters in a more seamless fashion to get up and running quicker and to start their path towards revenue faster.

Chris Uriarte:

Yeah, I think that’s a great point, Tarun. And I think if you compare and contrast where we are today versus maybe going back 7, 8, 6 years maybe, if you want to do something like issue a card through a sponsored program, some sort of co-branded program, really your only option at that time was to go directly to a bank that specialized in this and the bank would be responsible for setting up the program, managing the program. You’re probably essentially outsourcing most of the technology to the bank. But that model has changed dramatically over the course of the last five years. These fintechs have now made it much, much easier for organizations to get the piece parts that are required to put a more formal program in place around some of these different fintech activities.

Yvette Bohanan:

That’s a really good point. So when you look at the sponsor bank side of that equation and you look at how many sponsoring banks we have now versus, say, 20 years ago or even two years ago, what is driving this sort of appetite from the bank perspective to be a sponsor bank? We’ll get into the risks here in a little bit. What’s the incentive to go into this sponsorship role?

Chris Uriarte:

Yeah. It’s revenue, day one, right? That’s what it comes down to.

Yvette Bohanan:

Yeah. Are we following the money again?

Chris Uriarte:

Yeah. I mean, the traditional model of taking in deposits and giving out loans, yeah, that’s still valid, but the question is how much are these banks, particularly the smaller and mid-size banks, going to grow if they’re not doing something innovative? I think where if you look at the size of some of these fintech banks, you’ve got a good amount of the banks that are leading this market being smaller banks. If you look at, for example, Andreessen Horowitz who keeps tabs on who, in their opinion, the top fintech banks are, they’re tracking about 35 different banks that range from $10 billion-plus asset banks all the way down to banks that have less than $200 million assets.

So there is a wide variety of banks and sort of this sweet spot where a lot of these smaller and medium banks have taken advantage of is their status in regards to the Durbin regulation. One of the key things for these smaller banks is that they can earn significantly more interchange on debit cards than the larger $10 billion-plus banks. That gives them an advantage in the marketplace for card-related activity where they’re able to essentially charge or receive full dollar interchange revenue rather than the smaller interchange revenue that is limited in the Durbin-regulated banks where you have to stay below $10 billion to get to the full boat revenue. Otherwise, you are completely limited on the amount of revenue that can be generated through interchange or anyone that’s 10 billion.

Yvette Bohanan:

Right. Right. So sometimes you hear this sort of wording of exempt and non-exempt and it’s referring to subject to Durbin regulation, which means my interchange is restricted, capped. And I’m not, which means I’m exempt from Durbin regulation. These exempt banks have sort of gone after this space with a lot of zeal and zest to take advantage of the fact that they can get this full interchange, which means they can share some of it with these other parties in the trilogy if you will. Tarun, you had an interesting blog post around this that really caught our attention, and why we wanted to bring you into a podcast to discuss this. Some of the other observations you had were the drop in de novo banking licenses in particular and how that’s played out. Do you want to talk a little bit about that and where that fits into all of this landscape?

Tarun Gupta:

Yeah. Keep me honest on trajectory of thought here, but just to further build on Chris’s point, I think that in addition to the Durbin piece and the interchange caps, these partner banks, sponsored banks basically saw an opportunity to grab additional revenue. But they’re not exactly professionals at bringing new younger-age consumers to their platform, leverage fintechs for this who are using digital means to acquire younger users. I think that’s where the revenue opportunity was, and they were able to leverage that. As a result, you saw a lot of fintechs go that route, avoid the pain of getting their own charter, and I think that’s one big component of the continued rise of sponsored banks versus just new additional banking charters getting spun up. That’s one piece of it.

The other piece of it is just like the model that exists when you actually work with a partner bank and some of the intricacies associated with it and why I think we’re all talking about some of the risk-fraud-related issues that might come up in this ecosystem. So not to go super deep into the weeds, but to accelerate technical integration and simplify customer account onboarding, fintechs have utilized for-benefit-of or FBO accounts with the partner banks that they work with. Unlike direct on-core accounts, which are opened directly in an end user’s name at a bank, these FBO accounts are effectively virtual subaccounts that basically pull together end-user accounts and assets. So anytime a fintech acquires a new customer, there’s another FBO account that gets structure that sits within their single overarching account within a partner bank.

So this makes onboarding really easy, but it really obfuscates for the underlying partner bank who exactly their fintech partner is onboarding from an end user standpoint. And the fact they don’t have visibility into that leads into a lot of potential issues as it relates to oversight, compliance. Because at the end of the day, even though the fintech is the one onboarding those customers, the partner bank is the one that has the license, has the charter, and is regulated by state and federal regulatory bodies.

Yvette Bohanan:

Right. So you have a situation that’s been building up and evolving over a decade or plus and you have it’s harder to get a bank license, it’s expensive to get a banking license for a fintech. Some people are worried about being regulated like, “How do I jump into this?” So they go to these sponsor banks. The sponsor banks have a financial incentive if they’re smaller to do this, so they’re out there interested, growing this business. You’re bringing up a lot of good concerns like what’s going on with who knows who the customer is? That’s really what this gets down to is all the KYC. What’s been happening? We’ve observed some stuff in the news lately. Maybe we can talk a little bit about that that’s been going on to highlight the problem that you’re describing that’s building up here.

Tarun Gupta:

Yeah. There have been a handful of announcements in the press over the past six to 12 months that I think have shown regulators have really started to hone in and focus on this particular relationship in the financial services ecosystem. Blue Ridge was one of the first ones where there was an OCC order that basically resulted in Blue Ridge having to go to the OCC each time they wanted to onboard a new fintech partner because of a lack of oversight in compliance processes and how they were onboarding fintech programs. There was a more recent consent order as it relates to Cross River Bank around some of the fair lending-related processes they had in place. There was also the OCC forming effectively a fintech-related office to dive deeper into those issues.

There’s been a lot of focus, I think, from regulators on this, and I think partner banks and fintechs are now realizing that one, this is a big deal. Two, you need to get out in front of it because if you get caught in this type of situation, yes, you are exposed to fines and negative press. But it also really hampers your ability to generate more revenue. If it slows your ability to onboard new customers, you have to go back to regulars each time. New fintechs that emerge, why would they choose a bank that’s under a consent order versus working with a bank that isn’t under one, right? It’s just a more cumbersome process. So I think people are realizing that compliance… The view that we have is compliance historically was thought of as a cost center, and yeah, you got to do it, but it’s not a core of competency of our business. I think that thought process is changing in this environment.

Chris Uriarte:

Yeah, for sure. I think it’s good to stress, Tarun, is that this scenario that you’re talking about, delays in onboarding, because of enhanced compliance processes, maybe the different consent decrees, et cetera, this isn’t like a hypothetical thing. This is actually happening to banks right now. It’s a real thing that’s happening. We’ve worked with clients that have had these sorts of challenges, other ones that you’ve named at all, and they really do cause a hamper in the level of revenue growth that you can achieve, and it makes your story a little bit more difficult to sell to prospective clients. This is very much a real thing that’s going on right now.

Yvette Bohanan:

There’s definitely a domino effect here, and there’s a lot at play. There’s not necessarily historically a lot of regulatory clarity around who should be doing what. The regulators have not specifically stepped in. Clearly, banks are the regulated entity here, so the sponsor has to make sure stuff’s getting done. But you go to a fintech shopping around for a sponsor or partner, they’re going to be persuaded by how that sponsorship role affects their ability to onboard and attract customers. Tarun, To your earlier point, the fintech is out there doing acquisition and the sponsor bank is there to make sure things are done properly. But there’s been a lot of latitude in the process, in the technology, and who does what. How’s that playing out? What’s the state of play? If the regulators are setting up these offices and programs to look at this more closely, what are their expectations around internal controls? What has the FDIC and the Fed actually said they expect out of the fintechs?

Tarun Gupta:

I think we’re still waiting to get additional levels of clarity. There are some indications of what they’re looking for like true oversight into who is being onboarded, really understanding the fintech programs that a sponsor bank is working with, going through true rigorous compliance checks as opposed to just very quick checks to get someone up and running.

Yvette Bohanan:

One of the things that’s concerning is if you’re a fintech, you want to do this right because you want to preserve your business, you want to be able to tell your potential customers that you are compliant, that you’re the right group to work with. But, Chris, as you’re bringing up, the fintechs themselves have to make sure they’re choosing the right sponsoring bank. There’s this allure, this siren song of, “Make it simple, easy, and fast to onboard my customer, but keep me compliant, and keep protected, and behave with all the regulated…” But no one’s ever come in and said to any of those parties yet… They haven’t been overly prescriptive, let me put it that way. Who is literally supposed to do what, right? If you’re trying to choose a sponsor bank and you’re the fintech, where do you go here? How do you decide what’s the right thing to do in this environment, particularly when these consent orders and stuff are coming down with some of the biggest names in sponsor banking?

Chris Uriarte:

Yeah. We’ve looked deep into this about the type of expectations that are being set by banks, or more often, not being set by banks is the bigger issue here. Banks definitely need to be a lot clearer about their expectations with their customers. What should the customers expect? What is the roadmap when it comes to building a compliance program as they enter the sponsorship bank world? The reality is fintechs that are just going through this for the first time, they really don’t know what they don’t know as they’re going into this. Banks shouldn’t assume that their fintechs and their merchants know where to even start on this type of thing. So improve communication about their process, expected best practices, how the relationship is going to be established for the short term, whatever it takes to get them onboarded, and what the ongoing expectation is of the relationship really needs to be articulated clearly from the bank.

Otherwise, you’re just eventually going to run into some type of longer-term trouble if they’re just doing whatever they could do to get it over the finish line so they get onboarded and just pray for the best from that point forward. Both entities, the fintech or the merchant, whoever’s using the sponsor bank service and the sponsor bank themselves, need to keep up with an ongoing dialogue as the one entity grows, as they improve or increase their use cases, et cetera. Communication really has to flow both ways. Our observation has been that sort of communication, that sort of relationship has been I’ll just say less than optimal with a lot of banks for sure.

Yvette Bohanan:

Well, isn’t there just an inherent fragmentation here? I mean, we’re talking about two, three different parties may be coming into play trying to figure out, “Who’s the customer? Is there money laundering going on? Is there a problem with some sort of terrorist financing or something going on?” Each group might think the other group is doing something. There’s definitely fragmentation in these systems and in the processes, and that brings us to it’s just really ripe for compromise if it’s not controlled properly. I’m curious, Tarun, when you’re going in and looking and evaluating an investment, are you seeing this problem show up, and how are you all thinking about it?

Tarun Gupta:

Definitely seeing the problem show up. I think that a lot of the fintechs that were spun up, their goal has always been top-line revenue growth. They either didn’t have really strong internal compliance personnel in-house, it wasn’t a core competency, and it wasn’t a core focus. So they outsourced that piece of their journey to other software vendors to help address those gaps. What we’ve seen in a lot of the companies that we’ve talked to who we’ve looked at for investment maybe in other areas and just try to understand their compliance stack to get comfortable with how they’re onboarding and assessing risk is that they’re sometimes using 10-plus different vendors to stitch together a compliance program. Use one vendor for KYC onboarding, use someone else for leveraging certain types of data, someone else for transactions, someone else for case management, and the list goes on and on.

So in theory, that works if you can stitch that together appropriately and you’ve seen through that programming orchestration layers like an Alloy, who’ve done tremendously well in this ecosystem, provide a nice layer to help compliance teams and officers link the usage of everything in one centralized place and better manage their rule sets and flow of onboarding. But it still presents a very unique issue that that is how compliance is handled today. That’s not to say that the orchestration layers don’t really help solve a major problem and aren’t helping meaningfully streamline that process. But I don’t know if it’s a total cure-all for the situation.

Yvette Bohanan:

And if there’s a situation where the BaaS provider, the fintech, they don’t necessarily have a ton of resources at their disposal when they’re starting up. If these risks actually enter into this the equation, there’s also this other side of a revenue impact to them. If they’re issuing cards, if they have accounts out there and these accounts are constantly problematic for people to accept, we have situations where companies like Enterprise, or Hertz, or Marriott have imposed bans on certain cards because they’ve been linked to problematic accounts.

So it blocks access for people to get to their money to use these instruments in the real world, and it tarnishes the reputation of everybody involved. This isn’t just problematic from the sense of a regulatory perspective. If this isn’t being done right and things are not stitched together just exactly right and properly across process and tech stacks, you can actually be hurting your own revenue here as a provider of these services when people can’t use the product where they want to. It’s a downward reinforcing spiral at that point.

So now that we’ve painted this really beautiful picture of the environment, what the innovators are up against in this dilemma, let’s look at what do you do to future-proof your business? What recommendations do we have for people? Is there a light at the end of the tunnel? Are you seeing companies step in to help with this? Are you seeing banks do anything differently here? Let’s start with the banks. They’re trying to jump into this space, or get out, or try to figure out if they’re going to stay. What do you think they’re going to be doing here? What’s your prognosis? What do they have to do to actually be successful?

Chris Uriarte:

Right. So I think there’s a lot of forces working against banks right now because of what’s happening, as we mentioned earlier, about the regulatory environment, the macro conditions, et cetera. So we are seeing banks take some drastic steps in the short term to help strengthen their programs, to help make the regulators a lot more comfortable and happier where they stand. That has resulted in some pretty big and impactful decisions. So we see, for example, a number of banks now essentially either not accepting use cases anymore in certain focus areas or just completely dropping customers altogether in certain areas. Of course, the big areas that we see, the bigger use cases that we see being dropped, or modified in some way, or where we see banks really tightening their view from a risk perspective, crypto, of course. Anything sort of crypto adjacent is one. Money movement, we certainly see a lot more scrutiny of money movement-type BaaS APIs that are facilitating money movements. International remittance, for example, is one area.

We actually want to banks as part of some research that we’re doing on behalf of a client just to get a better understanding of what the industry looks like from a crypto perspective. We’re talking about all fiat activity. It’s money into an exchange, money that’s already been converted to fiat on the other side, ready be moved out. These providers are not actually touching crypto. They’re leaving that to the exchanges or whatever. But nonetheless, we spoke to a number of banks and the top three sponsor banks that we talked to were accepting crypto use cases a year ago. But now, we see two of those, the top three banks had told us that they’re no longer accepting new crypto clients or crypto use cases. That third bank had said, “We are only considering crypto-related use cases for existing customers. Of course, we’re going to put a lot of scrutiny on our due diligence around what they’re trying to achieve.”

Then when you look at how they’re handling the action there, we’re seeing one bank saying that, “We’re not doing any new onboarding for anything crypto-related.” All the way to extreme where banks are completely dropping crypto clients or crypto use cases. They’re saying, “That pure crypto needs to be offboarded now or over a certain period of time. We’re just not going to accept that risk anymore.” So we certainly see variety of different approaches here, but it’s becoming more and more difficult, not only for fintechs to find sponsor banks that want to do business with them, but now we see banks getting very, very into the weeds of specifically how these use cases are being implemented and trying to get a better understanding as to how they’re going to mitigate this risk and what needs to be done.

So it’s not like it was even a year ago, certainly, not as loose as it was maybe three or four years ago. We’re certainly seeing banks taking fairly drastic… They’ve had to make really, really difficult decisions because some of those use cases around crypto, for example, have also been very advantageous to them from a revenue perspective. They certainly don’t want to do that, but they’ve got the regulators’ thumbs on their head and they just want to get a fresh start and be in good standing. So you’re seeing a lot more scrutiny, a lot more risk management amongst their clients, and their use cases for sure.

Yvette Bohanan:

Do you think they all understand the interdependency here on the problems and what’s missing? There’s a missing ingredient is what it feels like to me, the orchestration or the provider that comes in and can pull all of this information together in a clear view like you’re saying. It sort of feels like the regulators are stepping in. They’re setting some examples out there in the industry. You’re saying that’s kind of getting the attention of the banks. They’re now either evaluating their risk appetite, or they’re putting more structure around, or they’re exiting different areas. Okay, but that’s not really good business overall long term, right? You can’t just keep coming into and going out of something and changing a risk appetite and thinking you’re going to have any sustainable revenue out of that, right?

Chris Uriarte:

Right.

Yvette Bohanan:

That’s actually hurting the innovation side of it with the BaaS providers and with the other fintechs that are using the BaaS providers. Are people saying that if they can solve the coordination of these systems, of this data, of the processes so that someone can come in and give them an end-to-end view of the customer somehow that this is actually good for everybody, the risk appetite can get adjusted right-sized, everything can get adjusted and right-sized? Are people getting it? Is there any evidence out there that anyone is going to solve this problem?

Chris Uriarte:

Well, I mean, I’d love to hear Tarun’s take on this.

Yvette Bohanan:

Yeah. I’m kind of thinking, Tarun, is there a bird’s eye view here of someone stepping in and going, “I actually can solve this. I get the problem, and I can solve this for everybody?”

Tarun Gupta:

Yeah, look, it’s a challenging problem. There are a lot of different systems that you need to plug into to get full visibility into all of the data that a financial institution, fintech, or bank is pulling in on the customers that they’re onboarding to actually see not just a sample of accounts but a full set of accounts, full set of transactions to actually actively monitor that in real-time. That’s tough. It’s historically been a pretty manual and cumbersome process, and it’s been very sample-driven as opposed to holistically-driven.

There is one company that we actually just recently co-led a Series A in called Cable that we believe is in the early innings of building a solution around this and specifically addressing some of the compliance and regulatory issues that partner banks are going through as it relates to onboarding fintech programs, having actual visibility into the accounts that those fintech programs are actually bringing on, and then seeing all of this in real-time and helping automate that second line of defense on actually checking on the various controls that are being used. Look, I’m sure there will be a lot more that needs to be built here to really resolve the issue, but I think we’re seeing early signs of interesting companies and founders realizing that this is a major pain point and issue and starting to build solutions against it.

Chris Uriarte:

Yeah. I think we kind of danced around this in a few parts of our conversation today, but as the value chain here of all the different providers, and customers, and everybody else that sort of has the relationships in the fintech value chain and ecosystem here, as this gets more complex, we lose visibility. The sponsor bank starts to get further and further away from the ultimate end customer, end user. So you maybe have a very, very straightforward relationship where you have a sponsor bank who has a relationship with the fintech, and the fintech has a relationship with the consumer, and that’s a very simple, I’ll call it, three-party model. But we know that’s not the model that is present in all relationships in the fintech world.

Very often, you have fintechs serving other fintechs. It’s a very common model where you have one fintech who has a relationship with the sponsor bank, and that same fintech has a relationship with another fintech, and that second fintech has a relationship with the consumer. Now, when you look at the growth potential from the sponsor banks is all around scalability. So you’re not going to make a lot of money with only 10 fintechs in your portfolio. Every fintech in the value chain is doing everything they can to sign up more customers. So when you look at the network map of the relationships between sponsor banks, fintechs, fintechs that are being served by fintechs, use cases that differ at each of those different levels, and different consumers that are attached to those different fintechs, it starts to get really, really complex. The more players that you weave into this network, the more challenging it is for the sponsor bank or other players to have full visibility of what’s going on in that ecosystem end to end which is challenging for sure.

Yvette Bohanan:

Is what we’re talking about the fundamental aspect is you have to change how you do risk management if you’re going to change how you’re doing everything else? Is that really what we’re saying here? And the way we’ve been doing it in the industry is kind of broke?

Chris Uriarte:

I’m not sure if it’s necessarily broke per se, but it can be done better. I think Tarun’s example of Cable, I mean, is a solution that’s trying to solve a real problem here that exists where I think when we look at the full fintech value chain, the relationships that exist, we don’t really have that holistic view. We’re not able to monitor things at that holistic level at the level of detail that I think we need to be. I have no doubt that we’ll get better at this for sure, but my opinion would be we’re just not there yet. It’s good to hear companies like Cable trying to address this problem directly because it is a real problem for sure in the industry.

Tarun Gupta:

I think there’s meaningful room for improvement as Chris mentioned. I think the first wave of it over the past decade has been that more and more users are onboarding to financial services-related platforms digitally, so it’s taken businesses time to adapt to that. We’ve had software vendors try and help with digital account onboarding, gotten into a decent place, but there’s still more to figure out as fraudsters get more and more sophisticated around that. There are businesses being built around more behavioral analytics like analyzing keystrokes to see, “Okay, is someone doing something fishy in how they’re typing stuff that indicates fraud?” That’s a unique way to analyze the problem. So I think there’s stuff like that that can be done.

I think, and we’re on Payments on Fire, so to get back to a very core payments-related thing, I think a lot of things also change if realtime payments and FedNow become meaningfully adopted in the U.S. over the course of the next year or two. If more and more money moves in an instantaneous fashion, it totally changes the game on how existing tools that have been built around different types of money movement and things taking a couple of days. Can they stand up? The instant money movement, do new tools have to be built? How do we think about broad and different situations there in pull-vs-push transactions? There’s a lot that comes through that way that I think we are still very early on in understanding and could actually present more issues that warrant more solutions down the road.

Chris Uriarte:

Yeah, absolutely. I’ll steal from our managing partner, Brian Derman, who loves to say that there’s nothing more attractive to a criminal in the financial and the payments world than having a new payment system that moves money in real-time in a non-reputable transaction. You can never get that money back once it’s sent. We are, as you stressed, Tarun, we’re in the early, early days RTP and FedNow right now. We don’t really know what the adoption’s going to be. But we know that as it becomes picked up and you’ve got more banks participating, it’s going to open up a lot of floodgates for fraudsters for sure.

Yvette Bohanan:

Yeah, I agree. I think what’s interesting too is not only is the appeal of that instantaneous, irrevocable fast payment big for fraud, anytime where you have systems that don’t talk to each other, that’s just like a perfect setup. Those disconnects are what any kind of a fraud scheme is going to take advantage of. There’s some really interesting connect points and, at the same time, disconnects getting built out in these systems right now that can lead to some really unintended consequences. So, Tarun, I want to make sure you go out there and you find all of these Series A and these startups that need funding to bring on the next generation of compliance fintech, if you will, to help out with this problem.

Tarun Gupta:

Fingers crossed.

Yvette Bohanan:

Fingers crossed. If you’re listening out there with a good idea, let’s get going here, people, because this is not going to go away. I think this is an area of the industry we don’t talk enough about. So really, really appreciate you both joining me for the conversation, and exploring this a little bit, and walking through it today with us.

Chris Uriarte:

Great. Thank you.

Tarun Gupta:

Yeah, thank you. Really enjoyed chatting with both you on what we think is a very, very interesting and now increasingly more top-of-mind topic.

Yvette Bohanan:

Yep, exactly. So thanks so much for spending time on the episode. And for those listeners out there, thank you for joining us and until next time, keep up the good work. Bye for now. If you enjoy Payments on Fire, someone else might too so please feel free to share this podcast on your favorite social media outlet. Payments on Fire is a production of Glenbrook Partners. Glenbrook is a leading global consulting and education firm to the payments industry. Learn more and connect with us by visiting our website at glenbrook.com. All opinions expressed on our podcast are those of our hosts and guests. While companies featured or mentioned on our show may be clients of Glenbrook, Glenbrook receives no compensation for podcasts. No mention of any company or specific offering should be construed as an endorsement of that company’s products or services.

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