Transcription:
Chana Schoenberger: (
Hi everyone. I'm Hanna Schoenberger. I'm the editor in chief of American banker. And thanks for coming to digital banking, 2022. This is a session in the open banking track, and we are calling it banking tech partnerships that work. If you wanna hear about partnerships that don't work that's next door. No, not really. No one cares about the partnerships that don't work. I have with me here today, two experts in the field. I have Jonah Crane, who is a partner partner at Klaros group and Kristen Kines, FinTech sales, and development at Evolve bank and trust. Thank you so much for coming. Do you guys just wanna talk super quick, five seconds or less? What do you do ?What does your company do?
Kristen Kines: (
Okay, so I am Kristen Kines. I'm the vice president business development officer for everything that we're doing in the FinTech space with Evolve. Evolve bank and trust has been in the best space for the last several years acting as the sponsor bank for a lot of the platforms and FinTech partnerships that we have in the market today.
Jonah Crane: (
Sure. And I'm Jonah crane. I'm a partner at the Klaros group. We are about a two and a half year old advisory and investment firm focused on the future of financial services. What does that mean? Means we work with lots of banks. We work with lots of fintechs partner of mine likes to say we help banks with their FinTech problems, FinTechs with their bank problems and everybody with their regulatory problems, which is roughly accurate.
Chana Schoenberger: (
It's like babysitting for grownups.
Jonah Crane: (
For grownups.
Chana Schoenberger: (
Great. Great. Okay. So let's jump right in. Where is the US right now in its open banking journey.
Jonah Crane: (
Go ahead. Yeah, I'll start on that. It's a big question. The interesting thing about the US compared to some other countries, and you may have heard a lot of this in the last couple panels is, the US has really been market led, right? We've not had a regulatory mandate come down and say, you must do open banking. So we've sort of been figuring it out over really a period of a couple decades. At this point, we've been experimenting with different ways for banks and non-bank to partner, right? And so open banking has sort of evolved from the marketplace and now the regulators have woken up in the last several years and said, okay, we better start paying attention and maybe bring some standards to this space but from my perspective, the US is actually further along in many respects because it's been driven by customer demand at the end of the day, customers saying, Hey, I want access to this kind of project or this kind of service. And the US sort of building through the marketplace, the infrastructure to enable that to happen. So that's a very high level take on it.
Kristen Kines: (
Yeah. I would agree with that a hundred percent. I'd say there's no shortage of business to be had in a space. There's no shortage of companies out there that are looking to deliver new products out to their consumers or their actual end users. What I'd say we see a lot of right now and I think we touched on this earlier and stuff. Seemed like 2021 was all about credit and credit cards. Moving into 2022, I'm seeing kind of the market trend, just kind of shift where I think a lot of these FinTechs are finding that it's a heck of a lot harder to secure the capital in order to sustain the programs long term. So I think as an industry, you're seeing this influx of shifting away from revolving credit type programs to more of a secured construct. So I think that from a trend perspective, I think that, that's something that you're gonna see a lot of moving forward from an issuing perspective.
Chana Schoenberger: (
Very cool. Okay. So how do banks view open banking? Are they afraid of it? Are they running towards it? Are they fighting with themselves internally about which of the two to do?
Kristen Kines: (
We're very bullish on it. So we are a hundred percent fully invested into the space. So we're very tech driven bank. We've got several different stacks of APIs. We're an acquiring bank, as well as an issuing bank. We do have a retail banking stack of APIs where we can manage subledgers different things like that. KYC, ongoing transaction monitoring, some of those things. A lot of our clients with how we look at the space, it really kind of operates in two different scopes. So we have our direct partnerships, which are the large partnerships, kinda like a Stripe. Stripe treasury was one of the things that we worked on over the last few years. And then we have more of what we call our aggregator relationships, which these can be middleware programs, bass programs, anybody that's gonna have like a portfolio of clients that can aggregate the business back to us. So we will ultimately at the end of the day, be the bank sponsor and then provide a lot of the technology into underlying payment rails to stand up these FinTech clients in the space. But it's just two different scopes with how we approach the market.
Jonah Crane: (
Yeah. I think it's really interesting to hear at the end of the last panel. So without fully repeating it, but to hear how the two banks on that panel were thinking about ways that they could better serve their customer base, deepen customer relationships, keep customers within their own bank, as opposed to going somewhere else by leveraging sort of open banking infrastructure and account connectivity which to me, that's a bit of a new evolution. I think banks, several years ago and I started working in the space, were very apprehensive about what happens. They were apprehensive mostly about where is my data going? What is it being used for? It's being used mostly for competitive purposes and they viewed it mostly through a competition lens of I'm gonna lose a customer relationship here, as opposed to thinking about, Hey, here's something my customer has just expressed an interest in. It's clear, they already want this thing. How do I facilitate what they want and need? And maybe how do I do it within the existing bank relationship so that I can again deepen, extend that relationship. So that was just one interesting data point for me to hear on that last panel because that was different than say five years ago, for sure.
Chana Schoenberger: (
Okay. So no, it's interesting because there's, and I think we all see this here, there are about 1200 people here for this conference this week and there it's like a big Venn diagram of all the different things that the companies do and how they compete and cooperate sometimes all at the same time with each other, so good place to meet people. What is the difference between open banking versus banking as a service partner banks. I suppose I should have started this with, how do we define open banking?
Jonah Crane: (
I mean, I'll give a quick shot at it. I think of these things as along a spectrum and it's not a linear spectrum, it's sort of a circular spectrum with lots of overlap and fuzziness between, but if I had to like write a paper on it, there's sort of traditional vendor relationships back off as vendor relationships on one end of it. Then there's sort of white labeled customer facing but still sort of traditional vendor type relationships. Then you move into, I think what people usually call bass, which is sort of the FinTech or the technology partner has a customer facing relationship. But at the end of the day, the account sits at a bank. The infrastructure is largely provided by the bank and there are of course many, many, many versions of that, almost all of which Evolve does at this point.
Jonah Crane: (
And then I would put open banking as either further out on the spectrum where this is consumer driven and consumer permission, you can think about open banking is sort of the way to put the customer at the center of it, deciding which services do I want access to. And open banking provides the infrastructure that connects all of my accounts to help facilitate what I'm looking for as the consumer. I think as open banking and the infrastructure there evolves, and you've already heard Kristen talk about all the APIs that Evolve has. It's really becoming the infrastructure, the layer that enables a lot of those kinds of partnerships to happen. So that's one way I think about it, but that may be a little too abstract.
Kristen Kines: (
No, I think you're hitting nail on the head. I think from the bank's perspective with the way that we've approached the market, I think that we think about it a little bit differently in that. From our perspective, we're thinking about it from a solution and a product stance and not necessarily the types of customers that come to us. We do have a more traditional side of the business within open banking as well that aren't necessarily FinTech partnerships. I primarily work with FinTech, so I like the crazy guys out there.
Chana Schoenberger: (
So the guys in the t-shirts.
Kristen Kines: (
I was just at consensus this last week too.
Chana Schoenberger: (
Lots of guys in t-shirts and McLarens. Anybody bring their McLaren to digital banking? No? Yeah? You brought yours. Okay. Say it like that. Yes? No, that's interesting. Okay, so we're talking about bank and FinTech partnerships. So what do FinTechs look for when they go to partner with the bank?
Kristen Kines: (
They very often already have an ID. They're either they're either about to launch after raising an initial seed round or a series a or whatever it is, or they are an established client or an established FinTech, that's looking to offer new solutions to the market. They're constantly thinking of ways to keep the ultimate end user base engaged so is that been sponsorship? Is it just accounts, different payment rails, facilitating payments, moving faster, getting it into the ecosystem back out again. So it just kind of depends on what it is that they're looking to do and what the final product is that they're looking to deliver. So we will work with these guys on flow of funds, you know, what is the right account structure? What is the right framework to make sure that it fits in line from a compliance and regulatory perspective and really just are looking for a bank to help them get that launched.
Jonah Crane: (
Yeah. We see all flavors, right? And so the question we always ask clients when they come to us and say, I need a bank partner or do I need a bank partner is sort of, what is it that you want to achieve? What's the product look like? What are the specific product features that you're really focused on that are core to your offering? Do you need something fancy, like the ability to have unlimited sub-accounts for a particular account, with different access controls to each one, right? So everybody has a different flavor of what they're trying to bring to the market. And we try and help clients figure out, okay, what's the best partner or set of partners for you. So it really just depends. And some of them are more focused on things like speed, right? So going to one of the middleware providers some of whom are here at this conference but just allow them to plug in really quickly. And that platform provider is already plugged into an Evolver another bank. And so it really depends on the priorities and the strategy of each company. They have to be thoughtful about who are the right partners to actually deliver on what they wanna bring to market.
Kristen Kines: (
Right. I would agree with that. As mentioned before we have our direct partnerships and then we have more of what we call these aggregators that will host a portfolio of platforms up underneath their umbrella so to speak. A lot of times with the types of companies that come to us directly, these are the really well established companies that have been in the market and they warrant the direct relationship with the bank for a lot of these startup FinTech companies that are out there. A lot of times it's better off for them to partner with somebody like a bond or a deserve or some of these other guys that are out there in the market today, rails bank to where they can leverage the different controls in the policies and procedures. And a lot of the things that these guys already have in place so that they can get launched quickly and in a pretty cost effective manner.
Jonah Crane: (
Yeah. That's been an interesting evolution over the last few years and I've seen a lot of banks take the same approach, which is we're not gonna necessarily onboard everybody directly, right? A) That's a headcount issue, and we don't have the people to help onboard every single partner over three to four months or however long it takes. And so, we've seen multiple banks sort of take the both and approach and it seems to be working reasonably well.
Kristen Kines: (
I think it really does and it helps support all those guys that we mentioned from before are platforms that we're working with to date. So when we get referrals for these new, new FinTech clients that we see, okay, this is a great opportunity. It's just a better way that we can help support the other partnerships that we have in the ecosystem and everybody's more successful as a result.
Chana Schoenberger: (
So then the opposite question for the FinTechs in the audience, which is as a FinTech, what do I need to do to be a good partner to a bank, so a bank will choose me?
Jonah Crane: (
Get your compliance in order.
Kristen Kines: (
I was gonna say the same thing from a compliance regulatory stance over index on that stuff. Documentation is really important. When we are looking at new use cases and thinking this through from a BSA AML compliance stance, a lot of times, we'll wanna take that on directly, just because from a regulatory perspective with the regulators, they like seeing that the bank has really worked with these guys to understand what are the different CIP levels, what are the different step ups and what actually knowing that these customers and these FinTechs actually know who they're doing business with and where the money is going to.
Jonah Crane: (
Yeah. I mean, just understanding, right? And working through with the bank, what are the roles and responsibilities gonna be here as it relates to compliance whether that's KYC and AML or whether that's fraud. Maybe there are other vendors who have to be brought into the mix. Maybe there are already vendors you have, maybe the vendors that FinTech is working with. There are different flavors, but the long and the short of it is I think that's the imperative here is only increasing. I mean, the regulators in DC are heavily focused on bank FinTech partnerships. The scrutiny is increasing I'd say, especially on the lending side. So it's really important but, there are basic things that every bank will ask for. And if you can be prepared ahead of time with that essentially due diligence set of material materials, you'll be at least a step ahead there.
Jonah Crane: (
The other thing to think about beyond just compliance is really strategic fit, right? Is this a bank who can deliver, who can help me launch the product I wanna launch? And not every bank has done these kinds of programs for a long time. Not every bank has the experience to do it and yet a lot of banks are trying to get into it. And so I think being really thoughtful about what's the right strategic approach, is this the kind of a customer base that will be useful to this bank? Is this the bank that can even use deposits? Is that what I'm bringing to the table? Or maybe they're super deposit heavy, like pretty much every bank for the last five years. Right? And maybe I can bring some assets for them. So, I think really thinking about that strategic fit would also I think distinguish you from FinTech we're looking for just, I need a charter to issue something. .
Kristen Kines: (
Right. Well, and I think a couple things there. So yes, absolutely. From the stance where I think in the last few years, a lot of these FinTech companies have afforded banks to start gaining a lot of large scale deposits. And I think that as a result of that moving forward with lending and credit and stuff is gonna be something that you're gonna see more and more of. Everybody's kind of pivoting away from debit and prepaid right now, as a result and banks are interested in it because they're able to get more creative with the balance sheet.
Jonah Crane: (
Yeah. No, we've certainly seen a lot more interest in sort of Credit side partnerships over the last few years and leveraging that other side of the balance sheet and increasingly partner banks trying to do both, which of course makes sense. And in some ways, to me, it's been surprising that we haven't seen more of that historically that banks have been focused on partnerships on one side or the other and that obviously.... The magic of banking is marrying those two sides of the balance sheet.
Kristen Kines: (
Definitely, definitely
Chana Schoenberger: (
The compliance point is interesting because compliance is one of those things where when you start a company, you get to a number of things before you get to compliance, right? You need an HR department, you need a general counsel. And then it's like, oh, I should have been writing all this stuff down. I guess I have no documentation. I should really work on that.
Jonah Crane: (
Yeah. No, I mean, it's definitely a maturation process, right? And this is where maybe FinTech aren't ready to go straight to evolve and integrate directly with evolve, can work through some of these other partners who can help them, they might have sort of built in offerings through other vendors for KYC, AML, and fraud and things like that. So there's a sort of crawl, walk, run approach you can take. But it's absolutely central. And like I said, the scrutiny from the regulatory side is definitely going up right now. And I don't think that's gonna change anytime soon.
Chana Schoenberger: (
Not in this administration. Certainly. Cool. Okay. So, let's see, we talked a little bit about the next question already. So what kind of firms are you seeing who are interested in banking partnerships? Is it mostly B2B, B2C, crypto, stable coin ?
Kristen Kines: (
All of it. You know, I think there's use cases all across the board. We see consumer, we see commercial, we see literally the gamut of what you can come up with is what's kind of coming through to the table right now. So there's all kinds of use cases.
Jonah Crane: (
Yeah. I mean, it's hard to detect trends precisely. I can't say I have data to support this, but I'd say there's been a bit more of a focus on sort of business banking in a particular small business banking over the last couple years where it was very heavily consumer driven for a while. Again, that's probably at the margin, but that's the trend I've seen over the last couple years. It'd be interesting to see where it goes from here.
Chana Schoenberger: (
Especially after the last few years of PPP loans, we were talking about this earlier at the conference that so many banks were able to really catapult themselves into that market and get a ton of new clients in the last couple years by facilitating PPP loans. And now they have those clients and what do they do with them?
Jonah Crane: (
Yeah. A hundred percent. And those clients now want to be serviced digitally.
Chana Schoenberger: (
And they expect you because that's how they started working. The paper form is pretty much over, we hope.
Jonah Crane: (
We'll see.
Chana Schoenberger: (
Right. Okay, cool. So what happens if a bank eventually becomes competitive with what their partner is doing? And there's a lot of, as we said, overlap in the missions of different companies and their strategies will change over time.
Kristen Kines: (
So, don't really think about it like that so much. From our perspective with all of these platforms, there has to be a bank and a background in order to facilitate what it is that they need to do. You know, there's different things like network sponsorship, there's different things. There's other services and solutions that ultimately at the end of the day, they still need to make charter in order to do those things. So I don't necessarily think that the bank is competing too much in the market there.
Jonah Crane: (
Yeah. I mean, this is where at least historically, I think there's a bit of a difference between the vast partnerships and sort of the open banking role that we were distinguishing between a minute ago. Whereas, historically banks were thinking pretty zero sum about what happens in an open banking framework where my data is out there and being used to effectively compete against me. And that's the lens through which I thought the comments at the end of the last panel were really interesting to hear the banks talk about the upside to them, of participating in more open data exchange and benefiting from that themselves and banks as users on the sort of data inside. And we're working with a relatively large bank at this point, thinking about starting with just one use case, but thinking about the fact that, Hey, I can actually leverage this infrastructure for my benefit. I can get easy, direct deposit switching. So when I have new accounts, they can seamlessly port over direct deposit. And then I have a real customer as opposed to that customer dropping off, or maybe never funding their account or something else. And so I think, I think banks are starting to increasingly see the value there. And again we're much more firmly in this sort of co-option world than the zero home competition world.
Chana Schoenberger: (
So are there some lessons that we've all learned from existing types of partnerships that we can bring into this open banking world to understand what works and what doesn't?
Kristen Kines: (
You know, what I would say from a banking perspective is, I don't think any of us really quite anticipated how much this space was really gonna mushroom and grow and kind of scale over time. What I'd say again, back to building out the compliance and legal regulatory framework not just within the FinTech, but also on the banking side. Over index on staffing there, that's just transparently we have a hundred positions posted within open banking right now. So we are scaling, we're actively growing into market. And I'd say for really, we are constantly working on our policies and procedures and how we are going to continue to evolve with the way that we've scaled and responded to the industry.
Jonah Crane: (
Yeah, no, I think that's right. You get the infrastructure right. And in this world, infrastructure includes compliance and that's the only way to establish something that's scalable. We've seen a number of partnerships and programs be challenged in the last few years because of regulatory constraints of one type or another. There were problems with a program or you bumped up against a capacity constraint and it couldn't take any more deposits. So we've seen a variety of these issues sort of pop up and hinder the ability to expand the programs. And then everybody sort of loses in that scenario. So I think that's certainly one lesson. I think another lesson is just to keep the strategic lens on. Right? What is it that you're trying to achieve here?
Jonah Crane: (
What's consistent with your core strategic focus as opposed to sort of, I think getting turned around because the latest hot new thing or not thinking strategically about it ending up in the wrong kind of partnership with the wrong kind of relationship. So I think that's the key thing we try to help people focus on is what's your strategy, keep your eye on the prize and stay focused on that and leverage these tools and these relationships for those purposes.
Chana Schoenberger: (
Cool. Well, we have time for one question from the audience. If anyone has a question?
Audience 1: (
I'll ask from the front row, because you can hear me.
Chana Schoenberger: (
You sat in the front row, so you could ask the first question.
Audience 1: (
So you mentioned there's a lot of banks getting in the space. Do you feel like it's getting over saturated and as more in, do you feel like you're competing more on tech or on price?
Kristen Kines: (
You know, kind of getting into the space right now, there is more business to be had. I think that I know all the guys over at cross river, I know a lot of the guys over at Silicon valley bank and to be honest, we refer business back and forth between each other, because I think it's no different with the networks too. The card networks between Visa and MasterCard. Everybody is a little bit saturated right now. So there's definitely opportunity for people to stand up banks and kind of explore standing this stuff up. From a commercial perspective, I'd say in pricing, everybody's different. We tend to look at the collective relationship and just say, Hey look, most of the partnerships that we have are not just doing one product, they're doing a collective I guess suite of products, whether that's accounts, whether it's issuing payment, rails, ACH, different things like that. So when we're taking a look at that and we're taking a look at the overall relationship, there's a million different levers to pull. So I think everybody, I don't know how other banks price their models and stuff, but we like to take a look at the collective relationship. And I don't really see that as a hindrance kind of moving forward.
Jonah Crane: (
I mean, from the FinTech side, when we're helping clients think about bank partners, obviously price is relevant, but the structure of the pricing is almost more relevant than sort of the sticker price, right? If I'm gonna get into a relationship and I'm successful, does it become prohibitively expensive at scale or not? Right. And thinking, just aligning there, it's less about the cost and more about alignment and that that's how we coach people. And as for demand, certainly the last couple years suggests to me that there was a lot of unmet demand and I think the big, gigantic massive looming question with the current market environment is, what's gonna happen to the broad swath of FinTech who have not yet reach profitability, et cetera. So I do think there are outstanding questions about where we go from here, whether the demand will stay at the levels it's been. I think there are among scaled FinTechs gonna continue to be demand issues. We have seen a number of FinTechs bump up against constraints, with their partner relationships. And so I think, at scale, you'll continue to see demand. I think there's a big question about the long tail and I suspect a lot of the banks we haven't yet entered the space are gonna have to think hard now about is this is this when I jump in the water.
Kristen Kines: (
I think a lot of, to your point of where, where are these FinTechs gonna go that have not yet reached profitability? And the VC landscape is kind of drying up right now too. So where do you see these guys going? I think we might see maybe a trend of acquisitions over the next year. So, I think that that's very possible.
Jonah Crane: (
It's our best case.
Chana Schoenberger: (
At much lower evaluations.
Kristen Kines: (
Yep.
Chana Schoenberger: (
Okay. Last question. What is the coolest thing you've seen recently that was not your own company?
Jonah Crane: (
Can I cheat and offer one of hers?
Chana Schoenberger: (
Sure.
Kristen Kines: (
I gave them my answer before this.
Jonah Crane: (
So I didn't know they were working with you until I looked up to see who they were working with literally right before this. But Stretch, they're brand new, they're early. FinTech has for a long time, really since the beginning of this sort of wave of FinTech talked a big game on financial inclusion and doing things for underserved populations, it has not always delivered. I'll just put it that way. And here's a company trying to help create bank accounts for formerly incarcerated individuals, one of the most underserved populations in almost every respect. So that's one I'm excited about. There's a company called Propel that runs debit cards for people on EBT program, the food stamp program, and they're looking to expand into other social services So those are just a couple that I'll highlight as doing what I think is really impactful work in the FinTech world that I'm excited about. And I was excited to find they working with Evolve, Stretch was.
Kristen Kines: (
Yep. So I'd say over this last week, I just left the consensus conference that was right on the tail end of this one as well. So lots of cool things kind of going on in the space with Stable Coins and NFTs and some different things and stuff there. I was also able to spend a lot of time with the MasterCard team that was in town during a conference and just hearing a lot of the stuff that they're doing with different bio facial recognition type stuff, biometrics, I think is super cool. When it comes to verifying your identity and KYC, different things like that, I just think it's neat.
Jonah Crane: (
I wish I knew anything about digital identity, but it's huge and critical. And I think, for a whole lot of the kind of financial services that people want to build in the future and almost everything people talk about in web three and stuff like that. Yeah. It's just absolutely critical and foundational for us to make progress there. So, the good news is there's lots of work going on.
Kristen Kines: (
Yep. Absolutely.
Chana Schoenberger: (
Very cool. Well, thank you very much Kristen and Jonah, and, um, now it's time for cocktails. So we'll see you at the bar.