Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Regular listeners have heard Kia Hasslett of Bank Director, Alex Johnson of Fintech Takes, and Jason McCool of Fintech Business Weekly, and I give our hottest takes on the state of banking, fintech, and regulation, all while dining on hot sauce. Yes, the hot ones inspired interviews are a hit on Breaking Banks, too. This is a particularly fun episode that was recorded live at Finnovate.

Barb McLean, head of technology operations at Coastal Bank, and Alan Denson, a partner at Morgan Lewis Bakkeus, joined us on stage to talk about banking as a service. Talk about a hot topic in the regulatory headwinds they face. This was a no-holds-barred discussion.

Three new hot sauces make their debut, Baz Island mango habanero, after Alex’s famous phrase, spice as a service, which is by far our mildest offering so far, and liquidity crisis ghost pepper. Well, let’s just say that brings the heat to this episode. Thank you, and I’m excited to report as of four o’clock today, it’s after five now, and that’s important not because we’re keeping you from happy hour, but when I checked the websites of the major agencies, it has been a whopping five days since any guidance, enforcement action, or other thing, and to be fair, two of those were actually a weekend, so three days.

And to start things off, audience get to know you, Alan, we’re going to start with you. 2024 has been pretty turbulent. A lot of spicy stuff has dropped.

What is the thing that gives you the most consternation, just makes your stomach burn so far? And we’re going to work our way this direction. Alan, you first. It’s the enforcement actions.

That’s what I spend 90% of my day doing, and so, of course, it’s enforcement. Kia? I didn’t have the reclassification of the broker deposit roll on my 2024 bingo card. I have to concur with Kia.

I actually was watching slash listening to that while driving across rural France. That’s how stomach-burning broker deposits are. Can’t miss it.

How your relationship survives just always astounds me. Barb? I think it was the customer stories that we’ve heard lately, just, you know, the absolute troubling, heart-rending things. Somehow we went into this as FinTech for good, and we ended up here.

Yeah, I think building on that point, the data breach that we had was not something that I was anticipating. You had Russia hacks on. Yeah, that felt like getting hit in the stomach with a sledgehammer.

I didn’t enjoy that. The hack itself, or what we learned from the hack? Both. Yeah, both.

All right. So, for those who listen to what we’ve started calling the hot takes after, like, the Hot Wings episodes on YouTube, the format’s a little bit different. We’re not going to have conclusions.

We’re going to live, you know, Alex calls it, let’s workshop an idea. And you know, Kia, Jason, and Alex are on quite frequently when we workshop our spiciest takes. And normally, we’re eating Hot Wings when we do that, and evidently, there was some concern about heart attacks and caterers.

So, we do have some special hot sauces here that, you know, and I was also hungry, so I brought chips for each of you, that if you just happen to want some, you have your choice of Liquidity Crisis Ghost Pepper. This is in Alex’s honor. Get Off Bass Island, which I have tasted, is exceptional.

It is a mango habanero. We have some for lucky audience members, too, by the way. And then the last spice is a service, so Alex, I’m going to give you one of these.

Thank you. And if you, you know, feel compelled, which would you like, Barb? Perfect. Oh, do I have to go spice for it? Lickilis or Bass Island.

TSA-compliant. That is so thoughtful. TSA-compliant for anyone who wants to take some home and split your chips.

We’ll share. Fantastic. And the other thing we’re going to change up a little for that, because we’ve been debating this, you know, for quite some time.

We’re actually going to do it a little bit Jeopardy style. I have four categories from you, and each of you will get to choose the category that you want to begin with. And Jason, I think we’re going to start with you in the middle.

So the four categories, and you get to choose which one we start with, FBOs and FDIC insurance, deposit treatment, consumer awareness, or responsibility and accountability when it hits the fan. You know, a eagle-eyed fintech observer here in New York sent me an advertisement the FDIC had on the subway, which literally said basically nothing, so let’s start with the consumer one. All right.

For the panel, and you get to start, Jason, are consumers aware of the risks inherent in working with a fintech when they see the FDIC logo attached to it? I’ll start with short answer, no. Longer answer, I think it’s very, it is a difficult thing to sort of inform consent disclosure your way out of, right? Even if we think about the changes to the deposit insurance disclaimer rules that went into effect earlier this year but deferred for enforcement until Jan 1, 2025, a normal person reading a long sentence about pass-through insurance has conditions which may apply and it protects against the failure of an insured depository but not a fintech, that means absolutely nothing to anyone probably who’s not in this room. And I just, I don’t think it’s something that you can disclaim and disclose your way out of.

So, Kia, you have to answer next because I can tell you’re jumping out of your seat. And you text about this all the time on our chain about you can’t believe people don’t understand the rest. Yeah, I think that fintech is the victim of its own success in that fintech has successfully and many times flattened what it means to have your money or your deposits out of fintech that are placed at a bank and what it means to bank directly at a bank.

Also, hats off to the FDIC for being so good at failing banks that most people who have been through a bank failure, perhaps in the great financial crisis, did not realize what was happening when a new debit card came in the mail. And so these are not meaningful risks that most people would even identify as being likely to happen to them. You know, FDIC insurance exists in part because the regulators understood that to a certain extent, depositors were not going to enact discipline on the bank by checking its solvency and its health and its credit.

And I think that whether or not we like think that’s good or bad, that is actually the world we live in. No one’s checking the solvency of their bank, especially if they’re uninsured, except the one like on March 8th, we all checked. Wait, your friends and family don’t read call reports for fun? No.

And they wouldn’t even know, the call report is not designed to be a consumer-facing document anyway. It’s not like you would know, reading a call report wouldn’t tell you meaningful information about the health of a bank. Ellen, anything, as someone who ends up litigating this, right, when it has gone wrong from the consumer perspective, you’d add to this.

So, I mean, as somebody who spends just hours and hours poring over these disclosures, writing them, trying to make them perfect, nobody reads them. Sorry, no one reads your report. I read them, they’re not.

No one reads your report. Outside of people on this panel. Yeah, we read them.

Nobody reads them. And so I think people are blind to the risk. They want to see what’s going to pay me the most of my deposits, what credit product is going to offer, is going to be offered at the lowest rate and what’s the most frictionless transaction I can have, period, end of story.

Yeah. So, Barb, you get to choose next, FBOs and FDIC insurance, deposit treatment, responsibility and accountability when it hits the fan. Oh, let’s go responsibility and accountability.

Daily double if we can. So, let’s start with what is the responsibility and how do you allocate the responsibility between the bank and the program manager when it all goes wrong? So, being the banker on the panel, the bankers have all the responsibility and accountability. That’s just the way it works.

You know, there has to be one place where you’re going to look to say, who was the regulated entity? Who’s the one whose CEO is ending up in an orange jumpsuit at the end of this if it all goes poorly? It’s not the fintech or the program manager. It’s the bank. Well, as key as chugging the hot sauce, there’s debate that sparked this.

Alex, how would you allocate it? Yeah, I think I would agree. The thing I would add to that is, I think the bank has responsibility for any regulatory fallout or remediation that happens because ultimately they’re the ones who have a relationship with the regulator. They’re directly supervised.

They set the rules and they determine what’s allowed to be built and operated on their charter. And so they have 100 percent responsibility for that. I do think there is a difference when we’re talking about credit losses, fraud losses, which relate more to how you run the product and the business.

And I think in that instance, you want the fintech company to be taking the risks they think they should be taking, trying to grow the business, and they should be the ones who own those losses. So I do think there is a way to divide up the regulatory liability from the credit and fraud losses to economic liability. Yeah, the economic liability.

Exactly. I think splitting those two makes a lot of sense. But I don’t really believe Kia Hazlitt in a split model of liability, because I do think you want those clear lines of accountability for different functions.

Kia and? Hey, this is really good. But no, I have found as someone who’s covered Bank Anza service since the 2016 prepaid card reclassification from the FDIC, thinking about how, like, I mean, kind of even how did we even get into this and how was there so much delusion among bankers? I find that I do wish that there was more accountability between banks and fintechs. And I think, you know, when we talk about should there be fintech deposit insurance, should there be a FINRA for fintech, we are getting at the fact that there is no meaningful non-market based accountability mechanism.

There’s no way for these fintechs to get to feel some of the consequences of their actions. And so when I hear, yeah, the bank is 100 percent accountable to the regulator, I’m not disagreeing with that. I’m saying that it seems like we’re letting someone off the hook for situations that they’ve contributed to or situations they’ve taken advantage of.

And until we come up with a meaningful accountability mechanism, someone, fintech, banks, I don’t care who it is. We’re not going to stop this problem from happening. We’re just going to wait for the next bank that it happens at.

Oh, that’s a hot take. Anyone want to? Isn’t the bank’s ultimate leverage to tell the fintech to go elsewhere? We’re not going to work with you anymore. You’ve got to go find another.

We don’t have prohibitions against any other bank working with them the way that, you know, in the banking industry, we have ways to have meaningful consequences for banks or the people who work at the bank. Sorry, I would point out that, like, we’ve seen that and it hasn’t been effective, right? You know, Evolve was trying to break up with Synapse, Synapse found other bank partners, Synapse bought, acquired a broker dealer. So it had a broker dealer license.

So even if the argument is, you know, let the market sort it out, have the banks sort of enforce responsibility and discipline by saying, oh, this program’s not working the way we want it to, we’re going to off board it. If somebody else is going to take the leftovers, it’s not solving the problem. But then that responsibility then goes over to the banks who should be communicating with the FDIC and the OCC and the Fed.

And so the regulatory community can, I think, be a check in that manner. I think they kind of are, would you say they are serving as a check now or trying to serve as a check now? Yes. The banks that I work with, I see the number of fintech partners shrinking.

I see it being harder for fintechs to connect with partner banks. I do see some type of self-policing and oversight that’s happened in the last 18 months to two years. I mean, is that sufficient? Well, I have a follow on to that that doesn’t fall on the bingo card, which is it feels like, and part of what we saw within our Bass Center of Excellence was as long as there was always another willing partner, the program had like the leverage to say, I’m going to go elsewhere, right? This is why we had published that roles and responsibilities.

It’s not a punishment for them to get kicked out if they got somewhere else they can go. Right. So they can negotiate it as long as there’s someone else out there.

So here’s the next question is, should every bank be allowed to be a partner bank and participate in banking as a service? Be allowed to? I mean, what do you mean by be allowed to? I mean, should regulators come in and say, no, you know, you’re in, you know, let’s take the quote from the lineage, which you’ll, you know, spare, hey, you can’t call us. We’re just a bank with 48 employees. Maybe you shouldn’t be a partner bank supporting a number of programs via a partner like Synapse if you have 48 employees and no special expertise.

Wouldn’t that just in reality look like a regulatory regime that requires non-objections from your regulator, which would require the bank to communicate their plans in advance to a regulator and then the regulator actually definitively say, we don’t object to this or we do. And we only we don’t even do that really for M&A, right? Haven’t we seen that in crypto, though, to some extent? They have now added, some regulators have added it for crypto. And I’ll say that the banks who are not getting in trouble are the ones who are going to the regulator and saying, hey, this is our plan.

This is who we want to onboard. And they’re having that communication before it happens. And this is our this is our plan to mitigate and control the risk.

Do you think it’s, do you think we should have as a rule, you go to the regulators for non-objection or do you think it’s a best practice that everyone in the industry should now adopt? Right? I mean, I would just say best practice. Yeah, we don’t want rules. We don’t want the rule.

But I would also imagine, I mean, I think the point I think I hear you both making is like you probably don’t want and I’m curious to hear your point of view. You probably don’t want to walk into a meeting with your supervisors and have them be caught off guard and surprised by some new activity or some business line that hasn’t already been communicated to them, whether it is a sort of formal rule, non-objection or the informal, what is the language in the paper, the dance of supervision? Supervision dance. Isn’t that the fundamental rule of management? Sorry, like manage up, manage out.

It doesn’t matter if it’s your boss or your regulator, no one wants to be caught off guard. And if we’ve all been sitting here wondering, you know, where’s the regulator been, quote unquote, here’s my hot take. Don’t view your relationship with your regulator as adversarial to start.

They’re actually there to help you. They’re there to help us all. They’re here to help us make sure that this industry is doing the right things collectively.

We can’t see inside each other, the other banks, but the regulators can. I will say one thing that makes it challenging, and this is going back three, four or five years ago, was I don’t think regulators had as clear a view and a framework for how to think about this as they do now. Right.

And so I think if you’re a bank that’s getting into banking as a service today and you sit down and talk to your regulator about that, they’re not going to be prescriptive, but they’re going to be sort of non-prescriptively prescriptive in the sense that they’re going to tell you like, yeah, it’s probably going to be this type of investment. You’re going to need these types of things set up. This is the infrastructure you’re looking at.

This is like setting up an entirely new business line. I don’t think that that was the conversation that even proactive banks were able to have with their regulators five years ago because regulators just didn’t have a developed enough viewpoint on what a well-run program looked like. And so they were like, OK, keep us in the loop about what’s happening.

But there wasn’t a lot of like guidance or ability to sort of help people steer around pitfalls as there is today. Well, to push back on that, though, given the proposed broker deposit reclassification, would you say regulators have a good understanding of the risk today? Oh, I think they have a better understanding. Now, are they going to settle grudges instead of regulating in a way that helps with this? I don’t know.

But I think the broker deposit classification is a really good example of one where there are multiple different goals that you have. And it gets really difficult. And this is the problem with not passing new laws to regulate banking.

When we have to regulate new things under old frameworks, they get muddled in a way. And I think that’s what’s happening with broker deposits. But the FDIC, it’s been reported by Bloomberg, is contemplating a new rule that would allow for or require banks to either own the ledger for sub accounts in an omnibus account or to get daily reconciliation.

And to me, that feels like a net new activity they’re trying to do to get their hands around it. Now, it might not be everything we want, but it’s progress. Do we really have to make a rule that you need to reconcile daily? Apparently, we do.

There were banks out there that weren’t doing that, which is shocking. But I guess rules exist to sort of bring up the laggards to a minimum standard. And that seems to be what’s happening.

Yeah. I mean, codified best practice, right? Yeah. Like obvious best practice.

But part of the challenge in this, you know, that I see is we’re asking the regulators to set what the standard is, but then that actually holds them accountable to did they actually set the standard appropriately that when bad things happen. So can I just say one quick thing about this? Why is that bad? Like, I know it makes regulators jobs harder, but isn’t that their job? Like, I totally get the incentive they have to not do that. But there’s so many things I see in banking as a service where it’s like if they would just take the, I don’t know, reputational risk, legal risk of putting themselves out there a little bit, that’s not going to be perfect.

I don’t think I would try to hold them accountable for being perfect, but it would be nice if they took a little bit of that risk so that the rest of the industry could follow behind them a bit more safely. And I see an epidemic of not wanting to do that on the regulatory side. So you have de facto raised the bar on responsibility and accountability when it hits the fan.

And let’s go with the option of what should be the responsibility of the regulators when it hits the fan? I mean, if you look at the Synapse case, apparently nothing. Are we just going to have this? Literally, like every crisis that has preceded the current one, there is not responsibility. I mean, the piece, and we can talk about other parts of this.

The piece that boggles my mind about that is how many exam cycles did Evolve and Lineage and AMG and American, with their respective regulators, plus the SEC, plus FINRA, go through and nobody had anything to say? And it’s not like from the outside we couldn’t perceive there being problems, right? It’s not like, oh my gosh, like no one knew. I mean, there was pretty clear indications that there was some stuff breaking, but it didn’t trip any alarms in those? I mean, part of me is like, this is by design. Why would the right, like, the fintechs are not banks.

They are outside of the supervisory parameter by design. This is their arbitrage. This is an outcome that was like, if not imagined that it would be like this, this is the worst case scenario.

This was, by design, the fintech did not want to answer to regulators, or FINRA is not going to be a meaningful regulator in providing access to money the way that FDIC makes sure bank customers have access to money or can provide remediation and hold, you know, I just like, sometimes I’m like, of course, of course the FDIC doesn’t have a role to play here. A bank didn’t fail. And I think that’s kind of a failure of my imagination, but like, why would I, why would the regulator take accountability for this? So, can I ask you a question about that? Yeah.

Because I was reading the consumer-facing newsletter that the FDIC published after Cinex, which was amazing. And I know no individual people in my personal life read it. When they randomly, weirdly updated the pass-through insurance page on May 29th for no reason.

Yeah, just like a sheer coincidence. But the pass-through insurance was actually one of the things that came up because in that newsletter, one of the things they wrote about was, well, pass-through insurance would apply in some instances if a bank fails and there’s adequate record keeping and other requirements that are met. So, what you should do as a consumer is go through all the terms and conditions and try to sort of discover if your bank that’s behind this service that you’re working with would be eligible for pass-through FDIC insurance.

And the thing is, there is no level of diligence that a consumer could do from the outside, reading through all the terms and conditions to actually verify if FDIC pass-through insurance would apply. It’s literally a function of the record keeping that happens inside those organizations. And so, that was one of those examples where I was reading that like five times going, am I not understanding how this works? Like, how can you advise consumers to do diligence on a thing that literally there’s no level of diligence that it would answer? Yeah, I mean, I would increasingly like, and I don’t say this as a criticism, but I just don’t think that FDIC is a consumer-facing agency.

And the fact that consumers are protected by deposit insurance is a byproduct of deposit insurance and the stability it provides to the banking industry. It is not the point of the deposit insurance. And you made this point earlier, and I’ve made a similar argument that, like, one of the great successes of the American banking system is that people believe their money is safe in banks.

That is not true in every country. I mean, you look at Mexico or Argentina or Turkey, I mean, even setting aside the inflation issues, like, there have been histories of bank failures and currency crises that lead people, I would argue, rationally to not necessarily believe their money is safe in a bank. But the byproduct of that, and aligned with your argument about FDIC not being a consumer-facing agency, is people see that logo, and what they understand it to mean is, I will be able to get my money back.

And as we’ve seen, brutally, to your point about the horrific consumer anecdotes, is that logo did not mean that these people were able to get their money back. The logo has never meant that. I know, but I want the banker to… Yeah, I mean, it’s just like, is that not the customer perception? Perception is reality.

That’s the reality you have to remember here. At one time, people used to bring their gold or their dollar bills or whatever, and it was put in the safe in the bank building. And that inherited assumption about what safeness means in this industry is still true from the perception of the consumer.

So I think we’ve all collectively missed a trick there, probably, but it’s what the consumer thinks and what they perceive about that, that is most important. Well, and the part they take issue with is the number of times you would see the FDIC take action because the logo was used incorrectly, right? Yeah. They take great umbrage at that, except the thing they should have been taking umbrage at is, you’re throwing it on something that imbues safety and soundness.

My money is safe and sound in the fintech, knowing full well no one could actually know that unless you dove into the numbers. And I think what we just said is, we knew the numbers were wrong. Oh, the ledger, the FEO.

On the ledger, on the pass-through, right? One of the major conditions. Yeah. This show is brought to you by Alloy Labs.

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All right, Alan, you get to pick next category. More responsibility and accountability, FBOs and FDIC insurance, deposit treatment, or consumer awareness. Have we done consumer awareness yet? We hit that.

All right, deposit. Let’s do deposits then. Yeah.

Deposit treatment, one of our favorites. Oh God. The key, Alex and I managed to talk for a full 58 minutes about brokered deposits even before- Twice.

Twice. We’re like two hours into this. And one of the analogies we made after the failure of SVB was one of the markets that looked the closest is actually if you look at the partner banking, Banking as a Service, because you have high concentration of deposits well over the FDIC insurance limit with a close community, that information can spread very quickly to move those large bulk of deposits.

And so why don’t we start first, Alex, because I think you got to watch Key and I spar over this entire thing. Are we in a position that if you look at how we treat deposits today and the existing rules, are they fit for function in today’s world? No, no, no, no. They are very much not.

I’ll steal from Mr. Mikula who pointed out that the original statute that sort of required the FDIC to define deposit brokers was written in 1989, which is as old as Taylor Swift. So it might be time- And half as popular. And yeah, vastly less popular.

You wouldn’t believe how little my wife cares about this topic relative to Taylor Swift. I think that it is absolutely not fit for purpose. And it kind of references what I was saying earlier about sort of using regulations and changing rules to settle old scores.

The FDIC between different administrations and different leadership has been batting the designation on broker deposits back and forth for years now. And in each case, what’s happening is it’s either considering way too many deposits to be extra risky, or it’s considering way too few deposits to be excessively risky. And I think, you know, between 2020 and now, which has been the time when we’ve had more exceptions for broker deposits, and we’ve had sort of looser rules around that.

I mean, Kia, you can give the numbers, but there were a lot of deposits that should have been considered brokered from a risk classification perspective that were not being counted as brokered. And so clearly we were undercounting, but the risk now is now that we’re changing the rule again, we’re going to overcount. And we just keep flipping back and forth between them.

Actually, I wanted to ask Alan, so thinking about some of the potential consequences of the proposed change and these fintech deposits potentially becoming reclassified as brokered, the critique of that is that many banks do not think these deposits carry the same risk characteristics as other broker deposits. What kind of conversations should banks be having with their regulators and examiners now before the rule is in effect? And if the rule goes in as proposed, how do you navigate that conversation? Again, when the regulator believes that this is an appropriate response to the risk that Banking as a Service presents to banks. I think first and foremost, you just have to have like a concrete plan for how we’re going to respond to the regulation.

What are we going to do? And now that our deposits have been reclassified and there are certain regulatory hurdles that are tripped by that, how are we going to address it and deal with it? And to have like a formal written plan that you’re going to follow. That should maybe acknowledge the potential concentration risk, not just like ledgering risk, not just like relationship risk, right? But now what if 80% of my deposits are brokered overnight? Yeah, yeah. And then what if we fall capital levels and how are we going to off-board all of these and things like that? Banks were in this situation in 2019.

The industry wasn’t as big in 2019. But I do think many, many banks got into FinTech, Banking as a Service, because they saw the deposits as low risk. And if you are, if you still don’t even see that as a concentration risk in your bank, you are still not ascertaining the risk level of these deposits, whether or not they’re brokered.

I’ve seen that with some banks who have faced enforcement actions. So you have small rural community bank that’s reaching for income, fee shares, and then they’re getting a significant portion of their deposits from one FinTech partner. And so regardless of how you classify it, it’s still the same risk, I think.

We saw that. We talked about this. Well, we saw the negative outcome of that with Blue Ridge, where it’s like, okay, if those deposits are leaving because Blue Ridge decided to exit Bass as a business, what did they turn to to backfill regular broker deposits, safer broker deposits? And as a result, their cost of funds increased dramatically year over year because these cheap FinTech deposits left and they replaced them with expensive broker CDs.

Barb, how does Coastal think about this idea of hot money, not hot money? Well, I feel like that’s the topic that maybe is missing from this one. Source of funds, yes. Concentration risk, of course.

But I think you can’t think about the risks independently. What about the risk of just the money leaving? You know, do we not have, in theory, free access to information now, you know, wherever we choose to find it? Do we not have an ability, in theory, to just move our money at will at any time that we choose? So regardless of the source of how the deposits come in, I don’t think you can divorce that perception and quantification of risk from what’s the risk of this just all walking out the bank for some reason all at the same time. All money is hot.

Which some of the regulators, specifically CFPB and Chopra, are essentially encouraging through 1033 open banking. And I’m not saying that that’s a bad thing, but if the goal is to have more of the economic benefit accrete to consumers who are placing their deposits there by allowing them to move that money more freely, you know, it’s a net zero, right? Somebody has to lose, and the loser is the bank and compression of NIM, which is your favorite topic. So, like, have you just created liquidity risk for the institution? Yeah.

Yeah, but, you know, Jason’s stumbling into when the FDIC informed him you’re not allowed to pay consumers as much interest as you want because you risk the safety and the soundness of the other small banks that don’t want to pay that much. But if we do have liquidity risk and the bank fails, the FDIC’s insurance will kick in. Yeah.

All right, I want to pause to see if any of the questions, we haven’t talked about this in advance because we have five minutes left. I have plenty of questions, but were there any audience questions posed that were going to come up on the screen? Or maybe they hadn’t yet. In which case, we’ll keep going because I want to take the last five minutes.

FBOs, are they the right vehicle for that? I feel there’s choice to the last question. Barb, you want to start? Sometimes we view these things like two binary, you know, zero-sum game type view. This kind of discussion is way more nuanced.

I actually think Kia nailed this, right? There’s four ledgers out there in banking as a service that you have to think about. There’s the ledger that, you know, every bank has, which is their general ledger. What ended up in there? And in an FBO world, that’s aggregates.

Then there’s the ledger that the fintech has. And, you know, that should be what’s represented up to the customer through their app. Then there’s this sort of no man’s land, I think, for a lot of banking as a service banks.

There’s some, you know, animal in the middle of that that is probably supposed to represent what is Alice’s balance. And then there’s the view of the ledger the customer has themselves, which is actually probably not what their app tells them, right? I wrote a check here, and it hasn’t cleared yet. I’m managing my cash flow in my head.

It’s those four ledgers, and one of them is, you know, only in someone’s mind that you have to always be considering when you think about who has what money where. Yeah, I mean, I think just to build on what you said, I think that’s a great way to think about the classification. One of the interesting questions to me, and it relates back to what you were saying about which banks belong in banking as a service and which ones don’t, is if you have no other choice to get into banking as a service but to embrace omnibus accounts and to rely on that animal in the middle that’s going to provide an interface to the fintech company to your omnibus account that then is going to go into your core ledger, to me, that might speak to a lack of technical capability for being able to adequately work with and manage the risk of fintech partners.

Like if you have to take the shortcut. Yeah, and I’m not saying you have to go through a core conversion and modernize your core and embrace some new cloud core technology. I know that’s not feasible for a lot of banks, and that’s fine, but I think there is a level of technical and risk management sophistication that FBO is the answer around this was probably an adverse selection rather than a positive selection.

I mean, it’s that piece, right? The technology piece of, oh, oops, what’s an API? We have FIS core from 10 years ago, and then it’s the economics piece, which is, oh, well, our core provider has a 10-year contract with us, and the way that that contract is structured makes it economically disadvantageous or unattractive to have all of these small neobank accounts, and I’ve got to quickly fit in my hobby horse of there are other kinds of licenses in other countries like EMI licenses that sort of get rid of the need for this convoluted fintech bank structure. National fintech charter. Yes.

Oh, I’m so sick of the FBO. Pitch your new name. I can’t believe that we didn’t fix this.

There’s been so much innovation in banking, and we’re out here making jokes about broker deposits being 30 years old. FBO accounts are older than that. I can’t believe there’s been so little curiosity, so little creativity, that we just don’t have something better, and I think that an industry that claims it’s disrupting banking could maybe turn some of their attention towards this account structure.

Absolutely. Just the last thing I’ll say is I think the FBO issue just, it raises another issue for me. Do you have to be at some type of minimum size or scale in order to be a fintech bank and to partner with fintechs? But under $10 billion.

There’s a sweet spot. There’s a sweet spot, but that minimum scale and a minimum level of efforts. The banks we see do it best, a la Coastal, obviously work together.

You can’t be doing it off the side of your desk. Yeah, you can’t run it on the side. You might be great at compliance and management of your existing customers.

Doing it via a channel partner that might be scaling quickly, and you’re adding channel partners quickly, that’s an entirely different piece. I think Jay’s going to bring it up. Especially if that channel partner is opening up accounts for businesses in Nigeria and Russia using registered agent addresses.

Only we knew someone who reported on that. So we are out of time for hot takes, but any of you who have stuck around this late in the game, if you are interested, we do have some extra bottles of hot sauce that might just get set out if you want to take them. They are TSA compliant.

If you don’t have time to get one, you can just send me a DM and I will ship it to you. But thank you, audience, for sticking around for the last session of the day. That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks.

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