546 Are FBO s Bad News 

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.

All right, so this is Kia Haslett from bank director slash FinEx Tech, one of my absolute favorites to have on the show because no one likes to talk about deposits as much as Kia and I. So last year, she wanted to do an episode on brokered deposits, and so we kicked that off her bucket list. Little did she know, as, you know, Baz Island is blowing up at the moment, hey, we’re back to talk about deposits and one of my personal passions, the four beneficial ownership accounts that are out there. And so Kia, welcome back to have another Hot or Not, Let’s Talk Deposits.

Yeah, thanks so much. I love that everything kind of, it’s like deposits all the way down, right? It always is going to come back to the nature of deposits and the recording of the deposits and the accounting of these deposits. So I’m really excited to talk to you about this.

Let’s jump right into that. I think until really, you know, this maybe the fire started with SBB when the importance of record keeping really came into light. But now that as we’re looking at, hey, when a bank is actually serving as the regulatory institution behind a startup or even more complicated behind a intermediary that is serving other programs, I think the precision of language is important.

Record keeping, so mundane, turns out is really hard, like really hard and super important. Yeah, it’s interesting because I think when we think about the role of a bank, we actually almost kind of like glance over when we talk about the gathering of deposits, like what does it mean to gather the deposits? And to account for them, it’s almost, it’s inherent to almost the idea of being a bank is to keep track of the amount of money in each account and who does it belong to and how does it come to us? And then also, you know, how would you know, how does the bank know how much money it has, right? Because obviously banks lend this out. This is really, really important.

And you know, I think about what comptroller Sue said a couple of years ago about the supply chain of banking, right, that this is hard work in and of itself, that direct relationship. If I walk into a bank and give them my money for them to keep track of it, but the further and further away the end customer gets from the bank, the more and the more links in that chain, the more breakage points or the more fat finger errors or the more transposed commas and period or, you know, decimal points can happen. And you would want to have a lot of visibility throughout the entire chain, but this is just a core fundamental aspect of banking.

And it’s something that, you know, I think bank customers care a lot about and regulators and auditors and, you know, everyone who looks at a bank cares about them doing this work well. Well, and I think, you know, in a slower moving world, some fat fingering, you have time to figure that out. But with as much digitization has happened, and even though straight through processing, right, the Holy Grail of this is supposed to work and APIs are supposed to solve this.

Things are moving fast and things break all the time. Were you going to say something? Oh, no, I agree. Yeah.

Sorry, I’m nodding. Yes, they break all the time. I think about, you know, you read about all these, like, the errors that happen at banks, you know, with the fat finger with the comma that’s supposed to be a period and units, millions versus billions.

Right. Or, you know, if a unit is actually in thousands, you don’t need to add the three zeros. Right.

These are really big issues that banks would want to one, a bank can make themselves to would want to correct themselves and make it right by the customer. And then three, like, how, you know, how would a bank know that it’s made a mistake and find and catch it? And then, you know, from there, how do they know if their partner made a mistake or if their customer made a mistake or if they’re, you know, things like that. So we’re just getting further and further away from the ledger that would probably keep all these numbers.

Well, and this is where you have even more complexity. The question becomes when you’re working with a partner, there is at a minimum now two ledgers. Right.

What the bank has is the ledger. What the partner has is a ledger. And if you add a middleware provider, you now have a third ledger and you might have the customer’s ledger.

Right. So now. So the customer might have a sense of what should be in their account.

Right. Hopefully, it’s probably the same as the middleware, the same as the fintech. But, you know, there’s four versions of a number floating around, four versions of a number that all, in theory, should sink.

And now I think one of the greatest complexities is when we look at the payment system, especially in the United States, and money moves at different speeds. Right. And I think Walt Cox did a great job of breaking this down on X. Right.

You think about, you know, debit and credit card rails run 24-7, seven days a week. You get into wires. It now is in various windows, get to international wires, other windows, windows with blackouts because you’re probably using a correspondent bank to do international transfers.

Right. And so the money disappears for some period of time. And then you get into our wonderful ACH system, RTP, throw in some Zelle, some FedNow related to this.

The trains are all moving at very different speeds and we’re trying to get them through the same station. Yeah. No, I agree.

And I, you know, I think about, like, you know, I use, you need a budget. And so every day I reconcile my account. And so I get to see, and I don’t send wires, I don’t do like cool payments, right? I use credit cards.

I pay my credit cards. But you see the gap in the posting, in the clearing, in the settling, right? You get to see how long it takes for money to move from one Chase account to another Chase account or from interbank to another bank, right? This timing. And like, again, when I read about these ledger issues, I actually always think about me reconciling every single day and how, like, the mistakes I make reconciling every single day.

And I’m like my own little middleware provider in the middle of everything. And I know, you know, I, you just, you really have to pay attention to a lot of this stuff. And, you know, it’s, it is kind of the other thing too, I always think about is whatever my, if my budget is off to my bank account, my bank account is the right number.

And I need to figure out where in my budget I messed up what got accounted for or duplicated or, you know, something was, I put it in as a payment and it should have been like a credit, like all these things. But I think about that all the time because I have to reconcile this budget every day. Well, I mean, a number of the banks have gotten into banking as a service could learn two really important things from you.

Number one is you better be reconciling every single day, right? And there are a number, unfortunately, I know that are not reconciling every day because they’re trying to let that timing of payments catch up, right? Like you just experienced it, right? That timing aspect means there’s always this gray area that it does not all check out. But the second piece that you said that’s really important is the great debate. What is actually the system of record? Right.

Well, and it is funny too, because I’ve been thinking a lot about the types of accounts that create, create some of these issues and vulnerabilities and why, you know, the FBO account became the account for fintechs to use what, you know, the, the benefits of doing that versus putting all the accounts directly on the core. And I’ve been reading a lot about that, but I think one of the major drawbacks is it seems like the FBO account was just not intended to be like a full transactional account and that there would just not, there’d be very little money movement going back and forth. And, you know, hopefully the, the, you know, if we think about a law firm or a parent opening a custody account for a child, you have like a really strong existing relationship with that person.

And also like, they’re not the, the, the direction of moving money is like, you would just maybe have a little bit more trust in, in that or in those, in those numbers. But yeah, I think the, I’ve been very curious or very interested to read about this, like who, who should have the ledger? Like, and I was like, Oh, I didn’t even know that was like a question, like the pig should have the ledger guys. But then also like, how do you reconcile and who, like, does your auditor get to see the ledger and how often does that happen? Things like that.

Well, so much there and want to call one thing out that I think I’m just going to say it out loud. I haven’t seen it said elsewhere. So back at perk street, we actually explored using a FBO account, but the quiet part out loud that I don’t think people are talking to enough.

It was because the fees from the core provider were killing us because Bancorp back in the day made us open an account on the core for every single account holder, rather than for as much as we can say, Oh, it’s the complexity of the technology stuff. It’s like, no, it’s also really the economics. There’s a major economic issue in why it was opening thousands of accounts is very expensive.

I have heard that it’s free checking is actually not free for a bank to provide. And I would imagine this comes back to that. Yeah.

On order of, you know, close to, you know, depending on volume between 50 cents in a dollar per account per month. Right. So if you have either low volume accounts or a number of accounts that open, but you know, have a failure to launch, they never become real accounts for you.

That is really expensive. Just want to call that out that one of the primary reasons that this all kicked off was not because of technology, it was economics. Then there is a technological issue on top of it is yes, opening all of those accounts can be very difficult and managing those, you know, can also become difficult.

It’s interesting because it’s like, you know, I was reading yesterday night about the encore versus the FBO account from the FinTech perspective, which is not obviously a perspective I spent a lot of time thinking about, but for the, you know, I was reading on one of the middleware providers that a drawback to an FBO account is that the FinTech has a greater responsibility for fraud prevention because the partner bank can’t see what’s happening within the customer’s virtual accounts within the FBO. And I was like, oh, I don’t think that sounds great. I think the bank would want to know, but sure.

And then, you know, if you go the FBO route, which you say is cheaper or was cheaper, at least back in the day, the FinTech has to, quote, participate in its own processes and take extra steps to provide the bank with any visibility it needs. And I think like everyone’s very blase about that. I just find that so alarming.

That’s, you know, to me, hearing like the, you know, the bank maybe doesn’t even have a sense of the customers in the account. It doesn’t have a sense of the nature of the transactions, fraudulent, legitimate, and has to like, you know, work, you know, the visibility is not inherent to the structure of the account by design. And that, like, I guess I hadn’t fully realized how difficult or how extensive and then also, you know, taken for, like, this is the nature of this account from by design, this account is like this.

And it goes back to it was not fit for purpose for this. And I think that, you know, if you look at the banks and the programs that do this exceedingly well, they have invested in the infrastructure and the people in the processes to make that exchange of information back and forth very quickly. Yeah, my question for you is, so I think like now what I’m wondering is how difficult is if you’re a bank that uses that that does bass and uses the FBO structure and doesn’t feel like your ledger gives you full visibility, how difficult is it to build a full visibility ledger while you’re running this account and then backfill it? Well, one of the ways that it is being managed right now, and I’m not saying it is the ideal way is you have either the program or the middleware, right, whichever you’re using, gives you access to their system.

Okay. But now it’s got like a log in. You have.

Yeah, you’ve got the logins. Right. But, you know, in the recent debacle, we can see what happens if, for whatever reason, your access is cut off.

Right. Now you have zero visibility. The other challenge is it is also a very manual process around this that when I look at some of the best run programs, the banks are actually getting cuts of those data files on a very regular basis, some even daily, where they can actually run their processes and their technology against it.

Yeah. Yeah. Which seems so important.

Like that’s like the check, right? That’s like, you know, the internal audit function. It’s the internal audit and one of my favorite presidents in this space who runs this business, you know, he and I talked about the importance of, you know, if you’re ever building an Excel model, you can tell who’s been an investment banker or an auditor or consultant is there’s always a check digit. Right.

And everyone always goes and make sure, right, as my formulas are coming together on the balance sheet, is my check digit correct? Yeah. So I wanted to one of the reasons why I joked about the deposits in general is that, you know, when you were at Perk Street, this FBO account structure would have been deemed brokered. And, you know, I think, you know, last year we talked a little about the nature of deposits and how some of these fintech deposits do not behave as broker deposits.

But I think one of the most important things about the broker deposit structure wasn’t necessarily how the deposits behave, but the nature of the deposit itself and that it came through an intermediary and that and how difficult would it be for an intermediary to pull it. And when we think about it for one of the biggest concerns is what is the documentation that intermediary provides you and the end customer around past their insurance, which is the FDIC, you know, that the FDIC will give these accounts deposit insurance coverage provided they meet three conditions. The other thing, too, is I learned yesterday reading about the FDIC’s past their insurance protocol is that they review potential pass-through arrangements at bank failure to determine if the requirements are met.

So I will take them at their word and assume that this check is maybe not being done during or not necessarily being done during a bank examination. It is performed when the bank fails and the FDIC has to find out who gets a payout. And then in reading about past their insurance, I found out that the FDIC published guidance in 2010 about this and that it was likely not a coincidence that what happened is a bank called Waterfield Bank failed in March 2010.

It was not assumed by another bank because it was funded mostly by broker deposits and most banks don’t want to buy another bank’s broker deposits. So it goes into liquidation. FDIC becomes receiver and the FDIC has to start paying out these deposits.

So there’s a time like the bank is fully funded by brokered funds and they have to figure out who needs to get a full payout of the insurance coverage and who doesn’t. And it sounds like, you know, in this paper I read this 2010 guidance was occasioned by the discovery of irregular custodial record keeping upon this bank’s failure. So that is one of the only times where I can find the FDIC has found maybe deficiencies with the custody arrangement paperwork impacting consumers.

And while, you know, I think most banks aren’t going to fail, it’s interesting to think about when is this checked? When is this audited? When does this matter? It kind of matters right at the end and you better have it right at the end. And so that was like, you know, I think there’s some questions about how this paperwork is accounted for and, you know, how do we know it’s being done correctly? And it sounds like we’ll find out if a bank fails if it was done correctly. Well, and let’s underscore that, right? And I know you and I sit on opposite sides of a debate around whether regulators should step in in situations where it’s the program.

But the one thing that is very clear and the FDIC is reinforced in the current situation is that insurance only becomes available in the event of the bank failure. And unfortunately for, you know, one, because not everyone talks about account agreements in the way, you know, everyone who listens to, you know, this podcast probably does. And, you know, they’re not like regulatory nerd, you know, pouring over deposit agreements.

You know, they thought they had FDIC insurance because the program told me they did and they saw the bank name there, right? Like for the people impacted, you know, by Yotta and others were like, but it showed me the FDIC insurance. You really can’t blame me that I don’t understand how FDIC insurance really works. Yeah, it’s kind of tough because I still like actually maintain there’s probably some coverage of FDIC insurance, whether it’s $250,000 to one FBO account or whether the paperwork of the FBO account means that every account sub ledgered in the FBO account gets $250,000.

I think like it, you know, it’s always, you know, I think the FDIC sometimes has been a little like it was weird that they were so focused on deposit insurance misrepresentations, but then a lot of the FinTechs showed us why they care. I think one of the things is the FDIC has not fully communicated to consumers what it actually means to have FDIC insurance. And when does FDIC insurance kick in? And I think the FDIC is too good at failing banks.

So almost no one interacts with their FDIC insurance. So therefore, in popular culture, there is the ability to have a large misunderstanding about what it does and doesn’t protect and who it does and doesn’t cover. And that when companies go bankrupt, like the company just goes bankrupt, like unless there’s insurance on that company itself.

I think I think the funds are still insured. The question is what the paperwork says, how much of those funds got insured. The question becomes right for that to pass through to the FBO, the three conditions.

Yeah. You know, being that one, you need very accurate records, right? Which, unfortunately, in a failure, like you said, this really only comes into play when the bank has failed. So now we’re talking about, you know, the bank needs to have accurate records that need to match the ledger.

And there might be four versions of the ledger out there, as you said, right? So we’ve got a quadratic in terms of level of complexity. The second piece is the nature of the agency relationship and the agreement surrounding it and the last is around the deposit terms. And I think you made a really good point that if regulators aren’t actually, you know, as part of the regular bank exam, not looking at the terms of the programs, right, that are at least one step, probably two steps removed.

You’re only reading this for the first time. It’s like, you know, reading what your homeowner’s insurance is while watching it burn. Right, right.

Probably time to go look at that policy. You know, I was looking at this really good paper written in 2012 by Paul Clark at Seward Kessel, and they’ve done a lot of work with the deposit brokerage space. And it is really interesting.

I was looking for, and I was really trying hard to find information about FBO accounts that kind of predates the fintech explosion because I wanted to read more about these accounts themselves. And he talked a little about in the paper about commingling of funds and the fundability of money in general. The commingling that the FDIC is concerned about in these funds, it’s obviously has to be maintained on the books and records of the custodian.

And then, you know, because the FDIC insures these deposits through pass-through, it needs to be, you know, he writes that they need to make a clear statement about the circumstances in which the commingling qualifies for pass-through. And then he said, you know, one of the sections was that this unfairly punishes depositors. Is it fair for the FDIC to deny FDIC insurance coverage if a deposit program is managed by an intermediary? And he’s talking about deposit brokers, right? He’s not talking about fintechs.

It’s 2012. To satisfy the technical criteria that the FDIC establishes, since the primary purpose of deposit insurance is to instill public confidence in the banking system, does the possibility that the FDIC disallows an insurance claim on these technical grounds that were beyond control of the depositor and likely beyond their comprehension undermine this purpose? So, and then he, you know, said in 2012, this is a good paper, by the way, I’ll send it to you, while the FDIC has written procedures for these insurance claims, there’s no evidence that procedures exist to review the custodial arrangements that are set forth on a bank’s, a failed bank’s records in order to determine whether custodial relationships conform to the policy. So there’s not a review by the FDIC prior to failure that this would qualify for insurance.

A review of custodial relationships for the technical compliance for insurance is probably not practical because in a bank failure, the FDIC tries to make depositors whole within two business days. I also learned that pass-through insurance was first established in 1946. So we are talking about an old, the FDIC, right? Shortly after established, recognized that people would be putting deposits at banks on someone else’s behalf and understood that this was a pretty core function of like money movement in the economy.

So I was pretty excited to read that. Good for you. I was searching too.

And unfortunately the noise, because all of the modern fintechs talking about FBO insurance made it really difficult to Google back to the original use cases. I don’t know what you found, right? I was on like page five of Google before, you know, able to find non-fintech use. What was the original conception you found in 46? Did it have a clear use case? So, oh my God, it’s like escrow accounts is one, parents and investment purposes, but investment has like a weird, like it could qualify for the SEC as well.

And then obviously there’s the creation of the broker deposit in like the eighties or the seventies. And then I’ve also read about passers for like legal settlement cases. So these kinds of use cases.

To your point, other than the parent relationship, most of those, even though there could be a large number of customers and large number of funds. The transaction flow is very different in the velocity of those transactions. Very different than a primary checking account.

Yeah. They’re not demand deposit functions for sure. These are very specific types of accounts that it was like, okay, this is so funny in this report.

I was reading like how interest is assessed. So like the bank pays the agent or the broker interest and whether the broker passes that interest on. That was like a huge issue apparently prior to Fintechs doing FBO accounts.

That was how the interest is calibrated could change whether it, whether you were a deposit broker or not. Oh, interesting. I know, I know.

Some secondary effects. I know so many knock on things that we have to think about because everyone wants to, because we just need an account where people can like put money on someone else’s behalf. And it sounds like, you know, I think as, as money moves faster, bank ledgers in general, don’t like don’t really work well.

And I think that’s where a lot of these cloud cores come from. A lot of the concerns about sidecar cores, maybe doing real payments on real time payments on that. And so whatever issues you have with like payments on demand accounts in your bank, like direct customers, the only, they’ll only probably be exacerbated at scale for Fintech programs, especially ones that are deposit accounts.

Not like maybe, maybe loans is different because that’s one payment once a month. And, you know, savings accounts are different. Things like that.

Well, as we wrap up, I don’t want it to seem like we’re all down on banking as a service and Fintech. I actually. No, just FBO accounts.

Well, even FBO accounts, right? Like there’s a whole bunch of structure and process you need to put around it to do an FBO because I get why you want to do it. So not for the outright ban of FBOs, but I think what we’re really trying to highlight is for startups that are getting into Fintech to understand the importance and complexity underlying this. You might be a great technologist, but there is a whole lot of complexity on something that seems really mundane, like a ledger.

We should have Wade Arnold come in to talk about the Bano journey of like what he discovered when he started peeling back that onion of, oh, this is a lot more complex than building websites for banks. You know, so it’s a level of complexity that I think needs to be appreciated by the startup. And for the banks that want to get into it, they really have to understand like one does not dabble in banking as a service.

Like you either commit to it, you build infrastructure and processes and the people to staff it. And you need to actually work it. And I think something you highlighted, I want to underscore is really, I think the bank has to be the ledger of record, much like you need a budget or YNAB, right? Like ultimately that is the record.

And that’s a change, I think, for most of how these bank Fintech program slash middleware relationships have really worked. Yeah, yeah. The other thing too is, you know, I mentioned this before we started recording, but I think FBO accounts need a rebrand because, you know, in addition to every other thing that needs to happen around the timing and the visibility, I think we should stop calling them FBO accounts.

And I’ve been trying to call them Fintech custody accounts to make them cool and exciting. I still don’t love the word custody because I think custody doesn’t underscore the transactional nature of these accounts and the timing and volume of payments or money movement. But so I’m willing to change the word custody to something else.

But I think we need to start calling them like FCAs instead of FBOs. Fantastic. Like let’s call your local regulator and legislator right now and modernize.

This will be called the Kia Haslett rule. Thanks for taking the time to riff on deposits in the FBO account, fulfilling my dream to episode on FBOs. All right.

Thanks for having me. Hello, friends. It’s Brett King from Breaking Banks.

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Unbound. Welcome back. I have Paul Davis from The Bank Slate here.

Now, we tried to get together in person when he was flying through Minnesota. He’s presenting at Minnesota Bankers Association. And I’m bummed I missed the session because it’s amazing to see that the entire state of banking, it appears, has woken up to the importance of fintech partnerships and where that plays.

And so, Paul, you really tend to be able to get into the weeds, you know, with some of these very community-focused banks. I’m curious, how have you seen the evolution for them about their approach to fintech partnerships? Yeah, you know, obviously, you know, one thing, by the way, Jason, thanks for having me on. But, you know, one thing, you know, you can say about community bankers, they’re usually not the first to market.

They’re not the early adopters, right? And so, in this case, I think that it applies, you know, perfectly. I mean, you know, you’ve seen, you know, the vast majority of community bankers just kind of sitting back and wanting to see what other folks have done in the space, you know, whether that’s by necessity, you know, whether they’re just risk-averse or whether it’s a matter of limited resources. Or, you know, the other thing I would point out is we’ve had quite a few fires to put out in the industry going back, you know, when you look at COVID, you look at the liquidity panic that we had last year.

So there’s a lot of things that have had community bankers thinking about putting out short-term fires rather than looking out over the horizon. With that in mind, you know, so when you go to these conferences, there’s a lot of interest now as maybe people have come up for air a little bit from last year’s deposits situation and really just trying to figure out how to get a handle on FinTech, how to work with FinTech, and how to do it in a way that’s not going to run afoul of regulators. So I want to unpack two parts of this, right? Very curious in your perspective, because it’s one of my major frustration points.

First, when banks say FinTech, what do they think they mean? And how do you define FinTech? That’s a very great question. You know, I think there are a lot of bankers out there, again, you know, probably thinking more on the terms of the community banks, the smaller guys that are honestly still trying to get a handle on what constitutes a FinTech. You know, is Amazon a FinTech? Is a bank with a technology focus a FinTech? You know, so I think they’re still trying to figure out, you know, what constitutes, what actually, you know, fits the description.

The way I just, I try to simplify it for people. I just look at it as, you know, anything that’s trying to take a technology approach to improvising, improving the financial, delivery of financial services can be a FinTech. Yeah.

And does it have to be a startup? So it feels like that’s also one of the big shorthands is when they say FinTech, they either mean bank has a service or a startup. I don’t think it has to necessarily mean a startup. I mean, you know, we, you know, there are several, you know, there are companies throughout the history of financial services that have reinvented themselves or, you know, taken a, you know, a bent, you know, so I think of, you know, there are banks out there that have either really migrated more towards a technology focus or have acquired or work with companies that are technology focused to kind of evolve over time.

Fantastic. Now, second part of that, you said FinTech and partnerships. Let’s unpack partnership because that also seems to be the new sexy word when we really mean vendors.

How do you think of the difference between a vendor and a partner? That’s a very good question. So I think a lot of it is tied to what kind of, what the business relationship is, you know, the direction of the information, the direction of the business, right? If, you know, somebody is just providing a service to help a bank do its job better, whether that’s starting a new business line or removing friction from the customer service perspective, I think that’s a vendor relationship. If it’s a real sharing of referrals, sharing of business and a two-way street, so to speak, that to me seems more like a partnership.

So that’s, I mean, I try to take the complex and simplify it and sometimes it’s not that simple, you know, not that easy, but that’s how I look at it. So for the banks, you know, of the size that you’re talking about in the community space and the importance, I think it’s great and really important that you’re out, you know, proselytizing the importance of both partnerships in modern vendor relationships. Like I don’t want to poo-poo either one of those, right? Like both are very important, different, but important.

How do you think they should get started? On the banking side. On the bank side. How should a bank, you know, to do this well, you know, what do they need to get the house in order to actually execute and make it worthwhile? I mean, one thing I think is pretty obvious.

I think you have to look ahead in the horizon, look five years in the future, right? And say, gosh, what does our institution look like? Who are our customers? What products, what services do we need to offer in order to fit our own vision for ourselves and a vision of what our client base is going to look like? And then you have to go from there and you say, well, what do we need to do in order to get to that point? You know, I go back and tell people there’s nothing, you can do an old-fashioned SWOT assessment right away. What are we good at? What are we weak at? Where can we really grow a business? What are the things that are going to really mess us up as we go through the journey? And then you have to look at really getting into the important things. Staffing, I think, is extremely important, right? You know, you saw a lot of folks get into, say, banking as a service and maybe didn’t have the right staffing, particularly from the compliance and risk perspective.

And, you know, that can cause trouble down the road. Education, and I think it’s not just education for senior and middle-tier management. I think board education is extremely important right now.

The regulators have made it very clear that the board needs to be well-informed about what the strategy is and how to go about doing it. And from that point, once you have a sense of who you want to be, make sure you have the right people in place, at that point, then you can really start looking at who those outside partners are going to be to actually get you from point A to point B. Well, a couple of points to unpack here, right? Starting with strategy is so essential. When we get into, you know, on the heels of, you know, Finnovate Spring partnered and co-host JP as this great analogy, it’s like, you never go grocery shopping.

When you’re hungry, you should not show up at one of these trade shows without a strategy because you just go, give me one of those gen AIs and a chatbot. And you get distracted by the shiny objects. Right.

A whole bunch of shiny objects. Corey LeBlanc, one of the co-founders and CTO at Locality Bank, one of the Ally Labs members told me in one of his prior jobs, the worst day for him was always the Monday after the CEO came back from a conference because he gave him a bunch of business cards and say, oh, this looks really interesting, but like zero context and no real strategy to hang it. And he’s like, what do I do with these 15 things? Right.

I mean, and the other way you can look at it too, is also some of your other employees, like your tech folks might see a solution. They’re like, oh, we need that. Let’s do it.

And let’s do it right now. And you have to explain to those folks, no, no, no, no, no. We have to go through compliance, risk, legal.

There are going to be so many steps to make sure that this is the right partner. This is not going to blow up on us later. We can’t just step in, turn the key and get the car going.

Part of that, though, is you shouldn’t even be getting into the car until you’ve figured out where you’re trying to drive to. Understanding you might have to take some detours along the way. Do you still see the challenge that a lot of the banks that don’t get into Ally Labs, that aren’t over the board, are the ones that don’t recognize how much banking is changing right now? They want to keep executing the business model that’s worked for hundreds of years, but there’s been so much change in how we operate.

Yeah. Let’s be honest. There are some places in the United States where that model, the same model, will continue to work, right? In smaller markets, rural markets, things like that, where bread and butter banking still has relevance.

When you start looking at urban markets, when you start looking at the next generation of bank customers, that type of thing, yeah, you definitely have to have an open mind and evolve. Clearly, technology is a critical element of that. Well, hot on everyone’s mind right now is regulation and regulators looking at that.

What’s your perspective? How do you advise these smaller banks in the regulatory risk? Yeah. I think you have to look at what kind of spurred the regulatory actions that have been happening, right? So you look at it and you go, a few years ago, banking as a service was this buzzword. Folks were finding that their other revenue sources were getting crimped.

They needed to find a new way to bring in revenue. This looked like a really great turnkey solution, or at least in the minds of some of the early adopters. So you saw dozens of banks jumping into this, signing these partnerships, bringing these guys on, getting the deposits, et cetera, et cetera.

And then you started having some hiccups, blowups anywhere at some of those fintech companies, right? You have glitches, you have customer service issues, you have disclosure issues. Some of these guys saying they’re FDIC insured when they’re not. And suddenly, I think that gets the attention of the FDIC and the OCC, and they’re both just like, whoa, no, no, no, no, no.

We need to try to harness this and rein it back in, right? So on one hand, we haven’t really seen a rule book, a playbook. We’ve seen some guidance over the last few years, but they really seem to be expressing their wishes more in the form of consent orders. And so I really tell folks, yeah, it’s great to look at the guides that are coming out, but really take a deeper dive.

Look at the Cross River, look at the Blue Ridge, look at the Sutton, the Pyramonts, look at those orders, and just kind of see what those expectations are, because those are the kind of things that a bank examiner is going to look at when they come to talk to you as well. Fantastic. So parting shot, what are you most excited about as you look at the back half of this year? I like the idea of, from a technology perspective, to just really continue to see what people are going to be doing in terms of automation, AI, things like that.

I’m just kind of interested in learning more about the use cases that people are going to be looking at. It’s not just about running a bunch of data and seeing patterns. I’m just kind of curious to see, especially what the mid to large banks are doing in the AI space.

Fantastic. Well, thanks for taking the time to join today. Excited to continue the conversation.

People should all get on Substack and subscribe to the Bank Slate. It’s a great source of news, and I always appreciate your Twitter feed as well. Well, I appreciate it.

And you can also go to thebankslate.com. That’s also where you get a daily rundown of things going on in banking and fintech. Fantastic. Thanks, Paul.

I appreciate it. That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by a U.S.-based production team, including producer Lisbeth Severance, audio engineer Kevin Hirsham, with social media support from Carlo Navarro and Sylvie Johnson.

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