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.

January is finally behind us. Wow. Talk about a long year this month.

This episode was originally meant to record and air earlier in the year under the title 2024. Is this the year that Baz goes boom? Talk about crazy happenings in just the first 31 days of the year. Alex Johnson, Jason McCool, and I talk about what projections we need mulligans for and which are already proving true.

We have some analysis of the current state of Baz and theories on the implications for the rest of the year. Rescheduling caused a conflict for Kia Haslett, so look for a special episode on the drivers of bank M&A and deposits in the very near future. Without further ado, does Baz go boom? Well, we’re a month into 2024, which means this is the cheater episode for the 2024 outlook.

Kia is supposed to be here, but because we had to reschedule, she’s at that little acquire be acquired thing that sucks up all of her time. We’ll tack her in later because I have several spots where I’m like, and now Kia, and then there’ll be no Kia. Okay, so here’s your chance at a mulligan.

Are there any of your 2024 predictions that you’re either going to mic drop right now and say, called it already? Or it’s like, I didn’t say that, like, I don’t care if you have an internet archive of that. Like, that was definitely not in my newsletter. Like, what I meant to say was this.

Any change of the predictions? Well, there’s, there’s going to be no drama in bass was something that I thought Jason predicted right at the beginning of the year. So I don’t know, Mikula, if you want, like, a do over on that or just to like, apologize. I want to double down all our gambling metaphors.

Well, I think it’s, it’s too early to revise our predictions. We still have 11 months left, you know? Well, the one that I’m going to just like, dude, and it was obvious one could claim like, so Ron Shevlin, if you’re listening, is going to say that wasn’t a prediction. That was obvious predictions.

You know, kind of like the scientific method must have some, you know, uncertainty or reasonable doubt was, you know, for me was really around, you know, Baz and Baz architecture in how it works is going to really change in 2024 where you can say, well, certain 2023, it’s like, yeah, I think we are seeing, you know, you know, little pops of it, but I think a restructuring of the market is part of what 2024 is going to bring. And even before the actions of the last couple of weeks, I’m curious to your thoughts wanted to title this episode, you know, 2024 is this year that Baz goes, boom, is it? I mean, something that, that, and Alex has the inside track because he knows my secret, secret side project that I’m working on, which I just can’t talk about now, but I just reference, but you’ll all find out someday. But I’ve been thinking a lot about, you know, banking as a service, as you know, I always do apparently, and, and bass business models.

And I mean, something that, that somehow had not occurred to me until now, and now it feels kind of obvious, but I’m curious to hear both of your opinions on this was the idea that in some ways, banking as a service has been a VC funded subsidy to banks, and there’s room to debate and argue and disagree. But, you know, the angle I’m getting at is, you know, this feels like it should have been a capability that banks, you know, could have done or should have done on their own. And certainly we’re starting to see that now.

I mean, cross river isn’t exactly new. It’s been around since I think 2008 column, grasshopper, et cetera, et cetera. So we are starting to see what you might call like bass native banks.

Fis acquisition of bonds, you know, is core banking and core banking vendors where this piece of technology sits. It’s not entirely clear to me that the standalone business model makes sense. And so it’s like all these VC dollars that flowed to whatever half a dozen different middleware platforms did a great job of developing technology, maybe did not develop businesses.

Thoughts? Well, yeah, I mean, part of the I think you’re on to something with that, Jason, because I mean, part of the challenge with banking as a service and someone I was talking to in the space put it to me this way, which I thought was a great description of it. It’s an anti network effect business, right? And so the challenge and I don’t think people realize this when they first started getting into banking as a service. But the challenge is if you’re going to build a technology platform to sort of sit in the middle between fintech companies and non bank companies that need a bank partner and then community banks on the other side that don’t have good technology, but want to essentially rent out their charter to facilitate that.

If you’re going to be in the middle doing that and providing a technology platform, which to your point, you know, circa twenty eighteen, twenty nineteen was a big gap in the market, given how popular fintech was becoming. That’s an opportunity. But I think a big assumption built into those business models was we can scale up and we can get network effects and we can become like a larger, better scaled business.

And I think where all of the drama has come from is the realization that, you know, banking as a service from a technology perspective is a network effects business, right? The bigger you get, the more resources you can share across a wider variety of users on each side of the network. But the flip side, which regulators are just sort of driving home right now and all the bank exams that are happening is we don’t want you doing this in a way that you don’t have your arms fully around. And so that network effect and that ability to add scale, that’s a bad thing for regulators and that’s a bad thing for regulated entities.

And that’s where all of the pushback is coming from. And so, like, is there a business model somewhere in here that you can do at a relatively low scale and still make money? Maybe, maybe not. Maybe it does have to be part of a larger core banking platform or something else.

But if your plan was to do this at a large scale and benefit from network effects, I think that’s the thing that I’ve woken up to just not being a possibility anymore. So I want to disagree slightly, because I love this concept of network effects. I hadn’t thought about it in that frame before.

I think the challenge is, if you think you are going to do this on the side of the desk or the side of the balance sheet of the bank, and you want network effects, that doesn’t work. If you are going to become a Bass Bank, and that is what we do, and we just happen to have a legacy business we used to be in the business of, but we are actually replumbing, retooling, and the purpose of the bank is to lend our charter and our compliance expertise that is feature fit to provide at scale for many programs, I think you can pull that off. I think it’s the middle ground that doesn’t exist, which is I can do it small scale on the side of the balance sheet with just a few additional people, or I can do it and I industrialize it on the other side.

I can’t be in the middle of this, which is I’m using my existing compliance people and BSA people and AMLs. Well, and the problem, I think that’s a good point, because the middle of the market is also where these middleware platforms sit, where it’s like they exist to enable banks that want to get into Bass, but don’t want to put a real big investment in to do it the right way. That combination, I mean, Mikula can talk about this better than I can, but that’s where the vast majority of the problems have been from a regulatory perspective is that marriage of semi-serious banks and middleware platforms.

That’s the messy middle. Yeah, and I mean, I’m always cognizant that even when we use a term like middleware platform, it refers to different business models, different operating models, some using a separate broker dealer license, some where you’re taking on part of the compliance stack, some where you’re not. So I definitely want to caveat that so I don’t get any angry emails.

But Alex, I think you’re generally correct in the sense that part of the promise, and I would argue perhaps unfulfilled promise of some of the middleware platforms was like, hey, community bank, you don’t need to worry about anything like just let us integrate and we’ll take care of everything and you just get deposits and revenue and it’s fantastic. And if it’s not abundantly clear by now, that is not how this works. Certainly not how regulators are viewing it.

Yeah. Well, and to that point, Etai at Unit was pushing back on me and how often do I hit, hey, we can’t paint with a broad brush when we talk about banks or we talk FinTech. He’s like, hey, you can’t paint with a broad brush when we talk about middleware.

I think Unit has done over time a job of saying, hey, we’re not going to claim to do any of those things that you just said. We are a tech operating system where we play. I think they’ll need to prove that out.

I don’t think they’ll escape unscathed, but I think they’re putting up at least clear guardrails to how they should be judged in their partners in the programs. So one thing that’s interesting though about that, and I’ve been noodling on this lately, I don’t know that I have a totally formed opinion about it, but the thing I find fascinating is there is this sort of trade-off between, let’s call it program management, right? The middleware platform playing more of a direct role in managing compliance and managing sort of all those operational elements. There’s a direct connection between that and the ideal developer experience that you want to give to your clients, right? So if you are a banking as a service middleware platform and you want to work with the absolute most sophisticated software companies to embed financial services, and those software companies are going to make their decision about who they partner with based on who their engineers and software developers say is the best platform to work with, they’re always going to pick one that’s more Stripe-esque in the sense that everything has been reduced down to an API, there’s a sandbox, and literally what you can and can’t do is a function of the software tools that are put in front of you, the developer environment in front of you.

You don’t have to go ask for permission. If it doesn’t work, it’s just not going to work. And otherwise, anything you can get to make work, just rock and roll, go ship code.

That’s like the Stripe-level developer experience that these companies want. The problem is in order to deliver that, you have to have a great technology platform, but you kind of need some level of program management too, because without that program management, then it’s like, well, yeah, you could do that, but we got to go check with your bank partner because we’re not sure they’re going to say yes. There’s a level of inefficiency from a developer standpoint.

If you’re going to have that sort of fully compliant, we just do the technology approach. So there is this tension in banking as a service where, and you see it with all these companies, they know exactly what to build for developers, but that’s not quite totally compatible with the way that regulators want banking as a service to work. I mean, I think another question, and I’m sure we’ll get to this in greater detail, is who is the customer of the banking as a service middleware platform? And what I mean is, is there revenue coming from the bank, banks plural, or is there revenue coming from fintechs? And that is going to determine sort of to what degree incentives and risk tolerances are aligned.

And I think a lot, this is all territory that we’ve probably talked about before, but I think a decent number of the problems that we’ve seen have come from that misalignment where if you’re a venture-backed middleware platform with venture-backed fintech clients, your goal is to grow as absolutely quickly as possible because if you don’t, you’re not going to be able to raise another round of VC funding. And that’s very different than the set of incentives, guardrails, risks, et cetera, or should be on the bank side. Right? And I think some of the banks that we’ve seen get into trouble are the ones that grew dramatically more quickly, account-wise, deposit-wise, number of transaction-wise, than their compliance and control infrastructure failed to scale with that growth.

So to the extent that we see this model evolve, I should really find another word to use for that. I think it feels like the customer needs to be the bank buying whatever software buying technology from the middleware and not the middleware selling to fintechs. And until that sort of economic model, business model shifts, I think you’re going to continue to see friction in this space.

Well, let’s talk economics for a second. Since you opened that up, I think one of the 2024 predictions that is an offshoot of what we started in 2023 is now it’s this race to quality as opposed to growth at all costs. What is the expectation in your view now that we’re going to see costs are going up? Everything we’ve just described, I think, says costs go up for everyone involved.

What is the economic reality that banks, middleware providers of all stripes, pun intended, and the fintech partners, what do you think that economic outlook is for them? A little bit scary. And this is probably not going to immediately answer your question, but I’ll try to work my way there, right? I mean, if you, you know, unfortunately in the US, private companies don’t have to really disclose anything, right? So we don’t know a ton about what the P&L of these middleware platforms looks like. I think it’s fair to assume they probably don’t look great, you know, given the position synapses in at least what we can infer from various, you know, legal filings and, you know, bonds exit to FIS, which, you know, didn’t, was generally characterized as kind of like a fire sale or not necessarily a super successful exit as far as VCs were concerned, rise to fifth, third, you know, there are signs that, you know, the business model for the middleware platforms is on, let’s say, unproven to put it nicely, you know, looking at who are some of the major clients of middleware platforms, unprofitable fintechs that often also have unproven business models.

And so it has been, and I’ll loop this back to my, you know, VC subsidy of banks sort of frame or argument. You know, everybody loves having something for free. Customers love having a free, you know, checking account, no fees, you know, overdraft, a hundred bucks, 200 bucks, you know, banks love having a free technology and somebody to do free business development and sales to get fintechs onto their platform and bring them deposits.

But at the end of the day, you know, if the economics don’t work for the customer facing fintechs that are spending money on customer acquisition, um, mostly on that. And if it doesn’t work for the middleware providers who are building the technology and doing the sort of biz dev sales work, then, then it’s not sustainable. And I think that is the, the come to Jesus we’re seeing unfold right now, where it’s like, oh, this was cool when VCs could foot the bill for a lot of this stuff.

But the checks, you know, started slowing down, whatever, 18 or so months ago. And now we need to figure out if we can make this work and, you know, there’s going to be some major realignment, presumably contraction. And that’s what we’re going through right now.

I will not pretend to be smart enough to know how it boils out. You know, I think the most logical places for some of this, some of these capabilities to sit are in core banking or in the banks themselves. And that’s what we’re starting to see with FIS and with, with some of the sort of bass native banks I mentioned previously.

Now, can they make the economics work? Maybe. Well, and, and to build on that, I mean, I think that one of the things that I’ve definitely heard, and I’m sure both of you, both the Jasons have also heard this as well, is that there’s definitely a higher floor, I think, for anyone who’s really serious about banking as a service anymore. And so, you know, I’m hearing things along the lines of, yeah, we only work with, you know, companies that have $2 million in annual recurring revenue or more at this point, right? So like banks that are getting into banking as a service or staying in banking as a service, banks that don’t yet have consent orders, perhaps that are attractive partner banks, they have a floor that’s much higher than it used to be.

They’re not taking every program. They’re being very choosy about the programs that they bring on. And then, you know, Jason, to your point, I think if you sort of go to the other end of the market, obviously, you know, the affirms and ramps and, you know, gustos and those types of companies, those are the really successful, you know, at scale fintech programs that a lot of banking as a service providers want.

And, you know, you can spend more money, you can build custom integrations for them, you can give them exactly what they want. And they have enough scale to really like be a profitable bet to, you know, focus on. But the challenge is, A, there’s not that many of those.

And B, those companies themselves, and I think we’re sort of seeing this at a much larger scale with Apple right now, those companies are not real nice to negotiate with, right? Because they know that they have scale. And they’re going to go to any bank partner that wants to work with them and go, yeah, we’d like you to agree to this deal, Goldman Sachs. And they go, oh, sure.

And then it doesn’t work out and people get fired. Or, you know, they’re kind of like put in a place where they have to negotiate very carefully. And because this is one other trend, I’m starting to see a little bit of sort of momentum around that I think is kind of fascinating, I wanted to ask you guys about.

But there are also alternatives for some parts of banking as a service, right? So there are things that you can do that are convenient to do through banks. And there are things that you can do that you have to do through banks. So if you’re going to issue a card, you have to have a bank.

If you’re going to hold on to deposits for your customers, you have to have a bank. But if you’re going to process payments, you don’t necessarily need a bank. And if you’re going to do lending, you don’t necessarily need a bank.

And we’ve seen like Apple go down that route with buy now pay later, where I think when they were issuing a card at the moment of checkout, they’re issuing a card in partnership with Goldman Sachs, but everything else, the balance sheet, the lending licenses, those are all things that Apple went out and got themselves. And so I think the threat on the back end of banking as a service from a business model perspective is you get a firm or you get whatever large fintech company you want. And then they start to go, well, what if we did a little bit more of this ourselves? And they can start to kind of cut you out of a lot of the business as well.

So it’s a tricky one. It feels like you want to have that like Goldilocks, nicely sized bowl of porridge right in the middle that’s not too hot, not too cold. Jason, is it just right? I don’t think we’re at just right just yet.

And something Alex said that I want to sort of like reiterate, I’ve heard this as well, as far as banks sort of setting a much lower, higher, higher floor. You and I have that argument a lot. Is it like a top of a volcano, bottom of a volcano? Of the programs they’ll want to work with.

On the one hand, that completely makes sense, right? We’re talking about increasing costs on the bank side, including the fixed cost of onboarding a new program, right? So perhaps due diligence was a little sloppy in the past. Everyone realizes we’ve got to shape up. We need to take a much more thorough look at who we’re onboarding, make sure they’re checking all the boxes, they’ve got the compliance management system, they have the right personnel, whatever.

But at a certain point, you have that cold start problem, which is, well, if nobody wants to work with that seed stage fintech because they have zero customers and they have zero ARR, then that pipeline of companies that hit whatever that threshold is eventually goes away. I mean, I’m not entirely convinced that’s going to be how this unfolds. For all of the hefty amounts of drama and consent orders in the space, you do still hear about banks, perhaps not as loudly and publicly as in years past, but you do still hear about banks that are sort of quietly either looking to get into the space or, you know, continuing to onboard programs.

And so I think, you know, perhaps in the past, you had a very, very wide spectrum of risk tolerance and expectations. And frankly, just level of sophistication of banks were playing in this space. You know, the two examples I always point to who functionally have been in the space since before we called it BAS being Pathward, formerly known as Betabank and Bancorp.

And it’s like, you know, Bancorp has had consent orders in the past, but at this point, it’s like the distant past. And they’ve learned from those lessons. As far as I’m aware, neither Bancorp nor Pathward work with a BAS middleware, and they’ve generally been pretty buttoned up about the programs that they’ll take.

So do I think you’re still going to see, you know, newer bank entrants to, you know, BAS slash partner banking or banks that have somewhat of a higher risk tolerance than others? Probably, you know, do we have the, you know, the freewheeling days of what I sort of think of as like the long tail of fintech where, okay, if I’m a bank, you know, if you add up these 50 programs that the BAS provider is dealing with, it’s material to my balance sheet. As long as I don’t actually have to deal with the resources of onboarding and third-party risk management of those 50 tiny fintechs, it works. The second you actually have to expend the resources to do, you know, the compliance and TPRM that’s going to keep you out of trouble, all of a sudden, this long tail of fintechs doesn’t make sense anymore.

And so all these tiny niche, weird little products that were, you know, seed stage companies, series A companies, you know, that were able to launch, most of whom leveraged middleware providers, they probably don’t make sense anymore. Well, it kind of feels like we need, like, to replace that VC sort of private company subsidy for the smallest fintech companies. It feels like we almost need, and it’s never going to happen, but like a regulatory subsidy for those ones? Like, to your point, Jason, I mean, I kind of wonder what the Durbin Amendment is, the regulatory subsidy.

I suppose. Well, I mean, as long as you like debit-based interchange models, yeah. I mean, the thing that’s funny about it, though, is like, you know, in a rational world, we would have a sandbox where it’s like, okay, up to X, come on in and play.

It’s going to be like super small size. Nothing bad is going to happen because it’s just too small to allow it to happen. But it gives you like that data and that ability to show like some initial product market fit before banks want to take them on as partners.

Like there has to be some, to your point, there has to be some type of pipeline that’s built to support this. And like banking as a service generally exists in the US the way that it does because of the gaps and weirdness of our sort of banking system and the way that regulators approach de novo charters and all these other things. And so it is a downstream effect of that.

But if you don’t fix that, I am a little pessimistic that we’re going to have a great gentle slope into the banking system for new entrepreneurs that want to build, which is a bummer because, you know, for all of the nonsense that we all see and talk about, there are really cool new ideas that people have that require a bank charter in order to enable. You’re venturing into like one of my favorite themes and talking points, which will probably never happen, which is, you know, absent the creation of some kind of new charter type. And I mean, obviously there was sort of like a semi attempt at a, you know, fintech charter under the prior administration OCC.

You know, absent that happening, like there is no other solution that I’m aware of other than working with banks. You know, if you want to offer regulated products, I mean, Alex, to your point, there are certain things that you are able to do. Perhaps they’re a little more cumbersome or less efficient.

I’m thinking particularly like state lending licenses or state MTLs. But yeah, I mean, absent a change in the licensing regime, actually, and I don’t know a ton about this, so I probably shouldn’t bring it up. But the special purpose merchant acquiring license in Georgia, I think, sounds like it could be a potentially interesting example of that.

I don’t know. BuySurf, right? Didn’t BuySurf just get one of those? This is like the end of my day, so I’m getting like sleepy brain. Potentially interesting example of like, hey, like there are, you can create avenues to do certain things that normally, you know, would require partnering with a bank, but sort of carve that out.

Now, do I think that’s likely to happen at the federal, at the national level? Like, not anytime soon. In an election year, no doubt. Yeah, clearly not.

Well, let’s hold that thought for a second and take a quick break and hear from sponsors. And when we come back here in a second, I want to talk about some of the next implications of this. If economics are upside down and VCs are no longer subsidizing the delivery of my sandwich, the walking of my dog, and now my cool fintech features, you know, what is a startup to do and what does that outlook look like? This show is brought to you by Alloy Labs.

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Hey, and we are back and couldn’t get a DoorDash or an Uber Eats scheduled in time because the cost was too prohibitive because Jason screwed up all of my VC subsidies of my life that I’m disappointed in. But we were talking in the first half, unit economics upside down on a lot of these, you know, a big push in terms of right size, what happens, you know, where should there be a new charter system? Because a lot of these things do require a bank. And I guess the question becomes, if the venture capital gravy train has stopped, there’s no longer a lot of this subsidy, you know, question one becomes, you know, is there going to be a number of the IPOs? But I think number two is, do banks begin to become acquirers of these technologies that are out there and do away with the partnership and fully consummate the marriage and, you know, solves a lot of the regulatory complexity and some of the economics.

But why don’t we start with, do you think either one of you that the IPO window is opening up? I think I wrote that in my 2024 prediction. So like fingers crossed, because I did really well last year. I mean, there seemed to like, whatever, Alex and I always like to caveat that we’re not equity analysts.

And Jason, I assume you’re not either. The conventional wisdom does seem to be that things are like moving in a positive direction, at least for more mature companies that either, you know, actually gasp, are profitable, or have a a convincing path to profitability, which is my favorite earnings, earnings call statement path to profitability. So I certainly think it’s possible we’ll see some of these companies go public this year.

I mean, I’m curious, you know, companies like Klarna, which, you know, has actively been talking about this, including mentioning where they’re going to list. Like, I do not know enough about the dynamics of if you went and raised it a $47 billion valuation from SoftBank, and now you’re worth like six or seven. Like, what does that IPO even look like? But, you know, the way the company is talking about it makes it sound like it’s definitely possible.

You know, same thing, you know, people are talking about Chime as well. I mean, I would love to actually get a look at Chime’s S1, because I feel like they never say anything about anything. And I would really like to know what’s going on there.

But yeah, I mean, it certainly seems, let’s say, what did I say in my prediction? Like, there’s more of a cracking of a window than a full-on opening of the IPO. The screen door is open to crack. Well, and I think that, I mean, the thing that’s going to be challenging and maybe different, right, is the IPO window, the last time it was open, it was like all the way up.

It was a SPAC window, though, last time. Yeah, well, it was like the IPO window was open, and then like Chamath took like a sledgehammer and bashed a new hole in the wall to make like a SPAC window. And, you know, what was it better went public, and they’re trading at like an abysmally low rate after going public via SPAC.

So like, that kind of like underlines my point. The cool thing about IPOs once upon a time was the market was just crazy for tech companies. And so you’d go public, the initial pop from the IPO would be really big, and then the stock would trade at a pretty good premium, at least for a while.

I kind of wonder if even if the IPO window opens up a little bit, and there’s less like pessimism about fintech, I kind of don’t think we’re getting back to those, we’re a tech company, not a bank type valuations, or sort of just public market perception of fintech. And this is where I’ll channel Kia for a second. SoFi is like the ultimate test case for this, right? Because like, SoFi is public, obviously, they are a bank, they are a chartered bank.

But they are still in some corners of the weird investment fintwit universe, treated more like a tech company, or given the benefit of the doubt as a tech company rather than as a bank. And, you know, she likes to say that, you know, SoFi doesn’t report earnings the right way, because they’re a bank, and they don’t report earnings like a bank. And they have all these weird, you know, line items in their, you know, earnings reports.

And, you know, I think that tension speaks to this idea that there are still some people working inside fintech companies and who live in the broader sort of public markets that are interested in sort of exploring what the tech upside of these companies looks like as a public stock. But I kind of think the vast majority of the market is like, yeah, you can be public if you want, but we’re gonna value you based on more reasonable comps. And I don’t know, that might not be quite the like, happy ending that everyone has been looking for.

Well, I worry once we actually see the economics, Jason, as you had alluded to, I worry that there are not a lot of happy endings there from a looking at the fundamentals in the tech-enabled world. I worry there’s a, yeah, there’s a lot of tech, but it doesn’t change the fundamentals related, right? Like, Jason, you’re nodding your head. So I’m going to hand you the mic.

Thoughts? It, I feel like a very broken record, but it’s like, we’ve seen this story before. And the examples I always used to illustrate, because it was right when I was getting my start in more tech, tech culture of fintech, is LendingClub and OnTech. And they told this very, I guess, to enough people, convincing story of like, oh, no, no, this is new.

And this is different. We’re using technology to do X, Y, Z. And this is why you should value us this way. And it’s like, okay, like, yes, you are using technology, but the business model and the economics are derived in that case, you know, from lending.

So why would we value you with the kinds of multiples that Google, whatever, Google ads or like Facebook have? Like, this is, it’s a completely different kind of business that is much more comparable to, you know, a boring lending business. And, you know, both of those companies, once they started trading publicly, and people, you know, looked at their quarterly earnings, it was like, oh, this is a lending business on the internet, that kind of has some peer to peer, except not really, because most of the money was coming from institutional private credit, whatever. And eventually, they, you know, started trading where they should have been trading.

I mean, there’s an entire different, you know, set of discussion points, we probably do not want to get into around, you know, companies staying private longer, who’s capturing the upside from these investments, companies that used to IPO, you know, when they were maybe 100 million market cap, and a lot of that value was being captured by public market investors now is going to private market investors. Like, that’s a very, you know, legitimate and important discussion as well. It does, I think, color some of what we see here, where, you know, particularly in the absolute, you know, unhinged valuations of the pandemic.

Well, once you have a Plarna or a Chime valued at 47 billion or 25 billion, you know, you can’t really grow into that valuation. So where do these companies go from there? And where do their investors go? Well, what I find interesting in the unit economics here, right, was we have a premise one is we have a fundamentally different business because technology dot dot dot, not describing what that is, but like, you know, our CAC is next to nothing because online, okay, but you’re still buying Super Bowl ads. So I’m not sure I fully believe that your your CAC is close to zero, because you open online.

But now it’s EBITDA. Yeah, you gotta, you gotta bring back the adjusted EBITDA. Adjusted EBITDA.

Yeah. Yeah. I mean, if you’re fundamentally a different business, how come a lot of these payment businesses, right, that started on the card side are suddenly also now lending businesses or, you know, I have a card business, but now I, you know, or a lending business, but I now charge a subscription fee for you to get rewards.

And suddenly, it’s like, okay, but now you’re like a cards business that’s doing rewards that has, you know, an annual fee. If you’re that different, how come like, there seems to be this center of gravity that pulls everyone back into the same business model? Well, it’s kind of one of those things where, and I joke about this a lot in the newsletter, but there really only are like four business models, and everything else is kind of a derivation or a temporary vacation from one of those four business models. And, you know, in financial services, there are advantages that you can get depending on if you’re a regulated bank, and there’s some sort of structural things that might make you a little bit different.

But yeah, I think there’s really only like four business models in financial services. And, you know, you can call it a monthly subscription, you can call it an annual fee, it’s basically the same thing. And, you know, I think that that kind of brings you back to, like, as Jason was saying, Lending Club, Prosper, some of those very early companies that were sort of seeing this initial pop in their sort of valuation, and then kind of coming down to reality.

Lending Club is a bank now, right? Like they had to buy a bank and sort of buy a structural advantage to sort of alter the fundamentals of their business model in order to sort of ramp up to that next level. And I kind of feel like there’s going to be a broad rationalization of all of these innovative business models in financial services that actually aren’t that innovative or different. And, you know, again, to Jason’s point, the market is going to look at these and go, okay, lending business, like, it’s cool that it’s online, it’s cool that you use AI, it’s cool that you use open banking, but like, this is a lending business, we know how to value a lending business, we know what that business model looks like.

And, you know, assuming that you don’t have like bullshit earnings, where you’re using all kinds of weird metrics, like, you give us the numbers in a way we can understand, we’re going to try to value you that way. Yeah, I mean, the other, you know, somewhat cynical take, you know, in addition to the points Alex made, is identifying opportunities for regulatory arbitrage, right? And saying, oh, okay, you know, BNPL is not credit, because it’s, you know, fewer than four payments, and no finance charge. So no TILA Reg Z, and we don’t need a license, we’re just going to go do whatever we want.

You know, or, you know, I mean, I think a lot of the subscription models also play into that. And again, to be fair to these companies, I think they vary in, I guess, let’s say quality, right? So like, using MoneyLion as an example of bad, you know, charging a $20 a month subscription for a credit builder product feels like a very poorly disguised finance charge. Whereas there are other, you know, subscription services where they’re bundling in more things, you know, Bridget being one, although they did get in trouble with the FTC, but the idea of like, okay, can we charge you a monthly subscription fee and give you some combination of products and features for that fee, including a lending component? But a lot of it, you know, call it a tip, call it an expedited funding fee, call something not credit, because, you know, it very narrowly is carved out of the definition of TILA.

The stuff is, if it’s innovation, it’s innovation and lawyering, not in technology. Well, I think the other thing on that front, just real quickly, to be fair, is I do think you need to put all of this in the context of the system that we have today, and whether we like that system or not, right? And using like, Bridget as an example, there are definitely segments of the market that are just, you’re going to get your hands a little dirty working in that space. And, you know, when the alternative is payday loans, or the alternative is incredibly punitive overdraft programs, or the alternative is just, you know what, we’re not going to give you any money or services at all, you just don’t get to be a part of our market that we serve.

Those are all also downsides that I think need to be sort of factored in. But to your point, Jason, the economic realities are what they are. And so you have to figure out a way to make money.

And yeah, it seems like there’s a pretty narrow strip of land between, you know, regulatory arbitrage getting caught by, you know, kind of regulation, business models that aren’t sustainable, like landing in that very narrow strip in the middle. That’s, that’s the trick. So if that is the narrow strip of land in the arbitrage, and if the IPO window is going to be a challenge in the future, let’s talk about M&A, as we bring this to a close.

The other X, there’s the stay private longer, seek a public exit, or find a private exit. So my phone is ringing off the hook with a, do you know someone who’d be interested in buying X, you know, company, and Kia would be able to tell us more in terms of what that flavor is that acquire be acquired both by banks looking to be acquired by fintechs, you know, to get the charter, and vice versa, banks looking to either buy or larger fintechs looking to, you know, acquire and expand. What’s your outlook for 2024 M&A? I mean, oof.

When I try to think about that, and I’ll put on the, the bank acquiring fintech side of this conversation, you know, my question is always, what is it? What are you acquiring? Exactly. You know, are you acquiring technology? You know, are you acquiring talent? Are you acquiring at, you know, end customers and users? You know, I, I tend to be of the opinion that for the most part, you know, fintech customer bases may not be all that appealing to a potential acquirer, right? At least again, from, from the data points that we can know publicly as far as what is the, you know, demographic profile, income profile, credit score, etc. You know, these may not be if the goal is to sort of buy customers, that might not be the most attractive target for banks.

I think the tech, the tech side is quite a bit different. And you can imagine, you know, I feel irresponsible speculating using names, but I will because I, oh, no, I won’t. You’re saying, oh, I’m like, oh, come on, name names.

Yeah, I’m, I’m a, you know, I’ve developed cash flow underwriting as a surface. And like, maybe this isn’t like big enough to be a standalone company. But like, could it go somewhere inside, say, a company like Vlad? Or could it go to something like FICO? Like, okay, so you start to see on the tech side, where, you know, again, have the VCs foot the bill to develop, you know, some kind of interesting technology that maybe, you know, as a standalone business, it’s not profitable, or it’s not profitable enough, or, you know, they don’t have distribution, and they’re really going to benefit by the distribution that an acquiring partner brings.

So I’m more inclined to think that we see activity driven by acquiring technology, more than acquiring customers. And I’m sure there’s some like exceptions there. I mean, okay, when Robinhood bought X1, what were they buying? You know, I guess they were buying the existing bill to the credit card, probably again, more than the actual X1 customers.

Alex is smiling, because that’s his favorite startup. It is. Well, that one and JP Morgan Chase buying Frank are my two favorite ones from the recent past.

Jason just spit out his water as I said that. I forgot about Frank. Shelby will be putting that up on TikTok, probably our most viral, you know, clip here.

All right, go talk about Frank in terms of what they bought and who bought it. Okay, well, all right. So here’s my thing on Frank.

Let’s just say that they weren’t committing a massive amount of fraud to trick JP Morgan Chase. Let’s just say let’s just pretend the thing that blows me away about that acquisition is when you sort of dig through all the stuff and a lot’s been made public thanks to this going through the legal world. But the thing JP Morgan Chase was paying for was a list of college students.

And that’s wild to me, right? You’re the largest bank in the US and one of the largest banks in the world. You have just a massive amount of resources. And you thought the best way to spend all these millions of dollars was to buy a list of college students who might be interested in financial products.

That’s a really lame reason to acquire a company. And obviously, it turned out to be fraud. But I almost think in a weird way, JPMC sort of got off the hook for it being fraud because now they don’t have to explain why they were just being stupid buying a list of college students.

And it’s similar in a lot of ways to the acquisition of block buying title, right? And then getting sued by its own shareholders for that acquisition. Companies make acquisitions for really weird reasons. I want to be friends with Jay-Z.

I’m afraid that we’re losing out on college students and we want to try to reconnect to that market. The psychology that drives acquisitions is oftentimes something that you can justify later using numbers, but it’s actually a very strange reason. And so when I look at the M&A market moving forward, the thing I’m sort of looking for is what is the weird psychology that might motivate different groups within financial services to make acquisitions? We know why someone would want to be acquired because as we talked about, there’s not as many exits as there used to be.

But why would you want to acquire someone? And I think that to Jason’s point, there is an argument to be made for buying technology. I actually think in some ways that might be more expressed by fintech companies buying smaller fintech companies. So obviously, Robinhood buying X1 is a good example.

Plaid a while back buying Cognito and getting into the ID verification and fraud space is another example. So I think you might see some roll-ups within fintech, particularly for later stage fintech companies that are maybe thinking about going public or getting close to that point and need to sort of put more potential storylines in their eventual S1 that they’re going to have to write about their future profitability. I also think the FIS acquisition of Bond is pretty telling because I do think one of the groups in financial services that we don’t talk about nearly enough are legacy technology vendors.

And they both have a real challenge building new good technology that people want. But they also have a lot of money and a lot of legacy revenue streams that are still churning in lots of dough. So the credit bureaus, the core banking providers, FICO, there’s a whole category of legacy technology providers that have a technology problem, but they have the distribution, they have the cash.

So I feel like that’s an area to look at. I would be surprised, candidly, if we saw a lot of banks buying fintech companies this year, and again, channeling Kia for a second. I think a lot of that is going to come from the fact that the M&A window, and I’m not at Aoba this week, but the M&A window seems like it’s cracking back open for banks acquiring other banks.

And I think that generally speaking, bank shareholders much prefer bank on bank acquisitions, where it’s very clear why you’re acquiring them. The acquisition math is very easy to explain. Versus when a bank buys a tech company, even when it’s not frank, ripping you off, it’s kind of a complex explanation as to what it is you’re buying.

And oh, we’re valuing them based on potential future cash flows and all these sort of more abstract notions, whereas banks buying other banks, the math and the explanation there is very simple. Yeah. Well, I mean, this is what I’ll be picking up to discuss with Kia for another part of the show that we’re missing here is, I think a lot of, just as a lot of the acquirers have no clue why they want this technology, other than fintech is the answer to everything, evidently, even if you are a large incumbent and they don’t have a plan, they have distribution, but they don’t have a plan for how do I take this integrated and roll it out in a way that I don’t inadvertently cut off at the knees, my existing revenue streams that I have, and therefore I buy it and it kind of gets shoved in a corner and never utilized.

I think banks acquiring other banks, the conversation for Kia here, I think is also kind of doomed right now if you don’t have a good strategy for what I go do with this. I think as we come to a close on our time here, maybe we end with something we’ve ranted on, the three of us plus Kia on some of the hot takes here is, I think part of the problem is we still haven’t seen enough fundamental innovation in how these pieces can be put together and redeployed. There’s this gravitational pull back to the what we already know, or a feature parity race.

With the CFPB now coming out against overdraft fees, if you are a startup and you’re like, hey, we’re the neobank that doesn’t charge overdraft fees, well, guess what? CFPB just said your differentiation doesn’t exist anymore. Where are those other things where we’re not at a race to the bottom that someone’s willing to pay a premium for? Well, one thing that’s kind of interesting to me just on that note is I think we don’t talk about enough in financial services is cross-sell is really freaking hard and it never gets easier ever. And so I think a big motivating factor driving a lot of these potential acquisitions would be, well, we can get this thing and then we can cross-sell this thing and then LTV will be improved and we’ll be stickier and everything will be greater, but the we’re going to cross-sell this thing part, that’s really, really hard to do.

And a lot of times it involves having a right to win and a right to sell into a new area with your customers that you might not know if you have that right or not until you try it and you see if it succeeds or fails. And so the element of this will all work out because of cross-sell and just sort of assuming that cross-sell is going to be easy and obvious and quick and inexpensive, that to me is one of the assumptions that just kills in this space. But Jason, I don’t know, what do you think? I mean, I 100% agree with your, it’s easy to say cross-sell, it’s very hard to do cross-sell.

I mean, that was absolutely my experience of the sentiment at Goldman, at Marcus. It was like, oh yeah, we’ll just build this thing and then everyone will come and get these other products and then everything’s going to be great. I was like, oh, that didn’t happen.

And also, I mean, it’s been a while since I’ve gone deep on SoFi’s earnings and product uptake, but also from what I recall is quite the case there as well, where it’s like, if you look at SoFi’s app or website, they have a pretty full product stack, mortgages and brokerage and all this other stuff. But as I recall, the majority of their financials are still driven by unsecured consumer lending, student loan, refined personal loans. It’s really, really hard to do what you’re saying, Alex.

Yeah, I mean, this probably doesn’t answer Jason’s question. I mean, I think in the bank acquisition or merger space, and I’ll be interested to hear Kia’s comments when you record with her later, is there seems to be a trajectory of either get bigger and be essentially too big to fail or be sub-10 billion. And there’s a whole host of reasons that in the last two minutes, we don’t have time to unpack.

But I think that was really illustrated by the spring banking crisis where it’s like, oh, well, if my money’s not safe at First Republic, I’m going to move my money to JPMorgan Chase because JPMC can’t fail because it just can’t. And so I do think you have a number of incentives, intentionally or unintentionally, where it’s like, well, for banks that are not playing in this sub-10 billion base that have certain regulatory benefits, not just Durban, but other sort of regulatory relief as well, or you want to be $1 trillion plus in assets and be gigantic in sort of the hollowing out of that sort of middle regional space. Where some of this fintech stuff fits in all of that, I guess we’ll find out.

That’s my cop-out answer. Well, cop-out, nonetheless, let’s re-record in February and do a do-over for any of the mulligans we missed here. We’ll just record our 2024 outlook once a month, and hopefully Kia will be on next time.

But as always, gentlemen, thank you for joining. Absolutely love some of the thoughts, and we’ll see if Baz does in fact go boom as we enter 2024. Thanks for having us.

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

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