Webinar: Demystifying Banking - 5 Things Banks Don’t Want You to Know
With lengthy disclosures, industry jargon, and intentionally vague claims, banking can sometimes seem like a black box. We’re here to help change that.
In this webinar, we co-hosted with Vouris, we dissect the inner workings of banks and share how they generate billions in profits. We also explore the emergence of Fintech neobanks – their disruptive impact on the industry and the five hidden truths that major banks don't want you to know about. In the last minutes, we share tips to safeguard and grow more of your excess cash.
Give it a listen and let us know your thoughts! If you have questions or if you’d like to take advantage of the Vouris-only discounts, visit this page or email Basile at bsenesi[at]arc.tech. If you're looking for a new cash management account, check out what we have to offer!
Webinar Recording
Transcript:
Well, first of all, I'm Dan McDermott. I'm with Vouris and we're joined today by Basile Senesi from Arc Technologies and Basile. You joined Kyle a few months ago, right? When, uh, you guys, I think shot a little, uh, YouTube video about the whole SVB situation when it was, uh, hot and heavy right in the middle of everything, right?
-
That's exactly right. Yeah. He, uh, he picked my brain a little bit through, uh, through the ups and downs of the regional banking crisis, and we've learned a lot since then. So happy to share it. Yeah, absolutely. I look forward to getting in there. And, uh, anybody in chat if you have questions, please, uh, please pop them in.
-
Um, and then we'll also have this posted in the Nest, uh, for anybody else who's in the Vouris community. So, um, yeah, look forward to jumping in. And why don't I let you take over here? Uh, anybody has questions, I'll be sort of in the background here. I'm not going anywhere. I'll, uh, I'll be answering stuff and then also, uh, shooting 'em over to Basile by the end of the, uh, by the end of this, uh, presentation.
-
So look forward to it here. And let me go ahead and give you full, uh, all the glory of the full screen here and, uh, let you get into it. Perfect. All righty. I appreciate it. Um, amazing. So guys, thank you so much for, uh, taking some time. I realize this is a dense topic, of course, an interesting topic, but a complex topic.
-
I think what's interesting is that you know, we've never talked about banking more than we have in the past three months. Um, and it's a reflection in a lot of ways of the broader changes that we've all gone through in the macro, culminating into, uh, you know, the meltdown that started with SVB and the dominoes that fell since then.
-
So, part of my goal today, very simply, It's to not necessarily dwell on the past and on what happened, but unpack the fundamentals of how banks work, and more specifically, how you can apply those fundamentals to picking the right bank partner in a way that works for you. Right. Um, with that in mind, you know, I want to just maybe give a quick primer and a disclaimer.
-
Uh, we play that role. We're a bank, we bank startups, we bank founders. Our main mission in life is to give founders access to three things, capital banking, and payments. What that means, right, is being, the recommended place for startups to store their cash, spend their cash, and access additional liquidity as they need to.
-
Um, we bank, you know, several thousand customers, uh, generally VC-backed tier one, uh, companies, many of 'em former SVB customers. Um, and you know, we've really seen kind of our, uh, our growth accelerate in the wake of that crisis. Because we're purpose-built for this moment, namely, the bank partners that we trust and rely on under the hood are not, um, at risk in the same way SVB or FRB were, and the native, digitally native interface that we're built on top of, you know, is much closer to the, the digital experience that I think most startups want to find, um, in this day and age.
-
Well, we'll get into all of that. I think, um, you know, beyond what Arc does, who we are based in SF again, a thousand plus startups, trust us. Um, we're growing very, very quickly. We've got folks from some of the best in the brightest minds in the valley, um, and beyond. And ultimately we've raised, you know, quite a bit of money from some very, very top tier investors, um, to help build that vision.
Um, but let's get into the interesting thing, like what actually is a bank. People tend to answer this question in very different ways. Um, at its core, it's really three things. Giving you a place to store your cash, making sure it's safe when you do that, giving you access to liquidity, borrowing lending, whether credit cards or mortgages or large loans.
-
And then ultimately, um, asset management. You know, not everything is cash. And so what do you do when it comes to wealth planning, wealth management, uh, investing in stocks, bonds, treasuries, and all. For someone to be considered a bank, they generally have to be playing in all three of these buckets. And so let's talk about the various kinds of banks that exist.
-
We talk about Arc as a bank in reality and from a regulatory perspective. We're not because the traditional bank we're requires a banking charter. To be federally registered takes years and years and years to apply. Um, it's very, very competitive, very expensive, and very slow. It also requires that, um, the financial institution designated as a bank be keeping customer money on their balance sheet directly.
-
That when you put money into Chase, it's sitting somewhere on Chase's balance sheet. Um, and that's not the same as fintechs like Brex or, or Mercury who are ultimately partnering with banks but not holding the deposits themselves. We'll unpack that more in a second, but that's the second big piece here.
-
Now, finally, um, Banks earn money in ways that are very similar to FinTech, but tangential. When you store money at the bank, the bank earns money on that. I'll unpack exactly how that works in a second. But deposit revenue is, at least in this market, but even in general, the core driver, um, of, of banking, uh, you know, kind of, uh, stable revenue.
-
Of course, what they do with your deposits, they lend them out, and so they're earning interest on the money that you keep in the bank as well. Um, that's another big piece of, their, their revenue source and of course, fees from asset management, fees from, you know, uh, payments, fees from various transaction types that they support, et cetera.
-
Fintechs look very different. Um, again, Brex, Arc, Mercury: “BAM”, as we like to call it here at Arc, uh, is kind of the trio leading tech banking for, for businesses. Um, And then, the core difference is that we're not actually storing these deposits ourselves. We're not federally registered as a bank and we're not directly earning, um, revenue from, uh, from the, the cash being stored on our balance sheet.
-
Instead, we're charging some spread, uh, from the partners that we work with and build on top of. I wanna unpack a little bit what the infrastructure looks like, cause I think that helps. Paint a picture. And to do that, it's important to start by understanding how banks actually make money. And so we just talked about this a little bit, but like, what does it mean to earn money from deposits?
But what happens when you put money in the bank? You have, you know, as a startup you raise a brilliant half-a-million dollar seed round, um, and you have to park it in a checking savings account somewhere. When you do that, the bank has a couple of options. Now it has half a million dollars. It can do nothing with it.
-
It can invest in securities, into other instruments. Um, it can lend it back to folks, or it can park it at the Federal Reserve. I'll start with that first one because it's the most relevant and interesting one today. There's a program called the Secure Overnight Facility, uh, rate, and S O F R as it's locally known, basically gives banks revenue for money that they keep at the Federal Reserve without getting too far into the macroeconomic weeds.
-
The Fed, um, sets the target interest rate. That target interest rate says two things. This is the minimum rate at which you can lend, and this is the rate that you will earn if you keep money, uh, at the Fed through S O F R. By raising that rate, the Fed is incentivizing banks to do effectively more of one thing and less of another.
-
It's saying we'll reward you more for the money that you keep at the Fed. And by the way, we're making lending more expensive. So it's harder than to lend, obviously, um, by setting this rate higher in this market. What we've seen over the past year, right, is that that means it's now really interesting for banks to not do anything with your money and just give it to the Fed.
-
That's how the Fed pulls money out of the system, cools the economy, brings down inflation, yada, yada, yada. But the benefit to the bank is ultimately that by taking your money and doing nothing with it in this market today, they can earn nearly 5% interest, uh, for just having it sit there through so, Of course in a different market, in a zero interest rate policy environment like we were in before, you know, um, Q2 of last year and had been for a long time.
-
It made a lot of sense to lend because interest rates were near zero. It was very cheap, um, for, you know, companies to borrow. So there was a lot of demand for debt and, you know, banks could charge a decent spread depending on the risk profile, et cetera, on those loans. So instead of parking that the fed and earning nothing, they would lend that money out.
-
Um, and there was a lot of cash being out as a result. Um, of course, the final piece, and this is what got SVB to arguably a hot degree and a lot of hot water, um, They can invest it, buy securities, invest in, uh, various, you know, kind of long-term short-term treasuries, et cetera. Of course, securities carry risk, even the safest securities, it's not cash, it's not liquid.
-
And you know, they have asset volatility associated with them. Um, but if you're taking that money and you're investing it in certain securities, you can earn a pretty meaningful return. What happened with SVB? They were lending a lot of money. They wanted to offset some of that loan risk with safer revenue.
-
They couldn't park it at the Fed and earn anything because S O F R was effectively at zero. So they bought what was considered to be safe treasuries without getting into the weeds on secondaries and all this good stuff, and securities. Effectively, they ended up in a position where those securities were not worth the whole lot, but they were locked up.
-
They had a lot of lending on the books and they couldn't easily allocate money back to. That's the gist of how banks make money. Now, why does that matter, and how has that changed over the past year? There are a couple of things to consider. Everyone feels like we're able to now take advantage of rising interest rates by having money at the bank.
-
There are advertisements everywhere for higher APYs for savings accounts that pay more. Obviously, the, you know, apple Goldman Sachs announcement was a pretty good sign of this. Consumers can now earn 4% on a Goldman Sachs Apple savings account. Well, the reality is that's true. But banks have gotten fatter than consumers have, and that their right customers have, because the gross earnings that banks get from customer deposits have gone up much faster than the yield payouts, uh, that they've given.
-
If you look at the three lines on here, the top, uh, the dark blue line represents the actual a p y that banks earn on average from funds placed through. So, um, today we're near 5%. This is, of course, dated by a few months. If you look at the X, but theist, it is, you know, They've seen their revenue from deposits increases very, very quickly.
-
At the same time, the light blue line is the average yield payout on savings accounts, um, that, you know, uh, whole basket of banks when averaged together have been offering their customers. Again, average means that JP Morgan Chase, they're still hovering in the very low, uh, sub 1% range. Other banks have gone up higher above one, closer to two.
-
But when you're earning 2% on a savings account, that doesn't mean that you're actually. Earning the bulk of that interest rate increase, uh, that we've seen. So if you look at the net earnings that banks have taken advantage of, they've gotten much, much, much better, even though they're making their consumers, uh, a little bit, uh, wealthier in the process too.
-
The good news is that not all banks are treating this spread the same way. And so if you know what good looks like, you can take advantage of that. Now the flip side of this, um, earning more because interest rates are high, is important, but how do you actually also avoid the downside scenario we faced, uh, with the regional banking crisis that involved First Republic, that involved, um, Silicon Valley Bank recently?
-
Well, there was a lot of talk around cash protection and so beyond making sure that the money is earning interest, it's important to make sure the money is also safe. How do you make money safe? There are a bunch of different ways you can do it. Two things, structural insurance programs, and then the perceived resilience of the bank that is holding, um, these funds.
-
I'll start with the second one cause that's easy. The gist of it is some banks are considered too big to fail, more formally known as, uh, systemically important or strategically important. Banks, sibs. These banks are widely seen as no matter what happens, we're not gonna let them go under because that would greater the economy.
-
Money at Chase considered too big to fail, means that even if your funds are not FDIC insured, if Chase were to go down, probably the federal government would step in and make sure that we're in an OK place. That's a lot of, uh, you know, wishing and prayer. Um, but in the pecking order of banks, that might fail on an absolutely catastrophic scenario.
-
That's where sibs. That said, that's not enough. Insurance programs help drive actual true, uh, safety in, you know, a formal papered way. And there are two kinds of insurance that exist. FDIC, the federal deposit insurance, uh, regime, and SIPC, the securities insurance program, FDIC, governs checking accounts and savings accounts, SIPC, governs brokerage accounts, and generally, all invested assets.
-
Starting with the FDIC piece, it's a government agency. Banks pay a portion of their revenue into FDIC every year as part of their insurance, uh, premium. And then if the financial institution that is FDIC insured fails deposits from their customers will be covered up to a quarter million dollars per depositor.
-
Now, the important thing to keep in mind per depositor, per insured bank, if you have your cash, At the same bank through multiple different FinTech partners, for example, which again, is how fintechs are built. They're insured once, not twice. And so it's very, very important to understand actually where the cash is sitting under the hood.
-
Um, we'll come back to that, but keep that one in mind because that's been a very big topical conversation. Mainly not every bank is federally registered as FDIC-insured, so reading the disclaimers for FDIC-insured Member FDIC is, is key. S sip, p C, same concept. Private covers more technically up to half a million dollars, but a pretty big distinction.
-
This is coverage in the event that the brokerage fails. It is not covered for loss of asset value. So if you're invested, securities go to zero, but Vanguard or BlackRock or whatever still exists, you're not gonna get money back for that. But if they fail outright, you'll be reimbursed after half a million dollars outta this insurance program.
-
Um, That's great in theory, but $250,000 plus half a million dollars is not generally enough to cover most corporate assets that, you know, venture-backed startups have. The venture model generally is you raise a pile of money, you burn through it, you raise another one, and you burn through that. The amounts that are involved in that generally far exceed the deposit insurance limits.
-
And so companies have to come up with different ways to solve that. Of course, one way to do it is to allocate cash across different banks, but a more common and traditional way to do it. And it's what large corporates typically do is to hold a different kind of asset that effectively is, uh, insurance on its own.
-
The US Treasury bill. Is widely seen as the safest, uh, type of asset that a company or a person can hold. Historically, they have not been a very high-yielding product. They haven't given you a lot of returns. Um, they haven't been very interesting frankly, but they've been very safe because of the interest rate environment we're in.
-
That's no longer true. Those assets are now both some of the highest-yielding considered safe products while also, um, theoretically being one of the safest. What's T Bill? It's an IOU to the federal government. When I buy a T-Bill, I buy I'm basically lending the US government, the US Treasury Department, a certain amount of money, and they're promising to repay me that amount of money, plus interest, what's called a coupon at a certain date in the future.
-
The further out the date in the future, the more I generally expect to get rewarded for that. Um, That I can buy different lengths of treasury bills as a result. A one month, a three month, a six month, a 12 month.. Um, I expect some payout for that. Basically, it's a guaranteed payout, a guaranteed interest rate, um, from the safest, you know, most reliable payout there.
-
The US, US government is seen as safer than JP Morgan Chase, for example, and it will always make goods that are obligations. So holding a treasury bill is considered a great way to ensure cash is above the FDIC and SIPC limits. Secondary benefit these days happens to also be the highest yielding product on the market, kind of in a safe category.
-
The other part of this, however, is maximizing FDIC insurance. So what you saw in the wake of SVB, um, is a lot of, you know, CFOs started to open bank accounts in a bunch of different places with the intention of kind of chunking out their cash. That had all been in one place across a bunch of different places, and the goal, of course, was to maximize FDIC coverage.
-
Well, that's great in theory and it works of course, you know, the reality is you have enough down at Chase at, um, JP Morgan or at Bank of America and at Wells Fargo. Now you're insured three times. Awesome. Chunk it out into three, you know, equal amounts at each bank, and theoretically, you can get to the coverage limits that you're looking for.
-
The problem is, you know, having cash in a bunch of different places is inherently painful, especially when you're a business that's going through a lot of. When you're moving money from bank to bank, generally wires take a day and cost money. ACH takes three days. The money's not in either account while it's in transit.
-
There's a whole bunch of limitations that just make managing multiple bank partners very complex. And so while in theory you can have as many banks as you want to maximize your coverage in practice, it's prohibitively complex and opaque and slow. Um, that's why cash sweep networks have emerged as a very common way to do this.
-
Effectively, your money goes into a cash sweep account. Under the hood. The bank partners with a bunch of other banks to distribute your cash into different chunks at each one of these partner banks. That way to you in your bank account, it looks like one big number and you can access that number and effectively, you know, one day in your real-time.
-
But under the hood, the funds are chunked out across a bunch of different, uh, bank balance sheets. So that you're maximizing your FDIC coverage for us at Arc, right through our product. We have this option, we insure up to five and a half million, um, through this method, and it involves 30 different banks that are participating in the program.
-
Ultimately, yeah. Sorry, forgot to slip to the slide, but, the end game very simply is that with a single kind of account and ultimately a single platform or dashboard or what have you, You can get a lot more F B I C coverage. Um, the added benefit, by the way, is that you know, because of, uh, where yields sit today, you can ultimately get higher yield rates as well, while also benefiting from FDIC protection.
-
So I wanna talk a little bit about how we solve that. And when I say we, I don't mean arc, but I mean fintech, this is our dashboard, but, uh, I think Brex and Mercury. Generally have a similar way of thinking about building these products. I said to them bunch of times, we're not a bank, we partner with them.
-
What that means, right, is under the hood at Arc, for example, we have three different bank partners that we give our customers the option to move money at, but they only interact with Arc in a single dashboard in a single way To them, they don't have three accounts. They have one Arc account, and they can do what they will with the money in that account.
-
Under the hood, though, we manage the complexity of multiple bank partners. The way that we do that is through a middle layer called banking as a service. If I want to start my FinTech tomorrow and start storing customer deposits at a partner bank of some sort, well that takes a lot of heavy lifting. I have to negotiate a contract with the bank.
-
I have to build integrations and APIs and rails with that bank, and ultimately, you know, that's just a very, very challenging and complex operation. This is why um, companies like Stripe, like Unit, like Treasury Prime have pioneered this concept of banking as a service. What that means is a company-like unit will go out and find banks, negotiate commercial agreements with them, build APIs and rails with them, and then let new companies build on top of that technology.
-
Fintechs pay unit, a SaaS fee effectively for, uh, using that service. It has made it really easy for new startups to access the bank side of the equation and build bank-like products for their customers. And so you've seen a proliferation in fintech offering services like this in large part thanks to this middle layer, the stripe’s of the world.
-
So when you put it all together, a great analogy to think about this right, is, um, take the ride-share model. Let's take Uber. The FinTech is the app. The banking as a service provider is the iPhone and the partner bank is the actual car and driver under the hood. Um, the FinTech doesn't own your phone, it just pays to be, you know, a usable, uh, application on that device.
-
And at the same time, neither the FinTech nor the phone, the, the driver, like they're an independent contractor, are doing their own thing. They're using the app. And the phone users would-be riders. Very similar concept. FinTech, front-end app banking as a service, middle layer, hardware partner, banks, actual end service provider that you technically interact with, but don't think about in that way.
-
You don't think about Jerry, who drove you in as Toyota, you think? I used Uber. Ultimately, um, to get the most out of banks today, there's a couple of things to consider. If you're thinking about how do I manage my company's cash in this particular market, um, what I typically recommend is focusing on three core things. Make sure that you have a few different bank partners under the hood and that your cash is diversified across those bank partners.
-
Make sure one of those partners is in the “too-big-to-fail” category. What people love about them is their safety. What they generally hate is that safety means that the product offering is limited. Um, and the UI, the experience, and the service generally also worse, But again, safety is one key vector here. And so having a portion of cash there is important for your day-to-day banking.
-
The actual easy-to-use, elegant, integrated, and just, uh, responsive solution is generally offered through a FinTech. Keep separate day-to-day cash from excess cash. And invest that excess cash in one of a few different things, a portion of it into highly insured cash sweeps that are very liquid, so that you're making sure that you know your money's safe, but also invest a portion of that money you're not gonna need tomorrow into long-term fixed rate assets that are going to provide guaranteed returns.
-
Um, treasury bills are generally, you know, the most common way to do that, um, especially in this, in this macro. Finally, um, make sure that your net APY is comparable is shop equivalent to the gross a APY and I'm sorry, there's a typo here. You'll often see an APY the average percentage yield advertised as a gross number.
-
Banks take a cut from that and so you might think you're earning 5%, but if the bank takes a whole percentage point, you're actually earning four. Don't shop headline shop net. Finally, um, if you're going to use a FinTech. Make sure you ask and you find out where the money's being actually stored under the hood.
-
Because again, arc, Brex, and Mercury, were not the bank. We partner with them, which banks we partner with matters. And if in March you had heard that, you know, let's say Mercury was using, um, svb, they weren't, but as an example, that might have made people think twice about using Mercury. Well, the reality is those regional banks that power a lot of the FinTech ecosystem matter for us At arc, we have a very, a diverse mix of banks that we use.
-
Um, you know, yes, regional banks, but also BNY Mellon, also Goldman Sachs, also much larger financial institutions, um, that we believe represent the kind of trust that customers are looking for in this market. And so knowing who you're actually getting into bed with by working through a FinTech is very, very important.
-
With that in mind, right? Um, anyone who is in the market for this, we're very happy to support our, uh, Vouris align customers. And so, uh, we've got a great product. We've got some of the best rates in the market. We've obviously got, um, some of the best protection in the market as well. Not to mention, you know, a whole bunch of cashola, uh, for folks that sign up off of this leg, if that's ever relevant and interesting.
-
On that note, I'm gonna pause there, um, and turn it back to you guys, and happy to take any questions.
-
Yeah. Thanks so much, Vaile. That's, uh, that's really, uh, that was really interesting. I mean, for me it's super eyeopening because it's a world I really don't know technically, and I feel like there's so many, there's so much in there to unpack, especially that, that final slide that you had there, a penultimate slide I guess, um, where just talking about the strategy of how do you actually.
-
Use the pros and cons of the different types of banks, the different types of institutions that are out there. Um, I, I have a couple of questions here. I don't see anything coming in through chat, so lemme jump into my own questions if you don't mind for a second here. Sure. Um, Let's say that I was the, uh, let's say that I was a founder or a CFO at a new startup, like you said, that had just, uh, been, uh, just raised, let's say a million dollars or something like that, relatively small.
-
I don't really know the world that well. Um, but I'm looking to learn more. What sort of resources are there out there for me to go educate myself? Yeah, it's a good question and I think you, you hit on a very good problem, by the way, which is that. Most early entrepreneurs are not CFOs. They don't do this by trade, but they have to play that role until they're able to bring on that person, right?
-
So there's a lot of education required and a lot of complexity, especially now. Um, I mean, I think look some, some good resources, of course, some self-promotion here, but I think we have a pretty solid content library, um, that's available. We take, uh, you know, Kind of education first approach, um, to, to thinking about our business.
-
And so if you go to Arc’s Resource Guide, there's an entire encyclopedia on key terms, do's and don'ts, ways to think about this that are fairly impartial. Um, so that's a good place to look. I think generally, um, you know, for my part. I, I'm not a banking expert. I didn't study this stuff in school. I'm learning it on the fly.
-
Um, because it's, it's the work that we do here at Arc and I found that there's some very good voices on, uh, on social that, you know, I like to follow and learn from, um, spend more time on Twitter than I like to admit. And that's where a lot of the deep intel on how this stuff works comes from.
-
Specifically, a lot of VCs, um, that play in FinTech have done a great job, I think, educating the market there. So I would also look there, um, I'm on Twitter if you guys wanna follow me. Plenty of folks that I'm happy to recommend there as well. Yeah, that's, I mean, also, um, I, I'll link to, uh, to your resource library as well here, um, at some point when we publish this, but then also, um, yeah, the idea that you have these experts running around on Twitter.
-
I'm sure a few on LinkedIn here and there, maybe. Uh, but yeah, vc Twitter is definitely a thing. Um, it's, that's, uh, that's definitely really, really, uh, It's funny how people learn and where some really, really valuable voices are sort of hiding in plain sight, so to speak. So I think that's a, that's great advice.
-
Um, I'd, uh, I'd, I'd really like to see some more there, so I'm gonna dig into this later today as well. But, um, I guess I also have a question around, um, you know, it's been a, it's been a wild couple of years, really. I mean, you know, all the drama earlier this year with SVB and First Republic and all the, you know, that stuff.
-
But then if you just rewind back into. The crypto, uh, spike, let's call it of, of 2021. Am I right? Um, mm-hmm. Where, you know, it's a huge rush of money into the market. Huge, you know, uh, well, everything. And then suddenly the crash, uh, the, I'm not sure if we're still in a recession, but we, we've seen so much up and down recently.
-
Um, mm-hmm. Even with Covid as well. I mean, and, and it's been so strange and so different, uh, in terms of the financial landscape and sort in terms of stability. Uh, do you see anything coming up in the next couple of years that might affect, um, how people should protect their money? How people should use their money?
-
Uh, you know, aside from, let's say diversifying across, as you gave that really great split between the, uh, the, the, uh, what's called the SIVs and then, uh, the fintechs and, and whatnot, anything that would change that at all coming up? Yeah, I mean, it's a very good question, I think. Look, um, yes and no. I think the principles apply through, you know, kind of good and bad and so good banking strategy.
-
Is not interesting or sexy in good markets and is only something that people talk about in markets like this one following crises like the last one we had. Um, but the principles are consistent and are the same, right? Um, the one very small nuance that I would add is there's a bunch of regulatory work being done, um, in DC and you know, across the country, around the relationship between banks and FinTech.
-
And that regulation seems really in the weeds, but actually matters. It all centers around who's liable in case something goes wrong. And very emphatically, I think where regulators are coming out is ultimately it's the bank's fault and the bank's responsibility, um, to make sure that who they allow to open accounts and store money with them are the right people.
-
And ultimately, you know, the bank, and the buck stops with the, the bank, right? This means in turn that banks who have effectively sold their charters through fintechs, um, Are starting to be very cautious around who they do and don't allow to have accounts open with them. Expect more stringent rules around how banks work with fintechs around what FinTech requirements are when they onboard customers to clear certain hurdles that the banks are putting in front of them.
-
To me, what that means, right, is if we take the FTX meltdown for example, it put a lot of pressure on their sponsor bank. The sponsor bank didn't actually do anything wrong in this case, but what it. Meant was did they do enough work to make sure that the folks FTX was allowing to open accounts for the right actors or safe, et cetera?
-
And generally the answer has been like, sort of, but probably not enough. And ultimately they should have done more. I actually really care now when I look at a banking as a service provider, how strong their safeguards are, how strong their compliance programs are, how strong their onboarding KYC and, and KYB type programs are, because it's a, I think, a bellwether for how well they're going to, uh, endure the regulatory pressure that's coming.
-
So I, I would probably say that on the FinTech side, know the banking as a service provider, know their reputation. That will go a long way towards understanding the likelihood of. The associated fintechs doing well or not well in a regulatory crackdown, which we all expect will come the next couple years.
-
Yeah. That, that's fascinating. And I think it's so, it's so important. It's really everything for, for a lot of startups. I mean, it can be literally life or death. Um, I think that it's, it's, that's not overdramatizing it at all. Um, I, I suppose this is maybe a little bit of, of a, of a. Fluffy question, but I'm, I'm, I'm curious, are there any red flags that you would sort of point out, and maybe this is an impossible thing to answer, but let me know, but if, if there are any red flags at a bank, when, again, let's say that I was the founder or whoever looking to, uh, sort of analyze the different options that I have, uh, is there anything that I should really look out for?
-
Um, that maybe, uh, is a, is is a big warning to me. Yeah. So look, I think, um, the, the short answer is, um, Safe is generally more conservative when it comes to statements, messaging, promises, et cetera. If you think about banking, because it's highly regulated, um, it has, you know, decades if not centuries of that regulation kind of imposed upon it.
-
Um, it's generally full of footnotes, disclaimers, and a lot of just, uh, kind of c y a type language, right? Uh, to make sure that no one's saying the wrong thing. Because the consequences rightfully are, are, are dire. Um, I think where a lot of fintechs in particular have tried to step in is exploit that and to be the, uh, bull in a China shop, move fast, break stuff entrance into otherwise regulated, pretty conservative and muted market.
-
And that means big promises, big claims, really high rates, really fast turnaround times. The most amount of FDIC protection you could ever think of. Um, That's not bad in itself, but I think in aggregate, the reputation of the FinTech that you work with should be one that, in my view, is much more aligned with that of traditional banks, meaning safe, conservative, and not someone that's making outlandish claims, that's really trying to, uh, upset the apple cart, but instead somebody that you can trap, somebody that you can be sure will be there in a crisis and somebody that regulators will not look to as.
-
The problem child, um, in the down market when we're looking for scapegoats, right? So generally, like if the website says things that seem too good to be true, I like to stay away because it doesn't inspire the confidence I'm looking for. I think that's probably the biggest thing I would call out. Yeah, that's a great answer.
-
That's a great answer. I think that's very much, uh, something that I know exactly what you mean by, by outlandish claims and stuff. I've seen them, you know, left and right. Uh, I also used to work at a different region of the world, and let's say that, uh, that came up quite a bit. Um, uh, and yeah, it's something to, to clearly avoid.
-
Um, okay. Well that's, that's really great. I, I learned a lot. Th this was really eye-opening for me, so thank you, Vail. I really appreciate it. And, um, we're gonna, uh, get this all published up. But in the meantime, could you let us know where to find out more about yourself, more about Arc? Yeah, absolutely. I, uh, unfortunately, spend way too much time, as I said on LinkedIn and Twitter, so, uh, you're, you're more than welcome to reach out to me there, and if you're sharing the deck after this, I think the social handles are on, on the final page.
-
Um, you know, you can always email me. My email's also on there. I'm more than happy to chat, um, about Arc, about banking in general. Uh, I happen to run a winery too, so if you're so inclined and wanna talk about that, I'll godly, uh, indulge you. Um, but yeah, feel free to reach out and I'm, uh, I'm happy to be a resource.
-
Awesome. Well, thank you so much for joining us today. I really, really, uh, appreciate your time and, uh, look forward to, uh, speaking more in the future. Right. So you too, everybody. I appreciate it. Yeah, absolutely. Uh, we'll, we'll, we'll be in touch soon and everybody who joined, uh, you'll get a recording of this and we'll speak soon.
-
Take care, everybody. See you later.