Henrik Nilsson 0:08 Hello, and welcome to the Buzz, a Bank Automation News podcast. My name is Henrik Nilsson, and I’m a Senior Associate Editor for Bank Automation News. In this conversation, you will hear from Vijay Sondhi, CEO of NMI. He discussed banks relationship with fintechs and what banks can do to stay competitive and innovative. Vijay Sondhi 0:29 Human beings we like to think in binary terms like enemy or friend. And we’d like to think and kind of black and white binary one or zero. And I actually believe that this whole area of FinTech is a massive gray zone, it is a massive frenemy kind of world. And we however, your question is very well taken because there is no competition. But I want to go back to the roots of how we got here. So you know, the fintechs, or, you know, some of these newer companies that entered the financial services, they were focused on the consumer experience, that’s where they started, they were not trying to fix the plumbing make things faster, better, cheaper, they just wanted to have a great consumer experience. So people like square came along, in in our market, you know, for restaurants. And they said, hey, it’s really easy to get this simple system, you turn it on, you can take payments, the pricing is 2.9% and 30 cents, one price, all blended, not complicated interchange rates. And it was really easy to use cloud based etc, etc. Stripe came along and said, Hey, you can connect to the payment networks with one API call and one pricing. But in the back end, there was Wells Fargo and JP Morgan and first data and all of the existing infrastructure. And so this was a layer on top. So that was phase one. Right? They work together. In fact, the fintechs could never have started without working with the incumbents. So phase one, we got it, right. It’s they’re working together. And even though the press, you know, often like to say, oh, you know, they’re their competition and their enemies, they’re not, they’re actually working together, the stripes and the squares never would have started, if the first data’s in Wells Fargo hadn’t worked with them at the time I was at visa, you know, we made sure we worked with them, because we liked these innovations. Now, phase two is these FinTech start to grow. And I’ll give the example of you know, the folks that are, you know, in that restaurant point of sales world just because it’s an easy example, but there are many others. So you’ve got a restaurant, maybe it’s, you know, Joe’s coffee shop. And the person that gave the point of sale shows up and says, you know, I know quite a bit about Joe’s coffee shop, I know how much money they make, because I process their payments. I know that Wednesday is busy and Thursdays dead. And I know exactly what their cash flow is, maybe they might need a loan, and I might be able to come up with a really good credit risk profile, because I am actually their payment backbone. And so they showed up and they said, We’re gonna start a capital arm and they went into the Joe’s coffee shop and say, Hey, you’re already pre approved for a loan of, you know, however much money oh, by the way, I’m going to deduct amortization and interest cost before I settle with you. So they have no settlement risk. And they have a really good pulse on the business. Now, if that guy at Joe’s coffee shop, went to a large bank, they might have to go to a loan officer and fill out arduous you know, forms that give personal guarantees and three years of tax returns. And just think of how different that is. Now you fast forward. And now you start to look at a Trojan horse strategy, right? This horse comes in, oh, those nice people in the other Valley have sent it, we go to sleep and we wake up and they come up with a horse and they take over. Now what is the third phase many of these fintechs have they themselves become bank holding companies, they have become processors, that means that they actually connects directly to Visa and MasterCard and people like the Allianz in Europe or as I mentioned the stripes in the US. And so now you’re into the Rift, and the frenemy, is now becoming more enemy. So that’s where we are today. Henrik Nilsson 4:09 Can you talk a little bit from a bank’s perspective? What are some major obstacles to staying competitive against fintechs? You know, given that banks are under a pretty high level of regulatory scrutiny, and you know, they have these massive legacy systems to take into account. Vijay Sondhi 4:26 Yeah, and I don’t want to characterize it is that it’s become an enemy from a frenemy it is still very much a cooperative marketplace. It’s just that the battle lines are starting to be drawn more so now in this what I would call phase three of the evolution. So what should the banks do? What are the obstacles being competitive? The first thing the banks have to do is I believe that many banks their number one master is usually the regulator’s then it’s the cost structure. And the last is the consumer experience, and they need to flip that paradigm upside down. Because the modern consumer has been working with iPhones for 15 years, regardless of what their ages we hear about Gen Z and millennials, but doesn’t matter what your age is, you expect an instant experience everywhere you go, whether it’s getting into an Uber, and not looking at payment credentials and fumbling with cash or cards, or buying something on Amazon, one click, you know, or paying with Apple Pay. So the bank should flip their paradigm they should lead with consumer experience, they should, they should embrace things like design thinking, you know, which is putting your shoot yourself in the shoes of the customer, how easy is it to open a bank account? How hard is it, that doesn’t mean the other two masters go away just flip the priority. Now the issue with that is many of the banks don’t have the technology Proace or even the people to think like this and do things like run a design thinking workshop. So my view is they should partner with the friendly fintechs the ones that are not competing with them, the people that are making tools and infrastructure, and that make it open for anyone. Now, I’m not doing this as a self serving message. It does happen however, that what we do at analyze, we sell tools, we our picks and shovels provider, we don’t get involved in the financial transaction other than the software stack, and we sell to the fintechs, we sell to the incumbent banks. And we sell to the agents of the banks. And so I would say partnership is the key word that you should take away from this if you’re in a bank. Henrik Nilsson 6:26 In my conversations with experts, they’ve often talked about how banks have been able to build this beautiful apps, great interface user friendly, but it kind of stops there, you know, and now customers want speed. They want other services, like faster currency, conversions, you know, between different countries and so on. So I guess that’s maybe where banks can move to the next level if they’re partnering with these fintechs. Vijay Sondhi 6:53 I think that’s right, because you mentioned speed, right? So it’s not just the speed of the transaction for the consumer that is important. You know, t plus three in stock trading is terrible. In the United States, we have the ACH system, it’s very antiquated. It’s based on, it’s called Automated cheque clearing house, it has the word check in it. I mean, who wants to deal with paper checks today, and it takes multiple days, right? In Europe, we have much, much better systems, faster settlement, there’s, you know, crypto rails that are coming out, even though we’re in a crypto winter, they’re still good infrastructure that I think will emerge. So I think that the banks need to go back to this concept. It’s the old age old concept of buy build partner. What do we buy off the shelf? What do we build ourselves in house? And where do we partner, and I think in the advent of web services, and configurable modular software, the partner is way easier now. Because you can make it look like it’s your tech stack, you can consume it instantly. And so yes, speed of transaction processing, but also speed of coming to market with newer innovations. And we’ve seen that, for example, in COVID, we had to, you know, really rethink and you know, here at NMI, we came out with things like, you know, order online pickup at the curb, we immediately came out with a QR code checkout process, that literally was a URL that our system would generate. And our customers could put it into Instagram, or WhatsApp or whatever checkout flow. And we’ve all seen the QR codes, which eliminate the concept of a hardware point of sale device to tap your card. And many of those innovations were coming from third parties, but they all work with the bank rails. And so this concept of partnership, partnership partnership, that’s what we need for the benefit of the consumers. That’s what we’re here for. We’re trying to make a better consumer experience. Henrik Nilsson 8:40 How can FinTech stay competitive against banks, you know, that have this established infrastructure and networks? I guess we’re partnerships. Vijay Sondhi 8:50 Yeah. So I mean, it? That’s a great question. Because I flip it, I flip it on its head and say, Hey, if you’re a FinTech, you don’t have to do everything. And in fact, the regulatory burden is very heavy. And the banks are, are becoming increasingly open to the partnership. So it’s two sides of the same coin, you flip it on its head. And I think one of the things we have to understand and really ground ourselves in when we are in the FinTech world, we are dealing with money. And when you deal with money in a democracy, governments rise and fall based on whether consumers are you know, being ripped off, they have due course they their money is protected. We’re seeing it you know, in the UK right now, there’s an absolute uproar, because of what the finance minister or the Chancellor of the Exchequer it’s called in England is done, right fear or maybe the government will get thrown out. So keeping track of money and keeping money safe is really important, which means it will always be regulated. So I don’t believe in some of my crypto friends who Oh, we’re gonna blow this all up or even an unregulated, you know, Blockchain based payment system and you know, custody and assets. No, you will not have that if you are in a Western country. that has due process at a democracy and consumer protection, you will have to deal with a huge regulatory overhead. Why do you want to deal with that as a fintech? Maybe if you’re big enough, and you have scale. So you should also be thinking of partnering. Now, you want to partner with Next Generation API based banks. You know, one of the ones that I like a lot is cross river bank, they are actually a more modern bank. But many of the existing banks also have API access. Henrik Nilsson 10:29 How do you build a successful bank FinTech partnership? Where are some areas where the two can come together? Vijay Sondhi 10:37 Yeah. So I think that’s one that has to be built on the trust. So we know we started the conversation saying, you know, we didn’t have it, we were in a distinct swim lane world with FinTech one Dotto. And so there wasn’t much, you know, problem there. It was, you know, an innocuous point of sale at a coffee shop, who cares? What does that have to do with the banks being threatened on loan book, phase two, now we’re like, Oops, maybe we are threatened by the loan book, phase three, some of the larger fintechs are now banks themselves, they’ve become registered to become bank holding companies. So I think what you want to do is kind of think of that curve and find if you’re a FinTech, you know, find a bank that isn’t going to be threatened by you, because you’re not going to suddenly turn on them and compete with them. Because you have your swim lane, which is consumer experience, depending on where you are. And on the flip side, the bank wants to make sure that you’re not going to turn around and compete with them. So I think it’s like very basic, you know, partnership, one on one, lay out your strategy, what’s your three year business plan, I think you have to go much deeper to just knocking on the door and saying, Hey, I need some help, you know, deep trust, long term partnership, you have to be in this game for five to seven years. fintechs are learning now in this current inflation, economic downturn, harder to get venture funding, right, you can’t just turn it on and hire 1000s of people, this stuff will take time. And so nurturing that partnership with someone who’s in it for the long run, and lay both your business plans down. Don’t be the poker player and hold your cards close. I think that’s, that’s really critical. The other one is just compatibility on the technology philosophy of both sides. If you’re working, if you’re trying to partner with a bank that works on, you know, COBOL mainframes from the 1980s and you are a modern FinTech and they have no way to wrap that technology stack is not going to work. So you better find some of these shares, what you want to do on the technology side, but the most important thing would be you kind of agree not to compete with each other. And nobody can say what the future is going to hold. But that’s how you go into it. Henrik Nilsson 12:45 But are there areas that you see now that are that are more susceptible to partnerships, like account openings, or automation of various services and so on? Is there anything specific you can point to? Yeah, Vijay Sondhi 12:59 I mean, I think one of the areas that is is most open for partnership is around the use of data. And so you want to look for places where interoperability is important. And that’s a ripe area for partnership. Now, what do I mean by interoperability, if you are a bank, and you want to keep all of your data and the perspective of your consumer in in your walled garden, that worked 10 years ago, 15 years ago, it doesn’t work. Now, you’re going to have to be able to make sure that your data can be used in other places, and you get access to other people’s data. That is a natural place where partnership with a FinTech makes sense. And I’ll just call out, you know, a company like plaid. Right. Now, I know there’s some talk in the press about, you know, is plaid a threat to the banks, but what plaid does as a as a non bank, at least today is they share data amongst banks, initially on behalf and the FinTech said, Hey, I need account opening, you know, and they make this little easy kind of account opening pages. Where do you bank Bank of America? Chase Wells Fargo, you flip it? They go and you know, look at some data with consumer consent, of course, how much money do you make? What’s your paycheck? What’s your expense, basically, okay, on that basis, you’re approved for a loan. That’s a natural place where the bank would want to partner with the FinTech and the FinTech and add something that the bank cannot. So I think that’s one way of data sharing and account opening, but data sharing goes way beyond. And I think that one of the paradigms that is really important to keep in mind is and I come from payments, so I have a payment lens. But in the payment world, we we used to just focus on processing the payment, making sure that authorization clearing and settlement is occurring. That’s all we cared about. Now we think of what happens before the payment. There’s a propensity model, maybe somebody saw an ad or a coupon, what’s the attribution that goes back to why they bought them thing, and after the purchase, you have what’s called the The feedback loop to have a good experience bad experience. Am I a net promoter? Am I a net detractor and you kind of close this loop? In order for that to happen? You need data sharing and you need it across things that have nothing to do with the banking system, advertising, cookies, attribution, and then loyalty and rewards. However, the gold is the golden nuggets are in the payment did the person actually buy? And is the issue that a Google would have? They know if you looked at the ad, and you click, they have no idea if you actually transacted only people that know if you transacted are the banks or the people involved in the payment system. So think of data as a very ripe area for partnership. So I think there’s two events that have happened that will spur more partnerships. So the first one is I mentioned earlier, we’re in a very different venture capital funding environment today than we were a year ago. It’s very hard for somebody to have a great new FinTech idea, get a massive amount of funding, and be in last making vote for multiple years. Now, those emboldened startups a year ago, two years ago, three years ago, thought they could do everything. Now. They’re retrenching, they’re actually laying people off, the new ones are not getting funded. So that’s the first kind of mega trend that is going to force that CEOs of those startups I sit on a couple of these smaller startup boards. And we’re starting to think, hey, you know, we were going to build that we should probably partner with a bank. So So I think that’s, you know, one that, that it, we’ll start to see more and more of that. The other big change is that I believe the banks have finally woken up, that the not invented here syndrome is going away. They don’t feel like there’s an admission, there’s there’s a realization that they have to work with third parties. And traditionally, banks, large banks, were just buying their software stack from the big guys, FIS Fiserv, IBM, HP Oracle, they are getting more and more comfortable with partnering with smaller companies. And they are realizing that that is actually the only way that they can survive because the clock speed of technology is so fast, hiring engineers and coming up with these great solutions is too hard internally. And they found that if they go to their large vendors that they traditionally have been buying banking services from for decades, those guys are as slow as they are. So those two trends, I believe, are going to spur a lot of partnerships in the next, let’s say three to five years. Henrik Nilsson 17:40 Last question here. Just to wrap up, are there any specific technologies or new software updates that you are especially keeping your eye on right now in the banking slash FinTech world? Vijay Sondhi 17:55 Yeah, clearly, anything in the crypto blockchain space is the place to be watching. Right? So there’s a lot of hype in that area. And now, you know, we’re in a crypto winter. And you know, now we’re starting to see, by the way, that would be a third trend as to why I think there are going to be more partnerships. Because we’ve seen, you know, crypto exchanges being hacked, we’ve seen, you know, crypto lending platforms that had no way of actually paying those interest rates and now are insolvent. And the regulators weren’t even involved in these companies. So there’s a lot of negativity and rain clouds around that space. But fundamentally, the idea of having a distributed more federated infrastructure that is not owned by trusted third parties is a very powerful concept. And there is so much brain power, and you know, intellectual throughput, as well as still venture funding that those guys have, that I think we’re gonna have more of a distributed I mean, defy decentralized finance has a bad name right now. But I think it will emerge just like we saw in the.com era where, you know, we had this huge run up dot coms gonna change everything, and then we had the crash oh, no, it’s not. Well, the reality was, it is you know, so I would definitely keep your eye in the world that I work in payments. You know, what sort of, you know, central bank backed digital currencies, so huge threat from MasterCard and Visa, that’s why you see them embracing, you know, they are now calling themselves network of networks. And they have their own crypto divisions. But that is the space to watch and I would not discount it just because of the current malaise in the industry. Henrik Nilsson 19:36 You’ve been listening to the Buzz, a Bank Automation News podcast. Please follow us on Twitter and LinkedIn. And as a reminder, you can rate this podcast on your platform of choice. Thank you for your time, and be sure to visit us at Bankautomationnews.com for more automation news.