The Evolving Relationship Between Fintechs and Traditional Banks

Jim Marous (00:11):

Welcome to another episode of Banking Transformed, the podcast that dives deep into the trends, innovations, and strategies shaping the future of banking. I'm your host, Jim Marous, owner and CEO of the Digital Banking Report, and co-publisher of The Financial Brand.

Jim Marous (00:24):

In this episode of Banking Transformed, we're thrilled to have Matt Harris, a leading investor and thought leader in the FinTech space, and a partner at Bain Capital Ventures.

Jim Marous (00:34):

As traditional banks, neobanks, and FinTech firms continue to navigate an increasingly complex and competitive landscape, Matt's unique perspective and deep industry knowledge, offering invaluable insights into the future of the financial ecosystem.

Jim Marous (00:52):

With his finger on the pulse of the most disruptive technologies and innovative business models, Matt is a perfect guest to help us understand the current state of FinTech and what lies ahead for the financial services industry.

Jim Marous (01:05):

Matt will also, show that success in this space requires a combination of innovation, adaptability, and a deep understanding of customer needs.

Jim Marous (01:14):

It's clear that the world of FinTech and digital banking is at an inflection point with disruptive technologies changing consumer expectations, and the evolving regulatory landscape all converging, the financial services industry is poised for significant transformation in the years ahead.

Jim Marous (01:31):

So, Matt, you've been with Bain for almost 12 years, and you've had a front row seat to say the least, to the rapid evolution of the FinTech landscape. What do you see as the most significant changes, certainly in the last few years, and how have these changes really shaped the future financial services from your perspective?

Matt Harris (01:50):

Well, Jim, first of all, thank you for having me on. I've wanted to talk to you for many, many years, and I'm honored to be included in your podcast here.

Matt Harris (01:57):

The thing that's causing the most waves right now, frankly, is the regulators. We had evolved to this architecture where you had FinTechs doing their thing. You had sponsor banks of various types underneath who were actually bearing the regulatory burden, holding the cash, things that only banks can really do.

Matt Harris (02:20):

And then you had these middleware companies that are generically kind of known as banking as a service companies.

Matt Harris (02:25):

And that architecture, which underpins much of the payments innovation, the lending innovation, the banking innovation that we've seen has now, been called into question by regulators and is being kind of litigated as we speak.

Jim Marous (02:41):

So, when you look at that and we talked before we started the podcast, that we've seen the venture capital markets go up and down, and that's I guess, normal evolution with anything. I mean, it was really hard for a long time.

Jim Marous (02:55):

But as you said, the regulators really, they're learning as they go it seems many times, and it's not going to stop because right now, you've been quite noisy on social media lately about regulatory situations, particularly related to, as you mentioned, the sponsor banks.

Jim Marous (03:14):

When you look at regulatory and compliance as a grouping, what trends do you see happening there? And why don't you explain a little bit about why it's so important.

Jim Marous (03:26):

How do you see regulatory changes maybe impacting the growth and adoption of FinTech solutions, but also, really changing the relationship between traditional and non-traditional organizations?

Matt Harris (03:40):

Yeah. So, four years, basically, there was this understanding that regulators were good and comfortable regulating financial institutions and wanted nothing to do with regulating these technology companies.

Matt Harris (03:57):

And so, the sort of implicit bargain was that the Fed, and the FDIC, and the OCC would just keep regulating banks, and through them they would sort of indirectly regulate the FinTech companies who were built on top of them.

Matt Harris (04:14):

And meanwhile, they would do everything in their power to keep new licenses from being issued. So, that was sort of okay. So, they would allow for innovation through this indirect regulation model, and I think everybody wishes they would just issue new licenses and allow for the creation of new dynamic banks.

Matt Harris (04:35):

But okay, that's not going to be possible. So, fine, you can let innovation happen indirectly.

Matt Harris (04:40):

And what they've come to realize is that that is insufficient control from their perspective. I think SVB and the rapid migration of deposits enabled by all the technology driven connectivity, it was really embarrassing for regulators and a wakeup call.

Matt Harris (05:01):

And so, the summer after SVB, the summer of 2023, there was this interagency guidance issued that said, we're going to look much more closely at these third party relationships.

Matt Harris (05:13):

And that those chickens came home to roost this spring with a bunch of ugly letters being issued to this population of sponsor banks saying, "You have insufficient controls. You don't understand what these FinTechs are doing and who their customers are. And transaction level monitoring through these middleware companies of the end users."

Matt Harris (05:43):

And the regulators are correct. In fact, there had not been at the level of the sponsor banks sufficient visibility into who the users were and what they were doing.

Matt Harris (05:54):

And so, we're in the middle of a painful transition process where basically relying on these middleware companies is not going to work. Where if you're going to be in the sponsor bank business, you have to have a very sophisticated tech stack so that you can understand exactly what's happening with every end user.

Matt Harris (06:13):

And that adjustment is going to be painful and it's going to drive some number of banks out of the business of being sponsor banks.

Jim Marous (06:23):

So, where do you see this evolving to? I mean, right now, it's pretty much the sponsor bank, the banker as a service realm of that. Where do you see this actually ending up impacting other areas? Because obviously, the tightening around the whole industry, is it going to continue this way? Is it going to get tighter?

Matt Harris (06:47):

Well, I think we do need to recognize this is an impactful problem. If you add up the users at Chime, and MoneyLion, and Dave, and all of just the B2C retail banking competitors that are non-banks, these so-called neobanks, it is tens of millions of Americans who are getting at least some degree of their banking services from non-banks today.

Matt Harris (07:14):

And so, if we pull the rug out from under that entire system, life is going to get worse for tens of millions of Americans who've chosen to work with these companies instead of a traditional bank. And there is a real risk of that.

Matt Harris (07:30):

So far none of those larger entities have been disrupted. The real disruption has happened with the customers of this company Synapse, this middleware company that has gone into bankruptcy.

Matt Harris (07:43):

But the way things work in banking, as you know as someone who's observed it for decades, these things happen in waves. And it could easily be that the next wave that happens is a real chilling effect on this entire community of sponsor banks and a de platforming of all of these non-bank retail banking providers.

Matt Harris (08:09):

And so, my hope is that sober heads prevail, the regulators realize that there's real consumer value being delivered, and they work hard to not disrupt this entire ecosystem.

Matt Harris (08:26):

I think where this ends, Jim, to your question, is with a bunch of much more capable banks providing sponsor bank services. So, this idea that you can have kind of an unsophisticated sponsor bank that basically just has a regulatory license and all the work being done by a Synapse type middleware company, that is gone.

Matt Harris (08:53):

If you're going to be in the business of underpinning a Chime, or a MoneyLion, or a Dave, or frankly even a payments company, not a sort of retail banking company, you need to be sophisticated, you need to have your own technology platform. And when the regulators come in and asking you-

Jim Marous (09:13):

You got to have answers.

Matt Harris (09:14):

You need answers. You can't say, "Well, let me get Synapse on the phone." It has to be, "Oh, the transaction you're worried about, that took place in Seattle at 5:24 at the gun shop. Yeah, we can look at that. Yep. That owner was of the appropriate age and we authorized that transaction and here's why." Not, "We'll get back to you."

Matt Harris (09:34):

So, where this ends, I hope and believe, is with a new crop or an upgraded crop of sponsor banks who are properly in the business of managing third party relationships in the way that correspondent banks have done since time immemorial.

Matt Harris (09:52):

This is not actually brand new but it will represent a maturity of the segment. And my hope is that can happen relatively quickly.

Jim Marous (10:02):

So, it's interesting taking the other side of that. You mentioned neobanks. It's been a hot topic, obviously in the FinTech world and many were promising to disrupt traditional banking. But it's interesting is as they evolve, they start to look more and more like traditional banks, but with just brand new names.

Jim Marous (10:19):

Also, we've seen that many, especially in the slowdown caused around the COVID time, many set of it have really struggled to achieve profitability and scale. What are the key challenges facing neobanks today?

Jim Marous (10:36):

Is it the investment marketplace? Is it the fact that they were living off some of these investments as opposed to building businesses in the old fashioned way? How do you see the neobanks environment changing and how do you see them addressing the challenges they're facing?

Matt Harris (10:56):

One question that you ask is how do the neobanks end up in the situation they're in? And one reason is there was very undisciplined funding. And you can look to venture capitalists of course, for this.

Matt Harris (11:08):

But during the period of zero interest rates when you had this incredible buoyancy around everything to do with technology, there were billions of dollars deployed into neobanks without a lot of questions being asked and answered about the fundamental business model.

Matt Harris (11:26):

And that was true in many sectors of technology. So, we can't just pick on FinTech or neobanks, but it was certainly true in neobanks.

Matt Harris (11:35):

And what that did was it meant that customer acquisition costs just skyrocketed because you had dozens and dozens of entities being funded to in effect compete with each other, to acquire customers. And obviously, that increased the cost of those customers.

Matt Harris (11:52):

The other thing it did was create way too many entrants, often who are very narrowly focused on a psychographic or a demographic or some segment that I think a more skeptical observer would say, "Boy, that's really not big enough to build a big enough business to cover all the fixed costs that are inherent in being in the financial services industry." So, you had mistakes made of those two types.

Matt Harris (12:22):

But as we sit here today, if you zoom out and look at the global picture, neobanks have taken real market share. I mean, Nubank public company traded in the US market, but half of Brazil literally uses Nubank and north of a hundred million customers, wildly profitable model.

Matt Harris (12:43):

And they've become a regulated bank in Brazil and on their way to being one in Mexico. And they will create a collection of global licenses.

Matt Harris (12:52):

Revolut in Europe is similarly massively multi-billion dollars a year of profit with incredible pace of innovation. And customers are voting with their feet that they preferred Revolut to Barclays and other sort of nationally focused banks in Europe.

Matt Harris (13:12):

In the United States, there are fewer and less obvious sort of hero companies, particularly with that kind of profit profile. And that's because in my view, you've seen two approaches that haven't really been synthesized.

Matt Harris (13:26):

One is really a DDA focus, so Chime being the largest of these. Where they have reached some level of scale in terms of number of customers and revenue, but not profitability. And to me, that's quite obvious because they just don't have lending.

Matt Harris (13:46):

And you really have merely half a loaf if you're going to be a retail banking company that doesn't have the profits engine that comes from lending.

Matt Harris (13:55):

And in the other side, you've seen companies like MoneyLion and Dave, both of whom have seen tremendous stock price performance in the last 12 months, but still are predominantly lending companies without a great story around deposits.

Matt Harris (14:11):

And the reason for this sort of you only have the left half of the brain, or the right half of the brain approach, is that none of these entities are banks.

Matt Harris (14:18):

And so, they can't leverage their deposits into lending. They're just two different businesses unless you get the banking license that allows you to bring together the cheap funding of deposits with the beautiful profits that come from a lending business. And so, you can understand why they grew up only doing one or the other.

Matt Harris (14:41):

But to me, that points to the future, which is look at what Nubank has done, look at what Revolut has done, get a banking license, buy one, apply for one, put those deposits to work in lending products with the unfair advantage of having already acquired the customer, having all the data that comes from owning their DDA. Leverage that unfair advantage to actually serve them with the lending products they need.

Jim Marous (15:08):

But even Varo have the banking license, but even they've had challenges with scale. It becomes a matter in the US at least our customers going to be willing to make them to your primary finance institution because even though you offer it doesn't mean people are going to come and use everything you offer.

Jim Marous (15:29):

We've had trouble with people transferring over to the other side of the business be it from deposits to lending or lending to deposits, with the exception maybe LendingClub and a couple others. So, it's very interesting.

Jim Marous (15:42):

When you're from a venture capitalist perspective, beyond just the neobank and the FinTech company, what are you seeing that's interesting right now? Is it the payments area? What are you funding? What is being funded in the industry?

Matt Harris (16:00):

The most important theme right now, is the implications of generative AI for financial services, and not least of all for retail banking.

Matt Harris (16:09):

What's being funded right now, are basically vendors. So, these new crop of technology companies that are springing up to serve banks and serve financial institutions more generally to help them with digital transformation as it relates to generative AI.

Matt Harris (16:29):

So, you could think of chatbot companies as being probably the most advanced wedge on this and customer service more generally as a way to introduce generative AI, lower OpEx, and create more customer delight. So, that's where a lot of the energy is.

Matt Harris (16:50):

My own view is that in the long run, or even the medium run, generative AI is actually an existential threat to retail banks. In the short term, they can use it to lower costs here and there.

Matt Harris (17:02):

But the question I always pose to banking industry leaders, CEOs of banks, is what are you going to do when all of your customers have generative AI?

Matt Harris (17:14):

Because if your customers woke up tomorrow and did the thing that was in their best interest, they would almost certainly leave you because you're never paying the top interest rate on their deposits. Your whole model is about making a spread between what you can get away with paying them on deposits and what you can get away with charging them on loans.

Matt Harris (17:34):

And so, if everybody optimized and they could do so without inertia, the retail banking industry would be in trouble. And in my view, that's what generative AI is going to allow for in the future.

Jim Marous (17:47):

So, let's take a short break and recognize our partners.

[Music Playing]

Jim Marous (17:54):

Welcome back to Banking Transformed. So, I'm joined today by Matt Harris, partner at Bain Capital. We've been discussing the changes in the FinTech marketplace and the changes he is expected to see in financial services in the future.

Jim Marous (18:05):

So, it's interesting, we just had financial brand form, which is our organization's collaboration or getting together the retail side of the banking world.

Jim Marous (18:17):

And it's interesting because in, I think it was 2018, I'm guessing here, we started seeing the vendors meeting with vendors at the same time they were meeting with banks.

Jim Marous (18:28):

It was very interesting because they started seeing this whole solution matrix, these organizations that are helping banks be better, what they do in a way that was very composable. Composable solutions where finance institutions no longer going to try to rip out the core and start over.

Jim Marous (18:50):

They were going to work with these partners. And the partnerships have gotten pretty strong and the solutions have gotten stronger.

Jim Marous (18:55):

But you're right, with generative AI, there was talk in this year's conference that when I asked the bankers in the room, “How many of you have closed a major financial institution relationship with your primary bank in the last five years?” Nobody raised their hand.

Jim Marous (19:10):

Now, mine is a very biased audience and that they're all bankers who work at a bank.

Jim Marous (19:14):

But then I asked, “How many of you have opened a new relationship with a non-traditional or a FinTech company in the last two years?” Everybody raised their hand.

Jim Marous (19:23):

And that's that transformation, that customers are actually moving away from traditional financial institutions in a very silent way because they're not closing their accounts, they're not doing it the old way. But they're opening new relationships that are fulfilling all these different service needs.

Jim Marous (19:40):

And as you said, when you have a consumer that has their own generative AI twin, and you maybe have a financial institution, some type of financial institution that's doing the same thing, then the banks become very generic. They're only a place to hold money. They're not a place to do banking. They serve the holding of funds but without even a vault.

Jim Marous (20:05):

It's a very different world than what we've had in the past. And you really wonder how many organizations get it, for lack of a better term, and are doing anything about it. It's a different world.

Matt Harris (20:17):

It is. And so much of the banking industry, their competitive advantage over time has been geography. Back to the sort of branching laws that prevented too much national competition from many of these banks.

Matt Harris (20:30):

But we have 4,500 banks in this country, most of whom exist because there's a local community that needed serving.

Matt Harris (20:40):

And that is not a durable basis for competitive advantage in the future. It really isn't even one right now, in the world where you have national digital competitors, whether they be Chime or JPMorgan Chase.

Matt Harris (20:54):

So, I think banks have figured that out. And the more interesting thing to me even is actually, (you make a great point) the vendors have figured this out. I think even the core vendors who take so much criticism ... I mean, just in the last month, the OCC was criticizing the core vendors for not allowing innovation.

Matt Harris (21:15):

But the fact is that all of the core vendors have done much better in this regard in the past two years than in any 10 year period that I've been observing.

Matt Harris (21:25):

Jack Henry investing in their Banno product, Fiserv making an aggressive acquisition. I think FIS spinning out payments so they can focus more on banking software, bringing in a dynamic executive to run that business.

Matt Harris (21:39):

I mean, everywhere I look, the cores are getting the joke more and more that they need somewhat of an open architecture to allow the Q2s and the Alkamis and the other digital experience companies to serve their shared customer base, but also, improving their products. And stemming off the core replacement trend that seemed to be picking up steam two or three years ago.

Matt Harris (22:07):

So, I think the vendor landscape has gotten much more interesting. And I think the banks will ultimately be far better served if they choose to stay with their core, or if they choose to insist that their core allow for other vendors to create digital experiences that are more innovative and novel.

Matt Harris (22:31):

In either case, I think the banks will have better options than they've had in the past.

Jim Marous (22:36):

And it'll really come down to who will make those purses or make those partnerships work. We saw all these solution providers, you could pick the best new account opening experience, you could pick the best communication experience, you could be pick the best back office onboarding experience and all these elements.

Jim Marous (22:52):

And if you actually did that, you're going to be much more future ready and resilient than the organizations that I see and that's from my perspective, it being those middle size asset ranges that are stuck between not having enough money to invest like the Chase and Bank of Americas.

Jim Marous (23:10):

But even more importantly, not having an innovative group of leaders that allow them to move quickly to build a composable solution organization.

Jim Marous (23:19):

Unfortunately but also, fortunately the banking industry has not seen a losing year. You don't see banks not making money, so they get stuck on the status quo because it doesn't feel broke, even though organizations like your own say, “You know what, I got to find those that are going to move the organizations forward. And it's not a traditional financial institution."

Jim Marous (23:43):

So, it's going to be interesting to see how it plays out for sure.

Matt Harris (23:48):

Yeah, I think there is a powerful inertia in banking in part, as you note, because they continue to make money in every environment. And in part because the regulators ask hard questions about any change in their technology stack and otherwise.

Matt Harris (24:05):

And so, that inertia, even if the log jam is breaking somewhat, and there are new vendors with new solutions and the cores are getting more supportive of innovation, I do worry that it's all fighting the last war.

Matt Harris (24:18):

That as the banks finally get their act together in terms of these more sophisticated customer engagement methodologies, the customers are just going to be using generative AI agents.

Matt Harris (24:30):

So, all that engagement investment won't mean much when you're facing off against, as you say, a digital twin that's doing the work of banking on behalf of customers.

Jim Marous (24:41):

Well, and the customer right now, I mean, I know myself and yourself, we're almost building our own open banking ecosystem. We're picking whoever from each category what we want to be our partner to move forward. And the banks aren't keeping up.

Jim Marous (24:57):

I mean, I'm dazzled by the fact that I continue to have money taken out of both of my financial institution relationships going into Acorns, and yet neither organization has ever offered me an alternative. And they see what's happening. I mean, it's not invisible.

Jim Marous (25:15):

Or when you look to buy a new car or a house, there's all kinds of signals that go out there and there's no response from the traditional players. And you go, "I have a lot of options."

Jim Marous (25:25):

And again, as I said earlier, there's no typical way of closing the account like you used to do 20 years ago. So, you can look like you're feeling fat and happy and doing everything right, and all of a sudden realize you've completely lost the relationship. It's a big threat.

Jim Marous (25:46):

As is, shifting a little bit here is a very obvious segue is around embedded finance because that takes it completely out of the traditional banking system as we know it.

Jim Marous (25:58):

What do you see in that area? What do you see in the whole embedded finance area and how will that work out compared to what we thought would be maybe five or six years ago?

Matt Harris (26:10):

Well, I think where embedded finance has taken hold most dramatically is in the small business category. And there it's been very dramatic.

Matt Harris (26:19):

I mean, if you consider vertical by vertical, look at restaurants, look at e-commerce sellers obviously you have massive penetration of companies like Toast and Shopify, where 70 plus percent of their base are doing their payments acceptance through the software company in question.

Matt Harris (26:41):

But the same is true across, we have a company that's in auto repair and they have a practice management software. And if you're using AutoLeap to run your auto repair shop, you're definitely going to use them to take payments.

Matt Harris (26:55):

They're started at 10%, then they're at 30%, and they will end at nearly a 100% penetration of the auto repair shop saying no to the brick on the counter and instead taking payments acceptance through the practice management software.

Matt Harris (27:11):

So, particularly as it relates to payments acceptance, merchant payments, that train is running exactly as we expected, and we're seeing more penetration on the procurement side as well.

Matt Harris (27:23):

So, more and more of these software packages are introducing card issuing and helping these cards do their spend, helping these small and medium sized businesses do their spend on embedded finance cards that are procurement cards within their software so they can buy their inventory, et cetera. Payroll is increasingly being included in these packages.

Matt Harris (27:45):

So, I think phase one of this, which is small and medium sized businesses adopting payment solutions in particular through the software that they use to run their business, that has a head of steam. And lending is a part of that.

Matt Harris (28:04):

And this is where I think banks need to be careful is if you're lending money as a bank to a restaurant that uses Toast, you really need to be asking yourself like why didn't Toast offer the loan? What does Toast know that I don't know?

Jim Marous (28:19):

Well, and they do know. I've told this many times on my show that my business bank is PayPal because I do all my payments through PayPal. I get my receipts through PayPal. And what ends up happening is they know more about me. So, they're offering me the bridge loan, not my traditional bank.

Jim Marous (28:39):

And if I went to my traditional bank, it would take weeks if I'm lucky, and I'd have to go into a branch and nothing simple. And on the other hand, I can push one button and get the loan.

Jim Marous (28:51):

And I mean, I remember banking when financial institutions used to have reps that went on and gave the little pin pad, the credit card acceptance thing. We've given up all the data. The banking industry no longer has access to real data.

Jim Marous (29:10):

Yes, 45 transactions went in or out by PayPal, and oh, by the way, the end result was done by Amazon, and you know nothing about me. You don't know what I buy, what I do, how often I do these things. You just see transactions.

Jim Marous (29:24):

And it's I think when you look, especially in the digital world, the data is where the business is. As you said, if Toast isn't going to give that organization a loan, what do they know that I don't?

Jim Marous (29:40):

Or on the other hand, if they see a really good partnership, what's to say they aren't going to take over that relationship from a credit standpoint?

Matt Harris (29:49):

Yeah. And I think the sleeping giant in the space is Intuit, who just in the past 12 months has made some very aggressive moves in payments to they have all these transactions. They are in many cases the actual source of truth as it relates to data about a company.

Matt Harris (30:08):

And they're in a very logical spot to disintermediate both accepting payments and issuing payments, and then obviously lending.

Matt Harris (30:16):

They've had a half in, half out relationship with payments and lending over time. And that's all changing now. So, I think Intuit on the small business side and that all these vertical players.

Matt Harris (30:29):

And on the consumer side, Apple is incredibly well positioned. They are the system of record for high-end and middle market consumers in the United States and globally. And they also,, have an incredible merchant footprint because of the iPad, because now of soft point of sale technology that they've pioneered.

Matt Harris (30:52):

So, they really are this incredible sleeping giant. They're on their own, they're moving very carefully to build a complete wallet that has your, now, in 17 states, digital driver's license, and obviously cards of all sorts.

Matt Harris (31:10):

And so, I think brick by brick over the next couple decades, Apple is going to continue to put themselves in a position to take over and own the data and ease of use for consumers. And it'll just be when they decide and how they decide to take more and more of that profit pool. And that is a major risk in retail banking.

Matt Harris (31:36):

I think for the middle market, higher middle market, and enterprise, that's still a relationship banking business.

Matt Harris (31:41):

We're seeing certain cases around treasury, where treasury software packages are enabling things like hedging, things like optimizing interest rate, certain tools around foreign exchange getting incorporated into these tools that CFOs and treasurers use. So, disintermediating some corporate banking. But that's going to happen much more slowly.

Matt Harris (32:07):

Where we're seeing real dynamism is in the small and medium sized businesses. And then with a consumer, with companies, as you mentioned, Acorns. Most of my banking life is on Acorns now. I've got accounts for each of my kids. They're saving and investing.

Matt Harris (32:23):

And they're all not real accounts, it's my account. But the subledger technology, it's no bank can offer that level of user experience so far that Acorns offers me. And all my bank knows is that there's money moving to Acorns multiple times a day.

Jim Marous (32:39):

Oh, yeah.

Matt Harris (32:41):

So, that's where we're seeing embedded finance actually really turn the banks into these dumb pipes, which they do not want to be.

Jim Marous (32:48):

Matt, you mentioned Apple and you mentioned the whole idea of the tech companies really having a really a powerful role here, as well as other organizations such as Acorns and others that use banking simply as a funding mechanism or a transfer mechanism.

Jim Marous (33:05):

And that people, consumers, small businesses, big businesses, keep on using more and more of these technology tools.

Jim Marous (33:12):

So, when you look at technology today, what do you see with things like artificial intelligence, blockchain, open banking APIs, as far as playing a role in the way that consumers and businesses interact with their financial institutions, but also, when you're looking at innovation and better customer experiences?

Matt Harris (33:35):

Yeah. So, when we think about the risks to banks, I think the biggest risks do come from these so-called big tech companies. FinTech has nibbled away at the edges, but big tech in an era where generative AI becomes the main playing field, the resources required to be on the cutting edge of generative AI are unprecedented.

Matt Harris (34:00):

Facebook has said publicly they're spending $15 billion on chips alone this year just to keep making progress on their quasi semi open source, large language model, LLaMA.

Matt Harris (34:18):

And there's just no bank, not even JP Morgan with their technology budget, who can compete in the arms race to stay at the cutting edge of generative AI.

Matt Harris (34:29):

And generative AI is one of these technologies, unlike blockchain where it's actually immediately affects the customer experience. The magic of going on to ChatGPT and interacting with it as if it was a human being or seeing it generate audio, and video, and text in a way that seems downright human maybe even superhuman.

Matt Harris (34:53):

But these are very powerful customer experiences. It's not some back office technology like the way enterprise blockchain didn't even fulfill those expectations, but the way that it was promised to be in terms of settling transactions, et cetera.

Matt Harris (35:10):

So, I think the threat to banks coming from big tech, heavily, heavily funded, extremely focused, large technology companies, like I think the most dangerous are Amazon and Apple.

Matt Harris (35:26):

Because Google and Facebook and Microsoft, they really do want to serve these banks. These banks buy a lot of advertising from Google and Facebook. They buy a lot of technology from Google and Microsoft.

Matt Harris (35:38):

Amazon now, with the cloud platform is slightly conflicted. But I think they'll be aggressive in consumer financial services.

Matt Harris (35:47):

But the company that doesn't care at all is Apple. Apple owes no allegiance to any bank and will be, I think, over time the most disruptive.

Matt Harris (35:56):

Tokenization. Jim, I want to return to your point about blockchain. Blockchain has been something that banks can safely ignore since its inception. It really has been largely a kind of a crypto asset class, a phenomena.

Matt Harris (36:13):

Consumers may be interested in owning Bitcoin or owning Ethereum, but banks don't really have to be in that business. And it's been frankly for them, safer for them to stay out of it. And until recent legislation, they've actually been prohibited from custodying these kind of digital assets.

Matt Harris (36:33):

And all the enterprise blockchain it was just sort of theater basically. There's not been a use case that's proven to be useful.

Matt Harris (36:41):

But I think stablecoins, I would submit that stablecoins are the first real innovation that banks I think should be paying attention to because they're growing very quickly.

Matt Harris (36:52):

In the first case, they're being used mainly by consumers outside of the United States, who for the first time have an easy to access US dollar denominated instrument.

Matt Harris (37:03):

So, if you're in Venezuela or in Argentina or in Nigeria, and you can use a crypto wallet, which right now, it just has Bitcoin, Ethereum, whatever, and you can add USDC and start keeping your savings in dollars in a very easy, very liquid way, that's been a very interesting technology for people outside the US.

Matt Harris (37:26):

And now, that BlackRock has introduced a yielding stablecoin, so that it's really a money market fund, but it's much easier to get in and out of, and you can, again, keep it in a crypto wallet, you can start to see where wallets that keep tokenized assets become very appealing as a comparison with a bank account.

Matt Harris (37:50):

You can actually hold the assets yourself versus having some counterparty risk with the bank. And you can get fed funds rate at all times with instruments that are also spendable.

Matt Harris (38:00):

And then as we introduce more real world assets that are tokenized beyond just money market funds and US dollars, instruments that are more interesting, higher yielding instruments, maybe even equity-like instruments, I think the future of financial services for consumers over the next 5 and 10 years will include these tokenized assets and savings instruments.

Matt Harris (38:26):

And so, now, I think banks have to start paying attention to tokenized assets. Maybe not tomorrow, but over the next five years.

Jim Marous (38:37):

So, Matt, we don't talk enough, but it's always interesting to see where the marketplace is going. What excites you about the future? And I'm probably talking three years down the road, because none of us have proven very good looking five years down the road anymore. So, what excites you right now?

Matt Harris (38:55):

The thing that excites me most right now, is crypto actually, which is a very contrarian position to take. But the innovations I'm seeing and again, mainly benefiting consumers outside the United States, where it's a true democratization of cutting edge financial services that could be delivered at this incredibly low cost, low latency, and low friction to anyone, anywhere.

Matt Harris (39:21):

That's why I got into FinTech in the first place, Jim, going back to the late '90s. I just felt to me that all this friction, and extra expense, and bureaucracy was getting in the way of providing this vital service to the people who needed it most.

Matt Harris (39:38):

And there've been many attempts to serve the underbanked with prepaid cards. I mean, none of it's worked.

Matt Harris (39:43):

And I finally see in crypto, (and it's funny that it's happening first in Nigeria and not in Manhattan) real solutions that are much lower cost and much higher efficacy and better financial outcomes for people who really need it.

Matt Harris (40:03):

So, to me, I think the next 10 years crypto is going to be not the speculative, messy, fraud driven corrupt thing that it's been for the last five years.

Matt Harris (40:17):

It's going to be this democratizing, liberating force that's going to really spread financial services into corners of the world that haven't seen it. And that's what I'm most excited about.

Jim Marous (40:31):

Matt, it is interesting. It is great to talk to you. I've seen you speak many times. It's great to have you on the show. It's also, a great time. We talk about the threats, we talk about all this change that's happening, it's the most exciting time in banking ever.

Jim Marous (40:46):

I mean, when things were running at 0% cost of funds yeah, it was certainly interesting back then, but you couldn't put your finger on what's going to actually happen and which companies were really going to survive. But I think we're getting a good feel for you still got to run a business.

Jim Marous (41:02):

Monzo was another good example we didn't talk about where you got to give some credit to the organizations that were started by a lot of bankers that were looking at new banking ways of doing things. So, we'll see what the evolution of banking really becomes.

Jim Marous (41:18):

But I really appreciate you being on the show and taking some time to talk about your view of not only the future, but also, looking back a little bit and saying, here's some things that didn't work out as planned. So, appreciate your time, Matt.

Matt Harris (41:29):

It's been a real pleasure, Jim. Thank you for having me.

[Music Playing]

Jim Marous (41:33):

Thanks for listening to Banking Transformed, the top podcast in retail banking and the winner of three international awards for podcast excellence. We appreciate your support.

Jim Marous (41:42):

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Jim Marous (41:50):

This has been a production of Evergreen Podcasts, a special thank you to our senior producer, Leah Haslage, audio engineer, Chris Fafalios, and video producer, Will Pritts.

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