Is Fintech Softening?

Joe Welu: Hello everyone. I'm Joe Welu. Thanks so much for tuning in to Expert Insights, where we talk with industry leaders across modern financial services to discuss leadership and innovation. Let's get started. Hey, everybody. Joe Welu here with another episode of Expert Insights, where we get together to talk about Leadership and Innovation in Modern Banking and Lending. Today, I am joined by a very bright and brilliant guy, Jason Henrichs, founder and CEO of Alloy Labs. Jason is recognized across banking and FinTech as an innovator across financial services, creating new business models in using technology to drive change. He has experience as a founder, venture capitalist, enterprise great executive, Board member, trusted advisor and startup mentor. He co- hosts a great podcast,'Breaking Banks', the number one global FinTech radio show and podcast, as well as his own podcast,'FinTech 5' on Provoke. fm. Jason, buddy, good to be with you again, man. How are you doing?

Jason Henrichs: Good. I was jealous the episode on'Breaking Banks' that you and JP did sounded a phenomenal. I was bummed. Didn't get to be me talking to my buddy, Joe, complaining about inaudible weather.

Joe Welu: Yeah. Right. No, it was good time. I appreciate the opportunity. So want to talk... Get right into it, man, and talk about a topic I'm hearing a little lot about, and maybe you are as well, is FinTech softening? What's happening? Markets are getting clobbered in some cases. What's your take?

Jason Henrichs: Well, I mean, the question I think is such a timely one, because there's a bunch of macro trends that we don't have to go into with inflationary fears, threat of nuclear wars causing turbulence in the broader markets. But I don't think this is a trickle down effect. It may be amplifies it. I think part of what we're seeing is... There was a bit of a Ponzi scheme in funding, right. Whereas how fast can I go raise and raise more in this idea of bubbling valuations, kind of pulled the next round behind. It is like," Well, I need to go raise in a bigger round, at a higher price and a unicorn status." And there's so much capital sitting on the sidelines kind of funneling the whole thing that even the insiders were willing to prop up valuations. And I think what we're seeing now is the aha moment of like," Oh, I actually have to go solve the indifferentiated problems." I'd say that the one you can go pick on is, if you look at the neobanks, there's a neobank for everything. The neobank for people who use their left hand when it's a full moon, it's okay. But is that different? Is that a need that's actionable? And on the flip side, it's easy for banks to point out and go," Aha, this is why this whole FinTech thing was overblown. And we focus on cost cutting measures." Well, you can't cost cut your way to success. And what we're going to find in between, I think is a happy medium that as the FinTechs are under pressure to really rethink," How do I deliver value?" And banks are challenged to figure out," What do I do that is unique?" That's where we're going to see the goodness happen. In some sense I'm disappointed. Dan O'Malley and I co- founded PerkStreet back in 2008 and Shamir Karkal was one of the co- founders of Simple, and I talked about this, couple, I guess months ago now, it's okay. So now we're 13 years later, it's frankly pretty disappointing that the neobanks can get you your paycheck two days earlier, that's it. That's all the inaudible That's what you guys came up with a prettier interface in my paycheck two days earlier.

Joe Welu: You're not far off though, in some cases, right, I mean, that's kind of, that's a big hook. I mean, that's one of the things these guys are sort of betting a lot of capital on, that they're going to be able to build a lasting business on that kind of differentiation.

Jason Henrichs: But under pressure though, Joe to build on that. This is where I think the super exciting things happen. On our investment side, we're looking at several deals right now that fundamentally rethink the business model and rethink what the value proposition is on both sides. Both as a supplier and as the consumer of their products in ways that are just much more fundamental. And I think when you're in this race to the top, it's about eyeballs in the first boom bust, it's all about growth and higher valuation. You don't necessarily focus on those hard things, you focus on the easy things that feel low hanging fruit, but they turn out to be vanity metrics.

Joe Welu: You're not really focusing on how do I go out and build sustaining relationships with these customers that are profitable, right. They're going out and acquiring a bunch of consumers that may or may not be able to drive a lot of profitability long term. And so kind of what you're saying is when things come under pressure, now you're going to really see where is value and differentiation actually going to happen, is that kind of what you're saying?

Jason Henrichs: Yeah. And if you look at some of the banks to be like, Oh, let me scoff at Chime and said," I wouldn't want their low value customers except." Chime has gone out and rethought how they acquire customers. So they're not paying the costs that a bank are and they've thought how they deliver on that. So maybe it isn't such a... Under the covers, it's actually a good relationship. It's just not one the bank is prepared to support, because the banks oftentimes think is... Not just banks and credit unions, are stuck in the," This is what we do and how we do it." And without kind of rethinking, what do I do for whom that's unique that they're willing to pay me a premium or they're stickier, that is not a long term strategy.

Joe Welu: Yeah. No, that makes total sense. And I mean, you're such an interesting guy to talk to because you are at ground zero of a lot of innovation. You're investing in FinTechs through Alloy Labs. You're also, you get a chance to interact with a lot of banks that are in the middle of various stages of digital transformation. Did I say that accurately?

Jason Henrichs: Yep.

Joe Welu: Yeah. And so you sort of see both sides of it. Right. And would love to hear kind of a little bit about how the banking world that we're a part of, and the conversations that we end up happening is like the whole digital transformation theme. We see a lot of organizations getting to the backside of some of those projects and saying," Okay, what did we really... What did we get? What did we improve?" Are you seeing that? Is it showing up more right now or am I just... Do I have a different see?

Jason Henrichs: No. I mean, we've been seeing it from the Savvy organizations for longer time. And I'll tell this vignette. This was several years ago now, but it's just as true. I had taken a red eye from Boston to Seattle to be with a relatively large bank out there. And the first thing the CEO said is... I strolled in bleary eyed with my whatever that larger size coffee is than the venti and he's like," We tried innovation once and it didn't work." I was like," Why did you just fly me across the country?" And if that's the case, I'm like," Well, as long as I'm here." And you know me well, and Joe, I was like," Might as well ask a bunch of questions." I'm like,"What did you try?"" We tried CRM." I'm like," Okay, what did you try with CRM?" And they're like," We implemented." And I won't name the name. It was not Total Expert. I'm like, that's interesting when they said it didn't work. I thought, did they go for some startup or did they try and build it themselves? Which you shouldn't do. And then I'm like," What isn't working about it?" And they're like," We're not seeing any value." I'm like,"What are you doing with it?"" Well, we implemented this vendor." I'm like," You didn't do anything different though. You digitized a poor process, right, so now you're doing bad things faster. Good for you."

Joe Welu: And some cases, bad behavior, right. They already have customer facing people that don't have great habits, anyway. Now you're just going to track those poor habits for me.

Jason Henrichs: Yeah. Well, in worse, it had gotten so bad that the executive sponsor who was under fire, who said," We need CRM." Had been to some conference top, right, quadrant. This is the vendor, went and basically threatened everyone that if they weren't uploading all of their contacts and their activities by Friday at five o'clock, they'd be fired. And I don't know if this is just myth or lore around it, but even turned to one of their biggest producers was like," Even you could be fired." Sort of thing. And so basically all business stopped at noon on Fridays for people to take their paper processes and upload them into something that no one else was doing. And part of the challenge is we need to rethink the model. Data and analytics are the most powerful tools that a lot of the FinTechs use, and is incumbent financial institutions were used to locking that up. It's like," oh, we need to keep this, it's valuable. We must keep it safe. We don't use it for anything." And yeah, there's a creepy extreme you can go to with this, but if banks will say all the time that the unique, competitive advantage is their relationship with their customers. And this is mistaking personable with being personalized. So when we lived in Chicago, Lola who's asleep under the desk, she knew every Chase branch within a two mile radius because they all had dog bones. Right.

Joe Welu: I was going to say, I hope Lola is the dog and not your daughter under a sleep.

Jason Henrichs: No, it's the dog. Well, and my daughter can tell you, which banks have candy, right. The five year old's well aware of that, but every time we'd walk in, it was always, they would offer me a loan. It was like," How many times have I said, no, to the loan. And here's what I want. And I want offers that matter to me. And I want you to use my data and tell me about a product or a service or something I could do that's going to add value to my life." And that's actually how you personalize something for me and build my relationships. I like to pick on Amex. I think they do a phenomenal job in most things. But when I get my," We pick these offers just for you email." The only reason I open it is so that I can get a good laugh of like," This is what you think I'm interested in. What transactions are you looking at that you think this is what I want?"

Joe Welu: Yeah. No that's... I'm a fan of all things, kind of marketing and in customer engagement when it comes to financial services. So I always look at those things too, and it is interesting. You touched on something that I want to drill in on a little bit, and that is data and analytics. The FinTechs do a great job at using that, and the banks, correct me if I'm misquoting you, but the banks have typically... They've been doing a lot of that stuff, particularly some of the larger institutions, but it's been this secretive private thing to where they kind of keep all of the analytics and data in one place. This is my part, I'm just translating what I think you're saying. And don't necessarily drill that into the people, into the business processes where," Hey, there's somebody actually taking care of a customer." That if they had that insight could have a different conversation. Is that what you're saying?

Jason Henrichs: Yeah. And we need to free the data, which means, you need to be able to pull it out of silos and more importantly, get it clean and into the hands of people and then train the people. This is as much a cultural issue. One of our members at Alloy Labs, they're head of analytics and I we're having this conversation two years ago is their chief banking officer kept asking for these reports. And he's like,"What are you looking for?" I was just like like," The CEO says, we need to be more data driven." He's like me running. He goes," One, you don't understand what data analytics really is. Right. This is not old school at management information systems. Right. Let me give you some dot matrix, green and white stripe paper. You got to tell me what you're looking for. What kind of insight, let me go test something." But just generating reports, doesn't tell you what to do. And there's two approaches to this, right? There is the discovery it phase, which is probably a little complex for a lot of banks to jump straight to. But then there's the... And so that discovery is like," Hey let me go throw some machine learning against the dataset and see what clusters, and then go investigate, what falls out of it. I don't know what I'm searching for, or if I'll even find anything." That's probably a bridge too far for a lot of the banks listening to start. But then there's also this confirmatory hypothesis testing, which is," What do I think?" And you need to get in the customer's head here would make their life better in this data. And then let me go set up a test that I can go do this. Right. And this is one of the things that I think is so valuable in a platform like a Total Expert is. Yeah, you come with a whole bunch of user journeys out of the box, but your ability to manipulate and create new user journeys, I know this is how groups of the Alloy Labs members that are Total Expert customers use it, is they go test and continually optimize, and look at what data fall out of the bottom. Two is, if I do it this way, is that better or worse in a performance than what I saw elsewhere. And you need a platform. You can't afford to build your own. You can't use something that's hardwired because the cost of... Actually experimentation needs to be dropped. Otherwise if you need to do big ROI, and it's a big lift and it needs to integrate to my core, and it's going to take us six months to implement, that's too expensive. You're only going to do inaudible.

Joe Welu: Yeah. I just literally had a conversation with one of our large bank customers the other day. And they're using us for part of the business and not another part of the business. And it was really around that speed to market and speed to be able to iterate, right. And testing a different communication, different journey essentially. And I won't even name the vendor, but they have four or five developers dedicated. Every time they want to do something, they got to put it into a queue and go bring on developers, and by the time they can actually iterate and get feedback in the form of what happened, right. It's form five, six months down the road. And we're just like," Hey, the pace of progress is really damn important for you guys right now." Right. At least that's how we think about it. You agree, I'm assuming.

Jason Henrichs: Yeah. And I think a big part of this is there's got to be a cultural change. And that cultural change has to be modifying what we did is not bad. That is actually positive because the likelihood that you hit the hole in one, right out of the gate is so low that if you don't go back and continue to modify and optimize, you're squandering a huge opportunity for... Was now a sunk cost, right? The incremental cost of continuing to test and learn and optimize is low. And that's not an admission of failure, that's a growth mindset of," Hey, we're going to do some stuff. We're going to figure out. It didn't work as well as what we were doing. So let's revert back to what we were doing."

Joe Welu: I'll be slightly provocative a little bit if it's the right word on, do you think there's a lot of banks and credit unions that really struggle organizationally to have a true growth mindset when it comes to it evolving?

Jason Henrichs: Well, There's a reason that I still-

Joe Welu: It's sort of a dumb question, right?

Jason Henrichs: There's a reason I still get to give that talk both on stage and with bank Boards and management teams, can tell things are lightening up. I've done it three times in the last month, right, including one of the big banking schools is spend an entire day talking about, how do we teach bankers to have a growth mindset? And I think the biggest challenge is if you look at our business around lending, it is not about managing risk. So much as we've gotten into this world where we try and eliminate risk, not often do you point to the corner office and see the CEO who almost always has come up through the lending operation, some form or fashion and point to the," Hey, remember when Joe had that spectacular failure. Yeah. That whole strip mall idea, that was brilliant right before."

Joe Welu: That thing tanked, and we lost a bunch of money?

Jason Henrichs: Yeah. But we gave everyone a trophy and that was good. Right. I think culturally, we struggle with growth mindset. And so now you're talking about a business that tries to control losses. It's natural to have a selection bias for people who have a fixed mindset. And I think if we tease apart, these are two different things. For our core business, we're not saying," Hey, let's just, anything goes, let's go throw it against the wall." No, it's like safety and soundness matter and processes matter. But around the edges, we need to be comfortable taking some risks, understanding that taking the risk is for the purpose of learning. That's what it's true value is. It's not a traditional ROI that we're going to look at and we're like, we're going to go do this experiment as over the next five years is going to generate a 100 million dollars in revenue. Well, it's probably not an experiment if you can forecast all of that. But if we look at it and say," Okay, for a small cost of people dollars and the potential downside risk associated with it, let's assume it all goes bad, and we lose all of those loans. What's the minimum amount we could go test to say, is this worth it?" Or once I have a platform and I want to optimize my system, what number of leads say in the mortgage business, am I willing to risk to say," What if we totally changed our onboarding? And we flipped it around that you could do an automated approval or a workflow." Right. We willing to do 20 of those mortgages and look at what actually just falls out the other side, you're recognizing the whole thing could blow up. That's probably worth learning. Right? And then you go build your business case once you have data.

Joe Welu: Once you have data. So when you're working with banks and credit unions. And I guess some of the FinTechs out there that you guys work with and you're talking about transformation in projects, are you advising them on," Hey, do more proof of concepts, do more tests, do more 90, 180 day type scenarios. Is that part of your kind of advice package on a typical basis?

Jason Henrichs: Yeah. Should Alloy Labs operates a reverse accelerator, and it's reverse in the sense that where accelerating is the development of new types of partnerships and what the use case is, not about," Hey, let's go teach a startup to be a better startup." Or even to go meet a bank. Let me give you... A great example that came out of it is, one of our fourth thematic areas is around healthcare, and for both small businesses and for consumers. And specific within consumer, we've been focused on aging tech. And so one of our VC partners said," Hey, they haven't been partnering with banks yet. They're direct to consumer platform called Carefull out of New York, Carefull with two Ls. And what they do is they help adult children or caregivers manage the financials of the aging parents. Right. And what they had started down this path of can you actually map cognitive decline based on cognitive data? And it turns out you can, right. You start missing payments, doing double payments inaudible. All of these other places that they can help highlight. And having lived with my parents when we first moved back to Minnesota, I can tell you, elder abuse is real. Their phone rings off the hooks.

Joe Welu: That's totally real.

Jason Henrichs: What Carefull solves for is, this is not just a lever you throw where it's Jason is on the outside to Jason is now full power of attorney because that's what ended up happening. And it was not a smooth transition. There's this gradual change, just think where you're moving from, you have read access to, now you have limited read, write access to, you have full control over the span of 10 plus years. Right? So that's the problem they suffer. And so they come to the concept lab and our banks were intrigued right. As one of our banks described.

Joe Welu: I'm intrigued, that sounds fascinating.

Jason Henrichs: Well, And so one of the banks, and it's one of our smaller banks, they were all over it. They looked at this and they're like," We have a aging population base. It's a huge issue for us." And so their approach was like," Hey, let's just play out. What would a paid pilot look like for you?" That it's not a full integration. It's going to get us the data we need. And for Carefull, it was like," We can prove out that banks can use this and go do something with it." And they figured out what is kind of the minimum for both sides to say, this is a good fit. And it works stunningly well, right. And so now they're on the fifth iteration of it, because frankly, even after you've signed the long term contract, you should still have a proof of concept mindset. inaudible

Joe Welu: You're constantly evolving. inaudible.

Jason Henrichs: Right. This is not a core conversion where the project is done. The day it goes live. And it should be a perpetual proof of concept until you're like," Hey, this thing is just running and humming. There's no more to be done. Let's go innovate on something else." But if you sign a three year contract, you should probably think of that as 12 proofs of concept over that span of time.

Joe Welu: It's just so mind blowing when you think about though, I think it's just been driven in to a lot of the people in these organizations, because maybe the cores and legacy technology that," Hey, we're going to buy technology and that's the destination, we turn it on. And then it works and we don't need to do anything." And it's like, man, it's just, that is not how your technology partners should be approaching. And I know you guys see that a lot. So couple more questions here, buddy. So you guys obviously see front and center ground zero, a lot of digital transformation projects. If you had to pick a couple of key points of failure, I think we've talked about some of this, but where would you point to most often are the failure points in some of these organizations when it comes to big digital transformation projects?

Jason Henrichs: Oh two. I'd just point to, the first one is always looking at cost savings. And we love those cost savings. Cause they're the easiest to point to," Hey, in our efficiency ratio, what's the impact going to be in hard dollars saved." Except not everything can be a cost savings. You're not going to cut your way to greatness, as I already mentioned. The other is there are just some foundational things that need to happen, that you're not going to attribute the ROI to. And I'd say the two big ones are, you need to figure out data and how you free the data. And second, you need to figure out APIs. And those are two things that you cannot point to today and just say," Yeah, and here's what that direct impact is." You just need to go do it. And the longer you inaudible. The longer you wait, the worse it's going to be. And if your Board says," No, you need new Board members because-

Joe Welu: It's really that profound, isn't it. Right, if they're not investing in freeing the data and having APIs and set up and those types of things, it's like, you're sort of just sealing your own fate. Right. It's me, just a question of time.

Jason Henrichs: Yeah, exactly. And then I'd say one of the other places that banks overthink the," I need a full digital transformation strategy." And they're going to spend so much time planning and the world's going to move so much further before they catch up. And this was one of the big insights out of our robotic process automation center of excellence. And I would say, this would be true of anywhere that you're looking at," Hey, where are there places I can automate." Is don't focus on the biggest impact things first, just go start doing some of them. This was a big aha for several of the members is just like," Yeah, we did one in the labor savings that we were able to redeploy and go work on other things." We just kept finding next easy things that quick hits added up a lot faster.

Joe Welu: Quick hits, man. That's so it's... You can make tremendous progress on various projects when you just take that mindset of," Let's find some quick wins, low hanging fruit." And then just do it again. Before we went on the show here, we talked a little bit about banking as a service. And the fact you mentioned that there's now a somebody starting a neobank for everything, every unique imaginable, unique person or group is, has a neobank, Where are we at with that trend? What are you seeing? And what are your thoughts?

Jason Henrichs: Yeah. Well, in I'd say the flip side is not only is there a neobank for everything, there's also a bank behind them, willing to be the bank behind the neobank for everything. So Fenestra just published a survey in Fenestra that 85% of banks said that they are going to do something in banking as a service in the next 18 months, which I find a couple things astounding about this, like which is, who are the 15% of banks that don't want to and are willfully choosing not to. And for the 85% of them that are, how are they going to get into it and do it in that timeframe? Because, I don't know that any bank would be accused of being fast and standing those things up. And what this really comes down to is a principle for both the neobank and the bank behind it is strategically what are you trying to accomplish? There just is not enough differentiation on either side in terms of what they're doing to make this business model work. Fundamentally I've said this before, and I think some people take umbrage to it, but is interchange cannot be your business model. I think interchange is going to go down. I think we're going to see it begin to maybe not get all the way to zero, but it's under pressure inaudible.

Joe Welu: People that don't know what that is, the fees that are charged when there's transactions, correct?

Jason Henrichs: Yep. So what the merchants pay that fund your awards program that are a huge source of profitability for most banks, it's the reason Mastercard and Visa exists. And I think what we're going to see is, there are now alternatives. When Dodd – Frank was introduced that put a cap on interchange fees for the biggest banks, there was no alternative for the merchants to not still pay those fees for the banks that are under 10 billion dollars. Well guess what? There are now, right. The number of places you can go and not only is it more convenient for you to say," Ooh, I'll click out using Amazon. And it knows my address and all of that." Well guess what? That button exists in a whole lot of places. And how often, do you just embed a payment method in your wallet for something. I can tell you and hope they don't do this. They would not have to give me very much at Starbucks to get me to link my routing and account number and turn that into an ACH. And actually when RTP is fully linked, right, if they want to take that, because I already store money there. Why? Because it's too inconvenient to like," Oh man, I..." Was getting a latte for my wife, which quadruples the cost. Right. So I only had 4 bucks in my Starbucks wallet. Now I need 25 bucks based on everything shorted. Right? So I keep 50 bucks in my Starbucks wallet that just auto loads. Well, if they said," Hey Jason, if you were willing to do that, to make it an ACH, you get one extra donut, and a quarter.""I do that for a donut. Are you kidding?" Right. Well, my case here is finished federal rap. I would switch for that and so that's where we're going to see interchange begin to have pressure. And now we're going to get into this case. It's like," Okay, so what's the business model, because the bank needs to be paid. The tech stack needs to be paid. The neobank needs to be paid. Everyone needs to rethink their business model in this new world. How do I operate?" And so Angela Strange of Andreessen Horowitz views said," Everything's going to be a FinTech." Which is true. If you are conducting commerce, you will buy the definition. If you are buying, selling, storing value of some sort, you are becoming a FinTech. Well, you the threat to traditional banking is not these new startups coming in. It's those that view the friction that we put into the system, whether it's fees or time or inconvenience, that's, what's going to get taken out of the system. There's a reason. And it seems crazy that why would anyone go to Rocket Mortgage? It's more expensive, right. On average 35 basis points that more expensive. Why would I go to Rocket mortgage? I'll tell you why, because Jason's problem that he is solving is not how inexpensive is that mortgage it's called, don't lose the house and I need to get a mortgage approved over a Saturday and I can't go into the community bank. Right. That's the problem Jason's in solving for, and I'll just refi that puppy later, but it is not get mortgage it's, don't get divorced because you lose the house that you've been dropping inaudible

Joe Welu: Don't have your wife or spouse mad at you for losing the house. That's a good one.

Jason Henrichs: We're living in her in- law's house, right. Like this was inaudible use case. And so nowhere at time, but you have to think about what that problem is and where it fits.

Joe Welu: That's very well said, buddy. And I feel like we're going to have another conversation and go deeper on those topics. So thank you as always, bud. Thanks for the time, Jason. Appreciate your thoughts, man.

Jason Henrichs: All right. Thanks Joe.

Joe Welu: Thanks so much for joining us today. Be sure to subscribe wherever you get your podcast.