Podcast: Revolutionizing business banking: A deep dive into bank-fintech partnerships with Meow CEO Brandon Arvanaghi

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Show notes

Bios

Bill Cilluffo joined QED as a Special Advisor in the fall of 2014 and became a Partner in 2015. He is currently Head of Early Stage Investments after six years as Head of International, leading QED’s Investment teams in Latin America, Europe and Asia.

Prior to joining QED, Bill spent nearly 20 years at Capital One, spanning several roles and leading several businesses. He spent the first 6 years of his career leading Marketing, product development and credit policy for Capital One’s subprime credit card business; ultimately having overall P&L responsibility, and growing the business to become the most significant player in the market. He moved on to spend 2 years in various new business development roles, spanning the telecom, medical finance and small business finance industries. Bill spent 3 years as Deputy Chief Credit Officer for the bank, playing nearly every role there was to play in the central credit function, after helping build the department from scratch in 2002.

Bill then pivoted his career to general management, leading Capital One’s Canadian, and ultimately International businesses, over the course of 6 years. Profitability of the business grew significantly under Bill’s leadership, through new product and channel introductions, acquisitions, and significant cost take out. During Bill’s last 3 years at Capital One, he led its Co-Brand and Private Label credit card business, building the business nearly from scratch to one of the top few players in the US market, through a series of acquisitions, most notably including leading the acquisition and post-merger integration of HSBC’s US credit card business, which closed in May 2012.

Bill graduated with a BA in economics from the University of Michigan, and competed the SEP program at Stanford GSB.

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Transcript

Bill Cilluffo:

You are listening to the Fintech Thought Leaders Podcast from QED Investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. QED is a global venture capital firm focused on investing in FinTech companies all the way from pre-seed to IPO. FinTech Thought Leaders brings together the most talented entrepreneurs tackling today's biggest problems. If you're looking to learn more about what motivates our founders and team members to succeed, you're in the right place.

Hello and welcome to the Fintech Thought Leaders Podcast. I'm Bill Cilluffo, head of International Investments at QED Investors. Today on the podcast, I'm excited to be joined by Brandon Arvanaghi, CEO of Meow. Brandon, welcome to the podcast.

Brandon Arvanaghi:

Thank you, Bill.

Bill Cilluffo:

Well, look, I know we've got a ton of fun things to talk about as it relates to banking as a service and how fintechs can more effectively partner with banks. But before we dive in, I'd love for you to share a little bit with the listeners what Meow is and what you guys do.

Brandon Arvanaghi:

Meow is a business banking fintech and we love Costco. The Costco model is you'll listen to the CEO and he'll say, "We're a volume business, not a margin business." Costco doesn't make a ton of money on anything they sell, but they want to sell a lot of it. We want to apply that model to the business banking landscape. We try to give the economics back to the customer. When they get a checking account through one of our partner banks, we pass back the majority of the economics of the interest to the customer. If someone were to apply the Costco model to business banking, that's an enormous vision and that's what we hope to be able to do at Meow.

Bill Cilluffo:

Oh, that's awesome. And how long have you guys been at it?

Brandon Arvanaghi:

We've been around for three years now. We're approaching $2 billion assets on the platform for Meow Technologies Inc. We're only about 15 people as well. One of the key parts of this thesis is we have to be ruthlessly operationally efficient, so that we can become profitable while playing this game, which compounds and pays off in the long run.

Bill Cilluffo:

That's pretty amazing. $2 billion in assets with 15 people. You don't hear about too many stories of pulling that off these days, so kudos to you guys.

Brandon Arvanaghi:

Thank you, appreciate that.

Bill Cilluffo:

We're going to dive into a topic today that I know is top of mind with lots of people in the Fintech ecosystem, which is fintech and bank partnerships. You guys, what you just described, you help a bunch of your clients intersect with a number of partner banks that you work with and have a really interesting way of doing that, but this is heavily in the news and really has been for the last year or so and probably will continue. We all saw the crazy weekend when SVB needed to be rescued at the last minute and more recently, we've heard about Synapse bankruptcy and I know that that's impacting a number of different fintechs in the ecosystem. Starting with a very high level, I wonder if you can comment on these sorts of events and what are your main takeaways?

Brandon Arvanaghi:

They're all different events. SVB very different than what's going on with Evolve Bank and Synapse, for example. I would say some are very predictable and some, frankly, fintech founders should have predicted some of the events. I wouldn't say SVB falls into that category. That was a crazy moment in history on the banking side, but what's going on with Synapse and Evolve is messed up. There were red flags for years, which I think a fintech founder should probably have noticed that a couple years ago and said, "I'm maybe not going to partner with this middleware or this partner," and now we're seeing the reality of that. It's rearing its ugly head now.

Bill Cilluffo:

Do you have any rules of thumb as to the things that you should particularly be nervous about in a situation?

Brandon Arvanaghi:

I can give you an example from Meow. Two years ago or so, we were going to spin up our first partnership with a bank partner and there were quick and easy ways to do so. There were options that said, "You'll be feature complete in a matter of days. You'll be able to have international wires, you'll be able to have a card, you'll be able to have anything you want." Very low friction onboardings, the lowest friction you could imagine, live in a week or two. That smelled fishy to us. It smelled really fishy to us and we saw everyone, seemingly everyone of our competitors, for example, doing something similar.

The question to us was why does this sound so easy? Why does this seem so easy? It doesn't match our mental model of anything going on in the space. It doesn't match our mental model of how regulators are viewing bank fintech partnerships, how the banking as a service industry is evolving, why things are low friction when we're seeing them get more and more high friction elsewhere. This doesn't smell right. We did a long procurement process and we ended up partnering with banks, three different bank partners, that moved at a snail's pace comparatively, that took months and months to onboard, each with a different primary regulator as well. We were the first fintech partner for two of them. You couldn't have picked a more asymmetric bet than what we did, and it took us a lot longer to get up and we didn't have any of those features on day one from our bank partner. We didn't have international wires, we didn't have cards.

Competitors would feast on that. They would say, "Oh, Meow doesn't have this. Meow doesn't have that." Yeah, you're right. We don't. We did not at the time through our bank partners. The rule of thumb was just because everyone is doing one thing, it doesn't make it right. You learn that in high school, you learn that in middle school. At some point, I asked one of our advisors and I was like, "This doesn't quite make sense. There's very low friction ways to onboard. There's fast and loose partners in this space. We are dealing with very slow partners comparatively. We're doing things a much slower way, compliance first way. It doesn't make sense. Can you explain to me why this is still going on?" And what he said, I'll never forget, this was like a year and a half ago. "Things that don't make sense, never will." I think that was prudent, and that's where we are now.

Bill Cilluffo:

I'd love to start at the beginning. If you're a potential fintech out there that might need a bank partner for various things, how do you know when you're ready for a bank partner, so starting at the very early part of a journey of a potential fintech?

Brandon Arvanaghi:

There are a few adjacent to banking business models you can do where it makes a ton of sense to spin up a banking offering through a bank partner. I'd say if you're a formation tool for example, you're helping companies form then when a company forms, they're going to need a business checking account. You as a business might feel you're ready to introduce a business banking offering from a partner bank. I think that's fair. What I think is changing, is that historically it seemed to be that if you're any software company that could have a business banking offering from a partner bank, they would spin it up in one of these quick, spin it up in a week scenarios, and that is wrong for a lot of reasons. Number one, it takes a lot more effort now as it should to spin up with a compliance first bank. Number two, it's going to take a lot of ongoing effort. It's a low margin, high cost, painful, slow arm of the business that you can't just moonlight.

I think the days of seeing, "Oh, let me just introduce banking until this offering is over." But if you're all about it, if you want to obsess over it day and night, there's still an opportunity for you. You're just going to need to have a big, big balance sheet. You're probably going to have to be series a, or you'll have to be a seed company that has a lot of social proof behind you for a bank to want to touch you in the first place.

Bill Cilluffo:

You already talked about the concerns with some of these very quick potential partners, but to choose a bank partner, what are the top few things that they should consider? You maybe referenced one that they should shy away from, but what are a couple of the main important things they should look for?

Brandon Arvanaghi:

You can look up the history of banks online. You can see if they've got consent orders. You can see if their name comes up in the news for all the wrong reasons. You don't have to be an expert or a genius to pick the right partner in that regard. I'd say that's the first way to screen them at the first level. Then you want to meet the executives of the bank or talk to them and understand if fintech is something they're just flirting with, if it's just an experiment that was approved and you have some mid-level person there who is the champion, or if it's systemic to the bank, if it's everyone in the C-suite has buy-in, they're planning on this for the next decade, they think this is where the ball's going. It's a combination of things. First, you avoid the red flags, which is tying your shoes level of competence, in my opinion, as a fintech CEO, and then it's about seeing how structurally committed the bank is if they're going to dedicate the resources to help your program grow, if they're going to build the features.

Bill Cilluffo:

Yeah, that makes sense. There's probably such a wide variety of people where partnering with fintechs as a core part of the strategy and some, which is, "Oh, everyone's doing it. Let me try it out and see what it's all about."

Brandon Arvanaghi:

And they'll be gone, in my opinion. Yeah.

Bill Cilluffo:

Probably the ones first most likely scared by news in the press, I would guess.

Brandon Arvanaghi:

Right.

Bill Cilluffo:

So look, you've talked about compliance so far. How do you think at Meow about assessing compliance as it relates to a bank? I'm going to guess here, there's both sides of this. There's, do they not focus enough on compliance and then are you worried about their sustainability? I've also seen the other way where some banks are so compliance focused that they'll never get anything done, but I wonder how you guys think about making these assessments and choices?

Brandon Arvanaghi:

The problem is a lot of fintech founders think that they're tech CEOs first and foremost. They have this impression of themselves. In the Departed, one of the cops says, "Do you want to be a cop or do you want to appear to be a cop?" A lot of fintech CEOs want to appear to be a CEO, which is flashy, fast-moving, cool tweets, cool Instagram photos, et cetera. And when you have that mentality, then you're going to throw anything at your bank partner, try to onboard people left and right, and do whatever it takes to win in that regard. That's not the winning path.

The way to think about it is you are in a partnership with your bank and you want to find the bank that you're on the same side of the table on that you are both treating the bank as though it's yours. Even though you're not a bank, you're treating it like it's yours. The bank's problems are your problems and your problems are the bank's problems. You find that commonality. You say, "Look, we want to be conservative. We want to do things compliance first way. This is the market opportunity for serving these kinds of customers. This is how I think we can reduce friction in the onboarding process." When you find the right partner on the same side of the table. That's how you get the best of both worlds of being compliance first and being within the right speed lane, so to speak. It really comes down to the fintech CEO's temperament and the bank partner.

Bill Cilluffo:

Yeah. That makes a lot of sense. How much do you value experience in the bank partners? There'd be one train of thought of, look this bank's been in business for whatever, 150 years, et cetera. They're rock solid. They have interesting pictures of Wall Street on their website Versus maybe, hey there's some other brand new bank that just came about a couple of years ago and just started, and should I inherently not trust them? How important is tenure or is that not really the right factor to think about?

Brandon Arvanaghi:

No, it's a great question. It's a trade-off, is the way I'd say it. I'll give you a very concrete example. We're the first fintech partner for two of our banks. Now, what does that mean? That means that there won't be, or at least there hasn't been because there's so few partners that they actually have and they don't seem to want many partners, frankly, there might be like three or four at one of them. It's a lot less likely that there could be another fintech program getting in trouble, that then leads to a concern from the public for that bank, which then would affect our program, if that makes sense. If a bank only has a few partners and you're their first one, that entire category of risk of some other partner creating issues for you goes out the window. That's a huge advantage.

Whereas, it might be smoother to partner with a veteran bank that has a thousand partners and you get up and running. But those people are getting in trouble now because they've been cowboys, in my opinion, for five, six, whatever years. I think the sweet spot might be a reputable bank that has a handful of partners that are all reputable in nature themselves. They work very closely with them. They don't partner with just anyone, but they know the ropes. They know how to onboard their fifth fintech partner, for example, so they're not learning and growing with you every time. That's probably the ideal, but there's a trade-off in everything.

Bill Cilluffo:

That's interesting. In diligencing a bank, you care a lot about who their other partners are. Your brand is related to the company that you keep. I guess is that even something that you typically have the ability to diligence? I assume banks are somewhat secretive with who their client list is?

Brandon Arvanaghi:

Oh, no. I mean the best part is you can and should. Any fintech company has to put we're not a bank. Banking services are provided by X, Y, and Z on their homepage. And so if you actually put that expression in quotes and search it on Google, you'll find an exact match of every website that has it. If you were to do that for Evolve Bank, you'd be able to list dozens. If you were to do that with one of our bank partners, for example, like First Bank, you'd see all their partners who are live, or a Grasshopper bank, or Third Coast Bank. You don't even need to ask the bank directly. You could just literally search the expression banking services are provided by, and then bank name on Google.

Bill Cilluffo:

Oh, that's fascinating. In the balancing compliance and speed, you've talked about how seriously you guys are taking the compliance side of this business, that you chose to go with new bank partners that maybe took longer, but at the end of the day, you're only three years old and you've got $2 billion of AUM, and I know you've launched a bunch of different features. How do you manage this relationship where you need the bank to move quickly? You're a startup and you wouldn't be in business if you're not moving quickly, but also need to get the compliance right. Are there any learnings that you've got to potentially share on how you're able to get both at the same time?

Brandon Arvanaghi:

I'm probably the 0.1% of founders, Bryce and myself, my co-founder, that believe in the Forest Gump theory of making a generational hundred billion dollar company, and I've touted this scene a million times. You can ask any of my investors, I've told them this since day one of the company. It's that scene in Forest Gump where Lieutenant Dan and Forest are trying to catch shrimp and they can't catch anything because there's everyone out there moving fast and loose with bigger boats, faster boats. Then that giant storm comes, right? And Lieutenant Dan is swinging from the top, navigating the boats, screaming, et cetera, and they're the only boat that lasts through that storm. Then Forest says, "After that, shrimping was easy." They're catching all the shrimp and they create bubblegum shrimp.

I am not as concerned about leaving meat on the bone. We can leave meat on the bone from any decision today, tomorrow. We can go slower than all the competitors. I very much believe if you stay patient and you play six year, seven year, eight year games, then you'll catch the shrimp. Speed is not really our top priority.

Bill Cilluffo:

Fascinating. And I assume related to that, is the fact that you're only 15 people and you've done an incredible job of keeping your burn rate low, right? Presumably if you had a hundred people, you might be forced to take a different set of choices. Yeah?

Brandon Arvanaghi:

Exactly right. That's the vast majority of it. We don't have a valuation we have to justify with investors. We don't have to go to market for more funding. We don't have a head count of 600 or a thousand. Exactly right. We stay lean, stay in the game, pass back the economics and build a compounding success, not a quick rocket ship in any one year.

Bill Cilluffo:

Yeah, that's great. Earlier in the discussion you referenced you need to find someone where you feel like you're sitting on the same side of the table, they're owning your problems, you're owning their problems. How do you really assess and build this cultural fit element? It sounds like that's a really crucial part of what you've found successful in your bank partners. Any learnings or thoughts on that front?

Brandon Arvanaghi:

It's not something you can forge. It's not there all the time. There's so few banks to pick from, the reputable ones at least, and then you have to meet the executives, and you just have to understand each other at your core. If you're the same kind of person, if you're ethically aligned, et cetera, then you'll be in a good spot. But it's hard to get to that, and it's hard to find that partner.

I will say one of the reasons that's so important, is because when that becomes the case, when the bank partner trusts you to treat the bank as though it's your own, even though you are not a bank, there's more you can do together. You're able to ultimately go faster if you are proven to be a valued partner who treats them the right way.

Bill Cilluffo:

Presumably, when you first got your first bank partnership, you were working on a pretty narrow set of things. I've talked to you in the past about your vision. What you're doing now is only a fraction of what you plan to be doing five years from now. Are you trying to select bank partners more for what you're doing today or are you trying to select bank partners for what you think you could be doing years from now? There's no perfect answer there, but I'd love to hear a bit about how you think about that.

Brandon Arvanaghi:

There's not a ton more. I think financial services are a commodity, right? Bank A's offerings steady-state are going to look very similar to Bank C's. There's not a ton more that we're missing, for example, that a different kind of bank would be able to do. There's underwriting expertise that a different bank might be able to provide, and that's always an interesting conversation if we were to partner with them. But the biggest thing would be if there's a deposit concentration issue, if we become too big for any bank, and I don't think that's going to actually be a problem for the next several years, even as we get into tens of billions in deposit. I think there's ways to work through that, but that's the only thing that really comes to mind right now.

Bill Cilluffo:

On that note, I know I've been in a number of conversations with fintechs and various bank partners where there's a discussion of, "Look, should you try to get multiple bank partners for the same thing so that you have redundancy and you have negotiating leverage? And heaven forbid if one of your bank partners gets into trouble, you have backups, versus on the other side, every fintech starts out pretty small and getting the attention of a bank partner, maybe there's value in really consolidating your efforts and taking a little bit of risk, but really working with one partner so that you can get their full attention and build things out." Do you have any advice on how to think about redundancy, how to think about multiple partners versus concentrating? Again, once companies have been successful and they're large, well, you can have your cake and eat it too, but early on, I know there's trade offs. Any thoughts on how companies could think about that?

Brandon Arvanaghi:

You need multiple, and we have three. That's more that I've seen with companies that are like 10x our size or like 5x, in some cases, so maybe we're the most conservative. And on top of that, we're so crazy that each of our bank partners is a different primary regulator as well. That was mostly on purpose, is what I'd also say there. If you're big enough to launch with a bank, then you're big enough to launch with two or even three, and you really need to do that. Unless you're really strapped for cash and you can only spin up one, which is costly, then you should really have two or three. And even then, if you're strapped for cash, I doubt the bank's going to want to work with you.

Bill Cilluffo:

And can you go in maybe another level of depth? Why is that? It seems like the obvious answer is multiple to you. Why is that the obvious answer? What's wrong with just kind of, Hey, I'm small, I'm trying to prove out product market fit. Let me just get started with one so I can focus and then diversify later?

Brandon Arvanaghi:

It's redundancy. It's different banks have different capabilities to onboard different kinds of customers. They might have the expertise in-house to handle them from an AML perspective. They might have different underwriting capabilities. If one of our bank partners is better at giving lines of credit, for example, the real estate funds, which is a giant vertical for us. If the bank partners of the sweep network, there might be a different sweep network a second bank partner works with as well. One bank might have checked deposits live sooner than another. There's just so many reasons to have redundancy. That's not even talking about the failure case or the negative case of, okay, the bank slowly decides they don't want to be in fintech anymore. That's all just for the offensive case.

Bill Cilluffo:

Presumably, there's tons of fintechs out there that are already partnering with banks, in probably ways that you wouldn't advocate. If you're listening to this podcast, how can you take stock of what you've already done and try and help make decisions on, "Hey, should I continue down the path I'm on? Should I dramatically change paths?" If you're already in the middle of it, any particular advice you'd have?

Brandon Arvanaghi:

Yeah, so my advice is if banking is not core to the bottom of your heart, core to the business that you're trying to build, having a bank partner, you don't belong in this space because it should be. It's going to end up being your top focus. It's going to end up being millions in expenses a year, I believe. All you think about. You're going to have to go slow. You're going to have to run everything by your bank partners in most cases. That's number one. I know it was probably easy to spin up with these bank in a box solutions, but that's not the future. That's the first thing you have to understand, is this critical to my offering? If it's not, you probably don't belong here.

Bill Cilluffo:

If I'm taking anything away from this podcast, bank partnerships are difficult. Using Meow as an example, they can be super powerful too. If it is core to your strategy and you are able to do it well, I know you've found numerous use cases that are really valuable to your customers.

Brandon Arvanaghi:

Yeah, I want to do that message first because it was too easy to spin up certain partnerships. And historically, that's just not how the market really is, and we're seeing that now. But having said that, if you want to build a vertical Neo bank, for example, which I think is still a promising line, I think it's underfunded, frankly, I think you could really get after becoming the business banking fintech for truckers, or the business banking fintech for X, or something like that, then it's core to your business, and there's a real opportunity there. Just remember, you're not a tech CEO. You are a slower moving conservative, compounding focused person at this point, and you need to find partners who have not looked like the partners you've chosen in the past.

Bill Cilluffo:

Yeah, no, it makes sense. Well, look, we're coming toward the end on this topic. Brandon, what have we not covered and what else would you like to share with the listeners?

Brandon Arvanaghi:

I think it's a tragic situation what's going on with Evolve and Synapse. A lot of this was predictable. I think we're going to learn a lot more in the coming months, but if you're going slow, it's not the end of the world when you're picking a bank partner. In fact, it's probably a very good thing because you have staying partner with that partner in five years, 10 years, and this is a very long partnership. It's not a six-month thing. Keep that in mind. You go slow sometimes to move fast in the long run.

Bill Cilluffo:

Yeah. Well, great. Well, Brandon, thank you so much for joining us today. It's a topic that's probably not the most fun one people talk about, which is I guess part of your whole point, right? If you're not going to be spending time thinking about this every single day, you should probably ask whether or not it's worth it. But if you are, and there's clearly great opportunities, but some of the recent events has showed us the need to do it correct.

For any of those listeners who'd love to hear more in depth, I know Brandon's wrote a very in-depth piece on this, so if you find him on X, that still feels sort of weird to say, so I'm going to keep calling it Twitter, but @Brandon, I know you can find his further thoughts. Look, I really appreciate you joining us today.

Brandon Arvanaghi:

Thanks a lot, Bill. Had fun.

Bill Cilluffo:

Absolutely. And to our listeners, thank you very much and take care, and we'll see you next time.

This has been the FinTech Thought Leaders Podcast, your window into the world of venture capital and financial services with today's digital disruptors. QED is proud to provide the best FinTech advice you can get. To learn more or to read the full show notes from today's episode, check out QEDinvestors.com and be sure to also follow QED on Twitter and LinkedIn at QEDinvestors. Thanks for listening.

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