RegFi Episode 48: Digital Infrastructure, Fintech and the Future of Banking
34 min listen
Alex Acree, Chief Legal Officer at Unit, joins RegFi co-hosts Jerry Buckley and Caroline Stapleton to explore the role that a financial services infrastructure company can play in the evolving delivery of financial services to consumers and businesses, strategies for innovative financial services startups to secure capital, and regulatory developments and challenges facing fintechs and banking-as-a-service providers.
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Jerry Buckley:
Hello, this is Jerry Buckley, and I am here with RegFi co-host Caroline Stapleton. And we’re delighted to have as our guest today, Alex Acree, the Chief Legal Officer at Unit. Alex brings wide-ranging experience to our conversation. He has spent his career at the intersection of technology, finance, and law as an attorney, advisor, and investor in financial services and other regulated industries. He has deep experience counseling banks on regulatory matters, innovative technology companies through their life cycles, and investment firms in connection with the formation and management of private funds.
Alex, let’s begin by talking about your work at Unit. And for the benefit of our listeners, who may not be familiar with Unit or its business model, could you share with us the business need that Unit is addressing and how Unit goes about meeting that demand from its customers?
Alex Acree: Thanks, Jerry. Before I get started, I just want to thank you, Jerry and Caroline, for having me on today. It’s a pleasure to be here with an old friend talking about these issues. And so happy to jump in.
So maybe I’ll just start briefly by talking about what Unit is. Unit is, at its core, a financial infrastructure company. We are a third-party service provider to banks. We provide a system of record for those banks that is purpose built for launching and managing digital programs. So digital banking programs, that means, we offer banks the technology to track accounts and balances through a fast and scalable, reliable ledger that’s maintained on their behalf. We help them power a wide variety of transaction types from all the traditional ones to some of the more current and kind of cutting edge like real-time payments and the like. We help banks connect to third-party partners of various kinds. Those might be distribution partners in the form of either fintech companies or embedded finance opportunities, as well as with a host of other best-in-class solutions that they might want to incorporate, such as different compliance solutions, dispute management, etc. The list goes on.
And then finally, we offer banks and the companies that want to work with them access to white label components and applications to reduce the lift on them associated with building custom front end user experiences. Not every bank and not every company that wants to work with a bank wants to go through the exercise of building their own custom user experience. And so, we offer a variety of tools that can help make that easier for folks. You can think of us in this way as Unit is functioning a lot like a lightweight side core system, a record for banks.
And when we look at why Unit was started, you know, ultimately, you know, our mission as a company is to power what we say is to power modern financial experiences. We think that a variety of constituencies from end customers to banks to the companies that want to work with banks are demanding and want access to more modern financial experiences that they can’t always get from their traditional banking provider. And so that’s ultimately what we’ve tried to build as a company.
We see value to each of these groups, first in the form of end customers. They are increasingly expecting to consume their financial services digitally. That’s a trend that continues to go on, and even in a more accelerated way. They want to have access to high-quality and convenient financial services that are both contextual and low cost. So, by contextual, I mean actually incorporate the context of the other activities that they’re engaging in. Banks are very much in need of better technology solutions to be able to access opportunities in digital financial services. And then ultimately, the companies that want to work with banks are looking to improve the experience that they can offer their customers by incorporating financial products safely into their digital platforms. They’re also, in many cases, looking to create more stickiness and more competitive differentiation for their digital offerings.
So that’s what Unit is, and this is kind of how we see the value that we can bring to each of those constituencies.Caroline Stapleton: Alex, thanks so much for joining again. And I think, you know, what you’ve broken down as the different constituencies is really helpful to understand what the model is that Unit not only offers, but facilitates for others. But I’m thinking that maybe an example or a case study that would give listeners, you know, kind of a more clear understanding of exactly how embedded finance works, the roles that the various players have to perform in the model would be really helpful for those who are kind of new to this area.
So would you mind taking us through, you know, an example, a case study, how this works and giving us a little bit more illustration?Alex: Yeah, absolutely, Caroline. Thank you. As I mentioned, we’re a financial infrastructure company, and we really see ourselves in that way, kind of as providing the foundation for our banks to be able to better serve end customers through digital banking experiences. And we really want to provide the technology and support services to achieve that mission.
And so, we’re very passionate about infrastructure at Unit. And one of the ways we think about this and talk about it a lot is really through the analogy of physical infrastructure, because that’s the way that most people actually think about infrastructure. It’s hard for them as often to think about the digital infrastructure that’s being provided. You know, just I’m going to come back to this a couple of times and just focus first on the physical infrastructure in the case of trucking, for example.
So, every day we’ve got thousands of trucks that are traveling across our roads that are moving goods across the country. And customers depend on these trucks to be able to move smoothly and safely without delays and accidents. And this kind of activity helps to power the economy. But really, like, you know, no one really sort of thinks about it, but these roads are, I mean, sorry, these trucks are all dependent on having high-quality roads that make it safe and efficient for these trucks to be able to move around, and similar with financial infrastructure. You know, we want to be the road. We want to be the foundation that’s powering these digital financial experiences for our banks, and the companies that want to work with them. But we really see ourselves as that enabling technology to help make it possible for end customers to consume high-quality financial products in more convenient ways.
And so, I’ll walk you through an example here. Again, just sticking with the trucking business. We work with a company called Outgo, for example. There’re others that do this as well. But, you know, in that case, the trucker that they serve are looking for a more unified and better set of financial experiences that they can consume. Right now, they depend on, you know, oftentimes carriers depend on, you know, banks from one location, financing from another. And it’s like a pretty disjointed experience and difficult for them to access all of those financial products in a way that actually makes sense, is easy, and has the context associated with their business.
In the case of this example here, Unit provides bank partners with the technology that they need to be able to offer these high-quality services through digital partners like Outgo, where the financial experience is unified and is very enriched through the information that Outgo has and through the banking services that are provided in a convenient way through that platform. Hopefully that helps to illustrate it a little bit.Caroline: No, it does. And I think it’s just, it’s exactly like you said, we’re so used to thinking when we use the word infrastructure, we think of, you know, physical infrastructure, something that we can all see. And then, you know, we’re also familiar with the not physical, but resulting in a physical outcome infrastructure. And here is something that’s critical to what everyone is using to make the economy function, payments and financial services and products, but harder to see and understand how infrastructure works there too. So, thank you for laying that out for us. Alex: Yeah, for sure. Jerry: That’s very helpful. And I’ve observed that you’ve been an active player in the public policy arena as well. You serve on the board of FinRegLab, which as our listeners know, because the head of FinRegLab and her deputy have both been guests at RegFi. It’s a nonprofit innovation center that tests new technologies and data to inform public policy and to drive the financial sector toward a responsible and inclusive financial marketplace. And you’re also a close observer of developments at the intersection of financial services, regulation, and technology from many points of view.
From your vantage point, how do you see the delivery of consumer financial services evolving over the next decade? And how do you see regulation of the players in this space changing as well? Ten years from now, what do you think financial services landscape will look like? And what tools will be available to consumers as they make their financial choices? And who will be providing those tools? Big tech companies, fintechs, banks, or some new players?Alex: Thank you, Jerry. Yeah, I would start by just kind of noting that I think we’re at a crossroads right now in the history of financial services. And again, it may be by virtue of having been in this space a long time and being a bank regulatory lawyer by background, but I really think about any individual moment that we face in the financial service industry as being very much in the context of the history of financial services. And I think we’re at a really pivotal moment right now in the history and evolution of financial services in the U.S.
And I think a lot of what the financial services marketplace will look like in 10 years, it’s gonna depend on not just what the market does today, but the policy choices that we make as a country today. I think this is particularly the case now for a variety of reasons. I think we are very much in a moment of change in the industry. There’s been, as I noted at the outset, a huge change in the way that customers want to consume financial services. You know, as much as we may look back at the kind of historical Main Street, you know, unit banks of the past, when I think unit banks, you know, unit banking of single location serving one geographic community, it’s just not the way it’s being done today. And folks are increasingly expecting those financial services to be there when they need them in convenient ways.
I do think we’re at a point in time where I got involved in financial services from a real interest in helping improve financial health for customers. And I think we are at a moment where we’re able to start thinking about moving from just access, like do customers have access to a bank account, to the question of do customers have access to high-quality, convenient banking services that understand or have context for what it is that these customers are trying to do.
And so, when I think about the technology changes, when I think about the changes to customer preferences, I think we’re just at a moment of real change in the industry. And I think how we react and respond to that change is going to very much impact what the landscape looks like 10 years from now.
But to answer your specific question, I think I would kind of break it down and talk about sort of the who, what, and how. In the case of the who, who will be providing the financial services? The what, what will the financial services look like? And the how, how will the financial services be delivered?
I’ll start with actually the how, because I think it’s the easiest. Customer preferences, as I mentioned, have changed substantially. There’s tons of research showing that. Branch visits are down. Customer expectations around digital banking have changed a lot. I think this is a change for good. Well, it’s not going to go back, I should say, to the way it used to be. Barring some massive change in the economy, it’s not as though folks are going to stop looking to consume their financial services via mobile and via web. I think it’s going to be very much digital consumption of financial services and that will just continue to be the case. So, for me, the how is pretty easy.
In terms of the who, I think this is a really, really important question. And probably to me, probably one of the most important policy questions we have facing the financial services industry today. Because if you look at the data, or at least my read of the data, what I see is the continued steady decline in the number of small banks that are serving, that exist, both banks and credit unions, and a number of challenges that are facing small and mid-sized banks. While the number of these smaller banks have dropped, the number of large banks has continued to go up and in fact has accelerated in its growth.
And one of the most interesting charts that I pay attention to is just like what the growth in the assets, bank assets has been since the internet went mainstream in the mid to late 90s. And if you look at the growth in assets and look at that chart against the growth in GDP, what you see is that nearly all of the GDP growth, it seems to be reflected in the growth of bank assets amongst the very largest banks in the country. And so, these trends are continuing. And indeed, I think the situations with COVID, the impact that that had on the financial services industry just further accelerated these trends.
And so, the question is, well, who’s going to be providing these services? Let’s assume for a second that the banks are the ones that are continuing to provide banking services. That is what I believe will be the case. But which banks will be doing it? And I think if one looks at the data, I think one sees a lot of challenges for small and mid-sized banks. And I think a lot of this boils down to the ability for those small and mid-sized banks to be able to access the kinds of technology and financial infrastructure that they need, in order to be able to serve customers in the way that customers are increasingly wanting to be served. Because if you look at the customer preference data on how financial services are delivered, and you look at the data about how small and mid-sized banks are — or how well equipped they are to be able to meet those customers’ needs, that raises a lot of questions, I think, about whether or not they’re going to be able to continue to do that or whether the banks that are primarily going to be able to serve customers digitally are going to be those that are, you know, on the much larger side of the spectrum.
And so, I think this really poses the policy question for us. You know, what are we doing both in terms of the market side through entrepreneurship and innovation, and what are we doing on the policy side to help encourage a world where there remains a diversity of banking choices for customers? And I really think about this as the financial infrastructure imperative, and it’s not just Unit but it’s a whole slew of companies that have been created to be able to serve banks, and be able to give them the tools they need in order to be able to make that jump into the digital world. That’s the who. I think there’s a big question on it. So, I think it really depends on the policy stance we take now will impact that a lot 10 years from now.
In terms of the what, I think that’s a really exciting thing. As I mentioned, I think the delivery mechanism will continue to be digital channels. I think that it will be both digital relationships that banks are able to create by themselves through their own marketing, but also I think increasingly it will be banks partnering with companies that have communities of users that do need banking products and services and that are looking for those services to be delivered within the experience that they already know and trust. So embedded finance, broadly speaking.
And I think ultimately, it’s going to be around how can we continue to hone and improve the financial experience that customers have. And I think this very much aligns, at least personally, with my desire to help promote more financial health for end customers. But I think there’s real opportunities with the contextualization of money, being able to provide banking that’s enriched by the experience that the user is having on a digital platform. I think GenAI, we could talk more about, but I think that’s going to be a really powerful tool for helping customers understand their finances better. Hopefully, we’ll be able to help on some elements of financial education. And, you know, again, just going back to the context thing, I think a lot of it is about, you know, kind of transitioning from an experience of just you’re just working with your money in an isolated way to, you know, incorporating your use of money and financial services into your existing situations and relationships.
So, I think we’re at a really exciting time. I think it will look and feel quite a bit different. My hope is that we’ll continue to have a diversity of folks that are banks and other providers out there that are meeting customers’ needs.Caroline: Alex, you’ve raised some really important questions, I think, about what the future of financial services looks like. And if there’s one thing I know about entrepreneurs where you have interesting and difficult questions, they will often see an opportunity. And I know that previously you’ve served as managing director and general counsel of Fenway Summer, a venture capital firm. I imagine in that role, you saw a lot of entrepreneurs, innovative financial services proposals coming from startups come across your desk.
If you were counseling a fintech founder today, what suggestions would you make to help them succeed in securing the funding that they need? Of course, we know that things have changed over time. The interest rate environment is changing. The technology, you just mentioned generative AI, is part of that evolving landscape. But I’d love to hear your thoughts about the best way for a startup to get seriously considered by venture funders, particularly in the financial services and fintech space.Alex: Great. Yeah. Thanks a lot. I think it’s a great question. You know, I’ve been investing in fintech for over a decade now. And yeah, a lot has changed since the time that I started doing that. You know, it is interesting, like despite how much has changed, I do think there’s an element of sort of timelessness to some of the advice. I think, you know, there’s sort of three sort of, I’ll call them, timeless pieces of advice, I guess. And I’m certainly not the only one to say these. And then I’ll focus a little bit more on kind of the particular moment that we’re in.
But in terms of kind of the timeless advice that I think remains very much true today, the first one is, you know, like really try to look for a real problem for end customers that you’re solving and ideally one that you have some experience with. But at least find one where there is a real pain point, where there’s a real willingness to, you know, a real need to solve a problem that you can build a business around. I think that, you know, one lesson from some of the early fintech era was that, you know, that some of these, solutions that had been created were a little bit more like vitamins than painkillers. And folks were not really able to build a sustainable business around them. But fortunately, I think there’s still a lot of significant problems in the financial services industry where folks can build meaningful businesses. But I would really, you know, I would kind of say focus on that as one of the main pieces of kind of advice.
The second one is again around team. I think that like team is so critical for early-stage founders. And one thing that I think is like, is really cool about the fintech era ecosystem today is that there’s a lot more talent floating around. A lot more folks have had experience over the 10 years, whether that’s from eng to legal to regulatory compliance. There’s just a lot more folks have a lot more experience building stuff in fintech. And so, you can really find some great folks today to help build a team around.
The last one I would say is really around just thinking about what kind of funding you need. So, this is sort of the last on the timeless side. There’s a lot of really great fintech VCs. That’s another thing too that’s sort of changed in the last 10 years is that there’s a lot more funders out there that are focused on fintech. Even today, with fintech having gone through a little bit more of a challenge on the venture side in the last few years, there’s a lot of great fintech VCs around right now. But I would also just sort of think about what kind of funding you need. With the use of GenAI and other kinds of tools and companies like Unit that can help with some of the infrastructure that otherwise would have needed to have been built from scratch, I do think there’s an opportunity to kind of pursue more lean kinds of operating models and kind of get further traction before needing to go out and raise larger institutional rounds. It’s not impossible, but it is challenging, you know, particularly for first-time founders to go out and raise substantial, you know, pre-seed or seed rounds without kind of really demonstrating traction today in fintech. And so, fortunately, I think there’s a lot more tools available to folks now to help build solutions with like a lower kind of initial burn rate.
And then I’d say like two main things that I would focus on today. I think, there’s still a ton of really big problems facing large institutional players in the space, whether those be banks or in the asset management space. There’s just a lot of like, you know, large opportunities, I think still in the space. One of those is regtech. I mean, one of the things we’ve been talking about is what are the solutions to, that can help banks really cross the chasm in being able to offer digital financial services opportunities. And I often say today, we’re at the golden age of regtech. We have more solutions available to banks today than we’ve had in the past, more companies that are tackling some of the esoteric challenges that the banks, asset managers, and other financial institutions are facing. And I think that continues to be a really interesting area for investment.
And then the last one, again, I’m definitely biased, but I do think there’s quite a few opportunities still in the embedded finance use case to support different industries through vertical SaaS. But just broadly speaking, thinking about how to help solve specific kinds of like verticals’ needs for integrated financial services.
So those are some ideas, but again, a lot of it remains timeless. So hopefully that helps.Jerry: Very much so. And I’m sure that some of our listeners are innovators who will take that advice to heart.
You know, Alex, you keep a close eye on the financial services regulatory developments, and you have for years. Could you highlight the regulatory issues you see most interesting right now? And perhaps you could touch on some of the challenges and opportunities for banking as a service today.Alex: Thanks, Jerry. Yeah, I could talk about this for a while, but I’ll try to be pretty brief here. I would say in terms of there’s been a lot. I mean, I think anyone who’s been kind of watching the, you know, I’ll go beyond banking as a service to talk about just the, you know, broader bank partnership space and just the overall kind of policy question of, should banks be able to partner with third parties? And if so, how? And what are the best practices around that? I think is a very important and very salient question today that touches on a variety of different businesses and business models.
I will say just at the outset that I think it’s been great to see all the additional regulatory engagement on this space. Bank partnerships are nothing new. They’ve been around, in a sense, for a very long time. And they’ve been operating at scale, both in fintech and embedded use cases for well more than a decade. But I do think it’s important that there is more engagement between industry stakeholders of various kinds, be they banks or technology companies, as well as policy stakeholders. So, in general, like extremely happy to see that additional engagement.
I’d say there’s three, you know, there’s many, but there’s three that I’ll touch on quickly. The first one is the request for information, RFI, the interagency RFI that was recently published relating to bank partnerships. I think that’s a really important initiative and effort to kind of gather information around a variety of important questions that were being asked. I think overall the questions are really good, and I would encourage folks in the space to respond to that. I think the deadline was extended until the end of this month, so there’s still some additional time to the end of October to get in those responses. And again, I think and hope that this will be just an opportunity for further engagement between industry and policy. In general, I do think that there’s a lot more in common in terms of our incentives than there are differences. And I’m hopeful that this additional engagement can help provide greater clarity, greater kind of mutual learning and ultimately good policy that can come out of that.
The second one is the broker deposits rule. I won’t talk about that too much. It is obviously a very important change, or it would be a very significant change, and it would impact a variety of different kinds of companies and arrangements if it were finalized in its current form. But it’s definitely something that I think the industry is watching closely and folks should be paying attention to.
And then the last one that I’ll touch on briefly is the new notice of proposed rulemaking on custodial account record-keeping requirements. I think in general, this is a good development. I think it’s really important, not just for BaaS, but anytime that there’s a critical service provider to a bank that’s maintaining a ledger that’s important for the bank’s operations, both the bank and that third party should be paying a lot of attention to proper record keeping and controls around that ledger. Ledgers are a critical piece of financial infrastructure and there should be good controls around it. So, that’s another one that I really encourage folks in the industry to look at closely and to engage on through the comment process.
In terms of challenges and opportunities, I think that, you know, in many ways, the challenges have been the sort of frequent refrain over the last year or two. Challenges of BaaS or challenges of bank partnerships have been in some ways, you know, the topic that has garnered perhaps much more airtime than the opportunities. I think on the challenges side, I look at it and think about this again, more from the perspective of partnerships generally, you know, bank partnerships generally. And I think, coming out of the first decade of the big fintech boom, that there was a regression to the mean around the level of skepticism and concern about like what the ultimate value is that fintech can bring to the industry and whether technology can help deliver on the kind of desired outcomes that folks are looking for from a policy perspective.
And I think that’s really what is, I think, sort of reverberating or has reverberated through the industry. I think that continues to be a challenge. I think there is more skepticism about fintech and partnerships broadly than there was in earlier kind of eras of fintech. And I still think there’s a lot of learning that’s needed. And I view this as mutual. I don’t think this is one way at all. But I think there’s a lot more learning that’s needed from industry stakeholders around policy and regulatory types of concerns. I think there’s been a lot that we have learned as industry about regulatory expectations, but I still think there’s more needed. And conversely, I think there’s a lot that’s needed still from the policy perspective to understand what are these types of technologies? What are actually the risks involved? And what are not?
So those are some of the challenges that I point to. But overall, honestly, I’m feeling more optimistic about the direction of banking technology broadly in the U.S. than I have in a while. And I think that’s partly from the fact that we are now engaged in a rather long and sometimes difficult, but at least open conversation about the risks, the perils, the opportunities and the benefits. And I feel like for a long time, there wasn’t enough discussion, even though the market had grown a lot, there wasn’t enough discussion and enough engagement. And I’m just a big believer, maybe it’s naive, but that ultimately we will get to a better place by having more engagement and not less. I think there is starting to be more clarity on certain elements of regulatory expectations, which will help. I think there’s a lot of desire amongst industry speaking broadly to meet and to build around whatever those regulatory expectations are. And as I mentioned, I don’t think there’s as much of a difference between incentives and goals as sometimes folks might think.
And then let’s see, I would say probably the last and biggest source of opportunity and optimism for me is really like, and it really begins and ends with the end customers and what end customers are looking for in terms of how they use, consume the financial services. And given the trends towards the digital consumption of these services, given the trends towards wanting these to be more convenient and more enriched and more kind of useful. I think that that market demand will continue and will really help to drive the industry forward.
So, I think we are at the beginning of a new chapter in bank technology. I think we’re doing the right things with the greater engagement. And from my perspective, feeling more optimistic today than I have in a long time.Jerry: You know, I’m sorry to say that we’re running out of time here. But Alex, it has been so great to have you and we covered a wide range of subjects. And that’s possible with you because you have an encyclopedic understanding of the industry. So, thank you. Caroline: That was awesome, Alex. Thank you so much. I’ve really enjoyed all of your insights. Alex: Thank you so much for having me, Jerry and Caroline. I really appreciate it. And I’m looking forward to chatting again soon.