PODCAST TRANSCRIPTION SESSION NO. 228 –  ANDREW DIX

Happy New Year, everybody and welcome to the first episode of 2020, Episode 228, of the Lend Academy Podcast. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Andrew Dix, he is the Founder and CEO of Crowded Media Group which is the publisher of Crowdfund Insider. Now, Andrew’s been covering the space for many, many years and I wanted to get him on the show to give a little bit of a retrospective of the first show of 2020 and also looking ahead at the coming year and the coming decade.

We touch on many interesting topics here, we talk about equity crowdfunding and the challenges that it’s faced, we talk about digital banking, we talk about Big Tech and Embedded Finance and crypto and much more. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Andrew!

Andrew Dix: Good to talk to you, Peter.

Peter: Okay. So, let’s get started by giving the listeners a little bit of background about yourself. We all know… everyone reads Crowdfund Insider, but why don’t you tell us a little bit about what you did before you started that.

Andrew: Yeah. That’s actually an excellent question because I have kind of what I think is a good background to be covering fintech. Back in my youth which was some decades ago (Peter laughs), actually worked in Washington DC and I was in the political and policy realm and I’ve always had an interest in policy, in general. So, I was in DC for a while, that kind of exposed me to the workings of legislation and politics and that is, of course, a very important aspect of fintech because financial services is a highly regulated industry, so that helped.

And then I worked in the media. I was in traditional media working in a small closely held company that owned print, it owned broadcast and at one point in time had television and I ended up doing running the digital operations. So, at that time media, specifically print, was going through it’s own digitization and it was really, really difficult to kind of watch what was happening with traditional media. I’m kind of a news and information junkie, I could see how the wheels were falling off and how the Internet was impacting traditional media and it was a bit of a struggle for me because I was engaged on the digital side and creating applications to manage news and working with the technology.

Meanwhile, it was kind of a circle the wagons approach with the traditional side, so that kind of gave me the perspective of digital media. At the same time, I always had an interest in playing it so my bachelors is in economics and when I had moved to the Cleveland area, which is where I’m located now, I took some classes in finance at Weatherhead because I’ve just always had a profound interest in finance.

So, I think in a different life, I probably would have been a banker (Peter laughs). In this life, I ended up being a kind of a news and media guy that had a deep interest in financial services and policy and that’s kind of how it all comes together in fintech, in covering fintech.

Peter: Right. So then, was there one particular thing that was the impetus to actually start Crowdfund Insider? Was there some particular aha moment?

Andrew: So, another good question. There was a period in the US….there was a discussion about the JOBS Act, the JOBS Act of 2012 and how this was going to transform capital formation. It had shifted from, you know, traditional capital formation to online capital formation, or crowdfunding.

I had a friend who was an investment banker and he said, hey, do you know about this. I’m like, yeah, kind of and he said, well, I’m kind of curious about this, this may be interesting. I said, well, you know, I know two events, I happen to know two events that are taking place where they’re going to discuss that piece of legislation. One was a law firm, a big corporate law firm in downtown Cleveland; another one had to do with a presentation, somebody from a second market which at that time was a platform I thought would get into the space, but did not.

So, I went to these two events and I realized that the platform side was going to be very crowded, very competitive, but I thought to myself, gee, this has been really an interesting subject area to cover from a news side and that was kind of the aha moment, the genesis.

I’ve always had a thesis that emerging sectors like these are opportunities for news. Now, I don’t consider it as a blog site, or blog, I consider it to be news because we cover news in a more traditional fashion. And so, that was kind of the moment where I said, you know, this something that I want to pursue because I had that whole digital background and it was really easy for me to, you know, get a site up and live quickly and start doing some coverage of the subject.

Peter: So, when did you go live exactly?

Andrew: I can’t remember the exact date, but it was after the JOBS Act of 2012 was signed into law and things take time, as we all know, when it comes to financial regulation. It was within months of that taking place and it took place in, I think, the summer of 2012, so it was either late 2012, or 2013. We started with the first domain which was crowdfundinsider.com and that really had to do with the fact that there was a lot of focus on facilitating capital formation and this act of legislation which was hugely bipartisan because that was the Obama administration and we got support from both the Republicans and the Democrats. It’s one of the standout acts of legislation that saw people from both sides of the aisle support and it was kind of an exciting period which obviously has taken a lot longer than most people expected.

Peter: Yeah, we’ll get into that in a little bit, but before I do so, I wanted to maybe touch on one question that I think many people have because a lot of people might not know your name, but a lot of people know your pseudonym. So, I want you to tell us about what your pseudonym is and why you decided to use a pseudonym in the first place.

Andrew: So, it’s another good question. So, when we started, I hired my first employee and most of it had to do with the content creation, that’s really what we needed somebody to do and that person did that. After running the platform for a while, we need to augment this, we need, you know, more content and in traditional media it’s very common to do a stock report. And so, what I would do is at night when I came home, I would do some stock reports which is pretty easy to do, but there was a following conversation about how Google liked to see by-lines, liked to see an individual’s name.

I was still in my day job at that time and I thought, well, okay, I’ll just do a pen name for this and I would just continue to do, you know, a couple of articles in the evening and just augment a little bit because this other person was doing a good amount of the content. So, that’s kind of how it came to be and once you go down that path, you know, it’s kind of difficult to put that genie back in the bottle, you know, how do you do that. And, I think that, over time, hopefully my prose has improved, but I do believe that I’m at a point where I’m probably the most prolific fintech writer in the world.

Peter: Yeah, I would agree with that. Just tell the listeners what your pseudonym is.

Andrew: My pen name is JD Alois and there is a reason for that name, but I’ve never shared it with anybody. Nobody knows why, but it’s a derivative of something and it actually has to do with, you know, part of my history and past experience. Anybody who can figure it out, I’ll give him a thousand dollars of free advertising. (Peter laughs)

Peter: Okay, that’s a challenge for everybody. So then, you started off covering the crowdfunding space and then the content has evolved over the years and you now cover a much broader sort of swath of content, So, tell us, has this been a conscious decision, or has this just evolved naturally? What’s been the evolution there?

Andrew: So, it was definitely a conscious decision. When we first started covering the ecosystem, we focused a lot of attention on the UK. The UK was first out of the gate and creating a regulatory environment that was robust and functional who worked on my capital formation and that was both debt and equity.

As you know well, peer-to-peer lending really got it’s start in the UK, they have the first really effective equity crowdfunding platforms, or investment crowdfunding platforms in the UK and so they had a head start on the US. I looked at the UK and said this was an opportunity to learn and see how they’re evolving because they’re ahead in the game. Over time, in the US, you have kind of the growth of the online lending sector and marketplace lending.

You have the Lending Club, you have Prosper, you have Funding Circle and these platforms became more prominent. And so, we started to get outreach from those platforms and we started to pay more attention to those platforms. There was a certain point in time and I said, there’s two sides of the coin. While equity can be kind of sexy, it’s kind of small. While debt is not necessarily as sexy, it’s huge, it’s enormous and that’s the way it’s been in public markets since I don’t know how long. I said, okay, it’s just part of that financial stack and really, in my opinion, online capital formation was the catalyst for all of fintech because I think it should have a lot of people that were young, you know, finance executives, or they’re going to Wharton or some place.

They’re looking at traditional finance and they’re looking at the way they have things have resulted in the past, or say, wait a minute, with technology I can do things differently, I can do things better. And so, first, you had online capital formation, debt and equity and then everything is saying, I can do this, I can do that. And then you just have this kind of creative boom of platforms, ideas, services, you know, from banking, to lending, to trading, to crypto and it’s really been amazing, the amount of creativity that I have seen and you have seen in the fintech sector for the full stock of financial services. So, that’s kind of the genesis of the site.

Peter: So, let’s get back to equity crowdfunding and as you say, it’s……I remember, I actually wrote about it as well in 2012, when Obama signed the JOBS Act and there was a lot of optimism and, you know, I think if we had said, let’s look ahead in seven plus years and no one will expect…it’s still a very small industry. Why do you think it hasn’t taken off in this country? Obviously, it’s taken off at the UK, Israel with OurCrowd, they’re very active, why has it not taken off in this country?

Andrew: Yeah, it’s got a multifaceted explanation there because as we know, regulations in the financial services industry is byzantine at best in the United States. You have to deal with 50 individual states and the new ones is dealing with state regulators, there are also around a dozen federal regulators that touch financial services. That’s hard. If you are a startup, an early stage company that wants a challenge in trans finance, there’s a significant hurdle that is costly to complete and that’s just part of the environment in the United States.

The rules that were created under the JOBS Act of 2012 were not the best. Now, I give a lot of credit to people that fought to get those rules done. In effect, you had three forms of investment crowdfunding had Reg D to succeed for credit investors, you have Reg + which requires $50 Million from both the creditors and non-accredited investors. We had Reg CF which initially integrates up to $1 Million via funding for all broker deals for both non-accredited and accredited investors, but in the infinite wisdom of our policy (inaudible) who always seem to air on the side of investor protection, the rules have been so stringent that they actually have put to the opposite side.

When you look at Reg CF, that regulation has been good, but it’s been a hobble by the strict regime. In fact, it’s kind of like …..it creates an environment of negative selection where some issuers and some platforms they do it because they can’t raise money anywhere else. That’s no what you want, you want, in my opinion, to have your smallest investors have access to the very best deals, that’s what you want to create, but that’s not what the regulations actually did. So, it’s been hobbled, it can only raise a million….$1.07 Million right now, there’s several aspects of the rules that really need to fixed.

Reg A + has been a bit of a disappointment because of deal quality, it’s been described as a mini IPO type structure. The cost to do a Reg A + is hundreds of thousands of dollars, depending on who you talk to. I think some of the issuers have not been that great. I think the clear winner in the full stack of crowdfunding exemptions is Reg D 506(c), basically, a Reg D that you can generally solicit or advertise. I am optimistic that some of these things can be fixed and can be changed.

I’m an Adviser to the Association of Online Investment Platforms (AOIP) and that’s one of the things that Dan Lucas is pursuing, is a regulatory fix for Reg CF. There are some people who like to see it raised to $20 Million, some people want to see it to $10 Million. I think the lowest amount that people are advocating for is $5 Million AOIP, the association, they have asked for a $10 Million cap and that would also kind of bring into line with what you’re seeing in the UK because under existing laws in the UK, there is a prospectus requirement once you raise 8 Million Euros or more. Creating a prospectus is a significant undertaking and what it does is it creates a bit of a speed bump, but under that amount you can raise as much as you want without a prospectus.

You can still crowdfund as much as you want, but you have that speed bump and that has seemed to have worked well in the UK. You regularly see issuers raise, you know, multi million pound offerings, you regularly see very high quality issuers raise money on these platforms where they are frequently doing side by sides with big VCs, a lot of the digital challenger banks which have achieved unicorn status.

I think just about all of them have, you know, pursued online capital formation like Monzo, or Revolut and they view it as a way to not only raise a little bit of money, but also to garner some earned promotion and to enlist the whole, you know, region of people that will advocate and utilize their services which is smart, if you think about it.

Peter: Right, right, yeah, I know. It’s really been, I think, one of the unique things about the UK fintech scene is that so many people now own slices of these neo banks and the challenger banks. They’ve seen the paper valuation of their investment increase dramatically which, obviously, helps future fundraising.

Anyway, I want to sort of move along here and just talk about…maybe we can start…we’re recording this a week before Christmas, but it’s going to be published first Friday in January, so it’s the first one of the new decade. First, maybe you could take a step back and look back to 2010s, a lot has happened in fintech in this last decade and fintech wasn’t really used as a term ten years ago. So, from your perspective…..you’ve been writing and covering the space for most of this decade, as you look back at the 2010s, where do you think the promise of fintech was realized and where did it fall short?

Andrew: Well, I think, the promise of fintech is ongoing and I think that really we’re talking about the digitization of finance, it’s really applying the Internet to financial services. One area where the Chinese got it right is what they call Internet Finance and similar to what happened in the newspaper industry where the Internet just totally disrupted them, that is happening and will continue to happen in the financial services industry at an accelerated pace. So, I think, that’s all good, but as we all know, innovation and change is never a straight line.

Everybody wants to see the hockey stick where you’re getting low and ends up usually successful, that’s not reality. Anybody really understands that it’s a roller coaster with many ups and many downs and many of these companies will end up failing which is fine, that’s part of the process. So, I look at….from the early part of the decade and I look at some of these things as platforms that only did these, or only did that, they tried to excel at these areas and at the time, I think, everybody, including myself, I thought this is great, it’s really going to change the world, but, I think, that, you know, maybe they overshot that hype a little bit.

Some of these platforms, they realize that doing this one thing really well is not necessarily the best path. I think what you’re seeing today and you’re going to continue to see is you’re going to continue to see these platforms that have some tractions in certain sectors either way and they’re going to continue to iterate and provide services and look at their consumers or customers and say, well, I’m already doing this, I can do this as well and I can drive incremental income and scale more effectively.

So, if you look at the equity side, you’re going to see platforms that do other things besides Reg D, Reg CF, Reg A +, but they’re also going to provide management services, they’re also going to provide advisory services, they’re also going to provide a whole host of investment banking type service, it’ll just be digital and that kind of makes sense. I think for platforms as they earn their stripes and they toughed it out wanting to survive, it’s going to make sense to do that. I think the same thing is going to happen on the lending side.

I think that if you look at a Lending Club, a publicly traded company, there’s a lot of debate as to whether they went public too soon. I think their idea about shifting into becoming a marketplace bank, provide additional banking services totally makes sense. They have the touch point of the consumer, they have the data, they have a lot of services they can already offer, to provide a few more services is not that much of a weep because it’s all digital, whether they’ll be successful or not, we’re going to find out.

I think that is kind of the pinnacle, or the transition that we are in now where the people, the platforms, they have captured certain amount of transactions, they have to continue to iterate to see how they remain competitive and to be able to compete, or partner with traditional finance. Taking that step further, I think these pieces about Big Tech and fintech is huge. So, I think, as we go into the 20’s, that is going to continue to gain more traction, it’s going to be bigger than what most traditional financial services firms think will be today.

Peter: Okay, okay. So, that’s interesting. You’ve already sort of started to answer my next question which is …as we look ahead to this decade you touched on Big Tech, what are some of the other key trends you see as really being a huge part of a fintech going forward?

Andrew: So, I believe that technology is at its best when it’s ubiquitous, it’s everywhere, but it doesn’t get in your way. It’s something that’s there when we need it, but, otherwise, it doesn’t bother you. I think that’s what you see happening for financial services. When I need to pay something, I point my phone at it, when I need to access credit, the credit is there, it’s working for me now. It doesn’t matter what platform I am on, I have access to it.

So, I no longer need to drive to my corner bank branch to do whatever I need to do with financial services, I’ll be able to access it anyway, anytime as long as I’m digitally connected. And, I think, that that is a theme and a transition that is multi-decade, it’s going to be, you know, years and years in the making, but it’s inevitable, right?

Peter: Yeah, that’s where we’re starting to talk about Embedded Finance which I think is a super interesting trend which we’ll be covering in depth at LendIt this year, I feel like it’s one of many. So, tell me about this thing, what do you think of the digital banking space in this country, specifically. You know, we’ve got some very fast growing operations here, we’ve got some of the Europeans arriving, none of them have worked out how to make money yet, so very few, I shouldn’t say none, a few of them have, how does the digital banking story play out this coming decade do you think?

Andrew: So, I think that traditional finance has always moaned and groaned about the regulatory environment to operate within the 50 states and across the country. I think, today, they’re looking at it as maybe something that’s a little bit better than bad because it’s created a bit of a moat for looming competition. One thing about traditional finance is it’s very effective with lobbying, they have a great voice in Capitol Hill and you can see that manifest itself from time to time in some of the things that happened inside the beltway.

I think that for traditional finance, the policy attempting to innovate and adapt and change by building their own platforms, acquiring platforms, or partnering with platforms which is absolutely what they need to do. For the emerging founders, the fintechs, again, because of the regulations, it’s been kind of a tough road to follow in the US because we have….. how many digital only banks have received a federal banking charter. Well, we have Varo lMoney which has a provisional charter, I believe, and they’re still waiting on that FDIC and that process is taking God knows how many years. It’s crazy, it’s taking so long.

Now, we have Marcus which bought a bank and that was probably a very smart move and we have a lot of other digital banks that have applied for, or are looking to apply for, or looking to finesse the regulations to offer bank-like services. I don’t think a regulatory environment was meant to make it so difficult. Do these entities need to be regulated? Absolutely, Yes, we have to have high standards as traditional finance? Absolutely. But should there be a path where these vigilant challenger banks to become regulated at the national level? That’s obvious. When you look at what happened in the UK and the number of challenger banks that have emerged and that are growing rapidly in leaps and bounds, that’s what should be happening in the United States.

Unfortunately, it’s been a bit of a slow go there that’s why you have banks like Revolut and Monzo coming into the United States to set up shop because they kind of cut their teeth in a different market and they’ve learned a lot of things. And they’re saying, well, I can just apply that here and I’ll do what everybody else is doing, I’ll use regulatory arbitrage and partner with a chartered bank to optimize services and then at some point in the future I’ll get a charter, maybe not. That’s kind of a convoluted process to do that. When you start, you should have a clear bright-lined path to be regulated at the federal level. So, I disagree with the regulatory approach.

I think that the OCC has made an attempt to pursue that path that you know as well as I do, legal challenge and battle from traditional finance in entrenched stakeholders has been enormous. I just wish that wasn’t the case. It’s also for legislators, you know, it’s not necessarily a priority for them, it’s not something that’s going to get them a lot of votes, it’s not something that they necessarily understand, you know, really well.

So, there’s not a whole lot of interest in fixing some of these issues which is unfortunate because in the end, the losers is always the consumer, right, because once you have more competition within the financial services industry, the people who will benefit are the consumers because class go down and the quality of services move up. And, if you are a congressman or senator that’s what you should want, you should be pursuing that, but, unfortunately, that’s not the case, outside a few exceptions, right.

Peter: Yeah, now that’s dead right. I feel like there isn’t enough push in Washington to change the status quo and I think it’s going to take a long time for that to happen, if ever, and it’s certainly going to hold innovation back.

Anyway, we’re almost out of time and there’s really a couple of things I wanted to get to. You know, we spent this entire interview, so far, and we haven’t talked about crypto. You’ve written about this a great deal, and blockchain, in general, but maybe just give us a minute, or so thoughts on the crypto space and what are the things you’re watching right now there.

Andrew: When bitcoin was kind of emerging, we really didn’t cover that, but then, all of a sudden, ethereum came along and ethereum enabled the smart contracts and ICOs and really we started covering it because people started sending us information about things we weren’t doing and I’m like, what is this, I don’t understand this. I mean, I need to spend some time researching this and you could see that it was a form of online capital formation that was kind of like, you know, cocaine-fueled crowdfunding offering that was highly illegal.

And so, you has this whole ecosystem develop where people would raise money and it was all speculative, it was breaking existing securities law and a lot of people predicted it was inevitable disruption which is what happened. One thing it did do was it showed how technology can help remove some of the friction in financial services if you do it in a regulated and in a compliant fashion.

So, I think, that ICOs will be kind of a footnote in history, it was a crazy, weird time and place with a lot of very interesting and colorful people, many of them doing things that they probably shouldn’t have been doing, but I also think that now you’re in this point where you have this transition to digital assets which in the United States means digital securities. I think the digitization of securities is coming, it’s just going to happen.

You know, I remember back in the day when I can call my broker and say, hey, send my certificate to me, I’ve got to hold on to my certificate, put it in the mail. Well, I really can’t do that anymore. There’s a lot of back office stuff that’s still kind of analog-ish that can be pulled out of the system to drive efficiencies. You look at Cagney’s new startup and I’ve heard him the other day where he is able to pull, I think, a hundred basis points out of a securitization process.

If you’re in traditional financial services, you’ll say, wow, that’s huge because at scale that makes me a lot of money. So, I think if you see that similar streamlining taking place in back office operations, it is really not that sexy, right. But, I think, that’s where we are now, people are just trying to figure it out, visual studies are going to happen, how that manifests itself, I don’t know, I just think it’s going to happen.

The other thing that I think may be of interest is a sector I call “esoterics,” and that’s because, all of a sudden, the technology you can securitize things that really we were not able to do in the past. This was not cost effective to do in the past and I think you’ve seen a little bit of this where people are kind of dabbling in real estate transactions. You some real estate transactions this is going to be managed on distributed ledger technology.

I think people are going to start to experiment with other assets and other asset classes. When is it going be, I have no idea. We’re going through a concept of utility token as opposed to security. You know, the juries out in the United States, or some jurisdictions in Europe that have facilitated that and in other countries, it’s happening, I don’t know whether it’s going to continue to happen, or whether it’s going to go, but in the United States, pretty much, if you’re doing a digital asset, a security with a couple of exceptions.

Peter: Okay. So, last question. You know, we’re starting the year, we’ve talked about a lot of different things in this interview, what is the most interesting topic that you’re following most closely right now?

Andrew: So, beyond the regulatory stuff…I think I have a generic flaw because I actually enjoy reading about regulations (Peter laughs)….you can’t take me out in public, my wife knows. She gets scared when we go out, I start talking to people and they have no idea of what I’m talking about, but beyond that I go back to the Big Tech in fintech. I just see that the pace has already happened in China where you have Big Tech like Tencent and Alibaba, Alipay and what you’re seeing happen there…..I think they’re ahead of us in many respects, I think you’re going to continue to see that happen within the US and elsewhere.

Do I want Apple to be my bank? Absolutely. I trust them with all sorts of information that I wouldn’t trust with anybody else and I’m already using them to pay for things. Is it a leap for them to provide more financial services to me, not at all. Is it dicey for them to go down that path due to the convoluted regulatory environment which is really, you know, kind of Jurassic? Yes, but I think over time they are going to continue to go down that path alongside other Big Tech firms like, you know, Google, Amazon, Facebook. I’m not a huge fan of Facebook, but I figure you will continue to see here in the United States and I think you’re going to see it globally around the world and you’ve actually seen actual examples of that.

Peter: Okay, it would be interesting to see. On that note, we’ll have to leave it there. Andrew, I very much appreciate your coming on the show today.

Andrew: Excellent, it was good talking too.

Peter: Okay, see you.

Andrew: Bye, take care.

Peter: The continued encroachment of Big Tech into finance, the movement towards Embedded Finance, the crazy fast growth of the digital banks, these are all important trends, I think, we will continue to be paying attention to, continue to evolve our thinking on as this decade progresses and it’s going to be a very exciting time. One thing I’m certain, I obviously don’t know, I don’t have a crystal bowl, I don’t know how it’s going to play out, but one thing I am certain of is that finance in 2030 is going to look very different from finance in 2020.

Anyway on that note, I will sign off. I very much appreciate you listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

PODCAST TRANSCRIPTION SESSION NO. 227 –  MIKE BUTLER

Welcome to the Lend Academy Podcast, Episode No. 227, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

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Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome Mike Butler, he is the President and CEO of Radius Bank. Now, Radius Bank is a very interesting operation. When Mike joined as CEO back in 2008, they were a small community bank with a handful of branches; now, they are one of the leading digital only banks in the country and it’s really a fascinating story to unpack, how that has come to a reality.

So, we talk with Mike about the decision to become digital only, how he’s been able to sort of develop this with a pretty….without really an engineering team which is a fascinating all in of itself. We also talk about the partnerships, some of the recent ones they have penned and how they approach Banking-as-a-Services, in general, and we talk about Mike’s reports on the digital banking space that is all of a sudden very hot, one of the hottest areas of fintech. It was a fascinating interview, I hope you enjoy the show.

Welcome to the podcast, Mike!

Mike Butler: Well, thanks for having me, Peter, much appreciated.

Peter: My pleasure. So, I’d like to get this thing started by giving the listeners some background. We know you’ve been with Radius Bank for many, many years, but what did you do before that?

Mike: I’m a pretty traditional banker, Peter. Out of college, joined a management training program with KeyCorp. We started out with $4 Billion, and when I left we were over $100 Billion, did a lot of different things while I was there, had the opportunity to participate in some M&A activity in a fairly big credit group and ran two lines of business before I left, and that was then, what was it, 2008, when I joined Radius Bank.

Peter: Okay. So, what was behind that decision then? Obviously, you’ve gone from a pretty decent sized bank into a very small community bank, what was the thinking behind that transition?

Mike: Well, I think, a couple of things. You know, one is probably….I easily would there was transition happening inside Key and there was a leadership change and obviously, there was going to be a new CEO for the next year ten years, or so, so it was a good time to pause and think.

I think there was a bit of an edge from my perspective to see if I could leverage some of the things I’ve tried to learn over my years and kind of see if I could find myself in a CEO role. You know, we all say that nobody really drives culture other than the CEO, so a chance for me to do that. So, I took the opportunity to look around and see what other opportunities there might be out there for me.

Peter: Okay. So, maybe you could just describe a little bit about Radius Bank and what it was like when you joined the bank in 2008.

Mike: Well, you know, Radius was a fairly traditional community bank, but one in which it was truly seeking kind of a strategic direction. That’s what was most intriguing to me. It had kind of just been a marginal performer and was looking for some leadership to come in and give it some direction.

As we talked, we talked a lot about what the future of the industry was going to be like and, you know, the role of branches and deposit gathering and I think it was an opportunity for me to kind of take that vision and try and execute it inside Radius Bank. But, we were a nine/seven-branch company, did a lot of commercial real estate very locally, you know a pretty traditional community bank.

Peter: So then, when you took over did you….I mean, you’re famously now…..I think it was 2012, or thereabouts, you can correct me if I’m wrong, where you decided that you would do away with branches you had. Was that you intention always going into this job, or was this something that sort of evolved over time?

Mike: Well, the intention was to, and as it is today, still remains is how you replace the branch network as a place to acquire and manage consumers and small business deposits. That was always the objective and I think……remember in 2008, there was some pretty significant economic downturn that was occurring.

So, what we did first was we stabilized the company and we started to implement some of the thoughts and ideas on how we might emerge as more of a virtual bank and that was in 2012 where we said, okay, we’re going to go there, we’re going to be all in on the concept of generating deposits and, you know, managing clients through a virtual network.

Peter: I mean, what was that decision like back then because really you were a bit of a groundbreaker. It’s not like many other community banks were treading down the same path, was it a really difficult thing to get by in from everybody?

Mike: Oh yeah, I mean, for sure, there’s no doubt about it. I think the….you know, what I like to say is there wasn’t really….I think everybody’s vision still was, you know, and still is today and it’s getting clearer and clearer that virtual or digital banking will become a much bigger part of the industry, less clear back in 2012, fewer people willing to take the gamble. So, I think, you know, you needed this kind of conviction to the vision and you needed some courage that you were going to be able to execute against that.

You have to start to surround yourself with people who had the same vision and courage to get that done and that’s a bit of a daunting task because, I think, as you know a lot of industries and sometimes more in banking is that people are a little bit more willing to hold on to the status quo than they are to kind of embrace the future which is okay. I get it, I’m not complaining, but what we had to do was start to transform the culture of the board and the organization kind of simultaneously.

You know, one of the things that I did make a fairly big decision on is by closing all the branches. We basically had no backdrop, there was no oh, let’s try this and if we can do some things virtually while simultaneously, you know, keeping the branches open. One of the things that I would say gave us what I thought was a cultural competitive advantage is the kind of bridge was gone behind you, there was only one place to move and that was forward.

Peter: Right.

Mike: So we were forced to kind of keep moving in that direction.

Peter: So then, like I imagine the culture is very, very different now than it was ten years ago, tell us a little bit about what it’s like today.

Mike: So, you know, right from the top we recapitalized in 2016 and we had the opportunity to bring in a new board. The new board contained some of our equity investors who are absolutely believers in the vision as well as people in the industry that are a part of this technological change versus some traditional bank boards and as importantly, the people that we brought in have a much….you know, we used to say in the industry that you should hire bankers first and you can kind of teach them stuff from there.

What we had said is, we’re going to hire non-bankers and we’re going to try and teach them what parts of the banking model we still need to keep. And that created this whole frost of every time you add a person to the team that has a different view about, or their view is about the future of digital banking not how to transform a branch, so a very big part of what we’ve been able to do is all of the people and the way we go about doing business inside the company. You know, we’d like to say that we’re much of a business than we are a bank, we’d like to say we’re much more of a technology company than we are even a business.

So, a very agile mindset that started with kind of the project management group where it usually starts, but we kind of like saw how cool this agile kind of environment worked and we all said to ourselves, we’re going to kind of embrace that in how we approach all of our business challenges day in and day out. We’ve kind of broken down traditional hierarchy inside the company and the bureaucracy sometimes that exists and we’ve gone to majority of cross functional teams and everybody has cross functional goals to kind of make sure we get projects done.

So, a whole bunch of really fun stuff and I think the culture of the company is also one in which we kind of say to ourselves we treat people like adults and a very open environment for people and we think that creates a very high performing work culture.

Peter: Sure. So, let’s talk about the bank itself. You know, we’re now looking at Radius Bank and reading about you over the years. You really have a couple of separate businesses, it feels like, or business lines, shall we say. I mean, you’ve got the traditional bank that still has the deposits and lending and you also have this sort of Banking-as-a-Service type operation, but rather than me describe it, why don’t you describe how the bank operates today different product lines.

Mike: Yeah, so, we’ve kind of started from the very start. Strategically, our mission was to be a kind of forward looking financial services company with a very sharp focus on deposit gathering liability side of the bank and focused on finding and sourcing deposits and managing deposits, or relationships under retail and small business side without a brand network driven by technology.

And also, we felt like and still feel like we have a competitive advantage over several organizations that do generate deposits digitally, the neo banks, because we’ve got a fairly sophisticated asset generating side to our balance sheet as well. And that’s driven by the same kind of culture that we talked about on the liability side in which we want to have very niche-like businesses which we can kind of provide a high degree of service to our clients, get paid accordingly, but those niches would be different than what you would generally see inside community banking.

We do equipment finance, we do SBA lending, we do some high net worth lending, so all of those would be designed to say, okay, you know, if you thought about kind of the technology, the fintech world and the emergence of specialty firms that offer some of these lending products, we tried to set up kind of like niche businesses in accordance with that as well.

And then along the way, we’ve developed this kind of what I call Banking-as-a-Service, but that really emanated from our commitment to our core business of deposit gathering absent to branches. So, we only do Banking-as-a-Service because we feel like we’re very good at gathering deposits and serving our clients from a technology perspective.

We’ve done that through partnerships with fintechs so we know how to work in the fintech environment and we’re fairly kind of optimistic about fintechs in general and that there will be and continue to be disruption and we think there’s ways for us to partner with that rather than ignore it and that’s where Banking-as-a-Service kind of evolved.

Peter: So, as I hear you talk, I would expect that you would have a large engineering team in-house to sort of help you with this, but I was, …..you know, at LendIt this year, I went back and re-listened to the session you did and you mentioned that you actually don’t have an engineering team at all. So, just tell us a little bit about that and how you can be an online bank and offering Banking-as-a-Service and not have a big engineering team.

Mike: Yeah. Well, I would say that some of my employees will probably take exception to not having a kind of engineer mindsets around here, so we’ve hired a whole bunch of ….that do have an engineer mindset, but we don’t really have our own engineering team and that was another decision we made a while ago. We felt if the disruption that was going to come from the fintech environment was real then that sector would have the best engineers and the best ability to deliver superior product service and we would build it in inside a financial services company.

So, we made this decision that we were going to partner rather than develop our own and that has served us really, really well because what you find is the fintechs that we’ve leveraged along the way to redo our technology stack have benefitted from our relationship nicely. We have this well, right, so we’ve also made strategic investments.

So, making a strategic investment in a fintech partner is also another way to kind of stay close to a partner without having an engineering team in and of itself inside the bank. So, we kind of have liked that model and we’ve done things with companies like MANTL and Narmi and Alloy who are experts in their field and we’ve put those companies together in our platform to create this outstanding experience.

Peter: Interesting, that’s super interesting, not a typical way to go about that. So then, like with the products you’re offering, you talked about equipment finance, SBA lending, I presume…actually, you can tell me, this has to be a digital experience because you don’t have a branch people to walk into, so are you plugging in other fintechs into helping you do those kinds of things as well?

Mike: We’re beginning to, but I would say that on the traditional lending side in places like equipment leasing and government guarantee through SBA lending, technology is less of a, what I would call, demand pull from the client’s perspective. It’s at a different place and it is on the consumer and small business front, so we started to take a look at those businesses, but most of our technology and our technology platform changes have been on the consumer deposit gathering side.

Peter: Right, right, got it. So then, I want to talk about some of the partnerships you’ve had recently. One of them was just last week, as we’re recording this. I read about you partnering with NerdWallet. We’ve had Tim Chen on the show earlier this year actually and really doing a phenomenal job in sort of the personal financial management and advice, that sort of thing, but they didn’t have a savings product until launching with you guys. So, maybe talk about that one, maybe talk about one, or two others, but how did that come about and what do you expect to get out of this NerdWallet relationship?

Mike: So, you know, our philosophy on partnerships is kind of simple and straightforward, but, you know, we choose partners that we think would benefit from a relationship with a financial services company like Radius and that their clients would benefit, right, so, there has to be a real partnership opportunity associated with it. We want to work with great companies that have this kind of high level of commitment for customer service that respect the regulatory environment and that whose business model we think can be disruptive down the road.

So, we talked to a lot of companies and NerdWallet is one that we’ve had a relationship with for years, a little bit more as an advertiser, but, over the years, we’ve developed this kind of mutual respect for each other and I think as part of NerdWallet’s…..I mean, NerdWallet has a wonderful brand, right, a great brand. And as they think about how they can expand the brand and what they do, they kind of came up with this concept of, gee, should we own a savings account, should we maybe own a checking account down the road and if so, we’d like to partner with a company like Radius that we know can deliver us that outstanding customer experience, so we did that.

And now, NerdWallet clients who follow that brand and have developed a deep respect for it can open up a NerdWallet savings account which is powered by Radius Bank. So, it’s a great opportunity for NerdWallet to provide a superior product to their client base and an opportunity for us to stake our savings account and supply it into the NerdWallet ecosystem.

Peter: Right, right. And so, was that the same thinking….obviously, that’s on the consumer side and we read early this year about Brex, your partnership there. They’ve now got a bank account offering for small businesses, a Brex Cash, I think, they call it. So, was the thinking behind that partnership similar to what you just said for NerdWallet?

Mike: Yeah, I think that Brex is another outstanding company leaders and brand that’s been built in a fairly short time with a outstanding product behind it. We felt very strongly that this was a marketplace, that small business marketplace, you heard me mention a couple of times where we want to be and we think technology will play a bigger and bigger role and the opportunity to see that Brex would be able to serve their clients in a much different way with a Brex Cash type account.

Experience could be as good as it is for our clients, and, yeah, what a great opportunity for us to partner with them. That’s, frankly….the Brex Cash account is going to evolve as 2020 rolls out into even a better product offering. There’s years ahead of great opportunities with Brex and Radius, for sure.

Peter: Right, right. Just on that, you go to your website and you look at personal loans, you’ve got credit cards, student loans, mortgages, etc. and you click on personal loans and it sounds like you’ve got a partnership with Credible there. You know, Stephen Dash has been on the show as well, we know Credible quite well, is the whole idea there again was to offer these solutions through this partnering.

Tell us…..the first time you actually got on my radar was when you had a partnership with Prosper many years ago for personal loans, but is the whole idea there to …..where you can’t kind of have your own product, or you don’t want to have your own product to partner with companies like Credible?

Mike: Yeah, I think you’ve said that right. Peter, I think the idea is we want to be honest where we’re really good, stay focused on where we’re really good and that, we believe, is in several of our products that we offer today on the loan side for more of the commercial relationship in these businesses, and consumer deposit gathering. That’s what we do really well and Credible and team do a really nice job on the loan refi and origination side.

And, again, we like to work with high quality companies that tend to operate in the same space that we operate in and that is, you know, a kind of broad segment of technofiles, people who like to do business on their devices. So, we kind of fell in love with those guys, they hit it off with us, and so we say, yeah, let’s get into our marketplace and find a way for us to kind of make our clients’ life a little bit better by saying, here’s a topnotch, high-end provider of a solution for one of my clients and I don’t have any problem with matching them up because they’re very good at what they do.

Peter: Right. So, tell us a little bit about that marketplace concept then that you’ve got because, obviously, you don’t just have Credible. I know you’ve got Lemonade and Ladder and Billshark, it’s on your website right now, so is the whole idea here really just to…tell us what the idea is with the marketplace?

Mike: Yeah, I mean, I think it goes back to the whole concept of what do you want your financial services company to do for you, right. So, we had this kind of comment/notion for the last five/six years, we need to improve the financial health of our customers, right. How can I make their lives better, how can I make, you know, personal finance, or business finance, or their business run better, and how can I help them every single day.

And so, the idea is that well, teasers, there are some really great fintechs out there that can help do that and maybe if we can take those select few that we think can make our clients day and finance better then let’s give them access to it in an easy place like our marketplace. So, it’s all about trying to improve the financial health, or ease of our clients.

Peter: Okay, that makes sense. So, I want to switch gears a little bit and talk about the digital banking space overall because during the last 12 to 18 months, there’s been a lot of movement here. You’re a pioneer now in the space and you see companies like Chime just this month raise a massive amount of money at a massive valuation and they’re attracting millions of people, what so you think….so, from your perspective, you’ve been doing this for many years and then suddenly you see all these challengers coming up with venture capital money being thrown around pretty openly. What’s your thoughts on all of that?

Mike: Yeah. Well, I think the first thing I would say is it continues to validate our vision and the hard work that we’ve put in to building the platform like we have. So, we’re excited to see smart investors invest in companies like Chime and Varo and others because it validates what we’ve been doing, so it’s all good. We’re really not a company that’s scared of competition, so I think it’s better to have people out there doing this. We would welcome anybody that compare our product set to either Chime, or Varo, we do it all the time to make sure we stay in an industry leading.

Competition is good, competition is healthy, so that’s all good, but we also feel like there’s some interesting differential that we draw and I would call it maybe, I hate to use the term, but maybe our maturity and where we are today and our work and that that is…..you know, there has to be a path to profitability, so I think that today, because we understand our balance sheet and we understand how to use our deposits, that we have a very clear path and we are a very profitable company.

We’re profitable, we’re very profitable, so we’ve been able to do that, build this industry leading platform and do it in a way that we have been able to be very profitable. I think those companies will get there and as they always do, or most of them do, but we feel like we’ve got a fairly good head start on that final part of it and that is at the end of the day, there has to be profitability.

Peter: Right, right. So, you think the fact that ……I imagine you’re not attracting millions of customers a year, new customers…..I mean, it sounds like what you’re saying is this is a good thing for the industry even though you can’t sort of keep up with these companies on a customer acquisition type operation, right?

Mike: Well, we could, but (Mike and Peter laugh) we need to……I think you need to…quality versus quantity is something that we have preached for the last two years. We think the quality of the client that we onboard is very, very important for us. We aren’t just chasing numbers. I think we’ve had a lot of learnings around that, so we like where we are and we like the quality of the clients that we continue to onboard.

Peter: So, beyond the partnerships you’ve already talked about, where do you actually find these quality clients?

Mike: Yeah, I think that’s the final frontier here for us and the whole world and that is kind of this, you know, we call it the digital marketing challenge. You know, finding clients to open checking accounts when you had to go to a branch and it was open from 9:00 to 3:00 and people waited in line to open up a checking account, well, those days are over and so the question is, where do you find these clients virtually and what type of marketing are you doing to be able to get that right client in the door, the quality client that you want, and that’s more than just search engine optimization and things like that.

They’re surely a part of it, but it is now becoming a much more, I guess, sophisticated environment that’s coming from other sectors that have been in the e-commerce world for much longer. I mean, we are neophytes as an industry in the e-commerce world of marketing, but we’re starting to see that kind of pick up some steam, and, frankly, that would be where our focus is over the next, you know, we think 12 to 18 months is kind of improving the effectiveness of our digital market.

Peter: Right, right, okay. So, do you think…..I’m talking of the community banking landscape where there still a lot of small community banks with, you know, a handful of branches. Many of them are struggling in the digital world. Do you still think there is a role for these small branch-based community banks well into the future?

Mike: Well, you know, I’m not sure I’m the astute visionary there to opine on that. I think everybody’s strategy is good and you can execute against it. I think it’s going to be a challenge for smaller branch-based community banks to grow, I think that’s just a natural. You don’t have to be an Einstein to figure that out, I think it’s going to be hard.

The natural demographics of it make it really challenging, you know, whether or not we need storefronts, in general, is probably more of a question of how e-commerce and other industries has evolved and what models work out there. But, I do think as we look at the changing demographics and the changing consumer behaviors and our ability to kind of deliver all of the products that you get from a branch, you know, via your device, I think it’s a hard road to be honest with you.

Peter: Right, right. Okay then, we’re running out of time. Last question, what are you working on, what does the future hold for Radius Bank?

Mike: Yeah, I think, for Radius there will be two things that I will tell you. One is we’re going to continue on this digital marketing kind of journey. I think you’ll hear more from us about some of the great stuff that we could do with that. We’re going to be a little bit more of pioneers in that and we are reading playbooks so that’s going to be interesting.

I think the second thing you’ll hear a lot more from us is on the SMB side, small business side, where, I think, we’ve launched out business account. We’re starting to market it much more effectively and I think in both partnerships and marketplace, you’ll hear more from us in that segment. We love that as a technology demand poll segment next, and we’ll continue to announce more partnerships. I think the fintech world is doing great, it’s changed, it’s been disruptive and we think there’s opportunities for us to participate even more.

Peter: Okay, well I look forward to it. It’s been a fascinating story watching this all unfold and how you’ve really….you sort of created a way for …not every community bank can do this, but, certainly, you’ve managed to come out the other side doing well. I appreciate your coming on the show today, Mike.

Mike: Thank you for all the nice things you’ve said, Peter.

Peter: Okay, my pleasure. See you later.

Mike: Okay.

Peter: You know, it’s interesting as we discussed, there’s so much money flowing into these digital banking startups beyond Chime and Varo, as we talked, there’s dozens, it seems like, of these new digital banks that are attracting capital. As Mike points out, the big differentiator that they have to hang their hat on is that they are profitable because many of these companies that are in this space are nowhere near profitability. Some have even said, one has famously said that profitability is not on their agenda anytime soon.

Bottom line is you can’t keep raising money forever. There are going to be, I’m convinced, many of these companies that are going to do very, very well and there’s going to be several that just flame out because they can’t get to profitability of pathway to profitability quickly enough. So, Radius is already there, obviously, they’re not resting on their laurels and they’re trying to keep growing, but they are, I think, a force to be reckoned with in the digital banking space.

Anyway on that note, before I sign off, I would like to say thank you to all the listeners, thank you to everybody who has listened to the podcast this year. I think we’ve had some fascinating guests, it’s been a really rewarding year from my perspective. I’d like to wish you all the best for the holidays and we’ll be back bigger and better than ever in the new year. Thank you very much for listening. Bye.

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, 2020, at the Javits Center in New York. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.