Between Two Fintechs with Dan Quan

By on November 10th, 2020 in Industry Insights

In this edition of “Between Two Fintechs,” TrueAccord founder Ohad Samet interviews Dan Quan, Managing Partner of Banks Street Advisory and formerly the Senior Advisor to the Director at the Consumer Financial Protection Bureau (CFPB). Dan led its fintech office, Project Catalyst, the first of its kind in the world, inspiring regulatory agencies across the globe to set up dedicated innovation hubs to promote financial innovation.

At the CFPB, Dan focused his work on consumer-permissioned data access/open banking and the use of AI and alternative data in credit underwriting. A nationally recognized fintech thought leader, Dan serves as a bridge between Silicon Valley and the Beltway, and we’re honored to feature him in this series.

This transcript was conducted in October 2020 and has been edited and condensed for clarity. You can see all the interviews here.

Ohad Samet: Welcome Dan, we’re so excited to speak with you today about your experience working with fintechs at the CFPB and your perspective around regulation, technology and consumer financial services.

Dan Quan: Thank you. Fintech companies, like yours at TrueAccord, are a really exciting sector.

In the earlier days at the Bureau, I remember walking into the office the first day, and it was a conference room with 20 computers. We had to work or have meetings in the hallway or kitchen. The Bureau’s staff mindset was, this is once-in-a-lifetime thing. I believe the Bureau was the first agency that recognized the promise of fintech. We got a lot of good information and data from folks like you to help the Bureau write better rules and make better policies.

OS: Yes, it’s been very interesting to work with the Bureau’s research department, and be able to provide anonymized aggregate data to support the Bureau’s requests for comment. But it’s not like you guys were very gentle on the enforcement side. There were a lot of inspections of FinTech companies, so without asking you to comment about specific issues, I’m wondering about how you found the balance between encouraging innovation but also enforcing regulation?

DQ: I think it’s really a balancing act, right? I will say there’s one common misconception about the CFPB: that there was never a “human side of the Bureau.” When we talk to companies, we also recognize that enforcement is a very blunt tool. It’s very effective, it shows results immediately, but at the same time it also can crush a business. It also doesn’t really help the market come up with better solutions.

How can you come up with better products to not only comply with the regulations, but also serve people better? Obviously, the work we did at Project Catalyst, the innovation office was trying to do that.

Informal conversations, interactions or idea exchanges with market participants are just as valuable. If you ask me what I’m most proud of that I did at the CFPB, it was the effort to push open banking in the United States. It involved so many conversations and research from various market participants from financial institutions, from think tanks, data aggregators, users, nonprofits and consumer advocates.

OS: Yes, I think it’s very satisfying for me, and I hope by extension to the team in general. The work that we’re doing gave federal regulators enough data needed to make these decisions. That was a very positive experience of being involved in federal policy even if we’re just a tiny cog in the machine
Pivoting a bit, there are a lot of new fintech solutions, such as microlenders like Dave, or those giving employees access to their payroll early, like neobanks and Earnin. What are you seeing in terms of trends in federal policy and how they’re thinking about this new crop of solutions.

DQ: You mentioned companies like Dave, Earnin, PayActiv, starting with earned wage access—allowing people to get to their paychecks anytime on demand with a small fee or sometimes just a tip or for free. Chime and Varo started doing this too, plus adding overdraft protection programs. They are all challenging the status quo. That’s going to be bad news for banks who rely on fee income. What’s interesting is that these new product offerings from such fintechs are merging to offer solutions that try to make their customers live a financially healthy life.

A lot of conversations are actually at the state level, whether these are payday lenders, or whether they actually are a better alternative to consumers. We shall see how things are going to play out in the next couple of years.

OS: You mentioned state-level attention, which reminded me of the discussion in the last few years around, if the CFPB is less active, state AGs are going to pick up the mantle and be more active. No one is an oracle, but what are some possible scenarios from your perspective for the CFPB after the elections?

DQ: I would imagine if President Trump is re-elected, we’ll see the status quo where there will be continuous fights between federal and the state regulators. States may think the CFPB is not doing an adequate job, whether that’s true or perception and will want to come in and fill the gap, which is manifesting itself in California, right? But I also want to point out one thing we should still realize is that there are still a lot of collaborations between the CFPB and the states.

If Biden becomes the president, I think you will see more collaboration. In the case of California, once their consumer finance agency is set up, they are not going to walk that back.

I believe it’s always better to talk to regulators, to help them understand what you do, as long as you’re a good actor—rather than operating in the dark, and have no idea what kind of rule is going to come down at you in the future.

OS: For our last question, can you talk about the challenges for regulation regarding machine learning? I think we’ve spent a lot of time trying to build a system that is not overly complex and is reasonably easy to explain. But there are machine learning techniques, like deep learning, for example, that are almost impossible or very hard to explain.

DQ: Explainability is really a key thing. If the practitioner cannot explain to a regulator, I think it will make a regulator feel extremely uneasy. But obviously if you go back to the old ways where everything is explainable, you obviously lose all the upside the machine learning can bring, so it’s a very delicate balance.

What we really need is more exchange of ideas, information between the CFPB, the financial regulators and the companies that are experimenting in the space. I think the CFPB started working with Upstart, for example, on how to strengthen the compliance management system, so I hope the CFPB will publish that in the near future so that everybody can take a look and say, “This is what they did and it looks like it worked.”

OS: I would say from our perspective, we’ve always tried to do something that’s within the bounds of the law, collect the data, then go to the regulator and say, “Here, this is how it’s working, so we think this should be the direction.” The worst results I have seen in terms of rules that have come out were when industry participants went to regulators and said, without context, “Hey, give us clear guidance” and the guidance always came back not as expected.

DQ: Exactly.

OS: Dan, thank you so much for your time. I’m sure we will continue to be in touch and maybe work together in the future.

DQ: Absolutely, I will look forward to it! Thank you so much for having me.

Between Two FinTechs with Hunter Walk

By on September 2nd, 2020 in Industry Insights, Industry Interviews
Hunter Walk

In our second installment of “Between Two FinTechs,” an interview series with leaders in financial technology, we have Hunter Walk, co-founder and partner of seed stage venture fund Homebrew. Previously at YouTube and Google, Hunter uses his startup and scaling expertise to help founders articulate their product/market fit, recruit stellar teams and build well-defined cultures. In this conversation with our CEO Ohad Samet, Hunter shares how he started his venture fund, his thoughts on major developments in fintech and his investment philosophy.

This transcript was edited and condensed for clarity. You can see all the interviews here.

Ohad Samet: Hunter Walk is one of the early believers in our company and one of the most outspoken leaders in the venture capital community, so we’re really excited to have you, Hunter. Can you start us off by telling us about the beginnings of Homebrew?

Hunter Walk: Thanks so much for having me! 

Homebrew came out of a partnership with my co-founder. Satya Patel and I had worked together at Google  and always wanted to work together again. At the end of 2012, I was thinking about leaving Google after almost a decade, most recently having run the Product team at YouTube. Satya had recently left Twitter where he had been running Product, so we finally started to talk about what we wanted to do together.

“We didn’t assume we were relevant just because we’d been around the Valley for awhile and had the ability to write checks.”

We didn’t assume we were relevant just because we’d been around the Valley for awhile and had the ability to write checks. We wanted to make sure we were committing to a relatively small number of companies that we would get up every morning and put sweat and reputation behind them, not just capital. My objective is to be able to look back and think about the impact the people we backed made. 

We think about who we’re going to be proud to be associated with—and TrueAccord checks off those boxes.

OS: You recently tweeted that your team is “big on banking as a service.” Can you tell us more about how you’re thinking about that sector?

HW: When we started Homebrew in 2013, we believed industries would experience innovation from how data that used to be siloed can now be pooled. Data analysis that used to be impossible or expensive had become more open and available for companies of all sizes.

Despite having no specific background in financial services, we were fascinated by the potential there as a tremendously large industry where its consumers didn’t feel empowered by them. We realized there were people taking a very low net promoter score industry to create something that was thought of more positively by its customers. We knew there would be very tough challenges. It’s hard as a startup to navigate around regulations. The incumbents have spent a ton of lobbying dollars. Old technology platforms are difficult to work with, and you essentially have to figure out how to partner with them or route around them. But the people who could do it successfully would build incredibly durable, important, and valuable businesses.

We’ve invested in and continue to invest in that sector. It’s an industry where depth of knowledge will really help you in a lot of areas. We’re always happy to bet on first time entrepreneurs, but no entrepreneur should underestimate the complexity that you encounter in this sector. That type of knowledge, mentality and accrued experience, makes a competitive moat as well.

“[Fintech] is an industry where depth of knowledge will really help you in a lot of areas. We’re always happy to bet on first time entrepreneurs, but no entrepreneur should underestimate the complexity that you encounter in this sector. That type of knowledge, mentality and accrued experience, makes a competitive moat as well.”

We also look for that little crazy gleam in the founder’s eye that says “Oh, if we can do this, then we can do that.” I call those iceberg startups. The 10% that’s above the water looks impressive, but then you realize there’s another 90% below the surface.  Maybe the metaphor is that the ship is the incumbent, and the startup is the iceberg. And that’s utterly horrifying if you’re a ship. I don’t know what makes the investor. Maybe like a happy penguin on the iceberg!

OS: That’s a really interesting point. How do you feel about companies expanding into new businesses? How do you think about balancing the legacy business, expanding that, doubling down, and then working on value-added services as a way to expand the product?

HW: Sometimes people assume that as companies grow, they’re de-risking themselves. And I actually don’t think that’s true of the best startups. I think the best startups choose to re-risk their business at various milestones because they know that they have the opportunity to expand the set of services or products they offer against a consistent mission.

During my decade at Google, I saw that if you are a successful company, in the near term it is always worth putting more resources on your core business and not in new opportunities because you already know that the ROI will be positive. But the reality is that that’s actually the right time to start placing those next bets because you have the stability of something that’s working. And so you say, “Well, what does that put us in a position to do next?” Is expanding into this new service aligned with the mission? Is it consistent with the capabilities and brand of the company? And is it a big enough problem worth solving?

OS: What’s your take on “lending as a service” type companies?

HW: It’s a very interesting and obviously a tremendous area. There are definitely challenges for companies trying to break into that. I think some of those horizontal plays and those essential infrastructure plays are interesting, but you have to figure out how to run a very lean, tight ship because it’s only going to make sense if you can get to a certain scale. You need to decide what sort of risk you’re taking on, what sort of value you add, and if that value actually catalyzes the underlying business of your partners. But looking at the Affirm’s and so forth of the world, it’s clear that there are very smart people in this space who can get and preserve some margin because they’re doing something their partners probably can’t do for themselves, and increase revenue by taking on some of that processing risk. We think it’s one of those businesses where value is going to accrue to a very small number of players.

We’ve seen some other areas that we think are less competitive that are more emerging in the infrastructure space of banking, insurance pricing, and reinsurance. When it’s an area like this, I get really excited when I hear somebody with a contrarian take. If that person is right, they are going to potentially have an outsized result versus a bunch of people who are like, “Oh, I’m going to do Square credit for influencers, or I’m going to do credit for Patreon.” I don’t think those are, by themselves, interesting, discernible big businesses. They don’t have the same vision mission objective that, for example, TrueAccord does. Sometimes if you build the right platform, what other people are calling companies, you can call features and products.

“Sometimes if you build the right platform, what other people are calling companies, you can call features and products.”

OS: Can you tell us more about your investment philosophy and what’s next for Homebrew: How do you balance pattern recognition and Diversity & Inclusion when making early stage investments? 

HW: We believe it really starts by being accessible—we respond to every cold email, work to meet new people and communities that weren’t just based on our own work histories, and bring a ‘pay it forward’ attitude to working with underrepresented segments in tech. That said, there’s still plenty of work to be done—while we’ve historically invested in female-founded companies at a rate 4-5x the industry average, I don’t believe our portfolio is yet representative of our ambitions when it comes to other underrepresented segments such as Black founders. Hopefully I’ll update this a year from now and we’ll have more to say there! 

Between Two FinTechs: An Interview Series with FinTech industry leaders

By on August 5th, 2020 in Industry Insights, Industry Interviews

Perspectives from Melissa Guzy, Co-founder and Managing Partner of Arbor Ventures

At TrueAccord, we are motivated by how our work impacts consumer finance through technology. Given how broad the landscape is for fintech products and services, we’re excited to introduce a new speaker series on our blog, called “Between Two FinTechs: A Chat Series with FinTech Industry Leaders.” Hosted by our Founder Ohad Samet, these conversations will provide unique industry insights and a chance to highlight notable players in this space.

For our inaugural interview, we’re honored to have Melissa Guzy, Co-founder and Managing Partner of Arbor Ventures, discuss her perspectives as an investor focused on fintech companies.

This transcript was edited and condensed for clarity.

Ohad Samet: We’re really excited to be launching this new series of virtual fireside chats. The goal of these chats is for us to meet with folks from across the industry, learn about the issues they care about, and gain new perspectives on the fintech space. Today, we have Melissa Guzy, general partner at Arbor Ventures, and board member at TrueAccord. Welcome Melissa!

To start, can you tell us a little bit about yourself?

Melissa Guzy: Thank you very much for having me. It’s really an honor to do this and to chat with everyone on the team.

My story is not that unusual. I did a startup in my 20s and it was a very colorful ride, both up and down—at one point, we even went public. After that, I joined VantagePoint Venture Partners as a partner. I spent 12 years there and then decided I really wanted to do something entrepreneurial again. So in 2013, I decided to start Arbor Ventures. It was very much like doing a startup all over again. We only invest in financial services, which is something that I’m tremendously passionate about.

OS: Why the focus on financial services?

MG: I always think you’re a better investor when you’re truly personally passionate about something than just thinking, “Hey, what’s the latest fad?” An early experience has made me very passionate about debt collection in particular.

When I first started my company, I had to put expenses on my personal credit card. which is what you do when you’re completely and insanely committed to something. Eventually we received funding but it was quite stressful for a period of time.

When I think about what TrueAccord is doing, I’m quite passionate about giving people a chance to get back on track There are so many unexpected events that have happened to all of us in our lives—including now during COVID. But that doesn’t mean you’re a bad person or that you’re a bad risk. It just means at some point, you needed more flexibility than what the system was offering you.

“When I think about what TrueAccord is doing, I’m quite passionate about giving people a chance to get back on the rails.”

So when the opportunity came up to invest in TrueAccord, I said, “Absolutely.” I think Ohad probably remembers we made a decision in two days. We never looked back and we’ve been fortunate to continue to invest in the company.

OS: Thank you, and likewise we’re lucky to have you! What are some more qualities you look for in a startup that you would invest in?

MG: It’s about the people. I always say your relationship with a team or your investment lasts longer than the average marriage in the United States. When you think about investing in a company, you need to think, “I’m going to be working with this person through ups and downs for a long period of time. Is this someone I want to work with and spend my time with?”

“Your relationship with a team or your investment lasts longer than the average marriage in the United States. You need to think ‘I’m going to be working with this person through ups and downs for a long period of time. Is this someone I want to work with and spend my time with?’”

The second thing, of course, is the idea, but what we have found is that really good entrepreneurs can learn to pivot and change. Every company will go through ups and downs. So it starts with people and from there it’s about industry and sector—what gets us excited. 

OS: Based on your experience, why do startups fail? Can you differentiate those who fail quickly versus those who fizzle out later?

MG: That’s a great question. Startups never fail because of one issue. Startups fail by consistently making bad calls and judgments. We’ve been studying this for quite some time and usually it has to do with not wanting to deal with the core problem at any given point in time.

You don’t want to deal with a problem or a challenge because you’re fundraising, or you don’t want to make a change on engineering because it’ll slow something down. What happens is people start to put bandaids on decisions, and then all of a sudden, the next decision is based upon something you’ve already put a bandaid on, and that just keeps building. And to me, that’s absolutely a point of failure.

I think later startups fizzle out because people forget that you’ve got to innovate and iterate every single day. We live in a very competitive world that changes at hyper speed. Often, companies will reach a threshold and then stop growing because they actually stopped innovating. And they stopped innovating because they stopped taking risks.

OS: Why do you think some fintech companies become successful versus others?

MG: The most successful startups in fintech have not been technologically revolutionary. They’ve just solved something incredibly messy. Take Stripe as an example—a couple lines of code to be able to accept credit card payments on a website so an e-commerce company didn’t have to hire a payments team. That was really simple. It wasn’t rocket science. It was messy. What they solved first was very sticky, and then they were able to build around it. 

“The most successful startups in fintech have not been technologically revolutionary. They’ve just solved something incredibly messy.”

If fintech companies start with something weaker, they’re not going to be able to build around it. I think that’s one of the benefits, again, of TrueAccord. We started with something really hard and now we can add everything around it to serve the consumer in the right way.

What’s so interesting is that many financial services are consumer-centric until someone’s late on a payment, and then they don’t like that consumer anymore. They fail to realize that it’s always going to be consumer-centric. As long as we understand that everything we do, at the end of the day, is to help the consumer, we will definitely succeed massively.

OS: How do you think COVID-19 is going to change funding and the overall startup environment?

MG: I think Silicon Valley has had a hold on being the startup capital for a long time that’s well-deserved. During the 2000 downturn in venture capital, VCs on the East Coast pulled back and got scared. The venture capitalists in Silicon Valley never did, and I think that’s why the Valley has the reputation it has. It’s part of the fabric of the community to take risks and to back entrepreneurs.

I think that’s going to change as more startups and more people are moving out of cities, especially with COVID, and we’ll see much more diffusion of startups across the United States —and across the world, for that matter.

We will pull through, and we’ll be in a new norm, and there’ll be new opportunities. And you can be nothing but excited about the future.