Joe Maxwell Would Emphasize the Importance of Regulatory Compliance

Joe Maxwell, Managing Director at FINTOP Capital sat down with Clayton Weir to discuss the currents of change in financial services, ERP movement to the cloud and how banks can enable digital transformation. Hear the full episode of If I Ran The Bank podcast through Apple Podcasts, Spotify, Google Podcasts, Amazon Music, or by visiting the If I Ran The Bank website.



Joe Maxwell is a multi-time FinTech entrepreneur, having dedicated FinTech specific venture capital (VC) across various vehicles. Starting out by building applications in the early ‘90’s before SaaS was a word and before the cloud, Joe has seen many rails coalesce over the last 30 years, laying the foundation for a capstone career in FinTech. In 2016, Joe began investing and was one of the first investors in FISPAN. Joe invests in key pillars across multiple vehicles for approximately 40 companies: office of the CFO, Embedded Payments, all things ERP, private and public capital markets, and bank technology. Fitting with the If I Ran The Bank podcast theme, Joe is the first guest who actually does run a bank! Joe is a chairman at Thread Bank, previously known as Civis Bank. 

Joe joined FISPAN’s CEO and Co-Founder, Clayton Weir, on Season Two of If I Ran The Bank podcast. In the episode, Joe and Clayton discuss the currents of change in financial services, ERP movement to the cloud, how banks can enable digital transformation, and considerations for compliance and bank regulators. 

Currents of Change in Financial Services 

Two large currents have shaped change in the financial services industry: one, the emphasis on outside markets for investment, and two, the pace of digitization. Looking at the former, Joe considered that large financial institutions have turned to outside markets in order to keep up with the pace of change demanded. Investing and building software internally isn’t enough. In examining the outside markets, Joe explained that “the whole concept of building big, huge enterprise software inside the walls of an FI are pretty much done. Now we’ve got interconnected software with API and microservices where we can really interconnect lots of smaller applications to be much more nimble, current, and move at a pace that’s just insane.” 

From the other end, change within the industry has been shaped by the pace of digitization, intensified throughout the COVID-19 pandemic. While new financial services software would have been adopted at some point regardless, the pandemic has accelerated the need to adopt sooner rather than later. Drawing from his experience in the banking industry, Joe illustrated that “[the COVID-19 pandemic] really accelerated a lot of native digital processes, pulled it forward, but it also exposed how many analog processes are still in the stack and how we need to attack them.” While many middle and back office processes had remote access, it wasn’t a native workflow, making them difficult to access. 

Office of CFO - Status of Digitization 

Financial operations of businesses continue to digitize at a rapid pace with 11% of ERPs already being natively cloud-based. Illustrating the pace of change, Joe noted that this number would rise to 100% within the next decade. In a look back to the old school processes, users had hidden factories built around their desktop software. With applications attached and integrated, “it’s not as easy and as simple as we may think to just move our ERP to the cloud” stated Joe. The sheer size of these operations is evident when considering the quantity of users who want to move to the cloud and how that affects their ERP-centered processes. 

As a core process, the addition of ERPs to the cloud opens opportunities for all other applications around it, including talking to one another natively. While a cloud-based application can connect to a desktop ERP, “you don’t get the benefit of the cloud. You don’t get the leverage. You’re getting a point solution - You’re not getting the cumulative effect of the benefit” noted Joe. 

Today’s Departments… Tomorrow’s Software

Through innovation, processes that used to be an entire company department are now becoming pieces of software. Moving off this idea, Joe anticipated which broader financial operations today would not exist five or ten years from now, adding that  “...the really, really large corporations that are processing 50,000 invoices a month are still going to have core infrastructure departments, but they’re going to be overseeing software.” For example, while AP automation is a core process used by many companies, this process was once 100% manual.

Revolutions in Bank Technology 

Building off of Fiserv’s acquisition of Finxact, a core banking software solution, Joe addressed the question of how close bank technology is to the cloud being pervasive. Joe explained that the numbers are much smaller than that of ERPs, and that “there’s about six cloud cores that are all at some point of gestation. Arguably, none of them have more than 15 to 20 customers and it’s unbelievable… So bank [technology] is changing fast, as fast as any market I’ve ever been involved with, just as far as the number of companies, the number of problems, the number [of] point solutions they’re chasing, the number of deals…  I think one thing that the pandemic accelerated more than anything, maybe by five plus years is digital transformation in a bank. And what I mean is native digital interaction with the bank. Did you know that in the US 65% of new deposit accounts that are opened today are opened on an app and people don't even know it's not a bank?” This misconception is drawn from neobanks; looking at the deposits, Joe marveled at the extent of millennial engagement and its technology.

Changing the Face of Digital Transformation 

 

In order to grow and benefit from digital transformation, banks must surround themselves with modern and nimble suppliers. As Joe explained, You have to find your point of entryYou can’t be all things to all people in this kind of digital charter business. You have to pick your points of interaction and interchange.” 

The Bank’s Bread and Butter

As the bank’s bread and butter, every financial institution’s core business consists of taking deposits and “getting a spread on secure, effectively near-zero risk lending” as explained by Clayton. Through the wave of FinTech evolution, the neobank space is increasingly filled with an array of deposit-taking institutions, so institutions are not actually getting the full slice of the pie.

In search of easy and frictionless experiences, consumers in the Buy Now Pay Later (BNPL) space are willing to pay off-market rates. These expectations can be seen even in the merchant cash advance space, where small business customers demanding fast, quick, and easy money pay the (high) price. “We need to take that same underwriting and credit experience, digitize it, and hang it on a bank, and people would love to hit the go button,” explained Joe. 

To better understand Merchant Cash Advance (MCA) and its benefits towards businesses, Joe explained MCAs as a loan off your transactions. For example, through a greater understanding of an individuals’ cash profile, lower rates can be offered in periods of slow activity by advancing a dollar amount to be paid back through credit card processing. 

Bringing a quality of underwriting data never before seen in traditional financial institutions, MCAs carry lower underwriting risks through a greater understanding of the businesses’ cash profile. As financial institutions begin to navigate the commercial lending landscape, opportunities for digitization are apparent. In order to accomplish this, Joe pointed to the importance of intelligent platforms, noting “…you have to have intelligent platforms to read the data. Otherwise, you’re shooting in the dark. And you can’t afford to have bankers do it. It’s too expensive.”

Joe Runs The Bank : The Importance of Navigating Compliance

Drawing from his experience running Thread Bank (previously Civis Bank), Joe emphasized understanding the enormity of compliance and regulatory compliance with the bank. From the very start, regulators are integral to business plans and present in meetings - “from comp to everything, they have a say in it and they have to bless it.” Having grown up in the technology space, transparency came naturally to Joe, who added “[Regulators] are very attracted to what we’re building because we’re transparent. We’re open. We’re honest.” 

In order to source the KYC, KYB, and AML compliance infrastructure needed to implement and scale platform-based FinTech business within a bank, the importance of doubling-down on and defining operations is emphasized. While FinTechs digitally orient their clients, considerations towards compliance may be put to the side. To mitigate this, Joe recommended starting soon - “If you can get in early with the [FinTech] platform and really educate them and have them be your partner in that, you can have a winning solution.” 

Joe drew two key insights when asked about his experience running a bank:  “[A.] The ability to engage in operational and compliance discipline and [B.] having the right team” are key to running the bank. “You’ve got to have people hungry for growth, transition, and change. You’ve got to have the anchors that believe this is the future, not fighting you, and I think you can have a really successful infrastructure for growth.” 

Is Blockchain FinTech's Next Super Highway?

As innovation continues in FinTech, Joe anticipated that blockchain and the use of cryptocurrencies will “be the biggest new super highway that’s being built right now.” While transactions may enter several sets of legacy ledgers before settling, the technological promises of open ledgers show the viability and sense of implementing blockchain. 

Areas with cross border settlement may become the first space to see the emergence of blockchain. Notably, these spaces benefit corporations through their efficiency and the reduced fees alongside your cash. Payment settlements are a second space in which there may be further emergence of blockchain as explained by Joe, adding “You're going to see the banks starting to offer and lean into the use of the concept of stable coin. But I think, just finding an instrument that points to the banks that backs to the creditworthiness so you can use digital payment infrastructure. I mean, we're going to see it start to emerge. It's amazing to see what's being built out there right now.”

USDF and Bank Stable Coins

In partnership with Figure, one of the largest, most capitalized blockchain companies, Thread Bank started a consortium called the USDF Consortium. In doing so, banks would have a single platform to plug into. Joe emphasized the importance of building such a consortium as “if we’re going to have a stable coin or a US dollar-backed crypto, for lack of a better term, so we can drive payments on this, then we’ve got to get something for the banks to join into that’s a consortium that they can agree to the terms and use. From my perspective, that’s why the banks are joining it; because they want to feel part of something that they can be led to the right answer that they can all agree to. It’s a lot easier for the regulators to join in and open on something that has a lot of members”. 

“At the end of the day, [crypto] is not a new technology. I mean, it’s a faster, more efficient, more transparent, more secure, more self identifiable way to interact with your money.” 

 

You can listen on Apple PodcastsSpotifyGoogle PodcastsAmazon Music or by visiting the If I Ran the Bank website.

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