SaaStr 795: The AI Impact on Banking and Finance with CEO and Co-founder at Treasury Prime, Chris Dean

0:01Welcome to the official SASTR Podcast, where you can hear some of the best SASTR speakers. This is where the cloud meets. Up today on the Saster Podcast. All anybody's interested in today, to an extreme. It's not the same, but there's only been four SaaS IPOs since 2021. There's only been four. One was OneStream, which is a platform for CFOs. And they're about 600 million. They IPO to 500 million. And it was very interesting to me, the founder CEO said that they're being very cautious on AI. The CFOs don't want it. They don't trust it. They don't want any hallucinations. At the same time, there's been machine learning and AI there since, I don't know, since the 60s probably, right?

0:41Yeah. So what is AI in banking and banking as a service today? Banks are generally interested but scared. I don't know anyone who's using anything at any interesting scale. The fintechs, one of the things the banks are scared about is that they become AI agents, which treat the banks as a commodity. The banks love this long-term relationship with the end user, right? With the consumer. They really like that. And what if you just had an app that rebalanced your bank accounts every day? And there was just your credit card just worked magically to pull money from whatever account it needed to. They terrified.

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3:11That's Jason100 at sasterannual.com. See you in May, May 13th through 15th in the SFA. bay. So welcome everybody in the global Sastra community. Have a good friend, an OG part of Sastra here, Christine from Treasury Prime. There are a few folks. We're going to talk about a bunch of things related to BAS, banking as a service, fintech, where we're going, what happened to my money at Silicon Valley Bank. Could things blow up on us where AI is in more conservative parts of the world? But Chris has been doing this, has been doing hardcore banking as a service since before anybody knew what this was.

3:56This is his second startup doing it. The first was bought by Silicon Valley Bank in the early days. Now he's got a YC back company that's raised over$50 million that has many top banks and fintechs and a marketplace for them. And we'll get into that. But Chris, thanks. Thank you so much for joining us. Thanks. Yeah. I love Sastr. Here's my only Sastr swag I still have. Oh, the fidget spinner. It's a fidget spinner. I love mine too. That is a classic. That is a classic. Okay. I want to talk about some stuff. And also I want to talk about a little bit about stuff that has blown up in the space. This whole Evolve Synapse thing.

4:34It's pretty nerdy for most people. but about a hundred million dollars of folks that deposited money in startups still remains at large doesn't it do we do we know where this money is it's it's it's still unresolved right it's unresolved yeah this is crazy different parties will say oh it's over there but it's always on someone else's room right it's never my room it's someone else's room and it's just pointing figures pointing at each other no no one knows where it is i assume there's some level of malfeasance there but i bet it's really small. Someone stole some money, but just tiny amount. Mostly it's just reconciliation is hard to make sure that books balance.

5:10It's hard. It's really hard. And they didn't do it for a long time. And it just leaked out. So let's talk about this for a minute. So give us some context in a corner of the fintech world. This is a big deal, but most people haven't heard about it. And I'll probably get it wrong, but Synapse was attempting to be a tool for fintechs to enable banking on their platform, especially for some low-end products and consumer-ish products. And Evolve was their bank, right? A real bank, a chartered FDIC chartered bank, correct me if I'm wrong. And Synapse couldn't keep track of its money. It got over its skis by almost$100 million.

5:46And no one knows where a lot of this money is, right? Is this a summary? And then tell me the summary and tell me where the hell is any of our money anyway? yeah so synapse was pretty much the og us banking as a service company they have an api where you can say i want to open a bank account and then you could do that there are rules about how you could open it but you could open it and say i want to send a wire or i want to issue a debit card stuff like that you can do all that stuff and they managed it and in our my world those are called program managers basically they want to pretend to be a bank but they're not a bank they need a bank buddy.

6:22They need a partner. So they got Evolve, which was, it's like you said, it's an FDIC bank. Pretty much every bank's an FDIC bank. Its main regulator is the U.S. Federal Reserve, the Fed. But basically, over time, Evolve and Synapse didn't like each other. They fought constantly. And eventually, Synapse, the software company, the program manager, started to add other banks and they added two, three banks and they moved money around between them pretty indiscriminately in ways that I would say, this is not my real legally, it's not my field, but seemed fairly illegal to me. And so what's happening now is like one bank says, I don't know where it is.

7:03It must be over to that other bank. And the other bank says, no, I don't have it. It must be with you. And you say, well, let's look at the ledgers. Let's look at the books. They're a mess because because Synapse was always a mess and they went bankrupt. Yeah, I looked at purchasing them and I back slowly away. What's I hoping to come out? And I was like, yeah, no, thank you. Where's the money really though? If it's in a bank, it's fine. But a lot of stuff aren't banks. Evolve, for all its troubles, is actually an okay bank. But also I could have said the same thing about SVB, right? SVB, I worked there for a couple of years.

7:35I ran their fintech group there for a while. Yeah. It seemed completely solid and ready. They're constantly fighting with the regulators. And at some point, they just got over their skis. They were relying on certain deposit interest rates. They're relying on people like you and me to keep our money there and never move it. And the interest rates were down. They couldn't pay the yield that they needed to pay. And people like you and I, maybe not you and I, but people like us, moved their money. And all of a sudden, there was no money there. And whatever else is true, whatever competent or competent thing SVB did, you cannot run a bank without deposits that is the whole bank business you buy and you sell money i buy money and take deposits i sell money in terms of loans and i make money on the difference so that's how you do it if you have no money you have no deposits can't make any money yeah that moment um there's some there is some saying that maybe that i made it up but if you do start up long enough there's a black swan event every four to five years right yeah yeah so for our little tiny team at SASTR.

8:36March 2020 was one. We lost$10 million when we canceled SASTR annual. And the other one was we had$10 million at SVB and we woke up and we log in and it's zeros. I was still, I couldn't, it's zeros. So horrible. So I want to ask, I want to ask about all of that for a minute and then go into the future. But before we get there, does, does, does, is my money anywhere? Like how does this ledger system exist? Is I had$10 million at SVB and then it's zero. Okay. Let's put aside FDID insurance and other questions. But where the hell is my money? SVB loaned it out. They loaned it out. Are there mainframes in the cloud that know where every...

9:14Does this money even exist? This is where I get confused, right? I sold... I tell you, when I sold my second company to Adobe, I was terrified to even wire the money anywhere. I'd never had that much money before. And I'm like, what if it goes to the wrong place? What if it disappears? And I put it in Vanguard because... And today I would put it in Wells Fargo because I'm like, at least I think Vanguard will survive. I didn't even know where to put that much money. How does this ledger really work? So people think two wrong things about banks generally is they think banks are very secure and know what they're doing.

9:46About they don't. Bank secure is like not very secure. And the other is that they, that your money is just sitting there in a big vault somewhere, whether it's like in dollars, physical dollars, or there's bits in a computer somewhere. but that's not how our banking system works basically no banking system works like that it's fractional banking yeah it's like that it's a wonderful life movie where like your money is in the where's my deposits it's in the more it's in the mortgage that i gave so and so to build their house so it's in their house and they're paying it off so if you had 10 million dollars at svb likely 9 million of it was out somewhere yeah and so all of a sudden when everyone pulls their money out, normally there's just a little bit of money movement and they can handle it by having enough reserve.

10:32They have a little buffer. But if all the money, if the buffer disappears, they're screwed. Where does their money go? Then they have to call the government and say, yeah, we're stuck. Right. Call some bigger bank and say we're stuck. Okay. Listen, I don't want to spend all the time on this, but just to be my money therapist, when Adobe wired me a big check back in the day to Vanguard, did it really wire money? Here's where I get confused. Did money change hands? Did actual money? What the hell happened when that$5,$10, I don't care, right? But when it's your life, when it's your big win, what actually happened with those proceeds?

11:07So it's turtles all the way down. There's like stacks of things recursively stacked on top of each other. Yeah. At the bottom of this, the stable base is the U.S. Federal Reserve Bank. Like every U.S. bank, U.S. commercially chartered bank, which say like, what, 4 ,200 right now, has an account at the Fed. Roughly, you can think of an account number. It's like the routing number. It's not exactly right. It's mostly right. Okay. So an entire bank's, all their funds, all their billions of dollars will be in that one bank account at the U.S. Federal Reserve. When you send a wire, what happens is there's a Fedwire protocol, which moves that many dollars from the account of JP Morgan to the account of Vanguard.

11:50You know, there's all sorts of extra little metadata stuff that says, by the way, that's Jason's money, don't lose it, right? And then it's up to Vanguard to increment your balance properly. But that's how it is. It's all electronic. It's all in the cloud, like you said. Got it. So the meta ledger is guaranteed by the Fed for the banks, right? And then the individual, and this is maybe, this is part of where Evolve and Synapse got in trouble. The individual account holders, the individual accounts, it's up to the bank or the non-bank. and I don't think that guards a bank, the non-bank to keep track of that.

12:17And that's where you can go awry, right? But the Fed keeps track of the total amount for each of these actors? Yeah, that's right. Let's pick Wells, right? They have, I don't know how many, Wells has, say,$500 billion. I don't know if that's true. They have an account at the Fed. Actually, it's probably spread across 20 accounts, but for 10, it's one account. That's their money, right? Yes. It doesn't have$500 billion in there because that's just their total. It has maybe$100 billion in there. because they've loaned out the rest, except to somebody else. For sure. And they have a core banking system, which is basically just a ledger.

12:52It's a database that says, okay, Jason has a dollar, Chris has$2, Jack has$7, et cetera, et cetera. And it's up to the bank, Wells Fargo, to make sure that the number that's at the Fed matches the sum of all the numbers on their bank accounts. Yes. And that act and making sure those are the same is called reconciliation. And if those are the same, everyone's happy the book's balanced. It's just regular, keep it back to company. I can tell you every day at all the banks I work with, every single day, there's a person who has to do something to reconcile those books. It is hard. Every day. Every day.

13:25Every day. Every day they're reconciled. Treasury Farm's unusual. The banks don't really love us for this either, is that we reconcile 24 hours a day, every hour. And we try really hard to do that. We were off once by, I can't remember what it was anymore. It was like 10, 20K,$1 ,000. Yeah. And we were attached to 10 billion. So 20 ,000, it's a rounding error. I had heart attack. Ah, what's going on? And of course, one of my folks said, oh, we found it and they fixed it. It was fine. Okay. It was all hands on deck for, I don't know, five or six hours. So you're checking it hourly. Once in the almost decade-long history of the company, you found a Reconciliate, a 10K or a five-figure Delta.

14:05Yeah. And you tracked it down and addressed it. Yeah. Yeah. Yeah. That's right. And often these things are fine. Sometimes it's just timing. You send a wire. You want the wire to work instantly, like it does in the movies. It doesn't work like that. Yeah. It goes to someone's desk. If it's a big enough number, like from Adobe, that they'll have to call and approve it. Adobe will. The bank will look at it. A person will look at a big enough number to say, yeah, we got to look at that. That all takes time. And sometimes you'll say, I think I have an extra dollar in the account, but it hasn't actually been wired yet.

14:36And so you just wait, and that handles reconciliation. But you can't do that. You can't just hope that it'll be better in the future. You have to say, if it's not good in an hour, then something's bad. If it's not good in the day, then something's wrong. Okay, so for anyone that wants a platform, Treasure Brimes only had one issue since inception for 10K, and reconciliation was solved that day, right? That's the track record across 10 billion deposits, right? Yeah. Sometimes we argue with the banks about, they say your software's wrong, and I'm like, I doubt that, but then there's a big hell of a blue, but there's not, I don't think we've ever found anything serious.

15:12Okay. So let me ask the other end of the spectrum. Let me ask the question that I think is under been under discussed on, in all the articles. Okay. Let's talk about some products which I use and enjoy using. Okay. I'm going to pick three Brex, Mercury, and China. A couple of questions. What if they went bankrupt tomorrow? It's not going to happen, but imagine they went bankrupt tomorrow. What would happen to the assets there? The most likely thing that will happen, I guarantee the most likely thing that will happen is that none of those are banks. Those are all neobanks. They're not banks. They're not.

15:42None of them are. That's the thing. But a lot of people think they're banks, don't they? They do. Chime became super clear. We're not a bank when people started doing this a year ago, I remember, right? But we use Brex and Mercury every day, right? They're very easy to use. They're very easy to use. Yeah. The UX is amazing. And banks, UX is generally a terrible. Terrible. My corporate account's at Wells. Wells and I use it all the time. It's bad. All right. For what we want to do, right? Work quickly. But I think most people think Brex and Mercury are banks, no matter what their website says. I think they treat them as banks.

16:14I think they're marketed as banks. I think when Brex said, move your SVB dollars over to us, it felt like a bank, right? And there's a convenience there, but SVB was also for folks that have been in tech for a while, especially folks doing like COs and VCs, SVB was super convenient too. And we paid the price, right? We almost lost everything. We almost lost everything. It's not going to happen, but I'm picking three leaders that won't go under rather than a synapse, right? But if Brex, Mercury, or Chime, which would not go under, if they did tomorrow with no notice, what would happen? We've got like$3 million at Brex.

16:46I don't know what at Mercury. What would happen to my money? In theory, and this is most likely what would happen, is Brex goes under. The bank still has it. And there are two banks there, Column and Fifth Third. Fifth Third's a big, giant bank in the Midwest. Yes. The bank would say, we need a copy of everyone's balance. They need to know Lentkin balance or Sastra balance, right? And then they would say, oh, you got$3 million. They would write you a check for$3 million. And they, not a joke, would probably put it in the mail and send it to you and hope that eventually it would get to you. That's in theory what would happen.

17:18That's what was supposed to happen at Synapse and of all. But they went to the books that Synapse, the ledger, said everyone had. And no one, they said, you said it has$3 million. dollars, it's not$3 million here. Yeah. So what do you do? So as long as everyone's a good actor, it's fine. And that's the most likely case because actually Brex and Mercury and Chime are all very well-run. Yeah. Like Brex used to be, have the best, by far best neobank. They've changed how they do it, but they used to by far have the best one, best design. Okay. Last nerdy question. Then I want to, I still want to stay nerdy, but I want to abstract up one level.

17:51Right. We'll see if you agree with me. After all this, would you put a hundred percent of your own money in a non-decent? I wouldn't put it in one, but I wouldn't do that anyway. It's like all about the backup. I wouldn't put all my money - Well, now you'd have multiple. Maybe that's the right question. You would have multiple banks. I always have multiple banks. It's funny, on the Treasury Prime business, every single one of our big clients has multiple banks. And if you use your examples, Brex has at least two. These technically, I think might have three, but at least two. Mercury's has three.

18:21They still have stuff at Evolve, if I remember right. And Chime, there are two. There are two banks. everyone has multiple, not only for the, we're scared that they're going to, the banks going to collapse reasonably, but also so they just economic. So they can say to bank A, I'm getting a better deal. Bank B, I'm going to start moving more of my stuff over there. And then bank A says, all right, pricing pressure, we'll make a deal for you. And that works. And did, and that has accelerated church. Do people pre SVB always have two banks or is that accelerated since the SVB first Republic? So. the big people have always had multiple banks it just moved that big number down so a lot more people have it right it used to be like you needed i don't know 50 million in deposits which is for bank small but for fintech large you had to have that and now it's more oh 20 10 sometimes 10 yeah yeah okay all right next one i want to talk about i want to talk about look.

19:19The rebound of fintechs, how that intersects with treasury prime. I want to talk about AI and then, and then a few more detailed things, but you've had a lot of different, you treasury prime's got a couple of products. You're connecting fintechs and banks. You're providing a service for that, right? A platform, a marketplace and more and a software platform. You've watched some of the quality of fintechs deteriorate, right? It's post 2021, but now it seems like it's back Like it's back with a vengeance, right? On many levels. So what's the pulse check? What are you seeing across FinTech? And how is it like impacting you at a product and customer level?

19:54Yeah, it's night and day. So December, 2023, I went over, I've been in the end of the year stuff that you do. I'm looking at all the books and where we like, we killed it and where we face planted. And I started just modeling stuff. And I'm like, there's a whole line of business we have, which generously breaks even, generously. But in practice, we lose money on every deal, right? Yeah. And I looked at what's happening in the industry. I said, this whole industry is going to face fun, at least for the next six months, maybe for the whole year, maybe longer. What do I know? And so we made some hard decisions.

20:30I rift, I got rid of like a whole bunch of wonderful people who like had done nothing wrong. It just, that was the market. And that was right. I didn't think we closed a single bank in 2024. And we closed one at the end of the year. And that was good. But since then, I can tell you there's multiple banks in play. Everyone wants this stuff. And they want it partly because the fintech side is back. There's like people with interesting ideas. There's established companies, there's SaaS companies who want to add banking like they used to in the good old days. And it's just taking off. And like part of its capital is around, but part of it also just there's been a big switch with how they're regulated.

21:12There's a new U.S. administration. They're like changing how all the regulators are running. And mostly the bankers are feeling much more generous and able to do things, which they weren't feeling like that last year. I see. It felt like the banks were at a huge walk away, especially from anything vaguely started being fintech. But now you're saying they're back. They want the business. They want the business. They haven't stopped being bankers. Yeah, I don't know any vertical SaaS company in particular. Vertical SaaS is also quietly on fire, right? Shopify, Toast, Procore all crushing it. I don't know a single vertical SaaS company that doesn't want to add some type of banking or fintech product, right?

21:52At a bare minimum, they're adding some sort of payroll, but they want to add credit, right? They want to add banking. they want it is every vertical SaaS wants to be the ERP for its industry right whether it's hairdressers or construction and everyone's decided that banking's part of that right you want banking and payments are part of that stack right yeah there's a whole range here like just doing simple payments like you can do that at scales you couldn't ever you couldn't do before couldn't do five years ago yeah very sticky for a lot of the a lot of the SaaS customer the end users right because they're like they get used to it they don't want to switch around because it's sticky product all the way up to a full banking experience.

22:31I want a bank account. I want to do some lending. We have three small as well compared to Procore small, right? Construction startups, they're all doing variants, the same thing. They don't actually really compete against each other, but they all have decided that they're going to, they added payments and then they added bank accounts. And now at least two of them have added lending since then. And I could see them growing and they're just growing steadily. SaaS companies do, they go up, right? That's great. Yeah. Yeah. Shopify pay is, Shopify is exploding at 11.2 billion in revenue. Exploding.

23:02It's all Shopify pay. It's all, it's always been a FinTech, right? For many years, but managing that stickiness of making the whole, and Shopify does everything, right? To that, this is a pitch I give to all the time, but imagine to the Shopify user, right? Not you or I, but like someone who's a merchant who's starting at their store. If I could just say, if I come to you to Shopify, so look, I could just do everything for you, including handling the money and handling the payments. And it'll just be dead easy. You just click this button and we're good to go. And said, wow, why would you do that?

23:33Because I want to be helpful. Shopify is all about making the merchant successful. But also, I'm going to take a few bips here, there, like a percent of a percent. Just here and there. And you won't even, it's so small, you won't even notice. But it's scale. It's huge amounts of money. You have to be at scale, but they are. It's huge. Huge. Yeah. I really don't think some folks notice it, right? Where the margins are very low. But for the most part, most of these vendors are pretty successful in, it's not just hiding it in the, it's just, it's not enough to matter, right? The value is so much higher than the little bit of take that they make, right?

24:11That it's at the edge of free for the end customer. Sure. The merchants would like gladly go somewhere else. It was even cheaper than Shopify with a good product. But frankly, even if they go somewhere else, it's probably not as good a product and they're going to charge them basically the same thing anywhere, maybe slightly more. So why don't I just stick with the good one who's a good deal and can do everything? Yeah. And then let me just, let me tie it back to treasury prime. And then for the last couple of minutes, let's pull it back high. But the three construction, the three smaller pro cores that aren't direct competitors that came to treasury prime, how did they come?