Georgia Fintech Academy

S2 - Episode 16: Legal considersations of Fintech and Bank partnerships with James Stevens of Troutman Pepper and Thomas Long of TripActions

June 10, 2021 Georgia Fintech Academy Season 2 Episode 16
Georgia Fintech Academy
S2 - Episode 16: Legal considersations of Fintech and Bank partnerships with James Stevens of Troutman Pepper and Thomas Long of TripActions
Show Notes Transcript

James Stevens is a Partner at Troutman Pepper with a focus on corporate and financial services law. He is joined by Thomas Long a recent graduate of the University of Georgia and now a leader at TripActions in Silicon Valley. The discussion explores the ins/outs of bank and fintech partnerships.

Speaker 1:

Welcome to the Georgia FinTech academy podcast. The Georgia Vintech academy is a collaboration between Georgia's FinTech industry and the university system of Georgia. This talent development initiative addresses a massive demand for FinTech professionals and give learners the specialized education experiences needed to enter the FinTech sector.

Speaker 2:

Everybody. This is Tommy Marshall , the executive director of the Georgia FinTech academy. And welcome to season two episode 16 of our podcast. Today we've got James Stevens , the corporate and financial services partner of Troutman pepper and Thomas Long, a recent grad from UGA is Terry school of business. And now in a great position with trip actions out in the Silicon valley area. Welcome to you both.

Speaker 3:

Thanks Tommy . Awesome to be here. Thank you so much, Tommy

Speaker 2:

James. We want to start productions with you. Um , thanks so much for being here. I know you've had a phenomenal legal career and in a lot of focus in this FinTech area for many years , um, are tell our listeners about your career journey and how you've you've gotten into this , uh, this space in such a meaningful way.

Speaker 3:

Sure. Be happy to do that. Um, well, you know, I, first of all, I owe it all to my education. Um, as you know, I , my , uh , uh, a graduate of Georgia tech, undergrad, and , uh , Georgia law school. So , um , that's the secret, the real secret to any success I've had, which is not nearly as impressive as pull for , I guess you can only , you have to pull for your undergraduate school unless you come to a school that doesn't have a team now that's painful, but that's the reality.

Speaker 2:

Okay. Um ,

Speaker 3:

So, you know, I always wanted to be in business , uh, or business law. I kinda , you know, kind of really struggled with that , um , in college and then, you know , went down the law path. And then when I was in law school, you know, it was clear I wanted to be a business lawyer. Um, actually I , I went out west on the west coast , uh, during the summer and worked at a firm out there. Um, but it wasn't FinTech. I was drawn to, it was the.com bubble at that time I up , I graduated in , um , oh one and so, you know, the summer of 99, 2000 , um , place to be. Um, so I kinda got drawn to that. And that was really what I was looking to do is to be a securities lawyer doing public offerings and such. Um, but early in my career, I ended up not going out there. I went and worked at a firm in Atlanta and early in my career , um, doing securities work. I started doing a lot of work with our bank clients because a lot of banks are pub were back then public companies , um, just simply because of the way they raise capital, they went out and got thousands of people to invest. And as a result had to file with the sec, and I got, I sorta fell in love with that business because , uh , they were, you know , frequently kind of smaller businesses. Uh , you were dealing with, you know , CEOs and CFOs, but they needed your help. Right. It was a very extremely, highly regulated , um, a lot of expertise required and experience to get that expertise. And so, you know, really in my first year of practice, which is now about 20 years ago , um, I just kinda got into financial services. Um, and , and I really did all did that, you know, for, for the next 10, 12, you know, continue to do that debt today. And , and I, I typically call that my bread and butter , um, but really, you know, early on we started doing a lot of, of financial services deals with non-financial services providers. Um, I think back to like, oh five, we were setting up something called net branches where we would bring a mortgage broker in and, and make them a branch of a national bank, so they could avoid getting licensed. And that, that is sort of a precursor to the bank as a service model that you see prevalent throughout the financial, the FinTech world today. And so I really jumped into that, you know, over the past, you know, sort of say five to 10 years as, as we've had a lot more growth and a lot more , um, you know, especially on the origination side, you know, FinTech being created that we're going out and , um, and acquiring customers and needing banks to partner with, I have, you know, really just kind of followed the clients and followed the business and, and gotten more and more into that. And today I really work on both sides of the fence, but I really focus on the intersection between banks and fintechs and those partnership agreements that are so critical to a lot of the product offerings that you see

Speaker 2:

Out there. Awesome. Um , thanks for that. And I want to come back to that point in a minute, but Tom's Thomas, let me give you a chance to introduce yourself.

Speaker 4:

Yeah, of course. Um, and James, super cool to hear his story , uh, when it comes to the Georgia, Georgia tech thing, I'm in an interesting spot where I went to UGA, but , uh , grew up a Georgia tech fan cause my, my dad went to Georgia tech. So I'm in an interesting spot in terms of who to root for. Um, but , uh, but yeah , so basically I was born and raised in Roswell, Georgia, a little north of Atlanta and , uh, you know, was always interested in finance in particular and , and kind of that, that side of things. And , uh, ended up going to UGA and, you know, when Terry college of business , uh, I obviously had an, you know , just an awesome experience with, with some of the greatest people I've ever met , uh, and majored in finance and economics and kind of through it. I was part of the student managed investment fund, part of the core stair society part, part of these, all these groups of people that were really interested in finance. Um, so with that , uh, you know, essentially I w my goal was to go into investment banking and was the path that I followed. Um, and then after my junior year of college, you know , I was looking for an internship and very long story short, I ended up actually getting an internship in venture capital over at Andreessen Horowitz in the bay area. Um, you know, so just kind of took that leap. Uh , it was the first time I had been west of, you know , probably Tennessee. So it was definitely a , uh , a new experience for me. And so I spent , uh, I spent the summer there then , uh, came back full time after college , uh , spent about a year at Andrew's , Norwood's just doing kind of late stage investing. Uh, and then with that, we invested in a company called TripActions and I was so excited about it that I decided to look , leave Andreessen and join it. Um, so, you know, I've been there for about two and a half years, and now I'm working on the product marketing side , uh, for kind of the B2B payments and corporate card product we have called culture factions , liquid , uh, and you know, just extremely exciting base and , um , you know, pumped to provide any advice I can to students that , uh, you know, th th th the want to make the, make the move to , to kind of start ups and technology in the bay area.

Speaker 2:

Yeah. Well, Thomas, I guess, first of all, I'm , I'm sorry, we missed you with our Georgia FinTech academy efforts. You know, we really just started getting humming with it right after you graduated . And , um, you'll be happy to know that , um, UGA there's a group of Kerry students that in the last 12 months created , uh , that what they call the Terry FinTech society, which , um, yeah, and they're , they've got about 45 students , um, that are, that are either juniors or rising seniors. Um, and they, they, you know, they've been great. They're , they're becoming a real force and military community. I engage with them deeply. They helped me promote all our ten-day academy efforts at , um, at UGA Terry . And that's been wonderful. Um, and then also, just from your story, I just, I hope that all the students here it is very encouraging because of course, you kind of went in with this finance interest into the bay area and the VC work you were doing with Drayson , but , uh, but now you're in a, more of a product and a marketing role, I mean, and that's in the span of what two or three years. Right. So , um , just kind of points to, there's a lot of , uh, flexibility in some ways, if you're willing to be creative and do kind of just do the work that needs to be get done. Um, so , um, I want to come back to trip action too, in a second. Um, but James, can you talk more about this intersection point between banks and fintechs , um, and kind of clarify really how that's a very , um, uh, synergistic , uh, relationship in , uh, in advancing this part of financial services?

Speaker 3:

Yeah, sure. Happy to. Um, so probably the foundation, the foundational element I'll lay is fundamental to these partnerships is an understanding that only banks can collect deposits and sure , by the FTSE only banks, or maybe some other licensed people can avoid getting licenses to engage in financial service activities, like check cashing or money transmission , um, which if you're not a bank, you may have to do that in approx , you know , and up to 51 different jurisdictions. And , um, only banks have access to the payment rails , uh, with the federal reserve and , um, and with the card networks. And so when you, when you sorta set that foundation, you, you realize that everybody else that is not one of those has to deal with one of those in order to provide any products or services that deal with those things. And as a result of that, you have this tremendous amount of non-bank people looking to the banking world and trying to develop relationships, contractual, we call them partnerships, but, you know, they're really just a contractual relationship with the banks where they for a slice of pie can, you know, get access to one of those three things and not have to do it themselves. Um, and on the flip side, you have banks that, you know, there used to be like 15,000, I think there's 5,000 as of last count , uh, you know, in Canada, there's like five and you have lots of banks throughout the country that are, you know, seeing stagnating growth. They don't have a lot of the cache or products and services. They're not as nimble as some of the FinTech companies. And so they're , you know, they, they really not able to get, you know, drive growth in terms of loans and, and payment activities and, and customers. And so they're looking at these, these FinTech people that are really good at that really good at creating products and , um, originating , uh, customers. And , and they're looking at those, those people trying to figure out how they can do business with them. And so, you know, that, that in and of itself sets the sets the stage for a lot of activity. Um, and before you ask a question, I was just say that one other more recent element is now you're actually starting to see a lot more of those, those companies combine . And that's another really exciting phenomenon where you have the non-banks buying banks or becoming banks, right. Or you have the banks that are, you know, becoming, you know, FinTech companies or, you know, by buying them or setting up, you know , uh , sometimes I set them up in different little silos or, or they just adopt a new line of business where they just, they just sort of double down and say, you know, I'm going to provide these, these services in a wholesale way to the FinTech community, and that's going to be a whole new line of business for my bank. And so it's, it's one of the, I think the, the most exciting place, you know, I think to be practicing law right now, is that, is that, is that intersection you asked

Speaker 2:

Me . So like, if we take an example, recent example , um, out in, out in Thomas' neighborhood , um, this company called sofa, they, I believe in just March. So what three months ago bought a community bank in California , um, um, golden Pacific , uh, for like $22 million, which I I'm just assuming in bank terms is kind of not that much money. Um, but like, if we look at that example , um , like why did Sophie do that?

Speaker 3:

Yeah, sure. Well, I mean, it , there might be a lot of reasons, but let's go back to the three things that I said earlier and talk about just those three things, because I think that those work may have been all the reason, but at least we're a substantial part of it. So one is, is so five was obviously has obviously been one of the most prolific lenders , uh, you know, in the country. You know, I started out doing student loans. I think they do a lot of other stuff. I had a so filed loan , uh, at one once upon a time I re refinanced my Georgia tech , uh, and Georgia loans under sofa . I got a t-shirt and, you know, had it for a little bit, but when every time they wanted to make a loan at five or 6%, they had to get money to loan out. And the only way they were able to get money was to go to a bank and borrow it at three or 4%. And so their margin was very narrow. Yeah . So one thing that they get cheaper by buying a bank is they can go borrow money from depositors , um, a deposit relationship. A lot of people don't understand this at a positive relationship as a liability on the books of a bank, a bank owes its customers that money, right . And , and, and the re and the customers are essentially loaning it to that bank. The phenomenon though is because that, that, that obligation to repay that that borrowing is guaranteed by the federal government. You don't pay a lot of interest on it. And so, you know, somebody that has a bank can gather deposits and pay, you know, 30, 50 basis points on those deposits and still loan it out at five or 6%. And they've, you know , doubled, tripled, quadrupled their margin. So that's a driver is their ability to get access to , um, to the , to, to give, to make insure deposits. And , and you'll see that with sofa . I don't know what they're doing today, but you'll start to see them doing something where they'll start to gather deposits. Um, the second I said was licensing, you know, so , so far as a, especially if they were doing a consumer lending business, consumer lenders have to be licensed in like 45 of the 51 jurisdictions. Um, if you're servicing , um , you , you may also have to be licensed as a servicer. If you're , uh, you know, doing a debt collection, you may have to get licensed for that. If you're a bank, you don't have to worry about any of those things. You never have to worry about getting licensed in any of those states. Um, you you're, a bank is exempt from all those licensing things. So they took their , you know, probably took, you know, hundreds of , of state licenses and replaced it with a single bank charter. Um, and then the third thing is, which is harder for me to understand, because I don't know exactly what so far is doing today is, is the access to the payment systems. And, you know, this is one of the bigger things, and Thomas probably knows a lot more about this than me, but, you know, you're starting to see the lending market and the payments market getting really , um, you know, combining and getting, you know,

Speaker 2:

All together . Nobody ,

Speaker 3:

Nobody sends out a check anymore, right. You're sending money using payment systems, real-time payments of loans. And , uh , ACH is of loans of loan proceeds and stuff like that. So then , so the third thing minimally that, so if I get to is they get access to , to disperse those payments directly without having to share the pie that I spoke about earlier with anybody else.

Speaker 2:

Yeah. That makes sense to me. Um, and then I guess, I mean, would it be fair to say, I don't, I don't know really much about this golden Pacific bank that they bought. I think it was around Sacramento or somewhere. Um, I guess I've been assuming that like what golden Pacific that's a , that's a California state regulated entity. And so the benefits would, would extend through the state of California, but likely not beyond the borders of California. Um, is that, am I thinking about that, right? Or is that no , yeah,

Speaker 3:

That's not, that's not really the case. I mean, th there is a national bank , there's something called a national bank. That's, that's, you know , chartered by the federal government and, and it does have , um, some greater preemption around the edges than a state bank, but generally a state bank. I mean, a state bank is a hundred percent going to get you all three of the things I just said. Yeah . Um, what, where you start to see a difference between why you would want a national mega state bank. And this is probably another driver of what sofa of sofa is doing, but I don't really , um, I don't know, because I believe that what they, their bread and butter is making lower interest loans to highly, you know, high credit score type people. Um, but, but one thing that you see is that different states allow people to charge different rates of interest. And when I bank is in a state, it can export that interest rate anywhere it does business. And so there's some states like the people that, you know, if you ever look at your credit card, the back of your credit card, the reason that they're all in South Dakota and Delaware is that those banks can charge a whole lot of interest. And the reason that you're not going to see them typically in California , uh , interesting example, is because they have, you know , very low rate caps. Um, and so , uh, one of the reasons that you might form a national bank is that you have some greater preemptive authority on interest rates, but generally speaking, you're going to be able to export their rights . And I suspect that even though California is not one of the more aggressive rates states that for so far as bread and butter business, I think I've said bread and butter, at least three times on this podcast. I apologize for that. But , um, but for their business, you know, that that's probably a sufficient what they've got pretty, pretty sufficient amount of , of , of availability there , um, to charge what they want. But, you know, if they decided to go into a different state or, you know, move that charter to a different state, they may get , uh , uh, an ability to loan their money . Utah, for example , is right there. And you can charge hourly rate of interest

Speaker 2:

[inaudible] . Um, the other thing I thought of is you were talking about the kind of access to deposits to , um, to, you know, the , the system of payment systems was that , um, if I'm a , if I'm starting to FinTech , um, I do have a few other options. I guess I could, I could go apply for a national banking charter, right. I could go to the OCC and say, Hey, OCC, I'd like to create a bank, you know, and go through that process, which as I understand, it is quite long, like year minimum , um , probably longer. Uh, and I guess I'm to say if I'm a , you know, cutting edge entrepreneur in FinTech, that's just not, not very appetizing. And so there's this speed element of a decision to get into a partnership with , uh, with a bank, a faster get to market, go to market. Um, am I, does that play out? Does that, has that been true for a lot of these contracts or support conversations you get into? Yeah.

Speaker 3:

I mean, you know, I've been painting, I guess, a rosy picture of banks, but I mean, first of all, getting a bank and then being a bank are in many respects, much, much more harder and maybe intolerable , um, than, than being a non-bank. Um, so, you know, getting a charter is, is really hard and we can have a whole second podcast on chartering a bank, if you want to do that. Cause it's, you know, it would take that long to describe it. But most, most FinTech companies could not, they could not complete it and they not complete it because they don't have quality . They don't have management. That's been a bank, man. You can't just be a smart person with great banking business experience and form a bank. You have to act, you actually have to have been in the game before. And so, you know, if, if you, if you notice a lot of times when these FinTech bank deals happen, you know, they start to bring in new management or they, they keep the management of a bank, they buy. And it's because those man that management is necessary to get the approval. Um, you know, if you're, if you're, you know, started up a new FinTech company, you have no experience working in a bank or being on a board of a bank. You're not going to be approvable to be a CEO of a bank. Um, there's a lot of other requirements like that, but that's just one easy one to talk about. It also takes a really long time. I mean, yeah, a year a year, if you know what you're doing , um, you know, more than that, if you don't.

Speaker 2:

I remember, cause I think it was all just, just this time, last year, that Varo bank received a national bank charter , um, from the OCC with FDAC approval or whatnot. And , um, and as I understand it, that was the , the first kind of FinTech started entity to go through that whole processing and get , uh , a national bank charter granted. And I think, I think it took three years , um, for them to go through that in the end. Um, and , um, I guess I've been curious to see, like, will others be following suit or are there slight suits and , uh, we'll think speed up or not. I don't, I don't know.

Speaker 3:

I could've got it done in a year and a half, but they didn't call, but I will say, I will say, I mean, you know, that, that there , there was, there was a couple, you know, so square, you know, it was , I think they got one, they followed one, they withdrew it or something. I mean, there's a whole bunch of that, but it's mostly going to be those things. It's, you know, they're going to look at your business plan. They're gonna look at your, your management and their experience. They're going to look at the capital that you're willing to maintain. That's a big one right there. You know, you gotta live, you gotta maintain like 8% liquid capital on your balance sheet, you know, compared to your assets. Um, so there's a lot of stuff like that, that , um, you just can't, you just can't like you can't take your FinTech business model and immediately become a bank. There's a whole lot of work that needs to happen. That probably should happen behind the scenes, not in front of the regulators for three years. Right. You spend two years behind the scenes and then you spend one year in the actual regulatory , um, process. But I, you know, I think you will see a lot more coming together of those of entities in those spaces. And sometimes it will be the banks buying the FinTech companies, and sometimes there'll be the FinTech companies buying the banks. Um, you're certainly going to see more of it. Um, it's, it's easier to buy than to get chartered. Um, it can be faster. Um, but because of the challenges of being a bank and , and the, and the tremendous downside, I didn't even mention the downside of being regulated, right. I mean, you know, when you're regulated by the FDAC or the OCC or the federal reserve, it's not like you get a , uh, you get, you have to fill out a questionnaire, you know, and it takes 10 hours a year, which is what it might take you to be licensed as a money transmitter in a state. It might be five hours, 10 hours of your life per year. Um, you know, being a regulated entity is going to take five hours of dealing with regulators per week. You know, I mean, it's, it's, it's, they are in, you know, they, what was the line bill Cosby said, you know, I brought you into this world. I could take you out. Right. And that's the , that's, that's the mentality. You know, you were in bed with these regulators, they give you this charter, they give you this federal, or this FBIC insurance on your borrowing and in exchange, they get to, you know, they regulate all aspects of your business. And so you will see many, you will see many combinations, but you will also see many people that will just go with the partnership model so that the FinTech companies can, you know, continue to maintain all the good things they have, that, that might get dampened by the regular regulatory environment. Some people just aren't cut out for the regulated environment.

Speaker 2:

Yeah. Well, you mentioned payments a couple of times , uh , sorry, Thomas. I mean , um , I wanted to give you a chance to , um, you know, talk a bit about TripActions and , and the payment kind of capabilities you , you all are bringing to market there.

Speaker 4:

Yeah. Yeah. And I wouldn't say super interesting discussion on , on, on sofa . I think that acquisition with super interesting, they also bought Galileo, which is like an issuer processor. So their , their whole situation is fascinating. Um, and then one name that comes to mind that just filed a two to action for an actual bank charters breasts , which was pretty as to making a lot of noise, they raised $400 million applied for, or for , you know , a banking charter. So, you know, we'll see what comes of that. Obviously they're more focused on business banking, but that's a super interesting name as well there. Uh, but , but, but yeah, with, with , uh, with , with TripActions, just, just to kind of transition on that piece , uh , you know, you all have probably seen that there's a huge amount of money and interest. That's kind of flowing into the B2B payments, corporate cards spend management space, right. You've got Brexit being one of them , uh, Devi ramp , you know, all these companies and tobacco is , you know, kind of been part of that. So we've , you know, we started out as kind of a platform that helps companies manage their travel. Right. And then , uh, it's almost a no brainer that, you know, with that comes a lot of expenses, right? Like TNE is very, very linked together. Um, obviously COVID has changed that in a lot of ways, at least for now, but , uh, essentially TripActions has built a product called TripActions liquid that automates , um, a lot of expense management and spend management and , and, you know, helps companies to kind of spin up virtual cards for a lot of their payments. Uh , we have like physical cards and it kind of, it's a part of the general movement of, of a lot of BPA B2B payments from employees , personal cards to , uh, you know, to actual corporate cards that have built in controls because , you know, essentially everyone knows there's Amex cards, right? There's all these other corporate cards out there. And there's a reason that CFOs don't give that to everybody because people get just go out and spend it on whatever they want. Right. But , um, a lot of kind of FinTech innovation through Stripe through, through other issuers and , uh, things like monitor treasury, plat all , all these kinds of companies , um , have created this , an infrastructure that makes it so you can build in controlled into your cards so that you can actually give corporate cards to everyone at the company , uh, without being worried about them spending on , on, on a ton of different things. So that's , that's kind of what the, what the liquid product is , uh, is nowadays. And yeah , we can definitely talk through it and , and the infrastructure behind it and all that.

Speaker 2:

Yeah. That , that area makes total sense to me. I used to do a lot of work for Amex is corporate card business. And of course, you know, they have all these massive global clients of that travel T and T and a product. They offer the corporate card product. And they were, you know, even at their scale, I mean, this was several years ago, but they were constantly investing in working on just what you're talking about, like how to, how to put greater controls in the hands of the employer to, you know, aim, to keep that TNE spend in manageable limits or, you know, with, you know, a partner negotiated partnerships with hotel chains or airlines, you know, whichever it was , um, and how to do better reporting. I was so , um , really surprised and just learned so much about how critical more flexible reporting is at all levels to the , uh , to the employers , um, on that, on that spin as well. That was really interesting to me.

Speaker 3:

Hey, Thomas , for sure . Thomas, can I ask you, how do you, how do you guys, you know, how do you issue cards? I mean, do you have a partnership agreement like we were talking about?

Speaker 4:

Yeah, yeah, we do. It's , it's , uh , you know, it's, like I said, essentially, these infrastructure players have created a situation where it's pretty easy to, you know, to kind of start spinning up cards . So yeah, we use ripe as the issuer , uh, and then , um, we do it through regions bank, obviously the way Stripe works, don't have a direct relationship with regions bank it's through Stripe, right. Uh , Stripe kind of comes to you and says, Hey, here's all these banks, you know, pick one. Um, and, and the interesting thing is, is that, you know, and, and you guys probably know about the , the Durbin amendment and how that all works. But I remember when I was first kind of introduced to this , I was like, why are all these banks like small? Why is it always like these ? Like, why wouldn't you work with bank of America? Why is it like Sutton bank or regions bank ? And obviously it has to do with , uh, the Durbin amendment cap on interchange rates, right. Because, you know, when, when you're building a corporate card, you want to be able to give a rebate back. And if the interchange is high enough, you can do that. So , uh, you know, that's, that's kind of who we're, we're using there to issue the cards.

Speaker 3:

That's interesting. Yeah. And you know, when I hear that, what I , what I'm thinking about is , is there's really two agreements there, right? There's Stripe has gone off and done the painful, probably a very painful experience of negotiating this ability to issue cards on behalf of regions. So, right. They're a front end third-party service provider to regions, to issue cards, and then, right , because they're great and easy to deal with, and they can give you lots of, out of products and services instead of you guys having to go through that pain of having to go to regions or another bank directly, you can go to Stripe and you could probably got, you probably got to market a lot faster. You've got a lot more flexibility and , uh , it's , it's great, but it's essentially, it's, it's two contracts, two contractual relationships that in theory, regions could do everything you're doing without either one of you, but it won't do it. Can't do it right.

Speaker 4:

Yeah, exactly. And it is, you know, we have one other banking relationship with it, which is with SVB Silicon valley bank. And that's when they essentially provide us debt , uh , so that we can fund our customers spend because , you know, the , the way it works is when a customer swipes their TripActions liquid card, we pay for that. And then they pay TripActions back in 30 days. So, you know, essentially we have a relationship with SVB as well for that kind of , uh, for kind of the debt that , uh , that, you know, that exists there. So, so yeah, it's definitely, it's a complex web of stuff and there's a lot of issuers out there. Right. There's Stripe being a very, well-known one Marketa just went public. We'll talk about that later. And then you , you know, you've got add in , you've got to Tuka , there's, there's all these guys out there. And one thing that we're having a hard time, or just, you know, just something that we're thinking about a lot is as we expand globally, you know, who do we use? Cause cause certain like Stripe is having a tough time in various places, kind of going more global and then adding in , you know, is known to be very global. So it's a tough thing. We have to try to figure that out as you expand.

Speaker 2:

Hmm . Interesting. Yeah. Um, well I want to pivot towards , um, news stories that , uh, FinTech news caught our attention in the last week. Um, James, I'll start with you. What what's, what's grabbed your attention?

Speaker 3:

Um, well , uh, I guess, you know, we , we couldn't, couldn't talk about what's going on in the world without talking about specs. Um, you know, specs were something I remember three or four years ago. One of our payments companies, clients here in Atlanta was, was merging with a SPAC . Um, DCE backing is what is oddly called. And , um, and you know, I remember saying, you know, we , we ought to really get into this and people told me, well, there's like this one small firm that, that, you know, maybe you haven't heard of that's in New York that sets up all these specs. And, and I think, boy, I wish we would have done what I thought about three or four years ago. Cause , um , it's just exploded the formation of these specs. We do a lot of spec mergers representing companies merging into specs, but the creation of these backs is still very closely held by a couple of firms. But anyway , uh , off on a tangent there. So, so fi you know, just went public via spec . And I think that , that that's just been the story for 12 months or so is, you know, people , um, I think, you know, because they want to get to , uh , they want to get in and take advantage of the capital markets faster. They're using a SPAC model, which basically a SPAC is , uh , uh, what we call it , what I call a blank check company, you know? So it's usually somebody impressive, like Tommy that has had huge success out in the world that people want to rally around and just say, Hey, I'll whatever he's doing. I want to put money behind him and they'd you give the money to Tommy. And then Tommy goes out and finds a deal. He does the due diligence, make sure it works. And then Tommy's in the business of whatever he merges his back into. And I, as an investor in this back become a , uh, an investor in that entity. And so sofa, you know, obviously great company, they could go out and do a public offering , uh, easy, but they decided to do a SPAC merger. They become a spec company in a matter of months rather than , uh , in a matter of a year or more. Um, and you know, it's a, it's a great way to get into the market. And it's been a place where you're getting really good execution in terms of valuations. Um, and I, you know, I'm not , uh , I've actually started as a securities lawyer, but , um , I'm a very, I'm not much of one anymore, but, but I think that, you know, the , the, the downside of the spec is that there, that can be very expensive from a dilution standpoint. You know, the people that, that forms backs are luminaries like Tommy and they like to get paid well for putting the deal together. And, and so, you know, when you, when you merge into one of those, you're going to take a little bit of dilution there.

Speaker 2:

Hmm . Yeah, I think the [inaudible] just on the valuation point, they're there pre last private equity raise. They were valued at five close to 6 million, 6 billion, and then post the, the spec , um, execution. They were at 16, 17 billion. Uh, so, you know, almost tripled , um, their valuation.

Speaker 3:

There's just a lot of , there's a lot of money in the spec market. And because there's a lot of money, you can get good prices that money's got to get put to work. You know, I think there's like a two year timeline to deploy back money. And so, you know, you can, you can get , uh , you can achieve a really nice , uh , result , um, for your legacy shareholders by doing a spec deal.

Speaker 4:

Yeah. And James , a quick, quick question for you on, on, on specs , if you don't mind. Um, you know, I, I they've kind of come down a good amount since their peak, right. Then there was that time where they were all extremely hot. Um, and I guess, what is your thinking on, on the longterm , uh, like where are our specs going to be around for the Walkman in your opinion, are they kind of just, just a thing that , uh, that are gonna exist for the next couple of years? Or kind of, what, what do you think is the long-term view for these?

Speaker 3:

Yeah, well, they've been around forever. Um, and you know, I don't, it's not like they got smarter or better or anything. It's just that people started using them more. And I think it was , uh, it was around speed and , uh , in , uh, in , in better execution. So I think on the flip side, you have the IPO markets where you've seen people, you know, you go out with , uh , a public offering at 20 bucks a share, and the next day you're trading at 80. I mean, that's great if you're a retail investor, you know, trading out of your game, stop stock, but that's not great if you're a company that's trying to sell stock in your company, you want to get the 80, not the 20. So , um, I think that what you'll see because of the , the costs of these specs , um, you know, the, the, you know, the, the money that comes off the top to the organizers, as well as some of the regulatory issues. And that's really, what's kind of chilled it a little bit this year is there's been this , this kind of concern about, you know , uh, the disclosures and things associated with specs as they become more prevalent. I think, I think that D during this kind of slow down in the SPAC world, which again, it's , it's still rocking and rolling, in my opinion, I think you'll start to see the IPO market, the traditional IPO market fix itself , uh, you know, wall, Street's gonna fix that. And then you're going to start to see a more balance. Uh , but I don't think SPACs goes away. I just think you see, you know, people are, are , you know, if you can go public, get the same price at the same speed and not have to pay off, you know, I'll stick with my analogy, Tommy Marshall, then you're in a better place.

Speaker 2:

Thomas, what about you? Um, what news is caught your attention?

Speaker 4:

Yeah, I mean, th there's been a lot out there. This is, I mean, honestly FinTech is probably the hottest, one of the, maybe hottest industries in the world right now that , you know, there's a lot going on, but one thing I wanted to zoom in on is Marquetta IPO . You know, we were just talking about issuers earlier and all the partnerships that, that , that kind of exists and how, how issuers allow all these FinTech companies to work. Right. So, like Marketa went public , uh, I think there were about 15 or $20 billion valuation. Um, and, you know, yeah, maybe they have customers like , uh , Klarna, Instacart , uh, square is there is their biggest one. I think , uh, I remember reading there , you know, essentially the power of a really, really good customer, like , uh, like square cash app means that about 70% of home Marketo's revenue came from square , uh, just one customer. Right. So , um, I thought that was a really kind of, kind of interesting piece, but, but in the end, you know, like Marketa really turned kind of issuer processing on its head . They were one of the first to do it. Uh, you know, usually as , as James is talking about, it's a very complex , uh, kind of stodgy business, but , um, but, but now, you know, Marketa has done a lot to kind of speed that up and , and , and make it more efficient for all these fintechs. So , uh, yeah, that's one of, one of many issuers out there, but I thought, I thought that was a super interesting kind of IPO and there was one which was fascinating to read as well. So , um, big news for sure, for the industry

Speaker 2:

Remarkable to me about Marquetta is that it's, cloud-based , it's a, cloud-based the processor issuer, right . And , um, yes, we, you know, we've got several , um, you know, long-standing credit card issue , dominant credit card, issuer processors here in our ecosystem in Georgia, total systems now global payments, first data , um, Pfizer to FIS others. And what I think has been exciting, I feel kind of Marquette has been leading in this regard is just the , uh , there's more and more of these cloud based issuer processors that are coming forward. I mean, we can really see a big sea change in the technology infrastructure, I think right before our eyes. And it's been proven out by companies like , um , Marketa . Um, the news that , uh, I will offer has to do with overdraft protection , um, allied bank out of , um , Charlotte, North Carolina, national digital bank, they announced last week that they were going to remove all overdraft fees on clients, on their clients , um, from, from today forward, yes , our last week forward , um, remarkable announcement in my mind because these fees , um, you know, they bring in the nice piece of revenue , uh, for the, for the banks by and large, the banks historically have gotten criticism from regulators and others for fees that are, that exist all real large to overdrafted . The overdraft is when, you know , you're , you have a checking account, you over, you, you spend more than is in the account. And so the bank , um, settles the funds out of the bank's own funds . So it lets you kind of run over. Um, and then in letting you run over, they charge you a fee , uh , and that fees called the overdraft fee because you've overdrawn your account. Um, so it's , um, it's , uh , I mean, I thought it was an , a kind of certainly an encouraging development for consumers. Um, I'm curious to see , um, to the degree which other banks will follow , um, what, what ally is doing. Um, James, what do you think about this? I think, you know, you've had a fair amount of experience in this overdrafts zone. What , what's your take here?

Speaker 3:

Yeah, I think it's , uh , there was a couple of other banks that went out. Um , I can't remember who, but some other big banks that went out and announced that this week. I mean, you know, I think this is a real challenge because we've got this sort of general expectation in the world that , that checking accounts are free. And, you know, I sort of feel the same way, right. You know, why would I pay for an account, but, but, but they're not free, right? It costs banks money to have a bank account for you. And so, you know, when you, the only way that really works from a business standpoint is that if you're doing enough stuff with that bank, that it can make enough money off of you to cover the costs of providing you that bank account and meeting its own profits expectations. That's the only time that contract between the customer and the bank really works. That freak contract works. And so when I think about people that overdraw their bank account, those are people that are basically violating that contract. Right. And so it's not that it costs them 20 or $30 to deal with your overdraft. It's like a recoupment, almost of all the other costs that they should have been charging you, but they're not charging. It's like when you don't pay your best by 0% interest on time and you get all that interest there , they accelerated all on you. It's kind of like, that is the way I think about it. And I think that ever since that it's become more and more prevalent, which I think I haven't studied it, but I suspect it follows directionally the decrease in fees on bank accounts. Um, it's been fraught with danger, right? From a compliance standpoint, people say they don't understand it. You know, you have problems with how, you know , do you, do you do the overdraft first or do you know, do you, do you put the big, the big items through first so that they count balance goes to zero so that you can charge three overdrafts or do you do all the small things first? So you only have one overdraft. I mean, it's become a compliance nightmare. And so I think that allies decision is a pure business decision is they said , okay, it costs X to figure out how to do overdrafts. It costs Y you know, from a compliance and a technology standpoint and, you know, and it's costing reputational or , or, or unfavor with customers, you know, is Y you know, and they sort of did all this formula and they decided that it just wasn't worth it anymore. Um, many other banks are sort of on the, kind of on the needle on overdrafts. Right. You know, I think ally doesn't didn't didn't rely on overdrafts. So it was an easier equation for them. But I think that, you know, you will definitely see it reverberate throughout the industry, but there will certainly be many banks that, that don't really have a choice , um, because they're so reliant upon overdraft and, and you may start to see, I mean, like Greenlight it , perfect Atlanta example, you know, I now pay them $5 a month to basically give me a bank account for my kids to have a cool app on their phone. I don't know why I'm doing that. Right. It's so anti what I believe in, but at the end of the day, they just got a better product. And so I think that it's going to create it might frankly encourage more of what we've been talking about this whole time, you know, create a better mouse trap that you can charge people for. And if you do that, then you're not relying on these fees ,

Speaker 2:

Right? No, that's a great point. And a , a, a great shout out for Greenlight , you know, I'm sure Tim and Johnson are avid listeners of the Georgia FinTech academy podcast . So,

Speaker 3:

Well , I hope they'll , they'll look on the website and find me and reach out

Speaker 2:

The , um, well, this has been great, James Thomas, thanks for this time today. Really appreciate it. Um, thanks for being part of the Georgia FinTech academy. We, you are both always welcome and , uh, I hope we can find some additional ways to, to have you involved with our students. Appreciate

Speaker 1:

It. The Georgia FinTech academy podcasts are available on iTunes and Spotify to obtain additional information about the Georgia FinTech academy. Please visit our [email protected]