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Transcript
This transcript was auto-generated. We made some light edits for clarity and readability, however it may still contain some errors.
Brett Turner
Welcome to another episode of Fintech Corner. Here we are at AFP. We’re live.
We’re with Matt Kelly with Fintop. Fintop is one of our investors. Full disclosure. Everything he says is benefiting them directly, not indirectly, directly. So excited to have him on the pod. Lots of stuff that we’re excited to dig into and talk about.
Of course, as an investor, you see it all. Everything’s kind of coming in front of your desk. So maybe first of all, maybe just kind of introduce yourself. Maybe what kind of areas you’d like to invest in.
Matt Kelley
Hi, Brett. Great to be here. So Fintop is a venture capital firm investing in the fintech space. We are currently deploying about 500 million in capital across a couple of different strategies. And a big part of what we do is work in the treasury and kind of bank technology space.
We have about a hundred LPs that are depositories, U.S. community and regional banks. It’s a big part of what we do. And so having a front row seat to what’s happening in innovation, in commercial banking, treasury, commercial lending, that’s a huge area of focus for us. And we are looking for the technology solutions that will help banks compete versus mega banks, versus fintechs, startups, and everything in between. And so that’s a big part of why we’re here.
Love supporting Trovata. Thrilled with your success. And yeah, glad to be here.
So my background, just real quickly, I spent most of my career as a bank analyst. And so I was not a technologist by trade. But we had a front row seat to some big trends that were starting to happen in the bank investment universe. And we were seeing that banks that were starting to lean in on technology were starting to be rewarded in a different way. They were more profitable, they were growing faster, and the public markets were treating them differently, better valuations. And so we wanted to lean into that. That was a big part of what we were doing. And so now we’re very fortunate to work with a fantastic group of bank LPs that we represent.
In some ways, we represent a little bit of the outsourced R&D for the long tail of the industry. I you walk over to JP Morgan or TD Bank or BMO, they have huge kind of innovation technology, Corp Dev teams. And so think about a mid-sized bank, don’t have quite the same number of resources, and in some ways, we act as a little bit of that outsourced R&D for them to have a little bit of a process of bringing them some of the feedback of what we’re seeing of the most innovative technologies that banks should be aware of.
So that’s, real quick, kind of who we are.
Brett Turner
Nice. Yeah. Well, I was getting a little distracted because, you know, you’re investors, so we’re trying to spend every dollar, maximize our capital efficiency there. But I love the sporty vest you got the fence. So I might I was going to say, you know, when it comes to like our operational spend, I’m like, we got to get one of these.
Matt Kelley
Good swag is a key part of what the Fintop team believes in. so Fintop, for those that are not aware, it just stands for Financial Technology Operating Partners. And so the leaders of our firm, the founders of our firm, they built, scaled, and exited companies in the banking technology space, in the capital market space, in the wealth tech space. And so that is Fintop.
Brett Turner
It’s great. Well and also like so your background like, you know from the bank… Yeah, you know you you know, know how how things work from the inside I think that’s a lot of us who you’re working with banks and it just you can get really frustrated. I tell people yeah I’ve you know spend the last year is kind of you know beating my head against the concrete working through the slowness of working with the bank. It’s it’s part of the part of the game. You got to be able to have you know that kind of patience and tolerance and working through that. But you’ve been on the inside, you know, but have an appreciation though because it’s not like they’re just twiddling their thumbs waiting and making you deal with that agony. There’s actually a lot of legacy systems, mainframes, there’s a lot of stuff that also doesn’t allow them to pivot or move as fast.
Matt Kelley
Yeah, absolutely absolutely I mean understanding, know the tech stack of all the banks that we’re working with and then starting just listen to them and so it’s a big part of what we do is just constantly being engaged with our bank partners and listening to what’s happening with our clients asking for and the area that Trovata operates in in kind of commercial treasury payments and integration into the tech stacks of banks’ customers is a huge area focus and it’s changing rapidly.
So I kind of like to bifurcate it a little bit because we have portfolio companies that are kind of seeing us on both ends of the market and so if you think of all the companies that are assembled here in Boston, megabanks, tier one banks, really trying to serve you know enterprise type clients, Fortune 1000 clients, you you guys are serving that clientele as well and banks need to deliver regulated services into the software, into the tech stack of their clients and this is happening up and down every part of the value chain, every part of the payments ecosystem, the lending ecosystem.
And then you go to the other end of the market and think about small businesses and what’s happening there, know, with QuickBooks and FreshBooks and Xero and all the industry vertical software platforms that clients are using.
Banks need to have all of that covered in terms of how they are going to serve their clientele. Across that spectrum are a whole host of technology solutions. that we’re investing in, among those being Trovata that we’re kind of thrilled to be working with.
But that area is moving incredibly fast. One theme that I think is key to this, thinking about open banking. So open banking is this contentious thing in consumer banking world. But in corporate banking land and business banking, it’s just what the market demands. And so these large corporates that you serve, they want to share their data. And so there’s a much different construct.
Open banking is a key theme that we’re focused on, all the technologies that will enable banks to serve their customers through open banking kind of protocols and platforms.
Brett Turner
So do you think of like all the, the pin up the demand in a lot of ways, if there’s digital transformation, digital, that means data. If everything’s kind of moving to data, and then everything’s sort of accelerating too.
You got from APIs to the cloud, cloud native technologies now, now we call them hyperscalers, there’s even a lot of commoditization on the cloud and web services. All that’s been happening in tech for the last 10, 12, 15 years now. And now, like you say, on the corporate side, they want their data to be used. I think a lot of that is because they know that if it gets out of the hands in the hands of some of these other players, they can innovate in ways that maybe the banks aren’t.
Do you feel like all that demand is it moving so heavy and moving so fast that in some ways it’s just outpacing the bank and maybe the bank was never really in its DNA to kind of develop all these new services, but now it’s hitting and accelerating.
Matt Kelley
Yeah, I think the most innovative institutions that we work with on the banking side of our ecosystem are LPs. They have been trying to harness that data that lives all across the organization from payments and transaction data to underwriting data to consumer banking data to everything on debit cards, everything that happens in the branch and aggregating that has been a massive project for the banks that is a top tier issue of where they’re investing. And so that’s been a huge area of focus.
Most of the banks have kind of migrated their data to the cloud, but managing it, harnessing it, figuring out what to do with it, and figuring out how to monetize that, that’s the next step that a lot of our banks are really trying to get their arms around.
Brett Turner
Do banks even realize how valuable the data is?
Matt Kelley
It’s incredible. The answer is, I think they realize it, but it’s a challenge. It’s a massive technology challenge for most community to mid-size institutions, regional banks, to harness that through all of those different silos and put it in a place that’s usable.
And now you kind of layer on AI, right? And if you don’t have that data organized ahead of time, you don’t have the ability to kind of point and position AI tools and LLMs on top of it to keep pace.
I would say it’s this two-step process of banks. I know we’re gonna talk about AI, the first is getting your data organized right, and that’s a huge, huge project for most of the banks that we work with.
Brett Turner
Well, and maybe tell the story to you, but I love the I mean, I’m from a small town. Yeah, I’ve been in startups most of my career. So it’s always like a David and Goliath story. I mean, you’re always trying to to build and I think this aspect of big bank, small bank, you know, how do you you always look at are the big banks just going to keep getting stronger, the smaller banks going to suffer and I think there’s been a little bit but I love to tell the story of this this network of smaller community banks that I mean, being this in some ways like this R&D, bringing all this technology, helping to kind of bring that to the banks. I mean, that’s like, it’s a great underdog story.
Matt Kelley
Yeah, no, it’s fantastic. As I mentioned, the banks that we work with, it’s a real cross section of the U.S. community, regional banking landscape. It’s about 100 institutions, coast to coast, ranges from banks with assets of three or 400 million all the way up to 100 billion and beyond and total assets. And when you look at what these banks are building, bigger is not always better.
I mean, there’s a lot of institutions that are leveraging their charter in unique ways, embedded banking, for example, thinking about serving a new end customer set, thinking about delivering a lending product through a software channel instead of a traditional underwriting process, thinking about providing access to the Fed payments network and what kind of fintech needs access to that, thinking about the advantages of a lending product that’s originated on a bank charter. Instead of 50 different charters.
That’s embedded banking. And we have lot of banks that are kind leaning in to that particular area. And many of them are smaller institutions that are producing really outsized gains and profitability profiles. So the industry is consolidating at a rapid rate. And what we’re seeing is that there are absolutely some scale advantages at the high end of the market. And that’s where you’re seeing M&A being announced every Monday morning. That is picking up. And at the other end of the market, we’re seeing these innovative banks that are producing very healthy returns on capital. They are earning their independence.
Brett Turner
I think that’s where this technology intersection is really interesting because is that like bigger is not necessarily better. In some ways, it could be a liability if you’ve got all this old technology that you’re coming with.
Matt Kelley
With tech debt everywhere.
Brett Turner
This light load that they might carry, are they being able to adopt stuff? And are you seeing that start to level the playing field a little bit? A little bit, AI hasn’t quite hit, but yet is that going to be the big equalizer?
Matt Kelley
Absolutely. I the tech stacks that some of more innovative banks are building on are more composable. They are easier to kind of work with with other technology solutions. I think banks are trying to diversify away from some of the oligopoly players that have kind of had a stranglehold on some of the institutions. So banks are looking to work with increasingly looking to work with just more innovative vendors and partners that help them move faster. And we’re looking to invest in those companies.
I mean, that is the north star of what we’re trying to do is to make sure that we are identifying those companies that can be a part of a bank’s tech stack that can help them establish and launch new products and services that can find new pockets of growth, serve new customers in new ways. And that’s a big part of what we are doing.
Brett Turner
Are you seeing that also kind of, know, on one hand, it’s like, the banks investing, it’s like you’re, and they’re hoping they’re going to bring really cool, innovative things to them, it helps, you know, they might not be discerning on what it on the on the flip side, of course, on the investing side, like, when you do that, you’re also seeing what resonates, like, how often do you see something really take hold or catch or like, I wouldn’t even expect that I wasn’t expecting that, but that’s like 10 times better than I thought it was or stuff like that?
Matt Kelley
Yeah, we definitely want to kind of make sure that we’re bringing together the portfolio companies we’re investing in on behalf of these banks, bringing them together with the right people inside of these banks. We’re building products and services that are relevant to that fintech. At the end of the day, Trovata and all of our portfolio companies, you guys win these deals on your own. You have to go through these complex kind of vetting processes and RFPs and vendor selection processes that are a little painful.
Brett Turner
Yeah, little painful. It’s definitely much different.
Matt Kelley
That cycle of selling into a bank looks very different than the corporates that you kind of partner with. And so we’re very mindful of that. But yeah, we’re trying to get the flywheel going and make sure that the banks that have entrusted us with their capital are aware of all these solutions that could be a good fit. And then each of those portcos have to kind of go out and win it on their own and execute those deals.
Brett Turner
Let’s talk maybe double click on what are the cool things? What are some of the latest? I’m sure you just, all these newer kinds of technologies, you look at, like you mentioned Open Bank, said APIs, but APIs have been around now for eight years. We got our start pioneering a lot of these, now it’s quickly moving. AI is just accelerating massively. What do you like? What do you see in? What’s really the hot and cool things that you?
Matt Kelley
Yeah, you mentioned AI, and so we have a couple of portfolio companies that are helping banks on the AI journey. I’d say that one of the pathways that we’re seeing here is that banks typically start out test driving these technologies inside, kind of employee facing types of deployments of AI tools, knowledge and data access of existing documents, policies, procedures. We have companies that are helping there. And I think the big opportunity in AI is going to be a cost savings opportunity. That’s what we’re really excited about.
When you look at most community and regional banks, a big part of their expense base lives around the commercial lending ecosystem. Think about all the people, all the process, all the paper. And, you know, there are agentic workflows, there are AI tools that are going to bring material cost savings to that automation, increase in throughput of collecting those documents and kind of getting things up to snuff for an underwriting, a renewal, credit monitoring, like that’s a big area that we’re pretty excited about.
I think we’ll see some investments from our investment team kind of centered in that area in the coming months and in the coming year. That’s going to bring substantial cost savings opportunities, as I mentioned. I mean, when you look at the typical US community regional bank, that represents a large slug of the operating expense base. So that’s where…
Brett Turner
If they’re innovating there, mean, you could argue that they might have, if they’re building like credit risk models with AI, doing stuff, you know, I mean, they’re punching well above their, their weight class, they’re starting to do things that are more advanced than some of largest banks, right?
Matt Kelley
Absolutely. We’re just discovering, you know, the more and more you talk to banks, the more you discover these little pockets of the bank where you have two or three people in the back office. That’s all they do is review this one particular form and that can be automated. so we’re looking for the tech solutions that can go after those very specific areas and also kind of the broader kind of, you know, problems that the banks are facing.
Brett Turner
stablecoins. How do you guys view that? I know that’s and it’s also moving so fast. You look at the Circle IPO that kind of, you know, hit the biggest IPO, I think, train and gain in, you know, one day, day one of when they went public in like 20, 25 years, a real catalyst.
I think that a lot of people got excited about a lot of people though, maybe caught a little bit by surprise on how that market reaction went. It seems like it’s only been getting more and more headlines ever since.
What’s, what’s your view of that? How is that kind of impact, you know, maybe from an investor’s lens, and then also from a banking, you know, the bank community lens?
Matt Kelley
Yeah, I mean, just from the banking perspective, starting there, I think this caught a lot of the banking industry off guard. It moves so quickly, you know, through Congress on the Genius act and, and behind that will be more clarity and kind of what’s happening in capital markets and other use cases of tokenized assets. And so I think there’s some risks, you know, to the banking sector, to be perfectly frank. And so there’s a lot of concern that there’ll be some deposit flight.
Banks really need to kind of take a front row seat and understand, you know, what are the use cases? Where is the utility? Like, where can they utilize either tokenized deposits or stablecoin or some type of a digital representation of an asset that trades in some market to find demonstrable cost savings or something faster or something that frees up capital. And so that’s where I think there are going to be some of the more interesting developments in the banking market in the coming months. You’re seeing that already in FX and international money movement.
I mean, think about remittance. about countries that don’t have developed banking markets. That’s where you’re seeing a lot of stablecoins that are being held by consumers. Now you’re in B2B payments. I think you’re seeing a lot…
Brett Turner
A lot of concentration in US Treasury.
Matt Kelley
lot of concentration in US treasuries by design, right? That’s by design with the Genius Act. so, yeah, I mean, it is the number one issue.
We had our conference recently in Nashville, where we brought together all of our banks, all of our portfolio companies, and there was insatiable demand for banks just to understand what’s happening. I think it speaks to how much I took the industry off guard a little bit.
Brett Turner
Here we are at the AFP conference, the annual treasury show, and it’s more bigger banks, know, folks selling in the ecosystem, maybe the big regionals as well. And I don’t know, I haven’t really heard much about anything about stablecoins here.
You know, you got a lot of technology that is being fostered that can be picked up by the smaller banks again in a way that they can move a little bit faster with it, more nimbly with it. And then the bigger banks are just, you know, having to deal. Maybe a little bit of denial of kind of what that is, how fast it’s moving or is that?
Matt Kelley
I’ll flip it back to you. I think with like JP Morgan, they had an announcement out a couple of weeks ago and what they’re doing, I think it was FedEx was the client that they were talking about and how JPM coin and the Kinexys kind of ecosystem that they have built is going to help their large corporate banking customers. And you can start to think about, FedEx is moving from bank accounts in the US to South America, Asia, all around the globe, probably have tens of thousands of bank accounts. probably want to move intra company on Sunday night and off hours between jurisdictions.
stablecoin could help that. That could have real utility to someone a large corporate like that. Yeah, you think about the kind of the vendor ecosystem and kind of the partners that they work with in the manufacturing kind of trade finance workflow. If you can bring real cost savings and settlement that’s faster and you’re freeing liquidity. Those are the types of use cases I think we’re to see a lot more of know, coming months but what do you what’s your
Brett Turner
No, you’re right. think right away people talk about like cross border payments. Yeah, and I think people hear that it’s obvious if you can kind of cut down or make that process because anybody who’s dealing with that deals with it can be expensive. get several days of delay in working through those. And then it’s just sometimes you’re dealing with different banks as part of that so that it’s not as transparent.
So yeah, there are a lot of issues with that. But then when you look at the end to end, all of the ecosystem kind of goes from, you know, being able to the on ramp and the off ramp and everything around that is just. It’s one thing if you’re moving, if like I’m just moving $100 to you in Brazil, but if all of a sudden it’s two or $3 million payment, you’re probably going to scrutinize that chain a lot more.
I think what corporate is going to look at that, they see that, they have to do that. The context matters. It has to be in the context of their treasury and risk policies that are approved by the board. They want to have that in the context of their own system.
You know, in the context of all their cashflow intelligence and liquidity platform and how they’re managing that, the various banks, how does that fit in the context of all those pieces? it’s not like you got all that, which they do. And then, we’re dealing in a transitional period where you have legacy workstations that are around for 30, 40 years and then they’re having all these workarounds and spreadsheets still and they’re still managing that.
I think you, what’s super interesting and I think that’s what JP Morgan is kind of seizing on is that inter-company [use casse] and if you’re a really big company and you’re, when you’re dealing with lots of different entities, especially around the world, you’re dealing with the entities are set up that have to have their own statutory sets of books. They have to operate in arm’s length between different inter-company entities.
So there’s rules and how they can actually do business. There’s reasons of what they’re doing business with one another for those reasons. They’re splitting different business segments into different companies and things like that or concentrations. If Treasury always kind of executes on that playbook that maybe business or tax is setting up, accounting is having to monitor and all that and account for it with all your journal entries and stuff, consolidation and all that, but Treasury has to execute the money movement and settlement of that inter-company.
And they’re always having to make sure that they can’t, if they send a payment from one entity to another, it can’t like pierce the veil. If you make a payment for something in the wrong way, it can potentially invalidate for tax purposes, why they exist. The stakes are high. You can’t mess that.
I think when you look at now, if you’re involving Treasury and banks to be able to settle that, oftentimes you’re doing it in batch at the end of the month because you’re like anything, everything is all kind of batch based or has been for the last 30 years.
Well now, when you could use a stablecoin and you could you could actually just make it like a ledger transfer and you could actually manage all of that. I mean, it starts to get in another yet another sort of killer use case that starts to get developed.
I think JP Morgan smart because they’re saying if we have that way to extend our ledger to manage all that and you’re using different banks to do all that, you might bring more business in house to JP Morgan because now you’re going to really truly leverage it as a global bank. And now you can kind of manage a lot of that internal banking function a lot more efficiently with these, you know, that more of a cost efficient ledger mechanism.
So I think what happens now when you look at stablecoins, it’s interesting, JP Morgan kind of went early on that with the JPM coin. And the other banks really don’t have something like that.
So now that that’s moving really fast, what’s going to level the playing field? Are they going to take more going to continue to kind of drive that forward? Are the stablecoins going to give a version of that that’s bank agnostic?
And then that’s going to quickly level the playing field? Is it part of the bank? Is it with the bank? Is it even separate from the bank? And all of those things in terms of how they unfold is going to be super interesting.
Matt Kelley
I think right now there’s a lot of conversations taking place across the banking industry of how we’re going to tackle this, how are we going to respond as an industry? Are the big banks going to do something together? Will there be regional consortiums or anchored around certain industries?
There was some context for who we are and where we’ve been on this journey of tokenized deposits. We were one of the founding members of something called the USDF Consortium. And that was an effort with a group of banks who wanted to be at the forefront of thinking about blockchain, thinking about tokenized asset flows, thinking about how that intersected with the regulated banking industry.
It was a little bit ahead of its time and under the prior administration became kind of gummed up with some of the concerns at that time around Bitcoin, blockchain, all things blockchain. There were a lot of high profile challenges and so that effort ended up kind of not going anywhere. But at the time, we were thinking about all the things we’re talking about right now.
How are banks going to lean in here? How are they going to be prepared? How are they going to compete? What are they going to use these blockchain enabled networks for to provide real utility to their customers? And that is something that we’re still continuing to really lean in on, look for the new technologies that banks should be utilizing.
It still remains very front and center, very top of mind for what we’re focused on for new investments and what we’re talking to our banks about.
Brett Turner
Yeah, no, super cool. So how do you I mean, how do you think then, again, maybe when you look at some of the smaller banks, how they will they do you think there’s a play to kind of interact with those in a way that could once again kind of level the playing field a little bit?
Matt Kelley
I mean there are some of the large kind of vendors who kind of work, you know deep inside the bank technology ecosystem the FISERVs the FIS the Jack Henry’s I think that they’ll have some kind of stablecoin partnerships. So you’re seeing some of these early kind of partnerships be established.
I think banks will be thinking long and hard about is this a tokenized deposit, you know, where those funds are actually sitting on our balance sheet It’s not funds flowing out of the industry or is it a stablecoin construct where you’re growing, you know, treasury backed, know, type of stablecoin assets?
That’s a big kind of debate right now. I think it’s very uncertain in terms of, you know, which one is going to have more success in the coming years. Right now it’s all things stablecoin. But yeah, banks really need to kind of understand how this could affect their payments business, their treasury business, their FX business. And then in consumer banking, you know, I think there’s three big things that are kind of factors that are at play that kind of converge here.
You think about AI, you think about faster payments, and you think about open banking, right? And so you put those together. And what they really go after is a lot of the banking revenue streams are built around some lazy customer behavior, right?
Where we have these low yielding kind of deposits. And I think that AI can really kind of attack that. You think about the large corporate treasury managers here. I listened to a presentation earlier, it was a woman from Bed Bath and Beyond. She was the head of treasury there.
Like her mandate is to make sure that there is no idle cash any day inside of the Bed Bath and Beyond ecosystem. And AI and automation is going to bring that to a much more efficient place, which will probably put some spread pressure for the traditional bank, net interest income type of revenue stream.
So thinking about that, where is the puck headed there in terms of how banks are making money, both in consumer banking, all the way up through large corporate banking, probably have some secular pressure on margin and net interest income over time as automation, faster payments, it kind of attacking the inherent opacity and kind of laziness of some customer behavior to maximize yield, that’s going to change quick. so that money in motion and that self-driving money concept is one that we think is very real and we’re looking for the tech solutions like Trovata that can kind of help banks.
Brett Turner
Seems like you, know, whether it’s APIs, cloud, AI, and now stablecoin. And as you go through these, it’s like, okay, this is interesting. It’s getting more interesting. It’s getting even more interesting. But all of a sudden now, if stablecoins in the context of all of them together, I think you kind of lose that. Then it’s like, now you’re starting to get all the pieces together that’s starting to.
Matt Kelley
Absolutely. Don’t forget, like, one of the things that the Genius Act allowed is for brands, non-bank brands, to issue their own stablecoins. And so I have to believe that somewhere inside of Walmart and Amazon, they are going to be coming out with something powerful for a consumer value prop where there is a stablecoin and they’re also trying to attack the interchange, which we know they hate and are going after that. And so they’re going to create some interesting value props and new products and services.
So banks thinking about building something comparable, where you’re getting a yield component and you’re providing real utility for the customer base, I think that’s going to be something that banks have to be laser focused on. That is the real risk that I think the Genius Act left the door open to, is large brands like that rolling out new products and services that have a yield component, accomplishes what they want in terms of reducing one of their costs, which is interchange and the Genius Act is allowing them to do that. So there’s a lot more interesting things to come here in the coming months.
Brett Turner
Can’t wait no it seems feels like is it all gonna stick yeah because that’s a framework yes so now it’s like it’s it’s gonna be a nail biter for all of that until how that all turns into law right no doubt yeah absolutely very cool well hey thanks for joining us yeah obviously love all the insights
Matt Kelley
Love to work with you guys and you’re a great team and tons of momentum and look forward to the next couple chapters.
Brett Turner
All you guys. Yeah. Thank you. Thanks. All right.
