Bank sponsorships have powered the proliferation of fintech in the past decade. Now under increasing scrutiny from regulators and in the wake of the Synapse catastrophe, this foundational element of the fintech industry is at a crossroads. On today's episode, Shawn asks Brian Enneking, COO of First Electronic Bank – a leading bank in fintech partnerships – what keeps him up at night. Shawn and Brian discuss the challenges the industry has faced and uncertainty about the future, but also the many positive developments, like AI enabling better oversight, and what makes for a good fintech-bank partnership.
Find Brian and Ensemblex on LinkedIn.
Hosted by: Shawn Budde
Guest: Brian Enneking
Produced by: Meagan LeBlanc
Theme Music by: Brad Frank
Shawn
Hello, this is Shawn Budde of Ensemblex, and this is The Ensemblex Exchange Podcast.
Today I'm talking with Brian Enneking about bank sponsorship for fintechs. Brian became the COO of First Electronic Bank in April of 2021. Prior to that, Brian held positions at Jumpstart Finance, Midland Credit Management, and Genesis Financial Solutions. In everything from business development to CEO. Earlier in his career, Brian was the Director of Risk Management at both Renaissance Holdings and at HSBC.
He holds a degree in economics from Kalamazoo College. Thanks for joining us, Brian.
Brian
Thanks for having me.
Shawn
So Brian, you studied abroad in Quito, Ecuador. That is not, you know, that's not Spain, England, kind of the normal locations. What made you decide to go to Quito?
Brian
Well, first I went to Kalamazoo College, as you said, that's a school where back in 1990 when I went there, like 98% of the kids went on foreign study and attracted me to go to that school.
Shawn
Interesting.
Brian
So just the fact that it was kind of compulsory and there were a ton of options. So I think that most of the people you're right, went to Mexico and Spain. Those were the two big destinations and Ecuador, I think there are 10 of us that went there. And Ecuador was just so different.
It was like a different culture, different environment. That was the attraction, just kind of the unknown. So you know, we would live in the homes with families and we'd go to a little university there. It was one of the best experiences of my life.
Shawn
And it's, I think it's the highest city over a million people at like 9,000 feet or something. was that hard to adapt to?
Brian
It was a little bit, yeah, it's like 9,000 feet like he said, and we, I like to play basketball a lot in college. So that was the toughest part, just going to the park at La Carolina and playing basketball with all the Ecuadorians. And boy, once we did it for a few months, we had the best stamina you could imagine. But yeah, it'd take your breath away.
Shawn
Yeah, I've been to two of the other top five. I've been to Bogota and Addis Ababa, and it does take me, I don't know, a few days to feel like I can breathe sufficiently.
All right, so why don't we dive in? Can you just talk about kind of the evolution of bank fintech sponsorship partnerships over like the last decade, 20 years, however long they've kind of been around?
Brian
Yeah. And keep in mind, I've been, as you said, I've been, I've been at the bank for three and a half years. So I've been a bit of a student of the past, but I'll use what I've learned. Going back over the past 10 or 15 years, number one, I think there just were way less banks doing it back in the day. I think there were probably 10 banks that really focused on this business today. There's probably 70 to 80 banks that have started doing sponsorship in the last couple of years, about three or four years.
So that's just a huge growth rate. And it's a lot of banks that the new ones have had to kind of figure out oversight. They've been managing their own stuff, but working with a partner and figuring out what you need to oversee and how you need to oversee it is a work in progress for the new entrants. It's also new, I think, for their regulators. So their regulators are used to just regulating what they do, but now they're also used to banks that have never been doing sponsorship and trying to understand what sort of expectations they should have.
And I think the regulators are all talking amongst themselves as well to figure out how to increase standards. Sponsorship is an area of a lot of attention right now in the regulatory community. And I think the old guard, if you will, the banks that have been doing it for quite a while, I think First Electronics, kind of in that camp, it's been doing it for the past 12, 13 years. The focus, I think, has been much more on how do we get more thorough and deep in our oversight? How do we make sure we are really connected with our partners, our fintech partners? Because the regulators see us as one entity, they don't see us as two entities. And so the banks have to have deep understanding of everything they do, how it works, answer questions very rapidly. And we're also trying to figure out how do we use more automation, more data analytics to get better at doing that oversight.
Shawn
Yeah, so you mentioned kind of being a good partner. What makes a good fintech partner and what makes a good bank partner?
Brian
That's a tricky question. I mean, there are a lot of different types of fintechs at different stages in their evolution. Some are just startups with a great idea and a passionate team, and some have been doing it for 20 years. I think that the keys begin with the people, like just making sure that a good fintech partner should have key people in key roles that really know their stuff, specifically in decision science and compliance and operations and hopefully the team that's leading has a deep understanding of this business and financial services.
The second is just an appreciation of being a regulated entity. So if they're gonna partner with a bank, like just knowing what that means, like understanding regulatory scrutiny and standards and how to ensure that you are designing your business to be able to operate within those standards. And it's stuff like if you're gonna be building your own predictive models, the way in which you build them, the way you document them, the way you have controls around them. There's a very strict and high standard for how you do that. That's an expectation to be a regulated financial institution. And so sometimes people come in to the industry and they're not familiar with those standards. They're familiar with them in a different industry. And so sometimes that takes a bit of education and getting on the same page with how the standards might be.
Shawn
Yeah, so I mean, I think, you know, if you look at like Uber, they were clearly violating the law, you know, or local laws for a long time. I think there maybe is a hubris here in the tech community that it's okay to kind of ignore regulations. Why is that different, you know, in financial services versus in rideshare applications?
Brian
I don't know if if I've seen it's that different. I mean, it's funny because we do work with both very tenured businesses as partners and startups as partners. That is kind of the old adage, right? People that come from deep tech, there is a level of hubris there. But I think what we've seen is just spending that time upfront with our partners to get them to understand.
We found them to all be pretty willing to listen and learn and try and develop. They want to figure out how to make it work. Like you can figure that out. If you're, if you're trying to work with a new partner and you're going through your diligence process, one of the things you really look for is what's that relationship going to be like? Is this a partner that's willing to collaborate and learn and listen or are they not? And I think most people are. Once they understand what the requirements are their eager to figure out how to meet them.
Shawn
So we've worked with a couple of fintechs to help them find bank partners. And I think one of the interesting things there is you're trying to find that balance between a bank partner who will pay attention to you, but also a bank partner who isn't, I guess, too pliable. I think we've seen in the past that there's certain banks that kind of didn't ask as many questions, and we had to talk our partners out of wanting to work with them. So can you talk a little bit about how that's kind of changed really just over the last few months. I think we've seen more of the fintechs getting into trouble because their partners didn't maybe do as much diligence or as much oversight as they should have.
Brian
Yeah, I think we've seen a real steady, this is a little backdrop to this question. So we've seen a real steady increase in just the oversight expectations from the regulatory community. They've continued to push for higher standards, for depth of understanding, for, like I mentioned, data analysis before. And I think that the new entrants have been figuring that out as well. And that's kind of come home to them and it's really been, I'd say over the past two and a half years, two and a half, three years, it's been intensifying and I think there's been very steady demand. But interestingly, like if I go back a year or two ago, a lot of the fintechs we would talk to had expectations of we're gonna get started and we're gonna go fast, we're gonna get turned on and we're gonna do it in two months or three months, can you do it in two months or three months? Because we need to launch and we'll say no, it takes a while, like diligence takes a long time to get it right. Like we have to go through making sure we understand the product very, very deep, like just an understanding of what they do, how they do it, and then testing before we launch. And like that can take six to nine months or longer, depending upon what they have in place and if changes are needed. And I think that early on they're like, no, I want to talk to other banks that are willing to go really, really fast.
And we've seen that start to come down. We've seen more and more when we're talking to interested fintechs, they're saying, yeah, we get it. We understand it's going to take a while to make sure that everything's running correctly. That's been one of the biggest changes I've seen is the attitude change.
Shawn
So a more realistic set of expectations.
Brian
I think so. Yeah.
Shawn
Has this affected, well, let me come at it a different way. So one of the things we've observed with VCs is that there's definitely a lower demand to fund fintechs that are actually doing lending, right? The part that requires a bank sponsor. You said you've seen pretty steady demand.
Brian
We have, yeah.
Shawn
That's interesting. So has there been a maybe a shift in the balance of power here? Do the banks have more power now than maybe, I guess, maybe we'll call competitiveness. Is there more competitiveness among the banks or is there more competitiveness on the fintechs to try and find the right bank?
Brian
I apologize, I have imperfect information here. We try and work as hard as we can to have pretty good market intelligence. But what I can say is the level of competition, I'd say, is pretty solid, pretty high for venerable institutions, fintechs that have been out doing this for a while, where they have consistent volume, they've really well honed their economics, they understand how much money they're making, they're doing well, they've got steady performance, they may work with more than one bank partner.
Shawn
Of course.
Brian
For those that are hitting their strides, also, I think once you have those questions answered, it's a lot less risky for the VCs to go in. And when they get into their later rounds of capital and putting facilities in place where they have three, four, 10 years track record, I see still a lot of appetite there for funding and costs starting to come down for funding. There, the competition's pretty high. I think for startups, it's been more challenging for startups to find a bank to work with.
Shawn
For true startups.
Brian
For true startups, both to find the capital and VCs that are willing to put up the money, as well as banks that are willing to be patient. In the past, I think when there was probably a lower standard in terms of oversight, like depth, go back five, 10 years, I think there was more patience for banks to have startups build their infrastructure, their talent as they went along. And now I think there's way less appetite for that. It's kind of like you have to have these basic things in place before we want to launch with you. And that makes it more expensive. They have to have more money, more infrastructure, more people up front before most sponsor banks with good track records are going to want to work.
Shawn
Yeah. So you've mentioned regulators. Yeah, how has their view of bank sponsorship changed and evolved over the last couple of years even?
Brian
I'll make it really simple. They wanna make sure that the bank and the fintech operate as one thing. That there's not really a line there. Like, if I'm someone in the bank, I should know everything that's going on, how it works, a lot of the details of how that operation functions. And we should be doing regular testing. Our partners should be doing regular testing. We should know what we're testing.
We should be really, really good at finding problems and really, really good at addressing those problems quickly. That to me is the basic expectation that the regulators have, which is just make sure you understand the regs, you understand if you're in violation of them, and you identify that quickly and you fix it quickly. That sounds simple, but it takes a lot of partnership and collaboration to make sure that we understand it, the partners understand it, we're working hand in hand to make that happen.
I'd say also just the depth of testing, like regulators are much more interested in, are you looking at complaints super thoroughly? Do you understand all the nuances of what you're seeing in the realm of complaints? Are you looking at all different types of consumer dissatisfaction? And when you're testing, how deep are you going? Like how much are you testing? How frequently? Like there's much more of an appetite just to make sure that we're our eyes on the ball, you know.
Shawn
Yes, you say when you're looking at all types of consumer dissatisfaction. What do you mean by that? What are the different types?
Brian
Well, you have consumers that can complain about, I don't like something. I don't like the way the product was structured. They could say, I don't like the way I was spoken to on the phone. And sometimes those complaints can get resolved right on that first call, right? Like kind of one call resolution, which is what most companies try and achieve. And sometimes they escalate. Sometimes they'll want to talk to a manager, or register a written complaint or a formal complaint. Sometimes they want to go to the CFPB and register a complaint or to the BBB and register a complaint. So there's all different types of dissatisfaction. I think a lot of companies now are using call mining technology to go and listen to all the conversations that are happening just to find things that maybe weren't flagged as a complaint by the fintech. But you can go super broad or you can just focus on like strict classification of what is like called a complaint per the definitions of the policies.
Shawn
Right. So you've talked a lot about compliance. How does credit risk fit into kind of oversight?
Brian
It's a complicated area. So most fintechs are very good at figuring out how to use predictive analytics to make decisions in terms of how to underwrite, how to adjudicate loans, who gets a loan and who doesn't get a loan. Modeling techniques have become much more complex over time. Back when I started, people would use a logistic regression, and that's what they'd use to build a model to decide who was going to get approved and declined. And now there's much more complex aspects of machine learning that are being used today. So just making sure that those methods are being applied correctly, that when people are figuring out how to build their samples to create models, they're doing it the right way. When they're looking at variables to be used, they're appropriate variables. They're not like variables you're not supposed to use to build a model.
When they're rolling out the model, they actually have good controls around it. They've documented the model really, really thoroughly. And they've got good philosophies around how often they're going to re-estimate these models. Because sometimes you can re-estimate that extraordinarily rapidly. And it doesn't necessarily create a lot of improvement, but it creates a tremendous amount of additional oversight and analysis to make sure that everything's working right.
We've got a lot of guidance for our partners around, what are the right sort of levers and knobs to turn there in terms of how to make those decisions? But we've seen partners that have extraordinarily overbuilt underwriting systems and predictive models, and some that have very clear, crisp, well-run units. It's an area where I think the regulatory community has started to pay more attention. What are the model risk management practices of this business and how do they work is something that's very important to us getting right.
Shawn
Yeah, and then are you also heavily involved in monitoring the performance and early payment defaults and things like that?
Brian
Yeah, I mean, it starts with the financial health of the business, just making sure that we know, is it a healthy business? Do they have the right amount of capital? Do they have the right access to funds? Do they understand how to make money? Are they at a point where they're just focusing on growth or at a point where they've achieved profitability and they're refining? But yeah, absolutely. Looking at first payment default rates, looking at changes in average credit scores for new entrants we look at the portfolio metrics as well as kind of the company overall financial metrics.
Shawn
Yeah, I think one of the places we see a lot of fintechs fall short is that they're probably over optimistic on their pricing. I would say most of the fintechs I've worked with eventually end up raising pricing because they hoped they would get positive selection or maybe they overestimated this quality of their models, whatever it may be. So why don't we talk about just where you see this evolving over the next 5-10 years.
Do we find the bank sponsors, are there going to be more bank sponsoring? Are there going to be fewer bank sponsoring? Is regulatory environment going to change? Are there other changes that might kind of impact this business model going forward?
Brian
It's hard for me to answer the question on kind of the regulatory attitude towards sponsor bank. There's clearly, there's a lot of attention being spent on the practice of the sponsor bank fintech relationship right now. The FDIC has oftentimes like looked at how do we increase the amount of products in the market and technology. And there've been times when there's been kind of a let's figure out how to expand the amount of products and consumer choice in times when they've been a little more critical. So I don't know how that's going to go. I'll just expect that there will be more banks. Let's just assume there's more banks that want to do it.
I think the banks that have been doing it a long time are working hard to evolve the kind of offerings they have to fintech partners. So some banks just basically offer the use of like the charter to issue loans in that partnership. And some have started to provide capital solutions. Some have started to provide other parts of that, the operations. So underwriting like what like banks will offer to provide an underwriting platform. Banks will offer to provide KYC use of technology to identify that consumer. It's the right, it's the right consumer. So there's different parts that we see being offered. I think more sophisticated banks are going to probably go in that direction.
Shawn
Yeah, we've seen overseas, it's become, I'd say, more common to create kind of non-bank lenders, right, which is a state by state issue here in the US. But to your point, we've also seen, in India in particular, I think the regulators were kind of hands off for a while, and now they've gotten much tighter in terms of the way banks work with fintechs.
You mentioned earlier call mining. I assume that's kind of an application of AI. Are there other places where you see AI playing a role in the way you interact with fintechs?
Brian
Yeah, for sure. It's a very hot topic right now. There are a lot of companies that are offering AI services. Some of them I think are more true AI than others. And most companies I see are, there's a lot of active discussions, both within the fintechs and within sponsor banks about how to use AI to become more effective. I don't think AI is really going to supplant humans for a while, in terms of oversight, having humans involved in testing and monitoring and tracking and evaluating the data is still crucial. But I think where I'm seeing progress is like in complaints, for example, just analyzing the data. So complaints have a tremendous amount of content. Like there's all the conversations around what the consumer said and there's all the, how was that addressed? What was the response? So sorting through all that data. AI can be great at like one complaint could be about three or four things. And oftentimes, historically, it's categorized, the complaints categorized as this kind of complaint. What AI can do is it can sift through all the information to still, what is it really about? Is it about more than one thing? And are there trends you can see emerging where there's dissatisfaction by using AI to point those out? And that's an area where we're really heavily focused right now.
That's a great application. It just gives you better intelligence about what's going on in those complaints. Others are, there's just oversight where there's like marketing out there. For example, you have to make sure every marketing piece has the correct language, the correct disclosures, doesn't have certain hot words it shouldn't have, and you can use AI to scrape like all of the digital ads that are out there, all the websites that are out there to look for problems.
As well as when we're just evaluating new marketing material, just having that automation to go through and inspect what's going on. Is there an issue? It doesn't take the place of human eyes to evaluate that, but it can help build some efficiencies. So I don't think I'm smart enough to know all the ways yet. I think we're just in the middle of figuring out how we can leverage it the best.
Shawn
Yeah, so make sure I got that. That's more of having the AI direct a human maybe to here some language that might be problematic or here's a place where you should spend more effort. Is that about right?
Brian
Yeah, it's like it's like when you go to the car, like the auto shop, you know, like today they just strap a computer out of the car and it can analyze everything that goes wrong and tell that that mechanic but the mechanic couldn't go and inspect every single part on that car. So just it very quickly tells them like where where the issues lie.
Shawn
Yeah, yeah, that makes sense. Well, I appreciate your time. Let me ask you just kind of one more question. When you guys are in a bank sponsorship partnership, what is it that most keeps you up at night? What do you worry about the most?
Brian
Jeez, I think a lot of different things. But I'd say that the most is, like I talked a little bit about kind of growing expectations around oversight and how to do that the right way, particularly from the regulatory community. Like everyone needs to up their game and be better at doing oversight and finding problems. The fact that it's still uneven. We have these new entrants, these banks that are just getting started and figuring out how to do it.
I'm sure sometimes that's not going to meet those expectations. And we're a community, sponsor banks, it's a big community that are doing this. And if some run afoul of expectations, I think it can really kind of color the whole sector, which isn't great. Because I think there are excellent operators in this space and there are new operators in this space, and I think that that just creates risk that we all face.
Shawn
Yeah. Yeah. I think that is a phenomenon in banking. A lot of people don't get, you know, I ran for a couple of years, the subprime credit card business at Capital One. And we worried about our competitors, you know, misbehavior, if you will, because like you say, it reflects on the whole industry and it just brings…if Target has problems, that's good news for Walmart. But in this space, if your competitor has problems. You're going to end up having problems because there's an assumption that you have the same behaviors maybe.
Brian
Yep, I think that's right.
Shawn
Well, thank you for taking the time to join us today. I really appreciate it. For everyone else, you can follow Ensemblex and Brian Enneking on LinkedIn. That's E -N -N -E -K -I -N -G. You can also visit us at Ensemblex .com.
Brian
Thanks, Shawn.
Shawn
You can find The Ensemblex Exchange Podcast on all major platforms. Thank you for listening.