November 6, 2023
On this episode, host Vince Passione is joined by Matt Harris, Partner at Bain Capital Ventures. Matt provides an insightful look into the evolving world of fintech, sharing his knowledge of new technology waves and the dynamics of the finance industry. From the intricacies of fintech to the expanding influence of generative AI, the conversation touches on a myriad of topics reshaping the landscape of financial services today.
Vince and Matt discuss:
- The importance of monetizing through embedding financial services, specifically with software companies.
- Insight into insurance and banking as a service, and their slower penetration into the market.
- The opportunity presented by offering financial services embedded in data-rich software.
- Generative AI’s role as a new wave of technology and its potential in software businesses.
- Reflections on the fintech bubble during the Covid era and its aftermath.
- Historical comparisons of financial bubbles and the pace of recovery.
- The evolving perception of fintech from a niche to a core component of financial institutions.
- The overlap of technology across industries and its implications for future funding.
In this episode
[00:00:00] Vince: Welcome everyone to this week’s episode of 22 Minutes in Lending. I’m your host Vince Passione and on today’s episode, we welcome Matt Harris, partner at Bain Capital Ventures. Aside from his day job as a successful venture capital investor, Matt is also a frequent contributor at Forbes and as well, he’s also a fellow history enthusiast, I think military history, which we’ll get some of those nuances as we get into the presentation.
[00:00:22] Vince: I’ve known Matt for a long time. I’m excited to hear what he has to say. Without further delay, let’s start these 22 Minutes in Lending. So Matt, thanks for
[00:00:28] Vince: joining the podcast.
[00:00:30] Matt: Oh, Vince, I’m really glad to be here. It’s terrific to see you again. Awesome.
[00:00:34] Vince: So look, I know I’m a little late, but congratulations on closing those two funds.
[00:00:38] Vince: I think it’s almost 2 billion of funding that you closed in the first quarter.
[00:00:42] Matt: That’s right. Our latest series of funds spanning early stage venture capital through to late stage venture around 1. 9 billion, up from 1. 2 billion in our prior set of funds.
[00:00:56] Vince: Amazing. That’s great. Great call to conference. So congrats.
[00:00:59] Vince: So, Matt, I had a chance to listen to your recent presentation at the bank 2023 fintech conference and you had this assessment. You said that these recent bank failures that you usually don’t don’t just happen as 1 and done that they come in waves and that perhaps this wave we haven’t seen the end of it yet.
[00:01:18] Vince: Can you expand on that a little bit? Your thoughts behind why that’s going to happen?
[00:01:22] Matt: Yeah, I do think there are some near term challenges that banks are facing. I mean, first, we do have that historical pattern you mentioned, which is that they do not tend to be so temporarily brief. Um, part because people get spooked by bank failures and it has a contagion effect, and in part because the conditions.
[00:01:41] Matt: That caused those bank failures don’t tend to go away immediately. I think on the contagion effect, the regulators have done a great job. You know, I’m sure opinions vary, but I think it was swift. It was decisive. It was laser focused on protecting depositors and not shareholders or executives. And it served its purpose of calming things down.
[00:02:03] Matt: But the conditions still apply. We still have. Significant impairment in the bond portfolios of the banks caused by this rapid increase in interest rates. And even if those bonds are held to maturity, it’s still causing some fear and doubt and uncertainty as it relates to that portion of their balance sheet.
[00:02:26] Matt: We still have this new phenomena of flighty depositors. Um, those depositors are still maybe a little spooked by the spring and certainly knowledgeable about higher interest rates. And so therefore, I think the deposit base erosion is still a risk. And then finally, there’s real concern on the. Assets out of the balance sheet about commercial real estate and newly multifamily real estate, which in a post COVID world is facing very changed circumstances and the banks and credit unions, but particularly the banks have just been massive.
[00:03:01] Matt: CNI and commercial real estate lenders, and we have to worry about the mark to market value of those loans. Um, so I think we have a real risk of, of continued, um, volatility in the banking sector in the immediate term. Um, even though, as we sit here today, it does appear like the dust has settled from the eruptions of the spring.
[00:03:24] Matt: Now, in
[00:03:25] Vince: preparing for this, I spoke to some folks at the FDIC, and they get back to history, and they’ll tell you that, hey, if you look at these various. Our crises, if you look at the Great Depression, and you covered it earlier, look, it was driven by the fact that regulation was, was limited and banks were limited by skate.
[00:03:41] Vince: Right? And we saw about 9, 000 banks fail there. And then we saw the great recession. And, you know, we probably saw about 3, 000 banks fail there. And as we went into this last sort of downturn, we saw about. But I thought it was about 500 banks in the presentation that you provided. So to me, the amplitude of these waves are going down, but you’re right.
[00:04:01] Vince: We just saw 3. right? And the question is, what will happen
[00:04:05] Matt: next? No, I think that that is a good argument that Silicon Valley Bank and Signature, um, were both distinctives in that way. And, and credit unions are far at the other end of the spectrum and. You know, if you, as you did, and I appreciate that as you watch the video, it’s actually less about Silicon Valley Bank and the depositor flight based on chunky uninsured deposits, because that was a really distinctive and anomalous phenomena within the sort of high tech bank community.
[00:04:41] Matt: But there’s a, there’s sort of a medium and longer term threat that I personally think of. However, the CEO of a credit unit, I’d be more concerned about. I think you can rest assured. Hopefully now everyone’s using intrafide. So hopefully people have solved their own uninsured deposits problem.
[00:04:59] Vince: I think Mark
[00:05:00] Vince: Jacobson’s really excited about
[00:05:02] Vince: that.
[00:05:02] Matt: I think it’s a good year for Mark. Um, but honestly, you know, he runs a utility that benefits all of us. Like, that’s right. The reciprocal deposit thing is just a magic trick and he doesn’t overcharge for it. So I’m, I’m good with it. Um, but the, uh. The bigger problem to me is that when we didn’t really have any endemic rates in the, in the economy, which we haven’t since the global financial crisis, I think the bankers and credit union leaders got overconfident about the stickiness.
[00:05:37] Matt: Of their deposit basis, and in fact, I, I personally find it a little offensive. This, you know, this overconfidence, this feeling that, oh, no, no, our depositors, even though they could just empirically get a better deal elsewhere, they will stay with us. Um, and I think they may frame it as they’ll stay with us out of loyalty.
[00:06:04] Matt: But what they really mean is they’ll stay with us out of inertia. That sound worth the hassle to them, but I think that that underestimates a few pretty fundamental changes in the financial system in the last 10 years. Since we had rates that were worth chasing 1 is, of course, money moves more quickly.
[00:06:22] Matt: Now, 2 is it moves more easily because of open banking. You can use 3rd party apps to manage money and move it around. You don’t have to. Go through the laborious bank systems each time you want to move money. And then finally, and this is a little future oriented, but new technology like generative AI, when it’s capable of acting on behalf of customers, you can automate complex tasks that historically have been challenging to automate.
[00:06:52] Matt: So I think if you put it to a credit union CEO and said to them, okay, say, imagine all of your customers tomorrow had the superpower of doing exactly what was in their best interest. Of moving their money to where it could get the highest rates, of shifting their loans to where they could pay the lowest rates, and of managing fees to zero in every case, if you ask.
[00:07:15] Matt: A self critical and candid credit leader or banking president that I think they’ll admit that they would lose almost all their customers the next day. And so if your business is dependent on your customers making mistakes, I don’t know if that’s a great long, long term bet. Yeah, so
[00:07:33] Vince: I challenge some of that regard and I think the answer is the answer that comes back more often than not is look interest rates for the last decade were held at such low rates that those deposits weren’t worth much.
[00:07:44] Vince: Right? And and I think that, in fact, becomes part of the challenge, right? Is that there’s a whole. Group of executives who lived in an environment where deposits were just cheap. Uh, that’s no excuse, right? But at the end of the day, there’s so many different sources to fund your other side of your business, which is your lending business that you forget how to do that.
[00:08:06] Vince: And there’s a whole discussion around wow, gravity. Is now sort of left the system, right? Beta on these deposits will go up and that should spur some. And and that’s innovation that we haven’t seen in a very long time in the banking industry. Right? And to your point, right? She said earlier before the call, you know, this concierge banking, I’ve been chasing for probably 2 decades.
[00:08:32] Vince: Right? I was probably too early in my life and trying to do it. My question is, how productizable do you think generative AI is, and how far away do you think we are from that concierge that will, when I get up in the morning, refinance everything that I should have refinanced and move my money to places where it should be because it gets the best yield?
[00:08:56] Matt: My best guess is 2 or 3 years and, um, I think the regulators are going to play a role in this, you know, we have a very powerful consumer protection, uh, regulatory apparatus in the US, which is a general matter. I’m I’m thankful for, um, but it can be kind of slow moving, you know, and perhaps regulation should be slow moving, but.
[00:09:22] Matt: I think there are unsolved, uh, matters here, you know, would, would this agent have power of attorney for you? Like, how would it actually work? This account opening and money movement mechanic. And, um, how will the banks and credit unions and other depository institutions or lenders, how will they participate in that?
[00:09:44] Matt: Will they gladly face off against these autonomous agents, or they work hard to block it? Because they realize that that kind of fluidity, that kind of intelligence fluidity is dangerous for their business model. I think there will be lots of fits and starts and it won’t be primarily about the technology.
[00:10:05] Matt: I think the technology problem will be solved within a year. I think the regulatory and kind of competitive dynamics amongst the incumbents. We’ll draw things out for another year or two, but it’s no less inevitable for that. And I’d be shocked if it was 5 years away and it’s a continuum like a concierge that literally does everything for you, I think, is the ultimate state, but a concierge that does 95% of it for you is pretty darn good.
[00:10:37] Matt: You know, if you had to wake up in the morning and click a mouse 3 times on a docu sign, you know, you probably do that to save hundreds of dollars a year. So I think, um, I think it probably doesn’t make sense for bankers to sleep on this phenomena, even though it’s not imminent. And actually, as you mentioned, really, it should be about delighting and caring for your customers.
[00:11:01] Matt: You know, it should be about engendering loyalty. Um, and customer love, my friends at Bain and company have these, these great books about customer loyalty and that’s what we’re scores and newly won about customer love. And, you know, these are really important concepts. And I think, you know, the banking industry in the United States.
[00:11:24] Matt: It comes out of a dual history on one hand of state based branching law, and in the credit union side, generally speaking, geographic employers. Um, and so between the two of those, you have this incredibly geographically situated industry. Um, and none of that really matters, or at least that would be my challenge to the leaders of this industry is if the whole reason you exist.
[00:11:59] Matt: Is because of geography and in a digital world, we can at least agree that geography matters less and you might even argue that it almost doesn’t matter then then what in fact is your raison d’etre? How do you build customer loyalty and customer love? How do you maintain it in such a way that you can get paid for it?
[00:12:21] Matt: By having stickier customers, both on the deposit side and on the lending side. And so whatever timetable before that potential extinction event of autonomous concierge agency is that sort of less important. What’s important is let’s act as though it’s coming tomorrow. How would you defend your business?
[00:12:39] Matt: How would you actually delight your customers so that whether they’re lazy or not, they choose to stay. So it’s
[00:12:48] Vince: interesting, right? So there are some historic proxies for how banks behave. I, I started screen scraping back into back in 1999, and we know how they reacted. They question whether the, the account opening, uh, application allowed you as a customer to allow some 3rd party to actually log in credentials.
[00:13:10] Vince: And that was the battle that was fought for almost a decade, right? Until open banking finally showed up. And I think many bankers recognize that as a lesson learned that you can’t fight that, right? Fighting your customer’s desire to use other apps to facilitate financial literacy or to facilitate their ability to transact with your institution is a losing game.
[00:13:32] Vince: So, hopefully, right history will teach them a little bit. And you and I are both students of history. I’d like to say that that’s probably not the right response. Uh, I agree with you that it’s about delighting the customer. And 1 of 1 of my favorite customers is maybe federal and maybe federal has this wonderful sort of slogan.
[00:13:52] Vince: It’s, it’s shown the humility, right? It’s all about recognizing the customer’s relationship and providing some kind of customized offering to them. And that concierge is exactly the types of things they’re doing. And to their credit, they signed their 13th million member this year. Uh, yeah, which I find very fascinating and their response would be that they’re relevant because.
[00:14:17] Vince: There are banking deserts out there that, again, created every time, like, Bank of America, we’ve seen what they’ve done. It’s very, very efficient and digitizing that bank. Uh, yet JP Morgan Chase is still on a multi year rollout, more branches. Uh, but, but they believe that what they sell is trust and part of trust is seeing that branch, especially when there’s concerns about deposits, because I remember my John Reed days at city group and John’s thesis around the ATM.
[00:14:45] Vince: He said, my dad was a depression era baby. The reason why it’s important is we want to put the money in front of the lobby, not in the vault. So consumers have access, so there are some things I think that human nature doesn’t make it so simple, right? They want that plus something else. So, I think some physical presence probably makes some sense.
[00:15:05] Vince: That would probably be the argument back as far and also that it creates some trust along the way. But you’re absolutely right. I think delighting your customer with with that kind of capability to customize things makes a lot of sense. So we have probably about another 3 minutes left. I want to jump into some of your investments and what you’re going to do with this big treasure trove.
[00:15:25] Vince: Because I think most people are very interested in your opinion about what’s happening next in tech.
[00:15:30] Matt: Well, I, you’re kind of saying that they might be interested. Um, you know, as I think about our, our strategy at the highest level, we’ve been pretty consistent over the last decade. We are 90 plus percent focused on B2B.
[00:15:46] Matt: Within Fintech, um, we look for models that are quite software driven. We’ve, um, written extensively about embedded finance, and that really has characterized Most of what we’ve invested in, which are basically software companies that have an ability to monetize through embedding financial services by most notably payments acceptance, but also issuing payments, storing money, lending money increasingly.
[00:16:19] Matt: Insurance, um, theoretically banking as a service, although I think that, frankly, is slower to penetrate. I don’t think most people want bank accounts everywhere. They do business. Um, but we’re seeing it in new fields like treasury management where you have. Software that can newly be, uh, you know, entitled with the ability to store money and optimize rates for seeing and supply chain finance as more and more of the global economy gets software enabled as more and more workflows are intermediated by software, the ability to.
[00:16:56] Matt: Present financial services, financial products at the point of need embedded in sticky data, rich software, which knows more about the customer in the context than any banker ever could is we’re still in the early innings of that evolution. So need to be companies with a. Software DNA at their core focus primarily on payments and wealth management are sort of our two core segments with insurance being a close third.
[00:17:25] Matt: But those industries, all 3 have this recurring revenue nature. It’s not a 1 and done transaction. It’s generally speaking, maybe transactional, but reoccurring is not recurring. They tend to have high gross margins and sticky customers. So. That’s been what we’ve done, and as technology waves have come and gone, we’ve just looked to see how they apply to kind of our, our core business.
[00:17:52] Matt: And I think generative AI is a new wave of technology. It’s already sort of, by the way, tipping a little bit into the chasm of, of despair. You, you’re hearing a bit less about it and people are starting to ask hard questions about it. Is it for real? Is it ready? Where’s the, where’s the actual ROI? And, um, you know, Vince, you and I have lived through enough.
[00:18:14] Matt: Of these waves of horizontal technology to know that there’s always this moment of, of, of questioning before your ultimate utility is proven out. So we’ll probably see that with generative, but as an ingredient. In a software business, I think you’ll see it become pervasive. It is just an elegant way to access and present information.
[00:18:36] Matt: Um. So, we sit here today, you know, having observed the kind of lunacy of the COVID bubble, which is how it’s held, certainly within FinTech, and then the dramatic fall from grace that always accompanies such lunacy. It feels to me like we’re somehow back in like 2016. Yeah, we’ve kind of like before the madness.
[00:18:59] Matt: But still a lot of opportunity and certainly a lot of founders building interesting businesses. So we remain very optimistic.
[00:19:07] Vince: Yeah, I was interesting your comment about it can take 10 years for it to get back to the way it was in 2021. and I only question I have is, does it need to get back to where it was in 2021?
[00:19:18] Vince: those are some big rounds for unicorns that probably should have been public companies and not private companies gaining more investment, but do you think it needs to get back to where it was in 2021?
[00:19:30] Matt: Well, the last bubble in 2000, it took 18 years for the industry to get back to that peak. And so that was 2018.
[00:19:41] Matt: And of course, we blew through that peak. Um, I personally would be happy if it took another 18 years versus a decade versus surely anything sooner. I didn’t, I didn’t experience 2021 as. Um, effective capitalism, it, it did seem like lunacy. Um, I think the one counter argument is that, you know, technology, let’s take Fintech as an example, Vince.
[00:20:08] Matt: You and I have both been investing, you know, investing and operating in Fintech for over two decades. It used to be somewhat of a sideshow, you know, you would have a bank, of course, you’d have an insurance company, you’d have a wealth manager, asset manager, and then of course there’d be Fintech. It’s a little thing off there, the weird guys doing that weird stuff.
[00:20:27] Matt: But now, to me, there’s no such thing as fintech. If you’re running any one of those types of institutions, and technology isn’t at the very spurt of what you’re doing, not off in some corner with some third party or some, that, you know, weird nephew of yours, uh, you know, running it. But instead, technology is at the very center of what you’re doing.
[00:20:50] Matt: Now, then fintech to me becomes, Sort of like, you know, we used to talk about digital media now that’s all of the media. Um, and to me, we used to talk about FinTech and now it’s all of financial servicers. And so you’re seeing that across different industries, healthcare, you know, they’re still obviously personal and in person healthcare taking place, but so much more of it is digital.
[00:21:13] Matt: So tech has really overlapped its historical boundaries. As just a segment of the economy and is now quite pervasive across all these industries. And so, in that way, you could anticipate that the funding for technology would, in order to keep pace with that opportunity would, would rebound more quickly.
[00:21:34] Matt: Um, and so the actual question is the 1 that you address, which is how much of that funding should take place in the private market versus in the public market. And I fear that the public market, which relaxed its standards, um, if we’re honest, and in late 2020 through to early 2022, with this tremendous wave of IPOs, both SPAC IPOs and traditional IPOs, will be gun shy for a long time.
[00:22:07] Matt: Um, having lost such dramatic amounts of money on on all of that IPO activity. And so I think if you, if you take as a given that tech is expanding, not contracting and still has a lot of room to go and you take as a given that the public markets. Are going to be inhospitable for early stage money losing companies for a long time.
[00:22:28] Matt: Given this recent experimentation that went awry, then I think you can construct a case that it might be sooner rather than later that the private tech investing markets swell up again.
[00:22:42] Vince: Matt, always amazing insights. Thank you so much. That’s all the time we have for today. Matt, again, thanks again for joining me.
[00:22:49] Vince: I really do appreciate it. Thanks for our listeners to tuning in and make sure you subscribe so you can join future episodes and I’ll meet you back our next 22 minutes in lending. Thanks so much.
[00:22:59] Matt: Glad to be here. Bye.