Founding Stories: Synapse

Imagine moving to a new country to start college. Now imagine trying to open a bank account at a local branch without having the traditional forms of identification: no driver's license, no social security card, and so on. You'd think that in 2019, you'd be able to do all of this online, but that's simply not the case. This is the situation founder and CEO Sankaet Pathak found himself in. He had just moved to Memphis, TN from Rajasthan, India to start at the University of Memphis. Every interaction with the local bank—from account opening to receiving payments to getting a debit card—was an excruciating, in-person experience with new hoops to jump through. Motivated by his own experience, Sankaet decided to build a solution. He started Synapse to help other companies build new banks or financial services (like a16z portfolio company Propel, makers of Fresh EBT which helps food stamp recipients manage their benefits). Think of Synapse as banking-as-a-service. a16z General Partner Angela Strange talks to Sankaet about his founding experience in our latest segment of a16z Founding Stories. Along the way, the two discuss: - The Synapse founding story - Who in the world actually needs more financial services? - Solving the (product) cold start problem - Winning the earliest customers - The most creative fintech startup ideas - Biggest surprises for a first-time technical founder — The views expressed here are those of the individual AH Capital Management, L. L. C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

• 0:14Speaker 1

  Hello, and welcome to the A16Z YouTube channel. I'm Angela Strange. I'm a general partner here at Indreason Horowitz focused on financial services. And I'm here today with Sanket Patak, who is the CEO of Synapse. And we're gonna talk broadly about some of the new trends going on in financial services, and in particular, why we're seeing so many new consumer and SMB focused fintechs, and how are those fintechs actually getting to market? Like what is the infrastructure behind them and how this has happened, which is probably an area many people haven't thought about, but is particularly fascinating once you uh you start to dig in. Yeah. Um thank you for joining us. Thanks for having me. Um Yeah, and so I thought we could start with uh the founding story of Synapse and how you ended up starting a company in the banking infrastructure space.

• 1:05Speaker 0

  Sure. Um yeah, so it kind of started when I came to America. So

• 1:10Speaker 1

  where did you come from?

• 1:11Speaker 0

  I came from India. So in India. Uh India, Rajasthan. Yeah. Which is like uh if people probably know JEPR, so it's the state of Jeff or so. Um so I moved from India all the way to Memphis, which is uh where I came to to do my undergrad. Um I tried to open a bank account uh and back then I tried with Chase Online, they denied me an account, they said I didn't have a social security number. Um the same thing with Bank of America, they denied an account too. Then I went to my um uh international student orientation program uh and they said they had a partnership with Bank of America, so I could actually go to the bank branch and open an account. Um I walked to the bank branch uh because back then I think Uber and Lyft didn't exist in Memphis didn't have good public transit, so I kinda and I was too shy to ask like my new friends to give me a ride.

• 1:57Speaker 0

  Um

• 1:58Speaker 1

  can you please drive me to the bank so it's an account.

• 2:00Speaker 0

  Exactly. That was probably awkward. Uh so I went in there and I tried to open a bank account, they asked me for my uh passport, bunch of these documents. Um, and then it turned out they wanted my advisor to also write a letter saying that I actually am a student at the University of MSO to go back to the university, come back. Um I just remember that experience being like extremely strange. Uh but then I thought maybe it's fine, like when you're coming to a new country, you kind of just take none of this infrastructure is really built for you. It's built for people that live there, uh, so that's completely fine. Um zip couple of years later, I've been doing uh uh uh I was almost like I was almost done with my undergrad. Uh uh, I was doing a lot of um uh solar physics research back then.

• 2:45Speaker 0

  That's actually irrelevant, I'll tell you how. Um I'm about to graduate and I'm starting to think about what are some interesting things I could work on in this new online bank comes about called Simple. Uh so I try to sign up for Simple and I run into the same problem again. This time I have my social security, but they say they do not accept social security that that's work workers only, like uh immigrants get a different social security bracket than like people who are residents. So

• 3:13Speaker 1

  simple was proving not as simple as maybe. Yeah, simple was different. But what was simple's value proposition for people who are familiar with it?

• 3:20Speaker 0

  Yeah, so Simple's value proposition was uh it was a branchless bank. Uh you could just go online, open up a bank account, uh, and it would let you open up a checking and a savings bank account, which to a college student were like high class financial products. Uh um, and uh uh some of the pieces that were still frustrating to me about banking were any time I had to do anything other than swipe a debit card, I had to literally go to the bank branch to open up a savings account. I I had to go to the bank branch. I remember my dad sending me like a little bit of money during uh uh my birthday, and they froze my Swift wire uh until I would show up to the bank branch and talk about the purpose of the funds, and then they release the money. Uh one time I was in Boston and my card was frozen because of some fraud alert, and I had to literally go to the bank for those things as well to make to kind of demonstrate that I was still in the country, things like that.

• 4:08Speaker 0

  Um I just remember that uh I remember that whole thing being extremely frustrating. So I thought, well, if I'm gonna uh sign up with a bank that doesn't have a bank branch, then they won't call me in. Like they they they cannot.

• 4:19Speaker 1

  They don't have a branch.

• 4:21Speaker 0

  Yeah, so I was like, I cannot really go in there, this is great. Uh so they'd be forced to serve me online, uh, which again, like every single thing they were asking me, they either could have done over phone, over a video call, over an email. Um so I really wasn't understanding what was really the barrier here. Um so I signed up for the simple uh uh app and they said they don't really accept immigrants. Later I talked to Shamir, who was the founder of Simple, and he said even he didn't have a simple bank account. Uh but but back then I just remember thinking uh I guess like maybe immigrant is just such an interesting use case that no one's really optimizing for that. Uh and that was the time when I was really thinking what like one of the most interesting things I can work on. Uh and then back then in my head I just remember thinking, why not try to build uh uh the Google for banking?

• 5:11Speaker 0

  Um the idea being we want like let's democratize financial access for people so that it doesn't matter if you're an immigrant, uh if you're rich or poor, uh, what have you, you get access to tools very easily online. Um because I knew nothing about banking except my experience, uh I thought the pr uh what I really need to do is build the next simple. So uh so it kind of started the company with uh a consumer-facing brand. So we had a mobile app, it kind of worked like Venmo. Uh in version one, my goal was kind of demonstrate to the partner banks that we can do ledgering, we can do identity verification, we can essentially like underwrite people before uh before we can do anything else, and then I'll slowly persuade them to start uh uh issuing debit cards and savings accounts and credit cards.

• 5:56Speaker 0

  Um as soon as I wanted to go there, I was like, okay, well, here's how identity verification works with Synapse, you've seen it work, uh back then even concepts like fingerprinting and uh IPS. So you're backing up. So

• 6:08Speaker 1

  you had this consumer-facing brand.

• 6:10Speaker 0

  Yeah, we had this consumer-facing brand.

• 6:11Speaker 1

  But then, okay, so then how did you decide to move from running this consumer-facing brand to try to solve some of the other problems?

• 6:17Speaker 0

  Well, so yeah, so what what happened was um my thought was I'm gonna take this consumer-facing brand all the way and can start adding the same features that like simple had, but this time it would actually work for everyone. Right. Um so then I go to our partner bank back then, uh, and I say, okay, you you see identity verification working the way it's working. You see how we can onboard users. Now I want to be able to issue cards. And they were like, well, you cannot really do that, and gave me like whole gambit of reasons, and most of them were fair. Um we don't know uh how to mitigate for this risk. We don't know how to do transaction monitoring really well. We don't really know how to hook you up into our card issuance stack to begin with. Like those things are not modular and just ready for you to just plug into. Uh you're like you're gonna have to build all of this out, which is gonna require PCI compliance, which is gonna require building out a compliance team and all of these things.

• 7:12Speaker 0

  And I'm sitting there thinking, I'm like, maybe Simple was actually not like it's not simple that was the issue. Uh uh, it was maybe their underlying bank. And then I started looking at who their underlying bank was, uh, and then I realized that's exactly what it is. Uh Simple has a bunch of obligations that they've had to kind of uh uh uh uh outsource in a way to Bank Corp Bank, which was their partner bank. Um, and based on whatever their K by C standards were and KYC policies were, that's all Simple could do. So in a way, Simple was just a reseller of an existing banking service that Bancorp had. Uh and then I and then in my mind I was like, okay, well, how about this? Let's not try to make a new simple. Let's just try to make a new bank corp, with the idea being if we can make the underlying infrastructure extremely more modular than it is today.

• 7:58Speaker 0

  It can accommodate for immigrants, it can it can accommodate for people who don't have credit history, all these things. Um essentially you've built a much more inclusive uh stack, and then any developer can hopefully plug into it and build from there.

• 8:13Speaker 1

  Awesome. Yeah, so we're gonna get into sort of all of the different pieces that are required. Um I think it would be good for you know, folks, some people might say, well, you know, I've got my bank now, I go down to you know pick one of the large banking brands that give me all the products that I need. Like, yeah, maybe I had to visit a branch, but not that big a deal. Yeah. So aside from solving the access problem.

• 8:35Speaker 0

  Yeah.

• 8:35Speaker 1

  Like why is it important that it's easier to spin up new financial services?

• 8:40Speaker 0

  Yeah, that's actually a great question. So uh uh we kind of do a little bit of behavioral research internally in the team. Um so we've kind of classified people in about three buckets. So one is uh someone who needs help financially, like uh in financial services, they're not very well educated, uh, someone who needs nudge, which means they have basic underlying education of how financial products work. They just need better process automation to be able to help them budget better. And third group is self-sufficient people who consider themselves as I have the best credit card on the planet, I have the best savings rate on the planet.

• 9:11Speaker 1

  And do those buckets align by income levels or not necessarily?

• 9:15Speaker 0

  Uh what we found is not always. Uh uh what we found is some people could have a very high amount of disposable income, but as it comes in, it goes out as well. And those people end up being in the needs help category because financial education is very low even though their income is extremely high. One of the most common examples of this would be think of people who win lotteries. Uh uh if the if you would win a million dollar or 10 million dollar lottery today, most of those people end up going bankrupt in like five, six years. There's a high correlation in likelihood that that would happen. Yep. And that goes to basic financial heads. Whereas if they had a

• 9:49Speaker 1

  financial services product that better help them with that, yeah. That

• 9:52Speaker 0

  would

• 9:52Speaker 1

  be a good case. Yeah.

• 9:53Speaker 0

  Yeah. So now uh, even if you don't care about access, I think the bigger question that's worth asking is how can you make sure that Finances just work for people and doesn't require you to piecemeal things together. Yep. That cannot happen until the basic underlying technology kind of upgrades itself. It's like expecting iPhone to exist. If we kind of like did not invent, I don't know, chips, like smaller chips or something like that. People still using like landlines. So you can really make that leap. And that's the leap you really need to make, which helps, which is in everyone's interest. It's in the interest of people who do not have access. It's in the interest of people who have access but kind of don't know how to use these products extremely well. And it's the interest of people who have access to the best in class products and are educated enough to be able to use them as well.

• 10:43Speaker 0

  Even those people usually surround themselves with accountants, financial advisors, portfolio managers. What if you didn't need all of that?

• 10:51Speaker 1

  Yep.

• 10:51Speaker 0

  What if these things just worked for you?

• 10:53Speaker 1

  Well, and you even made the point that more competition would breed higher rates, even for like people who are well served, right?

• 10:59Speaker 0

  Totally. Yeah. Like uh another big point is like if you're an athlete uh and you think you're today getting a higher health insurance, or if you're really good driver, uh and you think you're getting very high insurance from uh insurance rate from Geico, maybe brands should exist that would service just a customer base like you that are inherently better at underwriting what you do

• 11:18Speaker 1

  uh

• 11:18Speaker 0

  uh in that overall even helps people who are extremely privileged too.

• 11:21Speaker 1

  Yep. Um great. So I think before we break down how we can make infrastructure better, I think it would be pretty interesting to talk through you know, there's been lending club is one of the early financial services companies that got going, and now we've got all sorts of uh like neo banks as they call them. Um so these new companies got off the ground. Many of them took 18 months, two years to get launched, because there's a whole series of partnerships that need to happen on the back end, usually added technology that needs to be written on top of those partnerships. So I thought we could almost walk through step by step um some of those things. Um

• 12:00Speaker 0

  that's actually a great idea. And

• 12:02Speaker 1

  starting with, like we can even start like, okay, so you want to launch a new lending company. Yeah. You need a license.

• 12:07Speaker 0

  Yeah.

• 12:08Speaker 1

  Like you can either go state by state to the state regulators or talk through the options between that and getting you know the sponsor bank and what that is.

• 12:16Speaker 0

  Yeah, let's talk about two pieces that uh uh we would consider like least democratized. Like uh people at this point have kind of like taking just payment processing for granted. It can it can happen at scale and it can happen in a very distributed way, but what cannot happen and what a lot of neo banks or lending companies are trying to do is kind of really build out more innovative products on deposit taking or or or loans. Yep. And here's what ends up happening on both of those cases. Uh the first thing you have to do is go and find a banking partner. Yep. Um

• 12:45Speaker 1

  why? Why do you need a banking partner?

• 12:47Speaker 0

  Uh because it turns out if you actually have to move or take custody of money, you have to be a financial institution in the US. Uh same with lending. So uh either you are a bank or you're a lender. Yeah. Um

• 12:58Speaker 1

  who's the regulatory body for that?

• 13:00Speaker 0

  Uh for

• 13:02Speaker 1

  like a bank. Like if you were like, I want to be a bank, like who regulates that?

• 13:05Speaker 0

  Well, it Fed and the OCC. So more so, and and in some cases, state regulators as well. Uh, but mostly you're looking at a federally chartered bank, so you're looking at the Fed or the OCC being your primary regulator who would kind of do audits on you every quarter. Um most of them are safety and soundness based, which means are you are you not are you taking more risk than you than you can afford, which came after the last recession, uh, all the way to are you following the Patriot Act, the Bank Secrecy Act, uh are your policies written uh that you wrote is exactly what which you're doing on a day-to-day basis, or have you written policies that are completely off? And then the final piece is the model validation, which is the policies that you've written, are those sound as well. Uh so they kind of do all of these checks, uh, with the idea being that you want to make sure that the uh underlying fabric of uh the American economy is fairly strong and pro-customer.

• 13:57Speaker 0

  So

• 13:57Speaker 1

  and then customers get insurance that their deposits, like FDI so that their deposits will be there.

• 14:02Speaker 0

  Yeah, so FDIC, like just like any any insurance agency, they would have to do some kind of an underwriting mechanism. And here their underwriting mechanism is on the financial institution. Uh uh the Fed and the OCC, again, the same thing. They're giving you access to the payment trails, or they're kind of like responsible for over overall oversight of the currency in itself, and in those cases they have to just make sure that you're dealing with money correctly. Um then we also have C FPB and some of these bodies showing up that uh kind of sit outside of the quarterly uh uh uh oversight, but they still have uh overall oversight on top of financial instruments or products to make sure they're actually not predatory to the end user. Um so all these regulatory bodies can exist and as as a new company, uh what you really have to demonstrate fundamentally, uh, without all the pieces is can you ensure or can you give confidence to the bank you're about to work with that you can comply with all of this?

• 15:02Speaker 0

  Or can you help them comply with all of this for whatever program you're about to onboard. Um that is a daunting task. Like that piece is extremely difficult. Uh that requires making sure you build and design your programs correctly that work in every single state accurately, how they're supposed to, based on the laws, uh, make sure uh as kind of the consumer standards change, you evolve those programs over time. Uh make sure you're doing the right identity verification pieces you need to do. Uh make sure if there's suspicious activity, you have the right mechanisms to uh uh detect and report uh like all these things kind of like go into this. Um when you're going in starting to build out any financial product, uh these are like the underlying things you have to kind of get right.

• 15:48Speaker 0

  Otherwise uh you just cannot launch. Um

• 15:51Speaker 1

  like a new company right now for the state, they can't go and get a new license.

• 15:57Speaker 0

  Yeah, so this is very interesting. Uh no, because after after the last financial recession, uh there has been uh um I think about only two or three new banks that have actually been denovered. Uh uh almost everyone gets denied because again, uh new banks pose a higher risk according to the regulators. So that's the same. And there's a few

• 16:17Speaker 1

  like applications in process now. I think that approval is gonna be one of the most interesting things. Yeah. But for now, the main option is to go to a bank,

• 16:24Speaker 0

  yeah,

• 16:24Speaker 1

  knock on their door, and sort of prove all of these things that they're gonna be able to do okay. Yeah, yeah.

• 16:31Speaker 0

  And based on the current regulations, uh uh if they stay the way they are, uh it puts even if someone were to become a new bank today, for next two years, they would be pretty much uh uh kind of in a restricted category with the Fed and also with the FDIC. So an example of this is every time you're gonna have to send out a Fed via you're gonna have to give them a call. There are certain limits in place, there are certain processes in place. So they have they kind of have like baby wheels on you for like first two years. And then you also have to raise your capital requirements according to whatever deposits you want to take. Uh the idea being if you're gonna have if your projections are in next two years, you're gonna have about 100 million dollars in deposits. You need 10% of that sitting in the collateral.

• 17:13Speaker 1

  Much more, especially for a um new company with a creative new idea to come to a venture capital firm and say, hey, we're gonna we're gonna launch this. We we have great theories on how it's gonna work. Give us a hundred million dollars. So like huge credit to some of the new banks that have got started in the UK that have been able to do this.

• 17:30Speaker 0

  Yeah.

• 17:30Speaker 1

  Um, but that takes a lot of time, and so much easier and faster to go the sponsor bank route. But I think as you as you pointed out, it's not like there's a directory of sponsor banks out there and the people to call and how to convince them about what types of companies that they want to work with. And so this takes this takes a lot of time.

• 17:48Speaker 0

  This takes a lot of time, and just getting to the sponsor banks is not the only challenge you have ahead of us. It's also demonstrating that you can have all of these pieces by all these pieces I'm talking about compliance, uh integrations with payment processing in case of cards, printers. Or start on the complex

• 18:08Speaker 1

  start on the compliance side for a sec, which is um so banks, like multitude of reasons why sponsor banks now want to work with fintechs. Maybe let's start with the benefits. Like, why are banks wanting to work with Fintech right now, and then we can talk about the risks.

• 18:21Speaker 0

  Yeah, I think one of the most intriguing parts about uh uh this fintech banking partnership is that this pretty much eliminates the cost that a bank has for deposit acquiring. Uh, because they don't have to go and advertise to the customer. Um and they don't also have to build out the front-facing applications themselves. Banks in most cases are not good at like building out new software interfaces and tools. Uh and for that reason, even if they blew up their marketing, it would be highly unlikely to be able to get in a lot of these customers while companies that have been optimized to build and operate on the internet are extremely good at kind of onboarding people. Yeah, so they're

• 18:58Speaker 1

  almost like outsourcing their customer acquisition to best in class teams that do this. Yes. Yeah.

• 19:04Speaker 0

  Uh uh so that's like a great partnership because uh you're you're getting uh uh uh deposits at a much lower cost than you would otherwise.

• 19:11Speaker 1

  Yeah. But not devoid of risk, which was the point that you were bringing up, right? So let's assume you onboard a malicious partner that decides I don't know, they're gonna like purposefully launder money from XYZ country. Like where where does that risk lie?

• 19:26Speaker 0

  Well, let's even start at something like most common, which is just like uh uh uh UDAP, which is just uh deceptive marketing. Yeah. So uh and sometimes that's even accidental.

• 19:37Speaker 1

  Uh

• 19:38Speaker 0

  because uh like the most common mentality in Fintech is fake it until you can make it, and then you can

• 19:43Speaker 1

  that's that's any industry. It's just that fake it until you can make it in financial services will land you in jail versus some of the others. So you can't really fake it. Yeah,

• 19:50Speaker 0

  it 100% lands you in jail. Uh so that's like one of the most common things that you're like, okay, how can you ensure that you're not going to Like deceptively market a product. That's such a low-hanging fruit, and a lot of people get that wrong. Like

• 20:08Speaker 1

  what's just an innocent mistake that might happen there?

• 20:11Speaker 0

  Robin Hood is an innocent mistake.

• 20:13Speaker 1

  So tell us about that. So

• 20:15Speaker 0

  here's what Robin Hood did. Robin Hood launched a or at least they debuted a three to four percent interest rate checking product without really explaining what built that interest rate. Without really explaining how FDIC coverage would work and things like that. So they didn't really have the right disclosure. It wasn't

• 20:33Speaker 1

  FDIC covered in this case, yeah.

• 20:35Speaker 0

  Yeah. So there were a lot of questions and very very few answers around this kind of launch that they did. And they had to kind of like roll that back and now they're gonna go and launch it again. So that's like a very honest mistake. Yeah. Other types of honest mistakes could be uh it turns out things that we see commonly. It turns out uh the bank actually is giving an interest rate on the savings account, which is about 1.85%, and you want to tack on about 2% on top of that. Uh how you have to make sure you communicate to the user that the other 2%'s coming from you, not really from the bank, uh, things like that. Yep. Uh um and those things people kind of get wrong because they're like, well, I don't feel like confuse my customer and give them this breakdown, but you have to.

• 21:20Speaker 1

  And so if the FinTech gets it wrong. Yeah. From a regulatory perspective, who is who's at fault? Is it like the bank bear that risk? Does the FinTech bear that risk? Both?

• 21:32Speaker 0

  The bank bears the risk for the primary regulators. Now we've seen precedent being set where CFPB goes directly to fintech companies and also finds them. But mostly what happens is uh your primary regulator is going to knock on your door, your being the bank's primary regulator and say, do you have no oversight on this? Do you uh do you actually not know uh how to how to manage these programs? Because if you don't, you should exit this business, which goes down to their safety and soundness. Right. Like are you actually do you have the right talent in in in your bank to be able to build out this wholesale banking business that you're trying to build out? So that's the one of the biggest risks any bank uh uh faces. Yep. Um because usually if it's just one customer, there's some tolerance for this. If there's a pattern of this happening, then that gets extremely dangerous because then it goes down to okay, well, if it's happening about 15 to 20 times every year with you, then it might go down to your processes, and maybe you should exit this business.

• 22:29Speaker 0

  Yep. Uh so that's kind of like one of the biggest risks that any that any bank faces. Yep.

• 22:34Speaker 1

  Um, perfect. So I'm gonna I'm gonna be launching my fintech company. I have found a sponsor bank and convince them that I am going to comply with all of these processes.

• 22:43Speaker 0

  Yeah.

• 22:43Speaker 1

  Uh am I done?

• 22:45Speaker 0

  No, actually, you're just getting started. So here's uh it's good that you've convinced a bank that you're going to be able to do all these things in most cases, and this is outside of Synapses universe. So we're talking about how this actually works with like Bancorp or somebody else. Uh they're going to give you a list of uh uh approved vendors that they have for different functions. Functions being KYC, functions being

• 23:07Speaker 1

  KYC, know your customer identity checks,

• 23:09Speaker 0

  identity verification, uh uh uh transaction monitoring, uh making sure there is no illicit activity, uh terrorist financing, uh anti-money laundering obligations over there, uh ledgering, making sure balances are not wrong in your system, uh payment processing, ACH. Um

• 23:28Speaker 1

  let's talk payment processing. Yeah. So actually explain what what is a payment processor.

• 23:32Speaker 0

  A payment processor is someone who is connected to any network. May it be ACH, which is bank-to-bank transfer, or Visa and MasterCard, which is interchange. Uh uh, and on behalf of an originator, which in most cases is a bank, uh, they can originate an instruction for a transaction and move money. Uh in some cases they can pull money, in some cases they can push money. Yep. Uh if you're doing a neo bank, then you need uh a processor uh to be able to issue and process cards. Yep. So when your customer is going to swipe a card at a restaurant, uh the message goes to, let's say it's a visa card, it goes to from the swipe, it goes to the bank that's going to acquire that transaction, then it goes to visa, then it comes to your processor who then decides based on the balance of the account, the status of the account, a bunch of other things if the transaction should settle or not.

• 24:21Speaker 0

  And based on that gives that instruction back in real time. So you kind of need that piece. Uh uh, even for account funding, uh, being able to help move money into the system, you need bank-to-bank transfers, or you need uh uh to be able to parse through these like processing files as payment instructions come in. So

• 24:39Speaker 1

  if I want to deposit checks into my new account, like that's somebody totally separate. What if I want to use ATMs?

• 24:45Speaker 0

  Someone totally separate. So ATM separate, ACH is separate, card processing is separate. Uh uh in most cases, even uh card processing has two pieces, acquiring and issuance. Issuance is you issuing your card, acquiring is what Stripe does. So being able to kind of like process uh a third-party card. So if someone brings a Bank of America card to you and you want to process that, it turns out in most cases those two processes are separate too. Uh uh so yeah, like, and then you want to do Fed wires, that's mostly a separate processor. Uh if you want to do like cross-border money movement, that's a separate processor. So, yeah, a bunch of different ways to move money, and mostly people specialize in like one of those fields. Yep.

• 25:25Speaker 1

  So they're just requires right now, so it's luckily that a lot of these services exist. Yeah and as evidenced by some of the companies in the market that you know admittedly have taken 18 to 20 or 24 months to get going. You know, they've gone, this is maybe eight different partnerships that you've described, and they can launch and they can't.

• 25:42Speaker 0

  Well, eight to ten, uh, because the pieces that we haven't talked about is uh uh other use cases. Uh uh we can talk about how this applies for lending, but in case of neo banks, your customer wanting to pay a bill, and the way they pay a bill is with the check. Do you send them a checkbook or do you uh uh on demand print a check and mail it? Different vendors on both. Yep. Uh uh, you have to print and mail your card, a different vendor there. Uh uh so like yeah, like there are like so many.

• 26:07Speaker 1

  Getting the card art right is a problem that I hadn't thought that much about, except for it is probably the number one pain point of card design from most of the new companies that I talked to. So yeah.

• 26:17Speaker 0

  Yeah, I uh uh we actually did not, and we can talk about that probably more, but we didn't anticipate uh uh uh how difficult just the card printing pieces. Yeah, that's extremely fascinating. Yeah, but I think it

• 26:30Speaker 1

  just underscores um one, the you know, importance of you know companies in this category wanting to offer great user and design experiences right down to the card, and just that that is difficult to line up with all this infrastructure. And so then how um from Synapse's point of view, yeah. You look at this infrastructure, how did you how did you start? Like first you needed banking partnerships.

• 26:53Speaker 0

  Yes, so we needed banking partnerships, uh, and we had to essentially kind of build all of these things.

• 26:59Speaker 1

  Yeah.

• 27:00Speaker 0

  Um so

• 27:01Speaker 1

  And they'd be attracted because they're like, well, I'm a bank, I see the opportunity to get these free deposits, for instance, from a whole bunch of different startups, but then they're like, well, I then need to decide what startups do I want to work with, how do I manage to make sure that they're complying with all of the sort of KYC AMO regulations, et cetera, et cetera. So

• 27:19Speaker 0

  yeah, so from a bank's perspective, uh what they're really looking at is let's say I found 50 companies that I think are gold mines. They're gonna bring me so much deposits. Okay, now how do I go and make sure I have the right oversight on all of them? How do I make sure they uh uh in in pretty much a symmetrical way have their policies and procedures built out? This is just extremely tedious. And and what you're really expecting is that you're gonna be able to get the same outcome 50 times.

• 27:47Speaker 1

  Yep.

• 27:47Speaker 0

  Um something like Synapse is doing is saying, you know what, we're gonna centralize all of this, with the idea being everyone kind of follows the same set of rules in a way. Uh uh, same set of processing rails, all these things kind of like are very symmetrical. Uh with that, oversight becomes a little easier than it would be. And then mostly your focus on oversight ends up being uh uh like the UDAP stuff. So are you marketing the product correctly? Uh uh is it friendly to the end customer? And those pieces are at least easier to measure and monitor because you can do them on a quarterly basis or something like that, versus also having to make sure that the daily oversight functions are being done correctly 50 different ways.

• 28:27Speaker 1

  And how are you like I was just reading um you know the compliance staff increase at banks, which has been a big topic since 2008. I think the latest stats for someone like City,

• 28:38Speaker 0

  they

• 28:38Speaker 1

  have 30,000 people in compliance, like 15% of the workforce.

• 28:42Speaker 0

  Yeah.

• 28:43Speaker 1

  Uh which as a startup, you just wouldn't be able to hire that many people.

• 28:48Speaker 0

  Yeah.

• 28:48Speaker 1

  Um there any areas like that you've been able to uh like use technology to do things better in the KYC AML or like ways that you think you'll be able to reduce staff in that area in the future.

• 28:59Speaker 0

  Totally. Uh um so I think it's good to understand why banks hire compliance people. Uh banks have started hiring compliance people since eight years ago. That's because more additional obligations were put on them a lot around uh uh transaction monitoring, identity verification, things like that. Um if you would just look before eight years ago, uh banks were not technology companies, bankers banks are still not technology companies, so they've had this additional layer of oversight that's been put on them. Uh and the only way they know how to respond to this is how they have responded to problems before by adding more people. So we're primarily a technic technology company. So a lot of the pieces that you would have to hire humans for, you can try to automate them. Something as simple as identity verification, reading a government ID.

• 29:47Speaker 0

  Uh you can kind of use computer vision or CR to be able to start really like uh fine-tuning that tool. Uh when you talk about just transaction monitoring, you can use like LSDM type models to be able to, that plus time series. Uh um, you can kind of like build out some models there. Um So a lot of the back office functions that banks are hiring people for, uh, you can by and large automate uh depending on what type of operation it is from like 80 to high 90s percent. Uh with the idea being uh what we care about is hiring like extremely smart compliance people that can find uh uh deficiencies and can keep good oversight. Um and if we can do those things well, then though the system I would never consider the system automated. I would more so consider the system autopilot. It's mostly autopiloted with with kind of like your your hand on the wheel like almost all the time with the idea being we're gonna if something goes wrong, we're there to take take over.

• 30:43Speaker 1

  Yep.

• 30:43Speaker 0

  Um Synapse is not the exception to this. Uh uh other uh fintech companies are pretty much doing the same thing. Uh it probably becomes a focal point for us because we live or die by this because our entire business is wholesale banking, our entire business is building this infrastructure. So we can have to really get this one right, and if we have to hire I don't know, uh five compliance people per new two platforms that we add, some kind of a scaling function like this, then that really starts like reducing uh overall uh the business merit of this.

• 31:19Speaker 1

  Yep. Yeah. Um and so then so you've got your banking partners, your program management. Yeah. What what are the other services that you offer? And how did you think about like what do you build yourself versus what do you partner with?

• 31:31Speaker 0

  Yeah, I think uh uh here's the problem we're we're trying to solve in a recursive way. Uh we want to reduce the barrier to entry for anyone to build and deploy financial products. Um we're always going to kind of like just keep on building things around there. Uh the most common one that we talked about is banking partnership. The second one is compliance and back office automation. The third one is all the processing layers. So most of the work that you see in Synapse kind of happens on those three verticals, right? So the

• 31:58Speaker 1

  processing, like supporting swiping of debit cards and

• 32:01Speaker 0

  ACH processing, RDC remote deposit capture, check issuance. Um the goal being if if someone, if one of the end customer has a deposit account that is hosted by Synapse's infrastructure, uh it cannot be uh, it cannot seem like a step down from what you would get at Wolfs Fargo. It almost has to be either the same or better.

• 32:25Speaker 1

  Uh

• 32:26Speaker 0

  so you have to have all those functions. You have to have the check piece, you have to have the bank transfer fees piece, you have to have the card swipe piece, all those things need to exist. Um those three pieces we kind of like constantly keep on going back and forth on. Uh then there are other pieces as well, like uh kind of reducing support costs for customers, uh really getting customer support, uh uh uh being able to deliver customer support at scale, uh, then being able to also help people find customers reducing their uh CAC over time, uh, and then finally like capital. So I think those pieces would will kind of work on as well. Um but how we think of this is like the problem that's ahead of us is reducing barrier to entry to build and launch financial products. So we'll kind of build products in any of those uh categories that we can.

• 33:13Speaker 0

  Um we tend to partner on things that we think we cannot do ourselves in the short term. So uh banking partnership is extremely fundamental. We're most likely not gonna go and get a charter. Uh our goal today is how can we make this infrastructure more global? So finding regional partners is like key for us. Um then other things like when we got up and running with a card issuance stack initially we partnered with Jack Hendry instead of building that ourselves, um, and then took about like eight months or so to start building that ourselves. Um so sometimes depending on kind of like what products we want to launch now versus later, we might partner on some of those products as well. Uh but in most of those cases, what we found is building some of those things in-house just gives us the flexibility we need to be able to kind of move these parts around like correctly the way we need to to be able to build whatever financial instrument we need to.

• 34:05Speaker 0

  So we partner less compared to most companies. We build most of it.

• 34:09Speaker 1

  Yep. And so I want to rewind a little bit before you were um as known in the industry. You're a new startup, you're doing something critical like banking infrastructure. How did you convince your first customers to use you know no name synapse

• 34:27Speaker 0

  versus

• 34:28Speaker 1

  other companies or other banks that they might have known before? Like no one would be slow over here, but at least a little bit more established. Like how did you get over that hub?

• 34:35Speaker 0

  Yeah, I think uh uh uh our problem is just like any infrastructure company. Uh initially you're gonna have folks that are a little more tolerant of risk, so they're gonna be like, it's super critical for me to be able to build and launch some of these things, so I will do that. Um plus they kind of like relationally start knowing you, so they're like, okay, we're actually at least we're we're gonna bet on this team. Um, and your

• 34:55Speaker 1

  and your pitch to them was speed, it was a what was it? What was the early pitch, the

• 34:59Speaker 0

  syntax? Well, so one of our very early pitches uh uh were speed and access. Yeah. Uh like um it was extremely hard when we got started. In most cases, it still is for most companies to be able to get access to these products. So we were like, hey, we're gonna give you access and we're gonna give you access very quickly. Meaning if

• 35:17Speaker 1

  you're like not a brand name and you go knocking on a bank's door, like they're not gonna pay any attention to you. Totally.

• 35:23Speaker 0

  Yeah. Uh and then the second piece is so

• 35:25Speaker 1

  because they don't know how to like it's not their core competency to evaluate, right? So yeah.

• 35:29Speaker 0

  Uh and on top of that support. Like we had Slack support. So you're like, like, I'm gonna give you Slack support, my core team's gonna give you Slack support. So um usually that ends up working out for like startups when they can give like good support to their customers uh and also can kind of like get them to market faster. Um those were the things we thought were most valuable to our customers uh over time. Um they that still has remained to be true, but what we found also is because we built a bunch of these things in-house, adding more incremental products is easier for us. Um so in most cases it is ends up being easier for us to add those products for them than they have them having to go and get those somewhere else. So those have helped over time too.

• 36:10Speaker 1

  And are your customers they're just signing an agreement with you, or they signing an agreement with you and some other partners? What does that look like?

• 36:16Speaker 0

  Yeah, so since like we thought the best way to be able to solve this problem is be a one-stop shop. So we've kind of like always only partnered with people where no tri-party agreements are needed. Uh so they just come and sign an agreement with us and then we kind of manage everything else behind the scenes. Yep. You have to still get a lot of approvals, right? You have to get the approvals from partner banks, you have to get visa to approve their if it's a debit card, their co-brand, if they're doing if the lending company and then push money to a debit card, then getting their program approved. So you do a bunch of these things behind the scenes. But here's the fun part. Once you do them 50 times, you're so much more optimized to do this versus this company directly themselves. Yep. Now, if this company had to go and partner with MasterCard to use MC Send the product, they just wouldn't even know how to prepare for all the obligations they have.

• 37:04Speaker 0

  And one of the most common things MC Send uh MasterCard push to debit product asks is what's your anti-money laundering program? Guess what it is? The same across hundred companies or two hundred companies. So now they've understood that program so much better. So overall, what you're seeing is kind of centralizing this or has benefits to everyone because things the process starts becoming a lot lot faster than it used to be before.

• 37:26Speaker 1

  Makes sense. Yeah. Um so sitting in your seat, you get to see like the first instances of probably a lot of interesting creative ideas. What are like one or two examples of companies that you have worked with or will work with and what they're doing?

• 37:40Speaker 0

  I think one idea that admittedly me and also other uh peers of mine and friends of mine, mostly uh in venture, kind of like uh um underrated was Dave. Um and I think a big reason for that is uh uh most of the people that now I'm probably like uh um uh hanging out with or in close proximity with are people who are well off financially. So when a product like Dave comes and what's

• 38:07Speaker 1

  what's Dave's product?

• 38:08Speaker 0

  Here's what Dave does. Dave says we're gonna ensure that we're gonna try our very best or slash ensure uh that you're never charged an overdraft fee again.

• 38:17Speaker 1

  Yep.

• 38:17Speaker 0

  Um, how do you do that? Uh well, you sit and monitor people's account on a regular basis. And if it turns out uh there's a likelihood that they're gonna overdraw because some charts gonna come in that's recurring or something like that. Uh you just push money into their account just to cover that so that the account doesn't overdraw, so they don't have to pay over uh overdraft fees. Most people thought there wasn't a lot of demand for a product like that, and we have been blown away by like how many people actually use a product like that. Well,

• 38:44Speaker 1

  overdraft fees have gone up like to $35 now from 20 just 10 years ago. Yeah, I was checking uh yeah. So that's a big that's a pretty big chunk of change.

• 38:52Speaker 0

  Yeah. Yeah. So that product we've been like, uh I think a lot of people were caught by surprise. Uh some of the other other products, like um, I've been like a huge fan of like Empaver Empower, it's one of our new customers. Uh uh, they issue they issue debit cards and uh give you a savings account as well.

• 39:09Speaker 1

  And a higher yield savings account.

• 39:10Speaker 0

  A much higher yield savings account. I believe like 2.15%, something like that. Uh um and over there, um at this point, I don't have an account with Bank Mercuchase Wolf Spark by anyone. I literally only have my customers' cards in my pocket. Uh so like they've built a very good uh uh interface for this overall the experience of the product solid. Uh um my transactions get categorized correctly uh uh as soon as I swipe my card, I get my notifications. So pretty much at this point in a couple of months, uh they've been able to get at par with any other neo banking customer you can think of.

• 39:48Speaker 1

  Uh

• 39:48Speaker 0

  may be Chine, maybe Varro, all of these people. They started after them and now are at the point where we are, and next couple of months they're gonna be ahead of where they are. Uh um, and they've kind. Like execute on this fairly quickly. So those people have been extremely exciting. Do you have some like new partnerships that I think would be extremely intriguing too, but I should probably not.

• 40:09Speaker 1

  Alright, well we'll save that for a follow-up conversation. I want to chat briefly about sort of company philosophy. And one of the things you've done is you publish your roadmap.

• 40:20Speaker 0

  Yeah.

• 40:20Speaker 1

  Why did you decide to do that?

• 40:22Speaker 0

  Yeah, I uh uh it was actually extremely pragmatic. Uh uh we were hoping to be able to ask our customers what they were gonna work on. Um in some cases they were secretive about it, in other cases we just started having a lot of customers, so it just didn't seem like we could have that conversation with everyone. Um so what we decided was instead of trying to like pull this information out of them, why not we just tell them, okay, this is what we're gonna commit to building this year? Uh with the idea being if they have that in their vicinity, uh they would know that hey, we're here to kind of help you with this uh in next 12 months. And that was the reason why you just start putting it out. It also um motivates the team a whole lot because like, okay, well, we've committed to this publicly, so we have to deliver to it now.

• 41:08Speaker 1

  So we've seen a lot of ground up companies start, like I want to start a new Neo Bank, I want a new uh debit or credit card. Um but one of the one of the interesting trends going on right now is that non-fintech companies are becoming fintech companies. Take for example, Lyft, which launched a bunch of financial products for its drivers, and that makes a lot of sense because it's higher margin for Lyft and also provides um good benefit to its users. Yeah. Do you think what do you what do you think about that trend? How do you how do you see that continuing?

• 41:39Speaker 0

  Yeah, I think it's like very similar to the Apple App Store. So initially, the first version of apps that launched on the App Store were coreally about new companies that were trying to do something innovative with with the operating system in itself. Uh and then once kind of the operating system became extremely stable, then you started seeing Chase Bank of America, Facebook, like all these people that traditionally were not like iOS apps, uh they had web businesses or in-person retail businesses. They started launching their own apps as well. So I think very similar stuff things are gonna happen here as well. As you start seeing uh the barrier to entry in building these products kind of reduce, and all these just become plug-and-play Lego boxes or uh blocks in a way, then you're gonna start seeing more and more companies that have not considered launching these products before because they're extremely difficult to build, and uh now the barrier to entry is going down and they will start building these more and more.

• 42:33Speaker 0

  What established players that are non-fintech have going for them is that they already have distribution figured out. So what they really have to do is just get the right product that they need uh and then distribute it across to their existing customer base. So I think that's gonna happen more and more. Um Lyft Uber, they're doing it, Airbnb probably is going to do it. Um you're also gonna have companies that have not even been internet companies starting to offer this. You'll probably even see existing banks and existing firms like Prudential and all of them starting to offer more innovative products for their customers as well. Um, yeah, I think that's gonna happen more and more, and primarily it can only happen if the barrier to entry to build and deploy these goes down.

• 43:15Speaker 1

  Yeah. Well, and I think what's interesting too is it opens up an entirely new potential revenue stream for platforms, which can make the user experience so much better. Like if I have a massive platform, I was either gonna have to charge my consumers.

• 43:27Speaker 0

  Yeah.

• 43:28Speaker 1

  Um, or like maybe I would sell their data sometimes covertly, which never helps. That never makes people too excited. I'd have to do advertising and beg them with ads.

• 43:36Speaker 0

  Yeah.

• 43:36Speaker 1

  But now maybe I could offer them a product that they actually want that has the benefit of being a super high margin for the platform.

• 43:43Speaker 0

  Exactly. And then how you said, like in case of Lyft, it makes obvious sense. Like this is just something that helps their customers extensively. So they're gonna add those features in there as well. Uh, and that obviously has a good increase in revenue for them. So this is one of the most that's why this is extremely intriguing compared to other products and services that usually uh uh um affect your bottom line negatively. And this is essentially an addition because you're starting to make more revenue,

• 44:10Speaker 1

  uh,

• 44:11Speaker 0

  but also ends up adding massive value to your customer base. So we'll probably see more of that happen.

• 44:16Speaker 1

  Yep. So every company can be a fintech company.

• 44:18Speaker 0

  Exactly.

• 44:19Speaker 1

  And then like back to you as a founder, now that you've been you know scaling synapses for a few years. What were like what was one of the biggest surprises of being a you know first-time entrepreneur?

• 44:30Speaker 0

  Yeah, um that's a good question. I I I think I I would probably edit that question even more. It's like, what were the biggest surprises of a first-time technical entrepreneur? Um because um we anticipated a lot of our scaling uh challenges around tech. Uh so none of the those came to me in a highly surprising way. Um we're so far been able to kind of tackle most of them. Um most of my challenges uh have come from okay. Well, at some point me churning out code is probably not the most productive thing uh uh I could be doing. Uh uh, and how do you kind of like make that switch? And in most cases, uh when your company is growing very quickly, that switch is a step function. It's not a gradual switch. It doesn't give you a lot of time to be like, okay, I have about six months before I can uh improve on this.

• 45:19Speaker 0

  You have to quickly be able to change. Um so to me, the biggest thing has been uh instead of kind of being an individual contributor, which is as like a technical co-founder, most of the work is what you're having to put in by writing code, not really by talking to people. Uh, how do you move from that mindset uh to suddenly most of the value that I'm adding is making sure that I'm the editor for all the teams that are working on the company's different projects and initiatives? Um for me, that's been kind of like the biggest learning curve.

• 45:53Speaker 1

  Yeah.

• 45:53Speaker 0

  Yeah. But honestly, I've enjoyed it, I've kind of gone through it. Uh uh, but I think that's the piece, that plus communication. Like I think those two pieces for someone who's inherently uh highly functioning introvert is that how do you go from kind of being like I don't have to communicate with a lot of people to being like, no, you have you have your customers, you have your employees, you have your shareholders, and how do you kind of like communicate with all of them that know, like we're kind of making progress on all these things. Your

• 46:24Speaker 1

  VCs uh you know drag you onto talk shows.

• 46:26Speaker 0

  I know, uh, they drag you on to talk shows, uh um, which I really appreciate. But uh you have to kind of communicate with all of them. Um how do you do that extremely well? I think for a technical co-founder, that's probably like one of the biggest challenges. Yep.

• 46:42Speaker 1

  Um fantastic. Well,

• 46:44Speaker 0

  also another thing that has kind of like initially reduced my job satisfaction when I changed my mindset, improved it, um, is that when a company is growing really quickly, you always feel like you're running a little behind.

• 46:56Speaker 1

  Yeah. I think um just ending on the like what could be possible if uh financial infrastructure was a lot easier. Um, one of my favorite examples, um, there's a company um that helps users on food stamps.

• 47:12Speaker 0

  Yes.

• 47:12Speaker 1

  And this is like it's one out of seven families in the US is on and off of food stamps, and and you think about like this is a problem that a large part of the population is very, very aware of. Yes. And now, and this entrepreneur that started this company, Propel is like very smart, and I think could have navigated a whole bunch of different partnerships and he's launched a very clever, almost personal finance manager, which shows you the balance you have in your food stamps card, you know, where you should go shopping, and you can imagine different things that he can do on top of that.

• 47:42Speaker 0

  Yeah.

• 47:43Speaker 1

  But think of entrepreneurs from all sorts of different diverse areas that have great product ideas that we probably haven't even thought of. Yeah. Um, I expect like in the future, some of those will be able to come to market more easily.

• 47:57Speaker 0

  Yeah, well, let's talk about like some of them that are extremely interesting without even naming names. Like even if you talk about someone who primarily is building a product for uh a lower socioeconomic status customer base, um, the fact that as someone swiping their card uh um and it's a grocery store, uh they have 20 dollars in their account, but they need 40 to be able to pay for their groceries. The fact that you can in real time make those decisions is is massive. Uh uh companies that are really trying to build out a better credit card experience for young graduates that are going to have a really good disposable income but doesn't have uh uh don't have the credit score that they need to be able to get the Chase Sapphire card, uh that's a big opportunity right there, all the way to uh being able to do business banking extremely well, like Mercury being one of the customers that we've been extremely excited about uh from startups all the way to small businesses, uh cash flow management, uh all the way to accounting integrations and how can you make all that process extremely seamless uh while giving them the underlying structure you need for banking, and now you have access and visibility to their burn, their PL, uh and how can you build out some of the better underwriting products on top of that to be able to give out uh in case of startups, debt and credit, uh in case of small businesses, SME loans, like um like those pieces are extremely, extremely exciting all the way to high net worth individuals, and how can you build out better portfolio management for them that doesn't just only account for public stocks that they have to buy but goes across board from checking all the way to portfolio management.

• 49:34Speaker 0

  Uh that last one we haven't really seen happen yet, but we will probably in a year or something.

• 49:40Speaker 1

  Yeah. Yeah. Yeah, so I think the good sort of takeaway for uh our watchers is um an insight into the complexity of the existing banking infrastructure, but hopefully uh beyond this, won't need to think about infrastructure anymore. We'll just get to benefit from a lot of the new companies that'll be able to come to market a lot faster and serve consumers that are. Served yet, or you know, we even consumers who are served, but in better ways.

• 50:02Speaker 0

  Totally. Like uh, once you don't have to build the internet protocol, once you don't have to build the servers, once you don't have to build the operating system, guess what else can you build on top of that? And that's what we're talking about.

• 50:17Speaker 1

  Awesome. Thank you. Well, thank you for joining us.

• 50:19Speaker 0

  Well, thanks for having me.