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The End of Fintech Tourism

The Synapse / Evolve situation seems like it can't get any crazier. Then it gets crazier. If you aren't regular readers or listeners of Jason MikulaAlex JohnsonSimon Taylor or Kiah Lau Haslett they provide up to the minute updates as well as more detailed analysis. Kiah and I managed to talk about FBO accounts for a full hour on Breaking Banks Fintech Podcast. You know where to find it. 


Lots of questions this week. I was asked by a bank. And a regulator. And another bank. And another regulator. "Is this the end of Banking as a Service?" It's only Wednesday.


This will be a multi-part series but let's start with some basics. BaaS is bantered about like everyone shares the same definition. Even the members of our BaaS Center of Excellence, the leading banks in the space, had to get very specific about definitions: there are banks, there are middleware providers, and there are programs. BaaS is a broad swath that covers all of these. 


BaaS is not dead. We are at the beginning of a reckoning and return to reality. Too many tourists rushed to BaaSIsland (h/t Alex Johnson for the island analogy). The tourists came in many different flavors. Entrepreneurs without experience in financial services but thought their need was a market. VCs that thought they could play in fintech because they work with money. Banks that thought they were good at managing risk because they have a compliance department. 


Frank Rotman wrote an exceptional piece on Landing the Plane. No one starts or invests in a company thinking will fail. The reality is most ventures never find success or even a soft landing. When an acquisition of Perkstreet fell through, Dan and I would joke that "we landed the plane; sure it was on fire but nobody died." We pulled this off on a shoe string because we had a plan. 


Whether you are an entrepreneur, bank executive or investor playing in BaaS. Here is the roadmap you need ASAP. 


Assess the severity. 

When we started building a wind-down plan "just in case," we quickly realized our success in becoming the primary account (measured by direct deposit percentage) complicated our soft landing. The types of services and impact on customers, especially if they are consumers, drives the time table. The more severe the potential impact, the longer the time frame. Since switching direct deposit can take multiple payroll cycles, we needed to think in terms of months not days. 


Put together a plan.

You can't plan for every contingency but that isn't an excuse to avoid the exercise. We were surprised when we started our tabletop exercise how many interdependencies there were. This is perhaps the last place waterfall planning is a must do practice. The plan needs to include mapping critical vendors and employees, including retention bonuses as necessary. 


Build a budget.

The Synapse bankruptcy and cataclysmic collapse of their infrastructure underscores the importance a plan and putting dollar figures against the timeline and critical vendor costs. A SaaS business can wind down in short order. Whether right or wrong, that same business can leave vendors with outstanding bills. Because winding down takes longer in financial services and critical services need to be maintained, cash management and budgeting are critical. 


Get out the calendar.

The plan and the budget are meaningless unless it is mapped to a regularly updated timetable tied to the startups cash balance. The budget needs to be iterated upon as customer counts and other cost drivers change. The calendar needs a line in the sand when the wind down plan needs to be executed. Develop leading indicators to know when you might be headed toward that line. The need to execute the wind down plan shouldn't come as a surprise. 


Get on the same page. 

This was maybe the hardest part of the Perkstreet wind down: sharing with our team, our partners, and our investors that we had a plan for the possibility that things would not continue to be up and to the right. The eventual execution was easier because we'd already pulled the bandaid off in a time that was less emotional. It also allowed us to get feedback from key partners. Pete Chiccino and Joyce Mehlman were amazing partners. 


Act responsibly. 

I wish this didn't need to be said, but I'm gonna shout it for those in the back. Whether you started the company with the best intentions of creating greater access to financial services or becoming the next unicorn, it doesn't matter when it comes to wind down. You took people's money. Money that puts food on the table. Money that pays employees. Money that pays for daycare and weddings. Money that keeps a business alive. If you choose to play in financial services, there is a moral imperative. Serious travelers only; no tourists.

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