Transcription:
Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman. Over the past couple of months, we've seen an influx of crypto companies and fintechs applying for, and in some cases receiving, national trust charters from the OCC, and more and more companies continue to do this. In December five companies received National Trust charters: Circle, Ripple, BitGo, Fidelity and Paxos; and Coinbase, Crypto.com and Bridge have pending applications. The Trump family's World Liberty Financial has also applied for a charter for the right to issue and custody stablecoins earlier this month. Traditional banks might find this new breed of competitors unsettling, but Chris Black, CEO of Thread Bank, sees some opportunity and potential for banks to even grow their business with this trend happening. So Chris is here with us today. Welcome Chris.
Chris Black (01:04):
Hi. Thanks Penny. Good to be with you.
Penny Crosman (01:06):
So you are in the Nashville area. How have you been weathering this storm?
Chris Black (01:11):
Weather? Yeah, weather and storm. Those are two good words. Thankfully we've been okay. Family's been all right. We've had a lot of employees at the bank here in Nashville and our East Tennessee offices impacted, but it's been one of those opportunities for a lot of resilience on the team. We've got got concentration in Nashville and concentration in east Tennessee, but then folks all over the country, so it's been a good opportunity to exercise some of those COVID muscles maybe. And it's been really great from the standpoint of we haven't missed a beat. We've had board meetings and all types of activities we've been able to carry on and keep the business moving forward, but people would ask that they keep Nashvilleans and people all through Mill Tennessee and their prayers. It's been a rough week and a half so far, and it's still ongoing.
Penny Crosman (02:07):
You had a five-day power outage. How did you manage to keep things going in spite of that?
Chris Black (02:14):
That was at home. Yeah, five day power outage at home. The bank, fortunately we lost power maybe for six hours and they were able to get it back up and running at our offices here. So the family huddled close. We had just put in spray foam insulation, which I'd highly recommend for people over in our attic, which made an incredible difference. And I like to say a lot of people these days suffer and their children suffer from affluenza, I call it. So sometimes when you've got hardships like this, it's a good thing for families and folks to go through and try to keep their eyes on what really matters and back to basics. So we took it as an opportunity to focus on those things and make sure people were taken care of. So good things can come out of all kinds of situations.
Penny Crosman (03:08):
Yeah, that's a good perspective. I wonder if anybody broke their iPhone addiction during this storm.
Chris Black (03:16):
I think we forced a little bit of that, so that was definitely a good thing to come from it. We had board games out and a lot of blankets.
Penny Crosman (03:25):
All right. Well, I'm glad the power is back on and things are getting back to normal.
Chris Black (03:30):
Thank you.
Penny Crosman (03:31):
So onto this topic of so many fintechs and crypto companies getting charters. From your perspective, why are so many companies doing this now?
Chris Black (03:42):
Well, I think the first and foremost reason is just the opportunity, and that's the opportunity that we saw. It's been now since we put our investor group together and had the idea, it's been five and a half going on six years. We closed the recapitalization of Civis Bank, which is now Thread Bank, back in May of 2021. So we're coming up on five years. And that's what we knew was that the bank charter, while many folks focused on banking being, and I've said this a lot of times, but being one of the most highly commoditized businesses on earth, that is true. But at the same time, understanding how to deploy that charter, how to employ it in a safe, sound leverage manner to really capitalize on all the incredible attributes that a bank charter allows and gives that has scarcity value. And so that's what we have built our business on is that scarcity value of knowing how to manage the bank, all the basics, never compromising on capital and liquidity and sound risk management practices, all of these things. But then challenging the paradigms of geography or partnerships. Who's touching the end customer? Who owns the end customer? How do you do that in partnerships? So all those things are very scarce and they're very rare and they're hard to do, and I think that's what you're seeing is crypto companies and other innovative folks who have tremendous user bases trying to access that same functionality that we've been able to do for the last five years.
Penny Crosman (05:27):
So you feel like companies like yourselves that have been doing this for a while still have kind of an advantage over the newbies who are just getting their feet wet?
Chris Black (05:36):
Well, I think absolutely that the US economy is quite significant. It's quite large. I mean, we're pushing, what are we over $40 trillion GDP as an economy, and so the opportunities are manifold and one of my other thought processes that I try to think about is the commonality that all humans pretty much have to have. Food, water, air, money seems at this point. We've all, that's something that really no society is able to exist without. And so if you have a bank charter and you understand how to operate it again with compliance in mind and safe and sound, it's a ubiquitous opportunity and you have to have the flexibility and the mindset to access customers and use banking products and services in different ways, not from anything that's fundamental. Those are non-negotiable, but it's really about how do you deploy it and how do you think about that.
(06:43):
So I think there's room for a lot of people at the table at the same time you call 'em the newbies. I think, and this is an overgeneralized statement, so it's not true with every single organization obviously, but many people completely underestimate what it takes and what is required. And so I think we've seen this before in history. I think there was a rush to get trust charters maybe a couple of decades, 2, 3, 4 decades ago, and almost everybody turned those back in. I think Grasshopper Bank maybe when they acquired the AAA Trust last year may have been one of the last of those banks that was in that rush decades ago to turn them back in. So these things are cyclical and my point is that banking and solid safe banking is the thing that endures a lot of people are not prepared for that.
(07:37):
They think the pendulum has swung and they're going to jump on that train for some that will last and that will be enduring if they understand how to do it. And others, sadly, mistakes will be made and I'm sure those will be headlines in the future. And so we're focused on not chasing that pendulum we're focused on, we've got guardrails of how we operate and it's all built on those banking fundamentals. And so we think that especially for folks who are doing things the way we are, there's a nearly unlimited opportunity, and the more that these entrants come in, the more that it validates how large the opportunity is.
Penny Crosman (08:19):
I want to go back to the opportunity, but to your point about safety and soundness, a lot of people or some people seem to feel there's systemic risk to letting crypto companies have bank charters. What do you think about that?
Chris Black (08:34):
Well, I think that's a valid concern for sure. We've been big proponents and both things can be true at the same time of fostering innovation and different ways of deploying banking products and services to reach folks who maybe were underserved or didn't know how, or were just candidly unhappy. In some cases, abuse might be a bit of a strong word, but not happy with the lack of innovation that their banks had shown or the lack of flexibility of their rigidity that their traditional bank had shown. And so I think there's a lot of validity to people coming in and doing it in new ways, but the playing field has to be level. I think that's the thing that concerns me the most is from a policymaking perspective. And so we encourage representatives and the trade groups and all the different people we talk to, the policy makers.
(09:37):
This has to be the case that we can't have these players who are very resourced, extremely well funded. If they're going to come in, they've got to be full banks and they've got to be held to the same exact standards that we are. And that's what our hope is, and that's what we hope to see. And if they are, competition is great and competition is the most American thing and the most capitalistic thing that one could have. It just has to be a level playing field, and it's kind of a simple point of view from my standpoint.
Penny Crosman (10:13):
Well, it seems like the national trust charter itself is kind of a limited purpose charter that it used to be this kind of sleepy fiduciary custody charter, so it was used by people who help with pension funds and things like that, and it seems like it's morphing into more than that. It's going to be about crypto custody and stablecoin custody and things like that. I mean, what would you want the regulators to do about it?
Chris Black (10:51):
I would want all of the same AML/CFT/BSA standards. So we're held to the same standard as a massive bank, the same standard as a community bank serving a small isolated community. We all have the same exact rules and standards we have to adhere to, and then the risk-based approach is applied on top of that, which for people like us and for bigger banks, there's more risk in the system. There's higher volume, higher transactions, the digital, the third party risk, all these things add complexity and there, anytime you add complexity, you add risk. It doesn't mean it's bad risk, it just means it's risk and it's extra attention and systems and processes and expertise and the standards have to remain high. So that would be my concern. No one should be absolved of those same standards just because it's a limited charter.
(12:02):
The places that they're going to access and the types of things they're wanting to do with those charters by definition contain a lot of risk, and therefore they should really have to hold to those standards. It shouldn't be a complicated or controversial topic. I don't think that any policymaker should be supportive or the banking system or really the economy supportive of bringing in vectors where there is potentially more risky business. Again, risk isn't bad. It just has to be defined and managed the right way. You can't have lower standards for that. It just has to be high standards.
Penny Crosman (12:44):
And what do you think about the so-called skinny master account that's been floated that would give some companies like these national Trust charter banks some limited ability to use the Federal Reserve payment rails?
Chris Black (13:00):
I think it falls into the same exact thought process getting, particularly when we were able to recapitalize the bank and have access and partner with the existing bank. To have this charter is a very difficult process. It shouldn't be excruciating, but it should be difficult in the sense that the standards are very high and the bar very high to operate a bank charter. One of the primary reasons, there are a couple of reasons for that. Obviously customer funds and just the overall confidence that citizens and participants have in the US banking system is critical. That's really important. But also access to specialized government programs and guardrails and safety nets and systems, FDIC deposit insurance, that's not necessarily something the skinny charter would have to utilize, but the Fed master account and all that's contained with that, these are traditionally safeguarded systems and safeguarded rails, and it's just not to be taken lightly.
(14:12):
I think the standards that all banks have to adhere to, a huge part of it is that access to the Federal Reserve directly, and there just can't be any compromises at all for anyone. I'm fine with it, follow the wisdom of the Treasury and the Federal Reserve if they're holding those standards really high. But like what we've seen with the Genius Act of bypassing the rewards instead of interest, many of us saw that coming a mile away, and so leaving loopholes in and leaving opportunities for the system to be arbitraged and exploited, that's to me, what is unacceptable. If folks want to come in on a level playing field again and compete, let's go do it. That's the most American thing. It makes us all better. So it's very simple, kind of rooted in principle, not in rules. They start making all these rules and people are going to seek to break them. So it should be some very pragmatic, thoughtful, and uncontroversial rules of level playing field and high standards.
Penny Crosman (15:25):
So you mentioned before that there is opportunity for more traditional or established banks like yours to do well in this amid this charter boom. What are some of those opportunities as you see them?
Chris Black (15:43):
I think just our business itself lends itself on its face to incredible opportunity because what we do, penny at the very embedded banking and we do embedded deposits embedded, and we're really just embarking on the next two, we call them threads. Each of these things are threads, so embedded deposits and embedded lending, embedded merchant acquiring, those are the two offerings that we're really just launching during the first half and later part of this year where we seek to build scale on those businesses. There's so much opportunity as the economy continues to digitize and partners and brands, whether they're fintechs, whether they're technology companies, or whether they're well-established brands who understand using technology to access and deepen their relationships with their existing customers through adding banking products and services. That opportunity is unchanged and it's just growing again as this normalizes and becomes more well understood by the overall economy, certainly by the regulators and policymakers. We've seen great strides over the last year, over the last year on that front, and so our opportunity today is what it was last month and the year before that and five years before that. It's just becoming more clear and focused and therefore growing.
Penny Crosman (17:15):
Can you share a few examples of the types of companies that you embed banking into and the types of services that you are embedding today.
Chris Black (17:26):
Absolutely. We try to stay away from specific names, but I can give you where we focus. So if you think about broadly, you've got commercial and consumer, and then within each of those you have verticalized and horizontal opportunities, and many people understand the concept of vertical SaaS software as a service, but that means that you're focusing on an industry specific vertical accounting law firms, restaurants, agricultural products, music, what have you, and then horizontal would be more broadly, small businesses generally, and then it's a little bit different on the consumer side, but you can do that, so you've got horizontal, broad-based consumer neobanks. You would know the names of a couple of high profile ones there, but then you've also got niche, more verticalized, but niche offerings. And so we're highly focused on the commercial side, on the small business side for a number of reasons, and then where we're heavily focused on the growth is that verticalization because if you take one of these, a restaurant opportunity for example, they're building verticalized software for restaurants to help them operate, to accept payments, to move money to operate their kitchens efficiently, inventory management personnel, the entire vertical stack that those restaurants would need to operate their business.
(19:02):
That's really hard for any bank one to compete with, but two generalized horizontal small business commercial focused bank, no matter how strong their practice areas are, they have a hard time competing with that level of expertise that verticalized software company has. And so it's our partnership in bringing the banking products and services to that verticalized platform that it really enhances. Many times their customers tell them, and we've seen this too many times to count that the worst part of their business experience is their banking relationship. It's not their banker, it's not the person. Many times the relationships naturally are really strong. Community banks are really good at that, but it's the lack of service offering and specialized knowledge and advice and expertise that that community bank can provide for them. Then on the flip side, the big banks might have some pretty good expertise to help them, but oftentimes the companies are too small for them to get the attention. It's just not worth it for those big banks. And so there's a massive void in the market, and that's where we've been focused from day one and continue to be.
Penny Crosman (20:26):
Do you have a sense of what embedded banking could look like in the future?
Chris Black (20:32):
I think it's going to be everywhere. I think. I'm not saying that the traditional bank model is going to go away, but I think it's going to have to adapt massively, and I think this is how it is going to work in the future. The non geographic focused, again, that doesn't mean that you can't, and banks can't have geographic focus. Of course they can, but it's going to be a significant focus on, because if we think about the relationships again that these really successful software companies have with their own customers, if they can bring the same strong access and user experience to the safeguarding and movement of their money and they can reduce that friction, capital and water are the same type of thing, they flow to the lowest spot, they flow to where they're most needed, and that's just how the world works and how the economies work, how the economy works.
(21:41):
And so I think what would stop that, it doesn't seem that there would be anything kind of natural that would stop that. I think the interesting thing to watch will be how do the larger institutions harmonize and how do the very geographic focused and branch focused banks try to capture their share of this dynamic? How do they adapt? How do they blend in-person branch operations with the virtual? I think there are going to be a lot of folks who struggle with that and don't do well, but then I think there's going to is a huge opportunity for those who can capture it, and I think you'll probably see a lot of correspondent banking opportunities grow and fill part of the vacuum and part of the void here to help banks who may not have the DNA to fully do this, but they do have balance sheets and they do have the ability to provide other products and services.
Penny Crosman (22:44):
Alright, well, Chris Black, thanks so much for joining us today and to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by WenWyst Jeanmary. Special thanks this week to Chris Black at Thread Bank. Read us, review us, and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.