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Scott Orn

Scott Orn, CFA

Don Muir of Arc discusses how Arc has used technology to provide banking to startups

Posted on: 05/21/2023

Don Muir

Don Muir

CEO - Arc

Don Muir of Arc - Podcast Summary

Don Muir of Arc discusses how Arc has used technology to provide banking to startups, adding savings, checking, cash management, and brokerage services, making them easy and convenient.

Don Muir of Arc - Podcast Transcript

Scott: Welcome to Founders and Friends Podcast. Before we get to our guest, special shout out to Kruze Consulting. We do all your startup accounting, startup taxes, and tons of consulting. We’re whatever comes up like financial models, budget to actuals, maybe some state registration, sales tax, VC due diligence support. Whatever comes up for your company, we’re there for you. Seven hundred and fifty clients strong now, $10 billion in capital raise by our clients, I can’t believe it, $2 billion this year. It’s been a crazy awesome year. So, check us out at and now onto our guest.
Singer: So when your troubles are mounting in tax or accounting, you go the Kruze from Founders and Friends. It’s Kruze Consulting’s Founders and Friends, with your host, Scotty Orn.
Scott: Welcome to Founders and Friends podcast with Scott Orn of Kruze Consulting. Today, my very special guest, Don Muir of Arc. Welcome, Don.
Don: Hey, Scott. Great to be here.
Scott: This is podcast number two in a pretty short timeframe, so that’s the ultimate compliment I can give Arc and you. By the way, I’m a small investor in Arc personally. Just so everyone knows that. But I wanted to have you on because since we last talked, we’ve gone through a banking crisis. Holy cow. It turns out, pretty good for Arc. Things are going well for you guys. Maybe give the quick update on Arc and just tell us how things are going?
Don: Scott, the feeling is mutual. We’re huge fans of Kruze. Look, the world, the company, myself, everything has fundamentally changed. The last time you and I chatted on this podcast, now over a year ago, at the time, we were a pure play digital lending business in a zero-interest rate environment offering revenue-based financing. Since that time, we identified a much larger pain point, which was that the same banks that were extending credit to these software companies were underserving them on the checking account, the savings account, and with high-yield products. And so, we started moving into banking. Well, interest rates started to go up, and that business became profitable, so we doubled down. We happened to be at the right place at the right time when the world imploded, and the regional banking ecosystem collapsed last month. And so, we ended up picking up hundreds of new customers from SVB and FRB and other regional banks. We’ve retained those customers today, and now we’re giving them capital in addition to high-yield checking, savings, and brokerage accounts.
Scott: It’s so amazing. So much of life is being prepared and creating your own luck sometimes, and it feels like you guys did that Arc. Well, the coolest thing is you guys, you have the lending. You’ve always had the lending. But now, you’ve built the cash management aspect of it way ahead of the crisis, so that you were ready to roll when that happened. How did that feel? Was it a jolt of adrenaline? You’re like, “This is our moment.”
Don: When I pushed the company pretty aggressively towards banking, it wasn’t a sexy thing to do at the time. A lot of investors and other market participants advised me against it, but I viewed the bank account as the center of gravity for these early-stage software companies. Through conversations on the lending side, the unique insight is that those same offline financial institutions were underserving this market. SVB was the only player that addressed this ecosystem in a meaningful way. But the big joke, as you know, is that while SVB was the bank for tech, they were not a tech bank. And so, I saw this large market opportunity to offer a world-class banking experience, and most importantly, a high-yield brokerage experience at a very low cost that’s software-driven to these businesses. When all of a sudden, the market educated itself, as the startup banking world imploded last month, it was certainly validating. And it was this, “A-ha,” moment for a lot of Arc’s investors, a lot of others in the ecosystem who didn’t necessarily agree with the direction that we were taking. Everything really surfaced and became apparent to the ecosystem, which was validating for me and my team.
Scott: That’s awesome. When you say, “Underserved,” I’m guessing, but let me try to guess what it was … A lot of the banks don’t want to pay much interest on the deposit base, because that’s a very direct cost into their lending business. And so, what we were seeing all the time was haggling, I call it, the cash management aspect of banking. A lot of haggling. A lot of back and forth. A lot of slow moving. The interest rates people were getting in their bank accounts was dramatically lagging the interest rates that were available in the market. Is that kind of what you’re saying? You saw that and basically were like, “Hey. There’s an opportunity here.”
Don: There’s really two key elements at play. One is an offline relationship-driven transactional experience that you’re getting with these large financial institutions. They are focused at serving their large Goliath customers that have billions of dollars of deposits. They want to take them public and charge them lots of fees and bring in the investment banking team. Inherently, those large FIs are underserving the $5 million ARR companies with $10 to $20 million of cash on balance sheet. They’re not providing an API-driven, a technology-driven experience like Arc is. That was the first gap. The second is exactly what you point out. These banks are stingy on passing interest income back to their customers. They’re tracking ROA, they’re tracking NIM, and their goal is to pay as little yield on deposits to their customers as possible and keep all of that interest income for themselves to reduce their lending costs. And so, JP Morgan Chase to this day is paying 0.03% on cash. And then, they’re lending that out at 5% to 10%, so their margins are wide. At Arc, we went out on day one offering 4% APY with the launch of our core checking account. Today, we’ve launched our brokerage account with Bank of New York Mellon, where customers can log in and within minutes can buy three-month T-bills, which are yielding north of 5% APY. They can sign up today at 12:00 PM Pacific, and within two hours have purchased tens of millions of dollars of T-bills that’ll result in millions of dollars of passive interest income risk-free. That would take weeks to months to do with an offline financial institution.
Scott: This trend of buying treasuries directly I think is going to be a mega-trend. Because there’s no better counterparty than the US government. They’re always paying their bills. Shut down … Fingers crossed saying that. So, I think you’re really onto something there. There’s also something you said early in the conversation, which I just want to circle back to. You’d signed up hundreds and hundreds of accounts, but you had retained a huge portion of those. I think that’s a huge validation. Because what we’re seeing is there was this flurry of starting accounts at other banks, other institutions, and then everyone boomeranging back. And so, it sounds like that bet on cash management is the hook that retained all these customers for you. And that’s different than what we’re seeing across other banking institutions. Does that sound correct?
Don: Yeah. It’s really interesting. I think about it in three phases. You have the first one to two weeks following the SVB fallout, where there was panic in the market. These businesses wanted to open up whatever was fastest and easiest and lowest friction and just get their cash out and diversify their cash and protect their cash. That was phase one. We saw a huge uptick at Arc and across the other FinTech peers. Brex and Mercury, I suspect, experienced similar uptick in volumes. Phase one was this giant spike in demand. Phase two is what you’re describing, where these businesses also were opening accounts with JP Morgan Chase and Bank of America and Citigroup. The too-big-to-fail banks. When those accounts finally open … Because again, they’re not a technology-driven experience. It takes weeks and you have to go into a physical branch and you have to get on the phone with the relationship manager …
Scott: I can answer to that.
Don: Go for it.
Scott: A lot of the Chase banking locations have been asking for the startups VC fund’s EIN letter, which is never going to happen, ever, ever, ever. There’re just all these little frictions that are happening in-branch that are just impossible to overcome for startups.
Don: That’s exactly right. And that’s one of the problems that we’re solving here. That’s one of the elements of these traditional offline FIs. Just not being fit. Not being able to keep pace with the technology businesses they’re serving. Phase two is finally these accounts were opening and you saw some of the larger companies diversifying across the too-big-to-fail banks. I’ll come back to that in a second. And then, phase three. My hypothesis is there is a long tail of opportunity here for the digital banking ecosystem. The BAM fintechs. Brex, Arc, Mercury. These digital banks are now at a new baseline of penetration in the banking ecosystem. Previously, there wasn’t as much awareness of these digital products. The customers, the ICP, they hadn’t actually experienced how superior the digital banking experience is then the offline relationship-driven approach. My suspicion is that as we educate the market, this long tail that went to JPM and Bank of America, that will be fed up with the offline transactional relationship-driven experience, that leaves a lot to be desired for these software companies that expect their vendors to move at the same pace that they do … My guess is that these businesses over time will move back to digital banks. They’ll realize it’s actually just as safe, if not safer, to bank with a startup like Arc than it is to bank with JP Morgan Chase.
Scott: We can see that happening. We have data on that. We can see that happening. I do think there’ll be some … They’ll keep an account open at a big one or something like that. And this is why I think Arc is so well-positioned. They’re always going to have their operating account at the high service digital bank that you’re talking about, but you guys, Arc specifically, offers the awesome cash management tool. So then, there’s no reason to keep the money at those giant banks. Like you said, you can just buy treasuries through Arc. You can have your money in … I forgot what the short-term bond fund it is that you have, but you have the whole kitchen sink there for them. There’s no real reason for them to have their money somewhere else. Does that make sense?
Don: That’s exactly right, Scott. The fact of the matter is Arc is not a bank, and that’s a good thing. Arc is a tech layer with an institutional-grade brokerage platform, where in a click of a button, in a five-minute onboarding flow, you can open an account with the world’s largest custodian, Bank of New York Mellon, and diversify tens of millions of dollars of bank deposits across FDIC-backed products, SIPC-backed products. And then, most interestingly, in today’s market environment, invest directly in T-bills that are yielding north of 5.1% APY at a 20-plus year high.
Scott: It’s Scott Orn of Kruze Consulting, taking a quick pit stop to give some of the groups at Kruze a big shout-out. First up is our tax team, amazing. They can do your federal and state income tax returns, R&D tax credits, sales tax help. Anything you need for state registrations, they do it all. We’re so grateful for all their awesome work. Also, our finance team is doing amazing work now. They build financial models, budget actuals, and help your company navigate the VC due diligence process. I guess our tax team does that too on the tax side, but the finance team is doing great work. Then I think everyone knows our accounting team is pretty awesome but want to give them a shout-out too. Thanks, and back to the guest. Talk about your approach to the FDIC stuff. Because we have our FDIC page, which you guys are on. Which by the way, is a validation of what you’re talking about, where you’re comparing the old school banks versus the new school banks. Because you’re there right next to Comerica and Bank of America. It’s this moment where there’s this parity happening and there’s not a separate page for digital banks.
Don: It’s cool.
Scott: They’re all there. You know what I mean? It’s kind of cool. It’s a moment of arrival.
Don: It’s a really exciting time in the digital banking ecosystem. The day of reckoning is here for the offline banks. Right?
Scott: It’s really cool.
Don: The days of being able to retain all of the interest income from the Fed are now behind us. There’s radical price transparency being driven by these digital disruptors like Brex and Arc and Mercury. That’s a really exciting notion for us here at Arc.
Scott: How do you handle the FDIC insurance? Because if you look at that page, Arc has multiplied way beyond the base $250K. How have you guys layered that up?
Don: Just to reiterate, Arc is not a bank. And in this case, in this environment, that’s a really good thing. It means we’re not beholden to opening a single bank account with a single bank for our customers. We can actually diversify our customer’s deposits through our user interface across multiple financial institutions. When you bank with Arc, you’re actually banking with dozens of the world’s largest and most secure financial institution. Your first $250K might sit in a regional bank that is fully FDIC insured. The next $2.5 million might sit in a cash-insured high-yield suite program operated by the world’s largest custodian, Bank of New York Mellon. That’s another $2.5 million of FDIC coverage. Then, we can get you $500K of SIPC coverage through a Vanguard or BlackRock money market fund that’s yielding north of 4.5% APY in this market. We have an additional $2.5 million available through a separate money market fund of FDIC coverage. And then, finally, anything residual above, call it, that $6 million of FDIC insurance, you can park directly in T-bills, which are backed by the US government and many consider to be the safest place to park your cash. More so than FDIC or SIPC.
Scott: I love it. I love it. And I love how you can explain that layer, because it makes so much sense to me. Like you said, that big excess goes into treasuries, which is really where you want to have a lot of your money anyways if you’re sitting on huge dollar amounts. Because again, best counterparty in the world is the US government, US Treasury, so that makes tons of sense.
Don: Definitely. At today’s rate, it’s a no-brainer. There’s never been a better buying opportunity for UST bills really in my professional career. When I’m meeting with customers, it’s almost no-brainer. Most of these companies are either don’t understand or appreciate the availability of these products to them. They want to move their cash to JP Morgan Chase and it’s sitting in a checking account that’s, like I said, earning less than 0.1% APY. There’s no need to keep 100% percent of your cash on JP Morgan’s balance sheet when you can park it in UST bills. Or in a Vanguard money market fund that has SIPC coverage to earn north north of 4.5%.
Scott: I absolutely love it. I’m so excited for you guys, because you had that foresight to build this ahead of time. And that makes all the difference. So, I apologize. I’m a little crunched for time here, but I wanted to get this update out, because it has been so exciting post-SVB. Can you tell everyone how to reach out to Arc? How to reach out to you personally, if they’re interested and just wanted to learn more?
Don: Definitely. You can follow us on Twitter, @join_arc. We post most of our content on our LinkedIn page, so definitely follow us on LinkedIn. Drop me a line over LinkedIn or over Twitter and I’ll respond within an hour personally. We’re looking to help startups grow. We want to help you efficiently deploy your idle cash to extend runway. Rather than riffing your AE, you can get $150 plus K of passive interest income just by parking your remaining cash in a US treasury bill. There are ways to extend runway in this market environment in very trying times for our ecosystem that doesn’t involve cutting costs, but just by efficiently deploying capital.
Scott: Just do the math on that. $10 million in cash, 5% interest. That’s $500,000 of extra runway you get during the year. It’s pretty unbelievable.
Don: It’s been a game-changer for a lot of our customers, and I’m just fortunate that we could be in a position to help so many companies in a really challenging time for the startup economy.
Scott: I love it. Give my best to the Arc team. I’m just super excited for you. Great job creating your own luck and being … What does Wayne Gretzky say? “Skate to where the puck’s going, not where it is right now.” You guys successfully did that.
Don: Thanks, Scott. Look, I really appreciate it. I couldn’t have done it without my extraordinary team. This is a team sport, and I am one small element of a much larger narrative here.
Scott: I love it. Thanks, Don. Great talking to you, man.
Don: Bye, Scott. Thank you.
Singer: So, when your troubles are mounting in tax or accounting, you go the Kruze from Founders and Friends. It’s Kruze Consulting’s Founders and Friends, with your host, Scotty Orn.

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