What will 2020 bring in the startup banking world?

Scott Orn & Healy Jones of Kruze Consulting - Podcast Transcript

Singer:	(singing). It’s Kruze Consulting. Founders and Friends with your host, Scotty Orn.
Scott:	Hey, it’s Scott Orn at Kruze Consulting with Healy Jones, the manager FP&A at Kruze.
Healy:	Hey. How are you doing, Scott?
Scott:	He’s extremely smart and more handsome than you think a head of FP&A is. So, we’re very lucky there.
Healy:	I should think that FP&A heads are generally known as being pretty dapper.
Scott:	You are. You’re dapper. You’re wearing a purple shirt today. So today we’re going to cover startup banks and what’s happening in the marketplace there, and it’s been a pretty exciting time to be a startup choosing your bank. Because there’s actually a lot of great options now.
Healy:	Some serious innovation happening with both incumbents and new players in the bank world for funded startups. But first of all, Scott, why does it even matter, if you’re a funded startup, who your bank is?
Scott:	It matters because, for a couple things, obviously why banks have mattered for a thousand years or however long banks have been around, since the [inaudible] family. It matters that you have somewhere reliable to hold your cash. And make it easy to access, easy to pay people, easy to lever, all that kind of stuff.
Healy:	Okay, so First Third National Bank of Sacramento, something, something, why is that not reliable … ?
Scott:	Perfectly fine if you’re not doing a lot of transaction volume, if you have a small business. But for startups, most startups are actually paying a lot of international contractors.
Healy:	Okay.
Scott:	They’re setting up credit cards.
Healy:	True.
Scott:	They’re setting up bill pay.
Healy:	Okay.
Scott:	They are hiring a lot of people, so they’re spending a lot of money. And like a startup executive actually are very focused consumers who actually want to see data their way. That’s one of the reasons we’ve been successful in FP&A at Kruze, is that we know how to show charts and do everything.
Healy:	The visualization matters a lot. Yeah.
Scott:	It really matters. Right? And so, all of these banks are kind of competing for the same type of startup founder, and some are doing the customer service really well, some are doing the financial products really well, some are doing the interface and information really well. No one’s really kind of put it all together in the supremely unbeatable package, but I think in 2020 we’re going to see that.
Healy:	All right. So, you think it’s about to happen. So, all right, 2019 wrap up, startup bank. What’s going on? Who are the players that you need to care about and why?
Scott:	The three lead horsemen are SVB, who’s old faithful, been around for a very long time, dominant market share. We did market share early in the year and I think they’re at 75% market share.
Healy:	They’re super connected in Silicon Valley.
Scott:	Super connected, very strong, great product portfolio, do all the lending in addition to online banking, all that kind of stuff. Number two, traditionally, is First Republic.
Healy:	Right.
Scott:	And what First Republic does really, really well, is they have amazing customer service.
Healy:	It is pretty off the charts.
Scott:	It’s crazy. We actually switched our banking to First Republic and it’s like I noticed right away. It’s amazing. Now historically, First Republic had been kind of weakened online.
Healy:	Okay.
Scott:	Which bugs accountants, because we are constantly logging in, pulling, standing, [crosstalk 00:00:03:01]-
Healy:	And then seeing the data, right?
Scott:	… Transactions, looking at check, yeah. They have made some major investments there. It’s still not world-class, but it’s, I would call it, it’s fine. It’s not great, but it’s fine.
Healy:	All right, so we’ve got SVB who’s just the most connected bank in the world and gets startups. You’ve got First Republic, amazing customer service, dramatically improving online, understand startups pretty well. Who is this third player?
Scott:	The third player is Mercury, which is a new online bank. So, think-
Healy:	All right. So, I barely know about this one. You did a podcast interview with the founder recently. Talk about it. What is this?
Scott:	I am. I did a podcast with him on … I’m kind of like, to relate to the music business, I’m the guy who sees the new coolest band first and starts raving about it because I really appreciate all these little things they do. Mercury-
Healy:	I mean, Scott, in the startup accounting world, you are-
Scott:	Yes.
Healy:	… The hottest guy, right? Look at you. Look at you.
Scott:	So, mercury does a couple things. They have a super clean bank feed integration with QuickBooks. So nice. And this is super boring for everybody else, but for all accounts out there, they’re nodding vigorously, because that means that you can categorize all the transactions, get into QuickBooks, do the monthly accounting and reconciliation super-fast. And when you’re like us and all your clients are on a fixed fee, which clients love, that’s why we do it.
Healy:	Course.
Scott:	It actually makes you more efficient and can make you more profitable. So that efficiency is, that’s number one, two, and three reasons for loving it.
Healy:	Okay. So, Mercury Bank gets startup accountants.
Scott:	They do, but they also just get data integrity and ease of access and things like that. Second of all, they have an amazing dashboard, which actually gives the founder some information on spending and things like that. When you look at that dashboard, it’s kind of, almost like a BI tool. It’s designed very, very well.
Healy:	How did they come up with that, I wonder?
Scott:	I don’t know. I think they’re just smart and they ask the right people what they want to see. And frankly, probably not burdened by a lot of historical-
Healy:	No legacy, whatever? Sure.
Scott:	Yeah. Legacy stuff. First Republic was probably heavily burdened. SVB, to their credit, made a lot of investments. They acquired a couple startups and things like that three or four years ago to make their online presence a lot better. And so, if I were to rank the three, the online presence, Mercury number one, SVB number two, First Republic number three.
Healy:	Okay.
Scott:	But again, First Republic is coming out so far ahead on customer service-
Healy:	On service, yeah.
Scott:	… That I love them. There’s also a fourth that I like to throw out there, which is Bridge Bank, which doesn’t get a lot of press, but they’re actually a really aggressive lender. They’re really smart underwriters-
Healy:	For startups?
Scott:	… Of credit, for startups.
Healy:	Which is hard. Yeah.
Scott:	And venture debt. Very hard. SVB is probably the dominant in venture debt for startups from a bank.
Healy:	Okay.
Scott:	But Bridge Bank always seems to come up with a creative term sheet for kind of getting in there and winning the deal. Or something that SVB feels like they can do.
Healy:	Right.
Scott:	Somehow, Bridge Bank makes it happen. And so, I would actually call it a power four instead of just three. But Bridge Bank is a really strong lender.
Healy:	So, venture debt is a force multiplier for the right type of venture funded company for sure. Does First Republic have venture debt? Do you know? Or does Mercury?
Scott:	First Republic just has historically partnered with the big venture lending providers. So, they’re best friends at WTI in [inaudible] point, who are fun lenders, which I really like, because they let you use the money. They don’t have a lot of covenants that kind of … Sometimes covenants can be used by a bank as a get out of jail free card.
Healy:	Oh, okay.
Scott:	So, you’ve got to be careful, but that’s First Republic’s and it’s a perfectly fine solution. They’re not doing it with their own balance sheet.
Healy:	Okay.
Scott:	Mercury is too young. Mercury is only, God, I think the company is only 18 months old and probably had been available for six months.
Healy:	Okay.
Scott:	So, they don’t have a lending product yet. But SVB is very strong there. And again, SVB is probably doing the majority of the credit in the startup ecosystem.
Healy:	For sure, yeah. Great market share.
Scott:	Yeah. And they have the full package. They do everything. And they have a lot of relationship people too, which is really powerful. So, if I were to rank, I would actually say First Republic number one right now. They are just … You pick up the phone or you send an email, you’re getting a response in an hour.
Healy:	Amazing.
Scott:	It’s incredible.
Healy:	Yeah.
Scott:	SVB, number two, very strong.
Healy:	Mm-hmm (affirmative). Full service.
Scott:	Not going anywhere. Full service.
Healy:	Gets startups.
Scott:	I do think they’ve gotten to such a critical mass that they probably need to do some improvements on their customer service and things like that, like rededicating themselves to that.
Healy:	Okay.
Scott:	And then Mercury is an awesome online provider. Something super easy to set up-
Healy:	Might try some innovation, kind of like we saw with credit cards, right?
Scott:	Oh. I actually think Mercury is probably going to, pardon my French, but scare the shit out of First Republic and SVB. And I bet you those banks are putting a lot of money into online presence.
Healy:	Nice.
Scott:	It won’t show up for another six to nine months. It reminds me when Zero came into the market, and QuickBooks, Zero was like a full cloud accounting solution, and QuickBooks was QuickBooks desktop. It had a little fledgling QuickBooks online.
Healy:	Kind of sleepy there, a little bit, right? Yeah.
Scott:	It’s very sleepy, and Zero scared the you know what out of QuickBooks, and two years later QuickBooks was dominant and kicking ass and Quick was on it. That is what I think is going to happen in this marketplace.
Healy:	Okay, cool. Great prediction for 2020, and it is a good time for startups who want banks, as long as you pick the right one.
Scott:	It’s a good time to be a bank, too. They have huge cash balances because the startups have been really successful raising money. So, the banks are living the good life right now. Not a lot of credit defaults.
Healy:	Right.
Scott:	Big cash balances to make interest on those deposits. And one other group we should talk about is Brex Cash real fast.
Healy:	Oh sure. Yeah, let’s [crosstalk 00:08:11].
Scott:	Because they’re kind of trying to be a pseudo bank account.
Healy:	That is really interesting, right? What’s the strategy?
Scott:	That’s real innovation. Well, I think their strategy is like, “Hey, we already got you as a credit card client. You’re already using your credit card to pay a lot of stuff.” For people who want to pay via ACH or Wire or things like that, or TransferWise, PayPal, yada, yada, yada.
Healy:	It’s a really low fee with that stuff. [crosstalk 00:08:31].
Scott:	Brex Cash is basically free, which is crazy. So, they’re making money on the spread, right?
Healy:	Okay.
Scott:	On the spread of deposits and what they earn.
Healy:	Is that the strategy there?
Scott:	Oh, I think the strategy is they’re trying to buy as much market share as possible. They can make money and have a defensible revenue stream there, but I think they just want to be the all-encompassing payment company for startups.
Healy:	Makes sense. Okay.
Scott:	Which would be an incredibly huge market. Of course, things often start with startups and they go out to kind of the general public or small businesses.
Healy:	That is kind of a Silicon Valley sort of playbook right now. Right?
Scott:	Oh, for sure.
Healy:	Start serving startups and then go out to the real world.
Scott:	Look at Gusto, look at Rippling, look at Expensify, look at Bill.com. All these guys have done it. So actually, now that I’m rejiggering my list around-
Healy:	oh, all right.
Scott:	… Put Brex Cash number five, but there’s five viable players.
Healy:	Okay. But Brex Cash is not full service yet in terms of your banking.
Scott:	Not full service, but they’re going to take some of those early SVB clients or early First Republic clients.
Healy:	And does that mean you’re unbanked as a startup? What does that mean?
Scott:	You kind of are, but your cash is … There’s this, some super subtleties around what, Brex is, I believe it’s FTI insured, but it’s insured through a different provision in FTIC.
Healy:	Really?
Scott:	I have to check on that. But I’m positive it’s insured by one of the federal agencies.
Healy:	I knew that, okay.
Scott:	It’s just, it’s a little weird, right?
Healy:	Right?
Scott:	But I’m not a …
Healy:	But you probably still need a traditional bank account, right?
Scott:	Probably. If you ask Brex, that’s not what they’re going to say. Brex Cash is fine. You’re good.
Healy:	All right.
Scott:	But I would personally have a Brex Cash account and a normal bank account, personally, but that’s my two cents.
Healy:	There you go.
Scott:	So to recap, First Republic, número uno, best support on earth. I would actually, First Republic has some of the best support of any corporate entity I’ve ever interacted with. It is that good.
Healy:	Yeah, they’re pretty awesome.
Scott:	SVB, doing great. Probably can improve their support a little bit better, but they have the full product suite. Mercury, new, sexy, cool. Easy to use. Great data feed into QuickBooks.
Healy:	Right.
Scott:	Bridge Bank. Most creative lenders, I would say. Very smart. And then Brex Cash, just came out a couple of months ago.
Healy:	Just a wildcard. Wildcard.
Scott:	We’ll see what … Yeah. Wildcard is a great way of saying that.
Healy:	Yeah. Fun. All right, it’s a fun time.
Scott:	Fun for startup banks.
Healy:	All right. Thanks, Scott.
Scott:	Bye bye.
Singer:	(singing). It’s Kruze Consulting Founders and Friends with your host Scotty Orn.

What will 2020 bring in the startup banking world?

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