March 12, 2024
Arguably the most far-reaching innovations underway in finance today are the ones that are hardest to see — the assembling of new digital infrastructure. New payments rails are being laid down. Banks are migrating to cloud computing and redesigning their IT systems, data architecture and process flows. And B2B connections are being entirely reimagined.
Today’s show looks at a key player in creating this new landscape. My guests are Itai Damti, the CEO of Unit, and Unit’s general counsel, Alex Acree, sharing their vision for what they call fintech 2.0.
Unit provides a technology layer that enables banks and fintech firms to connect to do things together. In our conversation, Itai argues that fintech 1.0 arose out of the financial crisis and mainly took the form of a B2C model that, in his view, is over as a top arena of innovation. He thinks the future lies, instead, in partnerships between banks and fintechs, enabled by technology that removes friction and, importantly, that focuses on regulatory compliance — getting it right, and making it easy by engineering it organically into everything that needs to be done.
Regular listeners know that I think banks and fintechs, broadly speaking, need each other, because they both have strengths and weaknesses, and these are highly complementary. For most, in fact, their biggest weakness is the very thing that the other type of firm can bring to them. Small and medium size financial institutions find it very hard to provide customers with world-class technology, especially in areas like user experience. Fintechs, being born digital, find that pretty easy, but struggle to create what banks have in terms of customer base and low-cost, stable funding. Plus, of course, most of them need to connect to the payments system, which they can’t do without a bank. Small banks risk competitive extinction if they can’t innovate, while fintechs risk stalling out if they can’t reach critical mass in market growth and affordable funding models. Business relationships that harness the best of both worlds for their customers can be a match made in heaven, driving everything from healthy market competition to financial inclusion.
Making that connection, however, is easier said than done, because most smaller banks also have aging “back office” technology that makes it cumbersome and costly to deploy partnerships and deploy digital age vendors.
That’s where companies like Unit come in, and Alex and Itai offer us a snapshot of what this transformation looks like. They explain the origin of Unit, why they designed it as a “technology operating system” for bank/fintech partnerships, and the structure of the legal relationship. They also talk extensively about their strategy of engineering regulatory compliance into everything. They note that their first two hires had compliance backgrounds (which is not the norm for fintechs!) I am someone who spent much of my career trying to help banks improve regulatory compliance performance and I know first hand how hard that is. it’s tantalizing to think about the possibilities that digital technology could usher in a new era where companies get it right, easily, because the machines are building it into every process. The businesses will benefit and more importantly, so will their customers.
Before we listen to Itai and Alex, let me share a side note. We recorded this session at a roundtable that occurs each winter in California. One of the regular participants is a retired deputy comptroller of the currency, and this year, he brought his family, including two little grandchildren. The girls’ parents were evidently teaching them about spending, saving and sharing, through a project that involved
the children giving away stickers. At most of the meals, these two little girls circulated among the tables distributing stickers depicting colorful shapes and cartoon creatures. The adults of course thanked them and duly donned these little decorations. The result was that, throughout the conference, most of the participants were wearing a changing array of stickers – stars, octopi, unicorns, bunnies, and such.
The meeting attendees represented the whole ecosystem of finance – banks, fintechs, regulators, consumer advocates, lawyers, economists – you name it. We were debating the weighty challenges that lie ahead for finance, coming from very different and often opposing perspectives. And yet here we were, all emblazoned with these little badges connecting us all in a funny, good hearted little community.
It struck me as a cheerful metaphor for what we’re going to need, in order to figure out the best way forward. We need to be building lots of good will, and common ground.
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