FTT Q&A With Evolve Bank & Trust CEO Scott Stafford
By Ian Kar
Evolve Bank & Trust is one of the reasons fintech is as prevalent as it is today—the bank is one of the premier partners for a lot of banking-as-a-service companies and fintech startups. For the uninitiated, most fintech companies that offer financial products need to have a bank partner—banking-as-a-service companies have made that easier, but you still require a sponsor bank nonetheless. Evolve’s one of the banks that spearheaded this structure, working with tech platforms that support fintech companies and going direct to work with fintech startups as well.
More recently, the bank’s been in the news for its relationship with FTX, which we discussed a bit. We also got Scott’s thoughts on the OCC and regulation, how their qualifications for startups have changed over time, how startups can get better prepared to work with a bank partner, and whether it makes sense for late stage fintech companies to acquire a bank charter or not.
1. Tell us a bit about how Evolve Bank & Trust got into fintech partnerships in the first place. How were some of the first deals structured and what was the motivation for your bank?
Our dedicated Open Banking division which started almost six years ago offers a wide suite of Banking-as-a-Service or “BaaS” products that enable our FinTech partners to embed our financial and transaction services into a variety of use cases by combining banking and technology. As these fintechs have been disruptors in the financial services space, we were fortunate to partner with our fintech customers early on by working together to improve financial inclusion, increase access to credit, and maximize the user experience for consumers and businesses.
2. Let’s dive into the FTX relationship with Evolve Bank & Trust—there have been a lot of rumors about Evolve’s relationship with FTX. How close was FTX to Evolve and how did the partnership originate?
Our involvement with FTX was limited to checking accounts and debit cards for a small number of FTX customers. Those funds are safe and secure. To be clear, Evolve did not lend to FTX or their affiliates, and we do not have corporate or deposit accounts with FTX or their affiliates. Further, Evolve does not currently, nor have we at any point in the past, lend against or invest in or transact crypto. Evolve has no financial exposure resulting from FTX.
The partnership originated through a referral from an existing customer, and thorough due diligence and risk mitigation were conducted – as it is with all our fintech partners.
3. Rumors seem to be rife in the fintech and crypto ecosystems. How does a financial institution like Evolve deal with unsubstantiated gossip, like the rumors around solvency and liquidity have popped up regarding FTX’s implosion?
It is unfortunate that bad actors are spreading such false rumors. We have been transparent from the beginning about our relationship with FTX. We continue to post updates on our website and on social media. We believe it is important that the fintech industry gets their news from verified media outlets and not from internet bloggers who make baseless accusations with no facts to substantiate their false claims. Facts are critical when you are dealing with people’s finances. Rumors create unnecessary hysteria and are detrimental to the financial sector. Evolve has always been and will continue to be a well-managed, well-capitalized financial institution in good standing with our primary regulator, the Federal Reserve Bank.
4. What kind of products are popular with your non-bank partners in fintech? What about crypto—are they interested in different kinds of products? I know a lot of neobanks also use sweep networks—how do those work and how do you safeguard deposits for your neobank clients?
Our technology that powers neobank platforms, card issuance, deposit accounts, and various transaction types are among some of our most popular banking solutions. Our products are configurable in many different use cases, which allow disruptors to create new and exciting bank-like experiences that are embedded in their environment.
To facilitate the high volume of funds in our ecosystem, we created a specialized sweep program with a network of other well-known banks that offers FDIC insurance coverage up to $250,000 per qualified customer. For our sweep program, Evolve typically holds funds up to $250,000 on our balance sheet and sweeps excess funds to additional, well capitalized, and established bank(s) on our customers’ behalf. Funds are safe and available to users with 100%, same-day access.
5. What are your thoughts on banks that engage in crypto custody? Is that something that Evolve is exploring? Does engaging in crypto custody expose banks to unnecessary risks, and are there ways to mitigate against that?
At Evolve, we think that crypto is here to stay, and with that comes a new level of responsibility for all institutions involved. For us, mitigating that risk means limiting our involvement. As we have stated, Evolve does not lend against crypto; we do not offer crypto custodial services; we do not invest in crypto; and we do not trade crypto. It is simply not our specialty because we have chosen to focus our time and efforts elsewhere.
Evolve has taken a measured approach to the crypto industry and therefore does not offer any cryptocurrencies or blockchain solutions. We only support crypto use cases by offering consumers bank accounts to hold US dollars.
6. Can you shed some light into how Evolve picks and chooses different fintech and crypto partners to work with? There’s been some companies that have been failures, like FTX & BlockFi—how does the due diligence process work with startups? Is there more scrutiny or a different process for companies that engage in different kinds of activities, like crypto companies?
We have been successful because we listen to our potential customers and try to help them develop a solution that is compliant with regulations and is safe for account holders and also lets our fintech customers do what they do best – innovate. At the same time, we have to balance our need for thorough and comprehensive due diligence processes. We understand that not every fintech platform is the same, and that different companies and different payment types have unique risk profiles. We tailor our standard due diligence process to reflect the enhanced risk of certain use cases and transaction types.
7. What’s the best way for early-stage startups to “button up” before engaging with Evolve? What are some criteria around companies that get rejected from potential partnerships?
Potential startup partners need to present a clear product idea and how they anticipate working with Evolve. In addition, they need to make sure that they come to the table with the right compliance mindset and experienced personnel. We expect them to spend an equal amount of time and money on their compliance efforts as they do on their product spend. There are a few other criteria that must be met before the onboarding process can begin. We meticulously review key business components of each prospect such as IT controls, financial records, and determine if the prospective company will be viable for the next five years. When a prospect’s documentation or programs do not meet our criteria, we determine that a partnership may not be feasible at this time.
8. One thing that a ton of fintech CEOs are thinking a lot about is regulation. The OCC and the Biden administration have both indicated stronger looks into bank and non-bank relationships. What are your thoughts on clearer guidelines around these relationships, and has Evolve been doing any proactive work with the OCC to help navigate these new potential guidelines?
As a regulated financial institution, Evolve’s primary regulator is the Federal Reserve Bank and not the OCC. However, we welcome additional guidance in the space and closely monitor interagency guidelines. We believe it is incredibly important for banks and non-bank financial partners to have clarity regarding oversight expectations from the various regulatory agencies. Additional oversight will help strengthen the quality of all fintech programs. We spend a significant amount of time and money ensuring that our Open Banking division exceeds industry regulatory best practices.
9. How has Evolve Bank & Trust’s process to onboard new clients changed over the past few years, and how do you think it will evolve in the future (no pun intended haha.) Do you think that there will be changes in the process in the future (potentially higher minimums on funding, for instance)?
The fintech ecosystem is incredibly dynamic and our onboarding processes have changed with the industry and as our product offerings have expanded. Our current onboarding process is rigorous, and we will continue to evolve and follow trends in the market as the fintech world changes. We will adjust our underwriting accordingly to adhere to industry best practices and regulatory requirements. We are also very customer-centric and strive to make the onboarding process as seamless as possible.
10. A lot of late stage fintech companies are pursuing their own bank charter—how can Evolve play a role with companies that are thinking about that avenue? Is there a way to “graduate” from Evolve’s program and potentially work with companies through joint-venture structures instead?
The word “graduate” here seems to imply that having a bank charter is a natural next step for our fintechs. In actuality, we think that most of our fintechs should continue to innovate, focusing on growth and best-in-class user experiences. Banking is a highly regulated industry. Between the regulatory guidelines and the risks associated with the initial startup, it may not be a realistic goal for any company whose core mission is elsewhere. This is the beauty of Banking as a Service (BaaS) – Evolve provides ongoing support regarding regulatory and compliance matters, and the fintech handles the user experience and mission.
11. How does Evolve think about the venture investment space? With access to so many early-stage companies, does Evolve do any direct investing or work with funds
Evolve has been very strategic about the investments we have pursued thus far. We work closely with venture capital and investment firms to keep our finger on the pulse of the marketplace. At the end of the day, our focus is our partners. Whether our partners are early stage or well-established entities, the ability to collaborate with them is key in identifying trends and future opportunities.