Legal Ops and RegTech Lessons with Faraz Rana, former CLO of Bread

In this episode of FinTech Layer Cake, host Reggie Young chats with Faraz Rana, founder and CEO of Affinity.

Faraz shares his journey from being an M&A lawyer to becoming the Chief Legal Officer at Bread and eventually founding Affinity. He discusses the challenges of transitioning from big law to a startup environment, the nuances of the BNPL (Buy Now Pay Later) space, and the importance of compliance in FinTech. Faraz also dives into the concept of compliance co-pilots using generative AI and the future of RegTech.

Transcript

Reggie Young:

Welcome back to Fintech Layer Cake where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, senior product lawyer at Lithic. On today's episode, I chat with Faraz Rana. Faraz is the founder and CEO of Affinity, a modern compliance platform built for fintechs and banks. You can find out more about them at itsaffinity.com.

Previously, he spent nearly seven years as the chief legal officer and founding team member of Bread, helping build the company from inception to $0.5 billion exit. Before becoming an in-house lawyer and founder, Faraz worked as an M&A big law lawyer for almost seven years. We chat about how Faraz ended up as CLO of Bread, how he ensured he and his team could keep up with Bread's growth, what Bread's acquisition was like, and much more. We also dig into the company he's founded, Affinity, and what types of regtech companies will survive.

Fintech Layer Cake is powered by the card issuing platform, Lithic. We provide payments infrastructure that enables companies to offer their own card programs. Nothing in this podcast should be construed as legal or financial advice.

Faraz, thanks so much for coming on the podcast. Super excited for today's episode. You and I have chatted many times. You're familiar with what you're building right now in the regtech space, which is a very hot space, which I want to talk about in the podcast at some point. But also, you’ve had incredible experience with Bread, years there as an M&A lawyer before that, and big law, you've got your chops. I love especially seeing folks that are not just pure lawyers, but also entrepreneur types, problem solvers, which you definitely are. We'll get into that when we're chatting about Affinity and your time at Bread as well.

I would love to start talking about your transition. You were at a big law firm doing M&A. In case listeners aren't familiar, big law M&A is like the Grinder of corporate transactional business law. That's where you go for the hardest, best experience. You had, I want to say, six and a half or so years of experience there, and then you transitioned in-house, ultimately ended up as the chief legal officer of Bread. So I'd love to start chatting about that. How was that move from big law M&A corporate lawyer to CLO at Bread?

Faraz Rana:

Yeah, it was quite a change. First of all, happy to be here. Thank you for having me on. Big fan of everything you're putting out, especially the last few weeks. You've had some high-profile people, so I'm flattered to be in the company of all your guests.

Yeah, my transition from big law to Bread was definitely not a linear one. It wasn't like I had a job lined up when I left Weil and was a chief legal officer. At a start-up, it was very much a disjointed, kind of jumped out of the plane with no parachute onto the ground and was in this terrain for a few months, figuring my way around the start-up scene. This is summer of 2014. I was an M&A lawyer, as you mentioned. Liked working in big law, liked the idea of building a company more than being a practicing lawyer. And I kind of found myself on the weekends working on start-up ideas. And there was one idea that I actually took to an MVP stage and had the product live and worked with a designer on it. The last few months at Weil, that's the thing I was working on. And that really got me excited. It was a marketplace for creatives to meet each other and make money along the way.

That idea didn't obviously take off because I wasn't working full-time on it, but I realized that's what really got me excited. And being an M&A lawyer, you see all these private equity funds that we were representing buying companies. And ultimately, what I was interested in was a company that was being acquired. I would read their financial statements and their business models and all that.

I left the law firm without any plan in mind, which is a very unusual thing for big law associates to do. Usually, you end up at a bank or you end up at a fund. I think a lot of people were surprised. I don't come from money, so it wasn't like a safety net or anything. I was just like, all right, I'm just going to go out on my own and check out the start-up scene in New York. It was the summer of 2014. I remember the World Cup, the Soccer World Cup was happening. So I would go talk to start-up founders, and there were only like 10 start-ups in New York at the time, like in between soccer matches and ended up interning. And I call it an internship because I wasn't getting paid at an early-stage start-up and was working at a WeWork office with people half my age on partnerships in BD for a 10-person start-up.

That was a truly, truly humbling experience. You think start-ups are so glamorous and it's going to be so cool, and then all of a sudden, I'm in this WeWork office, a former M&A lawyer, just getting paid nothing to work. And I did that for three months, ended up being six months. And then my eighth month, someone who I knew from college actually emailed me and said, hey, there are these two guys that are building a fintech company, and coincidentally, they want someone with a legal background to be part of the founding team. Would you talk to them?

So that's how I met Josh and Daniel. We spoke for a couple of months. I still remember the first time Josh called me. He said, I got your resume from somewhere. What kind of fintech law experience do you have? And I said, I have absolutely none, to be honest with you. I used to be an M&A lawyer, and it was the shortest interview ever. I remember I picked up the call as I was entering Union Square Park, and I just entered the park before the call was over. It barely made it inside the park. It was the shortest, shortest call ever. And then he called me back a month later and said, hey, would you come in and talk to us? And so we talked for a couple of months before I made the move. Anyways, that's a long way of saying, not a linear path, just went from wanting to build a company nine months later to ending up at Bread.

Reggie Young:

Yeah, I love that. That is very unusual to just leave big law, nothing really lined up, go work for a start-up as an intern, unpaid. Amazing leap of faith. I'm always fascinated by the transition between law firm and in-house because it's different. You can kind of look at it and be like, oh, the laws are the same, the laws didn't change, how could your work be different? But actually, the substance of what you're doing day to day changes a lot. I'd be kind of curious, what were some of the biggest differences that you felt, or looking back, the biggest kind of, I don't know, approaches to work, scope, whatever, that you noticed or felt in that move from big law to in-house?

Faraz Rana:

Yeah, I mean, I would say the biggest night and day difference was you're going from an incredibly structured environment to the most unstructured environment possible. My first day at Bread was like, I walked in with my laptop and it was like I had a desk, but the next guy who joined had to build his own desk. So it was like, obviously, no HR department. It was just like, open up your laptop, blank screen, okay, what do I do now? That's a complete opposite of a law firm, for folks that worked at a law firm. You have three layers of review. You know exactly what you're doing. There are people who are protecting you and telling you what to do.

So that was the biggest thing. And I think the thing that I learned from that whole experience, especially in the beginning, was I realized I have to write my own job description. I kind of have a mandate from the founders of like, let's figure out our bank partnership model. Can you go find us a bank and execute on it? But then I have to figure out what it takes to get from zero to that model. And then more importantly, I have to figure out the eight other things I should be working on. So writing my own job description was probably the biggest, biggest kind of hurdle that I had to get over, which I'd never had to do anything remotely similar in my life.

Reggie Young:

That's funny, I love that because it's something I've been thinking about a bit at Lithic as we're continuing to grow. It's like, oh, the things I need to focus on are changing. And if I'm not conscious of that, I'm not conscious of creating and making sure that I have the right scope. At a start-up, you can easily get swept away as a lawyer. There's a million things that you can help and do and whatnot.

Let's chat about, so your title at Bread, CLO, chief legal officer, not something I always see. You definitely do see it. Sometimes you'll see head of legal. Sometimes you'll see general counsel. Maybe for listeners who aren't familiar, what exactly is a CLO? What's your typical function at a company?

Faraz Rana:

I recently had to look this up myself. What was my job as a CLO? I think there's a subtle nuance between a general counsel and a chief legal officer. I think the idea is a general counsel helps figure out the legal risks of the company and maybe stops short of making a decision on risk per se for the company, whereas I think a chief legal officer takes it a step further. It's like, okay, you figure out the legal risk of the company, but you also make a decision on what the company should do given that legal risk. So you're more facing the strategy on the business objectives of the company. So that's thing number one.

Thing number two, I think it's aligning with the rest of the C-suite, especially the CEO and the CFO, on what the legal objectives should be of the company and how they align with the business objectives. So it's kind of like shaping the trajectory of the company given a legal consideration. I think that's the right answer. I think that's what I did as well, but I think that the nuances are subtle. There are a lot of general counsels who do that anyways, and I think it's kind of titles.

Reggie Young:

Right, especially as when you're very, very early as you were at Bread, it's going to be in flux a lot. But I think that generally aligns with what I've come to understand. That also dovetails nicely to your point about helping kind of inform some of the risk decisions and make some of those risk decisions given the legal considerations. Bread was in the BNPL space, which is, was and continues to be a funny, gray regulatory space. Particularly interesting place to be a lawyer because you're in this space where the laws aren't necessarily clear, regulators may have different views.

Given what administration is in place, things can change on a monthly basis. If folks are curious to get into more, check out the Fintech Layer Cake episode I did with Cushion co-founder, Paul Kesserwani, we did a deep dive on BNPL and the current gray state of it. But that puts you in a really interesting position as a CLO to advise on this thing that is very new, operating in a gray space where there's not a lot of clear rules. How did you deal with that? I guess, two questions. One, how did it come up for you? And then two, how did you deal with navigating that gray space?

Faraz Rana:

It came up almost every day. Nothing we were doing had ever been done before. BNPL was a new product at the time. By the way, if you don't mind, I'll give my 30-second spiel on what BNPL I think is. I get this question from friends and family a lot. It's like, you worked at this company, how is it different than a credit card? Why don't people just use credit cards? And my answer is always the same. It's like BNPL is the online digital equivalent of financing, which has existed for decades and decades. Financing is not a new concept. Purchase finance is not a new concept. BNPL speaks the language of the digital world, like e-commerce merchants. And ultimately, it's a marketing tool for e-commerce merchants to help them sell more things. Hopefully, that's a helpful context that people already know that. I'm sorry I've had to explain this to a lot of people.

Reggie Young:

No, it's a good reminder. I think that analogy gets thrown out so much. Oh, this is just like a simplified credit card. It's like, sort of, but it's more, to your point, kind of the real unlock is it helps merchants. And there's some kind of different behaviors that you see between a traditional credit card and BNPL. I generally agree there's some important differences.

Faraz Rana:

Yeah. The kind of gray area, I mean, yeah, it was all the time. One of the first examples is to issue credit or to open up any kind of financial transaction, the customer, you're required to collect on the Patriot Act name, date of birth, address, and full nine social security number. And that Patriot Act is very clear on that. One of the first questions I got from the product team was like, is there a way to collect the last four only?

And so I read the Patriot Act. I was like, all right, it's very clear on the full nine, but there's gotta be more to it than that. So I did something that I hadn't done in practicing laws at Weil, Gotshal for seven years and maybe even most of law school, which I actually read the law. I actually went back and actually read the law. I read the regulation. I read the commentary to the regulation and found an exception for credit cards. And then I read when they were debating the exception, and the idea was like, look, we definitely want to get this information, but no one's going to give their full nine over the phone to a credit card company, let's make an exception.

So I took that exception and then wrote a whole memo on it about how that should apply to the BNPL market, given that the internet of today is like the credit card application over the phone of yesterday. Took that to our bank partner, convinced them that this is a way to do it. And we took a little bit of a risk. So for me, the gray area was like, all right, do your homework, but then make a judgment call and make a decision on it, and then I think assert your decision.

And I think that is one of the big differences between lawyers who practice in a law firm environment where you are trained to give the best possible information and maybe even give advice, but you are not supposed to make the decision for the client. And when you go to a start-up, that is all you're doing. You have to make decisions every day. And a lot of those decisions are going to be based on gray areas. As long as you've done your homework, you gotta make a judgment call one way or the other.

Reggie Young:

Yeah, I love it. I know the exact exception you're talking about. I've dug into those regs and commentary before, too. It's interesting. Folks, if they want to lean into that exception, you should go talk to a lawyer because there's some nuances. There's been some kind of more recent- but I also love that example because you talk about, okay, you took it to the bank, which I think is a really, really important thing for folks in fintech to hear. You can't be like, hey, here's this novel thing. We're just going to run with it. A good fintech partner kind of says, hey, here's this thing, we've researched it, we have a legal memo, now let's talk about this to make sure you're comfortable and make sure we're all on the same page and seeing this the same way. I think that's a super important part of the process when you're kind of operating in that gray space and partnering with banks.

Faraz Rana:

Yeah. We were working with the Cross River Bank at the time, which is a great partner bank. They were also just starting their program. I think this was like, we were all figuring it out together. And I think part of our partnership developed in us just kind of educating each other. It's like, I think we should do this. And they're like, ah, it seems kind of right, let's do it and see what happens.

Reggie Young:

So Bread obviously grew a lot while you were there. I want to say you were there for just under seven years, if I'm remembering correctly.

Faraz Rana:

It was six years and seven months, I think it was like, start to finish.

Reggie Young:

So I imagine the legal team, while you were there, scaled, grew functions, needs, expanded. How did the company's legal needs change as that scale happened? Because I imagine the things you're kind of focused on was like maybe just you are going to be very different than when there's other lawyers and other folks that you may be overseeing. How did Bread's legal needs change as the company scaled? Did you notice any meaningful shift in the substance, the time allocation, your process or anything else that comes to mind?

Faraz Rana:

Yeah, I mean, in the beginning, it was a legal team of me. I was a chief legal officer of my own department.

Reggie Young:

Not an intern anymore.

Faraz Rana:

Not an intern anymore. I got a promotion.  stole this joke from a friend of mine. I heard him say this on the phone because people would often, when we were talking to large banks, would be like, oh, how big is your legal team? And I said, five foot seven, about 155 pounds. Half the time I would get a chuckle and the other half just like crickets in silence. I was like, all right, this joke only lands 50% of the time.

But yeah, it was a legal team of me. In the beginning, I think that's like zero to one. So for me, a lot of it was like, I was operating in a very foggy environment where we're just sort of figuring things out as we go along. And for me, creating some clarity out of that fog was my job. So I would sit down and write processes that weren't really going to be used until a couple of years from now. But I was feeling better that we're creating some kind of structure and clarity out of it.

As we kind of developed and hired a team, I think my job shifted. And this is part of that rewriting your job description thing of every six months taking a step back. And I always tell lawyers who are operating in a start-up, it's like the start-up is moving very, very fast. Unless you zoom your camera out and take a look at the big picture and then rewrite your job description, it's going to move on faster than you, and it's going to move on without you. So you have to go and take a step back and be like, am I thinking about the right things? Am I working on the right things? Am I allocating my time properly? And then am I also thinking nine months ahead to the next thing around the corner?

I try to do that as much as possible and every six months take a step back. I think, eventually, as my team, I hired great people, and they began to execute. My job became obviously managing them, relationship building with the rest of the company, but also kind of setting an operating system for the team itself. Like, how are we going to function? What is our purpose here at Bread? What is our operating system here?

For me, a lot of that operating system- yeah, the thing I kind of really latched onto was telling everyone on the team, we're a brand here. Pretend like we're a small company, and everyone, all the other departments are like customers of our small company. And every day you walk into work, you have your own individual brand that you should walk around with. And then we have a team brand, a company brand. And what you should be always thinking about is your brand. What is your brand going to be? Are you going to be the person who shows up at the meeting prepared? I didn't dictate what we should do. Just think about your brand and what you want it to be. And then every day walk in with the intention of perpetuating that brand.

Our team brand was like, whenever we walk into a meeting, we want to be prepared. We want to be thoughtful about the answers we give to people. We don't want to be the folks who just say no without solutions. We want to know the product inside out. We want to know the company's operations inside out. We want to build good relationships with our colleagues. Those were the kind of qualities that we as a team adopted. And then I told every individual member of the team, it’s like, this is not your last job. You're going to go somewhere else after this, and you want people to remember you as X, Y, and Z. Whatever X, Y, and Z is, just walk in every day with that intention and that mindfulness of making sure you're perpetuating that.

Reggie Young:

Yeah, I love that. The concept of an operating system is something that I've been thinking about a lot more. I know there's Matt Janiga, a previous GC at Lithic. He did a great job of here's how we're going to handle information flow. Here's how we're going to approach other teams, to your point of like, yeah, just being intentional about how you're showing up to meetings because it was a very long way. And I think the more I see the company scale, the more I realize how important and crucial having those kind of operating system cornerstones are.

Were there any particularly challenging or uncertain moments or situations that you had to navigate at Bread? I imagine you've got the regulatory gray space. You’ve got the inevitable kind of fire drills that happen at start-ups. Are there any particular ones that come to mind? How did you navigate and unblock them?

Faraz Rana:

I would say, if I think back on my time at Bread, the most challenging times were the beginning and the end, the bookends. The beginning for me was very difficult, the zero to one. And I think the zero to one, I found now that I'm working on my own start-up, it elicits a very binary reaction. People love it or they hate it. And I think the people who love it are just used to love thriving in unstructured environments. They like the blank slate. They like creating structure out of nothing. And for me, that's a little difficult because I'm a lawyer and I operate in a very structured environment.

So the first couple of years were a little difficult. I was like, what should I be working on? What is my job? Where are we moving as a company? And I didn't have answers because nobody had answers. We're all figuring it out as we go along. So that was difficult. And I think I really enjoyed the second half of the company's life cycle a bit more when we had people. They're structured. We had a bigger office. I kind of knew what my function was, and it was to align the legal strategy with the broader strategy of the company.

The most challenging and probably the most exciting part of my time at Bread was navigating an acquisition through COVID. I think that was something that I knew going into it would just be a lot of work, but also like the screenplays of movies that nobody will ever watch. There's a screenplay somewhere of the M&A lawyer who advises other companies and gets to then sell his own company six years later. Nobody cares about that, but I did. For me, that was very cool as a former M&A lawyer to sign an engagement letter to hire a law firm to sell a company that I've been working on for seven years. So it was exhilarating, but we started the kind of process pre-COVID. It entered into COVID in this weird phase of like it broke down. That summer was just a summer of uncertainty for us. And then it picked back up in August.

And I remember Labor Day weekend is when I got the green light. And then after that, it was just go, go, go. And for two months, for me, it was like, wake up in the morning, in front of my laptop at eight o'clock in the morning till midnight, 16 hours a day. And it was running the company through diligence. They were very heavy. The diligence process was very heavy on legal and compliance. So answering questions, not being able to get resources because we hadn't told a lot of people, talking to the CEO every day, the CFO and kind of everything.

So that was very challenging. It was a lot of fun. The worst part about all of that was when we finally signed the acquisition agreement and we announced it eight in the morning and I'd been up for five nights. It was on a computer. It was like you're all sitting in front of a computer and I was barely awake. Just turn on the laptop for two minutes to hear Josh tell everyone we got acquired and didn't get to celebrate that at the company, didn't get to do the whole thing. So that was a bummer, but we celebrated another way.

Reggie Young:

Yeah, I've only had the joy of working on one M&A deal as an in-house lawyer. Easily the most chained I've ever been to my laptop, easily the longest in-house days I've ever had. Similarly, it wrapped up during COVID. It was just funny. Oh, we released signatures, and the deal is done. I'm like, there's no like, let's go get drinks, camaraderie that kind of happens at the end of it.

Faraz Rana:

It is also very anticlimactic for anyone who's closed the deal before it's signed the deal. You work all your way up, and then the closing itself is like a two-minute call. And then you're just like, okay, I guess we're done. It's very anticlimactic.

Reggie Young:

Yeah, fun process, though. One of those things that I'd love to do again but not on a regular cadence in my life.

Faraz Rana:

Definitely the kind of thing you want to do once or twice in your life, and that's it.

Reggie Young:

What do you think makes somebody a good fit for being a chief legal officer at a start-up compared to, say, a bigger established company? We've covered law firm versus start-up, but I'm curious about that start-up versus big company mentality. What do you think makes somebody a good CLO at a start-up?

Faraz Rana:

The first thing is, like I mentioned earlier, making judgment calls. So you have to be able to make a decision on things. Lawyers aren't necessarily trained to do that as an initial matter. So it's a skill that you have to either acquire or learn or just develop the guts to do it. And you do it once or twice, and you develop the muscle memory to do that. So I think that's thing number one.

What I often tell people is I think the bigger thing is also just making sure that you're able to zoom out and not lose the forest for the trees. That's super critical because as a lawyer, you're trained in law school to look at every fine detail down to the footnote and make sure you've read everything and understand everything. At a law firm, you're trained to look for typos in 100-page documents. And then when you go to a start-up especially, or even in-house, you have to zoom out that camera lens. And I often see lawyers debating and spending weeks worrying about or negotiating a limitation of liability provision in a vendor agreement.

I'm not saying that's not right. You should maybe do that. But given all your priorities, sometimes I tell lawyers, take a step back and think, okay, what are the odds that we're going to get sued by our vendor? So many things need to happen that are probably improbable. There needs to be a business issue that can't be solved by just calling up your relationship manager at the vendor and getting it solved. That business issue needs to turn into a legal issue. The vendor has to stake their entire reputation on suing you because no one's ever going to work with them again if they sue a customer. And then that threat needs to actually go to litigation before any of this comes to fruition.

A lot of things need to happen and maybe take a step back and say like, it's probably improbable. I'm going to let this go and focus on a different priority. And so taking that camera lens back and kind of looking at the whole survey of the company is super critical. And then I think the last thing is relationship building with your colleagues I think is very important. I think that was very instrumental to us as a company at Bread, building relationships with the product team but also with all the other departments, and making sure that they felt comfortable coming to us with questions. And that's just a soft skill that I think even I didn't have when I first joined Bread, I'd like to eventually learn that. Part of my job is making sure that I understand what other departments are doing. And that's only going to happen if I meet them for coffee and chat with them and actually have a relationship with them.

Reggie Young:

Yeah. I like to say that I always want to build a relationship with a colleague before I need that relationship. I don't want to come to you and be like, hey, this thing, you need to fix it right now. I want to have met them and know them a little bit so that when I come to them, they know it's not just a lawyer. Yelling at clouds may not be important.

I also love your example about limitation of liability because I feel like I have this kind of gloss as I will look through terms of the situation which this arises, it's not going to be fun, even if that clause is that way or is the way we want it or the way the other party wants it. If you're in that spot, it's bad anyways. It doesn't really matter if those three words are different. Obviously, to your point, there are many situations where you do want to negotiate those sort of nuances, but is it a big enough contract where that's actually going to be a meaningful financial risk for the company? You gotta kind of scale the legal judgments there.

Faraz Rana:

Yeah. I don't feel like there are people who spend a lot of time negotiating a vendor agreement. And they should, but I think taking a step back and realizing, okay, is this is going to- it's very tough. I've been in plenty of situations where I'm like- the one time that this does happen is going to be the time I didn't review that piece. You have to work against your instincts as a lawyer to be like, all right, I know it's not going to happen, but what if it does?

Reggie Young:

Yep. There's always tension there. We were talking about a second ago Bread kind of scaling and how to grow and kind of check in. You mentioned doing six-month check-ins, which is a great idea. I love it. I’m totally going to add six-month check-ins to my calendar after this podcast. One thing that fascinates me, people who've gone through that kind of fast-growing company ringer, is the kind of tools and resources that they've figured out to help them grow with the company. To your point, it's really important when you are at a fast-growing company to be able to grow with the company. Otherwise, you're totally left behind. I'm curious to hang on that point for a little bit. Besides the kind of regular six-month reflections and zooming out, were there other kinds of tools or resources or advice that you got that you thought were super useful to help Bread navigate the growth as CLO?

Faraz Rana:

This is a tough one because for me, there's really no substitute when it comes to growth for just very old-fashioned hard work mixed with self-awareness. And I think the hard work part is not necessarily putting in the hours, but just understanding as a tactician how everything is working. As a senior person,  part of your job has to be just a tactician. You have to understand how everything is working, how everything at your team is working, and how other teams are doing things, basically how the machinery is working. And for me, it was a lot easier to do because I'd started in the beginning at Bread. So everything I asked my team to do, I had already done once before, I'd already done that thing. I kind of knew everything and how everything worked. And I know a lot of senior people who approach things at a 10,000-foot level. I think that works to a certain level, but I think to be truly effective, you’ve got to be at the 10-foot level as well at some point.

Mixed with the self-awareness to know, all right, at what point am I too much in the details? At which point am I too high and zooming in and out? For me, if you do that, I think you'll always have a pulse on where things are headed, where the big machine is headed, and how you fit into that machine, whether you need to recalibrate yourself or not.

I don't know, I mean, the one thing that I wish I had done, and I think it's valuable, is some level of executive coaching. I think there are a lot of people who do executive coaching. I do think it's valuable. There are people at our company who are excellent at giving presentations. Our head of product, [Para Lee], was amazing. She gave great presentations. That's a skillset that you can learn through an executive coach. I never did it, but I wish I kind of had. I think that's one thing that I would have probably benefited from.

Reggie Young:

Yeah. Interesting. Makes sense. I agree with the comment about the people, some of the best kind of leaders are the ones who can do the 10,000-foot and the 10-foot. I think there's a funny phenomenon where I think some of the folks that are best in strategy roles- strategy can be so high level, what's the strategy of the company? But the best folks are the ones who can get into the very minute details because they've mapped it all out. They know all the details. It's not just high level, here are the three directions. It's also like here's every single cost in all of those directions.

Faraz Rana:

Yeah. Those tend to be the most effective people. The other thing I think always helps here is the community of your peers, whoever you're with. When I started, there was a group called Tech GC, which is general counsels, I'm sure you know, of tech companies. At the time, it was like 10 people. Now it's grown into a massive thing. Meeting those people every few months, whether it was a dinner or some kind of event, helped you also realize two things. One, if I'm worrying about this one thing, I'm not crazy. Everyone's worrying about this one thing. And number two, you're hopefully surrounded by people who are very good at their job and type A people and high-caliber people. So it forces you to up your game as well. You're like, oh, that person's doing that thing, or like they're focused on this. You learn from them. I should be doing this as well.

Reggie Young:

Yeah, phenomenal community. I'm part of their Deputy GC group and fantastic. Their dinners, happy hours, everything are just- yeah, you meet wildly useful people, and has been a huge resource. Yeah, having those communities goes a very long way.

Faraz Rana:

Also, you get wined and dined by the law firms, which should always be a perk.

Reggie Young:

Yep, definitely. We would totally be remiss if we didn't talk about Affinity, what you're building right now. So let's jam on that. Maybe give listeners a sort of overview of what Affinity is and what you're working on.

Faraz Rana:

Yeah. Affinity is a compliance awareness and learning management platform. We're kind of solving what I think of as like the horizontal problem in compliance. If you think about compliance as a department within the organization, a lot of folks are solving vertical problems, which is like workflow problems within compliance. We're solving how compliance works with the rest of the organization. The traditional way to do that has been compliance training and these compliance training platforms that generally don't work. They're very ineffective products. And we thought, well, two things. One, there's a better way to do it, and two, generative AI presents an opportunity to rethink how that model and how people approach it.

One of the products, for example, we have is a compliance copilot, which takes training materials but also the company's own policies as a gen AI tool and allows employees to ask questions and get real answers, real-time guidance on anything. So that does two things. One, it kind of embeds compliance awareness within workflows that people already have. Rather than the once-a-year training video that you forgot about, never watched, you're getting real-time guidance and you have that resource available to you. It's virtual, it's a robot, but it works.

And then two, it kind of acts like a water cooler. Back at Bread, we had a water cooler where our compliance team would be walking around and then overhear something and be like, ah, we shouldn't be doing that. Or they talk to someone on the fly and they get questions. This compliance copilot is like that virtual version of that. The company is able to extract data on the kinds of questions that people are asking and then use that data to kind of feed back into a training loop if they need to. So it's like compliance usually sits in a silo. The rest of the organization is integral to making compliance work at the organization. So it's like, how do you have the two communicating? That's what we're trying to solve for.

Reggie Young:

No, I love that. I think compliance can seem like this ivory tower that other teams don't want to interact with because it's that once-a-year training that everybody probably forgets. Ideally they don't. I think trainings have generally gotten better over the past five years and more engaging and interesting and fun. But yeah, I think the Affinity platform, which you've shown me, and it's great to poke around for a bit, it's great. I think it's a lot more practically useful.

I'm a huge dork for behavioral psychology. And I think what you're building taps into a lot of like, oh, here's how you practically can actually get this stuff accomplished, which is, as we're seeing, this is a really big trend right now with both regulators and in reg tech. I'm thinking of Cable where it's, yeah, you can have all these systems, but Cable will make sure that they're actually effective. You need that horizontal compliance system that you're building that is actually effective and going to be useful. Regulators aren't going to be okay with just checking the box anymore. They're going to want to see that the trainings are done, that people are, whatever, adhering to them and whatnot.

I'd love to hang on that generative AI point. Is it mainly that conversational FAQ interaction that you're using, or are there other uses? I think that reg tech and AI is a super interesting nexus right now. There's a lot of hot stuff going on. There’d definitely been a trend. So I'd be curious, are there other kind of key uses that you're seeing with Affinity?

Faraz Rana:

Yeah. I think the way I kind of think about AI and the way my co-founder Peter also thinks about it is like what the internet was in ‘97. There was, I think, a time when people are like, I'm going to build an internet company, or I'm going to build a company that has a website and eventually became table stakes in a couple of years. And I think the same thing with AI. It's like, it'll be the thing that people have as like a feature product or part of your business model, but there won't be anything, I think in a couple of years, that truly differentiates you unless you're building the core AI, which hopefully doesn't get disrupted by open AI in two minutes.

So for us, there's a lot of use cases for AI. The compliance copilot is one thing. It's basically a robot that has a bunch of data sitting in it. It can provide you answers. And then as it interacts with you as an employee, it gets smarter and smarter, and it's able to provide you better and better answers. Another thing that we want to build eventually is the ability to just create your own training using your policies. You feed data into the platform and voila, you've got your training done within a minute as opposed to hiring a person to do that and design a PowerPoint.

So there's a lot of use cases for it. And the problem that we're trying to solve is I truly believe that most compliance issues at any company, whether it's fintech, a bank, or just like any company, they arise not because of some secret scandal in the back room somewhere where someone is conspiring to do something noncompliant. It's usually not that. It's usually companies fall, banks fall, companies waste hours fixing compliance issues because people are just well-meaning but uninformed. And that's just a communication problem. It's an HR problem. It's an education problem. And it's one that nobody has solved for effectively until today, which is why you still have companies who have tons of compliance issues, even though they've got a robust compliance department. So we're trying to use AI to build effective communication tools that permeate throughout the company.

Reggie Young:

Love it. It's wild to think how many headcount there are in financial services just for all these compliance headaches that can be simply dealt with. Yeah, lots of opportunity for improvements.

I'll be curious, I mentioned a second ago, reg tech's been a very, very hot topic, very trending topic, both in terms of fundraising and start-ups right now. But I think it's been going on for maybe two years. I feel like I've started to see reg tech really pick up. I think the simple answer in my mind is like, oh, AI, in general, technologies and regulatory scrutiny that has increased in fintech. But I'm curious, do you think there are other reasons we're seeing the reg tech- I wouldn't call it a boom because it's on the initial up wave, but do you think there are other reasons at play, or do you think it's really because those two simple- they're not simple, but those two kind of primary reasons?

Faraz Rana:

I do think there's a reason why it's attracted VC interests, which usually it leads to- well, it's attracted company interests, which usually leads to VC. And by company, I mean customers. I think the simple reason is in fintech, there was the first wave of companies focused on top line growth, finding product market fit, growing, and now I think that market has matured and now people are focused on the margins. How do you increase your margins? What are operational inefficiencies that you have? The market has matured. Companies have gotten big enough where top line growth is not as important as your bottom line and your margins.

When you look at your margins, usually, one of the biggest areas of inefficiencies is compliance and operations. I think companies started to realize, wait a second, can I automate this? Can I fix this thing using computers as opposed to humans? And also there's a real cost to me not fixing it, whether I don't use humans. Alloy is a great example, something that people did manually for a long time. We built our own system to do it. Neither is a great solution. And they came out with something that helps you hire fewer people because they've got a whole system for this. I think part of that was a market downturn. I think the market, like the VC market slowing down, forced people to really think about their bottom line and their margin.

I think that's attracted- and then compliance is a heavy operational area. There's no reason why it shouldn't be automated in a lot of ways. For me, reg tech, it really started 10 years ago with legal tech and that boom. It surprised me completely because as a lawyer, I know how reluctant lawyers are to adopt technology, but there are a few pioneers who really took a contrarian approach here. I have a friend Noah Waisberg, who built out of Weil, he was a law firm colleague who built a company that does- back in 2015, using AI for diligencing M&A deals and contracts. This is way back when Vishal Sunak at LinkSquares- all these folks really bucked the trend and built these massive companies in legal tech and I think compliance tech is the next version of that. So I always tell people, think about where legal tech was 80 years ago. Compliance tech is at year one, first innings, we've got a long way to go. And there's a lot of great people, like Cable, you mentioned, building a great product and a lot of great products out there.

Reggie Young:

Yeah, I love the problem you alluded to of selling to lawyers is hard. I think the same is true for compliance. You may be dealing with a compliance team that's not totally reliant, but they need to look to their bank partner, and their bank partner maybe doesn't want to ruffle feathers too much. They want to keep their systems as they are. It can be an uphill battle to sell that kind of tech.

Faraz Rana:

Tell me about it.

Reggie Young:

Looking forward, what kind of reg tech companies are going to win out in the long term, like five years from now? What are the kind of survivors that we're going to see have success, besides Affinity, of course?

Faraz Rana:

Of course, yeah. I think it'll be the companies that figure out their applicability outside of fintech. And I think that's where a lot of reg tech begins and kind of financial services. Healthcare is a little bit of a tricky area because you've got different sub-verticals and they are all kind of different. So a lot of reg tech begins with solving bank problems and fintech problems. So the kind of thesis is like, fintech is just not a big enough market to build a gigantic company.

So then you got to go to banks. Banks are really hard to sell to and take a lot of time. If you can figure that out, like you're a winner, but there are only a couple of winners there, and it's a long slog. So then do you go horizontally into other markets? I think the reg tech companies that figure that out will be the ones that really win. Because you'll have a bunch of companies that are stuck in the fintech world, and they won't be able to emerge from that. They'll become like nice companies, good companies, but not gigantic companies. There'll probably be one or two winners who have been able to sell to banks. And then I think the remainder of the winners will come from other verticals.

Reggie Young:

I love that point because I've similarly had skepticism around if there's a big enough market within fintech for a lot of the reg techs that we're seeing, but I think that's a great answer, too. They will survive. I think there's a lot of super valuable use for a lot of the reg tech platforms being built, but I think it will hinge a lot on that ability to diversify outside of fintech. Makes a lot of sense.

Well, awesome. If folks want to get in touch with you or find out more about Affinity, where should they go?

Faraz Rana:

Just add me on LinkedIn. Would love to chat with anyone, or you can just email me faraz@itsaffinity.com. I'm not on Twitter or X, I think. I've got four followers on Twitter. I'm not prolific there, but email or LinkedIn, would love to chat with anyone.

Reggie Young:

Awesome. Well, thanks so much for coming on the podcast.

Faraz Rana:

Thank you for having me.