Lead's Journey and Tips for Fintech with co-founder Erica Khalili

Fintech Layer Cake officially kicks off its third season as Reggie Young and Alli Nilsen dive into an insightful conversation with Erica Khalili, Chief Legal Risk Officer and Co-founder of Lead. Erica shares the transformative journey of Lead, from its legacy as a century-old institution to becoming a cutting-edge fintech sponsor bank. She discusses the critical pillars of success—technical excellence, client obsession, and risk management—and reflects on the evolving landscape of fintech partnerships and compliance. Packed with real-world insights, this episode is a must-listen for fintech enthusiasts and industry leaders alike.

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, chief of staff at Lithic. On today's episode, my Lithic colleague, Alli Nilsen, the head of banking partnerships, joined to co-host.

Alli and I chat with Erica Khalili, the chief legal risk officer and co-founder of Lead Bank. We chat about Lead's journey a bit in the episode, but in case folks aren't familiar, it's one of the most cutting-edge fintech sponsor banks out there.

Before co-founding Lead Bank, Erica was general counsel for Square Financial Services, Block's bank entity, and led their efforts to obtain a de novo ILC charter. Prior to that, she was an attorney at the law firms Mayer Brown and Baker McKenzie and counseled on fintech and bank regulatory issues.

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.

Alli Nilsen:

Erica, so good to have you on. It's always fun when I get a chance to communicate with you and never have similar matching energy at all. So I wasn't excited about this in the slides.

Erica Khalili:

I know. I feel like the first time we met, Alli, it was like two people just being shot out of a cannon at each other, equally excited about all things related to life, all things related to fintech, and awfully excited about issuer-processor discussions, and also with such low ego that when Alli would use terms of art and I was like, I don't know what that means. She's like, oh, yeah, you are a lawyer. And I was like, yeah. But I just love any time I get to spend time with you guys and learn and banter and share information and just make the markets higher. So I'm incredibly excited to be here.

Alli Nilsen:

That makes me so happy to hear. You were one of my favorite moments of, I just remember messaging on the side being like, did we just become best friends, and wondering if using a stepbrother's line was going to get me in trouble. But it worked out, so I'll take it.

Erica Khalili:

I believe my Taylor Swift heart hands back at you. So there we were.

Alli Nilsen:

Perfect. Anyway, we're so happy.

Reggie Young:

Listeners are getting a sense of what this podcast is going to be like. It's going to be a stream of consciousness, just hanging out. That makes for good episodes.

Alli Nilsen:

Hey, it all works and I'm just excited. So let's jump in because as much as they're going to hear our banter, they're not going to escape it no matter what. Lead Bank's journey, how did the bank get to where it is today? Where is it going? Let's just start with the fundamentals on the fun questions.

Erica Khalili:

Awesome. Lead is actually a 100-year-old bank that's based out of Kansas City, Missouri. We have two physical branches there, which is really exciting. We like to tell people that we knew how great Kansas City was way before Taylor Swift ever did. But the idea for Lead Bank as it was re-imagined today largely started between myself and my three co-founders, Jackie Reses, Ronak Vyas, and Homam Maalouf. We were all colleagues at Block.

We spent a lot of time there working with an amalgamation of fantastic bank partners across different domains. We also worked on building Square's own in-house chartered institution. We saw the importance of the banks that participated in the sector and how they could really be impactful on opening the aperture of financial services via partnerships with fintech. So we're doing really unique and innovative things, being a part of the digital asset ecosystem.

That led to the idea for, hey, why couldn't we build the bank that when we were on the operator side, we always wanted to see. And then there was a global pandemic and, A, not a fantastic time to leave your job, but we felt a deep sort of moral imperative to stay and to facilitate PPP and to work on unemployment distributions. And so we kind of put a pause on that idea. And then as I was finally able to escape my tiny New York apartment and things started to reopen and we started to see a broader path to sort of rehabilitating and what fintech could do in stimulus, we got re-enthused. That led us to the journey that I think every fintech operator has, which is build, buy, or partner.

We decided that buying an institution would be the right decision for us strategically. So we started on a journey. We visited with a lot of banks of different asset sizes and really called down the list of what we were looking for. Let me tell you, if you ever want to see four people in a pickup truck car rental, it was an interesting one for us. We came across Lead Bank, and we started the discussions relating to the acquisition. It sort of hit all of our marks. We closed in August of ‘22, which was very, very exciting for us, and really started on our journey of the reimagined Lead Bank then.

We've focused around three sort of core areas of excellence. Obviously, technical acumen. We have our own in-house product and engineering teams that are really, really best in class building a banking infrastructure platform in a manner that we think is incredibly nimble. One of our main ethos is we need to meet our customers where they are, and we need to really be a thought partner for them. And so building for the use case and the imagination and what financial services can be is something that is really, really exciting to us.

Now, on the other side of that coin, being exceptional around risk and compliance is where I'm sure at least one or two folks wanted to ask Jackie Reses why she had our legal and regulatory expert as a co-founder of a tech company and probably did. A big component of that is that being exceptional around those verticals is inherently a requirement of doing this in the right way. Listen, we all read the same headlines and we all know what's been going on in the sector. And so we've built that from the ground up, both through the team we've built, but also through technology and really investing in it.

And then the third was financial excellence, making sure that we took things that, dare I say, some find moderately unsexy, like reconciliation, and making those just top of mind and really important and devoting both technical and financial resources to doing those in a way that unblocks our clients but also keeps us safe and calm. Because when we're thinking, we have our partners, we have our local customers in Kansas City who are super important, we have our regulators as clients, we have our investors, we think across all of those domains in terms of what we're building and strive for excellence across everything. That's how we started. It's been an incredibly rewarding and fascinating journey, and one that we're really excited on to continue what we're building.

So that's a little bit of the backstory of it. And I will say, prior to this acquisition, I had not spent a significant amount of time in Kansas City. I'm originally from Chicago, but I've been a New Yorker for about 12 years with a short stint in the Bay Area. But Kansas City is so fantastic. I think we're really blessed with the team that came as part of the acquisition, with the community that were in there, with the folks that bank with us locally. I will not lie, I have become a fair-weather Chief’s fan.

It's a good time to be seen. I've eaten a heck of a lot of barbecue. Reggie, I've never met an onion ring I didn't like. Onion rings, I will shout them out. But it's been a really great adventure to learn how to support our customers across the community banking side, the fintech side, and the digital assets side.

Reggie Young:

I don't think we're going to get to half of the questions I had ahead of time, but you hit on some really important things. You didn't frame it this way, but this is how I think about it. Sponsor banks aren't commodities. I think that was the view that some folks- you can't just plug and play the bank over and over. I like to advocate, banks are your customers in a sense. Lithic has customers, we also have banks. And they're just as important in how we prioritize things that are mindful. 

I also similarly worked on PPP, really invigorating time to see what financial service. I remember listening to some podcasts with Jackie talking about PPP. When I was in the midst of it and realizing, oh, a lot of other teams are also going through the fun crunch time, it was an invigorating experience to see financial services can add a lot. Payments touch everything. They touch everyone. They touch friends, family, the small business on the corner. It matters so much.

Erica Khalili:

It was such an area, Reggie, where you saw fintech serve markets and segments that were very underserved and were probably the most impacted. You saw the voice of fintech really rise up with partner banks individually to be that thought partner to the government in terms of how to utilize technology in a safe and sound manner, to really be a distribution channel in an unprecedented time. To hear and to have those customer interactions, that's what motivates me. It's what motivates our team at Lead is to hear from our partners like Lithic, our clients and our customers, about how we're making changes. The feedback we got during stimulus and from our customers today, when you see how impactful that can be, I think is really interesting.

To your point, listen, this is financial services. You're dealing with people's livelihood. The level of rigor and expertise and seriousness that you have to bring to that is something that we need our partners to understand, and we do have a very high threshold of who we work with. We do say we work with the best of the best because, again, there's so much at risk. It's just such an important area to have those. I joke with everyone, I find them unsexy, which by the way, the team also said that they were going to get me a t-shirt that says risk management is sexy. I personally think it is.

But I think it's really important to understand the power and the gravity and really what fintech and digital assets and the banks and the processors and everyone who works with them can do for local markets and communities and making things more digestible to people that historically and populations that have been put off by financial services.

Reggie Young:

Yeah, I love it. I also want to hit briefly on something you mentioned of being a legal hire as like, how's that like a founding member? It's funny, this is a common thing I notice from podcast guests that have successfully exited at fintechs, is legal and compliance was actually really super early- if not a co-founder, they were employee number one, two or three. That is a common theme. I think it's actually a really good indicator for, what's the likelihood of success of this endeavor? I don't think it's crazy at all, even if some of the conversations behind closed doors have proposed that.

I'd love to take a minute to talk about, what are the core pillars that Lead Bank looks at to be a sponsor bank? Not a straightforward endeavor, a lot of regulatory requirements, a lot of functions. How do you think about the key buckets of things a sponsor bank needs to put in place and get right to make things work in the long term?

Erica Khalili:

Well, it's super interesting because, again, we started from those three pillars of centers of excellence, but they ladder into the operating principles. One of them, which I think you hear a lot, is client obsession. What I mean from that is that every product that we offer is our product. Yes, we facilitate it through a fintech partner, but we have to understand it. We have to be able to advocate for it. We have to believe in it.

Listen, that's something that I say to everyone in the vetting process, which is if you don't believe that our team can sit before a regulator, before the media, before anyone, and defend your product and have that depth of understanding and appreciation for it, then we're not your right partner in this endeavor. Because that's something that is a gatekeeping item to us, is making sure that we are offering products and services that we have the domain expertise and the belief in to defend them. Because, again, everything does come under scrutiny. We're very cognizant of that, and we know that it's a very high bar to do what we're doing. That aspect of client exception is really, really important to us to make sure that we have that from the beginning.

I think that ladders into a lot of our work verticals in terms of how we engage with our clients. We like to say it's great when it's the happy path, but we want to be your first call when it's the unhappy path. Because, listen, mistakes will happen. You can avoid them. You can do everything. But I say to everyone, my job is not to have zero risk as the head of risk for Lead Bank. My job is to identify the risks, mitigate the risks, and then manage them. And so we do that with everything that we're bringing to our client offerings.

We will bring technical resources. We will bring financial resources. We will bring legal and compliance resources. But we also will be there when there's an outage or a sub or an issue. We know that those always happen on a night or a holiday weekend. It's funny, I will tease my co-founder, Homam, anytime he left me, about how we became friends, because it was over a sub on a holiday weekend. And I was like, well, yes, this guy is going to be my new bestie because we're spending Memorial Day weekend together. But I think it's really important.

I think that financial acumen is incredibly important here. There are ways to foster innovation while still ensuring that we're acting in a safe and sound manner. And so we've devoted a lot of resources to that. I think that's a core pillar of why we think we're going to be incredibly successful and how we give our clients comfort. Because I think the one thing that I always reflected on when I sat on the operator side was the existential risk that a bank partnership provided to my customer base, my program, my business. Ensuring that I had the right partner there that understood and would be my advocate, and was really a partner, not a vendor- everyone knows this, when we get called a vendor, language matters so much to me there because that's not how I view what we're doing. If that's what you're looking for, then we're the first to say, we're probably not the right institution for you to partner with. But making sure that we can be there to also bounce things off of.

We had a client reach out to us that was like, hey, we're struggling with figuring out this risk mitigation strategy. Can we just whiteboard with you guys? We're like, sure. That's the fun part of what we're doing, is building aspect. And so always remembering that and always remembering that at the core of what we're doing, there's clients, and fundamentally, our interests should be aligned with our clients and our partners because we all want the business to grow. We're all in the same area. We want to be successful. We want to see revenue. We want a safe and sound program because we understand the existential risks that go from that. And so finding those enhancements and alignments, I think, is where we've come from a first principles basis.

Alli Nilsen:

I love that. I know you and I have talked about this offline because you and I have the same opinion when it comes to partnerships. It's a marriage. You have to treat it like such. You have to be open. You have to want to have the same objectives and goals. And so I love that you guys take that approach.

One thing I've always really admired about your team when I've chatted with you guys about joint prospects and things that are going on in the market is your self-awareness around capacities and what you can or can't do or your interests. What have led to your team's self-awareness of what you're willing to do, capable of doing, willing to do in the future, but maybe not right now? Because I think when you can set proper expectations with partners and have that self-awareness, it just leads to a better success process for everybody involved.

Erica Khalili:

I think we will never be the ones that will overpromise and underperform. Jackie loves to talk about how we're the anti-sales network. We don't have really a sales function. The founders lead business development and sales, and that's a bit of the gatekeeping function that we have. One primary aspect of that is we won't bite off more than we can chew. And the big part of that was we've sat on the other side. If we have a date and we're getting internal resources allocated to it, we need to make sure that the bank can actually do that. We've had some really fast launches where there's been existential issues and people that needed bank transitions. We saw that, obviously, in the digital assets market with the demise of some of the other institutions that were having that.

We also have the ability to shift priorities really quickly and be transparent. We also have told people, as we were taking on some of our earlier clients, I believe our mantra was, we may suck for six months, we will be the best partner for the next six years. And I will say we were very transparent. Coming off of when people were in a bit of a crisis situation, I was like, we are going to manually onboard you. I am creating Google folders myself to get the documentation, and we will review it and we are all hands on deck. It is not elegant. It is embarrassing to me to ask a client to go through this flow. It is not the experience. But here we're going to optimize for speed because that was the critical path to do.

I think a lot of it just came from those learnings and the ability to pivot, but also because we are earlier stage and have that mantra of client obsession. We also can shift road maps, and we can make changes to support things that people need when there's a demand. And we take that very, very seriously because we're not always going to be the best bank for every partner. We'd rather tell people that up front and be transparent. And then in two years, maybe we have a follow-on conversation, or we become a secondary partner. I think there's a lot of opportunities. I think a lot of what we've done has been based on our, maybe sometimes to a fault, but Alli's witnessed it, hyper honesty in terms of capabilities, where we're like, yeah, we can't do that, but we will do that in a year. Do you want to talk in a year? We understand we can't block people's road maps either because that has longer-term implications. And those are the things that we're building our company around.

Reggie Young:

It's long-term orientation, right? It's not like we want to make revenue in six months. It's like, we want to be a sound institution with great partners in 2.6 years. I love that six-month, six-year framing.

Alli Nilsen:

I think people love that honesty. I think going back to that marriage kind of analogy, you know what you're walking into. Both sides are prepared when you have those proper expectations set. It just leads to a more fluid partnership in that it does allow you to pivot. And I know you guys have grown a ton since what you just described. So that's awesome.

Erica Khalili:

We've been busy. We've been busy, but it's all been really, really great. We've had a lot of launches that we're very proud of and very excited. We have a lot of partners that we're talking to right now. We see a lot of growth in the sector. I think there's a lot of people with interesting ideas. I spent a lot of time talking to people both on the fintech side as well as on the digital asset side and how the interest around stablecoins as a payment rail and what can be done there. I just think there's a lot of opportunity and a lot of ways that technology and innovation can lead to global money movement, faster money movement.

I think what people sometimes forget is these are actual problems that people have. When you go back to, why should this product exist, and you think about a worker who's trying to send money back to- I'm using El Salvador because I just chatted with a gentleman who is a worker at a local restaurant I go to, and he sends money back and the amount of fees and costs associated with that. Or you're looking at people who are trying to smooth their income and trying to find ways to make between paychecks, and so faster money movement is really critical to them. And so solving those problems with the partners we're working with is something that I'm really passionate and excited about as we look into 2025.

Reggie Young:

Yeah, it's a super important reminder. Lithic is an infrastructure company. We constantly remind ourselves, it's not just our customers that we're helping. It's their end users who have net new value added to their lives because of the cutting-edge stuff that our customers can do.

Erica Khalili:

Do you ever forget to talk to them? Because that's what we're fairly dogmatic about, is remembering who's the end customer that we're helping, whose actually life is being changed by these products. Obviously, we take complaints very seriously and we track those, and we look for product improvements and innovations that we can make based upon that. But we also love to talk to the actual customers who are using our products and hear what do you like, what do you not like, what's working. It's very interesting to hear the feedback and hear, again, because it's financial services, how impactful and important- and you think about credit and how immigrant populations are building credit and being able to help there. I don't know, I think that's what motivates all of us a little bit. Sometimes we lose sight of it, so I'm curious how you guys have dropped that over at Lithic. Do you ever get the opportunity to talk to the end customers?

Reggie Young:

I think we have from time to time. It's funny, I think I care really deep-

Erica Khalili:

I'm not supposed to ask questions, am I?

Reggie Young:

It's okay, there's no rules. This is a no-rules podcast. We hit about this with the PPP experience. I think my experience at Bluevine is just how small businesses employ half the country. Through that experience, I'm deeply rooted, and this affects the corner bodega that's on the corner of our block and affects them. They need to make payroll. They have all these payments they need to invoices. They need to buy supplies. It matters. This kind of stuff matters for them.

The lawyer in me can't help but ask about becoming a bank and acquiring a bank. You've had some interesting experience of both acquiring a bank or being involved possibly in acquiring a bank and also getting a de novo charter. I recognize ILCs, industrial loan charters, are a quirky type of charter with their own unique sets of rules so it's not totally apples-to-apples. But I love to hear you riff on what's the process of buying versus becoming a bank. How do they kind of compare?

Erica Khalili:

I'll say they're both really hard. I'm just going to be honest. They're covered now, but I think I have a lot more graze than when I started on these endeavors. I think they're very very challenging in terms of how you do business and what you think about and valuations and understand that. I think that oftentimes, folks think that's the easy path and it's really probably the hardest, is to actually acquire or become a bank.

Obviously, it's public, Square’s currently to obtain their ILC charter, was multi-years, and no easy peep by any stretch of the imagination. It really required an entire organization to be spun up with people who have deep banking expertise and understand that. And so from our perspective going through the acquisition process this time- because, again, build, buy, or partner, everyone does the same analysis. I think for us finding a strategic opportunity that made sense for us, but also going into it with eyes wide open about becoming a bank holding company, what that was going to mean, how we were going to navigate all of those things, we didn't have a vision and then decide, oh, we need a bank to do it. Being the bank was our vision. I think doing it with the direct purpose of facilitating fintech and digital assets partnerships, as well as our community presence in Kansas City, that won us a lot of trust from our regulators, because we came in and were very explicit about what our goals were, what we were expecting.

But it took quite a bit of time. At that point, there were no guarantees on anything, so it's also that existential risk question. But I think I've learned so much going through the process both ways. I don't know that one is necessarily better or worse than the other. I think it's really figuring out your strategic needs and where that fits in. Again, ILCs are a very unique animal as it comes to banking regulations.

I think the other aspect of having a bank holding company and what that means for our business and limitations is something that's a really strong issue that people need to face and consider, but it's been excellent. We're regulated in Kansas City. We have a fantastic relationship with our regulators in KC as well as in DC. I think with where we are, I think that there's a lot of room for partnership with the regulators, which I know might be an incendiary thing to say. But I do think that there's a lot of room for growth and the explanation and the whys of these products. I think when I first started working in digital assets, gosh, 2015, 2016- ouch, I was aging myself.

Alli Nilsen:

It's all dog years. It's fine. All dog years.

Erica Khalili:

It seems scary and opaque. I remember the first time I was explaining Bitcoin and losing access and things like that, and I was like, well, I'm a New Yorker, so if I leave my wallet on the F train, that cash is gone. Finding ways to make things that can seem opaque and complex really digestible as something that I think from a regulatory perspective we can all do a little bit better. I think that that's where I also love your team because, again, in the payment system, there's acronyms and things like that. Alli knows this, I have no problem pausing a conversation being like, I don't know what that means.

Alli Nilsen:

I did the same thing to you, so it worked wisely.

Reggie Young:

Totally. It's a super important idea. We've talked about this a lot. A lot of our value is abstracting things away and both seeing around corners that folks who may have not run a card program before don't necessarily know are there, but then also just abstracting away, like Visa's 700-plus-page rule. There's a lot of complexity that folks don't realize. I think the bank holding company, people think, I'll just buy a bank. It's like, no, there's a lot of complexity. There's all the committees that you need to go to the board of directors. There's so much more that is abstracted away from you as a fintech partner. It's not just like, let's go buy a company. A lot of value that banks had.

Alli Nilsen:

It's fun. It's a whole other language. That's what I realized when I joined the industry. It's not just a whole other language, but just like in English, how there's one term that has seven different meetings and context matters, it's there.

Erica Khalili:

Context matters so much.

Alli Nilsen:

I do want to follow up on the bank buying thing, though. Why Lead? You mentioned you got in a rental pickup truck earlier, and you guys drove around. I know that's just from you and I talking offline, but was it the name? It's a pretty cool name to have, but what about Lead Bank specifically made that the choice of bank to purchase?

Erica Khalili:

Yeah, we did look at a lot of targets for acquisition, and I mean a lot. I think we galvanized around a few core principles in terms of asset size and what we were looking for. We wanted a bank that we could obviously grow materially. I think when we closed on the acquisition, Lead was around 650 million in assets. I think our most recent call report, we're at about 1.5 million. So we've grown materially since acquisition. But we wanted a bank that had some runway in order for us to build and grow.

We also really wanted a bank that had the DNA of certain aspects of fintech. I'll tell you, the first time we visited in person, we were expecting traditional banking tellers behind glass partitions. We walked in, and there were farm tables and a plant wall. It just had a cachet that felt like there was an openness to innovation and to looking at things through a new lens. Because, again, we wanted to come from a place of the answer is not no. The answer can usually be yes, but sometimes the answer is no. You can ask a few of our clients. There's one in particular where he suggested something. Usually, he would get the, let me think, and I was like, yep, nope.

I think Lead was really, really unique. I will say they are the only bank that we looked at in the Kansas City metro area. The leadership, it was a family-owned institution, was really, really fantastic to work with. It felt like from our first- not our first, our first was virtual, our second meeting, we were spitballing ideas and talking and thinking through and whiteboarding. It just felt like those natural synergies came to fruition. We looked all over, and we're really happy with Lead and how the integration went. For anyone who's ever done M&A, no integration is ever easy, but this one was probably the smoothest I've ever done, especially where you had the smaller company acquiring the larger from a culture perspective and an integration, and that comes from having such a great team at Lead pre-acquisition, post-acquisition, etc.

Reggie Young:

I love one reality that your explanation gets at, which is that small, medium-sized community banks, credit unions, they have a reputation for not being innovative and open to things. But a lot of them are, I think, a little bit of a false stereotype.

Erica Khalili:

I agree. I do always worry about people getting into industries, though, that become the hot topic or the buzz. I think that was one thing that we observed, is that when we did the acquisition, we brought capital, obviously, but we also brought expertise around compliance and technology and risk. I think those are really critical for anyone who's looking to get into this or things that, to be honest, any partner should be asking about their bank partner. I've seen that shift myself. I love it, to be honest, because I think perhaps, historically, people didn't do the level of diligence on their bank partner that we all would have or thought we should be doing and we're looking for.

Obviously, speed to market is always going to be important and a good working relationship, but I've gotten more questions about financials and TPRM and all the good stuff that gets me excited. Maybe I'm a bit of a nerd that way, but the people are asking about, and I think it's so important because, to Alli's point, it creates that better long-term relationship, because these aren't short-term gigs. These are multi-year relations. So you’ve got to make sure you know who you're marrying.

Reggie Young:

I love your comment, and I know Alli, as our resident bank whisperer, has a few bank partnership topics she wants to dive into. You've repeatedly hit on this theme of longer-term value. We've been talking about this a bunch at Lithic, is we create enduring value. One of my favorite examples is our CTO the other day made the comment that the code engineers today is going to be processing unthinkable amounts in 10 years. It's a difference between, oh, here's the most recent AI SaaS fab that's going to be gone in two quarters versus fintech, it's hard, it's regulated. There's a lot of complexity. You have to deal with third-party risk. You have to deal with all that unfun stuff. But the flip side is you're creating really long-lasting enduring value. So if you can navigate all that, there's a lot of upside. Alli, I will hand it over to your bank whisperer partner question.

Erica Khalili:

It’s primarily because Jackie and I actually have this discussion where she's like, audits should be delightful for our partner. I was like-

Reggie Young:

Hot take.

Erica Khalili:

Hot take, I can work on that. It's like TPRM, our edict is how do we make the things that perhaps other people feel are painful. I don't know if I'm going to get everyone to delightful quite yet, delightful's a high bar, but we're working towards it.

Alli Nilsen:

Maybe the new phrase is audits should be sexy. It's enjoyable. It's what you should be marketing towards people. I am going to switch and touch gears more on those partnerships you talked about. We're all talking about bidding long-term value, the end user, how we're impacting those individuals. My next question is probably for all the listeners who are like, oh, how do I talk to Lead Bank? What makes me appealing?

You don't have a sales function, like you mentioned earlier. How does Lead go about today figuring out who they want to work with, finding those partners? Are there quick telltale signs of they're going to be good or bad, so you know to move to know faster? Want to get a sense of that. I'm sure this is where everyone starts pulling out their pen and paper and starts taking notes                                                                     kind of thing.

Erica Khalili:

I think there's a perception these days the banks will only look at you if you are scaled, and it's very hard for the folks that are coming into this early and maybe need a little help with certain things as they're maturing. I think we've taken the position that, of course, we love scaled programs. We love programs that have everything buttoned up that can expedite your timelines, but we'd be remiss if we didn't take some of those early bets. A big part of that comes down to the product. What is the product that you're offering? Do we believe in it? Do we think it's safe and sound? Does it meet our quality bar? And so we start there, like what is the product?

I think the other thing is, and I'll be blunt about this one, if you come in, because I've had people do it, and I ask about compliance or financial crimes or risk, and you laugh or are capricious about it, we are not your partner. That is not what we're looking for. We take it really seriously because, again, it's money. It's really important to do this right. You need to understand that this is a highly regulated space and it's not something that you can do side of desk. You have to be willing to make those investments.

To Reggie's point, I love when they tell me that their first hire, once they got their seed money, was a chief compliance officer or a chief legal officer because those are so important to building and to getting a partner that has that level of rigor that they're putting into this. Because I'll be very blunt, every partner we take on is an existential risk to every partner that we have. And so not having a quality bar and not having that rigor, it comes clear in early meetings  with us, is this really a prospect that makes sense? Do they understand what they're getting into in financial services, or is this kind of, oh, we think we'll just skirt around this regulation? I was like, no.

Reggie Young:

One of my favorite soapboxes that I'll briefly reiterate now is the reality that you can't talk to a bank and say, look at the growth we're bringing. That can't be your first slide. You can't be like, we're going to go to the moon next year. Instead, you should totally flip how you talk about your business to be like, look at our compliance team, and look at how we manage risk, and like, oh, by the way, we're going to be a stable business that grows steadily. It's a very different conversation trying to talk to VCs than it is talking to banks.

Erica Khalili:

And we want people to go to the moon. That's part of the calculus, is like, do we think you're building an amazing product? I think that's one of the other things that, Alli, how do people find us? Our clients refer each other, which is wild to me. It was very interesting because we had a recent client who asked for references, and we're always like, sure, no problem, talk to whoever you want. These are publicly available sources. We're having to make connections. They came back and they actually said, wow. That was what really sold us on Lead was it wasn't you guys telling us about how you're going to be a partner. It was an actual client that's been live with us for over a year saying, oh, and this is how they show up when it is the unhappy path, or this is how they've helped us here, or this is how they helped us think about this problem we needed to solve.

I think that's been a huge growth driver for us, is just the inherent flywheel that we created amongst our client base. And we've been very lucky in that regard. Again, we're happy to talk to anyone because at the end of the day, we're invested in the sector holistically. So even if we are not the right thing for you today, like how can we help? We say that to everyone. Some people don't want our help, and that's completely fine. But we're always happy to help.

Alli Nilsen:

No, and that's awesome. I think it's super entertaining because if I think about your energy and Homam’s energy- and people haven't met Homam. He's the most even keeled, nice individual, just steady. He's the opposite of Erica and I in all the best ways. I admire this human.

My next question then is, all right, people have met the threshold, and they've crossed that bar, and both parties are like, we're in this, we like this, let's do it. What next? You've had all these learnings. When you think about what has made the onboarding ongoing relationship be a successful one in that marriage, we're going to refer back to that analogy forever, what would you recommend? What makes it go well or go poorly in those situations?

Erica Khalili:

The first one is hypertransparency. If issues come up, my biggest pet peeve is never try to hide them from us. We're going to know about them. We're going to find out. It's better to have a proactive conversation because, again, there's very little we haven't seen or been a part of. Let us help you here. So that transparency is really, really important. If your timeline needs to be pulled forward or needs to push back, just tell us the truth and we can meet you where you are.

And then the way we approach onboarding, I think, is interesting because we do our diligence, our contracting, and our technical implementation all asynchronously because they can inform one another. And so it creates a staffing model early on, too, where you're meeting all of your domain experts on a kickoff call and you're working through the product and you're explaining it. And the teams are finding those synergies very early on, which then makes it so much easier when, hey, this is an issue with this policy or this piece of collateral, or we have these questions about the data schema or the API documentation.

And so having those relationships and the ability to speak real time, like we're working together, has been so impactful for us from an implementation perspective because, and Alli knows this, we are big Slack users here at Lead. And it's been really great to be able to say, hey, this is going on, or can I just ping you on this or things like that. That has really been impactful in terms of our ability to onboard and start the partnership or the marriage, as Alli was saying, on the right footing because that foundation of onboarding is how you set up for the longer term. We do it all asynchronously so that we can inform one another. If there are problems, we work through them as a team.

Reggie Young:

One thing I'd love to spend a few minutes on is how you think the bank sponsor space is going to change in the next five years, and also what's not going to change. I think, obviously, regulations, not bank regulations, capital requirements are not going away. But I think for listeners’ context, there's about to be an administration change in a few days. If folks want a deeper dive, we recently put out a podcast with two folks from FS Factor, a really good deep dive on what practically changes in policy. Spoiler, the exams don't stop. Things keep moving forward. Less changes and less is accomplished than most folks would probably expect. But I'm curious from your seat in the bank sponsor space, what do you think is going to change over the next 5 or 7 or 10 or however many years? What is going to stay the same besides the basic, like capital requirements for bank regulation?

Erica Khalili:

I think the bad is, though, the biggest one, is that there's not going to be a free for all. I got that question from everyone at a recent conference. They're like, what are you building differently- and it was before the election. What are you building differently based on who wins the election? And my answer was absolutely nothing. I need to run a safe and sound financial institution no matter who's in office. And that is critically important.

That being said, I am excited to see a lot of the regulators perhaps be more open to innovation. I think digital assets will be something that we will see a lot more openness to, and I think that's the right answer. We don't want to be left behind as the United States from a technological perspective, and I think we're at the place where not being in digital assets scares me more than being in digital assets. That being said, I think there will be a pendulum because I think a lot of banks will see the opportunity set and not realize the rigor and the staffing and what's required to do this in a safe and sound manner, and that'll lead to regulatory scrutiny around what they're doing.

In terms of what doesn't change, from my perspective, I want to be able to reconcile. I want to make sure that as a bank, my checkbook balances. I want to make sure that the customer-facing content is always compliant. I want to make sure the complaints are impactful and helping to shape a product. None of that's going to change. Now what will change is I think around digital assets and hopefully a more openness to innovation at the banking regulators. Everyone has heard me talk on financial crimes legislation and modernization. I'm very excited to see hopefully FinCEN and the FDIC and the OCC all align and move towards modernization because I think a lot about financial crimes, to be honest with you, and I want to be the best partner to law enforcement that we can be. But I think there's a lot of white space there to make sure that we're not closing a window and leaving the front door wide open as it relates to financial crimes.

Reggie Young:

If you depict three financial crime modernizations, what would your top three asks be? Or two or however you like. When you say modernization, what does that vision look like to you?

Erica Khalili:

I have a vision for some notion around proof of personhood that can be sort of that immutable, whether it's done on the blockchain or otherwise, because, again, we will always be compliant as a bank, and we will collect what is required under the CIP regulations. But in terms of actually knowing your customers, I think there's so much better that can be done. So I'd love to see some shifts around there.

For example, biometric data was something that was initially very controversial. I think it's something that in a lot of ways, the current regulations leave a lot of folks out of the financial system who maybe have an I-10 or don't have a social security number, but have a passport or some other things. Because of risk profiles and fear, I think, of enforcement, it leads to a lot of populations that really need financial services at an equitable pricing construct being left out. So that's one, and it covers a lot of different things, to be honest.

I'm really interested in where AI can be used. There's a lot of manual components right now as it relates to SAR filings and QA/QC. I do wonder if that's a place where we can all get better, because, again, fundamentally, when I think about those regulations and their goal to help and support law enforcement, everyone wants to do the right thing. I won't say everyone, but I think most people really have good intentions, but I think there's a lot of white space there that can be improved and also be helpful to making financial services more equitable.

Alli Nilsen:

That's awesome. I think the how something can be done is we're probably going to see change, to your point, of like the biometrics. There's a lot of ways to prove who someone is and that there's not those fraudsters. This industry is constantly riddled with those bad actors, and we all have to constantly be thinking about how to avoid them, but also getting that equitable access to the individuals who could easily be impacted by those lovely bad actors out there that make our lives entertaining, which is why risk exists in the first place.

Erica Khalili:

It's funny because it's also what leads people to be shy around cross-border and things like that. But then the downstream impact is the gentleman I was chatting with having to pay really high fees to send fiat currency to his family back home.

Alli Nilsen:

Yeah. And it has that trickle out effect. Switching gears, obviously, I'm head of banking partnerships here at Lithic, and I love my bank partners. And I'm trying to constantly stay up to date on what the banks care about, what they're doing, how they think, how they see the world ultimately, because that impacts how Lithic engages with, and then also how I help our prospects who want to approach these bank partners. What do you think fintechs get wrong when they think about sponsor banks? What do you think are the incorrect perspectives on bank partners?

Erica Khalili:

Bank partners are a commoditized vendor.

Reggie Young:

Vendor is a bad word.

Erica Khalili:

Vendor is a bad word to me because, again, if I'm a commoditized vendor to you, then you're not understanding the risk profile of what we're doing, and you don't have the right acumen around this. That is just we're a partner to you and we're going to fight for your product and we're going to make you do some things that you probably would prefer not to, but we're going to be the partner for you. Also, if you're looking for the lowest common denominator or the, what was the quote, we're looking for the easiest bank to work with, and I was like, wow, that's not us. We have data schemas. We take stuff in. We run it through our own business analytics models. We're seeing your trends. We're going to ask you questions about spikes and default rates. We're going to talk about seasonality and projections. That is what we should and need to be doing as the bank. And if that's not what you're looking forward to in terms of protecting your business, then I think that's a place where a lot of fintechs get it wrong.

Alli Nilsen:

So what I'm hearing then is fintechs need to stop thinking about there being a wall where you need to filter things through or keep all the different secrets, but really like, you guys are an extension of the team.

Erica Khalili:

Yes.

Alli Nilsen:

You’re the extension that's going to ask the hard questions they may not always love, but that's going to make the difference at the end of the day.

Erica Khalili:

Hundred percent. I see my role is to protect the programs that we sponsor for because they are our products. Again, it all goes back to if you don't think that we can articulate and defend your product in a regulatory exam, we are not the right thing for you.

Alli Nilsen:

Love it.

Reggie Young:

Love it. Well, Erica, now we're approaching time. This has been a fantastic conversation. I know we're going to do Part 2 about Kansas City food, but in the meantime, if folks want to find out more about Lead Bank or get in touch with the bank or you, where should they go?

Erica Khalili:

We have an e-mail, that is leads@lead.bank. That is a great way to get in touch with us. It's on our website as well. So super, super excited for all the listeners. Again, we're dedicated to the sector generally. So even if we're not the right fit today, we'd love to have a conversation and also just be helpful to people.

Alli Nilsen:

Perfect. And I'll put a plug out there that Erica likes espresso martini, so she'll also talk payments with you after a good drink.

Erica Khalili:

Nothing like discussing real-time payments over a cocktail with you, Alli.

Alli Nilsen:

We'll save those stories for the follow-up.

Reggie Young:

Yup, I love it.

Erica Khalili:

Thanks, guys.

Reggie Young:

Cool. Thanks, Erica.

Alli Nilsen:

Thanks, Erica.