Episode 1 – Derik Sutton, VP of Marketing at Autobooks
In this episode, Ron and Derik discuss the merits of embedded fintech and how Autobooks is helping small businesses with invoicing tools, accounting, and more.
Watch the full episode here.
Ron Shevlin:
Hi, and welcome to Tapping into The Potential of Embedded Finance sponsored by Q2. I'm your host, Ron Shevlin Director of Research at Cornerstone Advisors and senior contributor at Forbes, where I write the Fintech Snark Tank blog. My guest today is Derik Sutton and Derik is a true veteran of the fintech space with stints as the Director of Internet Business Development at CSI, Director of Products at Banno and again at Jack Henry, which acquired Banno a few years ago, and today is VP of Marketing at Autobooks, and he's also the board member at the Association of Financial Technology. Derik. Welcome. Thanks a lot for joining me today.
Derik Sutton:
Hey Ron. Thanks for having me.
Ron Shevlin:
You bet. So Derik to kick things off, just for folks who may not be very familiar with Autobooks, what does the company do and how do you fit into the embedded finance, embedded fintech landscape?
Derik Sutton:
Yeah, sure. So the way I always explain Autobooks is we kind of do two things. One, we help financial institutions stay ahead of the competition. We do that by making small business banking better for their end customers. So we embed invoicing tools, payment acceptance tools, and then as add-on features, accounting, financial record keeping, reporting, payroll services directly into a bank or credit union's existing digital banking channels. So ideally Ron, what we're doing is we're helping financial institutions really kind of get back ahead of the end-customer deposit so that once a business owner gets paid through their financial institution, funds settle directly with the financial institution, they can then begin to really mature that relationship in the same way that they've done in the past whenever a customer or a member walked into a physical branch and deposited those funds.
Ron Shevlin:
So tell me a little bit more about when you say embedded because many banks and credit unions integrate certain capabilities into their platforms, but what do you mean and how do you distinguish that from embedded?
Derik Sutton:
Yeah, it's a good question. It's, something, a topic of industry conversations around what's the difference between what we've always been doing in this embedded strategy. And for us embedded is really two-fold. One, it's making sure that we take advantage of our partners' SDKs, APIs to the best and utmost of our abilities. So we want to make sure that our experience feels part of our digital banking partner's platform, quite frankly. The analogy I always give is I want invoicing to be on the same level as bill pay as an example. It's a feature of the account. Whereas a customer or member can go into digital banking, they can add a payee, they can schedule a date in bill payment and money leaves the account. We want invoicing to be the inverse of that. So now you can go in, you can add a customer, you can put in a date that they owed you money and now money comes back into your account. So that would be the embedded on the technical side.
To me, there's a whole other opportunity around embedded that has to deal with a lot of the operational and go-to-market components that I think is really the key differentiator quite frankly in an embedded strategy. So let's kind of break that down what I mean by that. I feel like whenever you embed a FinTech solution as a financial institution into your operating environment, you have the opportunity to tap into a resource that should know a market vertical very deeply and hopefully deeper than you can know it yourself as a financial institution, and you have the opportunity to take advantage of that team. So, as an example, we believe at Autobooks that we know more about micro and small business banking than most any financial institution in the country.
We talk to thousands, literally thousands of small business owners every month, we're talking to financial institutions regularly about their challenges, and we're building and addressing not only our solution, but go-to-market messaging, support, operational tasks, how we engage with business owners, how we onboard them into the relationship with not only us, but the financial institution, into the outcome, a value for both the business owner and the financial institution. We're at the epicenter of all of that. And so when we partner with a financial institution, it's not just our widget, it's our team. And it's how we talk to business owners, how we market to them, how we support them, but at the same time, how we then relate that information and convey that back to the financial institution so that they can be part of that journey as well. We want to... embedded fintech to me is, I want to make every bank and credit union in the country on par with Square when it comes to helping somebody easily onboard and get paid. The major difference is I want the funds to settle with the bank and not in a third-party virtual wallet.
Ron Shevlin:
That's all great stuff and you know I'm a big fan of what you guys are doing and helping financial institutions, but that's the kind of thing that you could be doing directly with clients. And in fact, you have, and so let me...I'm going to ask you to look at this from two different perspectives, the financial institution perspective first, and then the fintech perspective second. From the financial institution perspective, what's the benefit of getting your services or really any fintech services from an embedded perspective versus getting it directly from you as a vendor?
Derik Sutton:
Scale. So quite frankly, scale. So if we go partner, let's say with our friends at Q2, we can work at the level of their platform to maximize APIs, SDKs, data availability. We can stay ahead of their roadmap. We can work on key objectives and initiatives together. And whenever we're able to work at the platform level, we can then scale that solution out to hundreds of financial institutions. If we're working with a one-off financial institution on direct integration unless, they own the stack, it's going to be hard to replicate the deep level of integration we can achieve at the platform level. And so I think where we're the industry's maturing, Ron is, let's face it, financial institutions are dependent upon their partners. Their, I'm not even going to say vendors, but their digital banking partners to help them strategically address needs in the digital channel.
And if that's the case, then we need to be working deeply with our, with those platform providers, to understand the full capabilities of what they have to offer, where they're going strategically, how we fit into that, and then relate that back to that embedded side, our view of the world of what are business owners asking for, what are they demanding of their financial institutional relationship? How does, where Q2 is going with their roadmap, relate to what I heard from a business customer last week, and to what end could we bridge that gap and offer a solution that provides value to the end customer, the financial institution. And then if those two things are true, then Autobooks and our partners are going to also benefit as well.
Ron Shevlin:
To be honest with you, Derik, the scale perspective, scale answer feels more to me like the benefit to you the fintech or the provider. From the financial institution perspective, is there a cost benefit? Is there a speed to market benefit? And if you tell me there is, I'm going to start pushing on you because listen, we've heard for so long from tech vendors who say, "Yeah, we can deploy my solution in 30 days, 60 days, 90 days." And of course it takes a whole lot longer, but it seems to me that the promise of embedded fintech is a truly shorter time to market. So what are you seeing in terms of reality in terms of the benefit to the financial institution from a cost and speed-to-market innovation perspective?
Derik Sutton:
Yeah. So actually I completely disagree on the scale side being self-service for us. Here's why. We really care about business owners. And so when I talk about scale, I kind of look at this as a velocity thing. I want to get to as many business owners as I possibly can, as fast as I can, because they're struggling with how they get paid today. And they're asking questions of their financial institutions. They're asking questions of third-party providers. They're in a state of the transition from in-person to online. They're looking for solutions. We hear it, the stress in their voices. When they pick up a phone call, we see it come through in the emails that we send, they're looking for ways to accelerate cashflow. So when I say scale, if I can go partner with Q2, integrate our solution, and then reduce dramatically times to market so I can get access to more business owners that have a relationship with a financial institution, that's a win, win, win.
The business owner wins because we are offering value to them because we're accelerating cashflow, we're consolidating down their operations, they can just use their bank. They don't have to use, as your report said in the Cornerstone report that we did last year, that I don't have to use 7 to 12 different service providers to get paid. So they're operationally more efficient.
95% of all invoices sent through Autobooks books are paid within five business days. You know, in that same report, what's the time of a traditional invoice to get paid for by a business owner, it ranges between 27 and 41 days. If we can do that in five days for a business owner, provide them access to working capital they can use to grow their business, that's a tremendous benefit. So when I'm talking scale, that's the kind of scale I'm looking at from, I want to get to as many micro and business owners as fast as I possibly can to their benefit. Obviously we are going to benefit. We're not a nonprofit we're going to benefit from that. Our financial institutions are going to benefit from that as well. Now let's talk about the financial institution benefit and the time to market and the operational side of that.
I can honestly say, like the work we've done with Q2 and others, we're dramatically reducing time to market. We're actually completely changing product procurement. You and I have been around long enough. My kind of stump speech here recently is I'm tired of going to conferences or jumping on a podcast, talking about the future, giving all of these prognostications about where the world's going, talking about all the future and everybody in the audience, looks at each other in the eye and goes, yep, that's a year away. That's two years away. That's at least six months away from being able to implement.
The time is now that if anybody listens to this podcast, they can call Q2 and say, we want that Autobooks thing. And it can be turned on that day, that week. It can be launched to their customers within two, three weeks. That's a reality today. I think that's going to continue to shorten. And so now we can actually go in and we can have events. We can have virtual events, we can have in-person events. You come and you hear about here's problems, here's some friction in your current banking environment. Here's where customers are struggling. We've got an embedded tool that's embedded with Q2. That's enabled in your back office. You flick a button, it's going to be on and you can go launch that today.
Here's all your go-to-market assets. Here's how we're going to support you in that, that launch. Here's how we're going to onboard your customers. Here's how we're going to assuage all of their anxieties and fears about this. Here's how we're going to do integrated calendar appointment scheduling so if they have those questions they need to ask a specialist, they can. So time-to-market scale, that's what I'm talking about, Ron, actually making our industry, having the availability for our industry take action in days, not months and years. To me, that's the most important thing when it comes to this embedded fintech conversation.
Ron Shevlin:
Yeah, you convinced me. I'm good with that, but you know, it's funny Derik, there's another, I think benefit to the financial institution that you haven't quite addressed yet. And I think this is a really big issue or big benefit. And that's the access to data. You know, I think one of the biggest benefits or advantages, or I should say, that Square has in a, in its embedded finance strategy is that by covering the bases of the various points of the value chain of a small business, it knows its small business customers better than anybody else, because it has that relationship with the marketing, sales, payments, now funding and banking, and I think a lot of bankers are still thinking, deceiving themselves into thinking, well, we know our small-business customers better than anybody else because they come to us for lending. No, it's the speed and access to the data that I think is the big benefit here. And what have you seen in terms of banks being able to capitalize on that?
Derik Sutton:
Yeah. Spot on. Sorry, I didn't address that, but obviously you're going to, you're going to find my flaw. So data is another key element of the embedded fintech piece, the scale piece too. So as we talked about earlier, because we can go integrate to a platform like Q2, we can also then start to say, how can we use data as a resource to the benefit of the end customer and the financial institution? So data is huge in the small micro-business market segments. I'm just going to address it related to that. So here's what we're doing with Q2, as an example, we're tapping into, through the SDK, access to their core, transactional history. So back-tested data, historical data of a business customer we can now have at our disposal. And so here's a really cool... actually I want to set this up a little bit differently. We recently analyzed a financial data set that included well over 750,000 end customers. Okay. Those 750,000 end customers at the data set we looked at, there were about 60,000 accounts attached to Square. Okay. Ron, how much in million or, how much processing volume deposits that we saw coming back from Square, do you think took place in about 60,000 account holders in an annual basis?
Ron Shevlin:
Five to six million?
Derik Sutton:
No 2.3 billion.
Ron Shevlin:
Oh my God!
Derik Sutton:
In a year, 60,000.
Ron Shevlin:
Of the payment.
Derik Sutton:
Yeah payment. All right. So then here's another good lens for that though. That's only the deposits that made their way back to the bank, right? How, how many more deposits set in the virtual wallet were spent directly out of that using the real-time Square debit card or purchased services directly from Amazon or what have you, okay. We further went down the list, you then had PayPal, you then had QuickBooks, you then had Stripe and the banks, merchant processing volume was fourth in order. That's the challenge, right. But that's what the data tells us. So now what we're doing and we're standing up and we're actually just starting to test this with Q2. We actually just got three or four banks, access to their data and we're doing the analysis of what's really going on in your bank today. And what we're finding is very similar findings quite frankly, we're seeing a lot of what we call signal deposits coming through from third-party providers.
So now what do we do about that? Okay. So there's one thing to know it, there's another thing to do about it. So from the data side, this is the benefit of embedded fintech in integrating at the platform level. Let's go prove out one use case for the financial institution once we do that, let's scale it to everyone. So now what we're doing is we're literally building a strategic project around targeting businesses that attach S uare, PayPal, QuickBooks, and others. When we see a signal deposit come through, we basically pop an email out to the financial institution that says here's three options. Would you like to email that client and tell them about your solution that you have? Would you like to call them? Here's your script. Or would you like to text them? And we've integrated a texting SMS service.
So what we're looking to do is actually take data as it comes in, in your real time and impacts a customer and then use it to make sure and ensure that the business customer understands, "Hey, your financial institution has a solution that competes against this third-party product that you just attached. Would you like to use us rather than them?" So I think, I think data is going to be to your, to your point. And we've talked about this as an industry a lot, one of the benefits for embedded FinTech is let us get access as a partner to your data, to your benefit financial institution, as well as to the benefit for the end customer, because there's a lot of information in there that we need to use proactively, not just looking at in a board report, but actually use the data for actions rather than reactions.
Ron Shevlin:
So I'm glad you brought up the access to the data portion because I was on a call recently with a CEO of a financial institution talking about embedded finance and embedded fintech. And he asked me about the compliance implications. And honestly, I didn't really have a very good answer for him. So from your perspective, what are the compliance considerations and implications around this access to this data?
Derik Sutton:
Sure. It's incumbent upon us to take down all of the compliance requirements that we had to do in a traditional environment. So in our case, because we're a PayFac or a payment facilitator, we're PCI compliant because we're taking in data, we're SOC-1, SOC-2. And so we have to be compliant in those cases as well. So we, as an embedded fintech provider, we don't get to skirt around regulatory compliance and,
Ron Shevlin:
And that's what the financial institution should be looking for is that accreditation?
Derik Sutton:
Yep, absolutely. Absolutely. One of the things I need, I'd love your opinion almost on this, so one of the objections we're getting or kind of conversations we're having here recently is turning our service on for consumer accounts, integrated invoicing, payment acceptance, and some banks have a bit of a hesitancy around, "Well, if we do that, that basically indicates that they're a business. And so our BSA compliance and our monitoring is different for a business account holder versus a consumer account holder." And so I'm sitting there thinking to myself yeah, that's, that's true, but isn't it also true that these consumers are currently using Square and PayPal for business services? Are you not then taking the same level of critical thought to those accounts as well? Should we, as an industry start to say, hey, if you attach Square or PayPal to a consumer account, you're doing business inside of our financial institution with those third-party products. You either need to turn that solution off or you need to open up a business account with us because you're currently out of compliance.
Ron Shevlin:
Well I thank you for, for saying that you almost wanted my opinion on this. Most people never want my opinion on any of these things. Here's the thing that I will jump in on, on that point is I think you're spot on in that what's, I think the banks are being maybe a little short-sighted on this because yes, there are going to be additional compliance hurdles and implications to this. But given the fact that businesses, business owners are generally more willing to pay fees for value with the banking services, this can be a greater revenue opportunity in addition, and covered like additional compliance and regulatory implications. I mentioned before that, I wanted you to take a look at this from both the financial institution, as well as the fintech provider perspective. So I'm going to ask you to kind of take a...for companies like Autobooks, fintech companies, what's the benefit of pursuing an embedded fintech... what, and more importantly, in fact, let me change the question. What should they be looking for in an embedded fintech relationship? As they're evaluating various platforms? What should they be looking for?
Derik Sutton:
Yeah. Good question. So for one, the company, because where you were going previously, I want to address that because I think it's important. It's important for the company, for us at Autobooks, we don't care to be the brand, quite frankly. We want to be... we have chosen to partner with financial institutions, to the end of helping them better serve and monetize their small business relationships. We feel like the best way to do that is to really be deeply integrated, not only at the product level, but at the operational support level with the financial institution as well. So that's thing one, right? We're fully down that track and that's what we believe. So if you're a fintech provider out there evaluating your strategy from embedded fintech, you need to ask yourself that question first and foremost, do you want to be the brand or are you truly looking to partner with a financial institution to help them become the extension of the support, the service, the capability, and to what end?
And so when you ask yourself that question, I think that takes you down the right path, quite frankly. If you want to be the brand, then go stand up one-off relationships with financial institutions and do referrals and redirects and all that. And your adoption utilization is going to suffer tremendously. The road is littered with people that have tried to do referral-type relationships and redirect people out and do the third party connection thing, and it just doesn't quite frankly, work. If you want to say, all right let's be honest, fintech providers, you're choosing a leveraged distribution model. And within that model, you're saying it's the bank's relationship with the customer first, and we're going to go support that.
If you choose that, then embedded fintech has a lot of benefits. You're going to have to pull back and say maybe I don't need to say the powered by, my name brand being. And I don't need to put my name forward with the customer and things of that nature. I'm going to leverage the power of the platform, the relationship the financial institution has with the end customer, I'm going to deliver my service capabilities deeply integrated with the digital banking channel delivery, so that it feels like, as close as possible, it feels like it's a native feature of digital banking. If you do those things, you are going to get better adoption and utilization.
Ron Shevlin:
Awesome. Derik, I appreciate you taking some time out today. We are out of time, everybody Derik Sutton, VP of Marketing at Autobooks, thanks for joining us and hope everybody will join us for the next episode of Tapping Into The Potential of Embedded Finance, sponsored by Q2. Thanks a lot.
