The SMB Tech Innovators Podcast, powered by Gusto, presents an intriguing conversation with Zack Miller, founder and managing editor of Tearsheet, a modern media company exploring the future of financial services technology, innovation, new models, and changing expectations.
In this podcast, Zack shares the insights and knowledge he has gained from reporting financial services news and producing over 650 podcast episodes. He provides valuable information on the complexities of the financial services industry, guiding us through the evolution of financial technology and highlighting the crucial role of seasoned leaders in steering hyperscaling companies.
Podcast highlights include:
- Tearsheet’s evolution and incumbent innovation focus.
- Traditional finance and fintech partnership necessity.
- Regulatory hurdles for fintech entrepreneurs.
- Small and medium-sized businesses (SMBs) hesitance to change financial providers.
- Embedded tools shaping SMB technology’s future.
- Intuit and QuickBooks’ ecosystem success.
- Essential partnership skills in fintech.
- Value of experienced managers in fintech.
- Zack’s view on AI, quantum computing, and crypto in finance.
- Banks adapting to new tech and trends.
- The state of fintech acquisitions and market challenges.
“Intersections are Interesting”: Chronicling the Evolution of Financial Services Technology
Tearsheet is unique in the modern media landscape covering financial services because the team focuses on the intersection of incumbent financial services players, technology, and innovation. Zack stumbled into the world of media over 15 years ago as a hobbyist, though his background in economics and finance as well as work at a hedge fund helped train a keen eye for the stories and people driving innovation. Initially a blogger and podcaster, he immersed himself in the world of fintech startups challenging the status quo of traditional financial institutions.
“At Tearsheet we focus on innovation from the incumbents point of view. That’s been an evolution for us. We started out a little bit enamored with [fintech], but it became very clear to me early on that many of the top venture-backed fintech companies would struggle as standalone businesses… I think intersections are really interesting. [In finance], it’s the intersection of incumbents with fintech innovation and technology.”
— Zack Miller
Today, Tearsheet offers a unique perspective on the relationship between innovation and established financial institutions through the lens of the customer-facing products made available. Through podcasts, newsletters, conferences, and other convenings, the team explores how traditional banks navigate the evolving fintech landscape.
Tearsheet’s insightful interviews and analysis provide valuable lessons on the opportunities and challenges that fintech offers established players. Going beyond the “shiny objects,” Tearsheet looks at the relationship between fintech companies and established financial organizations that create lasting change.
“They Need Fintechs”: Lessons from the Intersection of Traditional Financial Services and Fintech
In the podcast, Zack recounts many of the difficulties experienced by established banks when it comes to adopting new technologies. By examining the concept of “innovation theater,” he sheds light on the challenges that large institutions face in integrating innovation into their culture. Much of the challenge boils down to organizational structure and the idea that innovation is something you do “over there” in a specific team or department.
“A fintech or a technology company doesn’t have an innovation group. They just are innovative. It’s part of the fabric of what they do. Yet as I was speaking to innovation groups at banking institutions it became clear to me how hard it was for them innovate because it was something that had a department head, had a budget associated with it, but it remained externalized in the sense that it hadn’t yet become the fabric [of the business].”
— Zack Miller (emphasis added)
Innovation theater refers to innovation initiatives that give the appearance of progress but fail to deliver significant business impact. According to Steve Blank, who coined the phrase in a Harvard Business Review article, described innovation theater as “Activities [that] shape and build culture, but they don’t win wars, and they rarely deliver shippable/ deployable products.”
Zach notes that many banks are making progress in making innovation part of their cultural fabric, even when many innovation groups are explicitly tasked with investing in fintechs. For Tearsheet as a media business and for fintech writ large, incumbents are the buy side. As Zack points out, the more widely Tearsheet and other outlets share challenges and innovation stories of established financial institutions, the more opportunity there will be for fintechs or other technology companies to connect with these executives in the future.
Go deeper: In a recent Payments Briefing by Tearsheet, author Sara Khairi explores J. P. Morgan Payment’s new solution that eliminates the disjointed experience caused by using multiple payment service providers. Read more via Payments Briefing: A closer look at J.P. Morgan Payments’ new full-stack solution and what it says about the bank’s ambitions (subscription required).
“We Don’t Use the Word ‘Disrupt’”: The Challenges Facing Fintechs, Starting with Distribution
The fintech landscape poses significant challenges for entrepreneurs looking to establish a successful company. Zack shares one of the biggest hurdles: building an effective distribution network, which requires substantial financial resources. This task becomes increasingly difficult as funding sources dwindle. As a result, many fintechs have shifted from direct-to-consumer to business-to-business models, recognizing the complexities of navigating the market.
“One of the questions I like to ask fintech founders when they come on our show is, ‘Would you do this again?’ A lot of fintech entrepreneurs don’t come out of the finance industry. They’re not familiar with the level of regulations, not familiar with what it takes to run a financial institution. They get in, and obviously they’re super competitive and they want to win, but it’s a horrid surprise.”
— Zack Miller
Competing with well-established banks and financial institutions, some of which have built up a century of brand recognition, marketing, and distribution muscle takes a lot of work. While the idea of fintech disrupting the industry is prevalent, Zack drives home the message that “there are no overnight transformations.” Financial services are highly regulated and have been evolving for decades, making it challenging for fintech startups to succeed. While banks are still a dominant force, their numbers are gradually decreasing. Zack notes that increased consolidation has downstream impacts on distribution for new fintechs trying to find a foothold for new, innovative products.
“Neverland”: The Consequences of Multi-Decade Consolidation on SMB’s Finance Options
The consolidation of financial institutions has transformed the distribution of banking services over the past two decades. The number of banks in the United States is down from 8,000 to 4,000 institutions over the last twenty years (roughly) and down from 12,000 decades before that.
Community banks in the US have been in decline for decades.
Number of US community banks as measured by the FDIC, 2003-2022
Source: Federal Deposit Insurance Corporation
This consolidation reflects broader macroeconomic factors, including the aftermath of the financial crisis and ongoing regulatory changes. Zack attributes this consolidation to various factors but notes that government intervention to support structurally important banks during the financial crisis temporarily countered this trend. As a consequence, entrenched winners become harder to compete with and they don’t have to outperform to be able to stay in business.
“There’s a lot of intransigence, a lot of inertia within financial services. If you look at the data, when you ask small businesses [how they feel about their bank], they don’t feel fully-served by traditional financial institutions but very few of them are looking to make a change.”
— Zack Miller
Reducing the number of institutions has implications for distribution channels, especially for SMBs. Despite feeling underserved by traditional financial institutions, SMBs often exhibit resistance to switching banks due to the complexities of transitioning their financial ecosystem. SMBs feel overlooked within large banking institutions, leading them to supplement their financial needs with multiple apps. As Zack points out, this fragmented approach to financial management, characterized by using multiple apps for different functions, further reinforces the inertia within the SMB segment, making it challenging for fintech companies to penetrate the market with new solutions.
“The Future is Embedded”: The Role of Neobanks, Fintechs, and Vertical SaaS in Small Business Finance
The landscape of small business banking is constantly evolving. Recently, there has been a lot of discussion around the rise of neobanks and fintech disruptors like Mercury and Brex. These entities are generating excitement and debate, but they also add a layer of complexity to the ongoing narrative.
Neobanks typically operate solely online, holding a license or charter that allows them to operate independently. However, innovative fintechs like Mercury and Brex rely on one or multiple sponsor banks to facilitate their financial services. This distinction is important to understand the roles and influences of these companies within the small business finance sphere.
“Contrary to the belief that fintechs and traditional banks are at odds, incumbents aren’t disappearing — they’re essential. And they need fintechs to thrive.”
— Zack Miller
Zack shares a story about one small business owner, using modern software tools, who reached out to him to understand why his customers’ payments were processing correctly but the payments were not hitting his bank account. Zack uses the example to point out the power that embedded finance platforms can have on SMBs, but also the added complexity. In this case, the SMB owners’ payments were supposed to sweep into an incumbent bank. Banks still play a major role, whether it’s technical, for underwriting, or it’s just about trust. Many customers want to know that there’s a bank backstop if there’s an issue.
“Going back to the distribution problem, it’s really hard to go direct to a financial customer. What embedded finance has done within vertical SaaS is basically say ‘Banking is not somewhere I need to go. It’s something I do. And I do it in the course of the work I’m doing anyway within the tools I’m already using…’ I think that’s the future.”
— Zack Miller
Decoding the Hype: AI’s Position Among Other Technologies
Given the breadth of guests that Zack has on his platform, he offers an incredible synthesis of the impact of new technologies beyond the hype cycle. In fact, he describes Tearsheet’s role and value to readers in part as “helping differentiate the wheat from the chaff, the sizzle from the steak.” Zack himself feels it’s important to get an experienced, deeply technical leader to talk about what technologies like AI or crypto mean in the industry.
On the show Zack references a recent Tearsheet podcast discussion with Ed McLaughlin, the CTO and President of MasterCard, where the impact of AI on the financial industry took center stage. McLaughlin avoids using buzzwords like “revolutionary” or “seamless” and stresses a practical approach to understanding the real impact of AI, quantum computing, and crypto on payments. Despite its disruptive potential, there is a shared sentiment that the banking sector needs to be more cautious in fully implementing AI, especially in customer-facing applications. While AI is already utilized in back-office operations, such as data reconciliation and credit scoring, its application in areas directly impacting customers remains a complex challenge.
From Zack’s perspective, AI stands out as a technology already making strides in operations, from marketing to script writing, but its full potential still remains to be seen. The cautionary tone emphasizes the need for controlled implementation to avoid scenarios where AI systems might act independently, challenging the traditional stability associated with financial services. Banks and SMBs are cautious about fully implementing AI, particularly in customer-facing applications, despite its disruptive potential.
“AI, like crypto… it’s no longer like a feature. It’s just a platform technology. There are some great pilots but we’re nowhere near unleashing something like that yet… The fact that a chatbot can hallucinate, that’s a banker’s worst nightmare. You don’t want your chatbot to hallucinate and fall in love with your customers.”
— Zack Miller
Go deeper: This Tearsheet article explains how Gen AI is impacting fintechs and traditional banks.
“Learning How to Partner At Speed and At Depth”: How Banks and Fintechs Innovate Together
As the landscape of financial services continues to evolve, integrating embedded financial tools emerges as a key trend shaping the future of SMB technology. Zack recounts his firsthand experience running a small business across disconnected software tools and financial institutions. He also shares the power that brands — even influencer brands for younger generations — have in relation to financial services distribution.
“People don’t generally love their banks. They’re a necessary part of my business life and my financial life, but I don’t necessarily love my bank the way someone loves bingeing Netflix or on-demand delivery from Amazon… In the future, people will bank with the brands they love.”
— Zack Miller
He highlights the importance of embedded tools in streamlining financial processes within existing workflows, noting the convenience and efficiency they offer to SMBs by seamlessly integrating banking functionalities into their day-to-day operations. The example of Intuit’s ecosystem around QuickBooks is a testament to the potential of vertical SaaS in revolutionizing SMB tech.
Looking ahead, Zack envisions a future where vertical SaaS solutions become increasingly prevalent in addressing the distribution challenges faced by fintech companies targeting SMBs. The concept of embedded finance within vertical SaaS platforms represents a paradigm shift, where banking services are seamlessly embedded into existing business tools, eliminating the need for SMBs to engage with standalone banking applications. This integration enhances efficiency and addresses the trust and regulatory considerations inherent in financial transactions.
“For the most part, SMBs feel invisible within a large banking institution, so they supplement that by using apps. I think the average SMB uses six to eight finance apps.” – Zack Miller
He contends that this approach to banking, where financial tasks seamlessly integrate into existing business processes, represents the future of SMB tech, offering a holistic solution that aligns with the evolving needs of small businesses. According to Zack, “The future of finance lies in embedded tools. Some excellent direct options are available, such as neobanks targeting SMBs, whether through a bank or a series of APIs.”
However, Zack reiterates that that the path to this future runs through incumbent banks and deep partnership; not by displacing them. He notes significant progress from banks in terms of understanding what it takes for them to partner with fintechs at scale and he calls out middleware platforms like Arglye as helping advance this type of innovation. He points out that the skills around partnership are not only top of mind for bank executives, they’re a differentiated skill for fintechs as Zack’s podcast with the CTOs of Brex and Plaid makes clear. Innovation in financial services depends on the merger between the technology industry and the incumbents (including regulators). Hence, in Zack’s view, partnership is critical.
Listen to the entire podcast with Zack Miller on Spotify or Apple
To learn more about Tearsheet, visit tearsheet.co. To get notified when new podcasts are available, subscribe to the Gusto Embedded newsletter and read more on Gusto Embedded.
