Season
2
Episode
2

The Architecture for Global Finance with Lucas Vargas and Colton Seal

September 20, 2022
Sankaet Pathak
CEO, Synapse
Colton Seal
CEO, Routefusion
Lucas vargas
CEO, Nomad
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Introduction:

Welcome to season two of Under the Hood, a podcast series brought to you by Synapse. In this series hosted by Synapse founder and CEO, Sankaet Pathak, Under the Hood takes a deep dive into various challenges and opportunities in fintech. Topics range from technical design and architecture to regulatory and policy challenges.

Sankaet:

Hey everyone, thanks for joining us today for episode two off Under the Hood. In this episode, we're going to explore global banking, what that means and what is this new pattern in customer behavior that we've been seeing, how it's been working and what do we need to do to make it scale as quickly as possible. To share their thoughts and experiences, I will be joined by Colton, who's the founder and CEO of Routefusion, which is a global remittance platform. And also Lucas Vargas, who's the CEO of Nomad, who's building a really cool Brazilian US banking product.

Sankaet:

Colton, Lucas, thanks for joining me today. I was thinking about this new trend in fintech, which is people wanting to provide global banking products, and I thought who better to talk to than both of you given, Lucas, you're building phenomenal product for the Brazilian market, and then Colton, you're literally at the center of all local pay-in payouts and the vision around how can people just interface with a global financial stack easily. Might be good to start with what is global banking? I know there are different definitions and I think all three of us have seen this really interesting trend around US banking and access to it. Maybe Lucas from your perspective, how would you define this new trend around global banking and what is it looking like?

Lucas:

Sure. So thanks for an invitation, Sankaet. Happy to be here. So I come from an emerging market, and if you think about global banking from that perspective, it's kind of natural to expect that coming from emerging markets there's going to be a need for people to think about how to protect themselves in the long run and how to make their lives more efficient somehow. If you think about banking and domestic banking, we are right in the middle of a transformation that is happening. So adding the global banking to that equation, it is a lot of complexity. It really transforms how you think about navigating financial products and services. So adding my perspective from an emerging market and that additional variable that really transforms the complexity that we see here, global banking in summary for me is how to make a citizen's financial life efficient. And there is this dimension, which is the cross border dimension that's still extremely, extremely dark and inefficient and costly.

Lucas:

Colton can definitely help here. But when you think of global, that's what I'm thinking about, is how to make my life or someone who is in another emerging market just efficient because you have this barrier. And we see neobanks all over the world, really domestic ones being extremely successful. But being able to really provide a service in a frictionless way to make sure a citizen's life is really transparent when you think of the country where that person is consuming financial products and services, it's something really new. So to me, that's the challenge. When I think about global, it's cross border. How to make that barrier transparent, invisible, so that you can really navigate without thinking about, "Hey, I have this account or I have this financial product for service." And it's just as easy as it is for you to use your domestic card, bank account today in your country. So that's, to me, when I think about global is navigating cross border.

Sankaet:

Yeah. I think the interesting pattern, Colton would love to hear your thoughts on this as well, the interesting customer demand has been three dimensional. It's, "I want to be able to custody funds, not only in the country that I live in. I want to be able to move money effortlessly in not only the country that I live in. And I want to be able to invest outside of the country that I live in". And Colton, you're right there sitting on one of these very important variables, which is just making cross-border money movement, money coming in, money going out very effortless and easy on a global way. Do you align with this three dimensional definition of global banking? What are your overall thoughts?

Colton:

Yeah, Sankaet, thanks again for having me on. When you reached out and you said we're going to be talking about global banking and Lucas was going to be on, I was like, "Oh man. I've been waiting four years to have this conversation." I agree. I think the definition of global banking, I think Lucas said it really well. It's funny, Lucas and I have never really conversed, but the way that he describes sort of what... I'm not going to speak for Nomad, but what may be his mission for global banking is very much aligned with how we see global banking, and that is being able to transact anywhere in the world as if you're a local resident.

Colton:

People like to use the buzzwords like, "Oh, there are no borders. Borderless commerce." Those are cool. Those are kitchy. But yeah, I think for us getting into the space, we're right in the middle, you're right, with FX, the cross border payments. That's what got us started. And then as we kept diving further and further in it's like all of these problems... We initially started Routefusion with this idea of like, "Well, moving money internationally is really difficult on the payout side. There's all these different providers that have built these banking networks and how do you know who's the best one?" And that led us to like, "You know what, the only way you're the best one is if you literally integrated with every single one of them and know what everyone's capabilities are, and then you can decide from there."

Colton:

That led us, obviously, from payouts into going into these different countries. And once you get in, you start seeing, specifically in Brazil, our customers that are wanting to transact FX from Brazil to the US or US to Brazil, they also want to be able to connect into the local payment systems into Brazil. Pix in particular. Same with Mexico, they want to connect into the SPEI network while they also want to have the FX. And then Sankaet you know it, with y'all's Global Cash offering, people also want to be able to have bank accounts in the US. And I think right now it's very siloed. We see it as these individual offerings, but before long with the work that people like Nomad is doing, Jeeves, Routefusion, many others, eventually I think it gets to a point where global banking is just banking.

Colton:

FX will always be there, probably, even in cryptocurrencies. But this idea of it's so difficult to open a bank account in Mexico. Hopefully that doesn't exist anymore. It's like, "Oh, I can work with Nomad and they'll give me a virtual account in Mexico. And I can connect into the Mexican local payment system and make payments there as if I live there." I don't know. I may have talked a little bit in circles, but I feel like we're all very aligned in that sense around what exactly global banking is. It's the banking of, I don't know, maybe the future, the banking of the world. There you go. Banking of the world.

Sankaet:

Yeah, it seems like the pattern that I was very encouraged by, and I think Nomad's done a phenomenal job of that in Brazil. This high demand for what we saw at the beginning, just like access to the US banking rails, and then it seems like it's much broader than that. It seems like it's banking, investing, just easy transactions, money movement, to your point, connecting PIX with ACH, connecting PIX with your card issuer processor. So that for people, the money's just moving as fluently and as easily as possible. It seems like that's what the customers want. It doesn't matter which market you go into, I talk to folks in India, I talk to folks in Brazil, I talk to folks in Argentina, Mexico, at this point, it seems like everyone outside of the US and Europe gets this so obviously.

Sankaet:

But for some reason in the US, people still have a surprise that, "Oh, really? This is a thing? People really want to be able to do this specific thing?" And I don't know what contributes to that. What do you think is causing this? Which is people in the US are still surprised by this pattern while for us who have been working in this industry or people who are not living in the US, Lucas's point, it's like coming from an outside market this is such an obvious thing. What is so obvious about it there that's not obvious about here?

Lucas:

Well, it's a great question. I don't have the answer. But I can kind of think about what's happening recently. The pandemic has definitely accelerated one aspect of globalization, which is global eCommerce. So that has really been something that has become more obvious with the global supply chain. Everything that has happened over the last two years has accelerated both the demand for global services on the individual level, not only in a business level, people buying abroad, global eCommerce, all that stuff. So not only there is demand there, but also better understanding of how economies are connected.

Colton:

Supply chains.

Lucas:

The whole supply chain is behind everything..

Colton:

Supply chains really have come the forefront, yeah.

Lucas:

And everyone is talking about that in the US, "Look at the ports." So I think it's happening everywhere. Everyone is really more connected from that perspective. People are thinking about it, people are talking about it. When I go to emerging markets, and maybe this is just one perspective of what you're saying, Sankaet, Europe there's a portion that is really, if you think about the Euro zone, it's very strong, hard currency. But thinking about the emerging markets only, what has happened in the last two years in terms of volatility, it's crazy. If you look at the very long historical data, what has happened in the last one, two years is unprecedented, at least in Brazil. And I know Brazil has been one of the worst examples here, Brazil, Turkey, and some others. But if you look at least from here, it's become quite obvious that in the long run in an emerging market with volatility, volatility wipes out your wealth, you see that. And when people notice that, it becomes a force towards, "How do I somehow can protect my wealth?"

Lucas:

That's what is behind what we are building. And I've seen some other companies in different countries with similar approaches, which is how do you protect your wealth in the long run? And what has happened with Synapse, what has happened in the last five years in terms of infrastructure makes it now easier with the whole context for those people to have access to a very convenient, in a few cases free, which is our case, for example, way for you to protect against volatility by having part of your wealth, and Colton is part of this equation, right? Part of your wealth, moving from your emerging market, into hard currency and hold that in a, in our case, FDA insured bank account, protected, safe. So all of those aspects, in terms of context, help Brazilians understand and now have access to something that before was unimaginable. We were, in our case, competing with the cushion maybe of like a mattress, I don't know.

Colton:

So it's interesting from the perspective of someone in Brazil that's probably a Nomad customer, if they're not using Nomad, they're essentially like Nomad is a hedge, Nomad is an investment. You could probably calculate returns just by holding your funds with Nomad versus holding it in local bank account with a Brazilian bank. That's-

Introduction:

Nubank.

Colton:

Yeah, like Nubank or something. That's an interesting concept. You're investing without investing.

Lucas:

I can give you an example. I can give you one example that really shows how big the problem can be. I sold my previous company for R$3 billion, Brazilian currency. We signed it in March, 2020. One week before in Brazil the chaos was established. Back then with the back then exchange rate, it was $750 million after seven months of antitrust when the deal was approved, the $750 with the new exchange rate was $550. So the price fixed in Brazilian currency, but for our global investors, it was a big pain.

Lucas:

So it just shows the dimension of the problem that we're facing here. And so to your point, Colton, you're totally right. Just by having now dollars, you don't even have to invest to start with, but just by having dollars, you're solving a big problem. Because money was born out of a need for simplicity. When you think about how money evolved, from bartering to then metal coins and then gold, and then global hard currency, like Fiat. So there's an evolution here. And what we're building is a means to an end that was born of this need, which is basically replacing what used to be different ways for you to store value and protect.

Colton:

Well, I'm curious too. The cool thing too about Nomad is they get to hedge currency risk, but they don't have to do anything complex that I know for a fact Brazilian businesses do every day, every month, whether it's a vanilla forward or booking derivatives against BRL, the USD, whatever it may be, businesses are always protecting themselves. But now the average consumer can protect themselves and it's not complicated. It's frictionless. That's cool.

Sankaet:

Yeah, I think maybe the best articulation of global banking is that, which is a very simple way to hedge against the value that you have in your bank account. You could literally have money sitting in USD. Actually, I'm very interested in hearing both of your all's opinion about this. I am convinced that for global banking the central clearinghouse and custodian needs to be America. I'm just convinced that that needs to be the case for multiple reasons. I think the overall economics here are way better. I think the consumer funds are protected a whole lot better. I think the regulatory regime is far more solid than in other regions. What do you all think? Is that really the case? Are we really moving to like a US bank account federated globally? Is that the future?

Colton:

If you make it happen, it is, Sankaet.

Sankaet:

Well, I'm convinced that's Global Cash, but I'd love to hear your all's opinions on this as well. I feel like it's such an obvious bet. This seems to be the right thing. People want to hold USD. And the interchange rates are a whole lot better here. And it gives you the centralized place to be able to then export money in and out much easily. Because Routefusion exists here, it's much easier to interface with a company like that. So for multiple angles, from just general fintech innovation to the regulatory regime to the stability of the currency, I feel like we literally are in a way just scaling US banking globally. There's not a lot of need for local banking be integrated into this, which I know other BaaS providers and other companies take that approach, like Revolut has taken that approach where they've essentially established bank partnerships in every single country, and you can in way hold money in every single bank account locally. And I'm sitting here thinking, "Is that really needed? Or is it just a US account that you need to scale?"

Colton:

One's going to have a better opinion about it than Lucas, because he's interfacing directly with his customers. We're in the position where we're like Synapse in a way where we're interfacing with customers who have customers. From my perspective, I don't know if it's the US is going to be the dominating force. It seems like it is, especially with offerings like Global Cash, if you can do it in a compliant way. One of the things that I've been wondering is if it doesn't happen with an actual FDIC US dollar account, which Sankaet you know better than all of us the amount of regulation and hoops and hurdles you have to jump through to properly set that up and why it doesn't exist today, it's because it's difficult. Not necessarily from a technical standpoint, but from a compliance and regulatory perspective, you've got to really be able to put together a solid case. You have to have trust with your customers like Nomad that they're going to be doing their diligence. And so it's a very difficult problem from that perspective.

Colton:

And so I've always wondered, "Okay, if it's not that, is it USDC?" Is it still some form of US dollar? And everyone's just going to be hedging, the US dollar will continue to just stay in mainstream. I know when the pandemic started I was watching a lot of Ray Dalio and listening to him, and he's all, "China's coming. They're going to be the new global currency of the world. They're digitizing the Chinese currency." Whatever. And the more that we dug in through the pandemic, the more I was like, "I don't think so." Everything seems to be LatAm, India, even sometimes Europe. People coming here wanting to hold US dollar, whether it's an actual account or it's USDC. Now, then you have to ask yourself is that just because that's historical and that's what we've been trained to think is the most stable currency? Because the US dollar is experiencing its own inflation, but I think about that all the time. I have no idea. I know that there seems to be still a lot of demand for it. My sales guys are surely bringing a lot of those things to the table.

Sankaet:

What do you think Lucas?

Lucas:

I usually get some other questions that are somehow similar, like, "How do you think a crypto.com product with a debit card competes with Nomad?" It's kind of a similar question, right?

Colton:

Yeah. Is that the VC question that people ask you?

Sankaet:

That would be a very valid for of VC in my opinion by the way.

Colton:

I was going to say that-

Lucas:

Maybe that question was more valid two months ago. But yes. But those questions, "How will this new trend really change infrastructure and behavior" And I go back to, at least our case, what we're building and the pain that we're solving and the inefficiency that we see in the market, which is that's the cross border thing. If we are able to think about money, wealth deposits in the middle, this is wealth. You could have, as we had in the past, salt. That was wealth. Or some other assets like barley. People use multiple things. But that's wealth in the middle deposits. And what we're solving here is for, "Hey, an easy way for you to have that wealth protected and for you to use and grow it. Period." That's what we're doing.

Lucas:

So what's wealth in the middle? It can be... As long as it is in the long term stable, period, that's the core of wealth. It's stability. It's being able for you to predict value. So having said that, we're building something here around US dollars and we can have a card, we can have products that Synapse offers, we can have investment products to grow that. But it's around wealth. And if we are able to, "Okay, you're storing here." As long as it is stable, great. But if you're able to use and grow around that, well, you have your card, okay, we can use the card in Europe. So the problem is solved. I'm not answering the same question. But the point is, I don't know. I don't really know. Is it going to be China in the middle? I don't-

Sankaet:

Far too authoritarian.

Lucas:

It's so complex.

Colton:

Scares me.

Lucas:

Yeah, but to me, the point here is stability and having a common and shared understanding of the value is what's behind the coin. And if you think about that from that perspective, it looks like the US dollar right now. I would bet on it.

Sankaet:

Yeah, yeah.

Colton:

Yeah.

Sankaet:

I think there is probably US commerce, which is US payments, and then we try to do some research in Swiss custody, which is the end state, a sovereign country, like Swiss, like you money in Switzerland while payment processing and everything goes through the US. And then you just do an arbitrage custody piece. Didn't give me enough confidence by looking at some of the large banks there and the amount of regulatory oversight they had, AKA, I'm saying I feel like the Swiss financial market is not as stable as it seems. But to your point, I think this is a very articulate way to put it, which is at the core of it, what customers want is stability and ease of use. And it seems like when you look at those two features, America seems to provide that far better than what you will get in China. And I would actually say the economics are way better here versus Europe. So potentially for that reason, much, much better to do it here.

Sankaet:

Colton, there's a point you made that is quite interesting. You're like it's not that this concept is novel. It's been done before. The big piece is can you do it in a way where there's enough regulatory comfort? A part of it is technology, which is, can you do KYC and transaction monitoring well? So when I think through this in my head I feel fairly comfortable that you could on paper do the stuff well and get the US regulators comfortable because US has an incentive in being at the center of all of this.

Colton:

100%.

Sankaet:

But the question that I always go back to, how would local regulators react to this? Which is this pattern emerging where customers are in some way not preferring keeping money in the country and exporting it out somewhere else. Have you all run into anything like that? Or do you all have any thoughts about that?

Colton:

Do you have an example, Sankaet?

Sankaet:

An example would be the Brazilian regulators and their thoughts and feelings around customers not holding money in Brazil but moving money to the US. Because from a US regulatory perspective, if you can do transaction monitoring and oversight well, they'd welcome the wealth versus not. But in a way is exporting wealth from one country to another.

Colton:

But are you ever really exporting it? Because-

Sankaet:

Well, you're technically releasing circulation, right? Because now the Brazilian government doesn't make the 5%, 7% that on every transaction that they would've otherwise.

Colton:

Yeah. Yeah. That's so interesting.

Sankaet:

Lucas, go ahead. I feel like you have some thoughts on that.

Colton:

Go ahead, I'm just here thinking about it. Yeah. I'm sitting here like, "Geez." Lucas is like, "I had someone knock on my door last night. They tried to get me to shut Nomad down."

Sankaet:

You're like a poster child of this in Brazil. So I'm sure you've thought through this.

Lucas:

We're so small compared to what like really is the market. We are so small when you think about individuals, really If you think about the whole FX market, businesses transacting daily, it's really a different dimension. Of course, when you think of like billionaires, ultra high net worth individuals, it's a different thing. We're not talking here about that. We're talking about retail [inaudible 00:30:19] Brazilian and I've heard multiple things and opinions. I not a specialist here at all. But it just doesn't move the needle when you think about how really money flowing cross border by individuals changes the economic perspective from a government perspective, it's so small. So I personally don't think it's that big of a deal. But of course we have to really work closely with regulators. And really actually we help them in many ways just by giving visibility to something that is in a few cases happening behind the scenes, right?

Sankaet:

Already. Yeah. Yeah, totally.

Colton:

So we recently, it's kind of on topic, we recently ran up against some interesting ways that I think entity formation in Brazil keeps, maybe not the currency necessarily, but profits from the currencies going out of Brazil in Brazil. So one of the big things that we've been doing lately is getting deeper into helping our customers hedge currency risk. Our CRO, I call him both chief revenue and chief risk officer, he spent a lot of time on Wall Street early in his career, he's come up with some really awesome programs to help businesses hedge their risk. So we were talking with this customer and they hold a large sum of US dollars and every month they book-

Sankaet:

And this is, Colton, a Brazilian customer pretty much?

Colton:

Yeah, this is a Brazilian customer, yeah. And every month they book, call it, a 20 million notional exposure with BRL against their USD to protect currency. So we were moving really fast in the process and we get down to the nitty gritty. And the way that their entity was formed in Brazil made it such that they could only run currency hedging programs through local Brazilian banks.

Sankaet:

What?

Colton:

Yeah, it's crazy. And we had their lawyers come in on it. Long story short, they're going through a process now to change that. But their lawyers, their attorneys, they had no idea that this was even a thing. I'm sitting here looking at it and I'm like, I don't know how it was, but it's as if in some form or fashion the Brazilian regulators or governing bodies were somehow protecting currency leaving Brazil by keeping all of the profits from them leaving in Brazil. Which was just a really interesting concept.

Sankaet:

Yeah, India has something similar, I believe, unless I'm mistaken, if you export out more than $10,000, you have to give a disclosure. And then I think there are taxes as well that you have to pay.

Colton:

I don't even think you can move money out of China.

Sankaet:

Probably not. What do you all think is missing? I know we're just at the very early, early stages of this, which is this strange global banking product, which to your point, Lucas, is just all about convenience and security for customers. What's missing in the stack from your perspective?

Lucas:

We're all building startups here. So we all know timing is something that is critical, right?

Sankaet:

Yeah.

Lucas:

I think that we are still missing something that you mentioned in the beginning, that is more of a global regulatory framework. When you have two jurisdictions, you have one interface. When you have three, you have three interfaces. When you have four, it grows exponentially. And so I think that's what's missing. We chose to start with one country, which is Brazil, and one US banking infrastructure for multiple reasons. We are Brazilians building a business for Brazilians right now. We really understand how Brazilians behave. We also have proximity with regulators here. So we are here. Even though what we're building in terms of banking infrastructure, you know that it's kind of agnostic, right? But we are extremely convinced that really understanding the local behavior and regulation, not only navigating that regulation but also helping the regulator understand and evolve is critical. And it's the reason why we have doubled down on our focus here right now in Brazil because it looks like there is still a long way for us to be truly global.

Lucas:

If you think of what we've seen, for example, Revolut looking for... They're public about the way they communicate of having a license in each country where they operate. It's hard, man. Imagine. So they're doing the hard way, my understanding, and maybe they will win. Maybe they're going to do that and then they're going to become the standard and they're going to make things really easy and transparent and simple. I think it's going to be hard. That's the main thing, regulation, and I don't really have a good answer. But I think maybe crypto will help moving countries and regulators towards a more shared understanding of what the cross border products and services should be. But I think it's going to take some time.

Sankaet:

Yeah. I think when, Lucas, you and I were speaking once before you also said it's very hard to do multiple regions well for one more reason, which is just understanding the customer and different patterns and behaviors and asks and needs between even the Brazilian market and the Mexican market and the Argentinian market. Which is exceptionally interesting to watch. We've done some work in Costa Rica. We've done some work in Brazil. We've done some work in Mexico at this point, in Argentina. And it's so interesting to see how there are these intricate details around customer pattern, customer behavior that changes. Colton, what do you think? What is missing from your perspective?

Colton:

I think Lucas hit the nail on the head. I was going to add in every naive fintech starts out, and I was one of them, I imagine we probably all were, with this idea of like, "Why do we have to do things like this? Why do I have to have my social security number on this payload to send to this bank? How come they have to have a government ID and a passport photo? This is so dumb." I still hear my engineer sometimes like pulling their hair out over like, "These are just dumb requirements. Doesn't make any sense." I think for us internally we had a culture shift of we can still question things, because questioning is the beginning of diving deeper and solving a problem and all of those things. But I think internally what was missing for us and maybe for other fintechs and regulators is it's actually a culture of compliance, and regulation is strategic. And if you can learn how to play within those rules, that's where startups really shine. I think, not to pat you too much on the back, Sankaet, but some of the stuff that you guys have done, you guys figured that out at probably a year or two before us. You've been around a lot longer. You guys have done some really innovative things there and I think that's-

Sankaet:

Because we're nerds, man. We're nerds.

Colton:

Well, that's the thing, when you start saying, "Okay, compliance and regulation are a part of it, you can't run away from it." Let's get nerdy with it, right? Let's dive in into the deepest form, and it's like, "How can we give them better and more information? Let's almost like let's give too much information. But how do we give more information without requiring too much information from our customers to give us? What are those solutions that we have to build?" And I think when we start thinking like that, it eventually works its way to regulators. And then regulators begin to trust that people like Nomad or Synapse or Routefusion or whomever are here and they're not trying to disrupt their job. They're not trying to launder money or open up the gateways for people to just move money all over the world however they want with no oversight.

Colton:

It's like, no, what we're trying to do is how do we make it more efficient? How do we actually improve that regulator's job? How do we make your life easier? And I think that's the thing that's missing is it's like that message. And I think it is. I say it's missing. I think it just takes time because ultimately you're changing minds. That was one of the biggest things that people would ask, "What was the hardest part about Routefusion?" Culture. Changing culture at banks, changing culture at these large MSBs and FX houses. And I think that's the thing, especially in Latin America, it's almost as if... Latin America has protected themselves selves because of its past. In certain regions. And now Latin America is on the cusp of... It's it. It's the newest, most amazing market. It has one of the youngest populations, some of the most tech adopted countries in the entire world.

Colton:

So I think regulators are, obviously, they're seeing that, they're seeing the economies booming. And once that marriage happens, and even in the US, where regulators start trusting us and they start trusting that we're not just the hackers that just want to break everything. We want to break stuff, but we want to do it for good. I think that's it. And you know what how you fix that? Time. That's it. It's just time.

Sankaet:

Lucas, what's the hardest part of this in your opinion?

Colton:

The hardest part?

Sankaet:

Yeah.

Colton:

The hardest part for us at Routefusion at least is how do we form the right relationships and how do we get the best opinions from moving into these countries and for working with these regulators, and how do we do it in the fastest way possible? That's what's really hard. There's obviously tons of tech stuff that I could probably go into around document collection and verifying businesses in Mexico that want to open bank accounts, which I'm sure you guys are doing, Sankaet. Those challenges, those pose their own problems. But I think the core of it is building a healthy relationship with government regulators in different countries and then learning the lay of the land and not upsetting people. We have customers...

Colton:

Here's a good one. We had to move $5 million out of Columbia the other day for a customer, treasury transaction. Columbia to the US. That was one of the craziest things that we've ever done because the Columbian bank is sitting here, they're like, "What? We're not going to just let you move 5 million US dollars from our Columbian bank to your US. Who are you guys?" Like I said, give Columbia's history, right? The banks have set up themselves in a way to protect them. They have to protect themselves. So we had to go in deep. We had to work with different vendors. We had to work with boots on the ground there to really understand that this isn't fraudulent money, this isn't bad money. This is just a customer's funds that does business in Mexico that needs to move it here, and then it's coming back. Legitimately, it took a week and a half to just get to the end. And then finally we got through it, the money came through, it was a pretty big deal. We gave everyone high fives in the office. Made us closer with some of our partners. But it's stuff like that where the culture has been trained to think, "No. Bad." And we have to build trust and that's the hardest part. Just takes time.

Sankaet:

What about you, Lucas? What do you think is the hardest part about this?

Lucas:

Well, I agree with Colton.

Sankaet:

Lucas is so drained by regulators.

Lucas:

That's what I'm trying to avoid. But I'm going to give a broader perspective here. Before Nomad, I had never bought a US stock. So this is quite new to me. And from a very personal interior motive, I am personally attracted by learning opportunities. Similarly, in my previous 10 year journey in real estate tech, I had never bought real estate before starting that. And here I am again tackling a problem, multiple things that we are doing, we are kind of first movers. And that's really exciting to me. I can relate to Colton's mentioning how naive we are when we have this beautiful idea. "We're going to change the world." And then you'll start understanding after you learn that things can be a little bit more complicated than you anticipated.

Lucas:

So right now, we launched Nomad about 18 months ago. That's when we launched the first version of the app. Since then, imagine we were building, and Sankaet has been part of this, we started this before the pandemic. So imagine how much has changed since then. So if you ask me two years ago it was going to be a different thing. 12 months ago, a different thing. Maybe now is... I don't know. Maybe now is just how unpredictable even public markets are in the short term and how that's affecting everything else. And something that has not even been considered yet which is, those outcomes, how are those going to affect back everything else global?

Sankaet:

That was going to be my next question.

Lucas:

And I don't have that answer. And it's the reason why that's the hardest part for me. That's exactly it right now.

Sankaet:

Colton, what do you think? Public markets are down, there is uncertainty if we're in a recession or not. You and I were talking before we hopped on the pod, seems like transaction patterns and behaviors have not changed yet. But, again, to Lucas's point, Nomad initially was going to be traveler's card, then pandemic hit, no traveling, new pattern emerged. New pattern being people still want security in their money. USD is providing that. And that kicked off something. Now we're potentially in a recession. How do you think that impacts this trend, which is global banking, positively or negatively?

Colton:

I just talking with someone else about this the other day. How do I put this? A, I think that we're all startups. Once again, I'm going to lead with that. Lucas, you led with it last time. We're all startups. We all have the luxury of being able to move fast, quote-unquote "pivot", change, go to market, whatever it is. So I think though from a global banking perspective, Nabeel, who is our CRO, who's been in FX and payments for 30 years, he's gone through two recessions, he's gone through it all. And he always tells us, "Look, man, at least for FX, it's recession proof." In the sense that money doesn't stop moving. And I for me, I always, "Oh yeah, sure. Whatever, Nabs. We got to be it ready." And he's been saying that since we met in 2019, 2018.

Colton:

But now that we're on this like cusp of a recession, I feel like from a global banking perspective, especially with LatAm, what Nomad has been doing and what Synapse has been doing with Global Cash and what Routefusion has been doing with local payment networks and FX, those trends don't seem... To me, it's not as if just because we're in a recession people in Brazil are not going to want to protect themselves and have a US dollar account. If anything, it should speed business up. It's like, "Well, shit. I really have to protect myself now. Inflation's rampant everywhere. If the US dollar's inflating like that, like that means..." I'm making this up. "... That means the Brazilian real is going to go even crazier." It should in theory make you want to go into cost saves mode. So what I talk about with our advisors is, "What's our messaging? What's the change in messaging? Is it as much expansion as it is cost saves?" Buyer mindsets change so...

Colton:

I don't know. I think though in the global space money can't stop moving, people can't stop wanting to protect themselves, opportunities arise everywhere. Like I said, Sankaet, I think we already got a little taste of the recession hitting us, which I told you it made me happy because I was like, "Yes, there it is. Maybe that's the worst that's going to happen. Knock on wood." No, but I don't know. I think it's just a matter of you just have to find, like you said, where the opportunity is. It's always there.

Sankaet:

Yeah. Switching gears a little bit, not away from a recession, hopefully. We talked about compliance a whole lot in the regulatory regime. What about fraud? What does that look like in this new world where we already established that these buying patterns and spending patterns and customer patterns just vary by region? How does that extrapolate itself in fraud? Which, Lucas, I know you have like the front row seat to this.

Colton:

Yeah, I was going to say, I want to hear Lucas talk about that.

Sankaet:

And Colton, you see a much broader aspect of this as well.

Colton:

We see stuff but I feel like Lucas is like ground floor. You've probably blacklisted a few people, yeah? Just kidding. I'm just kidding.

Lucas:

Yeah. I think identity and fraud are definitely the two biggest ongoing projects that we have. As we have been growing recently... I'm sorry?

Sankaet:

Do they ever finish? I don't know.

Lucas:

Ongoing.

Sankaet:

Are they ever finished? I feel like they're always ongoing.

Lucas:

And we have been growing. As any startup, when you think about go to market strategy, you start with downloads and then accounts and then activation of accounts. Have those waves. We are in, especially the last six months, after Brazilians started traveling again, because until November last year, Brazilians were facing 15 day mandatory quarantine before entering the United States. So there was this moment that really accelerated everything and especially in the last six months.

Sankaet:

Well, don't be humble. You're in a hyper growth moment.

Lucas:

My point here is when you think of the consumer journey there are steps, and I will say we are from day one ready for KYC and really that's where we are really solid in fraud. We know this is something that you have to learn on the go. Let's remember, we're talking about a Brazilian using a Nomad card in the United States or abroad and those behaviors, they are not well known. And so we are learning. Having said that, it's critical within everything that we're doing, and it's definitely a shared responsibility with all of our partners. And internally, we always have those two topics being, of course not addressed in conjunction, but they are always one... They walk one by the other.

Lucas:

So that we could be talking a lot here, and this is really a big topic having started with a global banking product building KYC, AML fraud infrastructure was a critical component. And Synapse was from day one a big part of the solution. We established together that the requirements for a robust KYC process, validating locally, showed IDs, passport and then driver's license, all this stuff. And fraud starts with identity, and it's the reason why we always have those two walking together. We made sure we would always be above bar of what is a robust process in the perspective of the licensed entity in the US, using best in class providers in the space. And I remember, as I said, when I started exploring this opportunity, "Hey, fintech..." Talking to my lawyers, "What should I be worried about?" And, "AML crimes are one of the five crimes that you cannot get bailed out in Brazil.", so they said. So that's how serious we take it.

Sankaet:

Oh wow.

Colton:

Wow. That's scary.

Sankaet:

Wow.

Lucas:

So that's it. And so in our case, given that we are talking about a US bank account, another part is the effects component. And we partner with a Brazilian licensed effects bank to take care of the operations of the international money transfer to the US banking system. And it means that we also comply with the local identity and fraud prevention requirements, which may be even more stringent. Because FX in Brazil is regulated by the central bank here in Brazil. So everything is kind of connected. And finally, we partner with a brokerage as a service partner in the US to offer investment products. And this partner expects us also to comply with very similar requirements of a licensed broker dealer. So we take it very seriously. I just wanted to give this broader explanation because it's self explanatory how critical it is before everything else that we do.

Sankaet:

Yeah, yeah. Colton, what are your thoughts? Any crazy stories? Interesting patterns?

Colton:

Oh yeah. When we first got going, it was like our first taste of payroll fraud. So one of our customers was a payroll company that had started building banking features. And anyways, this was when the PPP loans were really big. And what had happened was there was a hack of all these PPP loan information at the government. So then think about the PPP loan, I don't know if you guys dug into it, but it has every single piece of information about someone's business that you would need in order to defraud someone's business, pretend that you are that business owner. So one of the major things that was happening at the time was these people were going and they were targeting early neobank or early stage companies that could give them access to ACH rails and were marketing themselves as real time payments and instant settlement and that sort of stuff.

Colton:

They were setting up accounts and then doing, what is it called... Sending $15,000 or whatever the max was and then trying to instant settle and then withdrawing that cash immediately, and then just walking away because they weren't anyone. It was all fake. We didn't technically get hit, but one of our customers got hit pretty hard with that. So that was kind of our entry point into, "Oh wow, fraud can come in a bunch of different ways that we never would've thought of." We would've never thought that'd happen. But most recently, it's a funny story, I was talking with a Web 3 company and one of their big things was like, "Hey..." Very popular provider that everyone knows here that helps people do instant clearing. Or a lot of people use them for NFT stuff, purchases or whatever. I think their max limit is like $10,000.

Sankaet:

MoonPay.

Colton:

No names, no names. It's not MoonPay though. It's not MoonPay. And this company had this huge demand for their new Web 3 marketplace. Crazy demand. And they were searching the market for someone that would give them upwards of $1 million in instant settlement over ACH. And those not like familiar with why that's just insane, ACH you have claw back periods where people can say that they didn't send the money, and banks generally don't mess around. They just say, "Whatever." They give the money back and you're left with the bag, as they say, left holding the bag.

Sankaet:

Technically about $60 million bag.

Colton:

Yeah, yeah. I just remember going through this conversation with them and they're an early stage company, but Web 3, insane demand. I just remember being like, "All right guys, look, I get it, in crypto world, I'm with you. It should be instant. But in reality, this is what's happening. You can't. No one's going to do this. This is why." We helped educate them a little bit. But I still think they're out there trying to find someone to help give them that instant settlement. I'm like, "Geez, someone's going to get hit hard." No one's going to take that risk on. But anyways. Yeah, we've seen our fair share. I imagine, Sankaet, you guys have seen-

Sankaet:

Oh yeah. I think Lucas put this quite well. We've seen our fair share in the US. And every market is a little unique. Then on top of that, to Lucas's point, the buyer journey and the pattern we have here, which is you live in Brazil, but you're shopping in the US or going to Europe or going somewhere else, it's unexplored. People have done it, sure. But they've done it in high socioeconomic status at brackets at banks. It's not that this data is available. This is the most fascinating thing, we've seen, to your point Colton, so many different ways. And on a constant basis you go, "What? How? How could you have even caught this?"

Colton:

They say that's why PayPal was so successful is because they figured out their fraud detection. That was it.

Sankaet:

I'm not sure how true this statement is, but somebody told me, so I'll repeat that, Max Levchin used to have this saying, which is, "How do you build the best fraud mitigation system?" And the answer is, "By losing a lot of money."

Colton:

Just losing less money than your competitor.

Sankaet:

Than you make. And your competitor, yeah.

Sankaet:

Where do you all think five years from now, what does this look like, global banking? What would you like to see? And what do you think most likely happens? Lucas, maybe you first and then Colton.

Lucas:

Maybe going in circles here again. But I think that we see this huge need for a product that provides seamless global banking for global citizens traveling, spending abroad, preserving wealth for global investing. We also see globally this momentum in terms of regulation to adopt technologies that may take some of the inefficiencies out of the international money flows. In the short term, the solution to global banking will continue entailing becoming trusted partners of licensed institutions globally. And so long term is even... It's hard, right? What is long term these days? Like five years from now? Is it two years from now?

Lucas:

But very long term, we really think this is going to be a world that cross border is not mentioned, is a world in which we don't talk about global [inaudible 01:06:41], is a world in which Nomad is a means to an end. And people don't even think about Nomad. They want to have a Starbucks coffee, they don't want to use our Nomad card. It's about experience. And we are more of a means to an end rather than the tool. So if we envision this future in which financial products and services are just financial products and services and not global products and services, then that's kind of the world that consumers will be really happy and we will be closer to fulfilling our mission. That's kind of how we think about it.

Sankaet:

Yeah. Yeah.

Colton:

That's good. I'm sure we all have these friends that love the conspiracy theory. I mean, who doesn't love a good conspiracy theory, right? But like really dig into it. And I have a big front porch at my house and I always have what I call front porch sessions, where if I have some friends over or my neighbors, we come over, I have a glass of wine and nighttime have good deep conversation. Anyways, one of my buddies was over and he was talking about, "Oh we need to just focus on America. Globalism is the root of all evil. It's... Da, da, da, da." And I think that mindset, even when we were starting Routefusion back in 2016, 2017, we were nervous. Because we were like, "Oh geez, this whole idea of globalism is going away. The new administration..." Whatever.

Colton:

But I think what's inevitable is that the world has to get smaller. This idea of globalism, global banking, a global economy, those things have been, I guess, propping up the world, have been the cause for I'm sure a lot of very bad things, but also for a lot of really amazing things. And I think it's been historically, at least for consumers, like Sankaet you said it earlier, it's been maybe for those of a certain socioeconomic class, extremely wealthy people that can have those things. But you see it with Nomad, I'm sure there's other companies that are doing similar trends all over the world where it's giving these things that have been exclusive to those wealthy individuals or maybe those... What I always say for us from the B2B side is giving the power that the largest companies, that the Fortune 500 has had, giving that power to everyday businesses to grow into new markets, to expand, to continue accessing the global economy.

Colton:

All of that to say that I am convinced that it's impossible to stop this movement of global banking or getting rid of borders or whatever it may be. I think in the next five years it's going to be... Shit, I'm excited. Five years now, I'm trying to think. I'm like, "Okay, if we continue to do that, what's our transaction volume going to be in five years?" I'm trying to [inaudible 01:10:30] I'm like, "Oh my."

Sankaet:

I think, "Which Avengers are we going to be on?"

Colton:

Which Avenger? Yeah. Oh man. Let's not get going on Avengers. We took the team... Now you got me going. We took the team to see the new Doctor Strange, the ones that are in Austin. People went out and saw the new Doctor Strange. Epic movie. Maybe my favorite Marvel movie.

Colton:

But back on topic, the next five years, I don't know. Someone's got to go public. Other than, I guess, TransferWise or Wise is one of the public companies that's done some cool stuff there. But not on the New York Stock Exchange at least. So someone's going to go public. A lot of consolidation probably. In five years what you'll probably see is everyone's going to be talking about global banking. It's the new big thing.

Sankaet:

Yeah, I think so.

Colton:

Maybe. Who knows? I think it's always been a thing. But no, I think that continues to happen. The world continues to get smaller and smaller and smaller. But I am adamant, I will say, as much as I want a smaller world and easier access to financial services everywhere, I still want everyone to keep their culture. I would really hate to go to Brazil and have to eat American food.

Sankaet:

You mean Taco Bell?

Colton:

Taco Bell.

Lucas:

Chipotle.

Colton:

Yeah, exactly. Taco Bell.

Sankaet:

Chipotle would be hilarious in Brazil.

Colton:

Chipotle, yeah. I always call it Chipotle.

Sankaet:

Oh gosh.

Colton:

I try and put as much of a gringo twist on it as I can. Chipotle.

Sankaet:

Oh, god. By the way, for people who cannot see this, I think you are having great hair day today both of you.

Colton:

I don't know. Lucas definitely has the better hair.

Lucas:

I'm sorry?

Sankaet:

Yeah, Lucas definitely has the hair.

Lucas:

No, should I [inaudible 01:12:39].

Colton:

Lucas, do you surf by chance? Are you a surfer? I don't know. You got the hair, man. You're in Brazil.

Sankaet:

That's true. I'm sure surfing would be fun. But guys, that's all I had. Thanks a lot for joining me. I really appreciate it. I enjoyed the conversation about global banking and where you all think things would be in the next five years.

Lucas:

Oh, thanks.

Sankaet:

Thanks for coming by.

Colton:

Yeah, this was fun. Thanks for having me.

Sankaet:

Awesome.

Sankaet:

Thanks again for joining us for this episode of Under the Hood. And a special thanks to our guests as well. If you like the podcast, please go to synapsefi.com/underthehood to subscribe. Thanks again. See you next time.

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