Ecommerce Fintech Risks: What Happens When Your Payment App Goes Bankrupt?

Welcome to the Ecommerce Finance Podcast. I'm Stephen Brown with LedgerGurus, and I have Stacy Walker, LedgerGurus Head of Growth, here to discuss ecommerce fintech app risks.

Stacy, we've got a bit of a series going on here talking about tech. We talked about AI costs and where we think they're going. We talked about, is it cheaper to vibe code or buy SaaS? And there's something that's been on my mind for a little while now, which is fintech app risks.

0:26 Stacy Walker

Hi, Stephen. Yeah, let's do it.

Let's start off defining fintech. Why don't you go ahead and define fintech for people who aren't 100% sure what that is.

0:54 Stephen Brown

I want to talk about fintech specifically as apps that are involved with the movement or storage of money.

So as I said in the beginning, that could be things like buy now pay later, that could be receiving payments, your PayPals, your Stripes. That could be paying bills. That could be these neobanks where you're storing your money. That could be the fancy credit cards out there. All of those that are involved in the movement of money is what I would categorize as fintech.

Now there's a close category that we work with which I call accounting tech, which is tracking money. But for this conversation I want to specifically talk about the things that are involved with moving money around.

1:33 What happened to Parker

Stacy Walker

Okay, let's do it. So let's start off. Do you have any examples of fintech app problems? I can think of one right off the top of my head. I wonder if it's the same one you'll tell us about.

1:50 Stephen Brown

Yes, I have one. And I don't usually like to throw companies under the bus, but this one failed so poorly that I feel like it merits calling them out. And that's Parker.

So Parker started as this ecommerce specific credit card that gave terms where you could have rolling terms on your purchases. You could actually increase those terms for a fee. So it gave some cash flow facilities. They expanded into bank accounts and some other areas.

2:20 Stephen Brown

And then a few months ago they just went out of business.

In fact, I want to read the tweet of their CEO. I won't call out his name, but you can find it. Well, that was a crazy turn of events. Three weeks ago I thought Parker was going to be acquired in a deal worth nearly ninety million dollars. Yesterday we filed for Chapter 7. I spent most of my twenties building Parker. We went from an idea, blah, blah, blah, blah. And the hardest part is the impact on the people involved. Customers dealing with disruption, employees losing jobs they worked hard for, investors who believed in us losing money.

3:00 Stephen Brown

That was basically how Parker went out of business. And that tweet wasn't actually when they went out of business. There were actually reports in TechCrunch and other news outlets.

We were testing Parker with our little brand. I hadn't pushed them on our customers. We had some customers using Parker. You went into the website, there was nothing. I remember going to support like, are you guys going out of business? Nothing.

3:28 Stephen Brown

I think this tweet came a couple of days later, and it was a rude awakening that fintech has some risks, and when they fail they can fail in glorious fashion.

In fact, I'm still trying to settle my account from Parker, because it just went out of business and I don't know what the balance is. I'm getting these weird letters from the banks that were underwriting their credit cards and their bank accounts, and I'm trying to figure out what the heck is going on. How much do I owe? Who do I pay? It's a complete mess. And it really makes me mad.

4:08 The four risks and vendor risk

Stephen Brown

So I want to talk about things that people should be thinking about when they're using fintech, specifically ecommerce fintech.

4:08 Stacy Walker

So what do you think the key risks are with these fintech apps?

4:08 Stephen Brown

I think there are four risks that you should be thinking about. One is your vendor risk, financial risk, operational risk, and strategic risk. So I want to talk about it in that framework.

4:19 Stacy Walker

Okay, tell us more. Let's start with vendor risk.

4:22 Stephen Brown

So vendor risk. Parker is a good example of vendor risk.

And let's be honest, there are a ton of these fintechs that are startup phase. Meaning they are operating off of venture capital money. They're usually losing money, there are no profits. They're unprofitable, they're burning through cash. They're using those investments to stay alive with the hope of going public or getting acquired someday.

I'll give you the big example. Stripe is still a private company.

4:52 Stacy Walker

Oh yeah, that is a good example.

4:54 Stephen Brown

I haven't read recently what their financials are. I'm assuming that they're probably pretty viable, they're huge. But Stripe is not a public, well known going concern. And so a lot of people are using Stripe.

The reality about the vendor risk is these fintechs are usually riding on top of banks. I mentioned the example of Parker. So these fintech credit card companies are usually working with partner banks for the credit cards, sometimes a different bank for cash accounts, checking and savings accounts, because it's really hard to get a bank license.

5:37 Stephen Brown

And so they're sitting on top of these. Stripe did a lot, I think, to build on top of the most basic rails. It's very hard to build on top of the banking system.

I mean, you worked in banking, right? It's crazy. What was your experience, the regulations and whatnot?

5:53 Stacy Walker

Yeah, it is hard. It's insane. The regulations are off the charts. I can see why fintech has come around, because it's virtually impossible for a small fintech to be able to get any kind of banking license.

6:15 Stephen Brown

And banking, as we've talked about in previous episodes, their tech is horrible. I don't know why. Do you know why? You worked in a bank. Why is their software so garbage?

6:20 Stacy Walker

It's terrible. No, I don't know why.

We were on DOS for years. Think about that. Years, we're still using DOS. I don't know why they're so slow to adopt new tech. I really don't know why. The bank I was at, I know had the financial stability to do something about it. That's just not where they chose to put their efforts, I guess.

6:49 Stacy Walker

But we've talked about also that for an ecommerce brand to get traditional lending is virtually impossible. So I do see a reason that these fintech apps can be successful.

7:00 Stephen Brown

Correct. And what's emerged is this interesting industry where there are certain banks, Thread Bank is one that's well known, that are the underpinning of a lot of fintechs. Where they'll be the banking, the compliance, all the regulatory part of the solution, and then they enable these fintechs to connect to their systems to do all the cool software things.

7:35 Stephen Brown

And so you have this interesting combination of banks where there's some stability. But I worry, Thread seems to be the underpinning of a ton of fintechs. What happens if one of those fintechs goes bad in a big way, and it took down Thread, and then all the fintechs that were on top of Thread were to go down?

I don't ever hear anybody talking about that, but it's something that's gone through my head as we've seen some bank failures in recent years, like Silicon Valley Bank. Who would have thought ten years ago that Silicon Valley Bank would go out of business?

8:08 Stacy Walker

I know, that was so surprising.

8:10 Stephen Brown

And so there are layers of risk here. You have the fintech themselves, and what we've seen with Parker is they can fail. Your money's going to be in some other bank, but unwinding it is a pain. And the problem is, how much of your financial operations are built on top of that fintech? It can take a while to switch things around.

8:39 Bank failures and how to vet a fintech

Stephen Brown

But underneath that, I think an even greater risk is, what are the underlying banks and what is their risk profile?

And I feel like we think that banks are fairly stable. Hey, 08, we fixed all those problems. But I feel like bank failures just go in cycles. We had a couple of banks around Silicon Valley. That was really based off of bond yields and some calls for capital.

9:06 Stephen Brown

So for people who aren't familiar with Silicon Valley Bank, they got a bunch of bonds, interest rates went up, those bonds went underwater. A lot of times banks will get these bonds and then sometimes they need to liquidate them. But if they're way underwater they don't want to, and then they have liquidity crises.

Banks don't actually keep cash. They turn around and they put it to work, and they have all these fancy formulas. And sometimes the regulators have expectations for how much you can deploy. And that's all great until there's a run on the banks.

9:52 Stephen Brown

And with Silicon Valley Bank, what happened is all the VCs were like, they're unstable, go pull your money out. Which further destabilized them, resulting in a bank run, good old fashioned bank run, and the failure of the bank. And the feds had to come in and bail them out.

So that could happen again. And I wouldn't be surprised if there was a fintech bank failure that has widespread issues someday.

10:12 Stacy Walker

Yeah, there are so many of them on top of that. That's a really good point.

10:24 Stacy Walker

Well Stephen, then how do you think our customers and other ecommerce sellers can vet whether a fintech company will still be around in three years?

10:24 Stephen Brown

I think we've gotten a little bit sloppy the last few years with the growth of SaaS. But I think you've really got to look beyond, hey, does it solve this problem, do they have a good reputation?

I think about things like, how much have they raised? When was the last time they raised? What's the word on the street around them? The problem with private companies is there's not always a lot of detail around their financial performance. But they love to brag about how much they raised.

10:58 Stephen Brown

And so I want to see how much they've raised, how long has it been, what are you hearing? What's the word around layoffs? When a fintech has layoffs it spooks me, because I'm like, ooh, they're not super stable. And I feel like fintechs have to operate a little bit differently than traditional startups because they're handling people's money.

So I would look at all those things, and I would just be like, buyer beware for a startup fintech.

11:20 Stephen Brown

Once they go public you have much better visibility. Let's take one that we've used for years, Bill.com. Bill.com went public. You can see exactly how they're doing. You can see how they're performing, if they're profitable, what's going on. And there's something to say there.

11:38 Financial risk and fee creep

Stacy Walker

Yeah, it's so true. What about financial risks?

11:52 Stephen Brown

So I think one of the things you've got to think about, particularly with startups, is fees and fee creep.

I've seen it over and over again where fintechs will come in with incredible pricing. One of the areas we saw this in was bill pay. There was this rush of bill pay apps for many years, and a lot of them have been acquired or they've gone public. But they'd come in with super cheap pricing. And I got to a point where it's like, free bill pay is just a price increase waiting to happen.

12:24 Stacy Walker

Yep, I totally agree.

12:25 Stephen Brown

So I'd be really cautious about pricing that feels too good to be true.

I would also just pay attention to price increases. Again, as a company goes public or is acquired into either a large public company, or, there's a lot of private equity and that's even worse because you don't know what's going on. But I'll tell you one thing about private equity. They don't like to lose money, so for the most part it's good, but they also like to harvest profits. But there's going to be instability when they're small.

12:59 Stephen Brown

I would also look at what are their pricing economics. Are they attached to a percentage of sale? And how does that affect your growth? I feel like a lot of these apps in ecommerce wanted to take a piece of sale, which means you can't really dilute that cost, it just grows with you.

I would also look at who actually holds or controls the funds, and how long it takes to receive funds. These are things that you don't usually dig into but are worth considering.

13:36 Stacy Walker

So if I'm using one of the fintech apps and they suddenly freeze my accounts and my money, what recourse do I have, to protect myself ahead of time?

13:53 Stephen Brown

That is a really good question. And my guess is it's buried in the terms of service. You're probably going to have to get a lawyer.

How much do you understand bank failures, having worked in banking, and when FDIC takes over?

13:59 Stacy Walker

I'm decent at it, I think.

14:14 Stephen Brown

I mean, you're protected what, like $250,000 on an account, and there are all these little exceptions.

14:17 Stacy Walker

Yeah, depending on how it's structured you can be protected for more. But it takes FDIC time to get you your money. And if you're an ecom brand, we already know that cash flow is a challenge for ecom brands. What if this happens during Q4? I mean, then what are they doing?

14:42 Stephen Brown

Silicon Valley Bank spooked me. I diversified banks after that. I was like, I don't trust any of my banks. I'm just going to have multiple banks so I can redirect money if I need to. I've tried not to create balances too big. And we're talking about traditional banks, not even fintechs.

But FDIC, when there are failures, from what I've learned, which I haven't gone super deep, FDIC comes in and they take over and they have to unwind all the assets. But like you said, it's not like you're going to get a check cut immediately. They've got to do an orderly wind down of those assets.

15:08 Stacy Walker

Yeah, it can take months.

15:10 Stephen Brown

And in the case of Silicon Valley Bank, it was big enough where I was super spooked that weekend. I was like, we're going to have a freaking recession starting on Monday. And the government went and bailed out the entire bank, not just the FDIC limit. So they created solvency, which they didn't have to do.

But that bank was wrapped around so much of tech that it could have frozen up the entire tech ecosystem, which could have frozen up the entire economy. So I would argue that we dodged a good recession because of that bailout. And the average person probably didn't even think about it.

15:45 Stacy Walker

Didn't even realize. I think the average person doesn't think about it or realize, right?

16:01 Stephen Brown

But these key institutions can cause systemic failures, as we learned in 08. For those of you who weren't around in 08, you had a domino effect with mortgages and it was just a catastrophe. Well, I think you could have something similar with fintech.

But to your question though, I don't know. I think you'd have to get into terms of service. And my guess is, if your funds get frozen, who knows? So how much is locked up in these fintechs, and what's your confidence in your accessibility of those funds?

16:41 Stacy Walker

Yeah, I totally agree. I love the diversification strategy. I think that's smart regardless of where you're banking or anything else.

16:52 Stephen Brown

Let me pull on that thread just a little bit.

I have this thesis of, even though they're a pain in the butt, always work with a too big to fail bank. So that's like your Chase, your Wells Fargo, your Bank of America. There are like seven really big banks in the country, I think PNC's up there.

And they kind of suck to work with. But my thesis is those banks are not going to go under, because it'd take down the whole country. So it's not a bad idea to have a foot in one of those big banks just in case.

17:35 Operational risk and reconciliation

Stacy Walker

Yeah, I like that. Let's talk about operational risk.

17:35 Stephen Brown

So operational risk, I think about it as, if these are a critical part of your workflow. So like a payment processor, or a BNPL, or maybe you're using something to receive payments, what's the impact if they were to go down?

Or let's say you're using a bill pay app. If your bill pay app were to have a hiccup, how would you pay bills? Could you redirect to something else? And what would be the impact?

18:10 Stephen Brown

Or a different case, what if they just slow down? Now, I haven't heard a lot of cases where there are outages amongst fintech apps, but I'm sure it happens. And I think you have to just consider, and again I would focus really heavily on the startups. Stripe has an incredible reputation. But something new, and this happens all the time, it's the latest and greatest thing. What's their reputation? Have they had outages?

And just kind of think through, if this app were to go down, how does this impact my business? Could I adjust, or could I wait for it to get back online?

18:48 Stacy Walker

Okay, so from the bookkeeping side, where do you see fintech tools break down the most, specifically maybe around reconciliation?

18:59 Stephen Brown

Fintechs are terrible when it comes to accounting integrations. Even the biggest ones, like PayPal, Shopify, they just barf all their data into QuickBooks or Xero. And in general we don't like to connect them directly.

So there are other apps out there. We've had A2X on the podcast that do intermediation between the sales order systems. But in general I don't like pushing the transaction level data from these fintechs. We either like to do summary data, or we'll do bank feed level data into the accounting software.

19:56 Stephen Brown

The fintechs, while better than some systems, oftentimes err on the side of just sending too much over. And so that's not as much an operational risk, but that's an operational impact.

And I think you have to understand, we've seen this all the time. People go out and they'll say, well, I've got two credit cards, three bank accounts, and one payment processor. And then we'll dig in and the team's like, they actually have like five.

20:26 Stephen Brown

And you hooked one of them up to your general ledger and they're making a mess. So that's something to consider. Most people don't use these apps for their accounting prowess, but it is definitely something to think about as well.

20:44 Strategic risk, AI, and a framework

Stacy Walker

Okay. Let's talk about strategic risk next.

20:44 Stephen Brown

So strategic risk I would think about in terms of regulatory and compliance spillover.

At the end of the day, there is a level of ownership around payment data and understanding what to protect. So how well are they compliant, and what are the risks there? Who owns the transaction data?

21:02 Stephen Brown

The other thing I think about strategically is getting too locked in. Let's say you become super dependent on a vendor, they get acquired, and all of a sudden they double their prices. Could you switch?

Software, I think about like supply chain. You hear about supply chain diversification in ecommerce, you think about, do I have one manufacturer? Software in some ways is the same thing. If something were to go sideways with a vendor, how would you adapt? And some are harder. Moving off of a Shopify would be very painful.

21:55 Stephen Brown

But moving from one BNPL to another, not so bad. Or is it? I don't know. Something you have to think about.

And the market changes quickly. So you've got to think about how painful it is to roll this out, how locked in am I, could I unwind it? Is there compliance risk with this partner? Do they have everything buttoned up?

22:21 Stacy Walker

So how much of the compliance burden do you think operators assume the fintech provider is handling for them?

22:29 Stephen Brown

I think they assume one hundred percent.

But the reality when you're using payment processors is you often will have to do a PCI compliance survey every year. I've had to do those. And they'll ask you, are you storing any customer credit cards, anything sensitive? Which usually the answer is no.

22:57 Stephen Brown

But one of the things you want to look at is, are they compliant with financial laws? Those are things that we forget to ask a lot of times. And the big one is PCI compliance, that's a really big thing around credit card information.

There are other things, but that's probably the one that's most likely to fall back on a business. Are you PCI compliant, and hopefully there's no spillover to you?

23:27 Stacy Walker

Okay, so we talked about AI not too long ago. And we know everybody's talking about how AI is the death of SaaS, right? So does this change any of the fintech risks?

23:45 Stephen Brown

Well, the last episode that you and I talked about was buy versus build. And I will emphasize one of the points. I wouldn't touch building your own fintech with a million foot pole. That's really dumb.

I think the way it's going to change it is accelerate how quickly things are developing. I would be really surprised to see OpenAI or Anthropic building fintech solutions. I think, per our previous conversation, we'll see a new wave of technology companies that are AI first.

24:20 Stephen Brown

And so the key is just going to be checking all the boxes I said. How solvent are they? What's their compliance?

But don't go build your own fintech, that's a really bad idea. And as there are new waves of technology companies emerging, you're just going to want to vet them the same way that I mentioned earlier.

24:45 Stacy Walker

Okay. So let's take it a step further. What if I have an AI agent that's moving money on my behalf? Who's accountable when it makes a mistake?

24:54 Stephen Brown

I have no idea.

These are the kind of things that, I would just be really careful about how you're moving money. And the idea of letting an AI agent, like setting up OpenClaw and connecting it to your bank account, to me that just sounds like the dumbest idea ever. But I'm sure somebody's already done it and they've probably found it to be really useful. I don't know, that's probably in some legal gray area that's going to have to get solved in the courts.

25:25 Stacy Walker

Yeah, I'm sure that's true.

Okay, so let's talk about the practical operator framework. What could that look like?

25:34 Stephen Brown

So I'm just going to give you a couple of key questions.

From the vendor, what happens if this company fails? Financially, what happens if pricing changes as they scale, or as you scale? Operationally, what happens if that system goes down? Strategically, does this limit your future flexibility? And who's responsible for compliance?

So just kind of walk through those questions as you're evaluating fintech vendors.

26:00 Stacy Walker

So if you had to pick just one of those questions, and you would say this one is the most important, which would it be and why?

26:06 Stephen Brown

That is so hard. They're all so important.

I think you've got to think about all of them, I really do. But if I were to put a little weight, I think viability. What happens if this thing were to fail tomorrow? Which kind of checks a couple of boxes, the operational risk, the vendor risk. If this were to fail tomorrow, what would be the impact?

That's probably an overriding question that encompasses a lot of the others. And if you're comfortable with the answer, proceed. If you're not, think through it.

26:41 Stacy Walker

Yeah, exactly.

26:42 Stephen Brown

All right, let's wrap this up. I'm going to put this out there. Fintech isn't just software, it's infrastructure. And every infrastructure decision is a risk decision. So choose wisely.

All right, let's call that a wrap. Thanks, Stacy.

26:56 Stacy Walker

Okay, thanks Stephen.