How Brex Built and Scaled Their Accounting and Financial Operations #028

In episode #28 of Fintech Underground, our CEO Yoshi speaks with Erik Zhou, Chief Accounting Officer and SVP of Finance and Accounting at Brex about the following topics:

1:00 - How Erik transitioned from auditing at PwC to the world of startups, including implementing new processes and overcoming challenges.

4:00 - Building an internal account team compared to the process of being an auditor.

9:00 - How internal accounting and financial processes scaled during Brex’s growth from 70 to 1,200 employees.

22:00 - Why Brex built a broker-dealer entity within their business.

37:00 - How Brex is working to position itself as the go-to commercial financial services provider for now and the future, and his role in getting there.

44:00 - The pros and cons of remote work in a scaling company.

51:00 - What is the one undervalued opportunity you see in fintech?

Thank you for listening to Alpaca's latest episode of Fintech Underground. You can listen on Spotify or watch on YouTube:

Full Transcript

[00:00:00] Yoshi: Hi, I'm Yoshi, I'm the co founder, CEO of Alpaca. Welcome to our podcast. I'm today with Eric Zou, who is a SVP Finance and Accounting at Brex. Brex is a fintech spend management service provider and combine both financial services and card issues along with the software to manage your spends. Additionally, Brex provides commercial banking services where businesses deposits funds. Earn yields and can address all transaction banking needs and Alpaca is a proud customer of Brex. So, Eric.

Erik: And we are a proud service provider to Alpaca, who was one of our earliest customers. So thank you, Yoshi.

Yoshi: No, thank you, Eric, for, uh, you know, taking your time to be on our pod. So you've been at Brex for a little more than six years. 

Erik: Almost six years. 

Yoshi: And then, you know, you were a PWC more than 10 years before moving to Brex. So can you tell me what was the biggest reason you moved to Brex and also tell me why you didn't move to Brex or to the startup world for more than 10 years?

Erik: I'll answer the second part first. So I started my career right out of school at PricewaterhouseCoopers in New York. I was in the banking audit practice. I spent six years in New York and then I moved to San Francisco with the same practice but within the firm and I covered other financial services institutions in San Francisco. But drinking the Kool Aid isn't quite the right definition that has a negative connotation to it, right? But I really enjoyed the work. I was on a lot of different clients. I was, yeah, we were doing audit. But you know, there, I felt there was a lot of value that I was providing also to my clients with observations that we were providing advice on certain complex transactions, frankly, just like getting the audit done on a really big client like JP Morgan Chase. 

[00:02:00] Erik: Yeah. You know, what, like we got it done within like 45 days, faster than the 60. And the Herculean effort sometimes it takes with a large group of people that gets something like that done. It just felt good.

Yoshi: Then, then why, why, why did you move? It sounds like, uh, 

Erik: I wanted to make partner. Okay. Right. I, I, I definitely was trying to make my way up the ranks at PwC. And the thing is. It's tough, right? Making partner at a firm, it's not a promotion, it's an admission. Those are different things. You could have all the skill sets and all the, you know, whatever it is that you need to kind of serve in the role, but ultimately it's a selection by a group of existing partners that will accept you as one of them into the practice. You know, if I look back, I want to tell myself that I would have gotten there, but I also thought like, okay, well. It's going to be another however many years probably to get there. And this opportunity at Brex kind of fell in my lap. So I wasn't looking at the time. The CFO of Brex is Michael Tannenbaum.

Erik: Michael Tannenbaum was a client of mine from when I audited SoFi. He was the VP of finance then. And we just kept in touch and then when he became the CFO of Brex and they were about to close their Series C, he reached out and, and gave me an opportunity to build out an accounting function. Yeah. I first managed the accounting function before I started doing more finance work at Brex from the ground up. And I had learned, I don't want to say all that there is to learn, but I saw a lot over 10 years. At PwC, I knew exactly the business that Brex was getting into with being in financial services and the importance of like books and records and avoiding reconciliation issues like sometimes you see with Synapse and others that you see in the news. And I was all for it. I wanted to kind of test my skills in this way and that's why I moved.

[00:04:00] Yoshi: So I think like, you know, doing the audits and the accounting work. From the outside to other companies and building the accounting team. I guess like there are a lot of similarities, but like, you know, fundamental difference is that you are, have to actually create a team and that you get audited by old you, right? Like what was the biggest challenge having the big four experience? But like, you know, building this actual team, like what was the biggest challenge that you felt moving into Brex?

Erik: I think the biggest challenge in that first month, yeah, uh, there was another accountant. He's the controller now. His name is Kevin Moore. He's great. He also worked with me at PwC. And I gave him hell that first month and I probably didn't need to. I was so focused on the result of like being spic and span. I probably went a little overboard in my comments and like trying to make sure like everything was like perfect and everything. Cause I was, I was looking at it as an auditor, but the fact is, you know, the audit and the auditor is one stakeholder out of many, many, many other stakeholders for accounting, right? I need to be able to also deliver.

Erik: The books and records and results and analysis behind those results to internal management. And that's a little bit different than USGAP. And then the speed with which I do that is very important. Like I don't want to wait three weeks after the end of the month to tell leadership how we did last month. They kind of need to know within the first week, especially when you're in a startup, you kind of need to See how you're doing and rapidly change course or, you know, be, you have to be agile,

Yoshi: which means that the priorities that you had to put on is sound like a different, like when you're being an auditor or you're actually building the internal accounting team.

Erik: Like when you're, when you're an auditor, you're like a food critic. Okay. Right.

Yoshi: Interesting. Yeah.

[00:06:00] Erik: You're like a food critic. You go to a restaurant. You taste the food and you give it a grade. Yeah. You may not care that much about how the sausage was made or the entire process that all these chefs had to do to get the food prepared because preparation for the food is probably the hardest part.

Erik: Right? That could take a lot of time. And I have a great appreciation for how the sausage is made now. Like I, I think I care even more about the process. Then the result, because frankly, if you have a good process, then the result will just be good. It'll be as accurate as it can be. Of course.

Yoshi: That's interesting because like obviously I never have been an auditor, but like we kept getting audited by multiple accounting firms. And I thought that they were actually looking into the process, but like, you know, it's interesting. You see that comparing like both experiences, you actually see much more process side from the internal than looking up from a

Erik: The thing with auditors is like, I was an auditor for 11 years, right? Yes. People in the practice, they're career auditors. And they've never booked a journal entry. They've never run payroll. They've never run accounts payable and collected an invoice and try to match it to a purchase order. They've seen the results of someone else doing it. They kind of think they know what it looks like, but they've never done it themselves. And there is a gap there. It's very different being on the audit side versus actually doing the A to Z of running your accounting and finance operation.

Yoshi: Was it, was it scary? Like when you go in, uh, internal and you are the one who's actually pressing the button to like make payrolls or like you're deciding, you know, actually putting the numbers. Into the entries that you've never done before. Right. From the, uh, being an auditor, how was it like, you know, first time you've done that?

Erik: It was an interesting experience. I was definitely, I don't know, it's scary, but I was definitely very cautious and I wanted to make sure that those entries that I first posted were correct.

[00:08:00] Erik: I remember my very first entry, it was a, it was a lease entry. Uhhuh . It was for rent expense. And when you do rent expense, there's these rules where you have to straight line, like leasehold improvements. There's like some rules, they're not like that complex, but there's a spreadsheet and I double check those numbers like three times.

Erik: Wow. Before, uh, pressing the button. Because it was QuickBooks. Yeah. There's no review. Right, right. You post it and it just shows up. Yeah, yeah. There's no second, there's no like, uh, waiting period for someone else to review before it goes in. Right, right. Yeah.

Yoshi: And then during your career in six years, how many people were at Brex at that time? And then how many people are at Brex right now?

Erik: So when I joined, we were around 70 folks. This is December of 2018. And now Brex has almost 1200 people.

Yoshi: Wow. So I think like, you know, as you grow the company and in terms of the headcounts, I feel like, you know, you also have to scale what you do. What was the, you know, change that you saw in terms of like, you know, hiring people and then how you interact with the people around you and the team? Like was there a clear difference when you look back six years ago when you joined? And then also like, you know, how you're doing it right now. Is there a very clear change or like, you know, like there's specific like kind of tipping point that you felt, Oh, I kind of got it that like, it's a very different company now compared to. When you joined, like when there was like only 70 people.

Erik: There were never any overnight changes. That's what I felt. So when we were 70 folks. I could probably say that a milestone we reached was like when we hit 200 folks and then 400 folks and then I think between 400 and a thousand there weren't any that like many particular milestones but even at those headcounts it wasn't like overnight we hit 200 and like we changed everything the day after right there were definitely some gradual changes that we made Policies for the company, controls around spend for the company The way that people on my team had kind of like more isolated jobs over time.

[00:10:00] Erik: Before, we would have a staff accountant or senior accountant. Yeah. And they would do many different jobs. They would do AP and they would do GL close and they would do X, Y, and Z. As the company gets bigger, those individual jobs, there's just more volume. We used to get like, you know, a couple of invoices a week.

Erik: Now we get like 400 invoices a week. And so I, I now have to have a separate like accounts payable team that just manages all that spend and making sure vendors get paid and, and all that stuff. And not just making sure they get paid, but also ensuring that when an invoice comes in, It's actually matched up with a purchase order, right? Because those are the things where like, yeah, I mean, it's like worst case scenario, but you ever heard the story about like at Facebook, someone just sent invoices because they pay everything?

Yoshi: Yeah, I think that someone was like, you know, they keep charging for nothing to big companies like Facebook and Snapchat and they all pay, right? Yeah. Because they don't even care and they don't want to check.

Erik: Yeah. Yeah. So, you know, it's like, it is not as prevalent as one use article might make it appear, but it's good to have like that one control or have someone in charge of this just so, because the worst that could happen is something really bad.

Erik: Yeah, actually. Yeah. Yeah. So definitely the segregation of functions across different people, people having their own swim lanes more. Yes. For me. Something that you have to do. The other side to it is like, yeah. When you start doing that, yeah. The job becomes a little bit less dynamic, right? Yeah. And then what I've always tried to do is I rotate people. Mm. Interesting. You gotta rotate people. Yeah.

Yoshi: Yeah. Yeah.

Erik: And it's because like if you hire a high performing finance and accounting function Yeah. You know, they'll wanna get promoted, they'll wanna do more someday. Yeah. They wanna grow. And if they. stick themselves in one particular role, they may not get enough experience over time to actually be like, be like me or be, be the controller or whatever. And so I've always been a big fan of mobility within the team. And that's one of the things that I really try to champion as the company got bigger.

[00:12:00] Yoshi: What is a typical duration when you do rotation? Is that three months, six months, one year? Oh, it's like a couple of years. Couple of years and then move. Couple of years, yeah.

Erik: I think at least, I think you need at least two to three years within a particular role to really like gain some level of mastery.

Yoshi: And then I think like, you know, another thing is that like, you know, when the transactions volume increase, like, you know, regardless of it's like, you know, the internal company stuff or. You know, actual clients volume, you know, obviously like, you know, we need to increase the people to do stuff. But at some point you start thinking about you cannot scale the people alongside with the transaction scale, right? You have to optimize each person's roles or jobs. These are like, you know, the certain point that you start thinking about creating a metrics like, you know, how you're trying to optimize things, trying to be more quantitative in terms of like, you know, okay, you're becoming more efficient than. Last quarter, we're like, you know, when didyou start doing that kind of thing if you do it now?

Erik: We started tracking like our month end process probably three and a half or four years ago.

Yoshi: Okay.

Erik: And that's

Yoshi: when like around like, you know, how many people?

Erik: So that was 2020, right? So it's pandemic. We were about 400 something people.

Yoshi: So like, you know, seven, 70 to 400 now. We're like 400 to 600 people at that time.

Erik: Yeah. Okay. Yeah. Yeah. And so one of the things we track is like success on like seven day close. So seven business day close. So we'll do accounting close by BD4. So that's when accounting is kind of done. And then those books and records end up flowing into FP& A and FP& A can then start preparing the management pack with assistance from accounting as well for some of the explanations. And so we do that by BD7. Other things like, you know, we try to do all our bank recs within two business days. We try to do overnight actually, cause we have a team in India. 

[00:14:00] Erik:And so usually by the next day, all the bank recs are done, but there's always like a few reconciling items that straggle, but we try to get them all covered by business day two.Following a bank close, we do like weekly runs for AP and our corporate card, accounting. It's more like those operational things. So we just try to make sure during the month, we're doing a lot. So that when it comes to the month end, a lot of it's already been done.

Yoshi: Yeah, and you can hit that specific like, you know, deadline dates that you have set it up, you know, part of the probably key results. And is there any metrics that you do? For example, I think like, you know, targeting the date achieving that is one thing. And I think another thing is like, you know, how much of the resource that you're spending to achieve that thing is also another question, right? Like, you know, more of the efficiency.

Yoshi: Like, you know, do track, for example, how many people's doing, uh, how many tickets or like, you know, how many people, do you do that kind of metrics? 

[00:15:00] Erik: Yeah. So we track like the number of journal entries, for example, that our India team is posting. And so we expect there to be, call it, like 600 journal entries that they get through at the end of every month. And then we look at the actual number of journal entries that they went through. Now, it's not a perfect metric, like in theory, well what if I don't need 600 journal entries? Right, right, right. But, you know, based on like the process as it's designed. And the number of bank accounts we have and all the other activity we think, okay, 600 journal entries is the right amount of output with the supports attached and everything that we expect them to do every month.

Erik: So that's like one thing for our productivity. And then like, you know, there's another thing where. You could argue if there's more activity, we would expect more journal entries. And so we would have to think, okay, do we need another person there? At some point, we also like know that everything can be manual. So we try to automate.

Yoshi: Which should basically like, you know, drastically improve that efficiency metrics, right? That 600 may go up to like, you know, 3000 or something with the automation and some kind of systems.

[00:16:00] Erik: Yeah. Yeah. So, so like one of those things that we did was. For our banking product and our broker dealer product, we used to run a process pretty manually by downloading all the data from the transactions and we had an algorithm basically in Excel that spit out what the daily journal entry should be.

Erik: We automated that, so we started doing straight through processing for all the transactions. We can automate the actual journal entry that gets posted for all these customer activities. Now, it's not perfect. That's the thing. Like, because when you automate at our size, it helps you automate what you've done already, or what you've planned already.

Erik: But if your business grows and changes, and if there's a change to your process, that automation will need to be reconfigured to capture all the new stuff. Okay? So one automation job is not going to solve your problems forever. Because your problems will change, right? And so what ends up happening is you end up needing to supplement your automation with humans almost always, unless you're going to tell me your process is never going to change ever again. This is your steady state business and all that, right? Cause that's just not how it works.

Yoshi: And I think when that people are scaling, like, you know, headcounts was scaling so fast while of course business is growing so fast, you know, there are a bunch of the product and engineering resource that is put into to build a product. Client facing products. And then there's the resources that, you know, you have to do automation in your departments and teams. Like, how was your experience, like, you know, fighting for the resources or like, you know, you really didn't have a hard time that, Hey, guys, like we really need to automate this.

Yoshi: Help me to, like, improve my metrics. Was it kind of deprioritized or how was it like to make sure that what you, You want that process to be, you know, automated, which means you need the tech resource, engineering resource by the company to do, right? So how was it like?

[00:18:00] Erik: It's a struggle for resources for sure. I also really tried to ensure that every time I asked for resources or I had a project in mind that there was true like ROI. So I'll give you an example of the other side, which is. I've seen, you know, folks make requests to automate something and engineers will size and scope it because They just see a problem and like, okay, let's just try to fix it and automate it.

Erik: Sometimes they don't ask the right questions on like what the actual time savings will be. So I've seen situations where, well, this would be so great if it was automated and blah, blah, blah. It would save me from doing this and that and the other, and I'd be like, Oh, okay. How much time does it actually take you every month to do?

Erik: And the guy's like, Oh, it takes like an hour. Each month, I'm like, oh, okay, that's not that much time. And then I ask the engineer, well, how long is it going to take to, like, develop this, uh, program, put all this code into production? And he's like, oh, it's like six eng weeks. I'm just like, well, maybe you can keep doing that, what you're doing for an hour each month.

Erik: Yeah, yeah, yeah. Right? Like, that's the give and take. And I, I, I sometimes, like, just boil it down like that. Right? Cause sometimes, like, Like, that's not scale. Those six engineering weeks could be spent on something else that's going to save someone even more time or, uh, it'll, it's, it's someone like customer, somebody customer facing even like, you know, so the way I fought for time was like, you know, what ended up happening is that when we do the books and records for the broker dealer, as an example, if you're doing it manually, you have a lot of questions where all those questions were based upon data that's generated by our infrastructure system for the business. So I end up going to them for all the questions and figuring out what's going on and support for this and that journal entry and accounting anyway. 

[00:20:00] Erik: So that's one of those things where like, okay, I can't avoid asking you the questions if you're not going to build out the automation for this accounting process, but that's when they really feel it. And then we got an audit and like the auditor will ask them questions and all that. So those are situations where it was very clear, like, okay, this is kind of unavoidable. We have to Do something to make this more efficient.

Yoshi: Yeah. And before going into that, like broker dealer related thing that, you know, you mentioned when the engineer asks for the requirements, ask those questions, uh, Brax, is that an engineer who does the requirement gathering or is a product manager or like, how is it usually structured when like, you know, going into that extremely technical, basically like, you know, scope for the engineers to, you know, being, uh, having to build the automation systems.

Erik: We found a mix. At first, it was an engineer. We had engineers and we were working directly with them. Like, we were basically the product managers. Got it. Right? Like, we weren't going to get a product manager to come in that knew better than us on what we needed. You know, I mostly hire, like, folks that have accounting experience at a big four or know systems to some degree, so I think we were the right fit for those kinds of discussions. There have been a few product managers that have come in and out because ultimately the requests that we have do impact. how the infrastructure for our business needs to be designed.

Yoshi: Understood. So like, you're the product manager comes in when that she or he is looking over, like, you know, more, I guess, like consistency amongst other infrastructures.

Erik: Sometimes the request that we want, it's not an output. It's not just an output, right? It requires a change. In the machinery in order to generate the right output that we're expecting. So that's when product managers have gotten involved historically. So today we work with a couple of product managers, for instance, in our Brex business account product.

Erik: Um, and we tag team on a variety of issues. Actually, we end up helping them also to figure out the right flow of funds. And ways to document customer records like account statements, which end up serving our customers, right? 

[00:22:00] Erik: Those are, those are the things that our customers sign up for. So it's been good that way. Yeah. Brex is nice because I think There is like a high value placed on, flow of funds design, accounting impact, etc. So it's been good for my team. Got it.

Yoshi: And then you also started the broker dealer entity Brex, even though you came in as the, uh, you know, accounting, you know, chief accounting officer. Now, of course, you have a different title. Firstly, could you explain why Brex has a broker dealer entity?

Erik: So Brex started off with our core product, which is the corporate card. And at the time, the way we were underwriting customers was pretty novel. We mainly catered to other venture backed companies. And when those companies would go out to try to get a corporate card or a corporate credit card, they would need to go through an underwriting process with a traditional financial institution.

Erik: That process could be very long, and it could take like four to eight weeks. And then, well, the company has no credit history, the founders are young, or the founders are foreigners, and maybe they don't have enough credit history. And you do this whole process, you end up with like a 30, 000 card limit. And that card limit is barely enough to even pay for your Amazon Web Services bill every month.

Erik: Or your Google ads or your Facebook ads. And the thing is, they were looking at operating history and credit history and all that. And we were just thinking, well, this company has 5 million in the bank, we could just underwrite them based on visibility into the bank balance via a plat or finicity or some odd connection.

Erik: And that's the kind of credit arbitrage that we did. Okay, I bring up that story because By launching that product and giving our customers the credit limits that they needed to just operate their business. And by the way, it's much simpler for a founder to have a card with that limit to then plop down the card number to do recurring payments to Amazon and Facebook and all that.

[00:24:00] Erik: It just takes a lot of work out of their schedule to like go on to a bank portal and send a wire or ACH, right? So that's the whole premise for that. But then as part of it, we were able to see all the bank balances for all these customers. And we could see that all these bank balancers are just sitting in checking accounts.

Erik: And oh, by the way, those checking accounts aren't earning any yield. And so we saw an opportunity there where for our customer base, if we created some kind of treasury management product. That that would be appealing back then this is 20 late 2018 right but going into 2019 rates were starting to go up, right, I don't know if you remember back at that time but rates got up to like two, two and a quarter fed funds, and some of our customers they were still holding and checking accounts and not earning.

Erik: Kind of like a maximum yield, even on a short term basis. And so we created the broker dealer to provide a money market fund sweep. That money market fund sweep basically earns equivalent of overnight rates, the fed funds mainly. And that's where it came from.

Yoshi: Yeah. Like I still remember I was on the call with Pedro, like, you know, that real time changing around the landing page messages. Like when, you know, you're launching the product. So that was really, yeah, that was really fun times. So Brex is a broker dealer entity, but Brex does not have a banking entity from the, um, financial services, fintech companies, there's like, okay, tech only companies, there's a company that has, uh, you know, certain licenses.

Yoshi: What has been your license strategy? Because like for the broker dealer side, you decided to get FINRAI CC approved and get the license. The banking, it sounds like, you know, providing a yield, that product, it sounds like a banking product. Like why didn't you go to the route of the, you know, getting the banking license? Or are you, you know, planning to do that? Or because it's interesting, right? Like, you know, You have a broker entity, but you don't have a banking entity.

[00:26:00] Erik: I think it's much more common to get a broker dealer license and have a captive broker dealer entity than to have a captive banking entity when your main business might not be banking, okay?

Erik: And I know corporate card issuance is often a business of banks, but it's only one of the angles that banks So we didn't provide products, and we weren't intending to provide any of the other banking products at that time. And then to get a banking license, it can be very difficult for a tech company that's really focused on growth.

Erik: You know, you go through the bank license application process, they kind of want you to be profitable within a couple of years.

Yoshi: So you felt like it's pretty different compared to getting the broker license, broker dealer license or banking license, like, you know, the requirement. It's pretty, like, very different.

Erik: It's different. It's definitely different. Now, it wasn't easy to get the brokerage license either, but, you know, it's very different than the operations for a bank and the capital requirements for a bank and frankly, the market view of running a bank and the multiple that comes with running a bank. And so, it's just not something that, You know, we've been interested in taking on the, I don't want to call it baggage, but taking on the requirements for it.

Yoshi: And then since Brexit is not a bank, obviously, like, you know, you partner with the existing banks to, as you say, like, you know, issue cards and stuff like that. You know, those banks names are on the, uh, each of the Brexit credit cards, so there's nothing secret about it. But like when you work with the banks, if it's okay to speak about it, do you work directly with the banks or there's a bunch of vast banking as a service company that existed?

Yoshi: We can talk more about that, but like, you know, how does that work and what was your decision making process to decide certain structure that you use at Brex?

[00:28:00] Erik: So one of Brex's main tenets in our operations is that we want to be the system of record and we want to own that ourselves. And we didn't want to be beholden to a bad services provider and kind of leverage their system of record because if that happens, what ends up happening is like, if we want to push a change that would benefit our customers, but it requires some change to the system of record.

Erik: It's not in our destiny. Like we have to work with this third party and try to get into their next sprint or what have you. And it adds like a level and layer of complexity that, you know, it's not all within our control. And so we decided to build our own card infrastructure from the ground up. We built our own deposits infrastructure from the ground up.

Erik: Was it a big investment? Yes. Was it easy? I would say no. It's actually difficult to continue to build it out and to maintain it. But I think the fruits of those labors are that we do have a lot of leeway. We are in complete control of like, The kinds of products that we want to offer our customers and we are able to present them on the front end in the way that we want.

Erik: Because there is this like transition period where like, okay, now you have all the back end stuff, the numbers are all there, but you need it to be set up in a certain way so that you can present it on the front end, right? In the way that you think is most user friendly to give the best UX. And that's been something that we've been able to tackle more easily, I think, because we're not leveraging another BaaS provider.

Yoshi: And then, like, you know, you basically build the, you know, system of the record. So, like, you know, that allows, I guess, like, you know, banking integration to be much simpler, because, like, it's all consolidated, like in a broker dealer world, it's like Omnibus, or Banking as like more the FBO, uh, type of the concept. And then I think like, you know, you work with multiple banks, or like, you know, you work with another bank, or like, you know, there's a history of like working with multiple banks of banks, right?

[00:30:00] Erik: We do have a number of different bank partners. And why is that? One, I think diversity, diversity of services. Um, I don't, we don't necessarily want to be beholden to one service provider.

Erik: I'll be, we do have close relationships, uh, with a subset of our, of our providers there. So like Collin Bank, they're the ones that power our DDA product, the commercial checking account product that we offer now. Emigrant and Fifth Third, big card issuers for us. And so like you end up having closer relationships with some of your major providers, and then also like in those instances. We have stronger integrations with them. 

Yoshi: So those are basically like regional banks, I would say.

Erik: Different sizes of banks.

Yoshi: Different sizes of banks in the United States. Yeah, I would say Fifth Third is the biggest out of all of them. Yeah, and then like, you know, we of course saw the drama between the Synapse and the Evolve Bank.

Yoshi: And then I feel like, you know, there's a, you know, regulatory rumors or like conversation that's, you know, It's starting to happen, like, you know, the same as securities broker, you are introducing broker to other clearing, carrying broker, and then you have to be licensed, for example. And then I think like, you know, I saw, you know, one of the articles that, you know, regulators talking about introducing the deposits, hence you are introducer to the banks.

Yoshi: Because of, I think, like, you know, a lot of conversations about, and the drama about like synopsis, and then. Evolve Bank and then bunch of like, you know, the non licensed banking services companies. I think that is a really the context of what's happening, but is the relationships between those banking partners that you have right now, did that evolve along the way that you're working with them for the last six years? Was there any big change or like, you know, do you see any trend or attitude change from the banking provider side, looking at this kind of business model? 

Erik: There's definitely a lot of scrutiny and attention being paid to fintechs working with banks today. Definitely way more than when I started six years ago. And I think for good reason. I mean, you see something in use on Synapse and some of these. 

[00:32:00] Erik: Customer monies that they're not just reconciling items that could be missing or maybe they're not missing, but on a spreadsheet, you don't know like where it went basically. Right. And that's almost the same as money being missing potentially. And so for a bank to work with Basically a reseller of their services, right? That it's reselling. It's white. It's to some extent white labeling. It's, it's, it's, uh,

Yoshi: Basically introducing the deposits that you're collecting on behalf of the banks that you work with. Yes. Yeah.

Erik: I think it is incumbent on the bank to ensure that the companies they're working with are doing the exact type of record keeping up to the standard the bank would operate under, right? And they have to be able to monitor that and ensure that that's happening. They can't look at an account as just one Omnibus account. They actually need to care that the end user, right, has their own particular allocation of it along with all the other end users, right? And they all have their split of that Omnibus account in order to ensure that they have.

Erik: Those customer records done the right way. They actually have to have some kind of monitoring process over their FinTech partner. And that's what we've been seeing more of. So like, I mean, I don't want to toot my own horn, but like, that was probably the number one thing when we started up our broker dealer. You know, I was I was a CFO of the broker dealer when it was first started. My number one objective in working with EPD and educating everyone about the importance of all this is that I didn't want customer monies to go missing, right? Like, I want I needed to ensure without a shadow of a doubt that alpacas Yeah.

[00:34:00] Erik: Allocation of all these funds that are sitting in this Omnibus account or in the Money Market Funds Reserve that is like, like the stock record indicated exactly what you guys had with Brex and all the activities, etc. So it was really important for me to, it was a long education process, I think, with engineers. Engineers who. The vast majority have never worked in financial services, frankly. But that's kind of what it took, and I'm glad I spent that time. Yeah,

Yoshi: I mean, like, you know, all the 15C33, obviously, like, a lot of investor protection, and then, like, you know, getting the broker license on that side, even though you're not the custody broker. You have to have your system audited by the regulator and everything if you are responsible for Yeah, the 50 C3 3

Erik: calc, like making sure we have enough funds set aside to cover our customers deposits. That's like an end result. I wanted to know not just for the free credits on balance, I needed to know for like the money market fund. That it was allocated appropriately across the customers too. So it's the whole A to Z and

Yoshi: making sure it was really tight. Yeah. And the books and records has to be like, you know, tight that, you know, that gets blessing from the regulators.

Erik: It's an SEC registered entity. We have to get audited within 60 days of the fiscal year end. I had a big four auditor, you know, the whole thing. So I just, it was really important to me.

Yoshi: I think like, you know, compared to that, like Ivan always. It's kind of like, you know, confusing to me. It was like, you know, us as Alpaca, we started as the broker dealer side of the product. And then, obviously, that was the norm for us to make sure that like, you know, that has to be extremely careful in the audit and have to be a license to do so.

Yoshi: But then going into the banking products. It's pretty surprising that had not been the requirement, right? Because like, you know, doing, being able to do the FBO account and like being able to like, you know, do the individual account books and records, you are not necessarily on the scrutiny by the regulators, uh, get blessing.

Yoshi: Obviously, like I think Brex's case is a little bit different because you know the importance of it, so you can actually implement that, those safety net, and then like what, how it should be. But I feel like, you know, many banking fintech companies that may not have any experience like that, that's easily can mess up or like, you know, uh, miss, like underestimate the importance of the books and records of the individual accounts, even in the banking side, right?

[00:36:00] Erik: When you're in financial services, your main job is actually the books and records. is just moving numbers around, right? When I give you a loan, you don't see physical cash. Like I'm not giving you a suitcase full of like, like hundreds. There's someone that moves A sum of money from one side of the ledger to the other, and you have your loan.

Erik: That's all it is. So it's all numbers. Financial services is just all movement of numbers and making sure all those numbers are exactly as instructed or it makes sense, you know, that it all trickles down appropriately. So that's the one thing about the industry that I love. I hope people understand.

Yoshi: Yeah, and I really think that like it's a great, you know, progress by the regulators like paying attention to that. And I think it makes it fair for other fintech companies like, you know, who had been regulated and going through. You know, investing a lot into the regulations and compliance and risk management, right? So I think, I think it's a good stepping stone. But talking about that, we're all just like, you know, dealing with the numbers.

Yoshi: There are like, you know, companies in the same segment, right? Like, you know, Brex obviously was the first one coming from YC by Henrique and Pedro. Then now there's a company like Ramp and there's a Mercury. Of course, it's a focus may be a little bit different, but how are you positioning Brex And then also, alongside with that question, in 10 years ahead, what does Brex look like?

Yoshi: In your view, like, it doesn't have to be consistent with, you know, what the founders are thinking. I think, like, each employee and the member thinks probably somewhat differently, because 10 years is very long ahead. But, like, how do you think about those things?

[00:38:00] Erik: So a lot to unpack there. Okay, so if I were to try to objectively compare Brex and our business model with RAMP, and then also compare our business model with Mercury, I would say that between the three of us, we've tried to do the most, right?

Erik: Because we try to provide an all in one financial, commercial financial solution for almost all businesses. So we can be your banking services provider. You can open up a bank account with us and have a checking account. Oh, by the way, if you need treasury management services for your excess cash, we can cover that too with a broker dealer.

Erik: If you have spend needs, right, for commercial banking or whether getting a corporate card, we can cover that too. And then we try to layer all that with good software solutions to help with the accounting, the tracking, the budgeting, etc. across all of your actual financial transactions at Brex. And I think our strategy has to be that client services all in one provider.

Erik: I think for RAMP and Mercury, they've been more focused on card only, and then banking only, right? I think there's trade offs there. I think by casting such a wide net abrex, there's a lot more to do. And there's other complexities with like competing interests and all that within the company. At the same time, when customers are looking for just a one stop shop to do all that.

Erik: That, that's where we see a little bit more success. And then for Ramp and Mercury, yeah, their products are slick too, you know, can't deny it. They focused on product user experience, they focused on making it as simple as possible for folks. But I think ultimately like we don't want you to try to shop around for all the different aspects of your financial services needs That's where I would want to be in 10 years.

Erik: Got it. Right. So in 10 years time, I want to be the go to commercial financial services provider One stop solution. Yeah. Yeah, and not only are we providing the financial service But we layer it on with a technology or a software that also helps you manage it on a day to day basis. Does the accounting for you in a more automated way.

[00:40:00] Erik: Helps you think about treasury management across A, B, and C areas. That's at least my dream.

Yoshi: Is Brex a software company or financial services company? I will say that we are both.

Erik: We're definitely a financial services company. Yes. Because how else would you describe corporate card issuance and taking deposits and providing cash, you know, treasury management.

Erik: Sounds like something JP Morgan would do, right? And then, you know, we layer it on and we do provide software. And that software comes at different price points depending on the deal that we end up signing with customers. But we do have software revenue. You know, we sell, uh, user seats for Empower. We have a travel component also that we earn some revenue from.

Erik: So I will say firmly that we are definitely a software company as well. Yeah.

Yoshi: And then you recently changed your role to the SVP Finance and Accounting from Chief Accounting Officer. Uh, so I'm still

Erik: the Chief Accounting Officer. Oh, you're still also the Chief Accounting Officer. I'm still, I, I, you know, if, if anyone from Brex ends up listening to this, I, I welcome all jokes. Cause everyone jokes that I'm just out there trying to collect titles. Which may or may not be true, you know, but you know, it just, sometimes that's what happens.

Yoshi: I don't know. What is the balance between the finance accounting and the accounting? Like, I mean, CAO is the chief accounting officer, and the SVV finance and accounting also has the word of accounting.

Erik: Yeah, so I oversee, I still oversee the accounting team and all the accounting operations and like those finance operations, liquidity management, all that. Yes, yes. Um, and, and now I oversee corporate finance at the company. So that's our monthly management reporting, it's quarterly and semi annual and annual planning.

Erik: So all those cycles where we work with the business to figure out headcount and figure out their resource needs, and creating the budget and the revenue plan on a consolidated basis for the upcoming period or year. Those are kind of my additional duties today. 

[00:42:00] Erik:  I field investor requests and all that for information, but maybe getting back to your question on like how the two I think should be more integrated together, I think a lot of, and at Brex for a while, I think now I look back and I, I realize more things now that I'm in the seat in finance, but I look back and I'm like, Oh man, there were a lot more synergies between finance and accounting that we could have taken more advantage of.

Erik: But maybe we just didn't know. We don't know what we don't know. Now that I'm in seat, I understand way more about some of the commentary and observations that we got from finance before. They made requests on certain things that from an accounting perspective, if you're just focused on like the books and records for the annual audit, for some areas, for example, this comment isn't material to you.

Erik: So, this comment on some kind of 000 item even, it's not worth a while to make the change just because it's been one month or the other. My audits for the whole year or for the quarter even, it's not going to change anything. If I'm thinking about 10Qs, I just care that the amount was booked within the quarter.

Erik: But then, being in a seat in finance, I think, oh, well. So, we do measurement of CAC paybacks, like cost of acquiring a customer, and we do that on a monthly basis for every monthly cohort. So if that 50, 000 is in one month or the other, it'll change how we think about CAC paybacks for that cohort or the other.

Erik: And, you know, from a perspective of managing the company and looking at trends, actually that monthly performance is important. And these are the takeaways that I have now and see that I go back to the accounting team and say, you know, we really do have to get. Like, we have to worry about this. And so, I think it's actually nice that I can oversee both, and then, actually, I can also push back on some of the finance team stuff too, and I tell them like, guys, like, You, you guys are making this way too complicated.

[00:44:00] Erik: We already do this process in accounting. Like your method is not going to give us more insights than how accounting is doing it. Like we should be focusing on something else and just leverage the estimation of the work that accounting is already doing. That's gap compliant already, by the way. And so I'm able to better explain to both sides the true rationale for why we're doing something and contextualize things.

Erik: And I think, I think I'm definitely seeing better teamwork and synergies now.

Yoshi: Interesting, right? Because like, you know, you came from the like big four looking at it externally, and then you're creating the accounting team internally, and then now looking at the, more of the finance or strategy, corporate finance, which seems to be also different from like, you know, the two things that you've done.

Yoshi: So it's, you're kind of going through like these three things related to Brexit. So, you know, I think like that's very interesting, even though when people say, oh, it's a finance, accounting, or] I don't think like a lot of people really understand deeply enough what is a true difference or like what is a relationship.

Yoshi: But I think like, you know, it's interesting to see like how you've been going through that journey. So before closing, I wanted to also like, you know, get into like, you know, one topic about remote working and then, you know, office working. Because I think Brex, uh, when the pandemic happened, Henrique and Pedro was like, you know, yeah, we're going to move to LA, right?

Yoshi: I think they moved to LA. And then I think they came back recently. I remember like, you know, going to Henrique's house before the pandemic happened. It was like on the hill and doing stuff. So it was pretty interesting about that move. And then now I think like, you know, you also go to the San Francisco office.

Yoshi: How are you managing that? In a way, it's kind of hybrid at this point, compared to full remote that you've been doing during the pandemic and like in a few years. So I

[00:46:00] Erik: think fully remote, you lose something in fully remote. And the way I think about it is when you're at work, there's kind of four ways of communicating.

Erik: You can email somebody, you could slack or instant message somebody, you could do a phone call or a video conference, or four, you could, you could talk to them in person. When you are fully remote, that fourth thing, it completely drops off. It'll never happen. You're in your office in your house or some room in your house, everyone else is in their own houses.

Erik: It's not just like having a scheduled in face meeting, you never have the ability to just like check in with someone for five minutes. Which can be very convenient if you're just on the floor in the pit. Like you, I have a quick question. I'm just going to turn around my chair. Ask this question, get the answer really quickly while this person is still working on the Excel sheet and then boom, right?

Erik: That's a completely different dynamic than like, sure. I can ask the same question on Slack, but it's different. I'm not going to get the answer very quickly and I'm not going to have the context that that person might be working on something that I shouldn't bother them and you lose on all that. Now, I think for a lot of people, maybe losing out on all that isn't worth the flexibility and the potentially increased productivity from.

Erik: Being fully remote and saving on the travel time and all that. But I think I look back on the last year and a half, I have been going into the office at least once a week, sometimes twice a week. And by the way, that's a drive. I live in Davis, California by Sacramento. And that's like sometimes an hour and a half or more in the morning to get into the office.

Erik: I do that because. When I go into the office, I end up having at least two or three conversations every time that I would not have planned for that gives me more insights into different parts of the business that actually changes how I go about the rest of the week potentially, or how I go about my day even, or how I think about the next quarter, you know, and these are. These are things that I think go missing when you're fully remote.

[00:48:00] Yoshi: And then, so now you're hiring only around the office, or like, are you still hiring people pretty remotely, or like, what is the hiring process?

Erik: We have different rules. So there are a lot of functions that we've basically, going forward, we're only going to hire around the hub.

Erik: So we have hubs in, meaning we have offices. We have local offices in Seattle, in San Francisco, in Salt Lake City, in New York, and in Vancouver. Uh, we're going to open something in Sao Paulo in the future. So for certain functions, we're only hiring in those locations. And then there's a bunch of functions that we're actually, we're still okay with being fully remote.

Erik: And in fact, we, from a business standpoint, there's a bigger pool of talent to hire from if you are fully remote for those particular functions. And we try to be really thoughtful about those rules. Makes sense.

Yoshi: Well, Alpaca has been, uh, full remote since we went into the pandemic and we're staying full remote.

Yoshi: And I think like, you know, there is a definitely like, you know, that one communication drop. And at the same time, I think it depends on the business type as well. Alpaca serves the clients from like 30, 40 different countries, different time zones. So, There's definitely pros and cons and, uh, I think like, you know, at Alpaca we do embrace that, uh, what you're saying, as like we do drop the specific communication.

Yoshi: And I think that's why, like, you know, we try to do more of the pod, uh, physical meetup, even though we don't have an office. Of course, there's a, uh, limitation. We can go on about this, uh, thing for

Erik: a long time to share. I also agree with you. Yeah, yeah, yeah. I do think there are times Like remember when SVB happened last year? I was going to the office a little bit, but, but, you know, we were basically fully remote company at that time. This is like March of last year, right? We would not have been able to handle that situation and crisis. If we were certainly a fully in office company as well as we

Yoshi: did. Is that the when I was here?

Yoshi: No, because that was the, I remember I was driving while like, you know, all the funds are, you know, coming back or like, you know, the I don't, I don't remember. Maybe it's like, it was like SVB, maybe it was like First Franklin, but yeah.

[00:50:00] Erik: That was March 9th.

Yoshi: Yeah, yeah, yeah, yeah. 20, 23. But that, that crazy things happened. Like, I feel like it's a long time ago.

Erik: Yeah. And the fact that the company had been remote until then, and even past time we were remote, but like, we were able to come together on Slack and on zoom calls and all that and work very efficiently as a fully remote company. That's what it worked. It was a discrete, exogenous crisis.

Erik: And the company came together and found ways of communicating and working together to go through that. I think that's different than the day to day. The day to day of like, your business as usual at the company, making decisions at the company, it's like a slow burn.

Erik: And so, Sometimes being in person for that will hasten actually the activity because you just, you just go through more cycles, right? More cycles on, on discussing things. Cause you just bump into somebody in the hall.

Yoshi: Yeah. I mean, that's the whole reason why like Apple has this. Huge, beautiful office designed by Steve Jobs. I mean, serendipity, serendipity. And Amazon's making everyone go back. So the really closing question that I ask always is, uh, in the fintech, of course, like, you know, the software and technology, what is the undervalued opportunity, if you can think about one thing that you think otherwise is actually a big opportunity?

Erik: Some people are going for it. It's very difficult, but like creating a better loop. Extracting more costs out of the system for making payments. So, the more automation that you apply to making a payment, like, the more that service provider is extracting from the value chain.

[00:52:00] Erik: So, for instance, like, even on credit card, in order for you to, the reason why you accept credit cards is because you basically get guaranteed payment. You're going to get a payment, right? You don't have to worry about account receivable, right? Because you're not the one giving credit anymore. You're accepting the payment and all that. And then you get the money up front. And for that you're paying the and for that you pay the merchant discount rate.

Erik: Exactly. You pay, you pay that. And so you've passed on the collections work and all the cost of funds and fraud risk and all that to a bank that, that took it on, right? So that's an example of like, like a situation where the payment's been facilitated, but the interchange is like X because they've taken on this risk, right?

Erik: That's an example for CARD and I think for CARD, Especially when you have a revolver, that does make sense, that model. Because not all of the folks who borrow on card will pay off their statement right away. They will need to have a relationship with a financial services provider and they will carry a balance and interest will be earned and like all this stuff, right?

Erik: But I think like there could be more loops. I'm trying to find a good way to explain it. Like wouldn't it be nice if like I made a payment and I had to make you a payment and like I just go on my phone and like. I sent you 100 and that was it. I guess you could do that in crypto.

Yoshi: Yeah, and I think like, you know, the, like instead of ACH or wire, like the money just arrives right away.

Yoshi: Yeah. And then there is no like fees around it, right? Yeah. I think like, you know, that happens in actually many countries like India, Japan. It's like, they're famous for that, right? Like, you know, the instant payment just go. I think like, you know, Europe too, like, you know, send network. Uh, not send network, but.

Yoshi: That there's a certain network that does that right away. Actually, like, you know, in the U. S. it's like ACH, of course, takes like, you know, a couple of days and there's, uh, chargebacks and stuff. Wire, it's like really expensive. But yeah, I think like, you know, crypto. Well, I guess like there's just some, like, trouble time.

[00:54:00] Yoshi: But, but like, what you were saying is that trying to make that whole network is the, um, Like a centralized

Erik: network would be a good, would be a public service. Yeah, yeah, yeah. Now maybe this isn't really, like, an opportunity from a business standpoint. But to some degree, like, you know, it would be nice if it was all central.

Erik: Like, like, I think maybe it's too idealist, but like, if it was a centralized payments network and everyone was on the system, like in theory, you would create a lot of economic value because people wouldn't have to. I think about

Yoshi: those like, you know, taking risk of the fraud risk or like, you know, those merchandise discounts, blah, blah, blah. That can be all removed basically in theory. Yeah. Yeah. That makes sense. That's

Erik: like a really, it is a very philosophical, just like,

Yoshi: you know, yeah. But I think like, you know, the many countries, like, you know, each country. Approaching that thing one by one very differently, I feel like. Like, India has like its own, like, very centralized network.

Yoshi: Uh, Japan, they're doing like, for example, QR code payments, and then there's no fees around that, but like, you know, the money moves. So, I don't know who's gonna do that in the U. S., or like, you know, the government has to do it. I don't know, but it has to be improved for sure in the U. S. Well, thank you very much, Eric.

Yoshi: For, uh, spending your time talking to me. It's an honor. I love this. This is great. Yeah, it's been fun. Thank you very much for answering all those, uh, some of the spicy questions that I went into.

Erik: Yeah, I like spicy, but I get sweaty.

Yoshi: Yeah, I know. That's a TMI, but it's good. Okay. All right, then. Thank you, Eric.

Yoshi: All right. Thank you. Bye.

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