September 11, 2025 • 22 mins
The rapid evolution of the financial services marketplace means the market for banking as a service is also evolving rapidly. From artificial intelligence to other new technologies to regulatory expectations, how is the partner bank sector shifting? On the season premiere of the ABA Banking Journal Podcast, Pathward Bank CEO Brett Pharr talks about the Sioux Falls, South Dakota-based partner bank’s strategy. Among other things, Pharr discusses:
- The evolution of the business model beyond interchange to include embedded finance, faster payments and other opportunities.
- The criticality of third-party risk management in partner banking.
- How Pathward is using AI to accelerate compliance review of its partners’ marketing materials — and how some AI uses might be limiting young bankers’ learning and development.
- The role of partner banks in advancing financial sector participation by the unbanked.
- How Pathward builds its workplace culture with its “talent anywhere” remote work structure.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Brett Pharr (00:02):
I grew up in commercial banking.
Literally how I started was takingcompany's financial statements, and
in those days, spread it by handon a piece of paper in the common
format, and then later on into a pc.
That is a critical skill to learn.
AI can do that all day.
And, and we don't need that anymore.
And yet my judgment is as an analystjust starting, needs to still do it
(00:23):
the old way and learn the processand demonstrate to their supervisor
when they know how to do it, and thenthey could use AI going from there.
Evan Sparks (00:33):
From the American Bankers Association, this is the
A BA Banking Journal podcast.
Welcome back to a brand new season ofthe podcast where we will be bringing
you a great, fantastic series ofconversations on all things banking.
I'm very excited to be back for yetanother season here on the show.
I'm really excited to bring,to kick off our season with a
(00:54):
conversation with Brett Pharr.
Brett is Chief Executive Officer atPathward Bank, which is a unique bank
within the American banking ecosystem.
But I'll let Brett explaina little more about that.
So, first of all, Brett,welcome to the show.
Tell us a little bit about yourself andyour journey in the banking industry.
Brett Pharr (01:11):
It's great e Evan to be with you today.
I'm a, a really old banker.
I've been in banking for 43 years.
I started way back in the day incommercial banking and very much
learned banking from the ground upin that area and then went with one
of the large banks in the country andworked in just about every division.
Went through all the mergers andacquisitions that happened to
(01:33):
build that to a large institution.
And then, you know, after thefinancial crisis, very much got
focused on risk and risk management.
So spent some time with Regional Bankin that came here to what was met at
the time now Pathward in a risk capacityand, and now very much focused on
running our banking as a service bank.
Pathward.
Evan Sparks (01:54):
So I know, and I understand along your journey, you've had a
connection to our a BA chair, John Asbury.
Any what, if you can tell, tell our, tellour listeners a little bit about that.
Brett Pharr (02:03):
Yeah.
John and I worked togethermany, many years ago.
It was started in 1990 at whatthe time was nations Bank.
And we worked together in thecommercial division and built a
friendship then, and we've been, youknow, friends for a very long time.
So I have a great deal ofrespect for John and appreciate
what he is doing with the a BA.
Evan Sparks (02:20):
Great.
So tell me a little bit moreabout Pathward Bank and how you
came, how, how did you firstcome to come to join Pathward?
Brett Pharr (02:28):
So, first about Pathward.
This was at, at one point a Midwestsmall community bank focused on ag
lending and serving the communityimmediately around South Dakota and Iowa.
There was a entrepreneurialspirit that came in and began
talking about doing sponsorship.
We know that now as theprepaid card business.
(02:49):
And over time and in conjunction withthe effects of the financial crisis
and Dodd-Frank, there began to bean emphasis on financial inclusion.
One of the negative byproducts of avariety of things that happened and
after the financial crisis, was theexclusion of people from financial
services, especially those at thebottom of the economy, or those that
(03:11):
want to be served in a unique way.
That part of the business reallygrew to the point that it became
the primary business here gettingdeposits and doing payments,
transactions for groups that oftenare excluded from banking or had been.
And so that's how that business grew.
And so eventually wesold to community bank.
Today we have no branches.
(03:32):
We're definitely a non-traditional bank.
And we deliver banking products througha variety of partners that do an awful
lot of the customer facing activities.
And it gives us an opportunity toreally emphasize our, our theme of
financial inclusion for all and beinga trusted platform for our partners
that allows them to grow and thrive.
(03:52):
And so that's very much been our focusas this company grew as you imagine from
a small community bank to a considerablymore complex payment organization.
The board and the management recognizedthey needed to have some expertise.
And so while I worked at banks thatwere in trillions of dollars and in
a hundred, a billion dollars comingto work for a bank that was only $6
(04:15):
billion in assets seemed a little odd.
But when you looked inside ofwhat was going on, it needed
that risk framework and scale.
And it was exciting to comehere and then kind of extend my
management here into the CEO role.
Evan Sparks (04:27):
Yeah.
So how does the, how, how did thebusiness, the prepaid card business model,
evolve and develop into this broaderbanking as a service platform model?
Brett Pharr (04:37):
I really think it's about that financial inclusion.
So what, so what happened was.
There were a number of peoplethat just, they, they couldn't
have a checking account or theydidn't want a checking account.
And that was during that periodof time when banks were, you
know, not particularly in favor.
Payroll cards came on.
People would go to work the first joband somebody would say, want a direct
(04:58):
deposit in your checking account, butsay, I don't have a checking account.
And so they had a mechanism withpayroll card to be able to get
paid and have that as their centralpart of their financial life.
And so that prepaid thing extendedinto not only general purpose cards,
but ultimately prepaid debit accounts.
And it has a lot ofthe same functionality.
(05:18):
Yeah.
Then our partners looked at themarketplace and said, people wanna
be served in unique ways, and solet us serve them in the way they
wanna be served ethnically, oraffinity or some other aspect.
And each of our partners has aunique way of serving these consumers
that are in a particular niche.
And now what's happening is theyounger generation, they often are
(05:40):
thinking they don't need a bank,although they do in the background.
And they're working with partnersthat may not have bank right at
the front of what they're doing.
Evan Sparks (05:48):
Yeah, and I think it's interesting that, you know, you have
these the prepaid cards can, can meetthe, the pre a prepaid card model can
meet the standards of the bank on nationalstandards that we've advocated for at
a, b, a here to you know, provide thatbasic financial capability that is so
important, even if you don't actuallyneed a, the full, the full features
(06:08):
of a traditional checking account.
Brett Pharr (06:10):
That, that's exactly right.
And that exploded and that'swhat caused a lot of the growth.
Now in, in recent years, someother things have been going on.
So there's the rise of thefintechs and there's been some
good at that and I'm excited aboutsome of the digital innovation.
There's also been some bad at that.
So we could talk aboutsome of those things.
And also it, there's now abroadening of the product set.
So you're starting to talk about, okay,I don't just need a single account.
(06:34):
I need faster payments, I need earlywage access, I need better access to
certain kinds of consumer lending.
On the small business side, embeddedfinance and some of these things, all
of which are now able to be deliveredthrough this third party delivery
model where there's a bank that isthe backbone of what's happening, but
the face, the front is one of thesepartners that's either a large, you
(06:57):
know, company's been here a long time.
It's very good at thatinnovation or startup fintechs
that are engaging as well.
Evan Sparks (07:04):
Is your, so is your business banking as a service model focused?
Do, do, how much do you focus onother banks that to collaborate with?
How much do you focus onnon-bank fintechs to to help
deliver those kinds of services?
Brett Pharr (07:17):
So it is almost a hundred percent non-banks.
Okay.
And, you know, FinTechis an interesting word.
Most of my partners have beenaround for a very long time.
They have large amounts of revenueand and are very profitable.
There are certainly some that arestartups that we engage with that
are in their cash burn, but that'sthe minority of what we have.
(07:39):
We will look for those and the marketingopportunities there, but people forget
that, you know, most of these frontend partners that, that at least we
deal with are large companies thathave been in existence for a long time.
Evan Sparks (07:51):
Yeah.
And, and, and so they, and and this isa you, what's the how do you describe
the value proposition for them inbeing able to deliver these kinds of
products to their, to their clients?
Brett Pharr (08:03):
Well, in the, in the classic business model of this awful
lot of it's based on interchange income.
There's no doubt about that.
And there's very, everycontract's different.
But in a very simplistic thing.
I get the deposits for free and theyget the interchange income, and that's
a nice division of what happens because,you know, think about stable unmovable
(08:23):
deposits that cost you no interest margin.
That's a valuable proposition.
And then they get the interchange incomeby which they can run the, you know,
the functions they have to marketing,distribution, customer service, et cetera,
and make a profit while they're doing it.
And so that's the classic businessmodel and the way it always worked.
Now again, every contract isdifferent and things are moving and
(08:44):
changing, but that's the way it works.
Evan Sparks (08:46):
Yeah.
And is there, I mean, so what is, what,what, what is changing in that, in that,
in this world, in terms of, you know, howthese, how these deals get structured,
how, where, where both parties find thevalue proposition, how is that evolving?
Brett Pharr (08:58):
Yeah, I think it is evolving because in some cases, all of
a sudden deposits actually are worthmore, and so the partners are demanding
some piece of the value of deposits.
But there's also, everybody realizethat they probably can't rely
on interchange income forever.
Mm-hmm.
And so now there's differentkinds of fee income.
So this is where you start gettinginto the transaction fees, you get into
(09:19):
early wage access opportunities andthe benefits of that, preferably where
the employer pays for the opportunity.
A number of things all the way up intoembedded finance, faster payments,
you know, the things that we all knowso that you can get more and more our
partners and us in a business model where.
It's more fee income oriented,not balance sheet driven.
(09:39):
And it's a situation where there'sincreased economics for people
that are getting into this space.
Consumers they're interested in it.
That might not be the traditionalbottom of the economy.
Evan Sparks (09:50):
Yeah, no, that, that, that, that is interesting to think,
how that consumer pyramid is shiftingin terms of your, your Oh, yeah.
Your second, thirdparty client base there.
Brett Pharr (09:59):
Yeah.
I mean, I would've said that, youknow, 90% of the consumers that used
our products five years ago were thebottom of the economy, and increasingly
portion of it is those that are under 30.
There's a shift going on, andthat's an important shift that
we all have to understand.
Evan Sparks (10:15):
Yeah, explore that a little bit before we talk about
some other dynamics in the, thebank and as a service model.
You know, you think about somebody comingin and saying, you know, oh, well, just a
banking account, particularly if you areof a, you know, you've got a job where
you've got a professional job, you've gota direct deposit, you know, you know, you
just get a bank account and that's that.
(10:37):
Why are young, some of youryounger, these younger clients.
S not seeing the where, where arethey missing ma not making the
connection on kind of the value ofthe traditional checking product.
Brett Pharr (10:49):
Well, obviously it comes with the smartphone in their hand.
They're not gonna walk into abranch, they're not gonna go
to a website for that matter.
Right.
And they very much are going to usean app that's very easy, seamless, you
know, all, all those kinds of things.
And when they see the word bank,they think of people like me.
They think old.
(11:09):
That's what they think of, right?
So, so that, that's their perspective.
And you know, awful lot of us havekids and grandkids and they don't
even know there's a bank behind it.
They don't even think about it.
And even as they start toclimb the economic ladder, it's
gonna be interesting to see.
How much of it they shift andhow much of it they do not.
(11:29):
'cause I think there's a realpossibility that increasing number
of them are not gonna shift.
There's gonna be similarly producedthings for mortgage advice and, you
know, wealth management and those kindof things, all of which are gonna be
part of that culture change of, I don'twanna deal with a bank I want to deal
with my phone and look at my phone andthere's an app for that and move on.
Evan Sparks (11:51):
I was having a conversation with my 9-year-old recently, and
my kids are probably slightly moreeducated about the banking system
because of where their dad works.
But it's you know, he asked, well, whathappens if your bank loses your money?
And I said, well, it's FDIC insured andI, and believe me, my checking account
is below that FDIC insurance limit.
So, you know.
(12:12):
So I'm not, I'm not worried aboutit, but you know, that's, that's
something I think a lot of peopletake the take deposit insurance for
granted because partner banks are the,these partner banks are FDIC insured.
And yet we have seen instances where I,you know, I think of where there have
been enforcement actions over perhaps,not the deposit insurance not being
(12:33):
available, but over the lack of recordkeeping or insufficient record keeping
to and risk management to ensure thatyou know exactly whose deposits are
where and what it is, what it all is.
Can you speak to the regulatory evolutionin the banking as a service space?
Brett Pharr (12:49):
Yeah.
This is critically important because as,as you said, there have been some blowups,
and I actually think there'll probably besome more blowups that are going to create
some question marks around all this.
So, you know, high level, we'reall sort of celebrating some
administrative deregulation forthe banking industry as a whole.
And, and, and from the topdown, the tone from the top.
(13:11):
We're very much seeing that.
But the one thing that nobodytolerates either side of the
aisle is consumers being harmed.
And, and I think there are two thingsin this that are critically important.
They've been a fundamentals of ourapproach for, you know, two decades.
One is, it is aroundthird party management.
So if you're going to deliverservices to consumers, you're
(13:34):
responsible for everything theydo as if you did it yourself.
And that is a principle of third partymanagement that I think has got lost by
some that have gotten in banking, theservice the last three to five years.
And they don't understand that.
And they say, well, mypartner's responsible for that.
No, you're responsible for it andyou're responsible for overseeing it.
The second one is moral clarity,and this is really important to me.
(13:58):
Is banking is supposed to be the integritycenter of financial transactions.
Generally over history, we haveplayed that role and played it well.
Sometimes we get criticizedbecause we won't take enough
risk because we play that role.
But often we manage to the once in ahundred year blow up, not the ongoing.
(14:20):
And that's somewhat important andthat's why we have, you know, fortress
level balance sheets and we have dualcontrols and triple controls, not
because of ordinary every day you'regonna need it, but because there's
gonna be a blow up at some point.
And, and that moral clarity and whensomething goes wrong, you're on the hook,
I think is what got missed even by someplayers in this space in recent years.
(14:42):
So there's going to beincreased regulatory scrutiny
of this kind of a transaction.
In some ways as it should be, but itall starts with third party management.
And that principle that if you do itthrough a third party as a bank, you're
responsible for that third party.
Evan Sparks (14:58):
Yeah, yeah.
And you know, speaking of third parties,fourth parties, I'd love to talk a
little bit more about the interesting.
Third party that most, more and morebanks are dealing with, and that is how
artificial intelligence gets integratedinto this process here, because that
is, you know, we've talked a lot inover the last several years, maybe
(15:22):
a AI is not new in banking, right?
This is, this is a longstanding toolthat has been used in banking, but
you don't, but it's a tool that is notfully understandable because there is.
Stuff going on behind the scenes thatwe, that you know, the computation that
humans cannot exactly control and predict.
(15:42):
And and, you know, we've gota bit of a black box problem.
What we, you know, what arethe ways that you're leveraging
AI and in managing all these.
With as a partner bank.
And then how are you let's, I'm,I'm giving you a two part question.
Let me just start with how are youusing AI and how do you envision
(16:02):
using AI in the future to managesome of the risks as a partner bank?
Brett Pharr (16:05):
Yeah.
Yeah.
So a little over a year ago wehired a head of ai and by the way,
we connect AI and data becausethe two have to go hand in hand.
Like most companies we're doingsome of the simpler things, right?
You know, office tools and people areusing it in meetings and all those kind
of things to create some efficiencies.
(16:26):
But we're also have you know, more thana hundred use cases around very specific
things that have to do with monitoringour partners and what our partners do.
Let me give a very specific example.
There are compliance rules onwhat you can publish about a
banking product, for example, ona website or on an application.
(16:48):
You have to follow a variety ofdifferent rules ranging from what you
can and cannot say about FDIC, howbig the font is, the various words.
There's, there's pages andpages of rules that are on that.
So every time a partner changes something,we have to have a compliance person review
it and say, this was called marketingcollateral meets the requirements that
(17:11):
are there hours and hours of work.
And every time there's a change, oftenresults in a fairly low you know, SLA
with our partners who are aggravated.
It takes us so long to doit and those kind of things.
Artificial intelligence can replacethat and can go in and can review it.
Come up with the answers, tell youwhere the problems are, tell you what's
changed since last time, and cut thetime into a very small fraction for that.
(17:37):
That's the good news, andI think that's a big thing.
Two pieces of bad news.
One your point about a black box,somebody's gotta understand how
all that's working and checkingthe checker, if you will, to make
sure it's happening correctly.
The other thing is, is you have juniorpeople that are coming in, they need
to understand how that process works sothey can learn so that when there's an a
(17:59):
output that they need to talk to a partnerabout, they know what has happened.
And in fact, in some cases we'resaying you're gonna get to use ai,
but you have to demonstrate theproficiency to do it on your own first.
And then after you've demonstratedthat, then you can use ai.
And I think that's gonna have to bea strategy in many, many disciplines.
Otherwise, we'll not be able to havethe judgments that need to occur on
(18:21):
the back end when people are using ai.
So very excited about it andcreate enormous deficiencies
and partner SLA improvements.
But there's gonna be some cautionsand we're gonna have to watch it.
Evan Sparks (18:32):
Yeah.
In my world, we publish a magazine and wewrite, I would really like to know, you
know, you can have ask Chat GPT or copilotto write a magazine article for you.
I'd really like to know that you knowhow to do that, how to report out
a story and write it and think anddo to use your independent judgment
to do that without the assistance,before you start using the assistance.
(18:53):
And I think, a reallyinteresting challenge there.
Brett Pharr (18:56):
Yeah, I, I mentioned I grew up in commercial banking.
Well, I mean, literally how I started wastaking company's financial statements,
and in those days, spread it by handon a piece of paper in the common
format, and then later on into a pc.
That is a critical skill to learn.
AI can do that all day.
And, and we don't need that anymore.
And yet my judgment is as an analystjust starting, needs to still do it
(19:18):
the old way and learn the processand demonstrate to their supervisor
when they know how to do it, and thenthey could use AI going from there.
And, and that will helpimprove the judgment for future
underwriters and all those kind of.
Evan Sparks (19:31):
Can you talk a little bit about, you talked about kind people
coming into your company and, and, andlearning the ropes and getting, getting
com, getting themselves established.
What is the, what's your ta, what'syour talent strategy at Pathward and
how are you how are you finding the nextgeneration of future Pathward bankers?
Brett Pharr (19:46):
Yeah, it's very interesting.
We are a very unique kinda company.
Even before COVID, we had peoplescattered all over the country.
Because there's certain kinds oftalent that you needed to have.
And so we were sort of, you know,half in office, half remote,
which really was not ideal at all.
And you sort of had second class CIcitizens, you had Travel warriors
(20:08):
and all those kind of things.
We're now a Talent Anywhere company.
We have, you know, high 30states covered with employees.
And it has given us access to talentfor some very unique things that we
would never have been able to get.
I think about technology and technologistsand the people that, you know, have left
places where they had to go to the office.
(20:30):
We're telling anywhere there is a bigpush to bring people into the office.
I think it misses thepoint to some extent.
There does need to be face-to-facecollaboration and business purpose
meetings and business purpose travel.
But there are things youcan do, tools you can use.
I'll give you a simple example.
Credit analysts get on eight 30every morning with their supervisor
(20:52):
and they're all on together whilethey're doing independent work.
And one of 'em asks the questionand the supervisor, here's the
question, but the other eightanalysts hear the question as well.
And so there are things like that youcan do that are more collaborative.
That allow for growth for people, evenin the talent anywhere, and sometimes
we don't think through the benefitsof it and we certainly have had
(21:12):
successful results with it, and so longas we do, we're gonna keep doing it.
Evan Sparks (21:16):
Yeah.
What do you do to, what doyou do to build culture?
How are you deliberate aboutbuilding culture in this
Talent Anywhere environment?
We've got people everywhere and they'renot necessarily hanging out between
their, between their Zoom calls, right?
Yeah.
Brett Pharr (21:30):
For example, we have weekly.
Companywide videos.
We send out a rarity prop, varietyof topics, and we have some very
talented people that do that, and thathelps kinda integrate the culture.
I mentioned business purposemeetings by departments and
divisions that helps with it.
We actually had a companywide event.
We brought everybody to Atlantaback in back in the spring.
(21:52):
Very expensive proposition, and yet ithelps to establish comradery, et cetera.
So you can do that and stillbe a Talent anywhere company.
Instead of spending money on realestate, you spend money on other things
that help to create that culture.
Evan Sparks (22:05):
Yeah.
Well Brett, this was really helpful forhelping us understand your unique business
model and yeah, I could, I honestly saymy favorite thing about working for the
a BA banking journal at the AmericanBankers Association is I get to learn
about the incredible diversity of businessmodels that American banks bring to the
table to meet the needs of customersand and support financial inclusion.
(22:27):
So loved hearing about whaty'all are doing at Pathward Bank.
Thank you.
Brett Pharr (22:31):
Thank you very much.
Thanks for having me.
For our listeners, you can findthis in previous episodes at
aba.com/banking journal podcast.
You can also find us on any of yourfavorite podcast apps or platforms.
Thanks so much for listening, andwe'll be back with you again very soon.
I grew up in commercial banking.
Literally how I started was takingcompany's financial statements, and
in those days, spread it by handon a piece of paper in the common
format, and then later on into a pc.
That is a critical skill to learn.
AI can do that all day.
And, and we don't need that anymore.
And yet my judgment is as an analystjust starting, needs to still do it
(00:23):
the old way and learn the processand demonstrate to their supervisor
when they know how to do it, and thenthey could use AI going from there.
Evan Sparks (00:33):
From the American Bankers Association, this is the
A BA Banking Journal podcast.
Welcome back to a brand new season ofthe podcast where we will be bringing
you a great, fantastic series ofconversations on all things banking.
I'm very excited to be back for yetanother season here on the show.
I'm really excited to bring,to kick off our season with a
(00:54):
conversation with Brett Pharr.
Brett is Chief Executive Officer atPathward Bank, which is a unique bank
within the American banking ecosystem.
But I'll let Brett explaina little more about that.
So, first of all, Brett,welcome to the show.
Tell us a little bit about yourself andyour journey in the banking industry.
Brett Pharr (01:11):
It's great e Evan to be with you today.
I'm a, a really old banker.
I've been in banking for 43 years.
I started way back in the day incommercial banking and very much
learned banking from the ground upin that area and then went with one
of the large banks in the country andworked in just about every division.
Went through all the mergers andacquisitions that happened to
(01:33):
build that to a large institution.
And then, you know, after thefinancial crisis, very much got
focused on risk and risk management.
So spent some time with Regional Bankin that came here to what was met at
the time now Pathward in a risk capacityand, and now very much focused on
running our banking as a service bank.
Pathward.
Evan Sparks (01:54):
So I know, and I understand along your journey, you've had a
connection to our a BA chair, John Asbury.
Any what, if you can tell, tell our, tellour listeners a little bit about that.
Brett Pharr (02:03):
Yeah.
John and I worked togethermany, many years ago.
It was started in 1990 at whatthe time was nations Bank.
And we worked together in thecommercial division and built a
friendship then, and we've been, youknow, friends for a very long time.
So I have a great deal ofrespect for John and appreciate
what he is doing with the a BA.
Evan Sparks (02:20):
Great.
So tell me a little bit moreabout Pathward Bank and how you
came, how, how did you firstcome to come to join Pathward?
Brett Pharr (02:28):
So, first about Pathward.
This was at, at one point a Midwestsmall community bank focused on ag
lending and serving the communityimmediately around South Dakota and Iowa.
There was a entrepreneurialspirit that came in and began
talking about doing sponsorship.
We know that now as theprepaid card business.
(02:49):
And over time and in conjunction withthe effects of the financial crisis
and Dodd-Frank, there began to bean emphasis on financial inclusion.
One of the negative byproducts of avariety of things that happened and
after the financial crisis, was theexclusion of people from financial
services, especially those at thebottom of the economy, or those that
(03:11):
want to be served in a unique way.
That part of the business reallygrew to the point that it became
the primary business here gettingdeposits and doing payments,
transactions for groups that oftenare excluded from banking or had been.
And so that's how that business grew.
And so eventually wesold to community bank.
Today we have no branches.
(03:32):
We're definitely a non-traditional bank.
And we deliver banking products througha variety of partners that do an awful
lot of the customer facing activities.
And it gives us an opportunity toreally emphasize our, our theme of
financial inclusion for all and beinga trusted platform for our partners
that allows them to grow and thrive.
(03:52):
And so that's very much been our focusas this company grew as you imagine from
a small community bank to a considerablymore complex payment organization.
The board and the management recognizedthey needed to have some expertise.
And so while I worked at banks thatwere in trillions of dollars and in
a hundred, a billion dollars comingto work for a bank that was only $6
(04:15):
billion in assets seemed a little odd.
But when you looked inside ofwhat was going on, it needed
that risk framework and scale.
And it was exciting to comehere and then kind of extend my
management here into the CEO role.
Evan Sparks (04:27):
Yeah.
So how does the, how, how did thebusiness, the prepaid card business model,
evolve and develop into this broaderbanking as a service platform model?
Brett Pharr (04:37):
I really think it's about that financial inclusion.
So what, so what happened was.
There were a number of peoplethat just, they, they couldn't
have a checking account or theydidn't want a checking account.
And that was during that periodof time when banks were, you
know, not particularly in favor.
Payroll cards came on.
People would go to work the first joband somebody would say, want a direct
(04:58):
deposit in your checking account, butsay, I don't have a checking account.
And so they had a mechanism withpayroll card to be able to get
paid and have that as their centralpart of their financial life.
And so that prepaid thing extendedinto not only general purpose cards,
but ultimately prepaid debit accounts.
And it has a lot ofthe same functionality.
(05:18):
Yeah.
Then our partners looked at themarketplace and said, people wanna
be served in unique ways, and solet us serve them in the way they
wanna be served ethnically, oraffinity or some other aspect.
And each of our partners has aunique way of serving these consumers
that are in a particular niche.
And now what's happening is theyounger generation, they often are
(05:40):
thinking they don't need a bank,although they do in the background.
And they're working with partnersthat may not have bank right at
the front of what they're doing.
Evan Sparks (05:48):
Yeah, and I think it's interesting that, you know, you have
these the prepaid cards can, can meetthe, the pre a prepaid card model can
meet the standards of the bank on nationalstandards that we've advocated for at
a, b, a here to you know, provide thatbasic financial capability that is so
important, even if you don't actuallyneed a, the full, the full features
(06:08):
of a traditional checking account.
Brett Pharr (06:10):
That, that's exactly right.
And that exploded and that'swhat caused a lot of the growth.
Now in, in recent years, someother things have been going on.
So there's the rise of thefintechs and there's been some
good at that and I'm excited aboutsome of the digital innovation.
There's also been some bad at that.
So we could talk aboutsome of those things.
And also it, there's now abroadening of the product set.
So you're starting to talk about, okay,I don't just need a single account.
(06:34):
I need faster payments, I need earlywage access, I need better access to
certain kinds of consumer lending.
On the small business side, embeddedfinance and some of these things, all
of which are now able to be deliveredthrough this third party delivery
model where there's a bank that isthe backbone of what's happening, but
the face, the front is one of thesepartners that's either a large, you
(06:57):
know, company's been here a long time.
It's very good at thatinnovation or startup fintechs
that are engaging as well.
Evan Sparks (07:04):
Is your, so is your business banking as a service model focused?
Do, do, how much do you focus onother banks that to collaborate with?
How much do you focus onnon-bank fintechs to to help
deliver those kinds of services?
Brett Pharr (07:17):
So it is almost a hundred percent non-banks.
Okay.
And, you know, FinTechis an interesting word.
Most of my partners have beenaround for a very long time.
They have large amounts of revenueand and are very profitable.
There are certainly some that arestartups that we engage with that
are in their cash burn, but that'sthe minority of what we have.
(07:39):
We will look for those and the marketingopportunities there, but people forget
that, you know, most of these frontend partners that, that at least we
deal with are large companies thathave been in existence for a long time.
Evan Sparks (07:51):
Yeah.
And, and, and so they, and and this isa you, what's the how do you describe
the value proposition for them inbeing able to deliver these kinds of
products to their, to their clients?
Brett Pharr (08:03):
Well, in the, in the classic business model of this awful
lot of it's based on interchange income.
There's no doubt about that.
And there's very, everycontract's different.
But in a very simplistic thing.
I get the deposits for free and theyget the interchange income, and that's
a nice division of what happens because,you know, think about stable unmovable
(08:23):
deposits that cost you no interest margin.
That's a valuable proposition.
And then they get the interchange incomeby which they can run the, you know,
the functions they have to marketing,distribution, customer service, et cetera,
and make a profit while they're doing it.
And so that's the classic businessmodel and the way it always worked.
Now again, every contract isdifferent and things are moving and
(08:44):
changing, but that's the way it works.
Evan Sparks (08:46):
Yeah.
And is there, I mean, so what is, what,what, what is changing in that, in that,
in this world, in terms of, you know, howthese, how these deals get structured,
how, where, where both parties find thevalue proposition, how is that evolving?
Brett Pharr (08:58):
Yeah, I think it is evolving because in some cases, all of
a sudden deposits actually are worthmore, and so the partners are demanding
some piece of the value of deposits.
But there's also, everybody realizethat they probably can't rely
on interchange income forever.
Mm-hmm.
And so now there's differentkinds of fee income.
So this is where you start gettinginto the transaction fees, you get into
(09:19):
early wage access opportunities andthe benefits of that, preferably where
the employer pays for the opportunity.
A number of things all the way up intoembedded finance, faster payments,
you know, the things that we all knowso that you can get more and more our
partners and us in a business model where.
It's more fee income oriented,not balance sheet driven.
(09:39):
And it's a situation where there'sincreased economics for people
that are getting into this space.
Consumers they're interested in it.
That might not be the traditionalbottom of the economy.
Evan Sparks (09:50):
Yeah, no, that, that, that, that is interesting to think,
how that consumer pyramid is shiftingin terms of your, your Oh, yeah.
Your second, thirdparty client base there.
Brett Pharr (09:59):
Yeah.
I mean, I would've said that, youknow, 90% of the consumers that used
our products five years ago were thebottom of the economy, and increasingly
portion of it is those that are under 30.
There's a shift going on, andthat's an important shift that
we all have to understand.
Evan Sparks (10:15):
Yeah, explore that a little bit before we talk about
some other dynamics in the, thebank and as a service model.
You know, you think about somebody comingin and saying, you know, oh, well, just a
banking account, particularly if you areof a, you know, you've got a job where
you've got a professional job, you've gota direct deposit, you know, you know, you
just get a bank account and that's that.
(10:37):
Why are young, some of youryounger, these younger clients.
S not seeing the where, where arethey missing ma not making the
connection on kind of the value ofthe traditional checking product.
Brett Pharr (10:49):
Well, obviously it comes with the smartphone in their hand.
They're not gonna walk into abranch, they're not gonna go
to a website for that matter.
Right.
And they very much are going to usean app that's very easy, seamless, you
know, all, all those kinds of things.
And when they see the word bank,they think of people like me.
They think old.
(11:09):
That's what they think of, right?
So, so that, that's their perspective.
And you know, awful lot of us havekids and grandkids and they don't
even know there's a bank behind it.
They don't even think about it.
And even as they start toclimb the economic ladder, it's
gonna be interesting to see.
How much of it they shift andhow much of it they do not.
(11:29):
'cause I think there's a realpossibility that increasing number
of them are not gonna shift.
There's gonna be similarly producedthings for mortgage advice and, you
know, wealth management and those kindof things, all of which are gonna be
part of that culture change of, I don'twanna deal with a bank I want to deal
with my phone and look at my phone andthere's an app for that and move on.
Evan Sparks (11:51):
I was having a conversation with my 9-year-old recently, and
my kids are probably slightly moreeducated about the banking system
because of where their dad works.
But it's you know, he asked, well, whathappens if your bank loses your money?
And I said, well, it's FDIC insured andI, and believe me, my checking account
is below that FDIC insurance limit.
So, you know.
(12:12):
So I'm not, I'm not worried aboutit, but you know, that's, that's
something I think a lot of peopletake the take deposit insurance for
granted because partner banks are the,these partner banks are FDIC insured.
And yet we have seen instances where I,you know, I think of where there have
been enforcement actions over perhaps,not the deposit insurance not being
(12:33):
available, but over the lack of recordkeeping or insufficient record keeping
to and risk management to ensure thatyou know exactly whose deposits are
where and what it is, what it all is.
Can you speak to the regulatory evolutionin the banking as a service space?
Brett Pharr (12:49):
Yeah.
This is critically important because as,as you said, there have been some blowups,
and I actually think there'll probably besome more blowups that are going to create
some question marks around all this.
So, you know, high level, we'reall sort of celebrating some
administrative deregulation forthe banking industry as a whole.
And, and, and from the topdown, the tone from the top.
(13:11):
We're very much seeing that.
But the one thing that nobodytolerates either side of the
aisle is consumers being harmed.
And, and I think there are two thingsin this that are critically important.
They've been a fundamentals of ourapproach for, you know, two decades.
One is, it is aroundthird party management.
So if you're going to deliverservices to consumers, you're
(13:34):
responsible for everything theydo as if you did it yourself.
And that is a principle of third partymanagement that I think has got lost by
some that have gotten in banking, theservice the last three to five years.
And they don't understand that.
And they say, well, mypartner's responsible for that.
No, you're responsible for it andyou're responsible for overseeing it.
The second one is moral clarity,and this is really important to me.
(13:58):
Is banking is supposed to be the integritycenter of financial transactions.
Generally over history, we haveplayed that role and played it well.
Sometimes we get criticizedbecause we won't take enough
risk because we play that role.
But often we manage to the once in ahundred year blow up, not the ongoing.
(14:20):
And that's somewhat important andthat's why we have, you know, fortress
level balance sheets and we have dualcontrols and triple controls, not
because of ordinary every day you'regonna need it, but because there's
gonna be a blow up at some point.
And, and that moral clarity and whensomething goes wrong, you're on the hook,
I think is what got missed even by someplayers in this space in recent years.
(14:42):
So there's going to beincreased regulatory scrutiny
of this kind of a transaction.
In some ways as it should be, but itall starts with third party management.
And that principle that if you do itthrough a third party as a bank, you're
responsible for that third party.
Evan Sparks (14:58):
Yeah, yeah.
And you know, speaking of third parties,fourth parties, I'd love to talk a
little bit more about the interesting.
Third party that most, more and morebanks are dealing with, and that is how
artificial intelligence gets integratedinto this process here, because that
is, you know, we've talked a lot inover the last several years, maybe
(15:22):
a AI is not new in banking, right?
This is, this is a longstanding toolthat has been used in banking, but
you don't, but it's a tool that is notfully understandable because there is.
Stuff going on behind the scenes thatwe, that you know, the computation that
humans cannot exactly control and predict.
(15:42):
And and, you know, we've gota bit of a black box problem.
What we, you know, what arethe ways that you're leveraging
AI and in managing all these.
With as a partner bank.
And then how are you let's, I'm,I'm giving you a two part question.
Let me just start with how are youusing AI and how do you envision
(16:02):
using AI in the future to managesome of the risks as a partner bank?
Brett Pharr (16:05):
Yeah.
Yeah.
So a little over a year ago wehired a head of ai and by the way,
we connect AI and data becausethe two have to go hand in hand.
Like most companies we're doingsome of the simpler things, right?
You know, office tools and people areusing it in meetings and all those kind
of things to create some efficiencies.
(16:26):
But we're also have you know, more thana hundred use cases around very specific
things that have to do with monitoringour partners and what our partners do.
Let me give a very specific example.
There are compliance rules onwhat you can publish about a
banking product, for example, ona website or on an application.
(16:48):
You have to follow a variety ofdifferent rules ranging from what you
can and cannot say about FDIC, howbig the font is, the various words.
There's, there's pages andpages of rules that are on that.
So every time a partner changes something,we have to have a compliance person review
it and say, this was called marketingcollateral meets the requirements that
(17:11):
are there hours and hours of work.
And every time there's a change, oftenresults in a fairly low you know, SLA
with our partners who are aggravated.
It takes us so long to doit and those kind of things.
Artificial intelligence can replacethat and can go in and can review it.
Come up with the answers, tell youwhere the problems are, tell you what's
changed since last time, and cut thetime into a very small fraction for that.
(17:37):
That's the good news, andI think that's a big thing.
Two pieces of bad news.
One your point about a black box,somebody's gotta understand how
all that's working and checkingthe checker, if you will, to make
sure it's happening correctly.
The other thing is, is you have juniorpeople that are coming in, they need
to understand how that process works sothey can learn so that when there's an a
(17:59):
output that they need to talk to a partnerabout, they know what has happened.
And in fact, in some cases we'resaying you're gonna get to use ai,
but you have to demonstrate theproficiency to do it on your own first.
And then after you've demonstratedthat, then you can use ai.
And I think that's gonna have to bea strategy in many, many disciplines.
Otherwise, we'll not be able to havethe judgments that need to occur on
(18:21):
the back end when people are using ai.
So very excited about it andcreate enormous deficiencies
and partner SLA improvements.
But there's gonna be some cautionsand we're gonna have to watch it.
Evan Sparks (18:32):
Yeah.
In my world, we publish a magazine and wewrite, I would really like to know, you
know, you can have ask Chat GPT or copilotto write a magazine article for you.
I'd really like to know that you knowhow to do that, how to report out
a story and write it and think anddo to use your independent judgment
to do that without the assistance,before you start using the assistance.
(18:53):
And I think, a reallyinteresting challenge there.
Brett Pharr (18:56):
Yeah, I, I mentioned I grew up in commercial banking.
Well, I mean, literally how I started wastaking company's financial statements,
and in those days, spread it by handon a piece of paper in the common
format, and then later on into a pc.
That is a critical skill to learn.
AI can do that all day.
And, and we don't need that anymore.
And yet my judgment is as an analystjust starting, needs to still do it
(19:18):
the old way and learn the processand demonstrate to their supervisor
when they know how to do it, and thenthey could use AI going from there.
And, and that will helpimprove the judgment for future
underwriters and all those kind of.
Evan Sparks (19:31):
Can you talk a little bit about, you talked about kind people
coming into your company and, and, andlearning the ropes and getting, getting
com, getting themselves established.
What is the, what's your ta, what'syour talent strategy at Pathward and
how are you how are you finding the nextgeneration of future Pathward bankers?
Brett Pharr (19:46):
Yeah, it's very interesting.
We are a very unique kinda company.
Even before COVID, we had peoplescattered all over the country.
Because there's certain kinds oftalent that you needed to have.
And so we were sort of, you know,half in office, half remote,
which really was not ideal at all.
And you sort of had second class CIcitizens, you had Travel warriors
(20:08):
and all those kind of things.
We're now a Talent Anywhere company.
We have, you know, high 30states covered with employees.
And it has given us access to talentfor some very unique things that we
would never have been able to get.
I think about technology and technologistsand the people that, you know, have left
places where they had to go to the office.
(20:30):
We're telling anywhere there is a bigpush to bring people into the office.
I think it misses thepoint to some extent.
There does need to be face-to-facecollaboration and business purpose
meetings and business purpose travel.
But there are things youcan do, tools you can use.
I'll give you a simple example.
Credit analysts get on eight 30every morning with their supervisor
(20:52):
and they're all on together whilethey're doing independent work.
And one of 'em asks the questionand the supervisor, here's the
question, but the other eightanalysts hear the question as well.
And so there are things like that youcan do that are more collaborative.
That allow for growth for people, evenin the talent anywhere, and sometimes
we don't think through the benefitsof it and we certainly have had
(21:12):
successful results with it, and so longas we do, we're gonna keep doing it.
Evan Sparks (21:16):
Yeah.
What do you do to, what doyou do to build culture?
How are you deliberate aboutbuilding culture in this
Talent Anywhere environment?
We've got people everywhere and they'renot necessarily hanging out between
their, between their Zoom calls, right?
Yeah.
Brett Pharr (21:30):
For example, we have weekly.
Companywide videos.
We send out a rarity prop, varietyof topics, and we have some very
talented people that do that, and thathelps kinda integrate the culture.
I mentioned business purposemeetings by departments and
divisions that helps with it.
We actually had a companywide event.
We brought everybody to Atlantaback in back in the spring.
(21:52):
Very expensive proposition, and yet ithelps to establish comradery, et cetera.
So you can do that and stillbe a Talent anywhere company.
Instead of spending money on realestate, you spend money on other things
that help to create that culture.
Evan Sparks (22:05):
Yeah.
Well Brett, this was really helpful forhelping us understand your unique business
model and yeah, I could, I honestly saymy favorite thing about working for the
a BA banking journal at the AmericanBankers Association is I get to learn
about the incredible diversity of businessmodels that American banks bring to the
table to meet the needs of customersand and support financial inclusion.
(22:27):
So loved hearing about whaty'all are doing at Pathward Bank.
Thank you.
Brett Pharr (22:31):
Thank you very much.
Thanks for having me.
For our listeners, you can findthis in previous episodes at
aba.com/banking journal podcast.
You can also find us on any of yourfavorite podcast apps or platforms.
Thanks so much for listening, andwe'll be back with you again very soon.
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