Show Notes

There are few things in this world as complicated as banking regulation. That’s especially true when so many small-medium businesses become part of the delivery chain. Tech startup LexAlign is simplifying compliance for banks by developing the “missing piece in the digitization of banking.”

In this edition of the Silicon Valley Momentum Podcast, tech-ally Roland Siebelink speaks with LexAlign CEO and co-founder Trevor Lain. They discuss the complexities of what LexAlign does and the challenges of a startup that’s hoping to conquer a new frontier:

• How the mortgage crisis helped Trevor realize the need for a company like LexAlign.
• How LexAlign tries to empower small-medium businesses while also fostering innovation and competition.
• What it’s like for a startup with broad capabilities to find a target customer.
• Why it’s okay not to have a finished product during the early days of your startup.
• The importance of having a purpose behind your day-to-day activities rather than being solely focused on money.

Transcript

Roland Siebelink: Hello, everyone, and welcome to the Silicon Valley Momentum Podcast. My name is Roland Siebelink, and I'm a scale up ally for tech founders. I'm so excited this week because, as my interviewee, I have Trevor Lain, who is the founder and CEO of LexAlign. Hello, Trevor. Thank you for joining us.

Trevor Lain: Hello Roland. Happy to be here.

Roland Siebelink: I'm so glad to hear from you. And it's in an area where we haven't done so much interviewing yet. So I'm really excited to learn more about LexAlign. Tell me what you do, Trevor. If somebody has never heard of LexAlign yet, how would you pitch it to them?

Trevor Lain: We help financial institutions, also potentially insurance companies, monitor and manage the risk of third-party activities. Small and medium businesses in their activities create risks for large institutions like banks and insurance companies. Banks need a way to monitor and support them. We provide an automated way to do that. Filling a missing piece in the digitization of banking.

Roland Siebelink: So, what does that mean? I am a small business. I'd like to be a supplier to a bank. And this is a software that helps me kind of tick the boxes to be able to be compliant with that bank. Would that be right?

Trevor Lain: It's a little bit broader use case than that. What we've seen over the last 30 years is that technology has enabled the migration of activities that used to be handled within banks to the site of small, medium businesses. So the biggest use cases on the customer side, actually where customers right now are depositing checks by scanning them, they're doing ACH transfers, they're doing wire transfers, other forms of digital payment from within their own business or currently from within their own homes. This is stuff they used to have to go down to the bank branch to handle. These activities are regulated. They're also high risk. And small, medium businesses just can't be expected to achieve the security and compliance that banks can in their controlled environments without help. And what we've seen is an exponential rise in fraud and money laundering because small, medium businesses are the weak link right now in the financial system. Banks need a way to better proactively and in a more targeted and scalable way, monitor and manage that risk and support their customers with good security and compliance. So that's really the use case we're focused on. But it also applies to vendors. It also applies to the supply channel partners, such as auto dealers or furniture stores or mortgage brokers that are putting customers into accounts. The capabilities apply across the board.

Roland Siebelink: Oh, that's amazing. That's amazing. That's must be solving a real demand in the market, right?

Trevor Lain: We believe so. And increasingly so do the regulators and some of the big banks that we're talking to, and that we work with, so yes, yes. We believe it is. There's a lot more to it than I than I just described. But that's sort of the high level of what we're doing.

Roland Siebelink: And tell me how you got to this idea? What was the genesis of a LexAlign? How did she get started on this? And what journey did you go through to get to the point where you're at now?

Trevor Lain: Certainly. It was truly a journey. Before LexAlign, I was an attorney for banks. And taking them through one crisis after another. It was during the mortgage crisis that I first saw the need for a platform like LexAlign. At the time, we were working with banks to help them manage their risks and compliance associated with default mortgage servicing. So that means foreclosures and collections and property management and the like. And a lot of the relevant activities for that are actually handled by small and medium businesses throughout the United States. Whether they're painting the property, whether they're doing collections, whether they're processing the foreclosures. And what came to light during the mortgage crisis is there were a lot of problems with compliance. Local rules with state rules and with federal rules relating to consumer protection, but also due process concerns on the foreclosure. And despite the huge amounts of money that the banks were spending, really reestablishing their internal compliance structures, I noticed that in the meetings with regulators and the state Attorneys General, the focus was really on activities that were being handled outside the banks. And the banks have very little visibility on that. And that remained the case. Now there's more to it than that, but I don't want to bog down there because the journey goes on. At the same time, I was becoming very interested in financial inclusion issues. So, at the time, we saw growing population or growing sub part of our population that didn't have access to basic banking services that you and I take for granted. So checking accounts, check cashing, credit and the like, and were forced to pay exorbitant fees for that. And that was growing because banks at the time were under duress from the regulators not to expand the risk, to restrain their risk taking. So even though the regulators wanted them to provide services to this population, the banks didn't see a way to meet those regulatory demands. And what we saw was a market response in the form of fintechs. The early stage fintech companies on the lending side were really going after this market. And with the premise that technology and big data could help solve it. I'm not here to opine on that. But in helping companies in that sphere, and in particular, taking them through state and federal audits of first impression, I quickly saw that I was looking at the flip side of the same problem. Just as banks didn't have visibility on what those small companies were doing, how they were handling their activities -- small companies that work closely with banks that handle high-risk, highly-regulated financial activities didn't really have the wherewithal to understand what we call the "3 Rs": the rules, the risks, the responsibilities that are associated with their activities. And they, in general, weren't able to provide the most basic, first-level documents and information that the banks and the regulators depend on as a way to assess their responsibility. And those are their policy documents, their internal audit reports, their checklists, et cetera. And what I quickly saw was that the blame really lay at the feet of my industry, which was the expertise. But the laws are so complicated and so voluminous and so Byzantine that it required expertise to translate them into actionable concrete steps for companies. And small companies just didn't have access to that expertise even if they thought they needed it. And the banks were still reliant on manual experts to do this risk management. And in a digital banking era, this was just not possible to scale across such geographical distances to maintain an ongoing oversight and support and assessment the way the law requires. And the way that their own risk management really requires.

Roland Siebelink: So, what you were saying is really that the expertise industry had been optimized to evermore complication that maybe big banks could afford to translate but that's really excluded small businesses that didn't have their own councils or other experts on staff?

Trevor Lain: Absolutely. And the banks were exposed because they were working with these small companies. So while the activities that shifted to the small company side, the risk really remained with the banks.

Roland Siebelink: And how does that then translate and who do you consider your core customer, if you will? Is it primarily targeting those SMBs or are you trying to really serve the bank by targeting those SMBs? Or how does that work in your mind?

Trevor Lain: Sure. Our customer is the bank.

Roland Siebelink: Yep. Okay. Got it.

Trevor Lain: They want to assess and wants to support their small company customers, vendors, and partners. So SMBs. SMBs, we're talking anywhere upwards of 3000 people in a business. Ninety-Nine percent of all businesses, not even including the large gig economy, which is.

Roland Siebelink: Yeah, yeah. Whole different ball game, right?

Trevor Lain: Yes. And so the small companies certainly benefit. You know, we're solving this two-sided information problem through automation. And one of the purposes and our goals is to empower SMBs with the knowledge and the documents they need foundationally to attain the level of security and compliance that is appropriate to their activities.

Roland Siebelink: So, this is one of your core competences, if you will, simplification, boiling it down to essentials. What do you do? Like what is your magic? Your secret sauce, if you will, to make that a more attractive business proposition for the banks and for their SMBs than a traditional way of doing things?

Trevor Lain: Absolutely. So, our secret sauce is a set of algorithms that we created that can take any area of law or risk, reverse engineer it, and then develop self-diagnostic modules. Similar to TurboTax that can take any small, medium business through a dynamic experience of question and answers, gain an understanding what they're doing, what do they think about it, what's their level of understanding of the rules, risks, and responsibilities, and what are their intentions. After that information, analyze it, provide to them the information, the documents they need. So, determine which rules, responsibilities, and risks apply based on what they say they're doing and their intensions. Determine where their gaps are and then provide them with very clear gap analysis, action plan, policy documents, and all the rest, and instructions so that they have the information that they foundationally need. At the same time, extract information that is relevant to the banks' risk analysis and then analyze that and present that to the banks in a dashboard framework so that finally they have for the first time ever, overview across the network as to what's going on, where the vulnerabilities are, so they can manage that risk in a much more proactive, targeted, and scalable, and ultimately routine way than they're currently able to do it.

Roland Siebelink: Did it take you a long time to get to that clear understanding of who to target within those banks, within those enterprises?

Trevor Lain: It did, although it was really a function of the product-market fit. So, we emerged understanding that this capability was needed. What we didn't have originally was knowing where our target customer really felt the need. Our capabilities are so broad base, but we needed to learn where is the market interest right now for these capabilities. And, you know, first we had to demonstrate that what we were proposing was possible. And then take it into the market. And if you're working with such large institutions as we're targeting, there's a challenge just in having these conversations and doing that market and assessment and really assessing one's suppositions and assumptions in the beginning. So that took some time and getting the right partners that could make those introductions for us. That was really when we were developing our channel departments. And then talking to the banks, and then even beyond that, there's levels of understanding that, you know, when the iPhone One came out, it's not like everybody flocked to the Apple store to buy one. There are early adopters. So then you have to determine what are the characteristics of an early adopter? How do we define the people who have the vision that they're going to look for that this is a priority for them. Rather than, what we saw a lot, which was, I would say in the most case, in particularly for us with smaller financial institutions, it was almost like having a booth in a world's fair. The reaction was, "Oh, okay, so this is the future." But they weren't buying.

Roland Siebelink: Because they weren't early adopters? Is that, was that your hypothesis?

Trevor Lain: This pain wasn't the paramount pain for them. So you had to find the ones where this pain was the compelling pain that they're willing to prioritize it over other issues that they're dealing with.

Roland Siebelink: Very good. I have two questions about that I know many founders ask themselves too. You said you need to be able to demo your project, not just talk about it. And yet, you know, there's such a risk that they will say, "Oh, what you built is entirely wrong? My real problem is here." How do you balance those two sides?

Trevor Lain: Well, that's exactly what you need to hear. It's not what you want to sell. And as a lawyer, I knew what was needed from a legal point of view. But business is different. And the products that we originally created, there wasn't much of a market for it because the power balance is different than we had realized between the banks and the third parties that we were focused on at the time. And there is going to be a certain amount of building. So I would say, don't overly polish what you have in the beginning. Take what you have that is revolutionary, that is new, understanding that there's going to be a lot of bells and whistles that you're going to add to it over time. Get that in front of your potential customers and ask them where they see a fit, where they see a need for it.

Roland Siebelink: So really keeping it to a minimal, right? Minimal value proposition and overcome that fear of showing something that isn't perfect yet, I guess.

Trevor Lain: Right. You're going to be rearchitecting it anyway.

Roland Siebelink: Can you talk little bit about the broader vision for LexAlign? How far do you see this grow? What trends are you capitalizing on? Just more, the longterm perspective.

Trevor Lain: Sure. That's an interesting conversation that we're having right now with our advisors because there's massive potential in the capabilities that we've created. And I'm not trying to be overly arrogant in saying that because third-party risk and third-party activity risk management really applies to multiple sectors. Very clearly in banking. Very clearly in insurance. But we can also look at the health sector, the hotel sector, others. What I'm most interested in, and so this is partly what it comes down to, is where we're excited. We're excited about developing a data set that hasn't been developed before. So we've talked to others in the industry, including the big banks and tne companies that they set up to be data repositories and to analyze data on behalf of the bank. And what we've learned from all of them is that we have a unique data asset. We have an opportunity to gather data that hasn't been gathered before in a set. And that has enormous potential beyond the first level use case that I've described. So not just to intake, to support and reveal gaps and vulnerabilities in the third party network. But it could be used with machine learning data science that's becoming more and more commoditized at this point to determine what patterns, how does their activities, patterns of how they're behaving on our site and with our platform, but what patterns are correlate with bad outcomes? We can actually, ultimately move the needle from risk detection, such as fraud detection, to risk prediction. So fraud prediction to indicate to a bank that a particular customer is showing patterns that correlate with a certain bad outcome in a certain timeframe. And enable them to intervene and to prevent that. So that's, you know, it's bringing this sector to a place where we see retailers already. Major retails already know a lot about us based on our behavior on their sites. They've done this. And this isn't rocket science. It's just based on getting a data set that enables us and could do it across a range of risks from attrition, you know, losing your customer, to default, to fraud, to money laundering and to whatever the banks are interested in looking at.

Roland Siebelink: So much potential, I really love it. And what I really love in this vision as you display it here, Trevor, is how your vision shines through so much the broader purpose of financial inclusion, democratizing access to some of these tools, and compliance measures for SMBs. You know, you've talked about that a lot more than about the money you're gonna make or about the next round you're going to raise. And I think it's so refreshing to just see a founder focus on their purpose so much, you know?

Trevor Lain: Well, thank you. Boy, there's so many ways we can go from there. It was on purpose that we set LexAlign up as a public benefit corporation when that was still a new thing. And at the time, I was really focused from having worked with fintechs and having worked in the bank sector as an attorney, I really saw that regulation and risk were actually impediments to innovation and competition. That holding back new ideas from emerging because your companies couldn't figure out what they were doing. So while we're not focused on the fintech sector, per se. It's too small of a use case for what we're doing and the need is far greater. At scale, we do see the process of facilitating compliance with whatever these rules are that the industry cares about is also a way of fostering innovation and competition. So that's another way to help consumers as well.

Roland Siebelink: I really, really love to see that. And, you know, you're really looking at how to make the world a better place. And I know that sentence is much overused in Silicon Valley here, of course. But I do think the most successful startups ultimately do need that strong purpose behind the day-to-day business activities just to keep them going and to attract the people who really want to make an impact, right?

Trevor Lain: Yeah. There's so many opportunities to just walk away when things get tough. You know why you're doing something and you have a purpose beyond just money. It certainly helps, and certainly it's helped me at least.

Roland Siebelink: Ah, that's very good. Can you talk a little bit about your team, Trevor? How far have you grown so far? What are some key functions that are on your team? And if you're hiring, what kind of people are you looking for?

Trevor Lain: Sure. We're a pretty small team because we were largely bootstraped. I had worked, just incidentally as background, I had worked with banks on creating structures, technological structures and other structures to manage risk. And I saw how complicated it became very quickly when it was created within the institution. And so it was really important for me to concentrate the expertise in as few people as possible. Elegant, extensible, easy to manage and to change because, you know, the substrate of what we're looking at, the rules and the risks, evolve continuously. So we needed a platform and a tool that could do that as well. So the key hire really was finding my cofounder. Somebody with a very highly-intelligent, broad background working with small companies and big institutions. But also the strong networks and I just really got lucky there. I mean, Sebastian Brocher, who is my cofounder. And then over time we've added on people we've needed. So risk officers, operational capabilities, folks more on the customer side. We are looking to hire probably in the near term on a fractional basis. Somebody who can help with digital sales. We're looking for that kind of scaling. Most of our, we have multiple channels. Our go to market and sales strategy is multiple channels. That's one of them that is still in the future for us. But in the near future, you know, just finding the right marketing people. It's tough to retain top talent as a startup because there is a lot of demand for them. And so we've seen people come and go. Sometimes it's mutually for the better, and sometimes, we wish we still had that person.

Roland Siebelink: Yes, yes. Of course, of course. That's understood. Has that changed do you feel since the pandemic started?

Trevor Lain: Yeah, things have changed since the pandemic started for us. I mean, the funding is difficult. And particularly if you're doing something that's so different like we're doing and really focused on our enterprise level for a particular industry. It's not something that most VCs have on their radar. You know, even when we go through the due diligence and emerge with the shining scores, it's, not something that a lot of VCs are willing to jump onto because they don't know what their value add can be. with something they are not so intimately familiar with. So, we have had to furlough some people that we wish we didn't have to, you know, We were largely, our largest core was in the technology side and some of those people we've had to furlough

Roland Siebelink: How do you and your cofounder Sebastian divide up responsibilities between yourselves?

Trevor Lain: Well, we do confer with each other on some of the basic business decisions. I handle largely the product roadmap, and the relationships, and the product design, in terms of the algorithms. And then Sebastian handles the technology side and making sure that the vision is achieved in a way that that works, that is extensible, and not something that we need to rebuild.

Roland Siebelink: Awesome. Very good. I often ask this question and then with very-early-stage startups, they often get confused. Looks like, "Oh, we all jump on whatever's needed." And I think as you start getting more experienced and you start scaling, being clear about who does what does become more important?

Trevor Lain: Well, you know, we have different skill sets and different backgrounds and so we bring it together that way.

Roland Siebelink: That's excellent. Very good. Okay. Well, we've been recording for quite a while already, so I wanted to give you an opportunity to also say, what do you need from our listeners? Is there anywhere they can go check out a little bit more about LexAlign and anything that they can help you with?

Trevor Lain: Well, they can certainly contact us at [[email protected]](mailto:[email protected]). For the founders out there, we're happy to pass them along and make the connections that might be helpful for them. For investors, if this is an area where they're interested in investing, we'd love to talk to them, whether it's on our behalf or another company that we know. We are very connected in the fintech space by now. And if anybody knows a bank or an insurance company that wants to talk, we are happy to talk to any of them. That's what our ask would be at this point. And if anybody's looking to apply their skills, particularly in sales, marketing in the fintech space, you know, that's something else we might be interested in talking about.

Roland Siebelink: Yes. And, of course, I'm happy also if you know me already and you'd like an introduction to Trevor, I'm happy to provide that. So please, just to drop us a line and we'll get you in contact. Okay, this has been an amazing interview, Trevor. Thanks so much for joining us in the Silicon Valley Momentum Podcast, Trevor Lain, founder and CEO of LexAlign. And we're looking forward to keeping in touch with you and hearing the next episode next week.

Trevor Lain: Thanks Roland. It was a real pleasure.

Roland Siebelink: Thank you everyone for listening.

Roland Siebelink talks all things tech startup and bring you interviews with tech cofounders across the world.