Building a Fintech Bank for Entrepreneurs - Loop on the StartWell Podcast

SUMMARY

Cato Pastoll, CEO of Loop, shares the company's pivot from Lending Loop to a cross-border banking platform aiding Canadian entrepreneurs with international finances, while critiquing Canada's rigid banking regulations versus global innovation.

STATEMENTS

• Loop is a cross-border banking platform designed to help Canadian companies expand internationally by reducing financial friction.
• Traditional banking has been inherently domestic for hundreds of years, treating Canadian and American banks as separate entities.
• Modern businesses operate globally, selling and importing worldwide, yet financial services remain domestically focused.
• Domestic banks primarily function as places to deposit money and lend it out, not for efficient international transactions.
• Ancillary services like payments and credit cards were added to banking but create friction due to the core lending focus.
• Over the past 20-30 years, specialized providers have emerged to address gaps in global money movement.
• SWIFT is a legacy network used by banks for international transfers, but it's antiquated and widely adopted.
• Companies like Payoneer help Amazon sellers repatriate funds from foreign marketplaces to their home countries.
• No traditional bank allows a Canadian business to easily open a UK account for receiving local payments.
• Loop originated in 2014 as Lending Loop, focusing on equity crowdfunding for small business capital access.
• The company pivoted in 2021 to emphasize how customers manage money beyond just sourcing it.
• Cato Pastoll grew up with entrepreneurial parents—a caterer mother and dentist father—working in their businesses from a young age.
• As a child, Cato was passionate about technology, building computers and self-teaching programming to mod video games.
• Small businesses have long been underserved by banks, which prioritize larger enterprises for profits.
• Canada lags 10-15 years behind the UK in financial innovation due to a concentrated banking system with only five major players.
• Real-time payments, available in the UK since the early 2000s, still do not exist in Canada as of 2024.
• Canadian regulations impose disproportionate scrutiny on small banks, similar to giants like RBC, creating entry barriers.
• Banks profit from holding funds longer, so innovations like real-time payments threaten their leverage.
• The UK's challenger bank framework allows easier entry for new banks, unlike Canada's $100 million liquidity requirement.
• Entrepreneurs should actively manage financial risk rather than complacently relying on big banks.
• Recent bank failures like Silicon Valley Bank highlighted vulnerabilities in even established institutions.
• Lending Loop initially connected everyday lenders with small businesses needing capital, bypassing traditional banks.
• Loop now offers comprehensive support beyond lending, acting as a daily operational partner for small businesses.

IDEAS

• Banking's foundational model of deposits and lending ill-equips it for the global, agile needs of today's entrepreneurs.
• Technology can transform IOUs into seamless digital protocols for storing, transferring, and exchanging value worldwide.
• Canada's oligopolistic banking structure stifles innovation, forcing fintechs to partner with smaller institutions rather than compete directly.
• Childhood immersion in family businesses reveals the manual, outdated financial processes that persist even in the digital age.
• Small businesses fund growth through family and friends because banks delegate approvals to inexperienced staff and vanishing back offices.
• Challenger banks in the UK democratize entry, enabling anyone to start a bank with minimal barriers compared to Canada's rigidity.
• Fintechs like Loop aggregate transaction volumes to offset flows, minimizing actual money movement and slashing costs.
• Virtual cards enable granular expense control, categorizing spends for teams or departments without personal credit risks.
• Organic growth via word-of-mouth thrives when products solve core pains, turning users into advocates among business networks.
• Banks' disinterest in small businesses stems from profit pursuits in larger segments, leaving SMBs to innovate independently.
• Multi-currency accounts eliminate FX losses by allowing revenue collection and repayment in the same currency.
• Regulatory proportionality could level the playing field, reducing compliance burdens for smaller players versus banking giants.
• Entrepreneurs' complacency with banks mirrors blind trust in infrastructure, ignoring risks exposed by failures like SVB.
• Loop's digital platform bypasses manual bank processes, enabling instant local payments across borders through networked rails.
• Integrating fintech with tools like QuickBooks automates data flow, easing accounting for e-commerce and high-volume transactions.
• Personal cards for business create credit entanglement, complicating life events like home buying with unexplained spends.
• Small and medium-sized businesses employ 90% of Canada's private sector workforce, underscoring their economic primacy.
• Fintech evolution from lending to full-service platforms builds deeper relationships, transcending transactional interactions.
• No-fee illusions in cards hide embedded service charges, making true transparency a competitive edge for innovators.
• Customer success stories, like unlocking US market access, fuel team motivation by linking savings to business growth.
• Banks resist credit flexibility, rejecting cash-backed debit-like options despite de-risking for growing enterprises.
• Word-of-mouth referrals from accountants and agencies amplify reach, as users propagate solutions in professional circles.

INSIGHTS

• Traditional banking's domestic roots perpetuate global frictions, revealing a mismatch between historical models and modern interconnected commerce.
• Regulatory monopolies in Canada hinder fintech agility, contrasting with competitive frameworks that foster innovation and lower barriers worldwide.
• Entrepreneurs' early exposure to manual finances underscores persistent gaps, where technology can automate trust and efficiency in value exchange.
• Banks' core lending focus neglects ancillary services, allowing specialized platforms to redefine financial partnerships for underserved SMBs.
• Disproportionate compliance burdens entrench oligopolies, stifling entry and innovation while small businesses bear the economic load.
• Active risk management in finances parallels operational diligence elsewhere, shifting from complacency to strategic empowerment for growth.
• Aggregated transaction offsetting minimizes physical flows, enabling cost-effective borderless payments through digital netting.
• Multi-currency tools eliminate hidden conversion traps, preserving value and streamlining international operations for agile enterprises.
• Organic advocacy arises from tangible savings, building resilient networks that prioritize user-centric service over institutional inertia.
• Virtual controls transform expense management, decoupling personal and business finances to enhance accountability and scalability.
• Economic vitality hinges on SMBs, yet systemic neglect demands fintech interventions to unlock their full potential.
• Transparent pricing disrupts opaque fee structures, restoring trust and enabling entrepreneurs to focus on expansion rather than erosion.

QUOTES

• "The world of banking that's existed for hundreds of years now has been inherently domestic."
• "If you're building a business today it's now an international business... why are the financial services that they use also inherently domestic they should be International."
• "Banks have had no incentive to make that better."
• "We're 10 15 years behind even the UK... it stems from the way that our banking system is constructed with basically only five players."
• "As a business owner as an entrepreneur put some thought to how you are managing your money where you are managing it and I think that's ultimately a good thing for the industry."
• "The original idea behind our business was what if we could create a way for businesses to more effectively Access Capital from the people who are putting deposits in the bank."
• "We want to be the exact opposite of a bank when it comes to customer service."
• "90 of the private sector Workforce meaning non-government Workforce are employed by small or medium-sized businesses."
• "I've had all these requests uh to use our product in the US right like... I can't actually like invoice them or collect that money locally in the US."

HABITS

• Immerse children in family businesses early to build hands-on understanding of operations, from waiting tables to bookkeeping.
• Self-teach programming and tech skills as a youth to mod games and innovate personal projects, fostering lifelong technical passion.
• Actively question and dive deep into financial pain points during conversations with entrepreneurs to identify systemic issues.
• Prioritize organic growth through exceptional customer service, personally handling support calls to build direct relationships.
• Diversify business offerings iteratively, evolving from lending to comprehensive financial tools based on customer needs.
• Integrate fintech platforms with accounting software like QuickBooks for seamless data flow and reduced manual reconciliation.
• Use virtual cards for team expenses to pre-categorize spends, simplifying bookkeeping and enhancing accountability.
• Regularly track FX fees and conversion losses to optimize multi-currency transactions and preserve business margins.

FACTS

• Canada's banking sector is dominated by five major players, creating high barriers for new entrants requiring $100 million in liquidity.
• Average bank foreign exchange fees on credit cards reach 5.7%, leading to $60,000 annual losses for businesses spending $1 million.
• Real-time payments have been available in the UK since the early 2000s, but Canada still lacks them entering 2024.
• Small and medium-sized businesses employ 90% of Canada's non-government private sector workforce.
• SWIFT, despite being antiquated, remains the global standard for bank international transfers due to universal adoption.
• No traditional bank allows a non-resident Canadian business to open a local account in markets like the UK for receiving payments.
• During the pandemic, many small businesses closed due to inadequate financial support, highlighting employment vulnerabilities.
• Businesses often lose 8% on cross-border transactions combining vendor and bank FX fees.

REFERENCES

• Lending Loop (original company incarnation for equity crowdfunding and lending).
• Payoneer (service for repatriating Amazon seller funds across borders).
• SWIFT (legacy international payments network).
• Amazon (marketplace requiring cross-border fund management).
• Shopify (e-commerce platform example for customer acquisition and transactions).
• QuickBooks (accounting software for integrations).
• Xero (accounting software for integrations).
• Visa (payment network for transactions and cards).
• Stripe (payment processor for e-commerce, with integration challenges).
• Silicon Valley Bank (failed bank exposing risks to startups).
• RBC (example of a major Canadian bank under heavy regulation).
• Challenger banks (UK regulatory framework for new entrants).

HOW TO APPLY

• Sign up digitally on Loop's platform to instantly access multi-currency accounts in the US, UK, Europe, and Canada for storing funds without conversion hassles.
• Provide your Loop account details (routing and account numbers) to international customers for direct deposits, avoiding FX fees on incoming revenue.
• Use Loop's invoicing feature to pull payments from clients via bank-to-bank transfers, charging 0.1-0.5% instead of 3% credit card fees.
• Issue physical or virtual Loop cards in specific currencies to team members or departments, setting limits for controlled spending on expenses like travel or ads.
• Send outbound payments to suppliers in markets like China or Europe by selecting local rails through Loop, achieving instant transfers without SWIFT's $50 fees.
• Exchange currencies within Loop at 0.5% rates when needed, automating based on inflows and outflows to minimize manual decisions.
• Integrate Loop with QuickBooks or Xero to sync transaction data, automating categorization and reducing bookkeeping errors from clumped payments.
• Monitor saved fees via Loop's dashboard to reinvest in growth, tracking how eliminated 8% costs double or triple revenue opportunities.
• Refer Loop to networks like accountants or agencies for mutual benefits, propagating usage through word-of-mouth in business communities.

ONE-SENTENCE TAKEAWAY

Canadian entrepreneurs must leverage fintech like Loop to conquer cross-border financial barriers and fuel global expansion.

RECOMMENDATIONS

• Evaluate your current bank's FX fees and switch to multi-currency platforms to reclaim up to 8% on international transactions.
• Diversify from personal cards for business by adopting virtual cards with customizable limits to protect credit and streamline accounting.
• Partner with smaller banks or credit unions lacking tech infrastructure, as they seek fintech collaborations to serve SMBs better.
• Automate invoicing and collections through bank transfers to cut processing costs below credit card rates for recurring client payments.
• Build tech literacy early by experimenting with programming and hardware, applying it to solve real-world financial inefficiencies.
• Prioritize organic referrals by delivering superior, responsive customer service that contrasts with traditional banking bureaucracy.
• Integrate payment tools with accounting software to eliminate manual data entry, especially for high-volume e-commerce operations.
• Actively manage financial risks by distributing funds across platforms rather than concentrating in one "too big to fail" institution.
• Advocate for regulatory changes promoting proportionate oversight to lower entry barriers for innovative banking challengers.
• Track business growth metrics tied to financial savings, using them to motivate teams and unlock new market opportunities abroad.
• Use aggregated volume networks for cross-border sends to achieve fee-free local payments, offsetting flows digitally.
• Educate networks on fintech benefits through shared success stories, fostering word-of-mouth expansion in entrepreneur circles.
• Reject opaque "no FX" cards with hidden 2.5% fees, opting for transparent models charging minimal, predictable rates.
• For scaling spends, request flexible credit backed by cash reserves via fintechs that adapt unlike rigid big banks.
• Focus hiring on growth teams to amplify awareness, targeting SMBs who undervalue specialized financial tools.

MEMO

Cato Pastoll, the co-founder and CEO of Loop, a Toronto-based fintech darling, traces his entrepreneurial roots to a childhood steeped in his parents' small businesses—a bustling catering operation run by his mother and a dental practice owned by his father. Growing up in England before moving to Canada, Pastoll witnessed firsthand the grind of manual bookkeeping and vendor payments in the early 2000s, even as his tech-savvy youth led him to build computers and hack video games. This blend of family hustle and digital curiosity ignited a passion for upending finance's outdated ways. By 2014, he launched Lending Loop as an equity crowdfunding platform to connect everyday lenders with capital-starved small businesses, addressing banks' failure to fulfill their original mandate: pooling deposits to fuel economic growth.

Yet, as Lending Loop evolved, Pastoll realized lending alone was transactional and shallow. Conversations with entrepreneurs revealed deeper pains—like receiving paper checks or hemorrhaging 8% on U.S. vendor payments via Canadian cards burdened by 5.7% foreign exchange fees. In 2021, the company pivoted to Loop, a cross-border banking platform billed as Canada's top choice for entrepreneurs. It offers digital sign-ups for U.S., UK, and European accounts, allowing seamless revenue collection without conversions. For a Canadian Amazon seller, this means pocketing U.S. dollars intact to cover stateside expenses, dodging the costly round-trip FX dance.

Canada's banking landscape, dominated by five behemoths like RBC, exacerbates these issues. Pastoll laments the nation's 10- to 15-year lag behind the UK, where "challenger banks" thrive under flexible regulations permitting startups with far less than the $100 million liquidity hurdle here. Real-time payments, a staple in Britain since the early 2000s, remain elusive in 2024, as incumbents profit from holding funds longer. Disproportionate regulations smother small players with scrutiny equal to giants, while SWIFT's clunky wires—prone to errors and $50 fees—persist as the global norm despite fintech alternatives.

Loop counters this with innovations like multi-currency virtual cards, issued for teams or ads, that eliminate FX hits and pre-categorize spends for effortless accounting. Sending payments to a Chinese supplier? Loop routes via local rails for instant, low-cost delivery, netting transactions to minimize actual flows—like PayPal's early matching but scaled for businesses. Integrations with QuickBooks or Stripe automate the chaos of clumped e-commerce data, a boon for bookkeepers weary of manual unpacking. Pastoll's model charges just 0.5% on exchanges, undercutting banks by digitizing what they still manualize in branches.

The platform's four pillars—accounts, receivables, payables, and FX—position Loop as a daily partner, not a distant lender. A restaurant supplier eyeing U.S. expansion told Pastoll Loop unlocked invoicing impossibilities, potentially doubling revenue. This resonates amid small and medium-sized businesses employing 90% of Canada's private sector workforce, yet facing neglect; pandemic closures exposed their fragility and the economy's reliance on them. Pastoll urges entrepreneurs to treat finances like any operation—diligently managed, not blindly trusted—eschewing complacency bred by viewing banks as unassailable infrastructure.

Organic growth powers Loop's trajectory, with 5-10% monthly user gains fueled by referrals from delighted SMBs and accountants. Pastoll embodies anti-bank ethos: he'll personally answer support calls, shattering the automated prompt purgatory. As AI and software efficiencies shrink big firms, fintechs like Loop democratize tools for the nimble underdogs driving jobs and innovation. Partnerships with credit unions bridge gaps the big five ignore, hinting at a future where regulatory thaw invites broader competition.

In a world where Silicon Valley Bank's collapse jolted startups into questioning safeguards, Pastoll's vision reframes finance as empowering, not extractive. Loop isn't just software; it's a rebellion against inertia, enabling borderless ambition one frictionless transaction at a time. For Canadian entrepreneurs, the message is clear: global growth demands ditching domestic shackles for platforms that evolve as fast as business itself.