Banking

‘The world is going to embedded fintech’: Former Bank Leumi CEO

A ransomware attack led Rakefet Russak-Aminoach, who was president and CEO of Bank Leumi for seven years, into fintech.

In October 2014, two years after she was promoted to CEO, the bank’s chairman, David Brodet, received an email from cybercriminals saying they had stolen data on all the bank’s customers and if he didn’t pay $3 million, that data would all be posted on the darknet. It happened to be Brodet’s 70th birthday. The passcode to open the attachment was his ID number.

“It was all like a movie,” Russak-Aminoach recalls. “It started a very big event.”

Fintech startups “should have a business model that makes money,” says Rakefet Russak-Aminoach, former CEO of Bank Leumi and current co-founder of Team8, which funds and develops young tech companies.

Photo by Ron Kedmi

She needed someone to help her figure out what happened. She was introduced to Nadav Zafrir, at the time the commander of Unit 8200, Israel’s military technology unit, who brought some of his colleagues in to investigate. They found that the attack had occurred at Leumi’s credit card company. Later, police caught the criminals, former Leumi employees who were living in Thailand, and they were jailed for 14 years.

Along the way, Russak-Aminoach and Zafrir became friends. When she decided to step down from the bank, she spoke with Zafrir about what she should do next. Zafrir, whose Unit 8200 acted as a talent incubator for Israel’s tech industry, convinced her that they should start a venture capital firm and foundry for the fintech and cybersecurity industries. 

Today, they are co-founders of Team8, which is based in Tel Aviv and New York and funds and helps build startups. It focuses on the fintech, cybersecurity and digital health sectors.

One startup Team7 has helped launch is April, which has developed technology Americans can use to file their taxes within minutes, Russak-Aminoach says. Another startup, Spot, provides insurance and financial products to e-commerce sellers. It uses the merchants’ digital footprints to evaluate risks. 

“In Hebrew, we have an expression: Make lemonade out of the lemon,” Russak-Aminoach says. “For me,” the ransomware attack “was a really bitter lemon. We got a great lemonade because Team8 is an amazing group that actually could not be built if we hadn’t had this, because I would not have known Nadav and we would not have built it.” 

In an interview, Russak-Aminoach shared how she chooses the startups her company will support, what fintechs need to do to become profitable and what the future holds for fintech and the traditional financial industry.

What is the relationship between Team8 and the startups it works with? Is Team8 more of a venture capital firm or a consulting company? 

RAKEFET RUSSAK-AMINOACH: We are more than a VC. We are an investor and co-founder, so we build the company with them. We tell the entrepreneurs, we are not in the business of portfolio management. We are not in the business of investing in 20 companies and then doubling down on five. Our business is to build five companies, but then we need all five companies to succeed. We help you validate the idea. We bring you access to tech talent. We bring you our network. We have an amazing village. 

We invest in seed rounds and take 40% of the company. We have 70 people who get up in the morning and work for the companies. It’s a much closer relationship than what you see in a VC. 

So then when they exit, you get a big chunk of the proceeds. 

Exactly. We are the largest shareholders. One company we worked with in cybersecurity, Curv, was sold to PayPal. Some companies will go for an IPO. Some exits will be acquisitions or mergers. 

What are some of your criteria when you are deciding which startups to fund and which to pass on? 

First of all, we ideate ourselves. The idea for April, the tax company, was born here and then we brought in the entrepreneurs. Sometimes it’s the other way around: Entrepreneurs come with an idea. We like the idea. We like the entrepreneurs and we work with them. And sometimes there is a group of entrepreneurs that want to build a company and we like them a lot, but we don’t like the idea. We will say, we like you guys, we think you will build an amazing company. We don’t think this is a good idea. However, let’s decide to build a company together. We will explore and try to validate your idea together with you. 

It’s the people. If you have the right people, you can do amazing things with them. 

How patient are you about these companies becoming profitable?

I’m an accountant and I’m a banker. So I must be in a way conservative. Having said that, in the last couple of years, it’s not really relevant to be profitable. The thing is they should have a business model that makes money. Now in the first couple of years, I want each and every company to build the best product technology-wise, to build the market, the go-to-market strategy, how do you get to the right customers to build the whole thing? Being profitable from the beginning is not something you can expect from the start. 

If you look at neobanks and other fintech companies that were built on a B2C model, you’ve probably realized already that they acquired great market share, but to acquire this market share, they paid hundreds of millions of dollars to Google and Facebook. They have to pay so much money for the market share that they never find a way to be profitable. And the question is, how can you work B2C and how can you get profitability in fintech in the best way? My philosophy is that the world of fintech will not be as much B2C as it used to be, because everybody can see that it’s very difficult to get to profitability if you have to pay all this money for customer acquisition.

My philosophy is that the world of fintech will not be as much B2C as it used to be, because everybody can see that it’s very difficult to get to profitability if you have to pay all this money for customer acquisition.

The world is going, in my opinion, to embedded fintech, where you don’t have to migrate the customer anywhere. You can look where the customers are and embed your products in. April, the tax company, is an embedded tax product. 

Does April get a fee or something? 

The idea of April is not to get the fee, but to be part of the product itself. So when you get into the neobank, you will be able to get your tax return for free. And then your refund will be deposited within the neobank. And then we will share profits [from those low-cost deposits] with the bank. 

When I was a banker, I always said that when you bring value to your customer, you can make money and your customer can be happy. It can work together, but you have to bring value. Otherwise there is no way you can make money over time. 

Some people feel there’s been a big fintech bubble, especially on the B2C side, as you’re talking about, and that a lot of the fintechs that have questionable business models fintechs that have questionable business models and no clear path to profitability are probably going to go out of business. Do you agree?

First of all, incumbent financial institutions should change themselves dramatically. They have to go through a very aggressive digital and data transformation. And some of them do to some extent, some of them do to a lesser extent. Fintech is starting to help this digital transformation happen. The price tags that were given to many of them are irrelevant. But how can you put values where there aren’t any economic parameters?

But the basic fundamental digital transformation is more than needed. And the people who didn’t understand it before COVID understand it now. The process is happening. It’s there. No one is going to stop it. 

Many fintech companies are doing a great job in helping this trend to be implemented. The disturbing thing is that there are amazing fintechs with amazing products and amazing results that raised money with crazy valuations. What is going to happen to them when they go to their next round and they have a down round? This is what worries me, because it will be a shame if companies will be closed just because of these crazy valuations. You need to have amazing management to run through this challenge. 

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