00:00hi everyone welcome to the a 6nz podcast
00:03I'm sonal and today Michael and I are
00:05taping another special episode of the a
00:076 & Z podcast on the road from London
00:10and so we are bringing this to you live
00:12from London and today's topic is FinTech
00:15or financial services and tech meets
00:18technology and joining us on the podcast
00:21today are Alex man pal who is our newest
00:24GP General Partner who among many other
00:27things will be focusing on fin tech and
00:29we also have Eileen burbage who is a
00:32partner at passion capital and early
00:34stage seed fund that's one of the most
00:37prominent early stage seed funds in
00:38London and she's also the chair of tech
00:42city and very interestingly the
00:44government special envoy for fin tech
00:46welcome Eileen and Alex thank you thank
00:49you let's just start talking about why
00:51FinTech why now let's just jump right in
00:53and in fact it's been tech like a new
00:55thing is that like a real phrase that's
00:57been around I mean is that like a new
00:58phrase or was been around for a while
00:59like what's going on with that we were
01:01just joking about this that it seems
01:03like a contrived term because if you
01:05were to ask any of the existing
01:06incumbent companies what they deal with
01:08there they would not say fin tech they
01:10would say we loan money we're a bank or
01:12we do finance we do microfinance but
01:15they they have very very well defined
01:16terms but anybody who's trying to
01:18that's fin tech company uh-huh it's
01:20almost like a dis right it's like the
01:21new newer companies are thinking oh
01:23we're gonna introduce technology into
01:25your sector right thereby implying that
01:27they never used technology to do it so
01:29it's almost a bit of it I think like
01:30Walmart Amazon's an e-commerce exactly
01:33exactly in Walmart's retail right yeah
01:35exactly yeah it's one of those terms
01:37that no doubt will disappear assuming
01:39that the FinTech people do what they say
01:41they're gonna do right because you
01:42wouldn't say I have an account with a
01:44fin tech company it's like where do you
01:46keep your money can you write me a check
01:47oh hold on let me login to my face I
01:49gotta call my fing tech company yeah so
01:52it is it true though that why can't the
01:53incumbents um compete with tech I mean
01:56they probably can I can't be easily
01:58acquire like you know some competencies
02:01and and make it happen like just hire
02:02really smart developers and bring
02:04technology to their business yeah I mean
02:07I don't think that's any different in
02:08the financial services sector than any
02:09other sector it's just a question of
02:11incumbents how big they are
02:13agile or not agile that might be and how
02:15quickly they can respond to what's
02:17happening right so I think that's like
02:18everything else whether it's publishing
02:20media you're mentioning e-commerce or
02:22retail you know a lot of large
02:24corporates are being sort of affected by
02:26but also looking at innovation aqua
02:29hires and bringing in-house sort of
02:31resources and knowledge coming from
02:32younger companies London is you know has
02:36a reputation obviously it is a financial
02:38center in the world but does that
02:40necessarily mean that it's a natural
02:41center for you know technology applied
02:44to finance yeah no I think that's a good
02:46question and one that you brought up
02:48earlier in terms of like why now I don't
02:50think just because it's like the
02:52financial capital world which it just
02:53read got again from New York this year
02:55it goes back and forth
02:56that's right often but we gots not a
02:59word but it's just recap do they really
03:00recapture that there's a raking oh yeah
03:04I would take it that seriously but got
03:16it back for this year but I do think to
03:18your point just because it's the
03:19financial capital of the world even for
03:21doesn't make it necessarily the natural
03:23sort of leader or Center for FinTech I
03:25think what's happened there is you know
03:27this happens for instance 20 years ago
03:29or it has it has it has done it's only
03:31because we've got sort of a digital or a
03:33tech ecosystem or a startup ecosystem
03:35that I think has really kind of
03:36flourished over the last really three to
03:38five years and so I think it's the
03:40combination of those two things and
03:41you're asking earlier sort of why now I
03:43really think the 2007-2008 crisis had a
03:47I think on the one hand you saw with the
03:49financial crisis that maybe there's too
03:51much money being captured by too few
03:53institutions at least that's what you
03:54know people here in the UK recognized
03:56too few banks we're having too much
03:58control and so there was a need to try
04:01and spur innovation and try and get some
04:03diversification from other areas of the
04:05sector in addition I think what's more
04:07crucial is that talent was sort of at
04:10least here in London culturally you know
04:13a lot of people maybe we're sort of very
04:15happy or comfortable working at large
04:17companies at banks at consultancies
04:19doing you know really well getting nice
04:21paychecks and then when the crisis
04:23happened and you started seeing layoffs
04:24or redundancies people started thinking
04:27fifteen anymore and I've always been
04:28thinking about doing something like this
04:30and this and this maybe now's a good
04:32time so when that safety net fell away
04:33that sty will go out and be founders or
04:36you know this just started with a few or
04:38a handful of people they just started
04:39tapping up former co-workers and started
04:41setting up startups this is why like in
04:44the Bay Area you had a lot of technology
04:45companies but how many technology
04:47companies in the Bay Area are going
04:48after the oil drilling sector or a lot
04:52of things it actually might be massive
04:53sectors of the economy but just because
04:55there's no that's not it's not located
04:58or based in the Bay Area so I totally
05:01agree you need you need a vibrant tech
05:03ecosystem you need people that are very
05:05entrepreneurial but lastly and almost
05:07most importantly it's the the Santa
05:09quinone of you need people that
05:11understand the particular industry that
05:13they want to go disruptor go after and
05:15it's interesting I've met with a number
05:16of people that were senior executives at
05:19various uk-based firms where they
05:21understand every bit of minutiae in
05:23terms of how a bank works and they want
05:25to build a new bank now they know they
05:28need is the the Venn diagram has you
05:30need to have knowledge of the financial
05:32system you need to have a very very
05:33strong technology background and you
05:35need to be an entrepreneur and those
05:37things don't overlap that often but when
05:38they do that that's the magic
05:40combination that you need I'd actually
05:43add to the Venn diagram I think there's
05:44a fourth element to I think another
05:46thing that makes London so special so
05:48you got the tech you know obviously not
05:50at the depth or the sort of heritage of
05:54Silicon Valley but I think in the last
05:55three five years we've really made some
05:57massive strides but then you've got the
05:59financial services like a Wall Street so
06:01it's almost as if we've got Silicon
06:02Valley and Wall Street in one place in
06:04one geographical City but on top of that
06:07and then like you said the
06:07entrepreneurial spirit which is a third
06:09part of your Venn diagram I'd put in the
06:10fourth one which is policy makers or
06:12regulars right because it's almost like
06:14well it's not almost we do we genuinely
06:16have the equivalent of like Capitol Hill
06:18and lawmakers here also in London so
06:21part of the reason we're chatting so
06:22early is I'm going over to number 10
06:24Downing Street later this morning and
06:25you can't really do that I mean you can
06:27get on a plane from Silicon Valley but
06:29we talk to policy makers who are really
06:31interested you know and part of my role
06:33is whatever envoy for the government for
06:35FinTech is to try to help the government
06:39can actually do to make a difference to
06:41help stimulate even more innovation or
06:43more entrepreneurs and FinTech so I
06:45think actually it's a really crucial
06:46part of the Venn diagram so not only is
06:48the encouragement important but then
06:50they actually set policy that helps so
06:51whether it's crowdfunding peer-to-peer
06:53lending you know they held early reviews
06:55of you know the blockchain Bank of
06:57England did a really big study on it
06:58these kinds of things actually make a
07:00difference and I think can kind of
07:01grease the skids in terms of about the
07:03first three elements of that Venn
07:04diagram especially for financial
07:05services because on a panel that we did
07:08yesterday I was talking about if you
07:10want to launch uber or Airbnb or do
07:13something of that sort in the sharing
07:14economy sure you might get your your
07:18risk might get tapped with a ruler for
07:20being a bad boy if you do this without
07:22getting permission but it's not that big
07:25of a deal whereas if you say that kyc
07:27and AML laws are antiquated then you're
07:28not gonna follow them you'll go to
07:30know your customer kyc is know your
07:33customer AML is anti money laundering
07:35you've got a hundred more in the u.s.
07:37that you have to follow so there's
07:38something called a No Fax screen which
07:40means it's an office of foreign asset
07:42control to make sure that you're not
07:43giving money to a terrorist there's a no
07:45and watch list of people that you can't
07:46give money to but you can't just say
07:48it's an excel file and you go check it
07:50there's a whole process for this so you
07:53know it's very very complicated when
07:54you're touching money I mean it's
07:57probably only beaten by touching
07:58healthcare in terms of the impact that
08:00you can have on people's lives as
08:02opposed to you okay there's a new
08:03on-demand food delivery company and
08:06they're not operating within the
08:07confines of food delivery law that was
08:09established in London in the year 1400
08:11like okay that's that's not good but
08:15whereas you lose somebody's money you
08:16lose their life savings I'm gonna find a
08:18terrorist yeah we're you funded
08:19terrorist like these are bad things and
08:21you do have to fall regulation a lot
08:23more click or a lot more closely so I
08:25get the reasons then for the regulation
08:26clearly this is another case where it's
08:28really important but I lean when you
08:29describe the environment in London and
08:31we think about the fact that their
08:32communal London in New York or competing
08:34head-to-head for the one in two spots so
08:35to speak whether it's objective or not
08:37is it that the government needs to do a
08:39better job of setting policy or getting
08:42out of the way in relaxing policy and
08:44there seems like there's a quantitative
08:46and qualitative difference between those
08:47yeah I think it's the balance of the two
08:49and I think actually the UK government
08:51job of balancing the two you know a lot
08:53of people so then some people started to
08:55talk about it not necessarily as light
08:57touch or have you touched but as kind of
08:58quote right touch regulation and I think
09:01that's right I think the government you
09:03know it's important to think it's not
09:04just at the government so like hugely
09:05altruistic and they're just doing
09:07whatever entrepreneurs want you know
09:08there is an economic driver for the
09:10government to sort of be supportive or
09:12at least watch this ecosystem really
09:14carefully the financial services sector
09:16contributes about 150 to 160 billion
09:19pounds a year to the UK economy in GDP
09:22it's not something the government wants
09:23to see go away that's the massive driver
09:25for the economy but at the same time it
09:28recognizes that the banks are in trouble
09:30what happened in 2007-2008 shouldn't
09:32we had bank bailouts here in this
09:34country and so it's got a vested
09:36interests to make sure that the banks
09:38kind of stay current or at least get
09:39ahead of the game and it's sort of done
09:41things like committed to saying you know
09:43we're gonna approve or grant new
09:45licenses for up to 15 challenger banks
09:47that's what you know Alex was mentioning
09:48and so doing that really sends a really
09:50strong signal it's not necessarily
09:52legislative but it actually says listen
09:54we want to see 50 new banks come up in
09:56the next year that's a really big
09:57message to both the banks but also to
09:59startups you know and it's got the
10:01government here sees 300 of the world's
10:04banks with their headquarters here in
10:05London we have more American Bank
10:07headquarters here in London than in New
10:08York so it's there's just this really
10:11thriving yeah really really thriving
10:13ecosystem it's like a petri dish and it
10:15makes sense for the government to be
10:16really watchful it's not also just
10:18keeping an eye but it might be looking
10:20at things that are outdated so a lot of
10:21laws here in this country have been
10:23around for hundreds of years like there
10:24was some kind of 1,400 you know
10:26established in the year 1400 not really
10:28joking but it dates dates really far
10:36back so there was something that sort of
10:37suggested to pay in a check or to
10:39deposit a check you'd have to show a
10:41physical representation of a check or
10:43you know an IOU or a promissory note or
10:45whatever and only about you know a
10:47couple of years ago to Berkeley sort of
10:48say this is stopping us from being able
10:50to use mobile apps or digital versions
10:52of checks and that went back to some
10:54kind of measure and introduced in some
10:551,400 or 1,500 measure when the
10:58government was you know when that was
10:59brought to its attention obviously you
11:01know it holds a quick review but it
11:03changes it and there are lots of things
11:04that were just developed in a
11:05antiquated analog world that need to be
11:08updated even on the AML side by the way
11:10so I think it's doing all the right
11:12things by examining all this is there
11:14we've heard over and over and it's
11:16somewhat bragging I'll be honest that
11:17that Europe and UK in particular are way
11:21ahead of the United States in terms of
11:22like the consumer side and in payments
11:24and like you haven't seen a paper check
11:26in decades or something but what is the
11:30customer poll and I want to know from
11:31both sides or maybe talk about how the
11:33government wants to do this and how
11:34clearly as investors you're very
11:36interested in doing it is there a
11:38different kind of customer poll here
11:40because of you know what people are used
11:43to and how they're used to handling
11:44money and versus the United States where
11:48maybe the poll isn't as strong and I
11:50don't know if you have any in sense of
11:52them it's a really good question and
11:53actually I haven't thought about it too
11:54much but now that you mention it I do
11:56think there's a big cultural difference
11:57as you were saying the question I was
11:59wondering if so this is just my
12:00hypothesis I'm not even sure if the fact
12:02that Europe as a continent or you know
12:05European Union because there was multi
12:06currency for a while maybe that made
12:09some consumer pull sort of slightly
12:11stronger to sort of say make this easier
12:13for me I'm not a hundred percent sure
12:14that that would that would sort of
12:16support things in remittances and
12:18foreign exchange but maybe there was
12:19something about you know moving faster
12:22cashless payments you know we've had the
12:24Oyster Card network in London for I
12:26don't know well ever since I've moved
12:28here I've been here 11 years it's got to
12:29be in there 20 years old it's the Oyster
12:30Card now the Oyster card is what you
12:32were able to use on the tube London
12:34Underground or on buses so basically all
12:36public transport and it was just a
12:39contactless card you know that you were
12:41able to just tag in and tag out for all
12:43of your journeys and all your fare you
12:45top it up every so often now you can
12:47actually use your bank card to do that
12:49so I can use my Barclays debit card and
12:52just tap in and tap out to get in and
12:54off the tube and that is the largest
12:56contactless payment bank sort of
12:57backbone as opposed to a private network
12:59contactless payment in the world we've
13:01had that for close to 20 years we also
13:03had Chip and PIN which I was just in the
13:05States to two weeks ago and I know is
13:07now starting to get rolled out it's not
13:09sure no parent yeah which is really
13:11weird cuz I was like at Walgreens and I
13:12was like don't show me my pin where's
13:14the two-factor authentication here
13:17laughter is I mean it's it's insane that
13:20we don't have to fast yeah and part of
13:21the problem is that in the US versus
13:24Europe in Europe if you go pay at a
13:25restaurant they bring the terminal to
13:27you yeah and that level of
13:29infrastructure that Wireless payment
13:31infrastructure does not exist in the
13:33u.s. at all so like you give the card to
13:35your waiter the waiter runs off with you
13:36why don't they introduce it to the mains
13:40it would be expensive well that is true
13:42but they actually to go reintroduce all
13:44the chip machines is very expensive as
13:46well but in October there is a liability
13:48shift so for the longest time merchants
13:52could conceivably not have liability if
13:54the card itself was a replica it was
13:57effectively a stolen created card and it
14:00was very easy to just create a magstripe
14:02you can go to eBay and get not a mag
14:04stripe reader but a mag stripe writer
14:06for 20 bucks or less so the main benefit
14:11of switching over to chip and the way
14:13that they've actually encouraged almost
14:14every merchant in the u.s. to do it is
14:16that if you're a merchant and there's a
14:17card that has a chip and you don't read
14:19the chip you instead read the mag stripe
14:20you and you alone as the merchants are
14:23responsible for fraud so this is caused
14:26I mean so you know imagine that your
14:28target and in addition to being hacked
14:30and everything else that has gone wrong
14:31for target use you lose a few hundred
14:33million dollars a year on fraud and you
14:35might have that if you switch over to
14:37chip and you look at the capex that's
14:39required to go replace all of your
14:41terminals all of your your little
14:42checkout machines your POS systems that
14:46actually might be like amortize that I
14:49was going to a sheep er then dealing
14:51with the additional fraud the u.s. just
14:54looked at the the issue was I mean
14:56chip-and-pin would be more effective
14:58yeah but just going to chip as a first
15:00step was enough for me save billions of
15:02dollars because a lot of the fraud was
15:04people just they get the credit card
15:05number and it's yeah it's a 16 digit
15:07number that's pretty easy i buy the
15:09twenty dollar gizmo on ebay and then
15:11boom i come up with a fake credit card
15:12and then i go steal stuff in store and
15:15not just online actually online fraud
15:16rules were much better than in store for
15:18our rules where you just go like this
15:19and then you're done but I hear both of
15:21you saying that you know post 2008 that
15:26consumers lost faith in banks and maybe
15:29bankers lost faith in banks but
15:30they're all asking for something new and
15:32at some level I sort of don't believe
15:36that I mean what are they asking for and
15:39what are the what is your evidence that
15:41they you know that they really want it
15:43another quick question have build on
15:45that if the crisis had never happened I
15:47don't buy that that's primary driver
15:51because it feels like it would we'd
15:54still be in this moment of FinTech if
15:55even if it hadn't happened like there's
15:57something coming together if we're wrong
15:59three different things though right so
16:01like Lending Club is really a bank and I
16:03use this term a lot and and companies
16:05like Lending Club are banks but they're
16:06not banks at the same time because think
16:10back to when Gmail came out so Gmail
16:12comes out in 2004 April 1st 2004 people
16:15thought it was an April Fool's joke and
16:16they give you a gigabyte of space and
16:18everybody else gave you ten megabytes
16:20right so it's very very hard to change
16:23your email very hard because you have to
16:24tell people don't contact me here and
16:26then of course Yahoo AOL hotmail the big
16:29incumbent mail providers did not make it
16:31easy so if you wanted to have an
16:32auto-response message saying I'm not
16:34using this email anymore
16:35please email me over here AOL would not
16:37allow that I'm very smart of that right
16:39because they wouldn't want you to switch
16:40but Gmail just said we recognize that it
16:44is a royal pain in the butt to go change
16:46your email we're going to make it
16:48objectively a hundred times better like
16:50compute a like right yeah add two zeros
16:54to the end of the ten megabytes and even
16:57if Yahoo wanted to do that well a yahoo
17:00had a revenue stream that was required I
17:03mean you had to pay 20 bucks a year to
17:04get Yahoo Mail plus where you got I
17:05think 100 megabytes and B so they have
17:08to get rid of that and cannibalize their
17:10own sales and then bu which is almost
17:12more problematic and they didn't have
17:14the computational capacity to go give a
17:16hundred million people one gigabyte of
17:19space that's that's a massive amount of
17:21memory and servers to have that stored
17:23redundantly so they just couldn't do it
17:25and that was enough me and even with
17:28that it took I don't know 10 years for
17:31Gmail to get even close to the number of
17:33yahoo mail accounts despite being a
17:34hundred times better and yahoo
17:36eventually caught up and I'd say the
17:38same thing is really true for banking
17:39which is I have a bank account it stores
17:43if somebody like how is somebody a
17:45hundred times better than that I mean to
17:47give a hundred times better interest
17:48rate that's very challenging right these
17:50if I'm getting 1% which I'm not but
17:52let's just say I could get 1% somewhere
17:54nobody's gonna give me a hundred percent
17:55right so what you do see is when the
17:58pain point is a little bit stronger like
17:59lending market places again in the same
18:02way that somebody's not looking for a
18:03fin tech company somebody's not looking
18:05for a lending market place somebody says
18:07wow I have I'm in debt and I'm paying 19
18:10percent interest to my credit card a
18:13friend or an app like Credit Karma told
18:16me that I can save a lot of money if I
18:17go sign up for Lending Club and
18:19refinance my debt well I just graduated
18:21from school and wow I have a lot of
18:23student debt a friend told me that I can
18:26go save a lot of money if I refinance my
18:28student and people have understood this
18:29with mortgages for a long time so like
18:32there actually is poll for people want
18:34that but I think it's just fundamentally
18:36very very hard with banking or insurance
18:38or things that have very very high
18:40inertia and very very long periods on
18:47which people might decide to go change I
18:50think you're right from a utility
18:51standpoint but I also think even less
18:54tactically what a lot of consumers are
18:56pulling for now is convenience literally
18:58like better usability in UX so one of
19:00your portfolio companies based here in
19:02London transferwise you know it's hard
19:04to argue that as you say you could have
19:05done better than what Western Union did
19:07you walk into a place you drop $100 you
19:09see that you know whatever it's gonna be
19:1180 pounds is gonna come out the other
19:12side so you go tell somebody in London
19:14to go pick it up that seemed to work
19:16really well you know transferwise was
19:18able to demonstrate well actually you do
19:19it online you make it a lot easier three
19:22clicks whatever you know you to scan a
19:23copy of your passport you create an
19:25account you make it really easy great
19:27customer support and you know what look
19:30at how many users they have you know
19:31better than me right so it wasn't
19:32necessarily changing the utility but it
19:35was changing the UX and a convenience
19:37you know you were talking about the
19:39timing of things the iPhone itself was
19:41only introduced in 2007 look at all the
19:43industries that have been just well
19:44quote disrupted or at least evolved just
19:47because of consumer convenience having
19:49it in your hand being able to walk
19:50around and do something whether it's
19:51on-demand or otherwise and then I think
19:53much to what Alex was pointing out
19:56the issue for the incumbents is that
19:57they end up with infrastructure capex
19:59which prevents them from being able to
20:01respond or deliver what consumers then
20:03start pulling for whether they're doing
20:05it consciously or not and I think what's
20:07interesting about the financial services
20:08sector is at least here in Europe about
20:10something like 90 percent more than that
20:12of all the banks are using one of two
20:15back-end suppliers if I ask sir if I
20:18serve which prohibits them from being
20:20able to do things faster like literally
20:22they cannot you know look up a
20:25transaction that you've made or that's
20:26been made on your credit card without
20:28blocking the card you know now you're
20:30realizing that well actually you could
20:32actually freeze the card for a bit you
20:33don't have to actually get a new one
20:35sent to you the whole in and just
20:36incumbents couldn't do this because
20:37their systems just didn't allow them to
20:39do this and it a lot of it just comes
20:40down to customer service and UX which is
20:42sounds crazy right but I think that's
20:44what's gonna be changed well I think
20:46that that's the point of FinTech as well
20:47which is if you look at credit cards you
20:50had very novel approaches to who gets
20:53so Capital One came out it's a thirty
20:55billion dollar company today started
20:58partially by a British expatriate and a
21:01really remarkable company they've done a
21:02great job I think more so than most
21:03other banks in the u.s. in terms of just
21:05intelligence around granting credit but
21:08their whole system is built on company
21:11called tsys which is built actually it
21:13sounded off you know tsys total systems
21:15Corp it's a spin-off of a bank they've
21:18been around for a few dozen years
21:19they're based in Columbus Georgia which
21:22is right on the Alabama Georgia border
21:24I've been there many times and actually
21:25one of the cool stats is it's right on
21:28the central time zone so it's like I
21:29always have the people that work there
21:31it's working like a different time zone
21:33how does that work but and you cross the
21:35little bridge that goes across a river
21:37and then you're in central time 9:00
21:38you're in the eastern time zone but
21:39anyway I digress the point is that
21:42Tisa's is effectively the operating
21:44system for maybe half of all credit card
21:47companies that issue credit cards and
21:49they're not really a tech company I mean
21:52they are a tech company if you ask them
21:53what they do oh we are a technology
21:54company that provides an operating
21:56system just like Fiserv just like FIS
21:58but these companies like this is the
22:01infrastructure that if you're starting a
22:02bank from scratch if you're starting a
22:04credit card company from scratch you're
22:07much better served if you want speed to
22:10and just like to have something that's
22:11like everything else out there you use
22:13one of those guys just like if you're a
22:15community bank you don't build your own
22:17thing you use digital insight or Jack
22:19Henry or one of these other services
22:21you're a five person bank you can have
22:23an app you can have a website because
22:25you need that if you're chase and you
22:28have 250,000 people you'll build your
22:30own but there's a lot of blood there's a
22:32lot of legacy code that dates back to
22:34the 1950s there so I think that's the
22:36opportunity but that in and of itself is
22:39not enough you can't have a solution in
22:41search of a problem and like just saying
22:42okay we've got a new bank and it's tech
22:44enabled and instead of getting two basis
22:47points of interest on your I learned
22:49that a checking account is called a
22:50current account and current account
23:02exactly so you know you're getting in
23:04the u.s. it's about one basis point on a
23:06checking account if you get two basis
23:08points or three basis points that's not
23:10going to work out too well no matter how
23:11much technical technology and
23:13technological innovation you have
23:14powering that so but I do think that the
23:19the way to get into FinTech or the way
23:21to get into the banking sector and
23:23disrupt it is you start off with a wedge
23:25and then on top of that and the wedge
23:27being like I think what sofa is doing is
23:29very interesting because they get people
23:30when they graduate from school you
23:32graduate from schooling we have no
23:33investment so far so this is a genuine
23:35admiration for what they've built here
23:37you graduate from school you've got lots
23:39of college debt they look at you and
23:42they uniquely relative to every other
23:43bank and refinancing company out there
23:45save you a ton of money because they say
23:47wow we trust you we want to invest in
23:49you because you went to a good school
23:50that's kind of their algorithm right now
23:51it's not that complicated
23:52now I go get a mortgage with them I go
23:56getting a check I go get a checking
23:57account with them I go get a credit card
23:58and ideally if they do all of those
24:01things and they really do become a tech
24:02company and not just a refinance company
24:04he's doing mortgage refinance there's
24:06not that much work involved with
24:07mortgage refinance that's not technology
24:09the underwriting might have some
24:10technology around it but I think there's
24:12a big opportunity and this is what we're
24:14doing with a firm as well which is can
24:16we reinvent all of that stuff which is
24:18reinventing it is not enough I mean it's
24:21this is the the quote that I use around
24:22the office all the time which is
24:23the battle between the incumbent and the
24:25startup comes down to whether the
24:27incumbent gets innovation before the
24:28startup gets distribution and it's very
24:31very hard I mean that the deck is
24:33stacked against you a hundred to one if
24:35you're a startup and you're going after
24:37financial services because distribution
24:39is just that powerful and is that unique
24:42and regulation is certainly a part of
24:45this but is that unique to FinTech as a
24:47as opposed to I mean we talk about Gmail
24:49but as opposed to any other startup
24:51going after an incumbent industry in in
24:54and I think it really is because because
24:56of the regulation that you mentioned
24:58that's a big one I think it's also this
25:01trust element which is it's different
25:03than the cable industry where that is a
25:06legally chartered monopoly so like this
25:09is this is what I call the TiVo problem
25:11because if your TiVo and you're selling
25:13into an industry that only has nine
25:16different people that's not good like
25:19things are not gonna work out well for
25:20you and they they almost never do and if
25:23you're going so they're two ways of
25:25doing this right there's the full stack
25:26method which is I have software which
25:29I'm going to sell to every bank and I
25:31don't think anybody in FinTech think
25:33thinks that that's a tremendously great
25:35idea just because the banks I mean some
25:37some are and I think some people have a
25:38chance to build an operating system
25:39actually this is one of our theses which
25:41is operating systems just in general for
25:45finance if you can get traction or good
25:47but it could take years to do that and
25:50you know there are ten banks I mean this
25:52is one of the big differences if you
25:53look at credit card issuance in the u.s.
25:55in the top ten banks for like 70 80
25:58percent of the market and once upon a
26:01time like there was a company called
26:02WaMu there was a company called Wachovia
26:04and these are all big mortgage lenders
26:07credit card issuers they're gone
26:09right and it's consolidated more at the
26:11top I mean Wells Fargo has a trillion
26:13dollars plus of deposits and these are
26:15small like individual account deposits
26:18Chase has the same so there's been so
26:21much consolidation at the top and that's
26:24really different today so I but what I
26:26was saying is that the there are a
26:29variety of reasons why selling here if
26:32you go full stack the like you get
26:37on marketing cost I think that's the
26:39other problem because Geico spends a
26:42billion dollars a year on marketing and
26:44insurance not banking but kind of same
26:46overall field of FinTech so the problem
26:48is that if you want to build an
26:50insurance company for the 21st century
26:52it's like a triple whammy it's
26:54incredibly capital intensive because a
26:56you have to lose your equity to build
26:58out your actuarial models and the same
27:00thing goes like if you're building a
27:01lending company you have to lose your
27:03equity intentionally to go lend and
27:06figure out oh I shouldn't lend to people
27:08that have no credit I'd say they're not
27:10gonna pay me back and but how would you
27:12know that ex-ante you have to actually
27:13make loans to figure out if people are
27:15going to pay bad loans right yeah like
27:18alright I want to start a life insurance
27:19company will have to wait 25 years for
27:21people to die this is very very hard and
27:24the models that current life insurance
27:26have a companies have very very valuable
27:29so and then you have to spend a ton of
27:31money on marketing because people don't
27:33wake up in the middle of the night I
27:34think this is actually the most
27:35important thing unless you have a wedge
27:36to get in people don't wake up at 1:00
27:39a.m. in a cold sweat saying I need to
27:41change my bank right or I need a
27:43different insurance company so - and
27:45then Geico does not spend money very
27:47effectively and that's normally a bad
27:49thing if you're a guy co shareholder
27:51you're like wow I would love it if Geico
27:52they could probably get just as many new
27:54customers per year spending five hundred
27:55million dollars here I'm going on the
27:56lemon not spending a billion dollars
27:58here but the fact that they poorly spend
28:01marketing funds is actually terrific for
28:03them because it keeps out all of the the
28:05new competitors from going in where you
28:08know if Geico was only spending $15 a
28:10click on Google then a start-up could
28:12compete if they're spending $100 a click
28:14on Google this startup can one reason I
28:17like the sector so much and again why I
28:19think it's such an interesting one why
28:20we probably spend so much time on it is
28:22because that's maybe just scratching the
28:24surface and that what's great about
28:25FinTech is there's all this sort of
28:26plumbing behind the scenes so like Alex
28:29mentioned kyc and AML earlier you know
28:31we're seeing the reason why the FinTech
28:33sector here is so sort of really really
28:37interesting and deep within London is
28:39because you see a lot of startups also
28:41going after these sort of non sexy you
28:43know FinTech plays so non consumer
28:45acquisition type plays or a distribution
28:47reliant but actually serving other
28:49customers within the finance
28:51services sector so more the b2b side so
28:53you know for instance there are
28:54companies I haven't invested in either
28:55of these but you know on Fido or
28:57passport which are both london-based
29:00trying to tackle kyc AML identity
29:03verification and trying to figure out
29:04how a company a financial services
29:06company that has all the problems Alex
29:08was just talking about can sort of take
29:10money out of their costs base and cost
29:14of acquisition or you know having to
29:16comply by to comply to regulation or you
29:18say things like fraud or you see think
29:20you mentioned insurance which is
29:22actually on the back end I think there's
29:23a lot to service you know Barclays has
29:25been publicly establishing that they
29:27spend three billion pounds a year which
29:29is about five million dollar five
29:31billion dollars a year on its IT spend
29:33or its tech spend you know doing a
29:35start-up that just services Barclays not
29:37a bad you know revenue drivers so I
29:39think there's a lot more underneath I
29:42guess like if you think of an iceberg
29:43type analogy you've got all the
29:45challenges on the consumer facing side
29:46but under the water under the surface of
29:48the water there's so much more to tackle
29:50I want to go back to something you both
29:52kind of alluded to Eileen you mentioned
29:54the UX which i think is a really
29:55important and often overlooked point
29:57especially when we have like sort of a
29:59new generation that's coming into
30:01banking that's completely mobile native
30:03and used to a certain type of experience
30:04and Alex you mentioned very briefly the
30:07word trust as part of why incumbents you
30:09know have a certain distribution like I
30:11think the ability to do certain things
30:12that startups can't does that really
30:14matter for I hate using this phrase
30:17Millennials but does that really matter
30:18for like snake people I mean Millennials
30:19I mean does that really do things for
30:22big here in the same way yeah I think
30:24absolutely I mean if you're dealing like
30:26would you give a hundred percent of your
30:28net worth even if the net worth is a
30:30very small number to a start-up and you
30:33just saw that the last four startups
30:34just went out of business I mean I think
30:37a lot of it is people don't understand I
30:39understand too well like what the
30:42capitalization requirements are for a
30:44bank well you're so paranoid well
30:51because I know that you can't use
30:53customer deposits to go fund the
30:55operations of the bit like there are
30:57certain things that you cannot do
30:58whereas how would how would somebody
31:00that knows nothing about this sector
31:01actually understand this this is
31:03actually where regulation if it were
31:04well communicated might be more helpful
31:05is saying or like the the effective like
31:10FDIC insurance in the US and whatever
31:11the equivalent is here like that's
31:13that's effective as a means of
31:15establishing trust I mean this is how
31:17you dealt with the whole financial
31:18crisis in 1929 is when when the FDIC was
31:22set up when FDR set this up
31:24that was that was tremendously effective
31:26and you had like five or six day bank
31:29holiday and then people decided to trust
31:31their banks again and that reestablished
31:33the financial system so you know I I
31:36think the trust is important if you have
31:37things like that that are well
31:39communicated and well understood by a
31:41younger demographic then maybe it
31:42doesn't matter as much because you know
31:44okay there are very very few Millennials
31:46they graduate from school they have
31:48250,000 dollars in liquid net worth so
31:50therefore if a bank is covered by FDIC
31:53and they trusted and it's a better UX
31:55and blah blah blah then they'll use it
31:57but I just don't know how well that
31:58actually is understood yeah I think
32:00that's right I think the concept of
32:01trust is still really important or as a
32:03USP or whatever I mean as a driver but I
32:05do think what's interesting about the
32:07younger demographic is that surveys are
32:09saying and you know I don't know how
32:10much is true you know that the younger
32:12generation is not trusting what the
32:14previous generations trusted so what is
32:17the stat you know I don't know what the
32:18percentage basis is but some massive
32:20percentage certainly more than 50 I
32:21think was close to eighty percent of
32:22Millennials trust the brands you know
32:24Facebook or Google or Apple I think was
32:27the top of the pile much more than their
32:29banks and they're wanting to see
32:31services come from those companies
32:33before they would actually open up like
32:35a second or a new bank account and so
32:37then I think what's interesting and we
32:38think about this when we're investing in
32:40some of the FinTech startups is your
32:42exit opportunities aside from staying
32:44independent and maybe going public or
32:45whatever is potentially on the buyout
32:47side you may not be selling to a bank
32:49you might be selling to Facebook you
32:51might be selling to Amazon you might be
32:52selling to Google as they try to expand
32:55what they offer in terms of you know
32:57they're not gonna call financial
32:58services or FinTech there's going to
32:59talk about you know it was like in app
33:01purchases or whatever or it's you know
33:03gaming you know sort of gaming upper
33:06bulking up your purchases and they're
33:08gonna look at ways to reduce friction on
33:09what they they have to manage with money
33:12and transactions on their systems I
33:13actually personally believe I mean I'm
33:15not an expert in this space
33:16means but I actually personally believe
33:17that all the sort of stealth players
33:19that have these sort of shadow payment
33:21systems we're giving them your credit
33:23card like lyft and uber and I always
33:25think to myself like god I wish I could
33:26just like use that to buy everything in
33:28the world without even having to put my
33:29credit card every like iTunes having I
33:31don't know have more credit card numbers
33:33than any other network for the longest
33:35time or Alibaba I think is like one of
33:37the biggest threats not threats would
33:38Ally pay right in terms of how many
33:41people actually make purchasing
33:42decisions and have their payment details
33:44with that company right we actually
33:46published a very in-depth primer on
33:48WeChat and one of the most fascinating
33:49things is how the messaging into all the
33:53services became sort of having the
33:55credit card allowed all this traction
33:57for all these other cross purchases to
33:58happen it's just incredible wallet right
34:00right yeah I mean the two things on that
34:03I think it's really interesting I think
34:05part of the reason why Millennials don't
34:06trust their bank is I don't think this
34:09is unique to banking but like the larger
34:10the company and the less product driven
34:12it is the more the innovation is around
34:14like how do we charge more so you hire
34:15Mackenzie Mackenzie comes in and says
34:17ooh you know if you charge late fee you
34:19can make an extra four billion dollars a
34:20year that sounds great or comcast in the
34:23u.s. is about to roll out if you use
34:26more than 300 gigabytes of a bandwidth
34:29per month there's an additional fee
34:31that's their innovation of the year
34:34Comcast already site exactly but I think
34:37banks have done a tremendous and I mean
34:39this in a very sarcastic way but but
34:41banks have done a tremendous job of
34:43layering on new fees and doing things
34:45that are not transparent where again the
34:47service rendered is totally disconnected
34:48from the fee structure that's actually
34:51you know foisted upon the consumer and
34:53consumers don't like that and Apple
34:55there's no way there's no gotcha on an
34:57Apple product and the only gotcha is
34:59like damn I wish my my iPhone battery
35:01lasted more than a year and I have to
35:03buy a new iPhone to get a new battery
35:05but it's not like ooh like after 90 days
35:08of using your iPhone it will only
35:10continue to work if you paid this
35:12special fee and that's a lot of stuff
35:14that people have found to be very
35:16prevalent with banking so I think that's
35:18part of the reason why they're not very
35:19popular you know on the point of I think
35:21it's a very interesting topic that we
35:23were just mentioning and it actually
35:24came up with you talking about the
35:25Oyster card I mean so the the largest
35:29in the entire world is Tokyo so Tokyo is
35:32a city proper is not as big but like the
35:34Tokyo metropolitan area is almost 15
35:35million people and everybody has what's
35:38called a sweet cut card which is kind of
35:40like an oyster card here and it works
35:42through all the different public
35:43transportation systems but it also works
35:45in every vending machine it's like there
35:48are I'm incredibly bearish on any
35:51startup that says we're gonna build a
35:52new payment system because it doesn't
35:54work that way like these things kind of
35:56they start organically and then they
35:58expand out concentric Li dating back to
36:00BankAmericard which became visa in
36:03Fresno California it started off in a
36:05very small town and then just expanded
36:06concentric Li outward but I think you do
36:09have a number of interesting like some
36:10of the larger companies that are not
36:12financial services companies at all
36:14whether it is like if if Ulster wanted
36:17to become a payment card in London
36:19enough people have that at least on one
36:22side of the distribution for consumers
36:24where you could get merchants to do it
36:26the thing that's very very interesting
36:28in my mind about payments right now is
36:31everybody hates Visa and MasterCard I
36:33mean pretty much every merchant now the
36:35issuing banks don't like them either
36:36like nobody likes them because they're
36:37making all of this money and I mean the
36:41fact that Visa Europe is selling to Visa
36:43is a big big windfall for for UK and EU
36:46based banks and they kind of need that
36:47capital right now but but the reason why
36:50I mention this is for merchants to
36:53switch people out of their current
36:55habits of using a payment card they have
36:58to pay the consumer effectively more as
37:01a bribe to get them to change pieces
37:04very hard to change behavior than the
37:05fees that they currently pay the credit
37:07card companies so you have all these
37:09merchants in the u.s. that are saying
37:10okay we don't like Visa we don't like
37:12MasterCard we're paying two percent in
37:13fees I know we're gonna switch people to
37:15use our own card oh wait they won't do
37:17that on their own we have to give them
37:18five percent cashback which is of course
37:20more expensive than the two percent
37:22they're paying right now whereas in
37:24Europe this is another thing that I
37:25think is going to force a lot more
37:27innovation so what's happening in Europe
37:29right now is there's a European mandate
37:31on interchange which is reducing debit
37:33interchange to 20 basis points in credit
37:35interchange to I believe 40 basis points
37:37so all rewards on all credit cards are
37:40gone they there are effectively term
37:43because who pays for your miles or your
37:46Amazon points or your cashback well it's
37:48actually the merchant and that 2% fee
37:51half of it is going back to you as a
37:52consumer on your rewards card in Europe
37:54that's gone in Australia that's gone so
37:56that's another thing that people in the
37:58US are not aware of I think it's going
38:00to happen in the u.s. eventually but in
38:01Europe it's going to trigger I think a
38:03little bit more of a ooh who can give me
38:05a card that actually offers a reward and
38:08it's probably not going to be a big bank
38:10I think actually this is a major
38:11opportunity for a lot of startups to
38:13come in because as a consumer right now
38:16you don't get rewards on a card you want
38:18to get rewards on a card it actually
38:19it's triggering a shift
38:21I was checking Google Trends in Europe
38:23for like credit card searches and they
38:24are ticking up which is abnormal like
38:27why would people wake up and say I want
38:28a new credit card a lot of it is that
38:30they got it they got a letter from their
38:31bank this summer as saying your rewards
38:33program is terminated I mean it also
38:36sort of suggests that a company like
38:38Amazon which could afford and would
38:40benefit from like keeping you within the
38:43Amazonian financial system could offer
38:47something like that I mean Amazon
38:49already kind of is like to me it's
38:50exactly like the way I use Lipton uber I
38:52buy everything on Amazon because they
38:54have everything conveniently I don't
38:55have to even think about it right I mean
38:56it's in my head it is a payment
38:59this is gets to the subject of trust but
39:01we were talking about countries and
39:04economies where there is solid
39:06infrastructure where there is you know
39:07choice but like it makes me think of
39:10Argentina where like all of a sudden you
39:12know my life savings the sort of frozen
39:14in my bank account and the pesos been
39:16devalued or China where they devalue the
39:19yuan and I sort of or the Bremen bee and
39:22I do those kinds of situations were
39:26really kind of there's if I wanted to
39:28invent a financial system in Argentina
39:32people sort of were doing it on the fly
39:33for themselves do they give us any
39:36indication or clues as to where some of
39:39this all might go I mean I think those
39:42are different there are different
39:43motivations for those markets like I
39:44think the lack of infrastructure and the
39:47fact that they sort of leapfrog or they
39:48kind of then kind of take every other
39:50step that we might see the US or the UK
39:52or Europe take is really quite
39:54interesting because like all those
39:56about what's probably driving a lot of
39:58maybe innovation on traditional
40:01financial services is the fact that the
40:03largest parts of the population didn't
40:05have access to it so it's all about
40:07inclusion it's about access it's about
40:09you know the fact that they didn't
40:10necessarily have 10-15 years of like
40:12broadband and desktops or laptops in
40:15their homes to start and do online
40:17banking in the way that you know
40:19Americans have been used to for doing
40:20online they'll pay for I don't know 20
40:22years they just started doing micro
40:24payments as we call them now
40:25but person-to-person payments on their
40:27mobile phones you know like you look at
40:28em pace in Kenya or you look at what's
40:30happened in India they've had 190
40:32million people open up bank accounts in
40:34the last four years but those aren't
40:36bank accounts like we get at Wells Fargo
40:37their bank accounts that they're gonna
40:39access through their mobile phones
40:40because they now have more mobile phones
40:42and mobile subscribers than they do you
40:44know people with a national identity
40:46card that kind of thing so you have a
40:47different set of problems I think I do
40:50think there's stuff we can learn I it's
40:52a little be a question though of whether
40:53or not everyone is keeping up with
40:55everybody else or as I was saying you
40:57leapfrog and you actually have sort of
40:58every other point of innovation gets
41:00achieved in a certain market or an
41:02emerging market as I guess we would call
41:04it first is what we would see here and
41:06if we're gonna then leapfrog and go to
41:07the next stage or or how that works I
41:09think you're just gonna have different
41:11types of use cases I think my wallet is
41:14happier for this discussion in the sense
41:16of like it has something to look forward
41:18to so you're not a millennial it's gonna
41:20make that really how you feel I have
41:26trust I have hope in this FinTech thing
41:28although I think we have to lose the
41:29name you want a better bank I want a
41:31better Bank company on that note we will
41:33never say FinTech again
41:35Alex Eileen thank you guys so much thank
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