00:00hi everyone welcome to the a 6nz podcast
00:02i'm sonal and today Michael and I are
00:04doing an interview with olives were in
00:07Pelle who's our newest GP and among the
00:09things he'll be focusing on his FinTech
00:11and it's about time we had a FinTech pod
00:13so we've been excited to get him on the
00:15podcast to talk about this welcome Alex
00:17good to be here so Alex let's actually
00:19just start by talking about your
00:20background I think you break the record
00:23among all our GPS for being a serial
00:25entrepreneur in terms of how many
00:26companies you started well more is not
00:29better it's quality not quantity so so
00:32it's actually kind it's kind of funny I
00:33mean I fell into all of this by accident
00:34and the way that I started was I got a
00:38Mac as a computer I got the Mac 2 which
00:41was the first color Macintosh everything
00:44up until that point I've been black and
00:45white and I was a very ungrateful child
00:47so because all my friends had pcs all
00:50the games were written for PCs so I hey
00:52dad you know what why did you get me
00:54this Mac I'm so angry like you got me
00:56this like massively expensive actually
00:58was my grandmother who bought it for me
00:59but my dad helped her pick it up there's
01:02no games for this I can't do this
01:04because you literally you go to like
01:05some computer store and 99% of all
01:08titles were for PC and one there'd be
01:12like this little anemic Mac section
01:13which just made you feel bad about
01:15yourself if you owned a Mac in the 80s
01:17and Apple of course learned from that
01:19mistake many years later and now they
01:21really prioritize developers so my dad
01:23said well why don't you learn how to
01:24make your own program so he got me a
01:26book on C and I also there was a program
01:30that some people might remember called
01:31HyperCard but it had introduced this
01:33concept of the hyperlinks so I started
01:35writing programs and HyperCard
01:37and also in C and then there was this
01:39movement called shareware where it was
01:41kind of the counterculture of
01:42commercially shrink-wrap software that
01:44would get sold in CompUSA or Best Buy
01:46this was something where you were
01:48encouraged to share it and if you liked
01:50it you were supposed to pay for it and
01:52that was via checks in the mail and is
01:54actually how I got into payments so
01:55people actually paid you for your stuff
01:57I mean what were they paying for was it
01:58a game so the first program that I I
02:01think I got anybody to pay for was a
02:03screen saver and I wrote the screen
02:05saver called mini screensaver it drew
02:07ovals on your screen I uploaded it to
02:09AOL CompuServe bunch of other bulletin
02:13and I said if you like this send $5 to
02:16me in Palm Beach Florida and if a couple
02:18days later I got a $5 check in the mail
02:19and then a couple days after that I got
02:21a $20 check in the mail because some
02:23company bought four copies actually I
02:24still have I think I still have the
02:27photocopies of all these different
02:28checks in the mail that I got so I was
02:30making like a hundred dollars a week as
02:31a ten eleven year old and I just I
02:34really focused on these utilities like
02:37what was an annoying screensavers were
02:39not a good example of this but I
02:40remember on the Mac it was very hard to
02:42change the sound volume not very hard
02:45but you have to like go to the Apple
02:46menu go to control panels then find the
02:48sound one and then like click somewhere
02:49else and then like change it from zero
02:51to seven so I wrote a little control
02:52panel remember that term that hit
02:55control and then a number and then it
02:57would change the sound to that level
02:59that was it and that was like eight
03:01dollars it was called volume quick
03:02change this was not like complicated
03:04code but it solved an annoying problem
03:07so like a lot of people bought that and
03:09just kept doing things like that so how
03:11did you go from these kinds of products
03:12to payments I was running my business
03:14off of AOL because in the the early mid
03:1690s a what was kind of the de-facto
03:18internet for most people that didn't
03:20have you know we're another university
03:22campus and didn't have access to like a
03:23t1 line or something in the I think it
03:27was the winter of 1996 AOL used to
03:28charge three bucks an hour these charged
03:31six dollars an hour when I started using
03:32it they cut it to three then they went
03:33to $20 a month flat rate and
03:35understanding the laws of economics if
03:37you lower the price of something
03:38typically the quantity demanded goes up
03:39if you lower the price of something to
03:41zero the quantity demanded goes up a lot
03:42but they kept the number of modems the
03:45same consequently it became impossible
03:47to connect to AOL and AOL would dial
03:49each number one time and then give up so
03:51I wrote this program for me that was
03:53called always online it would dial each
03:54number a thousand times in a row so it
03:56would guarantee that you connected and
03:57then once you connected it would keep
03:59you online forever by emulating modem
04:02activity and dismissing these dialog
04:05boxes that AOL would pop up to kick you
04:07offline always online sold tens of
04:09thousands of copies which was kind of
04:10crazy I was 15 years old and I might get
04:12like a thousand ten dollar checks in the
04:14mail and how long till Steve case came
04:17knocking on your door it's funny you
04:18mention that so that was actually the
04:20best thing that happened was because I
04:21was 15 and AOL was like this enormous
04:24hundred billion or whatever how large
04:27large company at the time they banned
04:29the product and Forbes did an article
04:32about like little tiny fifteen-year-old
04:34gets bullied by big bad AOL and here's
04:36his product and then sells another ten
04:38thousand so anyway I needed to figure
04:40out how do I get people to pay me how
04:43were people paying until then the
04:45biggest innovation that I had was a
04:47check endorsement stamp so I'd open my
04:50mail get a lot of mail open it I'd
04:53endorse every check and then I'd go to
04:55the bank and then I'd like write down
04:56like the total diplomat was fun but I
05:00did two things one is I bought a credit
05:02card terminal on it was called auction
05:04web it became eBay this was probably in
05:071996 so actually I started processing
05:09credit cards and had to learn how to do
05:11that and what I did was I with always
05:14online and all my other products I'd
05:16bundle a little application where you
05:18would enter your name your address your
05:20credit card number it would encrypt all
05:22of that information and then it would
05:24send it to me via email this was kind of
05:27like the early web order form and then
05:29it would get processed on my little tiny
05:31credit card gateway which was actually a
05:33modem it would dial-up to the bank and
05:35then like authorize the card and then I
05:37charged at age fifteen yeah probably
05:40couldn't even get a credit card I could
05:42not get a credit card but I could charge
05:43a credit card and actually that was very
05:46complicated respect when Square came out
05:48I only got the credit card because my
05:49dad runs a small accounting firm and it
05:53was actually in his firm's name was how
05:55I initially got the credit card I think
05:56I transferred like the credit card
05:58processing relationship to my own
05:59company eventually because the idea of a
06:01virtual company in 1996 was not really
06:04well known so I maybe it was an
06:06incorporated entity but like well where
06:08is your principal place of business well
06:10it's in my room that doesn't make sense
06:12so that was your first foray into
06:14payments actually like the real way that
06:16I got into trial pay which is kind of my
06:19largest company that I founded was most
06:22people that were using always online and
06:24all of the other products that I came up
06:25with they didn't pay because a lot of
06:27this is like Here I am holding a
06:29vitaminwater which probably cost $5 at
06:31oh yeah I'll pay $5 for a vitamin water
06:33I never pay $5 for a song on iTunes
06:36that's a ripoff that's outrage
06:39people like to pay for tangible goods
06:41much more than they like to pay for
06:43intangible goods so even to today oh I
06:46think more so true today than ever
06:48before because there's so many different
06:49types of intangible goods you're kind of
06:51hit like if you were to pay full price
06:52for every iPhone app that you ever
06:54touched it's like you'd be paying five
06:55dollars every day for something and
06:57paying for coffee that makes sense
06:59paying for an iPhone app like not so
07:01much at least not as often like even the
07:03top games on the on the App Store like
07:04they might only get 2% of people to pay
07:06so always-online a very dim price from
07:08$8 to to $20 and a lot of different
07:11changes in between these you kind of get
07:13a feel for the elasticity of that demand
07:15so I tried coupons I tried discounts I
07:18tried this there's the pro version
07:20there's the lite version so where did
07:21the tangible goods part come in so the
07:24idea was wouldn't it be great if I could
07:26let you pay for something tangible and
07:29by doing so I get paid from the tangible
07:31goods company and then I'm able to give
07:34you my product for free so I started
07:36doing this kind of in the early 2000s
07:38which was this was the the harbinger of
07:40trial pay which is okay you don't want
07:43to pay for my product I'll give it to
07:44you for free if you go shop at Gap com
07:46it turns out gap is a 50 percent gross
07:48margin or more you go spend 200 bucks a
07:50gap that's $100 of gross margin that
07:53they have to play with they almost every
07:55major retailer has something called an
07:56affiliate program where they will pay
07:58for the referred traffic so that's what
08:00I started doing and that seemed like a
08:02major problem as well because I wasn't
08:04the only one out there a little
08:06shareware Alex wasn't the only one that
08:07had a problem of most people not paying
08:09me every major software developer every
08:11major kind of intangible goods maker had
08:13this exact same problem where a hundred
08:15percent of the revenue comes from one
08:16percent of their users if you can get
08:19one percent of the other 99 percent to
08:21do something whether switching to Geico
08:23which I try to do but it turns out you
08:24can't incent people to switch their
08:25insurance or shopping a gap or signing
08:28up for Netflix so this actually worked
08:30really well and started branching out
08:32beyond that so that's the story of trial
08:35pay now you hear at Andreessen Horowitz
08:37so what are you going to be focused on
08:39so I think the number one thing is is
08:41financial services which is now commonly
08:44called fin tech for financial technology
08:46which really can mean anything it's kind
08:47of it's reinventing the banks because
08:49the notion of banks haven't really
08:50changed that much and well probably
08:52thousands of years but
08:53they haven't really met the 21st century
08:55very lately brokerage insurance is
08:59another category payments all of these
09:02things have a long way to go
09:04and are ripe for disruption so FinTech
09:08and disruption all sounds really
09:09interesting in theory but how does this
09:11actually play out in practice I mean as
09:13a consumer how would something like this
09:15affect me personally so I'll give you an
09:18example if you borrow money there's
09:21company called Lending Club and what is
09:22Lending Club to you they kind of they
09:24help most of what they do is actually
09:26refinance credit card debt so if you're
09:29a bank like JPMorgan Chase you have two
09:31hundred fifty thousand people that work
09:32there you have thousands of branches
09:34across the country you have millions and
09:37millions of people that have deposits
09:39and you pay those people one basis point
09:41you know 0.01 percent interest if even
09:43on their on their deposits even if
09:45they're quite large then you have all
09:47these credit cards that you issue and
09:48when people rack up debt on their credit
09:50cards you charge 18% and it's kind of a
09:53good business because you're paying one
09:54side point oh one percent you're
09:56charging the other side eighteen percent
09:57and you have a company like Lending Club
09:59that actually a lot of what they do is
10:01they show up and say hey if you have
10:03lots of debt on your credit card why
10:05don't why don't we're gonna pay it off
10:07for you you're gonna owe us 12% but
10:09where do we get the money from we're
10:11gonna take one of those little poor guys
10:12that's getting one basis point on their
10:14savings account deposit and we're gonna
10:16give them 8% so in a small way actually
10:20kind of a meaningful way because it's a
10:21multi-billion dollar company now Lending
10:24Club is helping to disrupt finance which
10:26don't the incumbents have a structural
10:28advantage here the structural advantage
10:31that Chase has is that they have lots
10:33and lots of depositors they have a very
10:35well-known brand they have all these
10:37different systems in place for managing
10:38risk these structural disadvantages that
10:41they and also the other structural
10:42advantages they can borrow from the Fed
10:44for 0% which is kind of nice right now
10:46the structural disadvantage is they have
10:48two hundred and fifty thousand people
10:49they have thousands of branches these
10:51are all things that were super relevant
10:5225 years ago that's how you grew as a
10:54bank but if you were going to develop a
10:56bank from scratch today chances are very
10:59very high you wouldn't say my first
11:01order of business is to go sign 9,000
11:03leases at different commercial banking
11:06the country it's a I'm gonna have a
11:07mobile app and I will do it for me Alex
11:09are you suggesting we're going to start
11:10to see new fin tech companies directly
11:13take over chases business you're
11:15probably not going to see somebody who's
11:16going to take over and and take on chase
11:19directly it's more of you'll see minor
11:21things like Lending Club that attack
11:23little bits and pieces of its business
11:25and there is um there's something I
11:26looked at a while ago where it showed a
11:28picture of Craigslist in all the major
11:30categories on Craigslist it had little
11:32arrows pointing each one of those
11:33categories and you're gonna find that
11:37with banking as well so I think someone
11:39already made one actually see the
11:40insights did yeah there have been a
11:42bunch so like Robo advisors as an
11:44example so this is like companies like
11:46wealthfront and betterment which are
11:47doing a better job and arguably than
11:51some financial advisors and charging a
11:53lot less because it turns out that
11:54software can do a better job with that
11:55so so stuff like that one thing is you
11:58mentioned that you know if you had
11:59reinvented banks today in the world we
12:01can you break that down for our audience
12:03a little bit more what does that mean to
12:05reinvent the financial services industry
12:06and are we talking that's a big catch
12:08tall category that describes a lot of
12:10things from from a mobile native like a
12:14software centric world like what does
12:16and also I you know you talk about
12:19Lending Club but they didn't reinvent
12:20the business at all they're in the same
12:22business they're large business their
12:23margins are just different right so how
12:26do you reinvent the baking industry and
12:28how do you reinvent the business so at
12:30the end of the day you don't need to
12:32reinvent it if I'm a bank and I can line
12:36up if I can source loans in a meaningful
12:39way I can control my risk in a
12:41meaningful way and I don't have all
12:44these what I would call structural
12:45disadvantages like thousands of leases
12:48hundreds of thousands of tellers and you
12:51know no disrespect to the profession of
12:53the bank teller but it's probably not
12:54one that's going to be around in 50
12:55years much less 15 if I don't have to
12:58pay all these people and I can lower
13:01that spread Lending Club is kind of a
13:02bank it's not it's not a bank for a
13:04variety of reasons and they can't call
13:05themselves a bit officially right yeah
13:07officially but it really is a bank
13:08because they're accepting deposits on
13:10one side I mean that's the thing that
13:12they're not a bank and that most people
13:14are not going to want to give their
13:15money to Lending Club because they don't
13:17want to say ok here the 19,000
13:19that I own a small piece of and here's
13:21how much interest I earned today and oh
13:23this one defaulted and that one didn't
13:25and I can go sell this loan no they want
13:27a safe place that they can keep their
13:28money they want to know that it's
13:30insured and it's protected but really
13:33Lending Club behind the scenes exactly
13:35as you said is doing the same thing as
13:36chase but Lending Club has I don't know
13:38fifteen hundred people and not two
13:40hundred and fifty thousand people what
13:43chase what the new version of Chase for
13:45the 21st century and who knows maybe it
13:47will be chase a lot of times companies
13:48can figure out how to regrow themselves
13:50or become reborn in a way that's more
13:52technologically meaningful but it's
13:54going to be the same thing which kind of
13:56sucks because people really seem to hate
13:57the banks people hate their banks
14:00because it's really not transparent at
14:02all in terms of what you're going to be
14:03charged and there's also there's a major
14:06market failure when it comes to lending
14:08in general what do you mean by that a
14:11lot of people have this this mental
14:13image of they don't want to see their
14:15bank account balance drop below a
14:16certain amount and maybe it's irrational
14:18maybe it's not because they can always
14:20borrow money or maybe they can't but
14:21they'll say I can I always want to have
14:23five thousand dollars in my checking
14:24account I don't want to see it drop
14:26below that so that actually feel more
14:27comfortable taking out a loan to buy
14:29something then watch that mental barrier
14:32get breached so the market failure that
14:36you have happen is I go to Walmart I
14:38want to buy something it stretches my
14:40budget a little bit and I know that if I
14:43charge it on my credit card I'm kind of
14:45gonna get ripped off or maybe I'm not I
14:47just don't even know I know I'm gonna
14:49get charged a lot of money and if I pay
14:51it late I'm gonna get charged a lot more
14:52money it's not transparent and the thing
14:55that the credit card is credit card
14:57companies because I you know I think
14:59highly of these and I've worked there
15:00for a while it's not just the credit
15:03card companies it's lending in general
15:05it's not really based on the item that
15:06you're purchasing so the market failure
15:08happens where I would have bought this
15:09if I'd been offered a loan at a
15:11reasonable rate instead I'm offered a
15:14loan where all loans are the same size
15:16and you know that they're different like
15:18there are car loans there are housing
15:21loans mortgages and there is kind of
15:23like general purpose credit and those
15:25are kind of the three major categories
15:26but why does a home have a different
15:29interest rate than a car than what
15:31you're paying on your credit card in
15:33some cases it's a secured asset so
15:35that's one reason but just people behave
15:39differently like they they're a little
15:41bit different when they when they think
15:42about taking out a loan to buy a
15:44property versus a car versus some
15:45general-purpose credit card items so the
15:47market failure happens we're like
15:48Walmart wants to sell more stuff they
15:50would sell more stuff they can't sell
15:52more stuff because people are hesitant
15:54to buy it because they don't know what
15:56going into debt for this particular item
15:58has or what what what that means for
16:01them so that's one area of just lending
16:04in general it can be made so much more
16:05efficient right well I do want to talk
16:08about um the Financial Inclusion aspect
16:11of this as well another aspect of
16:12lending that's inefficient in a way
16:14that's regressive to people who maybe
16:16don't have the best credit history but
16:18actually could be very credible totally
16:20this is a huge problem like FICO you
16:22know the ferry's Isaac Corporation has
16:23been around for a long time and that's
16:25what FICO stands for and a lot of this
16:28is based on I would call it the the
16:29mathematical concept of induction if you
16:32paid your bills on time you will pay
16:34your bills on time in the future and
16:35there are two flaws with this one what
16:37if you've never paid a bill on time
16:39before because you're 25 years old and
16:41you've never had a bill well guess what
16:43you're a terrible credit risk which is
16:44not true right or what if you pay your
16:46bill in cash all the time because you're
16:48just not in credit I remember I could
16:50not get a credit card in college and the
16:53reason why I kept getting rejected is
16:55because I had never had a credit card
16:56before and this is the definition of a
16:58catch-22 if you look at most people
17:00between 20 and 30 years old they have a
17:02debit card not a credit card but the
17:03point there is that they they are known
17:05as thin file customers they're not bad
17:07credit the term in the industry is thin
17:09file and how do you under write credit
17:12for somebody that has no file or a thin
17:14file and the answer is you can't using
17:16kind of traditional FICO scores the
17:18other thing is that you have this whole
17:20category of people that went through
17:22some kind of hardship in the past so
17:252008-2009 might seem like a distant
17:27memory but it's not for your credit
17:29report so you might have been doing
17:30everything right and you had this double
17:32whammy of you lose your job and your
17:35house is foreclosed and it doesn't mean
17:38that you were being reckless with your
17:39spending you actually you are
17:41predisposed to always paying your bills
17:43on time you're a very honest ethical per
17:45and now you have this this black spot on
17:48your credit rating or your credit score
17:50you actually might have a lot of cash
17:52now maybe you won the lottery and all
17:54these good things happen there's a bank
17:56on you no pun intended but exactly
17:57people should Bank on you but they don't
17:59because they're looking at this one
18:01thing that hasn't really changed
18:02actually you have a whole category of
18:03consumers that aren't even thin file
18:05their thick file but the file itself is
18:08misleading by the way where software
18:10does have an opportunity to change the
18:12FICO definition of how the signals for
18:14FICO scores are worst yeah it's already
18:17changing me like right now you rely on
18:18kind of they're the three big credit
18:20bureaus and they have to kind of redo
18:22their own stuff and like one thing
18:23that's actually happened is there's a
18:25change in that algorithm for what if you
18:28go to debt settlement it's actually
18:31interesting I've seen a number of
18:31companies in this space where they'll
18:32say that the the highest-quality
18:35consumers are the super primer ultra
18:37prime like that's the category we have
18:38eight hundred plus FICO and these guys
18:40always pay their bills on time and until
18:42they don't but but they look very good
18:44for the time being in their induction
18:46wise they've done very well in the past
18:48there's another category where imagine
18:50you did fall into hardship it turns out
18:52the people that raised their hands that
18:54say I want to get out of debt and I want
18:56to do the right thing I want to be
18:57honest they're actually very very
18:58reliable people the signal there is
19:00actually quite good because what you
19:02want to find is you want to find groups
19:04of consumers that at least at first
19:06glance you know judging the book by its
19:08cover the cover doesn't look so good but
19:10inside the book is actually quite good
19:11and it's going to perform well so
19:14there's a lot of stuff that is just
19:15going to be done much much better from
19:16underwriting but you do run into you do
19:19runner issues with the with regulation
19:21and whatnot by law you have to explain
19:23why you're rejecting somebody for a loan
19:25and come up with I think it's I don't
19:28remember off the top of my head but I
19:29think you have to provide the three
19:30reasons for like why you're dinging them
19:31for the particular loan if you're using
19:34complicated machine learning and you're
19:36looking at nine thousand different
19:37inputs that's that's challenging but the
19:40other market failure just kind of in
19:42lending in general is that the reason
19:44why interest rates tend to be very very
19:46high for people that are deemed a high
19:47credit risk is because you're counting
19:49on half of those people or maybe 90% of
19:52those people are a huge number of those
19:53people that never pay you back actually
19:55I take issue with people that think that
19:59or just high interest rate lending is is
20:01this evil terrible profession because
20:04imagine that I'm trying to just make
20:06ends meet and III need to pay my
20:08landlord on Friday and my my paycheck is
20:12coming the following Friday I owe the
20:14landlord out of the hundred dollars
20:17I have zero right now I'm getting $200
20:19next Friday so if somebody showed up and
20:22said okay I'm going to loan you the
20:25hundred dollars B you owe me a hundred
20:27and fifty dollars the following week so
20:29that's 50% interest effectively in one
20:31week that's considered like super
20:34illegal usury but the problem is that if
20:37you were to charge like a normal
20:38interest rate of you know the max of 36
20:40percent in the state of Utah or whatever
20:42it is you'd get a couple dollars for
20:45making a pretty risky loan of a hundred
20:47dollars under the hope it's completely
20:49unsecured it's like okay I'm gonna count
20:51on you of your own recognizance to come
20:54back in one week and pay me a hundred
20:56and two dollars when I'm loaning you a
20:57hundred dollars like nobody would be in
20:59that business and therefore the person
21:01that actually really needs the money
21:02would not get it I think the problem
21:04that people have with that though is
21:05that if they feel it punishes people
21:07already poor there's a huge power
21:08differential in that system so I kind of
21:10I see your point but I also think
21:12there's a point to be addressed on the
21:13other side of it which is the sort of
21:15you seriousness that takes advantage of
21:17that situation as well I totally agree I
21:20mean I think this john oliver did a
21:21really good segment on this which is a
21:23lot of the payday lenders are kind of
21:26trained to get people to just come back
21:28and get more loans and this is where you
21:30run into this problem where the the
21:32interest dwarfs the principal which is
21:34bad but one way of dealing and so one
21:35way of dealing with this is regulation
21:37but that can have some unintended side
21:39effects such as nobody will loan to
21:41these people because they can't make
21:43money right you can have regulation
21:45where nobody can loan to these people
21:46but somebody sees an opportunity through
21:48software to kind of separate the wheat
21:49from the chaff so that by charging two
21:51dollars on a hundred dollar loan when
21:53it's completely unsecured they actually
21:55could make money on that right that's
21:56another way of looking at it but then
21:58the other is if you have lots and lots
21:59of competition then that actually takes
22:02so I actually I'm in favor of regulation
22:04just being like requiring absolute
22:07clarity on what you're being charged
22:09because a lot of people don't realize
22:11this this is actually what
22:12in my opinion and contribute to that
22:13cycle of poverty because you go take out
22:16a loan you don't know what you're
22:17getting charged there's a hidden late
22:19so the hundred dollars oh well if you
22:21don't pay it by it's actually due at
22:2311:00 a.m. you paid it at 2:00 p.m.
22:24aha $50 fee and then that's what really
22:27kills people if you make it super clear
22:29and super transparent you're not going
22:31to run into that problem and if you have
22:33the law being around clearness and
22:35transparency and you have lots of
22:38competition that's what will bring the
22:40rates down what you described is it sort
22:44of just a longtail scenario where you
22:46know companies now whether it's Lending
22:48Tree or some other Lending Club Larry or
22:50something else is it a question of now
22:53finding the right risk and all that and
22:56doing making all those relationships you
23:00know person to interest rate to risk
23:02more efficient and and uncovering the
23:06ones that actually work and then finding
23:08the the right amount of charge for a
23:09week where you can make money and they
23:12still will be a customer but how does
23:14technology enable all this and how is it
23:17starting to change me because I hear you
23:18describe the sort of landscape how do we
23:20then come in with new ideas that help
23:23change what you describe so I think
23:26software is a huge part of it because
23:28this is exactly like the reason why you
23:31charge very high interest rates is you
23:33just it is this regression to the mean
23:35they're not even regression to mean it's
23:37like I don't know so I feel like I'm
23:39protected with the margin of error if I
23:42just charge you a lot part of this is a
23:43regression to or just going back in a
23:46time machine to an earlier place so I
23:48find this very fascinating like a
23:49hundred years ago you go to the general
23:51store and you left your wallet with your
23:53gold ingots and your silver back in your
23:56home and you say hey general store owner
23:58Joe you know me I'm Alex I don't have
24:01the money right now but I live like
24:03right near the saloon like I'll go pay
24:05and they'd say or maybe they wouldn't
24:08right no you're the one that got drunk
24:11last week and ripped off the barber shop
24:12so but they Joe can make a judgement and
24:16say okay I'm gonna just pay me back next
24:19week I'm gonna keep that on my ledger
24:20can you imagine doing that at Walmart
24:21you go to Walmart and you say hey
24:23remember I come here every
24:25and I buy four bananas and and a rubber
24:30ball I'm not gonna I don't have the
24:33money right now but I'll pay back
24:34tomorrow they're like yes they escort
24:35you out of the store and the same thing
24:36goes for like banking and lending it's
24:39kind of like time traveling through
24:41software like back in time going back in
24:43time because what we're able to do today
24:45it's really interesting if you look at a
24:47lot of the micro lending operations that
24:48are happening in a lot of the developing
24:50world some of it is it's like somebody
24:52goes to a village and they kind of just
24:54they know people in the village really
24:55like they know their parents like their
24:57aunts married somebody else and so and
25:01so was the officiant at the wedding
25:02there's that kind of personal connection
25:04which is very hard to quantify like
25:06putting that in software is actually
25:07like that's not software that's kind of
25:09the human touch and that's actually work
25:11quite well and you've lost that when you
25:14go to branch banking you've lost that
25:16when you go to these like massive
25:17massive stores where knowing if you're a
25:20credit risk or not you can't say aha
25:22like this is my uncle's best friends
25:24roommates sister therefore like he's
25:28vouching for her and I think it's gonna
25:29work out okay you can't do that with
25:31software but you kind of can because
25:33there are other signals out there like
25:35humans think that they're very smart and
25:36they make a case as they are but there's
25:38a lot of other information out there
25:39that can be brought to bear
25:40you mentioned lending trading majesty
25:42Lending Club but you mentioned Lending
25:43Tree but actually it's good that you did
25:45that because Lending Tree like what does
25:47Lending Tree do it's like okay I have I
25:48want to look at every mortgage available
25:50to me I want a Google but for like
25:52seeing all the terms how much I'm going
25:55to have to pay like you have little meta
25:57marketplaces like kayak for lending
25:59which is lending tree and applying that
26:02to more I've seen a number of companies
26:03in this space as well where they all say
26:05like we're the hip thing in startup line
26:08is I'm the x4y so it's the I am the
26:10kayak for payday loans or I am the kayak
26:13for whatever you want to call it and
26:15then being transparent around all the
26:18different terms there that's another
26:19thing that's going to push rates lower
26:21and be friendlier for the borrower but
26:23the main thing that's going to change
26:24this is the software to identify okay we
26:27think that you are a positive quality
26:28payer we see what's going on in your
26:30bank account we see things that are just
26:32much much better than what FICO can
26:33provide to us we're a phase in at least
26:36financial services where it's it's
26:39in the transparency phase right it's
26:40shining a light on you know terms
26:43conditions rates and also people and
26:46behaviors and then you know eventually
26:49it moves on or maybe not eventually
26:51maybe right now it is in to changing how
26:54we do things and but right now it sounds
26:57what you're describing is still this
26:58this phase very much of you know it's
27:03shining a light on things and and
27:05describing it and looking for
27:07looking for inefficiencies in finding
27:08these examples where you truly do have a
27:10market failure where a transaction would
27:12happen or something that's very good for
27:14all parties involved would happen but
27:16you either have a lack of communication
27:18you have a lack of transparency you have
27:20too much resilience or calcification in
27:24terms of why rates are set it's like
27:26well why is the credit card rate
27:28one-size-fits-all regardless of what
27:30Adam you're buying that doesn't make
27:32but it's too much work to make it
27:33dynamic when federal fund rates go up
27:36does that change kind of what you might
27:39see in the marketplace in terms of like
27:40what people are interested in and where
27:42the opportunities lie so definitely the
27:44fact that we're in it's called zerp this
27:47is the zero interest rate policy we're
27:50in whatever it is you're seven observe
27:51so and I think we're gonna remain in
27:54good a year in and year nine that's
27:56that's my own personal opinion but that
27:58does change things a lot so if you look
28:00at so five so if I is a great example so
28:03sofa is now a multi-billion dollar
28:04company and they're they're kind of big
28:08innovation I mean I and not to
28:10oversimplify it but if you go to Harvard
28:12Medical School after you graduated from
28:16from Harvard Medical School took on any
28:17like pie in medical school you're going
28:20to become a resident you get paid very
28:21little then you become a high paid
28:23doctor you get paid a lot more and
28:25across this entire trajectory of your
28:27career your chance of declaring personal
28:29bankruptcy is very very low the only
28:31thing that I need to look at to know
28:33that is you graduated from Harvard
28:36Citigroup on the other hand so my wife
28:38went to actually she went to her
28:39business school and had a bunch of loans
28:41from Citi and they were they were pretty
28:43high-priced because it's like well
28:46they're saying well all all student debt
28:48is at the same relative weighting like
28:50they they weren't looking at this one
28:52vector which is like you went to a
28:54pretty good school where the average
28:55person makes so much money and this is
28:57the average default rate and so if I did
28:59because so file goes okay your city
29:03because they were struck in 2003 or 2004
29:07or ronimal what the numbers are but this
29:09is what they were struck at now interest
29:11rates are zero we're gonna come in and
29:14do it for three and a half percent and
29:16you'll save fifty thousand dollars and
29:18you say holy holy moly this is great I'm
29:21gonna sign up for this that's a lot
29:22harder to do if rates go up more you
29:26have less room for somebody to come in
29:27and start refinancing debt so so that's
29:30one thing that would certainly because a
29:32challenge does behavior need to change
29:34mean is that we're kind of fighting
29:35against why things don't happen as
29:37quickly so inertia is an incredibly
29:39powerful thing especially for banking so
29:42why don't people change their bank
29:44accounts to earn more money so all you
29:46have to do is go to bank rate.com or any
29:48of these other kind of savings account
29:50like how much do i earn on my money that
29:52i have in my bank account and you'll see
29:54like I mean probably ninety-nine point
29:56nine nine nine percent of people do not
29:57have the highest yielding bank account
29:59because it's probably the bank of
30:00Internet or some like crazy name that's
30:02listed on on bank rate.com but think
30:05about what goes on with your banking
30:06relationship you have your salary direct
30:08deposited into there so I want to change
30:10my bank and that means I have to go to
30:13my my employer fill out all these forms
30:16bring a voided check I don't even have
30:18like what is it check I've never seen
30:20one before what do I get one I never
30:22asked for one can my ATM card work no
30:24that won't then you have maybe you have
30:27a mortgage from your bank and they'll
30:29give you a 25 basis point reduction on
30:31your overall rate assuming that you have
30:33a direct deposit salary integration with
30:35them why are they incentive to even do
30:37that for you if you're so captive as a
30:39customer actually it's twofold one is to
30:41keep your banking relationship but
30:43actually more importantly it's to watch
30:45your cash flow so they know what kind of
30:47risk you are they know if you've lost
30:49your job because you no longer have
30:51deposits coming in from your employer so
30:53they're able to watch them in real time
30:55I mean it turns out that with companies
30:57like Yoda Li and Intuit anybody can do
30:59this now you don't have to own the
31:01banking relationship if you want to see
31:02what people are doing with their own
31:04personal funds like non-cash but
31:06like in a bank account you can watch
31:08that through one of these third parties
31:09so my main thing is that it's just
31:11inertias very very it's very powerful
31:14and Chase has trillions of dollars of
31:17deposits and they offer the lowest rates
31:20which seems like that doesn't make any
31:22sense in any other industry like if
31:24there are like two gas stations ones
31:25over here ones across the street and one
31:27of them offers gas for three times as
31:30much you'd say well jeez like it's a
31:32little bit of a pain to take a u-turn
31:33but I'm gonna take a u-turn because I'm
31:36gonna save 50 bucks on my gas and all
31:38gas is gas and a you know the same
31:40chemical compound so it doesn't really
31:42banking it's just you have to get people
31:45to care which is a big problem there are
31:47all of these kind of interconnected
31:49relationships which you have to dislodge
31:51even if it's painful and inefficient
31:53it's not kind of point click efficiency
31:55you can't just say I'm going to click
31:57two buttons and then I'm done you know
32:00the US government intentionally so you
32:01have all these kyc and AML you know know
32:04your customer and anti money laundering
32:05laws that require disclosures from a
32:08consumer that takes a little bit more
32:09time so you have all of these things as
32:11well like insurance is another one where
32:14inertia is just I mean nobody cares who
32:16they use for their insurance I know I'll
32:20be hated by the geckos and the state
32:21farms of the world for for uttering such
32:23a falsehood but I don't think anybody
32:25cares at all who they use for insurance
32:27at the same time they don't even care
32:29about getting the lowest rate because
32:30once they have it and Geico spends I
32:32think 600 million dollars a year on
32:33advertising the US to convince you that
32:35all it takes is 15 minutes to change
32:37your insurance but no one bothers to do
32:39it there's a there's a quote by George
32:41Bernard Shaw which I'm very fond of
32:43which is every profession is a
32:44conspiracy against the lady and I firmly
32:47believe in that because there's actually
32:50a law in most states I know this because
32:51we tried getting into the insurance lead
32:53generation space of trial pay where you
32:55cannot reward people for switching their
32:58insurance and this is so
33:01imagine that I'm an upstart insurance
33:03company and I do everything better than
33:04State Farm and I say okay I know that
33:06you don't care if you use State Farm or
33:08all state or whatever I will pay you
33:10$100 right now if you switch to me and
33:14against the law against the law why
33:16can't you do that well because every
33:17profession is a conspiracy against the
33:19to do that so that's another one we're
33:21like that should change dramatically
33:23data would make a huge huge difference
33:25in that space like we're still giving
33:27people rewards if they go install a
33:29LoJack in their car and that's that's
33:32the biggest innovation that you've had
33:33in like car insurance we're like you get
33:36ADT and your rates are lower for your
33:38house but I just think how much better
33:39of a job we can do but you have to get
33:42people to care and this conspiracy
33:44against the lady makes people it makes
33:46it harder for people to care abuse you
33:48can't reward them in a meaningful way
33:49for switching let's transition then to
33:52something you wrote about five years ago
33:54now I think which is this concept of
33:56online to offline commerce or Oh - oh
33:59not to add another coinage to our list
34:01of b2c b2b but so what is it and
34:05actually um given that you wrote that
34:07piece five years ago how have things
34:09changed since then because some of it is
34:11maybe not as relevant today the reason
34:13why I wrote that and the reason why I
34:14was very interested in that is at trial
34:16pay we had two markets we had publishers
34:19or app developers they would show offers
34:22so you don't want to pay for zynga poker
34:23you can get it for free if you sign up
34:25for Netflix or if you shop at Gap com or
34:28go to Banana Republic com or shop at
34:30j.crew com notice the prevalence of the
34:32dot-com and the other side of our
34:36business was you know signing up more
34:38guys like Zynga and I liken this to a
34:41wine list at a restaurant if you're a
34:43restaurant and you want to optimize your
34:44revenue I mean the most important thing
34:46is you get more people to sit at your
34:47restaurant and if you only have two
34:49wines and both of them are red the
34:51marginal benefit to adding a white wine
34:52your very first white wine is probably
34:54pretty high but if you already have a
34:56wine list of 900 different wines and you
34:58add your nine hundred and first like
34:59you're better off getting more people to
35:01sit at your tables so those are the two
35:02levers that we had a trial play we
35:03either get more publishers or app
35:05developers like Zynga because that was
35:07more tables or we get more wines on our
35:09wine list it turned out we had kind of
35:11tapped out on the online wine list and
35:13it turns out not surprisingly that 93%
35:16of all commerce happens offline that's
35:19up from 0% 25 years ago but still the
35:22majority of Commerce in the United
35:23States and the rest of the world happens
35:25offline and wouldn't it be great if we
35:29could save for trial pay get your Zynga
35:31coins for free if you go by
35:33coffee at Starbucks or get your Zynga
35:36coins for free if you go bowling today
35:38that's what you made by online top line
35:39cover yeah so this was the idea of it's
35:41it's kind of a third category of
35:43Commerce because the US Commerce
35:45Department broke this out a while ago
35:46which is there are two forms of Internet
35:48commerce there's travel which is very
35:50large that's expedia.com hotels.com
35:52priceline.com all these different OTAs
35:56and then there's for lack of a better
35:58term stuff in a box where I go to Amazon
36:01I buy something it gets shipped to me in
36:02a box and that's how I actually receive
36:04the goods there is a third category
36:06which means you buy something online it
36:09doesn't get shipped to you it's not
36:10travel related in the traditional sense
36:12that's online to offline and it's a huge
36:15one because all of that 93 percent of
36:17Commerce sure you might buy your coffee
36:20and redeem it redeem it drink it offline
36:25online parlance but you go to Starbucks
36:28you could get that or you go to Burger
36:30King to actually eat your big mad
36:31whopper but at the end of the day these
36:34transactions should happen online I mean
36:37it should be on your mobile phone we're
36:39an online that's happening on the
36:40Internet connected device and that
36:42allows you to do something really cool
36:43which is actually do performance
36:45marketing because the problem is if
36:47Burger King wants to go advertise on the
36:49internet they don't know if any of those
36:51advertisements actually work Priceline
36:54knows every single ad did it work did it
36:56not work because people click on the ad
36:57Burger can you figure out if they
36:58clicked on the app they don't know if
36:59they bought the whopper Priceline knows
37:01that they clicked on the ad and then
37:02they went from that click to actually go
37:04buy something at priceline.com because
37:06they can track that end-to-end on the
37:07Internet and you just don't have that
37:09for offline so I thought this was gonna
37:10be a huge category that would really
37:12redefine online commerce and did the
37:14term take off it's funny um I I was one
37:17that coined this term and if you do a
37:19search for o2o on on google everything
37:21is in Chinese I met these this group
37:24just like CEOs of like all these large
37:27Chinese corporations they came over a
37:28little while ago and like you invented
37:31ohto well not there it's like the term
37:38is the rock star so he's like if you
37:40look at Baidu if you look at a lot of
37:41the big companies over there like a lot
37:43of their focus is on enabling
37:44on line two all said that was a big
37:46theme of a WeChat primary that we don't
37:48put out so how have things changed since
37:50when you first wrote that I mean that
37:51was five years ago the first category of
37:54online to offline was really for things
37:56that were easily measurable so uber and
37:59lyft came about a little bit after I
38:01wrote that obviously it wasn't in any
38:02way shape or form based on my idea or
38:05not it wasn't even my idea was just kind
38:06of trying to to come up with a canonical
38:09form for what was happening but it was
38:11very easy to do relatively speaking to
38:13do who were in lift because it's time
38:15and distance travel those are kind of
38:17the two variables that you're measuring
38:18on and you're taking something that it
38:20was originally delivered offline we'll
38:22always kind of be delivered offline like
38:23moving you from point A to point B will
38:25be delivered offline but you you start
38:28that process and you pay for that
38:30process online or on mobile that's a
38:32great Alex well thank you for your time
38:34on a station C podcast we I'm sure it's
38:37gonna be the first of many welcome and
38:39we're excited to have you
38:40likewise thank you so much
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