“I think there are trillions of dollars in market cap for financial services, insurance and real estate. All of these industries will be upended by the Internet.”
Alex Rampell started his career as an entrepreneur and founder and explains how that helped him succeed in his transition into a VC investor. With expertise in FinTech, Rampell discusses the outdated models of financial services, making it ripe for disruption. Entrenched incumbents in the financial services space will ultimately need to innovate in order to fend off the wave of start-ups. Rampell also explains the huge opportunity for tech companies using a new money-making model called embedded finance. He talks about the inevitable digitization of wallets and an increasingly friction-less financial processes. Lowering regulations for start-ups to receive bank charters will be critical to increasing healthy competition.
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SPEAKER
Alex Rampell
General Partner
Andreessen Horowitz
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro
3:10 - Moving from entrepreneur to investor
9:18 - Evolution of FinTech and its disruption
20:57 - Ability for big banks to innovate
25:28 - Embedded finance
38:40 - Digital wallets
45:59 - FinTech regulation
John Darcie: (00:08)
Hello, and welcome back to salt talks. My name is John Darcie. I'm the managing director of salt, which is a global thought leadership forum and networking platform at the intersection of finance technology and public policy. Saul talks are a digital interview series with leading investors, creators and thinkers, and our guests today actually fits sort of all three of those descriptions, but we'll get to that in a second. But our goal on these talks is the same as our goal at our conferences, the salt conference, which we're excited to resume in September of 2021 here in our home city of New York. But that's to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited that I'd welcome. Alex Ram Pell to salt talks. Alex is a general partner at Andreessen Horowitz, a leading venture capital firm, where he focuses on financial services.
John Darcie: (01:01)
He has a long history of both founding and investing in leading financial services companies, including currently serving on the board of branch bright side descript, divvy, Earnin FlyHomes loft, mercury pier street point propel central link, super evil mega Corp. My favorite, uh, TransferWise and very good security. Alex, additionally led the firm's investments into open door plaid Quantopian, which was later acquired by Robin hood and arrival, which was later acquired by it live nation prior to joining Andreessen Horowitz, Alex co-founded multiple companies including affirm, uh, which is a leader in the buy. Now pay later space, uh, that he co-founded with max Levchin a fraud eliminator, which was acquired by McAfee in 2006 point TrialPay, which was acquired by visa in 2015 TXM, which was acquired by Envestnet in 2019 and YAB, which was acquired by coupons.com in 2013. Uh, Alex holds a bachelor's degree in applied mathematics and computer science from Harvard university. And as I mentioned, I think he's one of the foremost experts in the best investors in the world into the financial services sector with a focus on FinTech hosting. Today's talk is Jason Zinn's, who is a partner at SkyBridge capital who leads a lot of our FinTech investments, uh, that we're engaged in at SkyBridge. Uh, and he's also a contributor here on salt talks, I think making his second or third appearance, but we're excited to have Jason joining us again here on salt talks. Jason, go ahead and take it away.
Jason Zins: (02:35)
Thanks, John. And thank you Alex, for, uh, for joining us today, excited to have a discussion around the future of FinTech. And before we dive into some of the relevant topics today, I want to start quickly with more of a personal question. You have extensive experience as both a founder and operator, as well as more recently at Andreessen with, um, with, with more of an investment role. Um, so touch on, if you can, some of the differences in skill sets required for those roles, as well as perhaps some of the similarities or the senators choose between
Alex Rampell: (03:08)
The two. Sure. I mean, and hopefully the synergies, uh, are pronounced, but there are some people who are great investors in terrible entrepreneurs and vice versa. Um, when our firms started a lot of the logic behind getting founders CEOs as the investors is because they're going to have the most empathy. Like if you, if you take somebody who's a spreadsheet wizard and they say, Hey, let's make C1 that sell higher. Um, what does that actually mean? Like at a company, how do you actually increase your gross margin by 5%? Or how do you launch a product if you're relying on a bank to okay. The entire approval process and you know, one of the nice things about being an entrepreneur is that having been in the trenches and like, okay, when crap happens and everybody quits one day, because they got higher offers for Facebook or, you know, all the kinds of things that are the ups and downs of being an entrepreneur.
Alex Rampell: (04:00)
It's nice when you have that experience. So again, you have empathy for the entrepreneur. So when you can help them through that situation, because really we are, we are trying to not just provide capital, but actually expertise know-how and advice to the entrepreneurs that we work with. And it's kind of hard to do that if you haven't done the thing that they're doing right now, but that haven't been said, um, like the most, the most important thing from an investment perspective, it's just like find the best investments, um, you know, find the best investments. And like the job of investing is the most venture capital is finding, picking, and winning. And it's obviously very different than public equities because of public equities. There's no winning. Like if you want to go invest in ticker symbol XYZ, you just go buy it. Whereas a lot of the best deals in venture capital tend to be a consensus, right?
Alex Rampell: (04:47)
So if you think about a two by two of right versus wrong consensus, non-consensus, you can't make money being wrong. You know, it doesn't matter if you're in public equities, private equities, if you're wrong, you're wrong and lose all your money. Um, in public equities, you obviously want to be right. But if your consensus, right, well that might already be priced in. You're not going to get a great return. So you want to be non-consensus right. Whereas a lot of the best deals in venture capital, they're almost known to be very, very interesting deals. Like, you know, Coinbase was known to be a very, very interesting deal. When we did the series B of that one, many, many years ago, we had a win that deal. So that was consensus. Everybody wanted to do it, we had to win it. And one of the ways that you win it is just from like, you know, you're, you're pitching yourself as the product.
Alex Rampell: (05:30)
And again, it's helpful if one of the areas of expertise that you have is that you've actually done this job, that this entrepreneur is working 20 hours a day doing. So, so I'd say like, they're, they're very different, but, um, there's definitely a lot of benefits in terms of just understanding the complexities, if you will, of, uh, what ended up going into the financial statements as the output, um, if you've actually worked on the inputs, then it's, it's a nice, uh, it, it gives you some of understanding of the struggle for one, but also it's like, wow, like maybe that isn't as easy as the guy is suggesting. It might be because I've done that before. And it's really complicated.
Jason Zins: (06:08)
So having some empathy with the founder across the table from you has been helpful in, in winning deals, which seems like it's an increasingly important part of venture investing today. I think one, one part I just want to highlight is it's not just identifying the next great investment. It's winning that investment and getting the company to actually agree to take your money. Is that something that has evolved and gotten more challenging or more apparent of late as more money has come into the space?
Alex Rampell: (06:36)
No, absolutely. I mean, once upon a time there were only, I don't know, three venture firms, right? I mean, if you go back far enough in time, there was probably zero venture firms, then one and two and three, but we're at a time right now where there's a lot more capital than there are great opportunities. I mean, just because think about today 2021, the five biggest companies on earth are tech companies. You rewind 15 years. It was financial services companies before that it was oil and gas companies. So like the, the big area of explosive growth is in technology. All of that's been the case since mankind first invented fire. I mean, technology has always moved us forward. There's always interested in technology. It just comes in many different forms and sizes. So now it really is a it's kind of a sellers market. I mean, the seller gained the seller of, of shares in companies, namely entrepreneurs.
Alex Rampell: (07:23)
So they have a lot of choices around who to work with. Um, at the same time, the, the outcomes have gotten much bigger, which is why, you know, what is called venture capital today is, is a bigger asset class in many respects than it was in the past. Because, you know, once upon a time, if you sold your company for $400 million or $500 million, that was a big exit. And in that era, you'd have funds that were relatively small. I mean, now you have companies that when they go public, they're worth tens of billions of dollars. And it's not just all, um, bananas like 1999. You know, some people say that because there are real people using the internet. I mean, 4 billion people have smartphones, um, apple, Google, like these are tech companies that print cash. They're not just attracting eyeballs and hoping to monetize them later. So that's, what's led, I mean, know, take 0% interest rates and everything else. Add that to the mix. You have a lot of interest that's going after the sector, which has made it more competitive, which is great for entrepreneurship. I mean, it, it, there's probably no better time on earth to be an entrepreneur.
Jason Zins: (08:26)
Well, we, we, uh, certainly have picked up on some of those dynamics in some cases, are, are I guess, guilty of, of coming into this space as new entrance. We've been a little more active in, in the private markets, um, specifically on the FinTech side and, and our view has been really post pandemic. Uh, that was really the catalyst that has now accelerated much of the disruption that we're seeing. And while there's been disruption going on for, for many, many years now, financial services, unlike other sectors is arguably been the most resistant to change. Um, you have an interesting, I, I assume an interesting perspective on this because you've been in the space, uh, for much, much longer. And so when you zoom out and you think of how FinTech has evolved over the years, but really more specifically pre and post pandemic, uh, what are your views on that?
Alex Rampell: (09:19)
Yeah, well, FinTech, it's funny. Um, I gave a presentation a few years ago and I said, you know, what is FinTech? And if you were to ask people 20 years ago, it would have been selling tech defense. And I highlighted this by showing a map of the world and I highlighted Finland, but it's not fins with two ends like Finland. I mean, it really was selling technology to financial services firms. So FIS Pfizer, TESIS like, these were a lot of the original financial services companies or fi FinTech companies, right? They were software companies selling software to banks. Um, so like, you know, somebody like TCIs, uh, that was part of, I believe Synovus was part of a bank. Banks said, Hey, we need software to go actually issue credit cards and deal with like how much balance and whether or not we approve this transaction on the fly.
Alex Rampell: (10:04)
They built that internally. And then they ended up spinning that out into a separate company called TCIs was worth tens of billions of dollars before it itself got acquired. And that was the original kind of gen one and FinTech. And now FinTech is not, it's kind of like what you've seen happen with software. Like 20 years ago, you could have had a Lyft or an Uber, but when the amount of capital available was low and risk-taking was not extreme. And I mean that in a, in a negative way towards Ben in a positive way towards now, what would Lyft or Uber have become? They would have been taxi dispatch services. It's like software, very high margin software. They just sell that software to taxi cab companies. But the whole experience would have been terrible. And of course, taxis are still terrible today, but Uber and Lyft have really changed that industry.
Alex Rampell: (10:51)
And if you think about where I'm going with this metaphor, it's all right. Uh, we're going to build a software company, a FinTech company that sells software to banks, but banks suck because if you want to go transfer money from, I don't know, dollars and send it to the UK, you have to go to the bank of America branch and wait in line for two hours and then fill out all these forms. And then they screw it up and they get like a decimal place wrong. Then you have to go back and do it again. I mean, like, this is the kind of stuff that you have to deal with with the bank and just having software wouldn't make the entire experience better. What you've got to do. If you really believe in the software that you're building is you vertically integrate. You say I'm going to be my own customer.
Alex Rampell: (11:29)
I'm not going to, I'm not going to wait five years to sell bank of America on something that they don't want. And they don't really care because they have this like nice little oligopoly going, like I'm going to crush bank of America. So, you know, somebody like chime today. I really admire, we're not an investor. So this is a genuine admiration. Somebody like chime, like they built a lot of software and you know, what would they have done 10 or 15 or 20 years ago in one point, oh, well, they probably would have sold that software to banks and said, Hey, kind of like what digital insight does or what Jack Henry does. Like, you know, make software that banks buy. But again, Jack Henry is a very valuable company, but if you want to make the experience much better and say, Hey, you can get paid two days early, um, or no overdraft fees, um, or really take, take advantage of the cost advantages of the internet, right?
Alex Rampell: (12:16)
I mean like, what is COVID done? It's like, why the hell would you go to a bank branch? It was kind of comical to me like when the government is just kind of like flippantly shutting down X versus Y. And it's like, who knows? Like why is the wine store open? But the gym that actually makes you healthy as close. It's like who the hell knows it doesn't make any sense. But the thing that is a absolutely necessary thing that has to be open all the time is a bank. Really? This is the 21st century. What do you do in a bank? Like, do you need to try on a mortgage? Like, it makes sense to buy clothes, maybe offline, but even ask moving online. So I just think the bank branch is an anachronism. All of these banks are really tied into this. Very, like I w I wouldn't even call it 20th century.
Alex Rampell: (12:53)
It's like 18th century notion of it's like physical presence is what gives you the right to go offer financial services to your local community. Like, yeah, that made sense in the 18 hundreds where you stored your gold in a safe, and then the bank guarded it with like guys with guns. That's not where the world is today. I mean, cash is going away. There's really no reason to go to a bank. Branch and banks are really clinging onto this old fashioned technology. And then there are other areas of financial services, like take insurance. Like, do you really want to get sold insurance by an agent who like, wants to talk to you on the phone if you're 30 years old? Like, no. Um, and this is one of the jokes that I make, which is if you're under 30, do you know what the least used app on your phone is?
Alex Rampell: (13:34)
What's called the phone app, right? It's like the one where you actually talk to people. So there really is a generational divide, which is one of the other reasons why you have this massive, uh, once in a generation opportunity, which is, you know, I would say if you're under the age of 30 or 40, people just want to buy things in a different way. They don't want to talk to a salesperson. They just want to point click purchase. And then on top of that, you have the geographical opportunity, which is, you know, take Nigeria 200 million plus people, almost all of them now have smartphones. Like a smartphone is 40 bucks, uh, that is now a bank. So a lot of people that were skipped over for getting offered financial services, whether it's investments or interest bearing accounts, or just digital money. So, you know, if you live in a country with a massively inflationary currency and you want to go swap it to dollars, wouldn't it be great.
Alex Rampell: (14:20)
If you could do that online, you don't have to go to a branch. You don't have to go like, wait in line. You don't have to get robbed while you do that. Like, these are all things that technology is moving forward. So, I mean, I think there are trillions of dollars of market cap in what I would actually more broadly define as a fire it's financial services, insurance and real estate. Like all of those different industries are going to be upended by the internet. They haven't been historically, but, uh, the, the, the Internet's coming for you would be my message for most, most, uh, bank and finance executives. W w
Jason Zins: (14:49)
W we certainly agree that, um, you know, you've, you've absolutely seen a post pandemic, uh, really a, a massive decline in people going into brick and mortar banks moving to manage their finances. Online. Chime is a great example. W w we happen to be an investor in chime. We're very excited to see where that company goes. It almost seems like chime. And the other big fintechs are finally starting to sort of bully some of the big banks and the incumbents into submission. I think just this week, a few of the, um, the bigger, uh, banks announced that there'll be stopping overdraft or account balance fees. So, um, perhaps you're starting to see that continue. Uh, and that's a concept I want to come back to in a moment, as far as how, uh, the banks are responding, but, um, to be blunt, do you, do you think FinTech is going to do to the big banks and financial services, what Amazon did to retail over the years?
Alex Rampell: (15:45)
Well, it's complicated. So, I mean, I, I don't want to write off the banks all together. And a lot of what they have going for them is, I mean, they have higher operating costs in terms of the bank branches. They have 5,000 people working in compliance when they could just write their own software, if they had competent software engineers, and then, you know, do it at a fraction of the cost. But what is, what does JP Morgan have as an example? Well, JP Morgan has over a trillion dollars of retail deposits and how can any FinTech company that is not a charter bank have a lower cost of capital than JP Morgan? Like they can't. So when you look at things like lending, it's like, okay, well, the cost of maybe originating alone or servicing a loan, all of these things will be cheaper for the financial services upstarts, the FinTech guys, but the cost of capital is just massively, massively lower for the entrenched incumbents.
Alex Rampell: (16:40)
Um, and part of that is just a regulatory thing, which is like, why not make it very, very easy for every one of these fintechs to become a bank? Um, because like you, you can't be an eBay for money, if you will. Uh, if you aren't actually able to take deposits and use those deposits to fund your loans, to do that, you have to be a bank. So that's the big advantage that the banks have, the big disadvantage that the banks have is that they've got bad technology. They have entrenched P and L lines. Like you mentioned the overdraft thing, like I think bank of America made over a billion dollars last year on overdraft fees. So they've got a guy or gal or somebody who's in charge of the P and L for overdraft. And it's like, right now, it's a P like, why do you want to turn that into an L?
Alex Rampell: (17:24)
Um, and you take, you take away enough of these things that are right now, very big profit centers. Like you've gotten a business and you have a cost structure. That's very bloated as well. So, I mean, if you're running bank of America or Citi or chase or any of these, you should probably figure out a way within two years to completely exit branches, go digital, only offer digital service. And if you can do that very, very quickly, and you're making most of your money on net margin, and then you as a bank, I mean, this is where Walmart beats Amazon, right? Because the challenge with Amazon versus Walmart is kind of two-fold one is that there's no way in hell Walmart's ever going to advance an Amazon web services. So like the optionality on product expansion for Walmart is basically nil. Um, and they have this physical footprint, but the physical footprint for Walmart I would argue is actually valuable.
Alex Rampell: (18:12)
Like they don't, they're not renting like class, a real estate at a hundred bucks, a square foot a year. Like they find these giant warehouses. They actually double as fulfillment centers. Like there's a lot of advantage there, but there's not like this. There's not an analog of this cost of capital piece. That is the key input to net interest margin, which is where banks make a disproportionate amount of their money. So I don't think it's as black or white as that, but in terms of where Americans might have their primary financial relationship, like where does the direct deposit of payroll go? There's a higher and higher chance that that's going to go to a FinTech player. And then there's also this chance that what you think of as a FinTech player is completely different. And what I mean by that is more in this kind of embedded finance sense.
Alex Rampell: (18:58)
So if I'm Lyft or Uber, you know what I should do to retain all of my drivers that currently have left me, and that's why it's hard to get a Lyft or an Uber right now, I should just give them free bank accounts. And that doesn't mean that I'm opening the bank of Uber or the bank of Lyft. I should find a way to white label and account, um, deposit money in there in real time, give them a card because that's one of the ways that I retain them as a user. I get a percentage of all of their staff. That's what interchanges, that's how chime makes all of their money. So you'll probably see more of these things, but then again, when it comes back to the most profitable Motherlode of, of, of banking of, you know, net interest margin, when, when times are good, um, it's, it's harder to see a clear path for how the fintechs really dominate that space without becoming a licensed banks.
Jason Zins: (19:44)
No, absolutely. So it'll be a little more nuanced and it'll be interesting to see which fintechs go, which route as far as you know, lending certainly is, is an interesting one where balance sheet is helpful. I think you also identified some of the clear issues with the bank business models, which I'm sure inside of these big banks they're well aware of as well, right? The cost structure that's eaten up by their real estate footprint, uh, the P and L it's driven by charging customers fees, which is a big reason why they're going to fintechs like chime. Um, do you think that there's enough Goodwill, uh, within, or, or willpower, I should say, within the banks to innovate and get past, uh, the inertia in their business structure, the bureaucracy and the politics that goes on inside these banks? Or is it just going to be a slow bleed and, and, you know, certainly some, some may innovate, right, like impossible to ever bet against Jamie diamond at JP Morgan, certainly visa, which, uh, which you've worked at is, um, has been innovating acquisitions and new products. Um, but broadly, do you think, do you think that the big banks, the incumbents are going to be able to innovate in the ways that they need to?
Alex Rampell: (20:58)
Yeah. I mean, there's a saying that I use a lot, um, which is the battle between every startup and incumbent is whether the startup gets distribution before the incumbent gets innovation. And I think it's part it's true for everything, but it's particularly true here because to go get access to millions and millions of, um, uh, customers like to get them to switch from a direct deposit at bank of America, to this unknown company called chime, that loses money, like, you know, w would my grandmother who, you know, throughout the great depression, which she put money at a bank, like, like chime or a non-bank light shine, like probably not. So to win people over takes time. Like, that's the thing that people kind of underestimate. I mean, like which, which I have a lot of exp, like you asked about the entrepreneur experience, it's like, wow, like it's really hard to acquire customers on the internet.
Alex Rampell: (21:47)
It's not hard to give away money on the internet to go get when over Casper is get them to deposit their life savings. But I feel like that kind of stuff is very, very hard. Um, so, and it's not like this, um, this, this is not like, you know, blockbuster, that's going to get run out of business by Netflix. It's like JPM has many business lines. One of which is retail. Like if, if retail suffers and loses 5% account volume, but really only like the tiny accounts that kind of complain about overdraft fees and everything else, it's like, it's kind of a non-issue for them. I mean, it's an issue, but it's not, it's not existential. Whereas when people start buying an Amazon, like that is an existential problem for circuit city or comp USA, or any one of the, you know, a hundred tombstones that now lie on the intranet graveyard or the kill by the intranet graveyard.
Alex Rampell: (22:34)
So I, I think it really, um, I think it's a little bit more nuanced than that. Um, and you know, the, the big is to their credit. They are moving more towards this, uh, digital first embrace. But I, I gave a talk at a big bank maybe three years ago, and I had this whole thing where it's like, I start off with this sat analogy, which is, you know, Walmart is to Amazon as, you know, XYZ bank that I was talking about is to what, and they're like, can you take that out? Because we have a question here, charge of expanding our branch network. And I was like, no, I'm not going to take it out because I don't think you should be expanding your branch network. It doesn't make any sense. And they're like, no, but like, we actually, we saw that in places where we have more branches, we get more accounts and it's like, you know, there there's this thing called correlation.
Alex Rampell: (23:17)
And there's this thing called causation. I would make sure there was a causal relationship between the two before you, uh, before you go all in on this like correlation thing. So I, I think they'll, they'll get with the program eventually. Again, it's not, it's not an existential threat, but I could see like this and actually like in, in their defense as well, like they have to serve not two masters, but kind of two different age groups, if you will, which is, there are people who are 75, who if they're like, Hey, if I have a problem with my bank account, I want to go into a branch and talk to a person. And they're like, Nope, Nope. You got to, Hey, by the way, who has all the money in America? It's not people that are 15, right? It's not people that are 20. So there is this generational thing where like an older bank actually has to serve two different demographic groups.
Alex Rampell: (24:00)
One of which is probably very, very comfortable going to bank branches. The other one is like, why the hell would I do that? So, and obviously if you're, if you're a new upstart, you're just like, you know, to hell with the people that are rich, that have, you know, millions of dollars in, or 75 and older, I'm just going to focus on people that I don't have to go build a physical presence for it. But you know, that, that had been said, I think they all have apps. That's kind of proof in and of itself. It's not like they haven't gotten with the program, but they haven't gone all in on that as a strategy. Whereas that is the all-in strategy for all the FinTech guys.
Jason Zins: (24:29)
And it seems like to, to pick up on a point you just mentioned, and in many, in many cases, the banks versus the fintechs are serving different demographics, different constituents. And it'll be interesting to see as, as that continues to play out and that expands, and then they really start to play on each other's turf. Um, how, uh, how, how, how they react, hopefully it's ultimately the consumer that, that will benefit from, from that competition. Um, I wanna shift gears a little bit and pick up on a concept that you mentioned in one of your comments a moment ago, this idea of embedded finance, um, which is an idea that you and your colleagues at Andreessen Horowitz has been talking about for, for a number of years, um, sort of this notion that, uh, all companies will be FinTech companies. Can you explain at a high level, uh, what, what that concept means? And, and you touched on an example already, but if you could sort of hammer that point home, because I do think it's a very important trend that we're seeing.
Alex Rampell: (25:29)
Sure. So I'll, I'll start with a little joke, which I like, which is, uh, there, there are two pigs in a barn and one of them says to the other one, like this place is great. Everything's free, the food's free, it's heated. And then the caption underneath the little cartoon says, if you're not the customer, you're the product being sold. We see that the pigs were about to become vacant. Um, and effectively, there are two ways of making money as a consumer company. You either sell a product or sell a transaction or sell a subscription to a consumer. So like Peloton, they're selling you a subscription. That's very, very clear, or you are selling the consumer to an advertiser. So Facebook they're, you're the product. Uh, and you are the customer of Facebook, but not really not financial, you're not paying anything you're being sold.
Alex Rampell: (26:12)
The impression that's being offered to you is being sold to an advertiser. And those are kind of like it's option a or option. Do you even ask people when they're pitching us? Like, how are you going to make money? Is it a transactional business model or an advertising business model? Well, now there's a third one, which is this embedded finance thing, which is like, if, if the, if you update that to pigs, a little cartoon, it'd be like, no, um, the, the barn is free. They just want us to use their co-branded credit card and deposit all of our payroll into their bank account. And, and, and so what's happening right now is that if you look at B2B as an example, like look at a company like mind, body, which basically does like, you know, CRM and booking services for spas and beauty salons and whatnot.
Alex Rampell: (26:53)
Um, they made money by selling software, but actually it's like, now they'll do credit card processing for you. Oh, wait, your spawn needs money in advance of getting paid by all of these consumers that have bookings next week. We'll give you a loan and that's embedded. And again, going back to the point that I made around, like this battle between, uh, distribute distribution versus innovation here, like the cool thing is if you build a software platform that already has all the distribution, so you're Uber, you already have all the drivers. Um, it's very easy for you. Now, there are tools like what AWS did for rolling out servers through tools like I'm on the board of a company called plaid. It makes it easy to read information from somebody's bank account, um, or there's a company called Marketa that allows anybody to issue a card.
Alex Rampell: (27:39)
So these are examples of embedded finance for any company can very, very easily offer financial services in a, in an integrated way, not lead generation, not saying, Hey, you want a loan click here. And it goes to some third-party website. It's like the loan is actually captive within the product. And you've seen the financial services companies do this first, like, you know, square has a very low margin credit card processing business. Um, but guess what? That gives them captive rights to that entire merchant base to do. What's called, um, you know, a merchant cash advance business and MCA business where they can say, okay, we have this thing called square capital. We're just going to take 5% off the top, not 2% or not 2.9%, but like it took, we're going to give you a loan right now. And then we're going to get the next week of credit card payments as they come in.
Alex Rampell: (28:27)
And that's how we're going to pay off the loan. We have better underwriting that way, but we're embedding this lending thing into our company, but that kind of makes sense for square. And we see kind of, I mean, square, it has got a banking charter there. They're getting an ILC, I should say. Um, but you know, what about companies like mind, body? Um, what about companies like toast, which is like square for restaurants or like there was a company that pitched us that does, um, it's like a operating system for body shops for your car. That's effectively going, how are they going to make money? They're going to make money, uh, via embedded finance, uh, where there's a big space in vertical software called dental practice management. You go to a dentist, they have a software product. It's not Excel. They store all the pictures of your teeth.
Alex Rampell: (29:08)
They they'd get reminded of like when to call you for an appointment. Again, they bill your insurance company, all of this as part of a, it's called a DPM dental practice management software products. Like it's kind of a small market, but actually it's not. Once you think about the embedded lending opportunities either to the patients or to the doctor, as you think about the VIG on credit card payments that you're going to get, like these are massive massive spaces. So the point is that almost every company, if they have a long lived relationship with a consumer or a business, has an ability to embed financial services monetization, um, in a way that they control. And that gets two opportunities. One is it's the infrastructure layer. Like that's why we bet on something like plaid or why, you know, Marketa might be interesting or a lot of these things that allow anybody to have this financial services line, um, or a line item to the revenue lineup. And then the other is kind of just changing the way you look at companies, which is like, oh, what is mind, body? That's a boring company. Why would whoever Vista, why would they buy that? Um, well it's because there's so many additional revenue opportunities. Once you, once you turbocharge them with financial services,
Jason Zins: (30:15)
Wouldn't have thought of, uh, such a big opportunity set in the dental space. But, uh, it reminds me that I do need to go to the dentist. So thank you. But the infrastructure companies that you mentioned like plaid and Marketa and square and Stripe are really the enablers of this embedded finance concept. Um, but ultimately it's up to the companies themselves to really implement that. And even to go so far as to base their business model around it. So w where are, where do you think we are in that evolution? Is this just a buzzword that's being talked about in VC circles or fintechs that are popping up around it? Where are we in, in, you know, corporate America, whether it's fortune 500, uh, to, to early stage startups?
Alex Rampell: (31:00)
Well, I think right now the charge is being led by companies that actually have a, well, number one, you have to have a close relationship with your client or customer. If it's something that you see once a year and you think, oh, that's going to be like, um, Zynga the game company, I'm going to get people to use my bank. It's like, that's, that's probably not the right relationship, but, you know, if, if you're a QuickBooks and you're like, wait a minute, like, why don't I just offer my own insurance? Like I already know, like how much money this small business makes. Like, how do I embed insurance in there? Like, that makes a ton of sense. Um, and this is a top priority for a lot of the companies that already have a financial relationship. They just never had the tools. It's like, okay, I know I want to launch a website, but there's no AWS, well, you know, I'm sure Intuit's had this idea for a long time, but now that the building blocks are available, they're able to actually do it.
Alex Rampell: (31:51)
So I would expect companies like them to do this much more quickly. I think for ones where it's like, you know, dental practice management, um, like there was a company called synchrony, uh, which is, it's one of the biggest players and the kind of installment payments place, a space. Um, and they have, they're one of the most profitable business lines is called care credit, where they do installment payments for elective medical procedures. Um, and dental would be considered one of those as well. So things that aren't covered by insurance. So, um, they have always been the, like, they, they they've relied on like just selling into doctor's offices for a very long time. And that's how they've gotten their distribution. But, you know, one of the dangerous to them as an example is that if you have the dental practice management software that says, Hey, wait a minute, we should do this.
Alex Rampell: (32:38)
Right. Um, they're not going to, they don't even have to do it themselves. They're not like, I don't think that, um, you know, Henry Schein, the dental supplies company and their software products is going to go figure out balance sheet lending, but they can take some, they can bid out that space, white label it, and then get a big chunk of the economics. I mean, it's kind of like what you've seen with Shopify as well. Like how does Shopify make money? Well, Shopify makes money by they've just got recurring. They, they have a recurring billing model for their hundreds of thousands of small merchants, but they also make money on payments that they offer. So I think kind of V1 is always going to be like, where there's a clear financial relationship V2 is where there's like almost a clear business relationship, like dental practice manager.
Alex Rampell: (33:18)
Like I help you run your business, mind, body, I help you run your business. Uh, service Titan is like an operating system for HVAC contractors. So like, it keeps track of your jobs where you're going next, but your billings are like all of this kind of stuff. You know, it's a multi-billion dollar company. It's still private. How can they make money? Well, they own this relationship. They run the HVAC contractors business. It's trivial for them to add lending and payments now that the tools are available. But the ones that are kind of further field is it's like, should apple offer a bank? Should Google offer a bank? It's like, ah, I don't know, like if I'm apple or Google and I'm printing, you know, tens of billions of dollars a year of net income, I'm not sure if I want to mess around with this like low margin thing called financial services, versus if I'm a SAS company with a couple hundred million dollars of ARR. Um, and it turns out that by getting two points of GM of my customer is GMV. I can double or triple that number. It's almost a no brainer.
Jason Zins: (34:14)
Big tech certainly seems to have enough of their own regulatory issues. I, I don't know that they want
Alex Rampell: (34:18)
To add on the only way that it could be worse. It's like, okay, I want to do my big tech thing and censor speech. And I want to be an oil company and I want to be a bank. That's the only way that you could potentially be run more of fell of government regulation. So I think that the big guys are going to tiptoe more slowly. They're going to be more of an enabler. So, you know, if you think about where the future goes in five or 10 years, will you still get solicitations to go sign up for a credit card in us postal mail? And I think absolutely not. Um, there's probably going to be an app store for financial products, and that's going to sit on your phone. So just like, there's the app store on my iPhone where I can go download whatever app I want.
Alex Rampell: (34:58)
Well, I have my apple wallet. Like that should be not just adding stuff to my apple wallet, but it's like, oh, I want to get a capital one card. I should be able to permission my contact information. Like, just like, you know, you go and install an app on your phone and it says, do we have access? Can we have access to your photos? Can we have access to your contacts? Your location is permission, right? And you as a consumer, get to choose the permissions that you give the app. And one set of data that you have is like your social, where you live your credit history, all of that, like, you know, my vision for the future is that, and this is where I think the big tech guys are gonna play a big, uh, disproportionate place, as opposed to like trying to own the account is you're going to go to the apple wallet or the Google wallet and say, I want to add a new card to my wallet.
Alex Rampell: (35:41)
And then it's going to say, do you, do you permission your social and everything else to capital one? And I'll say yes. And then, boom, uh, I'll get decisioned on the spot. I'll either get the capital one card or I won't, it gets provisioned to my wallet. There we go. And by the way, I can do the same thing with refinance. Um, you know, most of, uh, companies like lending club, what do they do? They just go refinance credit card debt. Why can't I just add an auto refinance partner in my apple wallet doesn't mean that apple is going to be in the refinance business. That's terrible idea. But what it does mean is that you're going to unbundle this idea of a product product is credit card, right? Pay for things from the rate that I'm paying on my revolving credit line, which is, you know, happens on the backend.
Alex Rampell: (36:23)
So, you know, capital one, can't stop me from paying off my entire 18% balance right away. Um, there are lots of people that are competing to get that business, and that will probably happen within these wallets as well. So I, I think that's probably the direction that big tech will go, which is they liked it. Like there's no better, there's no better, uh, area of the market to play in and being a platform. Um, and given that the way that you're going to pay for things, which is the ultimate daily active use product, it's, you know, it's a term that we often use a lot of venture capital. It's like, do you have a DAU product? And the only one that's really there in financial services is payments. I mean, maybe gawking at your stock market portfolio might be a daily active use product, but not really at the same level worldwide as paying for things.
Alex Rampell: (37:06)
Um, so, you know, controlling that payment instrument is going to be important. That's increasingly going to be the phone. COVID also accelerated that like acts like apple pay took off Google pay took off because, you know, places stopped accepting cash and people didn't want to pay with dirty credit cards anymore. So, boom, you've got that taking off and they are the ultimate platforms for a new generation of, of, um, of companies I think. And even for the incumbents, right? It's like, you know, how much money does capital one send, spend sending out postal mail to get people to go sign up? How much money did they spend on commercials from Samuel L. Jackson asking what's in your wallet? Like that's all going to get redirected, I think, to, to mobile and being top of wallet on the digital.
Jason Zins: (37:45)
So it, this is a good, a good shift into another topic. I want to touch on which, which you've started to discuss. Um, as far as the future of payments, digital wallets, I listened to a great podcast recently that you appeared on, uh, with Patrick O'Shaughnessy is the host of invest like the best, um, uh, a great FinTech, uh, and, and related podcasts. Um, perhaps just behind Saul talks, of course. Um, but you did a great breakdown on visa and the history of visa, which I found to be fascinating. Um, you started a company that was ultimately acquired by visa, and so you spent some time there. Um, so you certainly have some, some unique insight into the future of payments. And you started to allude, um, to where we're headed. How far away do you think we are too, to fully integrating payments and wallets onto our
Alex Rampell: (38:39)
IPhones? I think we're pretty close. Um, again, had it not been for COVID, um, we'd be doing this, not as a zoom, but probably in person and zoom kind of you'll still have in-person stuff, but zooms are taking over for a lot of otherwise, you know, far away meetings that would have to be done via planes and in-person. And I think the same thing can be said, as I mentioned for, uh, digital wallets where it's really accelerated adoption. Um, but there's still like go to a gas station. Most of them, you can't pay with apple pay. So there still is this, this lagging technology thing in the U S the irony is that the kind of more emerging the market, the more emerged it is in terms of this very, very topic, like, you know, China is an emerging market from a, nobody had credit cards there 30 years ago, perspective, like they've fully emerged. Like there's no such thing as cash anymore. It's like all of these QR code based payments. So I thought it was
Jason Zins: (39:39)
Bothered me, but by the way, we, we always seem to be behind Europe. You mentioned China. Why is it the us is always behind whether it's a QR code, even the credit card chip. Is it just like a C systems?
Alex Rampell: (39:52)
Well, I think it's like, if it ain't broke, don't fix it. So it's one of these things, like if you're running on cash and cash, cash, cash, cash cash, and like, nobody has cards, nobody has cards. And now it's like, everybody gets a smartphone, then it's like, oh, wow, like what's the best thing available. And we're competing with nothing. Like you go to the best available technology at the time. It's like, you know, there are no landlines in many countries because it's like, you know, many countries didn't have landlines for dozens, if not a hundred years. And then when this mobile technology kind of came available, then like everybody just got a smartphone or even before a smartphone, I just got a cell phone. So I think you have a little element of that here, which is a lot more people here have credit cards.
Alex Rampell: (40:34)
We're kind of over penetrated relative to, I don't know, like how many people in Nigeria have a credit card. Like almost nobody. How many people in Indonesia have a credit card? Almost nobody. Uh, it's very expensive to mail out plastic and to get merchants, to go buy these terminals and all these different things. Like, what's the cheapest way of getting this out there? Well, everybody has a phone let's just use QR. It's like your credits. Aren't fundamentally better. There's nothing better about them. If anything, they're a little bit slower. It's like I have to open up my phone and like, like the, the actual, like NFC chip is probably the fastest, like that's how apple pay works. Um, so I don't think we're necessarily behind. It's just like, we don't really have an incentive to like change because it's not that hard in this country.
Alex Rampell: (41:14)
I mean, even if you're at the lower end of the income bracket, like you can go into Walmart and buy a prepaid visa card. It's not that hard. So I think that's the main reason why, but, um, but kind of looking at to, to your question of like, where things go, like, I mean, I think it's inevitable. Like there are some questions that are, if questions, there's some questions that are questions, and this is just a, when one, like, you know, will people be carrying around a dead cow wallet, which is what I call my, my actual leather wallet that has like cash in it and credit cards and whatnot in 10 years, it's like, no, will that be eight years or five? Like, I don't know. I can't tell you exactly how many, but there's no question that all this stuff goes in your phone.
Alex Rampell: (41:51)
It just makes a lot more sense. Um, it's going to, actually, I was joking with a colleague of mine, like, you know, what happens to like stick ups in robberies? Like, you know, what, what do I steal from you if all you have is your phone, right? And the phone will only unlock with like your face or your fingerprint and you have no cash, like, like what's the point of robbing people anymore. Like maybe criminals, we will have to go to like, you know, night school and study computer science and figure out how to blackmail people that way, as opposed to like, you know, sticking them up with a gun in San Francisco. So
Jason Zins: (42:20)
That's an interesting concept. I hadn't, I hadn't thought of, of, you know, mobile banking, digital wallets as a potential, uh, uh, remedy for crime,
Alex Rampell: (42:30)
But that's Korean unemployment is the way that it's gonna, it's gonna unemploy all the Roberts that it's, it's really unfortunate. So, um, for, for them not for me. So I, you know, I, I, I feel very, very confident that it's going to happen and it's already on its way to happening. The question is really more interesting for me is like, what then changes in the world when you've built that, like, who gets disrupted. And that's why I mentioned things like net interest margin, where like, if you could, uh, if you could remove all friction, like a lot of banks just rely on friction. Like, why do I have an account with like crappy bank of America? Um, this is actually true for years. It's like, so I remember this, um, I wrote a check for somebody whose bar mitzvah. They hadn't deposited like three months later.
Alex Rampell: (43:08)
I wanted to close my bank of America account. I'm not going to do that in like, have my check bounce. Like what kind of, what kind of smoke would do that? So I leave this account over there and then I've got my direct deposit from my employer going in there. And then my gym membership is withdrawing from there. So it's like kind of, there's too much friction for me to switch. But think about what happened with cell phones, where I used to have sprint. And now I've had at and T now for 20 years, maybe not 20 years, but I don't know if you remember this, but the, uh, the U S government said there has to be number portability between the cell phone carriers. So if you want to switch from sprint to Verizon, uh, sprint has to let you do that. They can't just hold on to your number.
Alex Rampell: (43:46)
Whereas before I don't know what it was probably 2004, 2005, you couldn't do that. You were locked in with the carrier and it actually incented, uh, from the carriers perspective, uh, more, more R and D and more cap ex like Verizon, like had the best network and they weren't really being rewarded for it because like sprint sprint had the worst network and the sprint customers didn't want to leave because it's like, they'd have to lose their number. When that changed. You had a massive, massive migration. Like I was a sprint customer that got the hell out of sprint. Um, and this actually did happen, like sprint really suffered because they under invested for a long time, the ones that actually over-invested and had like competent infrastructure you're, you're called and you get dropped every 10 seconds. They got an influx of customers. Like you could argue the same thing will happen.
Alex Rampell: (44:31)
Banks enabled by the mobile wallet increasing, or rather decreasing the friction from moving from one count, from one account to another. Because if you were to ask people, it's like, Hey, why don't you go switch your bank account? Like, everybody's got their version of the apartments for check and the gym payment and the Netflix membership and the blah, blah, it's just like too complicated. Um, and if you could just like wave a wand and say, oh, well, my phone will keep track of all of that. And we'll just reroute it or like, oh, I'll keep my bank of America account open. And then if there's a debit there just push the $200 in there for the bar mitzvah gift, like great, like solves that problem removes friction. And whenever you remove friction, it makes the customer experience so much better. Like it actually increases competition. And by increasing competition, that's the way that customers actually pay less and get more. And
Jason Zins: (45:19)
It seems like some of these infrastructure fintechs like a plat, um, and others are, are removing frictions through things like a direct deposit switch plan recently rolled out in beta. Um, it sounds like that innovation and the benefits to consumers are coming from the fintechs and not from the regulatory side. Where do you think regulation play plays in here, or you mentioned, uh, as it relates to telecom, um, how much is regulation hindering this innovation and what can the, the, the regulators and, and, and government do better, um, to enhance the experience for consumers?
Alex Rampell: (46:00)
Well, I think this is a very easy one. I mean, um, I think almost all regulation gets it backwards, which is the only companies that can afford the 500 lawyers that can ensure compliance with regulatory X, Y, and Z, especially when Gramm leach, Bliley is 400 pages long. And Dodd-Frank is like, you can only afford that if you're rich and you're rich, if you're an incumbent. So these regulations always help the incumbents always. And what you should want, if you're a regulator is to say, okay, how am I going to screw those fat cats at JP Morgan and Citi and chase? Well, let me just get 10,000 companies out there that are competing with them now, how do I do that? We'll make it easier for them to get a bank charter or don't threaten them with jail time. If they break some law that was passed in 1820, like, you know, create a sandbox where it actually encourages, you know, I hate to use this term.
Alex Rampell: (46:50)
Innovation is what the hell does that mean? I'm in competition. It's like, we want a thousand companies out there that are like bank of America, but aren't charging overdraft fees. And if there are a thousand that are out there, they're like bank of America that can get launched in almost no capital, um, that are FTC insured and, you know, make sure that they don't blow people's money on like Lambos and whatnot. But like, that's the kind of regulation that's good. That kind of regulation that's bad is, you know, here are the 4,000 pages of documents that you have to fill out to become a bank and show your, you know, five-year projections and all this kind of stuff that just, you know, what you're doing is you're ensuring that no new banks will get created. And if you want the banks to be more, pro-consumer like, that's going to happen naturally with competition.
Alex Rampell: (47:35)
And that's what regulation should be focused on, but everything that's done, I mean, it drives me crazy because like, if you look at GDPR in Europe, it's the most idiotic thing ever. It's like, who can afford like, okay, we hate Facebook and we hate Google. I got it. Europeans make sense to me. But like what's, you're doing is you're ensuring that there will never be competition to them because of this whole, like, you know, Facebook can afford a thousand lawyers and like startup that can go compete with them. Now that they need 5,000 lawyers to compete as well. Like there will be no such startup, like I'm not going to invest in a company in a company if they show up with their business plan and it's okay. Our first plan is to build no product, but hire 500 attorneys. Like no, like nobody's going to do that.
Alex Rampell: (48:14)
That's insane. So I think the regulation here is just very, very clear, which is like, just eliminate it as much as possible for the upstarts. Um, that's unfair for the big banks and actually like that, that has largely happened with credit cards by accident. So there's part of Dodd-Frank called the Durbin amendment, which basically said, uh, interchange for debit cards at, uh, one rate. Like the federal reserve actually gets to set it if you're a big bank. So if you have over $10 billion of assets, it's five basis points plus like 21 or 22 cents. So that's very, very little like, you know, a hundred dollars transaction and whatever bank of America is making like 20, 20 something cents, right? Like it's very, very little money. Uh, if you're a startup and you're having your card issued from a bank, like sudden bank or Celtic bank that has under $10 billion of assets, but guess what?
Alex Rampell: (49:06)
You're exempt from that. And you're making maybe 1.6%. So like the reason why chime and others, like everybody that's in FinTech land, that's issued a card, a debit card to people that's making like hundreds of millions of dollars a year on this stuff. It's all because of this like random thing called the Durbin amendment in Dodd-Frank that was never intended for this. It was meant to like, you know, um, it was because the merchants hated paying these high credit card interchange fees. It didn't change credit card interchange fees. They only changed debit card interchange fees, but it ended up helping startups, like without the Durbin amendment, it's like this random stroke of luck that enabled all of these companies like chime to, to thrive, which is great. It's like, that's another example of like how regulation helps. Although if you look at that from the merchant perspective, merchants are like, what the hell? I don't want to pay 1.6% when money's just moving from this account to another account. So it's more complicated, but you know, regulation can have a benefit for the ecosystem. But I think by far the main form of regulation that that will help this ecosystem is getting rid of, is getting rid of as much of it as possible.
Jason Zins: (50:04)
I, uh, I, I certainly agree. I think it's an interesting example with the Durbin Durbin amendment and, and shine, um, sort of the unintended consequences of regulation, but in this case, uh, arguably, uh, a positive one at least for, uh, for consumers. So we've, uh, we've run out of time. Alex. I appreciate you spending some time with us today. It's been an interesting conversation. Hopefully you'll come back and that and see us again, whether it's via zoom or at our, our, uh, our salt conference, uh, in New York in September. Um, so with that, I'll turn it back over to John and thank you
John Darcie: (50:39)
Everybody for tuning into today's salt. Talk with Alex Ram, Pell of Andreessen Horowitz. Just a reminder, if you missed any part of this talk or any of our previous salt talks, you can access them all on demand on our website@sault.org backslash talks or on our YouTube channel, which we would love for you to subscribe to it's called salt tube. Uh, we're also on social media. Twitter is where we're most active at salt conference, but we're also on LinkedIn, Instagram and Facebook as well. And please spread the word about these salt talks. We at SkyBridge are enthusiastic investors in the FinTech space and Alex, more than anyone is an expert on everything that's taking place, the massive growth that's taking place in the FinTech sector. So if he knows somebody that's interested in the space or wants to learn more about it, definitely share this talk from behalf of Jason, the entire salt team. This is John Darcie signing off from salt talks for today. We hope to see you back here again soon.