a16z Podcast - a16z Podcast: Fintech for the People

Episode Date: December 19, 2017

New fintech companies are democratizing access to financial services in different ways, whether it's making food stamps more efficient, no longer waiting two weeks for a paycheck, or enabling anyone with a smartphone in developing countries to create small businesses. But what these all have in common -- besides a more inclusive approach to finance -- is also changing, in some way, the fundamental way our financial system works. Featuring CEO of Propel Jimmy Chen, CEO of Branch Matt Flannery, and CEO of Earnin Ram Palaniappan, in conversation with a16z partner Angela Strange, this episode of the a16z Podcast is based on a discussion that took place at a16z's annual Summit in November 2017. Financial innovation can come in unexpected ways from unexpected places -- but what does that mean for established players? For the future of fintech overall? The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, and welcome to the A16Z podcast. This episode of the podcast is all about new fintech companies that are democratizing access to financial services in different ways, whether it's no longer waiting. two weeks for a paycheck, making food stamps more efficient, or enabling anyone with a smartphone to create a small business. Moderated by Angela Strange partner at Andreessen Horowitz, the conversation includes Jimmy Chen, CEO of Propel, Matt Flannery, co-founder and CEO of Branch, and Ram Palaniapen, CEO of Ernan, and is all about what those kinds of new fintech companies have in common, besides a more inclusive approach to finance. How is innovation coming in unexpected ways from unexpected places, and what does this mean for the future of financial services as well as established players?

One of the most staggering statistics is that almost 50% of Americans don't even have $400 in savings. Now, the underbanked space, less-serve space, has been traditionally dominated by nonprofits and ignored by VCs. That in huge part is because building a business here is really difficult for all the reasons that you might expect. Customer acquisition is really challenging. Once you have your customers, it's very hard to risk. score them. We're joined by three companies today that are building some of the new financial services companies in the future. So, Rom, Matt, Jimmy, thank you for being here. One of our premises is that there hasn't been that many great for-profit models here. And so, Ron, we're going

to start with the genesis of the idea and how you came up with the new business models that you're approaching this space. I was running another company, also in the payment space in Cincinnati, and I noticed that some of my employees, particularly the ones in the call center, were getting lots of overdraft fees and short-term loans. And it didn't make any sense to me because I was paying everybody well, and I didn't think that they had to go to those clearly bad financial products. And so when I spoke with one of my employees, she said the issue wasn't how much we were paying her, the issue she needed money then. And we would pay her only the next Friday, which is how our payroll system ran. And so I'd order a check from my account, which is, I think, what millions of

small business owners do. And then on payday, she paid me back. And I did that because I hoarded money for the work that she had already done. If she could, I would have actually pay her that day, but because she wasn't quitting, she'd have to wait until the next Friday to get paid. And so this went out for several years. We sold most of the company and moved out from Cincinnati to the Bay Area. And I had all of my employees on its messenger. And so they weren't enough. I'd still do this for them. And I didn't mind doing it. I knew how to move money. But I also needed to know if they were working or not because I wasn't part of the company. So I just had to give me the username and her username and password to the time and attendance

system. And then if she wanted money, she would message me. I would log in as her and see if she had earned as much as she wanted. And if she had that money, then I would push it out to her and then pull it back on next payday. And so this went on for a little bit, and every time she won money, she'd message me. But if I went out to see someone, I come back on this really long list of messages, and I'd have to, like, read through her entire day's story to figure out how much she wanted. And so I was like, this shit's not going to work. So I built a really simple web form and said, if you want money, just go fill out that form. And then once I had that web page out, there were people who I didn't know would try to use it. So I said,

okay, this is more interesting. Let me see if I can do it for people who I don't know. So I had them give me access to their employer's time attendance system, and I could do the same thing for them. And I realized what I was doing was essentially what the payroll system does, is it looks at how much you've worked, calculates what your take-home pay is, and then pushes that into your bank account. But instead of doing that in a batch for everybody, I was doing it for each employee when they wanted it. And when I did this, they were paying all their bills on time, no more overdraft fees, no more payday loans, like their life was much, much simpler, just giving them access to the pay that they had already earned. And so that's kind of how

this started. Today we do it in a far more automated way for employees from over 25,000 companies. So you're using a little bit more than a spreadsheet probably. Yeah. Excellent. Now Matt founded a nonprofit that you've probably heard of called Kiva, which used to do microloans in Kenya. So maybe you could talk about the opportunity that you saw moving into the for-profit space and how that's different. So my story goes back right after I graduated from college in the early 2000s. I was a Java developer at TiVo, and I was really restless with that and had a lot of ideas. And so I ended up traveling all over Africa and getting really interested in entrepreneurship there and volunteering at various NGOs, making videos of borrowers who were, you know,

using a $500 loan to start a restaurant or get supplies for a pharmacy or things like this. And being an internet person, I eventually made a website for this. Sort of like Rom Story started lending to these people in Uganda, Kenya, Tanzania. over my own website and getting the money to Africa via wiring money back and forth with an NGO. And, you know, really got into this. And in about 2005, all of a sudden it got really popular. And we were on TV and we were on Oprah and we got a lot of press. And so we eventually expanded that system called Kiva to about 80 countries. We lent over a billion dollars to low-income people in rural places that way. But along the way, I got really interested in the business

of microfinance and what is good about it and what is not. And I realized that a lot of the people I was working with had mobile phones and digital money and you could lend money directly to them without going through an NGO in Kenya or India or wherever. So I kind of got obsessed with this idea of lending to someone's phone and eventually left and started this new company called Branch was essentially doing artificial intelligence-based lending to people on their phones. Right now we work in Nigeria, Kenya and Tanzania. and we're about to launch in India. Okay, Jimmy, some of the stats I used in food stamps, as it's better known,

$70 billion a year and one out of seven families. So you think of large markets, you would think that there'd be lots of entrepreneurs flooding into this space that hasn't been the case. So I grew up in a loving and supportive household that also had trouble putting food on the table. I ended up getting a full-ride scholarship to Stanford where I studied CS and cognitive science

and then ultimately landed at Facebook as a product manager. In 2014, I left Facebook looking to apply the skills, of Silicon Valley Tech to solve some of the social challenges that I cared really deeply about. And so moved out to Brooklyn to join a nonprofit to do a fellowship program. Through that program started to learn about the food stamp program. And so as Angela said, it's a massive program that touches about one in seven families throughout the United States, but the user experience of it coming from Facebook and thinking about things from the point of view of what we expect from these modern software companies seems just

totally out of whack. We learned about the program by applying for food stamps ourselves. And so my team and I went to the food stamp office in Brooklyn to apply. And one of the things that was really striking about that is that you go to that line, you see hundreds of people standing in line to talk to a human caseworker and fill out a paper form, and the majority of people are passing the time and have a smartphone in their hands. So the problem is not a hardware one, it's kind of a software one here. The other thing that we realize is that once you get through that line of applying for food stamps,

you get the benefits on an EBT card. People who have their benefits on an EBT card have to call a 1-800 number to go check their balance, and then are expected to manage how they spend that balance over the next 30-day period. There are lots of challenges where lots of families run out of benefits around week two or week three of each month, and then spend the next two to three weeks of the month using food pantries, trying to borrow money from friends and family. And so we think that there's an opportunity here to apply a lot of the techniques used in modern consumer software and modern financial services to this population.

So our core app is called FreshEBT. Works kind of like a mobile banking app for somebody who's on food stamps that helps them to manage their EBT benefits. But we really use that as a hook towards broader financial health by introducing our users to the types of products that help them to save money, to build assets, to find savings on groceries, and so on. I teed up a couple of the core challenges, risk scoring. I want to dive in there. 90 million Americans are mispriced. A lot of customers have no credit score at all. One of the big challenges of entering this space. Rom, how do you decide who to lend money to, especially if you've never seen them before? If you don't have a credit

score, what other data can you pull in that's going to give you a good indication of who to lend to? So ours is very simple. We don't say no. If you work, you get your pay. We don't do any of the decisions. We don't ask for social security number. Don't ask for your phone number. Don't ask for your home address. If you work, you get paid. We make sure that they're actually working, and we calculate how much they've earned. We'll also look at their bank accounts so we can calculate what is the rate at which they earn money. So if they work for eight hours, we know how much that is in dollar terms. And so we pull all of that data to construct how much somebody is earned. and once you've earned it, we let you take it out.

And so all that you have to do as an employee is give us access to the pieces of data that we need to show that you've worked. And so as long as we can see that you've worked, then we'll let you take out money. Matt, if you're not going to link to their bank account, you need to come up with a variety of different signals. And one of the core challenges if you talk to a lot of the lending companies in the U.S. is they'll run machine learning algorithms over all of your data. And then let's say, for instance, I decide that I don't want to lend to this front row right here. But the front row all has purple hair, and purple hair is a protected class. Now all of a sudden, I'm running a foul of a regulation of the U.S. called disparate impact.

And although I might not actually be discriminating, it's going to come out that way. And so there's a lot of techniques that have been harder to use in the U.S. Matt would not be able to do if you're in the U.S., and do you think that's helpful to consumers? In lending in the U.S., there are great laws that protect people from being discriminated against in that process based on the race, gender, protected. properties like that. But alternative data sets like the data you can get on someone's mobile phone can be extremely helpful in making more and more rational decisions about just how much money to lend to somebody at what price. What's something that you're doing specifically that you think would be harder to pour it over to the U.S.? I think the main thing in the U.S. is when you make a loan,

you have to have a defensible line of reasoning for that that's easily explainable to a regulator. Whereas when you're using deep learning or artificial intelligence, different methods of machine learning, it's really hard to articulate exactly why someone got exactly this loan. And robots would be much better at making that decision than people. In the end, it's a very mathematical decision that's multidimensional. And so you can't really explain to the state of California why exactly this person got this loan or why this person exactly got rejected because it's just a deep learning network that makes that decision.

Jamie, I want to flip over to consumer acquisition. And we have this expression that we use a lot, which is the battle between the incumbent and the startup, is whether the incumbent can get innovation before the startup gets distribution. And this applies to any industry, but especially financial services, consumer acquisition is very, very difficult.

Talk about how you've managed to scale and grow fairly difficult to acquire a customer. Yeah, I think our lens on that problem is a little bit, it's kind of odd, because the incumbent, in this case, is actually a partner of ours, in this sense that it is a government program that we're providing a skin on top of.

So we're not trying to displace the incumbent necessarily. We're trying to augment the service that the incumbent offers, because we think there's a lot more to gain from the consumers' point of view. We bring a lens of consumer software that's kind of intuitive in Silicon Valley, but far from intuitive when you talk to state governments,

and we talk to federal governments and the folks who run programs like the food stamp program. And so what we try to do is kind of blend both. We try to blend the best of the food stamp program with kind of the philosophies around how you can make something that people really want and that solves a real consumer need and then bring that to the market at scale.

We try all different types of acquisition strategies, but the most important of them is word of mouth. So we have a million monthly active users across the country now, who use fresh EBT at least once a month. These are all families that are on food stamps. About 60% of them found the app through some friend or family member telling them that this is something that they should try. We think that's the core kind of core signal that we're solving a problem that real people have, that they're willing to promote us to their friends and family. And how do you get over, you know, like many other early fintech

companies, consumers are generally skeptical of the banking services in general. How do you think about getting over that hurdle or what have you encountered? Solve a real pain point for people. We started with a very niche pain point of, it's hard to check my balance on my EBT card. I've got to call this phone hotline. It takes a couple minutes, and it's like, it's not the worst thing, but it's kind of annoying. If we can take that to a three-second thing that you can check on your smartphone, the same way that you would check your card balance for your Chase Debit card, we think that that kind of is enough to get somebody to engage in the product,

and then our opportunity is to use that entryway to create real value for people who are lower income. Rom, have you found consumer trust to be a hurdle in the growth of Vernon? Yeah. Yeah. I mean, so our product, when people hear about it the first time, it's you can get your pay whenever you want. And we don't charge any fees or interest, so we let the users just pay whatever they would like to pay. So it's get your pay whenever you want and pay whatever you'd like for the service. They're super skeptical of it. They're like, this sounds too good to be true, should be a scam.

Yep. But reality is, like, what they're used to overdraft fees and payday loans, like those are too bad to be part of our future. And so we're not going to compromise the product because it's much better than what people expect it. I think as they see others using it, there's much more acceptance of it. and then they completely hate the other products that were always taking advantage of them. And so how do you get over that hump, though? Is it word of mouth? So from the way we get customer acquisition, word of mouth is very big.

There's also a really strong community aspect to the product because we let users pay whatever they think is fair. Very often users will cover the cost for another user. And so if I go in and I offered a tip more on the app, it'll show me that I'm covering the transaction cost for another user. And as soon as the other user comes and it's going to say, I'm already paid for you. but I'm already covered the cost of your transaction. And then that person can send me back a thank you message.

And so every day there's thousands of thank you messages going up and down between our users. On the acquisition side, too, we actually put it back in the community. So if you got one of your friends to use the product, we're going to say Angela got one of our friends to use the product. And people from the community can actually thank Angela with money. And so even our acquisition is funded by the community. Yeah, so creating this element of social proof to help bootstrap new brands to come up. So I want to talk a little bit about the future in how you guys see this playing out. There's lots of nonprofits trying to help this space.

And now starting to be more smart entrepreneurs coming in and creating new business models. Do you think, like, is this a fundamental shift we're seeing where it's expensive to be poor is not going to be the case, kind of 10 years from now? And if so, like what needs to happen? Yeah, I'll just say some things that are really obvious to me, probably obvious to every mood, but really important. First of all, we have this whole emerging market, which is great. growing and a very young group of people, and everyone's getting on smartphones, and it's going to be

really hard to buy a feature phone in the coming years. At the same time, most of these people are going to have access to some sort of digital wallet or digital bank account, yet there's no credit card infrastructure, no credit bureaus, or traditional infrastructure to build out a lending layer on top of that. So credit cards just aren't going to spread. You know, the middle class of India is not going to have plastic credit cards, and Nigerians are not going to have Visa cards or master cards anytime soon, because there's nowhere to swipe them, and people can't get credit scores. So it's going to be through apps, and so the credit card of the rest of the world is going to be an app. It's really obvious, and plastic cards are not going to get there.

So there's just a huge opportunity to layer on other services on top of the credit. So we're just using credit to acquire millions of users, and then hopefully you can add to the things like payments, savings products, money transmission, remittances, etc. Yeah. So new platforms is a way to accelerate it. What do you think is going to be, like, are we at an inflection point that we're going to start to see more business models in and around your space? I think we're getting there. I think that the problem is not going to solve itself. And I also think charity alone is not going to be the solution to solving the financial needs of low-income Americans.

I think charity certainly has a role to play that role. But I think for-profit companies can play a really unique role in this space of helping low-income Americans just understand different opportunities for how they can improve their own financial health. I also think it requires us to be a little bit more creative. requires us to think of different models of business and how to generate revenue such that it doesn't pollute the goals of what we're trying to build. So, Ron, we've tackled payroll,

which has been incredibly rigid since the beginning of time. You see that these sort of sticky, resistant to change models are eventually going to get pressured into new models. So, first of all, I wouldn't say that payroll has been rigid

since the beginning of time. I think the concept of this rigid paycheck is only a few centuries old. I mean, till a few centuries ago, people were actually paid every day. As a society, we did not accept, that people could go home without their pay. There's references to this in the Bible

where you're required to pay employees before sunset. Clearly, employees would rather get paid before they worked and companies would rather pay the employees after they worked. And the fact that all companies today pay employees after they work just shows you where the balance of power is that is so skewed towards the companies away from the individual, but it wasn't always like that. There's different categories of incumbents,

and each one of them have got institutionalized and have got things that keep them in place. Like, you could look at it. at banks, and banks have so many advantages, they have access to payment networks. As a startup, you can't get into payment networks. They have access to capital. As a startup, we really can't take deposits. So they got really low-cost capital. They've got privileged access to regulation where they can get a chart and they can do all these things, where we have to go get licensed for these things one by one. So there's like a huge hurdle for us. Even if you just look at the

whole concept of like pay cycles, that's been institutionalized as well, because lots of your overtime calculations are actually on a weekly basis or two weekly basis. That makes it a little bit more complicated now for you to do daily payroll because we built these laws after we were used to getting two-week pay cycles. And so the payroll companies that are used to doing all the compliance are used to calculating overtime on a weekly or a two-weekly, whatever it is for that particular state. So lots of these things, I think, are institutionalized. For sure, we'll all try to do what's right for the customer and see if the incumbents either do the same thing or if they try to stand the way. We'll see the reaction. Excellent. I want to thank Ram, Matt, and Jimmy for joining us.

being here.