a16z Podcast - a16z Podcast: When Banking Works Like My Smartphone

Episode Date: January 29, 2016

There are fewer and fewer parts of our lives that don't feel like an extension of our smartphones. Any song you might want to hear. Any place you might want to go. And a ride to get there. All served up simply, quickly, at the right price, and with an experience that is actually enjoyable. And then there is the world of banking. Taavet Hinrikus, CEO and co-founder of money transfer company TransferWise, and a16z's Angela Strange discuss why and how banking and finance -- from paying back a friend to refinancing a mortgage -- is about to catch up to the rest of our technology-enabled lives. 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. Welcome to the A16Z podcast. I'm Michael Copeland. And we sit here with Tavit, Henrikos, CEO and co-founder of TransferWise. Tavert, welcome. Thank you, Michael. You're here for like 36 hours. These are some of your waking hours that you're here, and we really appreciate that. Also, in our humble podcast room, we have Angela Strange, who's on our deal team, Angela. Welcome. Thank you.

Happy to be here. TransferWise is a payment transfer company. You guys are based in London, engineering in Estonia. Tell us a little bit what TransferWise does, and then let's get into this whole payments world. So we are an online money transfer platform. We help people and businesses make international payments. We help them do it in a very quick. and easy way. It's a very simple service. Classically, you would have gone to a bank or Western

Union or maybe PayPal to do it, but we're just offering it in a cheaper, faster, better, and more transparent way. Right. So I owe you money, and let's be clear, I don't owe you money, but if I did owe you money, I could just transfer it via my bank account to yours. Exactly. But the catcher is only internationally. Right. So if you want to pay some money to Angela, you can probably use Venmo or something like that, which works brilliantly. Angela's nodding her head if I want to pay her money. Yes, yes, yes. I'm accepting.

But if there's another Angela who lives in another part of the world in France, for example, then if you want to pay her, then transform it is the best way of doing it. Right, right. Because international transfers are hard and expensive and conversely. Exactly. We typically do it 10 times cheaper than the bank would do it, and we do it in a pretty quick way. Right.

Well, we'll get back to that. You guys did a study about financial technology, otherwise known as FinTech, and the findings that you guys published were really pretty interesting. And I just want to start from the beginning. One of the things that you guys say in this study is that, look, the time of FinTech is upon us. We've done all this research, and everyone's, you know, they're up for it, behaviorally, we're ready for it. Why should we believe you and others this time around? So I think, first of all, I don't think anybody really cares about FinTech as such.

So if we think about kind of consumers and consumers really care about having a choice and getting a better service, whether it's fintech, whether it's fin, whether it's fin, whether it's tech, or whether it's some other busword, nobody cares about it. So it's really about giving consumers better services. So what kind of the whole premise of why I started transfer wise with my co-founder, Krista, was about being disappointed in banks as a consumer. So, you know, we got incredibly frustrated by seeing that our banks are kind of in broad daylight, charging us hidden fees, which you never tell us about, taking forever to get some money across. So I was the premise for starting transfer wise. And, you know, when we launched in 2011, five years ago now, you know, we were kind of, you know, the question was, you know, will people trust us? Will people trust the website, which was built by two Estonian guys with their money? So, you know, apparently, so we're willing to trust us and, you know, we're doing quite well at this point.

And now we've kind of, you know, we've started thinking about the kind of overall future of finance and how, you know, how we are seeing that tech companies are doing a much better job at providing financial services compared to banks. And that's what the study really focuses on, seeing that people are willing to trust and use tech companies to do things with their money. Let me back up a little bit. When you say you were disappointed in what your banks offered, was that relative to other banks? Banks or relative to other parts of your life? Relative to other parts of the life. So, you know, consumers have come to expect that everything works away, Skype works, away Uber works. You know, you basically get what you want, you get it now, you know how much you pay for it, you know how quickly it's going to arrive.

But banks, you know, aren't quite set up to work that way. So it's really the difference is in consumer expectations. In a number of industries, whether it's media, telecom, transportation, we've got to. the news to this much better new user experience, but in banking, things haven't really changed. One of the things you talk a lot about in the report and is a real driving point at transfer-wise is the lack of transparency around the cost. And you look at banks, you have your checking account, you have your lending, and some of the fees are transparent, but interestingly, checking accounts, which are advertised as free, account for its $8 billion of costs, and that's just in the UK.

Do you think that there's an element of consumers just not realizing these costs, and if they did realize the cost, then they'd be more willing to switch? And I think along those lines, one of the interesting things you've done at TransferWise, which made a lot of buzz last year, was your entire team stripped off their clothes and got naked in front of a bank with nothing to hide tattoos across your front. And is that, like, is bringing the cost issue to the transparency? is that going to help really motivate this future of finance? And that's why now. For the record, I have to say Tavut is fully clothed at the moment. But you can just go to TransferWise blog if you want to see otherwise. I actually do believe that if people knew how much they're paying for their basic banking service,

I do believe they would think twice about it. So one other figure that I've heard is that every customer who believes they have free banking in the UK ends up paying around two, three hundred pounds in fees every year to the bank. So if people knew they're paying two, three hundred, pounds in hidden fees, they would think twice about it because that's a very noticeable amount of money. But banks are doing all they can to make sure we don't really understand what happens. Part of it is driven by greed on bank side. Part of it is just driven by inefficiency. Banks have kind of gotten used to this world where, you know, say, can have lavish office

buildings and the branch network and all this jazz, which doesn't really matter anymore. Banks, I mean, banks, it seems like we were discussing this a little bit, are a vestige of a much earlier time where things were local and regional and you did need this physical manifestation of your trust and safety and solidity but what do you need now and what are people

looking for and on top of that you talk about trust behaviorally why are we do you think we're there or at least a good percentage of the population is there? I think people are now much more willing to trust

a recommendation from a friend so if I look at how transroid has been growing and most of our growth is coming from word and mouse referrals. So hearing from your friend said, hey, you know, I was paying, I was sending some money over to Germany. It got there in a moment and I saved a bunch of money in fees is way more powerful than seeing a ridiculous bank ad in the newspaper. Right. So, you know, thinking about the social proof, all of these things, which are

much more powerful when compared to the official voice from the entity. And I think it's kind of, you know, banks as an institution have sadly lost a lot of the trust. And much of it goes back to the global financial crisis kind of in 2007 and eight. So I think that's kind of like, you know, I would even say that in a way, banks kind of flushed themselves with the financial crisis, which was literally brought on by their own greed. I'm going to talk a little more about trust. And one of the things you mentioned a lot in your report is how there was just this inherent trust in banks. and that's been somewhat broken in 2008. But then interestingly, when you talk to your customers,

it's a wide range. 20% really trust the banks, 30% really don't trust the banks, everything in between. And then you look at the stats of why people are the early adopters, at least looking for new services. Two-thirds of them say it's actually cost. So do you think in some ways to be a bit controversial, is this whole trust, is it overplayed,

and it's really more cost, it's convenience, It's what my friends are using. Like, how much is trust really at the base of all this new banking activity? I think trust and security are a little bit, the kind of the given thing. So, you know, when you talk about, you know, in different sectors, it works differently.

I would, that's my guess, you know. If we're talking about online photo sharing service, you know, we might worry about trust, but it's probably much less important. But if we're talking about people using a financial service with significant amounts of money, so, you know, it's average. transaction size is $2,000 on transfer-wise.

So that's an noticeable amount of money. And if you don't trust the company, you would not use it to whatever costs they offer. So I think kind of trust and security come as a first layer. It has to be, it's a given that it's there. You know, if you don't have that, then none of the other things matter. And at the same time, I would say, you know, if we say that 30% of people don't trust banks, that's a huge number. It's 30% of the population.

So obviously, there are lots of people, you know, maybe it's people who, who are slightly older than we are, you know, who've grown up with banks, who are not so much early adopters, and, you know, they might not trust the banking system as they will trust their bank, because that's my bank. That's for my money. So, but, you know, to get these people to change, that can't take a while, but 30% is super significant. Do you know whether that 30% has ever changed over time? I mean, is it, you know, less people trust banks, you know, at this point in history than ever before or, you know, there was always this cartoonish figure of a banker who didn't necessarily. necessarily look so trustworthy for centuries, right? So it is the first time we've done this research. So I can't, you know, I don't have figures from, from us to provide, but I would be surprised if we can't find anything which shows that trust has been eroding in the past years much more rapidly.

I would be very, very surprised if we can't find any proof of that. There's definitely a lot around the millennial generation and how they hate going to their banks more than they hate going to the dentist. They would actually trust Apple, Google, name your tech institute more than banks. It's definitely, definitely been declining. I was just surprised to see a new report how high those other factors were also. But we can consider trust security as table stakes. And then I have my mindset that says, great, I can open an app on my phone and get any kind of cuisine delivered to me within 10 seconds. I can get a car. I can take world-class education online in the space of no time. But if I want to open it, if I want to get a major loan, I'm still going to have to drive to my bank and develop a relationship and fill out all of this paperwork. I think what you're saying, too, with transfer-wise,

is that it's user expectations is what's going to, like, augment and really drive the success of companies like yours. Very true. Will banking ever become more than a utility? I mean, you mentioned the dentist and we go to the dentist because we kind of have to. We go to the bank because I don't shove my money under my mattress, and it offers me some services, but, you know, they're mostly undifferentiated and you shop on price. But do you think this new fintech push or the push of tech companies will make banking less of a utility and more of something that I can wake up and be excited about or engage with on a more regular basis? That's a fantastic question.

Will fintech make banking sexy? I didn't say sexy exactly. I like the refraisal. You know, to be honest, inherently, I tell you that banking is incredibly boring. And banking should actually be a background service. There's nothing exciting about banking. You know, what we all care about is we care about the stuff we can get with our money.

So if we think about the mortgage, you know, we don't care about the mortgage. We care about that house we're buying. So a mortgage which just happens there. And, you know, if the world was set up in a way that I would automatically get the best mortgage, which, you know, kind of suits me and is affordable for me, it would be no big deal. So I think, you know, actually, there's less visible banking geese better, but I guess sadly has not the way the world works. So I do think, you know, probably banks and financial services will have a visible place. Probably also has to do with trust reasons a little bit. But, you know,

kind of, I do think I should, you know, rather focus on being as less intrusive as possible and, you know, kind of focus on us as consumers getting the service we want. Banking is a facility that we should be kind of very transparent and non-intrusive in the way. I think there is an opportunity for a new, big, beloved banking brand, if done in the right way. We were talking about this before. I don't, nobody wakes up in the morning saying, great, I would really love a new place to park my deposits. But there's times in your life we've been terming internally as inflection points for things like I have $100,000 in student loans and I really need a lower rate or I need a mortgage or I need a name your other financial services products. And if a new user-friendly, super easy to use fintech company could be there at that time, then that company could have an opportunity to develop a relationship with me. And as I'm starting to think, so far, is the classic case of this.

If they come in, they refinance your student loans, they treat it really easily, and then now they're layering on mortgages. And you can imagine layering on different types of products to the point where I have a more frequent and maybe not sexy, but at least more positive relationship with this company. TransferWise has amazing user trust in reviews. And how do you think about brand for TransferWise and your ability to develop that? Or are you thinking you want to stay in the background? We put a lot of effort in building up our brand and building up trust.

So, you know, I totally believe it's important. And for us to be the trusted and beloved brand that puts consumers first globally is incredibly important. But really, you know, brand as someone smart said, brand is a collection of all interactions you have with a company. So however nice our logo looks, however funky is a good. colors are, we use. I don't think that really matters. So what matters is that we're providing a service and experience a customer gets, leaves them thinking, hmm, this company is doing something right. Just to kind of go back to your previous point. So I spent a large chunk of my life building up another company called Skype. And Skype today is, I don't know, 12 years old maybe,

but Skype owns 40% of long distance calling. That's a pretty significant achievement for a piece of software we built in the kind of outskirts of a Soviet city in some time ago. I firmly believe that we're going to see something similar in banking. We'll see tech companies own 30, 40%

of banking in 10 years' time. And that's going to be vertical winners like TransferWise, like Lending Club and Funding Circle, like Betterment, Wells Front Nutmeg, in asset management. So it'll be vertical winners that we

some of them which exist today some of them haven't been started it'll be probably the tech companies of today Apple with Apple Pay

already eating into Tsar I'm sure people at Google or alphabet they're thinking about I think F is still not taken in alphabet so I'm sure we'll see the current tech giants

think about it and a bunch of new winners and send in 10 years time we'll have a world where a bunch of tech players is acting as equals with a bunch of the remaining financial players and banks

and some of the banks won't make it because going through digital transformation is going to be too hard for them and some of them will adjust in a fantastic way will the tech players be banks I mean you know sort of in a technical sense or is you know

do they have to be what are in fact for transfer wise what were you up against in that regard what is a bank I actually don't think we know what does it mean to be a bank in 10 years time. Yes, there is a technical part of owning a banking charter.

That's one thing. A banking charter is really good for one thing. It's for holding deposits. And that's actually the only thing that banks are still great that's for holding people's money. A bank as a collection of services to deal with money is a different thing. But I think the meaning of that is going to change. We'll see people cherry-picking services by using transfer-wise for money transfer

and lending club for lending and so-fi for student loans. We'll probably see new universal banks come up and establish themselves. We'll see all kinds of partnerships. Universal bank meaning what, that they cover the broad variety of services? City Bank, Wells Fargo, offer you everything from a very bad money transfer to credit cards. To an expensive credit card, yeah. But wait, what about the new, I'm curious how you think the new universal banks will come about. Will it be somebody gets a new banking charter, they start with deposits, they build on stuff,

or will it be someone builds a killer money transfer service, develops trust with the consumer, and then starts to. And then, hey, by the way, you might want to consider, you know, keeping your money with us. Yeah. We'll probably see both ways. You know, so today would be really cool if we take transfer wise and we take in the UK Fund. circle and someone else and, you know, we could actually, you know, put the new skin on top of the services and offer universal banking. It would be super cool to do. And maybe, you know, we could do it together with somebody who owns a banking charter, or we could establish

a new banking charter for it and put together all the fintech companies who actually offer the services. I think we'll see various combinations. Also, regulation plays an important role here. So different things will work in different countries based on regulation, based on who tried first and who fucked up and failed. As well, sadly have an impact. But I'm pretty sure we'll see all combinations being tried. What we don't know is kind of where do we end up globally? Is it 10% cherry picking or is it 10% universal banking? You know, it's going to be somewhere in between. You mentioned other countries. Are there, you know, we sit here in Menlo Park in somewhat backwards United States, at least in terms of

financial services. Are there other parts of the world that, you know, we can kind of look forward to what they have already while we sit here in California and banked the way we've banked for decades. Well, I listed here in Happy Will. Yeah, definitely, I do think the world is moving faster in other places. So I think, you know, FinTech probably has more kind of traction and more companies in UK. But, and I think that, you know, and regulation is slightly better in UK as well.

So I think that will be a little bit ahead of U.S., but, you know, We already mentioned so far, which is, I think, pretty exciting over in the U.S. But I think we might see even more change in some of the emerging markets. So what happens in China or India or Africa, I think could actually be, you know, even more chains, you know. Kind of like, you know, in a way that say we'll jump over the old Internet and go purely mobile. And the ways that will deliver services is probably going to be much more exciting than change is happening in. in UK or US. But, you know, inevitably, UK and US and old Europe will all change as well.

We'll get there at some point, yeah. We've talked a little bit of sort of generational views on this, but do you feel like, let's say we're five years down the road, does the what we want as people with money to invest or to keep or to use change, you know, the older we get? And do you think, you know, fintech is great for millennials, but when the millennials, you know, get a little bit old or maybe they'll be just like their parents.

I think the world will be a pretty exciting place where millennials take power globally. I think it's a complicated one to answer. If we look at the research

and one of the things which was so much surprising to us was that the views don't differ that much based on age. If we think about banking services

there are probably different kinds of services you need in different and the phases of your life. So I'm not sure that age is actually a very good or very helpful predictor in this place. It may be more about attitude and kind of attitudes around trust and stuff like that, which might be kind of a better leading indicator of change. And attitude is about using technology for certain things too, right?

I mean, at some point it's just the norm. That's how I grew up and that's what I do. So why can't everything be like this? Totally. And I'd say I'm kind of, you know, one thing looking at our research. But I'm also surprised, you know, if I look at my parents who are approaching 70 right now and they did not grow up with computers. You know, we didn't, you know, back in the Soviet Union, we didn't even have TV remote control.

So I was kind of afraid when we got a TV with remote controls, I was bloody hell, how are they going to learn to use a remote control? Yeah. But guess what? They are using a computer. They're both working. They're both using a computer every day. We have Skype calls weekly and, you know, they've become adopters of technology.

Yes, you know, they occasionally struggle with a computer. But, you know, so do many people. So I think it's more kind of about, yeah, some, and I wouldn't call my parents early adopters by any mean. But, you know, everybody will be an adopter. Right. How much do you see the emergence of new services like transfer-wise and new lending service? services, really driving some of the larger banks to more quickly adapt their products. There's a lot of talk around it.

Like, for instance, there's an interesting stat from your report that consumer to consumer payments, so you know, you paying Michael cross-border, on average, gets charged 8% in fees. And if you look at worldwide, consumer payments are 8%, but the total volume is less than 1%. So there's just a complete mismatch in terms of how much fees are getting charged to consumers. And right now, transfer-wise, it's growing very quickly and all the other services are fairly small, so there's not that much competitive pressure. But at what point does the new fintech ecosystem get large enough such that the larger bank start reacting more quickly? I think it's happening, and it's happening now.

So we have 5% market share in UK. And I think it's kind of hard to find other examples of companies having reached 5% share in any given geography. So we're pretty proud of that, but, you know, by no means are we stopping there. So, you know, we're thinking about how do we double and triple into UK and how do we do the same in money transfer in other countries. And I think, you know, if we look at maybe Lending Club, you know, there's probably not at 5% yet. But if we think about kind of overall lending market, I think, you know, probably is ballpark of a percent, which is being done by per different lenders, you know. But if you add up, it's a huge amount of volume. We can definitely say that banks have gotten the message.

So what was surprising to me, I was at a very funny event last week in Davos. And what struck me is that every bank called themselves a tech company. So we're all in FinTech now, including Western Union is FinTech. It's sexier to be fintech. So I've gotten the memo the challenge is for them to go through a digital transformation to kind of rebuild their systems to change the attitude is an incredibly painful process. Some banks have been on the way doing it for the past five years. But that's like you can kind of count that on one hand. Others are just starting.

And it's going to take some a while. And, you know, most of the managers will say, ah, you know, I'm here for two more years and nothing's going to happen in two years. So I won't focus on it. So it's just going to be hard. But I think they are starting to see it and starting to feel it. I agree. We host a lot of the management teams from many of the financial services institutions here and filled with incredibly smart, smart people that see the change coming, want to adopt. you have a 50,000 person organization with branches across the country and systems that are built in computer languages that aren't really taught anymore.

So you can have that desire, but then when you get down to practically, how do you move quickly, it can be pretty difficult. One of the things we've seen them going after is saying, well, consumer experience is really important. And so it might take us a while to completely re-architect our back end. But could we partner with a startup and hook into the key system? such that that startup can provide the nice, easy-to-use, front-end mobile interface that gives us a better face to the consumers without requiring five years to overhaul this. Do you see that maybe that's a way the industry will play out in the future? So sadly, in case of many of the services, you know, purely by putting on a little bit of makeup

and a better front-end, you can't really offer a fundamentally better service. So you do need lots of kind of, let's say, you know, as a popular. world is full stack you know you need to control the whole the full stack to be able to offer a better service so but at the same time we will we will see lots of these partnerships I mean we launched a first partnership with a bank where you go in the bank's online bank and there's a transfer voice button so you know we're super happy to talk to any bank about it you know

the only thing we ask is that you guys need to be transparent to your customers and you can't charge them as much as you used to charge so if you're happy to subscribe to that and yeah We're here to offer the best mine transfer service to your customers. Do you foresee a day in the next five years or soon where you don't ever walk into a bank and it's just all, it's on my, it's an app on a phone and you go from there unless you really want to or need to. Michael, when was the last time you walked into a bank? Good question. Ten years ago. Yeah, it's been a long time. And Angela, you? About that.

So I think that the world is here. Yeah. Kind of, you know, probably the same for me. You know, I've, let me think, when was the last time I had to go to a bank opening up a new account? Yeah. With Bartlett in UK, but, you know, to be honest, it feels like a very poor reason to go visit the bank. Why do I have to go visit them to open up an account? You know, I have a smartphone which has a high-resolution camera, you know, in my pocket.

I should be able to use that to open up an account. You probably already have a toaster, so you don't need a new one from the bank. So, yeah. And you know what? I actually had to go the other week to deposit a check in Canadian dollars. Oh, my God. Which I was pissed about. Wow.

Yeah, but, you know, let's call his fringe cases. There are a fringe case. There we go. We will bring transverse to Canada very soon, so maybe, you know, you don't have to deposit your checks anymore. Excellent. When? Date.

Soon. Canada, you have so much to look forward to. Tabit, I want to thank you so much. And Angela, you too. I have to say, you know, I hope it's the case that I don't wake up, you know, joyful to do some banking every day, but it seems like it'll be a less cumbersome part of my day going forward. And I thank you for that. Maybe an exciting part of your day. Yes, yes, let's hope. Thank you. It's been fun.