Tech Brew Ride Home - (Bonus) A16Z's Angela Strange On Why Every Company Will Be a Fintech Company

Episode Date: February 1, 2020

This is the promised interview with Angela Strange from Andreessen Horowitz. I told you about it on the weekend longreads segment yesterday, so no more need to explain it: let’s talk about why soon, every company could be a Fintech company. Sponsor: Tinycapital.com Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the TechMeme Right Home. I'm Brian McCullough. This is the promised interview with Angela Strange from Andreessen Horowitz. I told you about it on the weekend Longreed segment yesterday. So really no more need to explain it. Let's talk about why soon every company could be a fintech company.

Angela, the whole reason that I wanted to talk about this is because I did a segment. on the show, I don't know, maybe a month ago. It was like, the story was something along the lines of, like, Google getting into banking or something like that. And I said something snarky, like, oh, the big tech companies, they always have to be in every business. So the reason that your thing blew my mind was that actually, so your thesis is that the landscape and the technology is such, and it's changing enough that essentially soon any company could get into financial services? Exactly. And I think it's right now it's the ones that are with deeper pockets that are more well-known that are making the headlines, but there's a lot of companies that already derive

a lot of their revenue from financial services that might surprise you. Yeah, we're going to get into that in a second. But my first real quick question is, is what you're describing different from the fintech revolution that we've been hearing about for years, or is it a continuation of it, or what? Oration of it. And often it's, and so here's why. Like, as an investor, you always have the why now question. And point one, and this is, this is old news, but I think it's very much the frog and boiling water analogy,

is that consumers really don't love the existing financial institution. And depending on who you talk to, you will get a very different story. Like if you pick your middle class 40-something that banks at Wells Fargo, they might not love their bank, but they're not actively looking for a replacement. If you talk to millennials, Gen Z, anyone who went to the financial crisis, watch their parents go through the financial crisis, there's a lot of stops thrown around, but one is 28% trust their banks to be fair and honest. does not provide me delightful products, make my life better, it's just baseline, don't treat me,

don't treat me poorly. So there's a strong, strong demand to get financial services pretty much anywhere else. Then, and this is also becoming more in the news, which I think is good from a solution perspective, like there's 100 million Americans that live paycheck to paycheck. And oftentimes, they can't get what they need from mainstream financial services, and they live in an entirely different financial. services world. It's payday lending, it's title loans, and they need financial services even more, but they've got fewer options and they're charged way, way more. So this consumer demand for new financial services products is a new, but it's been escalating dramatically over the years, and I think it's very, very much hit a boiling point where consumers want to get financial

services from other companies, be them ground up fintechs or be them companies that haven't offered financial services, but already have these customers' businesses and could. So that's kind of point one. And then you need the consumer demand. Then you also need the company desire. And just to completely oversimplify, like if you're a company, your business models, like you could charge for the product. So that would be like a Netflix subscription fee.

You could make the product free la Facebook, but then you're making money via advertising. And now what more companies have figured out is they've already got the customers, they want to retain them better, they could offer financial services. And that would be a great new revenue stream and would also help provide more and more value for the consumers. So consumers want it, companies want it. The big missing piece, which is happening now, which is what is accelerating this. It sounds like unsexy, uninteresting topic, but actually when you look into what it's enabling, it's very, very exciting, and that's what's driving a lot of this activity. Yeah, let's get into the details of the actual what's enabling it in a second. But

staying on this idea that these are new revenue streams and things like that. The biggest example is Apple and their credit card. But when you talk about, okay, this is a two-part question. You're talking about the unbanked population, these people that the incumbent banking system hasn't seemed to want as customers? Is it that they haven't seemed to want them as customers or couldn't until now serve them as customers? Any business wants customers that are profitable, and they don't want customers that are unprofitable. So, you know, the altruistic deal would be nothing against the customers. It just hasn't worked for their business model. And so if you think the traditional bank, right,

that has hundreds of physical branches across the country, tons of staff that they employ, very expensive IT systems, there's a very, very high fixed cost to serving a customer. So you can't afford to pay, you know, X hundred dollars to acquire a customer that's not going to keep thousands of dollars in their bank account and get a credit card from you and get a mortgage from you and in and, and, and, and the math just doesn't work. Okay, so then that's exactly what I want to know. If these are customers that the incumbents don't want or haven't wanted traditionally, then if I'm an Apple or a Google or a Walmart or whomever, why do I want those customers that the banks never had? Is it just, is it, is the answer that there are certain companies that have, is it additional revenue streams because certain companies have a scale of customer base that it's like, well, whatever, this is additional revenue. So we don't care that it's lower margin than what JPMorgan would like.

I think it is a very good question. If you break down, do I want a customer to, you know, am I going to make money off of them? There's the revenue side and the cost side. And simplistically, you can break the cost side into cost to acquire said customer and then cost to serve said customer. And so if you think cost to acquire, take a company like an Uber and Lyft that has already spent a lot of money to acquire their drivers. And so they're already on the platform. They've been acquired to help support the ride-sharing business. Then it makes total sense if,

and we can talk about the cost to serve, you can start offering bank accounts to those drivers. Because one, you're not incurring an additional acquisition cost. You've already incurred that. In fact, you might even be helping prevent future acquisition costs because your drivers will stay on the platform longer. And then cost to serve is actually going to be much lower. And we can look into the infrastructure, but number one, Uber and Lyft don't have bank branches all across the country with fixed real estate costs and fixed staff costs. So their equation from the cost to acquire minus cost to serve and how much revenue can they get out is very, very different than a traditional bank. You know what? Let's go ahead and get into the actual infrastructure and what's changed here

and why we're even having this conversation as this is a possibility, right? So the obvious parallel is to – well, actually, it's anything as a service, right? So the obvious analogy is AWS, computing as a service. I can whip out a credit card, set myself up on AWS, create a company, and I don't have to worry about the whole tech stack at all, essentially. So is what has changed essentially that all of the – of the complicated things in banking in financial services are now being segmented out into these X as a service sort of offerings? Exactly.

So imagine, let's use the Uber and Lyft example again, they're like, okay, I have drivers. It would be really great if I could become their bank account. Imagine if their only option was literally to start applying for a banking license, build all of the core systems, like how does the money flow, how do the payment flows completely by themselves, but all of the regulatory infrastructure, build the fraud, build the, like, et cetera, et cetera. Then, to your point, it would make absolutely no sense to do this. But what's happened now is that each one of those layers of the stack, like you said,

is as a service. And so take banking licensing. Like, yes, you could apply for license, and there's companies that have done that, but it's very expensive. It takes a very long time. The outcome is very uncertain. There's a whole crop of banks that have figured out that they're terrible acquiring customers, but they have the infrastructure of the banking licenses.

And so they've become now what the industry calls sponsor banks. And these are banks that will partner with mostly tech companies or fintech companies to lend these companies a license in exchange for a share of the economics of whatever these companies are offering. Do you look at all of these new fintechs that are offering high-yield? savings and checkings accounts. They're doing this because they're partnering with some of these sponsor banks. Because they're not they're not technically banks themselves. They're like getting a loaner like banking license essentially. Exactly. They're totally getting a loaner license and they have to pay for that loaner license. Like there's got to be an incentive for the

bank to loan the license. But if you are a mid-sized bank in, you know, middle America, You used to have a great, your advantage was you were local, you'd get all the local customers, local customers would come into your branches. Now as more and more of that has moved online. These banks are thinking through, how do I acquire customers online? And a lot of them are trying to do that, but they're also realizing that's not as much their core competency. What they should do is get a bunch of partners who have creative product ideas and partner with them to acquire the customers. and lend their banking licenses to support that and share in the economics. What about things like, you know, financial services,

they're almost, except for maybe medicine. There's no more regulated industry. So there's also, I guess, companies that are doing, I guess, regulatory compliance as a service that you can turn Keyway, get into banking that way as well? Yes, and you can do it a couple ways. So there's an entire industry called reg tech, which is filled with hundreds of companies. But exactly, to your point, financial services extremely regulated. And then I often say, unlike other industries that are regulated where if you mess up,

you get a fine, like financial services, you can actually go to jail. Like these are very, very serious regulations. And that had traditionally been another big prohibitor to getting into this industry. But now there are lots of fintechs, actually, that focus on very specific pain points within regulation and providing that as a service. If you're a new company that has a great product idea where your differentiation has nothing to do with regulation, you just want to make sure you don't run afoul of regulation. Now you have a bunch of companies you can partner with to do that for you. And same thing with fraud issues, money laundering issues. again, if you get it wrong in financial services, you go to jail.

Exactly. And before it used to be, and I said this has really done two things. One, you know, the point it's dramatically lowered the cost and complexity to get into this business, which is why we're seeing, you know, more and better products on the fintech side, especially those that serve the traditionally underserved or underbanked. But then, two, it's enabled a whole new crop of entrepreneurs to get into this industry. is before you can be a brilliant product person with a great go-to-market, but you would also need deep, deep payments infrastructure knowledge,

like to your point, regulatory infrastructure knowledge, but now the fact that you can get all of these things that are non-cour to your business as a service, if you've got a great idea and a great distribution strategy that's going to target a population that really needs your services, you can launch your company much more easily, and that's also expanding the market. That's funny that you just said that because that's what it was on my mind this week. I can't remember maybe it was Benedict Evans or somebody had an essay recently that reminded me of like the whole idea of the credit card coming in and making it so that small retailers didn't have to have this whole infrastructure just to provide credit and collect payments and stuff. So like this idea as a service is really about X as a service is really about killing, I think I called it the frustration stack.

like taking away the parts of the business. I like that. That are frustrating or not core to the real business, but they're necessary to doing your business. And so, like, this is that for this. It makes the products better. It expands a set of entrepreneurs that can go after. It expands the problem sets that can be tackled.

And I think really just accelerates where the solutions come from, which is why we have, you know, traditionally over the last five years, seen it from ground up fintech. But now we're very much starting. to see it from mid-sized companies of all sorts, even B2B consumer companies that are figuring out how they could add financial services in addition to their products. And they have never done fintech before at all.

Well, and like you mentioned this. I don't know if you have any more details on this, but like I did not know that Shopify makes nearly 50% of their revenue through financial services. Yeah, and so do companies like MindBody, which is what they do, they help. provide scheduling systems and others for yoga studios, gyms, and they charge a monthly subscription fee. So most think that their revenue model is that monthly subscription fee, but a, you know, solid almost half is payment processing. And I think that's the next way of coming through. There's lots of different ways to process payments. It's a very complex stack in there. And there's ways that

you can do it where you accrue much more margin than, for instance, the completely outsourced way. So there's starting to be more infrastructure companies on the business side of the equation, too. That kind of comes back to what I was poking at at the beginning. Like, are these high-margin things? Like, again, if these are opportunities that have been left on the floor by the incumbents, which, look, that's what incumbents maybe do, and that's how disruption happens. But are these actual margins that companies want to chase, or is it just additive, if it's easy to do, it's just additive to what you're already doing?

Dependent. But I think the way I would think about it if I'm an existing company, it's that I've already acquired the consumer. And that, for many industries, especially financial services, is one of the biggest, biggest costs. So right there, because you have the consumer, you have a significant advantage. And then you have to think through what financial services would, make sense for my company. Like, it's very different to be, like, if you're a bank account for a

lift driver, and at the end of your day, you can just pay that lift driver their cash earnings. Like, that's a very integrated financial services experience versus, let's take the polar opposite extreme. You're like, oh, I don't know, I sell shoes, and maybe I'll sell life insurance and I'll just put a link to a life insurance company on my site. Like, that doesn't make any sense. Like, that is not an integrated experience. So the thing that's new is, as part of the product street and as a very integrated consumer experience, how do financial services fit into that? And the advantage is you already have the customer, so you've gotten rid of the biggest cost. And then the infrastructure costs have come down dramatically.

And so now you can do it in a much more integrated way. on the question of the incumbents you know plaid just got taken out right um the the idea i think the way that i thought of fintech for a long time was that there would be these startups that would do what the banks were already doing but better and different and those startups would maybe become the new banks over time and have their own little quarter of the world um like I suppose that is there anything stopping the incumbents from copying this stuff since they already have? Like, I might already have a relationship with a Bank of America or whomever. And so then they can offer these same things.

I guess it's just the simple copying thing. It's what they always ask. You know, why can't Barnes & Noble just do what Amazon does in books, right? So I think your thesis still holds true. Like there's still, you know, something called neo-banks, or pick your term, completely new banks that are going to, you know, do a lot of what the incumbents do and occupy Good Corner. Like I think that that still holds.

Then there's a crop of companies that start solving one very specific pain point, and they layer on more and more different types of services, and those eventually turn into full-fledged banks. to think companies that enable you to get access to your wage very early, and then they're layering on checking accounts, et cetera, et cetera. So that's still going on. But I think what's specifically exciting about this infrastructure revolution is that it does also help the incumbents.

You talk to regional banks, they have, or even some of the larger banks, spend 75% of their IT costs on maintenance. Like, that's not very inspiring. And you're very, very smart people, but you're just stuck on these systems that were built in the 60s and 70s. And so FinTech, the infrastructure FinTech, are selling to the large banks also. And if you free up some of that IT costs to not be spent on maintenance, then you're going to be better and faster at launching more new consumer products that will help you get new customers and keep new customers. So this is a case where everybody is going to get better. Well, and actually you made the point, again, to come back to the AWS analogy, is that this is enabling thousands of experiments.

You know, AWS allows a million different experiments of like, is this an idea? Is this a thing that works? Does this have traction? And so if a similar thing is happening and it becomes plug and play and it becomes cheap, like it's, there could be all these different experiments run and we don't even know where this is going to. go. As a consumer, like ultimately, all of these benefits are going to accrue to consumers in the US and globally. As more people try and launch better products compete for your business, it's a win-win.

So I kind of do these weekend episodes to educate myself on things that I, spaces that I don't know really well. So to sum up, would this analogy work? Like, is this the APIization of the financial stack that will essentially, you know, that will essentially allow killing the frustration stack in financial services? And I like it. Or even, yes, if you API the frustration stack, then maybe we can rename the frustration stack into something else.