The a16z Show - a16z Podcast: Fintech from the World's Financial Capital -- London

Episode Date: November 17, 2015

The title of world's financial capital bounces back and forth between London and New York. This year London has bragging rights, but does being the word's center of gravity for finance mean so-called "fintech" companies will naturally flow from that position? London-based investor Eileen Burbidge joins a16z's Alex Rampell to pick apart fintech in this segment of the podcast recorded on our U.K. road trip. Everything from the term (please make it go away), to the particular barriers and opportunities facing entrepreneurs looking to create what really amounts to better banks. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that 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. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi everyone. Welcome to the A6 and Z podcast. I'm Sonal and today Michael and I are taping another special episode of the A6 and Z podcast on the road from London. And so we are bringing this to you live from London. And today's topic is Fintech or financial services and meets technology. And joining us on the podcast today are Alex Rampel, who is our newest GP general partner, who among many other things will be focusing on Fintech. And we also, We also have Eileen Burbage, who is a partner at Passion Capital and Early Stage Seed Fund. That's one of the most prominent early stage seed funds in London. And she's also the chair of Tech City.

And very interestingly, the government's special envoy for FinTech. Welcome, Eileen and Alex. Thank you. Thank you. Let's just start talking about why FinTech, why now? Let's just jump right in. And in fact, is FinTech like a new thing? Is that like a real phrase that's been around?

I mean, is that like a new phrase or it's been around for a while? what's going on with that? We were just joking about this, that it seems like a contrived term, because if you were to ask any of the existing incumbent companies, what they do, they would not say fintech. They would say, we loan money, we're a bank, or we do finance, we do microfinance.

They have very, very well-defined terms, but anybody who's trying to compete with them, that's a fintech company. It's almost like a diss, right? It's like the newer companies are thinking, oh, we're going to introduce technology into your sector, thereby implying that they never use technology to do it. So it's almost a bit of a,

I think it was like Amazon, Walmart. Amazon's an e-commerce company. Exactly, exactly, in Walmart's retail. Right, yeah. Exactly. It's one of those terms that no doubt will disappear, assuming that the fintech people do what they say they're going to do. Right, because you wouldn't say, I have an account with a fintech company. It's like, where do you keep your money?

Can you write me a check? Oh, hold on, let me log into my fintech. I got to call my fintech company. So, wait, is it true, though, that why can't the incumbents compete with tech? I mean, they probably can. Like, can't they easily acquire, like, some competencies and make it happen, like just hire really smart developers and bring technology to their business.

Yeah. I mean, I don't think that's any different in the financial services sector than any other sector. It's just a question of incumbents how big they are, how agile or not agile they might be, and how quickly they can respond to what's happening, right? So I think that's like everything else, whether it's publishing media, you're mentioning e-commerce or retail. You know, a lot of large corporates are being sort of affected by, but also looking at innovation,

aqua hires and bringing. and house, sort of resources and knowledge coming from younger companies. London has a reputation. Obviously, it is a financial center in the world. But does that necessarily mean that it's a natural center for technology applied to finance? Yeah, no, I think that's a good question. And one that you brought up earlier in terms of like, why now? I don't think just because it's like the financial capital world, which it just

regod again from New York this year. It goes back and forth in the tradeoff. But regaught's not a word, but it just recaptial. Actually, do they really recapture that? They did they recaptured. Oh, yeah. There's a ranking. Oh, yeah.

Not that we take it that seriously, but no. I didn't read that. But I think this is like the college ranking. Like Harvard is Stanford. It doesn't. Like one and two. Okay, so they're both competing head-to-head. So they compete head-to-head and London got it back for this year.

But I do think, to your point, just because it's the financial capital of the world, even for a year at a time, doesn't make it necessarily the natural sort of leader or center for fintech. I think what's happened there is, you know, if this happened, for instance, 20 years ago or has it had. as it has done, it's only because we've got sort of a digital or a tech ecosystem or a startup ecosystem that I think has really kind of flourished over the last really three to five years. And so I think it's the combination of those two things. And you're asking earlier sort of why now.

I really think the 2007-2008 crisis had a lot to do with it. I think on the one hand you saw with the financial crisis that maybe there's too much money being captured by too few institutions. At least that's what people here in the UK recognized. Two few banks were having too much control. and so there was a need to try and spur innovation and try and get some diversification from other areas of the sector. In addition, I think what's more crucial is that talent was sort of, at least here in London,

culturally, a lot of people maybe were sort of very happy or comfortable, working at large companies at banks, at consultancies, doing really well, getting nice paychecks. And then when the crisis happened and you started seeing layoffs or redundancies, people started thinking, oh, I don't have a safety net anymore. and I've always been thinking about doing something like this and this and this, maybe now's a good time. So when that safety net fell away, they decided we'll go out and be founders.

Or, you know, this just started with a few or a handful of people. They just started tapping up former coworkers and started setting up startups. This is why, like in the Bay Area you have a lot of technology companies, but how many technology companies in the Bay Area are going after the oil drilling sector? Or a lot of things that actually might be massive sectors of the economy, but just because there's no, that's not, It's not located or based in the Bay Area. So I totally agree.

You need a vibrant tech ecosystem. You need people that are very entrepreneurial. But lastly, and almost most importantly, it's the sign of quannon of you need people that understand the particular industry that they want to go disrupt or go after. And it's interesting. I've met with a number of people that were senior executives at various UK-based firms where they understand every bit of minutia in terms of how a bank works. And they want to build a new bank.

Now, they need this, the Venn diagram has, you need to have knowledge of the financial system, you need to have very, very strong technology background, and you need to be an entrepreneur, and those things don't overlap that often. But when they do, that's the magic combination that you need. I'd actually add to the Venn diagram. I think there's a fourth element too. I think another thing that makes London so special. So you've got the tech, you know, obviously not at the sort of depth or the sort of heritage of Silicon Valley,

but I think the last three, five years, we've really made some massive strides. But then you've got the financial services like Wall Street. So it's almost as if we've got Silicon Valley and Wall Street in one place, in one geographical city. But on top of that, and then, like you said, the entrepreneurial spirit, which is a third part of your vendetagram, I'd put in the fourth one, which is policy makers or regulars, right? Because it's almost, well, it's not almost.

We genuinely have the equivalent of like Capitol Hill and lawmakers here also in London. So part of the reason we're chatting so early is I'm going over to number 10 Downing Street later, this morning. And you can't really do that. I mean, you can get on a plane from Silicon Valley. But we talk to policymakers who are really interested, you know, and part of my role as whatever, envoy, for the government, for FinTech, is to try to help the government appreciate what it can actually do to make a difference to help stimulate even more innovation or more entrepreneurs in FinTech. So I think actually that's a really crucial part of the Venn diagram. So not only is the encouragement important, but then they actually set policy that helps.

So whether it's crowdfunding, peer-to-peer lending, you know, they have to held early reviews of the blockchain, the make of England did a really big study on it. These kinds of things actually make a difference than I think can kind of grease the skids in terms of what the first three elements of that Ben diagram too. Yeah, especially for financial services because on a panel that we did yesterday, I was talking about if you want to launch Uber or Airbnb or do something of that sort in the sharing economy, sure, your risk might get tapped with a ruler for being a bad boy if you do this without getting permission.

but it's not that big of a deal. Whereas if you say that KYC and AML laws are antiquated, then you're not going to follow them, you'll go to prison. KYC? No your customer. KYC is no your customer. AML is anti-money laundering.

You've got 100 more in the U.S. that you have to follow. So there's something called an OFAC screen, which means it's an Office of Foreign Asset Control to make sure that you're not giving money to a terrorist. There's a known watch list of people that you can't get money to, but you can't just say it's an Excel file and you go check it. There's a whole process for this. So, you know, it's very, very complicated when you're touching money.

I mean, it's probably only beaten by touching health care in terms of the impact that you can have on people's lives as opposed to, okay, there's a new on-demand food delivery company. And they're not operating within the confines of food delivery law that was established in London in the year 1400. Like, okay, that's not good, but it's not a big deal. Whereas you lose somebody's money, you lose their life savings. Or you fund a terrorist. Yeah, or you fund a terrorist. Like, these are bad things. and you do have to follow regulation a lot more closely.

So I get the reasons then for the regulation. Clearly, this is another case where it's really important. But, Eileen, when you describe the environment in London and we think about the fact that London and New York are competing head-to-head for the one in two spots, so to speak, whether it's objective or not. Is it that the government needs to do a better job of setting policy or getting out of the way and relaxing policy?

And there seems like there's a quantitative and qualitative difference between those. Yeah, I think it's the balance of the two. And I think actually the UK government has done a great job of balancing the two. You know, a lot of people, and some people started to talk about it, not necessarily as light touch or heavy touch, but as kind of, quote, right touch regulation. And I think that's right. I think the government, you know, it's important to think it's not just that the government so, like, hugely altruistic and they're just doing whatever entrepreneurs want.

You know, there is an economic driver for the government to sort of be supportive or at least watch this ecosystem really carefully. The financial services sector contributes about 150 to 160 billion pounds. a year to the UK economy and GDP. It's not something that the government wants to see go away. That's a massive driver for the economy. But at the same time, it recognizes that the banks are in trouble. What happened in 2008 shouldn't happen again. We had bank bailouts here in this country. And so it's got a vested interest to make sure that the banks kind of stay current or at least get ahead of the game. And it's sort of done things like committed to saying, you know, we're going

to approve or grant new licenses for up to 15 Challenger banks. That's what Alex was mentioning. And so doing that really sends a really strong signal. It's not necessarily legislative, but it actually says, listen, we want to see 15 new banks come up in the next year. That's a really big message to both the banks, but also to startups. You know, and it's got the government here sees 300 of the world's banks with their headquarters here in London. We have more American bank headquarters here in London than in New York. So there's just this really thriving, yeah, really, really thriving ecosystem. It's like a petri dish, and it makes sense for the government to be really watchful.

it's not also just keeping an eye, but it might be looking at things that are outdated. So a lot of laws here in this country have been around for hundreds of years. So like there was some kind of 1400, you know, established in the year, 1400. Alex wasn't really joking when he said 1400. No, no, it's true. Well, Magnicard is even older than that. Yeah, no, there's a lot of stuff.

It dates really far back. So there was something that sort of suggested to pay in a check or to deposit a check. You'd have to show a physical representation of a check or, you know, an IOU or a promissory or a note or whatever. and only about a couple of years ago to Barclays sort of say this is stopping us from being able to use mobile apps or digital versions of checks

and it went back to some kind of measure introduced in some 1400 or 1,500 measure when that was brought to its attention obviously it holds a quick review but it changes it. There are lots of things that were just developed in a very antiquated analog world that need to be updated even on the AML side by the way.

So I think it's doing all the right things by examining all this. Is there a, we've heard over and over and it's somewhat bragging, I'll be honest, that Europe and UK and in particular are way ahead of the United States in terms of the consumer side and payments.

And like you haven't seen a paper check in decades or something. But what is the customer poll? And I want to know from both sides. I mean, we talk about how the government wants to do this and how clearly as investors you're very interested in doing it. Is there a different kind of customer poll here because of what people are used to

and how they're used to handling money versus the United States where maybe the poll isn't as strong. And I don't know if you have any sense of that. It's a really good question. And actually, I haven't thought about it too much. But now that you mention it, I do think there's a big cultural difference.

As you were saying the question, I was wondering if, so this is just my hypothesis, I'm not even sure, if the fact that Europe, as a continent or European Union, because there was multi-currency for a while, maybe that made some consumer pull

sort of slightly stronger to sort of say, make this easier for me. I'm not 100% sure. That would sort of support things in remittances in foreign exchange. But maybe there was something about moving faster to chip and pin, cash list payments. We've had the Oyster Card Network in London for, I don't know, well, ever since I've moved here, I've been here 11 years.

It's got to be near 20 years old. What's the Oyster Card Network? The Oyster Card is what you were able to use on the tube, London Underground, or on buses. So basically all public transport. And it was just a contactless card, you know, that you were able to just tag in and tag out for all of your journeys in all your fare. You'd top it up every so often. Now you can actually use your bank card to do that. So I can use my Barclays debit card and just tap in and tap out to get in and off the tube. And that is the largest contactless payment. Bank sort of backbone, as opposed to a private network,

contactless payment in the world. We've had that for close to 20 years. We also had chip and pin, which I was just in the States two weeks ago, and I know is now starting to get rolled out. So chip, no pin. Yeah, which is really weird because I was like at Walgreens and I was like, don't you need my pin? Where's the two-factor authentication here? I worry about that too. Two-factor is, I mean, it's insane that we don't have two-factor. And part of the problem

is that in the U.S. versus Europe, in Europe, if you go pay at a restaurant, they bring the terminal to you. And that level of infrastructure, that wireless payment infrastructure, does not exist in the U.S. at all. So, like, you give the card to your waiter, the waiter runs off with your car. Yeah, but why don't they

introduce it? Because it would be expensive. Well, that is true, but they actually, to go reintroduce all the chip machines is very expensive as well, but in October, there was a liability shift. So for the longest time, merchants could conceivably not have liability if the card itself was a replica. It was effectively a stolen, created card, and it was very easy to just create a magstripe. You can go to eBay and get not a mag stripe reader, but a mag stripe writer for 20 bucks or less. So the main benefit of switching over to chip

and the way that they've actually encouraged almost every merchant in the U.S. to do it is that if you're a merchant and there's a card that has a chip and you don't read the chip, you instead read the mag stripe. You and you alone as the merchant are responsible for fraud. So this has caused, I mean, so imagine that your target and in addition to being hacked and everything else that has gone wrong for Target, you lose a few hundred million dollars a year on fraud, and you might have that if you switch over to chip

and you look at the CAPEX that's required to go replace all of your terminals, all of your little checkout machines, your POS systems, that actually might be, like, amortizing that is going to be cheaper than dealing with the additional fraud. Yeah, completely. By the liability. So the U.S. just looked at the issue was, I mean, chip and PIN would be more effective. Yeah.

But just going to chip as a first step would save billions of dollars because a lot of the fraud was people just, they'd get the credit card number, and it'd say, ah, it's a 16-digit. it number. That's pretty easy. I buy the $20 gizmo on eBay, and then boom, I come up with a fake credit card, and then I go steal stuff in store, and not just online. Actually, online fraud rules were much better than in-store fraud rules where you just go like this, and then you're done. But I hear both of you saying that, you know, post-2008, that consumers lost faith in banks and maybe bankers lost faith in banks, but that they're all asking for something new. And

at some level, I sort of don't believe that. I mean, what are they? asking for and what is your evidence that they, you know, that they really want it? Another quick question to build on that. If the crisis had never happened, I don't buy that that primary driver because it feels like it would, we'd still be in this moment of fintech even if it hadn't happened. Like there's something coming together. You guys can tell me if we're wrong for sure. There are different things though, right? So like Lending Club is really a bank and I use this term a lot. And companies like Lending Club are banks, but they're not banks at the same time.

because think back to when Gmail came out. So Gmail comes out in 2004, April 1st, 2004. People thought it was an April Fool's joke. And they give you a gigabyte of space. And everybody else gave you 10 megabytes. Right. So it's very, very hard to change your email. Very hard.

Because you have to tell people, don't contact me here. And then, of course, Yahoo, AOL, Hotmail, the big incumbent mail providers did not make it easy. So if you wanted to have an auto response message saying, I'm not using this email anymore. Please email me over here. AOL would not allow that. Very smart of them, right?

Because they wouldn't want you to switch. But Gmail just said, we recognize that it is a royal pain in the butt to go change your email. We're going to make it objectively a hundred times better. Right. Add all the storage.

Add two zeros to the end of the 10 megabytes. And even if Yahoo wanted to do that, well, A, Yahoo! Yahoo! had a revenue stream that was required. I mean, you had to pay 20 bucks a year to get Yahoo Mail Plus where you got, I think, 100 megabytes. and B, so they'd have to get rid of that and cannibalize their own sales.

And then B, which is almost more problematic, they didn't have the computational capacity to go give 100 million people one gigabyte of space. That's a massive amount of memory and servers to have that stored redundantly. So they just couldn't do it. And that was enough. I mean, even with that, it took, I don't know, 10 years for Gmail to get even close to the number of Yahoo mail accounts, despite being 100 times better. and Yahoo eventually caught up.

And I'd say the same thing is really true for banking, which is I have a bank account. It stores my money. How is somebody 100 times better than that? To give 100 times better interest rate, that's very challenging. Because if I'm getting 1%, which I'm not, but let's just say I could get 1% somewhere, nobody's going to give me 100%.

So what you do see is when the pain point is a little bit stronger, like lending marketplaces, again, in the same way that somebody's not looking for a fintech company, somebody's not looking for a lending marketplace. Somebody says, wow, I have, I'm in debt, and I'm paying 19% interest to my credit card. A friend or an app like Credit Karma told me that I can save a lot of money if I go sign up for Lending Club and refinance my debt. Where I just graduated from school, and wow, I have a lot of student debt.

A friend told me that I can go save a lot of money if I refinance my student debt, and people have understood this with mortgages for a long time. So, like, those things there actually is poll for. people want that. But I think it's just fundamentally very, very hard with banking or insurance or things that have very, very high inertia and very long periods on which people might decide to go change. I think you're right from a utility standpoint,

but I also think even less tactically what a lot of consumers are pulling for now is convenience, literally like better usability in U.X. So one of your portfolio companies based here in London TransferWise, You know, it's hard to argue that, as you say, you could have done better than what Western Union did. You walk into a place, you drop $100. You see that, you know, whatever it's going to be, 80 pounds is going to come out the other side. You go tell somebody in London to go pick it up.

That seemed to work really well. You know, transfer-wise was able to demonstrate, well, actually, you do it online. You make it a lot easier, three clicks, whatever. You know, you scan a copy of your passport. You create an account. You make it really easy. Great customer support. And you know what?

Look at how many users they have. You know better than me, right? So it wasn't necessarily changing the utility, but it was changing the UX and the convenience. You know, you were talking about the timing of things. The iPhone itself was only introduced in 2007. Look at all the industries that have been, well, quote, disrupted, or at least evolved just because of consumer convenience, having it in your hand, being able to walk around and do something, whether it's on demand or otherwise. And then I think much to what Alex was pointing out, the issue for the incumbents is that they end up with infrastructure or CAPEX,

which prevents them from being able to respond. or deliver what consumers then start pulling for, whether they're doing it consciously or not. And I think what's interesting about the financial services sector is at least here in Europe, about something like 90% more than that, of all of the banks, are using one of two back-end suppliers, FIS or FI-Serve,

which prohibits them from being able to do things faster. Like literally, they cannot, you know, look up a transaction that you've made or that's been made on your credit card without blocking the card. You know, now you're realizing that, well, actually, you could actually freeze the card for a bit. You don't have to actually get a new one sent to you.

And just incumbents couldn't do this because their systems just didn't allow them to do this. A lot of it just comes down to customer service in U.S., which sounds crazy. But I think that's what's going to be changed. Well, I think that's the point of fintech as well, which is if you look at credit cards. So you had very novel approaches to who gets credit. So Capital One came out. It's a $30 billion company today, started partially by a British expatriate. and really remarkable company.

They've done a great job, I think, more so than most of their banks in the U.S. in terms of just intelligence around granting credit. But their whole system is built on a company called T-Sys, which is built, actually, so I don't know if you know T-Sys, Total Systems Corp. It's a spinoff of a bank. They've been around for a few dozen years. They're based in Columbus, Georgia, which is right on the Alabama-Georgia border. I've been there many times.

And actually one of the cool stats is it's right on the central time zone. So it's like I always, half the people that work there are working like a different time zone. Like, how does that work? And you cross a little bridge that goes across a river and then you're in central time now and you're in the eastern time zone. But anyway, I digress. The point is that TIS is effective the operating system for maybe half of all credit card companies that issue credit cards. And they're not really a tech company. I mean, they are a tech company.

If you ask them what they do, oh, we are a technology company that provides an operating system, just like FISA, just like FIS. But these companies, like this is the infrastructure that if you're starting a bank from scratch, if you're starting a credit card company from scratch, you're much better served if you want speed to market and just like to have something that's like everything else out there, you use one of those guys. Just like if you're a community bank, you don't build your own thing. You use Digital Insight or Jack Henry or one of these other services that says, okay, you're a five-person bank, you can have an app, you can have a website because you need that.

If you're Chase and you have 250,000 people, you'll build your own, but there's a lot of legacy code that dates back to the 1950s there. So I think that's the opportunity, but that in and of itself is not enough. You can't have a solution in search for a problem. Like just saying, okay, we've got a new bank, and it's tech enabled. And instead of getting two basis points of interest on your, I learned that a checking account is called a current account. Nice. So I know garage, boot, lift, flat, and current account. I'm like totally British and I'm going back tomorrow.

Going native. You've got Madonna on us, Alex. I can't believe it. Exactly. So you know, you're getting, in the U.S., it's about one basis point on a checking account. If you get two basis points or three basis points, that's not going to work out too well. No matter how much technology and technological innovation you have, powering that.

But I do think that the way to get into fintech or the way to get into the banking sector and disrupted is you start off with a wedge and that. then on top of that. And the wedge being like, I think what SOFA is doing is very interesting because they get people when they graduate from school. You graduate from school, and we have no investment in SOFA, so this is a genuine admiration for what they've built here. You graduate from school, you've got lots of college debt. They look at you and they uniquely, relative to every other bank and refinancing company out there, save you a ton of money because they say, wow, we trust you, we want to invest in you because you went to a good school. That's kind of their algorithm

right now. It's not that complicated. Now I go get a mortgage with them. I go get a checking account with them. I go get a credit card. And ideally, if they do all of those things, and they really do become a tech company and not just a refinance company, because doing mortgage refinance, there's not that much work involved

with mortgage refinance. That's not technology. The underwriting might have some technology around it, but I think there's a big opportunity, and this is what we're doing with a firm as well, which is, can we reinvent all of that stuff, but just reinventing it is not enough. I mean, this is the quote that I use around the office all the time,

which is the battle between the incumbent and the startup comes down to whether the incumbent gets innovation before the startup gets distribution. And it's very, very hard. I mean, the deck is stacked against you 100 to 1 if you're a startup and you're going after financial services because distribution is just that powerful. And is that unique?

I mean, regulation is certainly a part of this, but is that unique to FinTech as opposed to, I mean, we talk about Gmail, as opposed to any other startup going after an incumbent industry in tech lines. because of the regulation that you mentioned, that's a big one. I think it's also this trust element, which is it's different than the cable industry where that is a legally chartered monopoly.

So like this is what I call the TiVo problem, because if you're TiVo and you're selling into an industry that only has nine different people, that's not good. Like things are not going to work out well for you, and they almost never do. And if you're going, so there are two ways of doing this, right? There's the full-stack method, which is, I have software, which I'm going to sell to every bank. And I don't think anybody in FinTech thinks that that's a tremendously great idea, just because the banks, I mean, some are. And I think some people have a chance to build an operating system.

Actually, this is one of our theses, which is operating systems just in general for finance, if you can get traction are good, but it could take years to do that. And there are 10 banks. I mean, this is one of the big differences. if you look at credit card issuance in the U.S., in the top 10 banks are like 70, 80% of the market. And once upon a time, like there was a company called WAMU, there was a company called Wacovia,

and these are all big mortgage lenders, credit card issuers, they're gone. And it's consolidated more at the top. I mean, Wells Fargo has a trillion dollars plus of deposits, and these are small, like, individual account deposits. Chase has the same. So there's been so much consolidation at the top. And that's really different today.

So what I was saying is that there are a variety of reasons why selling here, if you go full stack, the, like, you get obliterated on marketing cost. I think that's the other problem, because GEICO spends a billion dollars a year on marketing, and then insurance, not banking, but kind of same overall field of fintech. So the problem is that if you want to build an insurance company for the 21st century, it's like a triple whammy. It's incredibly capital-intensive because, A, you have to lose your equity to build out your actuarial models. And the same thing goes, like, if you're building a lending company, you have to lose your equity intentionally to go lend and figure out, oh, I shouldn't lend to people that have no credit and say they're not going to pay me back. But how would you know that ex ante? You have to actually make loans to figure out if people are going to pay you back. Bad loans, it turns out, right. Yeah. And like, all right, I want to start a life insurance company. Well, I have to wait 25 years for people to die. This is very, very hard, and the models that current life insurance have, companies have, very, very valuable. And then you have to spend a ton of money on marketing because people don't wake up in the middle of the night.

I think this is actually the most important thing. Unless you have a wedge to get in, people don't wake up at 1 a.m. in a cold sweat saying, I need to change my bank. Or I need a different insurance company. And then GEICO does not spend money very effectively. And that's normally a bad thing. If you're a GEICO shareholder, you're like, wow, I would love it if. Gaico, they could probably get just as many new customers per year spending $500 million

a year. I'm going on on a limb and not spending a billion dollars a year. But the fact that they poorly spend marketing funds is actually terrific for them because it keeps out all of the new competitors from going in where, you know, if Gaico was only spending $15 a click on Google, then a startup could compete. If they're spending $100 a click on Google, the startup can. One reason I like the sector so much, and again, why I think it's such an interesting one, why we probably spend so much time on it is because that's maybe just scratching the surface and that what's great about fintech is there's all this sort of plumbing behind the scenes. So like Alex mentioned KYC and AML earlier, you know, we're seeing the reason why the fintech sector

here is so sort of really, really interesting and deep within London is because you see a lot of startups also going after these sort of non-sexy, you know, fintech plays. So non-consumer acquisition type plays or distribution reliant, but actually serving other customers within the financial services sector, so more the B2B side. So, you know, for instance, there are companies, I haven't invested in either of these, but, you know, on FIDO or Passfort, which are both London-based, trying to tackle KIC, AML, identity verification, and trying to figure out how a company, a financial services company that has all the problems Alex was just talking about can sort of take money out of their cost base and cost of acquisition or, you know,

having to comply by, to comply to regulation. Or you see things like fraud, Or you mentioned insurance, which is actually on the back end, I think there's a lot to service. You know, Barclays has been publicly establishing that they spend $3 billion a year, which is about $5 billion a year on its IT spend or its tech spend, you know, doing a startup that just services Barclays, not a bad revenue drivers. So I think there's a lot more underneath, I guess, like if you think of an iceberg type analogy, you've got all the challenges on the consumer facing side. But under the water, under the surface of the water, there's so much more to it.

tackle. I want to go back to something you both kind of alluded to. Eileen, you mentioned the U.S., which I think is a really important, an often overlooked point, especially when we have like sort of a new generation that's coming into banking that's completely mobile native and used to a certain type of experience. And Alex, you mentioned very briefly the word trust as part of why incumbents, you know, have a certain distribution, like the ability to do certain things that startups can't. Does that really matter for, I hate using this phrase millennials, but does that really matter for like snake people? I mean, millennials, I mean, does that really, do you think they care in the same way?

Yeah. I think absolutely. I mean, if you're dealing, like, would you give 100% of your net worth, even if the net worth is a very small number to a startup and you just saw that the last four startups just went out of business? I mean, I think a lot of it is people don't understand. I understand too well, like what the capitalization requirements are for a bank. Why, you're so paranoid.

Well, actually less so. I think I'm actually less paranoid. You're comfortable with it. Because I know that you can't use customer deposits to go fund the operations of the bed. There are certain things that you cannot do. Whereas how would somebody that knows nothing about this sector actually understand this?

This is actually where regulation, if it were well communicated, might be more helpful, is saying, or like the effective, like FDIC insurance in the U.S. and whatever the equivalent is here, that's effective as a means of establishing trust. I mean, this is how you dealt with the whole financial crisis in 1929, is when the FDIC was set up, when FDR set this up, that was tremendously effective. And you had like a five or six day bank holiday, and then people decided to trust their banks again, and that reestablished

the financial system. So, you know, I think that trust is important. If you have things like that that are well communicated and well understood by a younger demographic, then maybe it doesn't matter as much because you know, okay, there are very, very few millennials. They graduate from school. They have $250,000 in liquid net worth. So therefore, if a bank is covered by FDIC and they trust it, and it's a better U.X and blah, blah, blah, then they'll use it. But I just don't know how well that actually is understood. Yeah, I think that's right. I think the concept of trust is still really important, or as a USP or whatever, I mean, as a driver. But I do think what's interesting about the younger demographic is that surveys are saying, and, you know, I don't know how much

this is true, you know, that the younger generation is not trusting what the previous generations trusted. So what is the stat, you know, I don't know what the percentage basis is, but some massive percentage, certainly more than 50. I think it was close to 80 percent of millennials. Trust the brands, you know, Facebook or Google or Apple, I think was the top of the pile much more than their banks. And they're wanting to see services come from those companies before they would actually open up like a second or a new bank account. And so then I think what's interesting, and we think about this when we're investing in some of the, the fintech startups is your exit opportunities, aside from staying independent and maybe going

public or whatever, is potentially on the buyout side. You may not be selling to a bank. You might be selling to Facebook. You might be selling to Amazon. You might be selling to Google as they tried to expand what they offer in terms of, you know, they're not going to call it financial services or fintech. They're just going to talk about, you know, it was like in-app purchases or whatever. Or it's, you know, gaming, you know, sort of gaming up or bulking up your purchases. And they're going to look at ways to reduce friction on what they, they have to manage with money and transactions on their systems. I actually personally believe, I mean, I'm not an expert in this space by any means,

but I actually personally believe that all the sort of stealth players that have these sort of shadow payment systems where you're giving them your credit card, like Lyft and Uber. And I always think to myself, like, God, I wish I could just like use that to buy everything in the world without even having to pull out my credit card ever. Like iTunes, right? Like iTunes having, I don't know, had more credit card numbers than any other network for the longest time.

Or Alibaba, I think, is like one of the biggest threats, not threats. With Alibay. in terms of how many people actually make purchasing decisions and have their payment details with that company. Right. We actually published a very in-depth primer on WeChat. And one of the most fascinating things is how the messaging entire of the services became sort of having the credit card allowed all this traction for all these other cross purchases to happen.

It's incredible. It's a new wallet, right? Yeah, I mean, two things on that. I think it's really interesting. I think part of the reason why millennials don't trust their bank is, I don't know like this is unique to banking, but the larger the company and the less product-driven it is, the more the innovation is around, like, how do we charge more?

So you hire McKinsey. McKinsey comes in and says, ooh, you know, if you charge a late fee, you can make an extra $4 billion a year. Ooh, that sounds great. Or Comcast in the U.S. is about to roll out if you use more than 300 gigabytes of bandwidth per month, there's an additional fee.

That's their innovation of the year. Yeah, and people love Comcast already. Exactly. Exactly, but I think banks have done a tremendous, and I mean this in a very sarcastic way, but banks have done a tremendous job of layering on new fees and doing things that are not transparent, where, again, the service rendered is totally disconnected from the fee structure that's actually, you know, foisted upon the consumer. And consumers don't like that.

And Apple, there's no gotcha on an Apple product. And the only gotcha is like, damn, I wish my iPhone battery lasted more than a year, and I have to buy a new iPhone to get a new battery. but it's not like, ooh, like after 90 days of using your iPhone, it will only continue to work if you pay this special fee. And that's a lot of stuff that people have found to be very prevalent with banking. So I think that's part of the reason why they're not very popular. You know, on the point of, I think it's a very interesting topic that we were just mentioning,

and it actually came up with you talking about the oyster card. I mean, so the largest metropolitan area in the entire world is Tokyo. So Tokyo is a city proper is not as big, but the Tokyo metropolitan area is almost 50 million people. And everybody has what's called the Suica card, which is kind of like an oyster card here. And it works through all the different public transportation systems, but it also works in every vending machine.

It's like there are, I'm incredibly bearish on any startup that says we're going to build a new payment system because it doesn't work that way. Like these things kind of, they start organically, and then they expand out concentrically, dating back to Bank AmeriCard, which became Visa in Fresno, California. It started off in a very small town and then just expanded concentrically outward. But I think you do have a number of interesting, like some of the larger companies that are not

financial services companies at all, whether it is, like if Oyster wanted to become a payment card in London, enough people have that, at least on one side of the distribution for consumers, where you could get merchants to do it. The thing that's very, very interesting in my mind about payments right now is everybody hates Visa and MasterCard. I mean, pretty much every merchant, now the issuing banks don't like them either. Like nobody likes them because they're making all up this money. And I mean, the fact that Visa Europe is selling a visa is a big, big windfall for UK and EU-based banks, and they kind of need that capital right now. But the reason why I mention this is for merchants to switch people out of their current habits of using a payment card,

they have to pay the consumer effectively more as a bribe to get them to change because it's very hard to change behavior than the fees that they currently pay the credit card companies. So you have all these merchants in the U.S. that are saying, okay, we don't like Visa, we don't like MasterCard, we're paying 2% in fees. I know we're going to switch people to use our own card.

Oh, wait, they won't do that on their own. We have to give them 5% cash back, which is, of course, more expensive than the 2% that they're paying right now. Whereas in Europe, this is another thing that I think is going to force a lot more innovative, So what's happening in Europe right now is there's a European mandate on interchange, which is reducing debit interchange to 20 basis points and credit interchange to, I believe, 40 basis points.

So all rewards on all credit cards are gone. They are effectively terminated. Because who pays for your miles or your Amazon points or your cash back? Well, it's actually the merchant. And that 2% fee, half of it is going back to you as a consumer on your rewards card. In Europe, that's gone, in Australia, that's gone. So that's another thing. that people in the U.S. are not aware of. I think it's going to happen in the U.S. eventually. But in Europe, it's going to trigger, I think, a little bit more about, ooh, who can give me a card that actually offers a reward?

And it's probably not going to be a big bank. I think actually this is a major opportunity for a lot of startups to come in because as a consumer right now, you don't get rewards on a card. You want to get rewards on a card. Actually, it's triggering a shift. I was checking Google trends in Europe for, like, credit card searches, and they are ticking up, which is abnormal. Why would people wake up and say, I want a new credit card?

A lot of it is that they got a letter from their bank this summer saying your rewards program is terminated. It also sort of suggests that a company like Amazon, which could afford and would benefit from keeping you within the Amazonian financial system could offer something like that. I mean, Amazon already kind of is. To me, it's exactly like the way I use Lyft and Uber. I buy everything on Amazon because they have everything conveniently.

I don't have to even think about it. I mean, in my head, it is a payment. I'm wondering, this gets to the subject of trust, but we were talking about countries and economies where there is solid infrastructure, where there is, you know, choice. But, like, it makes me think of Argentina, where, like, all of a sudden, you know,

my life savings is sort of frozen in my bank account and the pace has been devalued, or China, where they devalue the yuan and I sort of, or the Redmond B, and I freak out. Do those kinds of situations, where really kind of there's, if I wanted to invent a financial system in Argentina, people sort of were doing it on the fly for themselves. Do they give us any indication or clues as to where some of this all might go? I mean, I think those are different, there are different

motivations for those markets. Like, I think the lack of infrastructure and the fact that they sort of leapfrog or they kind of then kind of take every other step that we might see the U.S. or the U.K. or Europe take is really quite interesting because like all those markets, talk about what's probably driving a lot of maybe innovation on traditional financial services is the fact that the largest parts of the population didn't have access to it. So it's all about inclusion. It's about access. It's about, you know, the fact that they didn't necessarily have 10, 15 years of like broadband and desktops or laptops in their homes to start and do online banking in the way that, you know, Americans have been used to for doing online

bill pay for, I don't know, 20 years. They just started doing micropayments, as we call them now. But person-to-person payments on their mobile phones. You know, like you look at M-Pesa and Kenya, or you look at what's happened in India. They've had 190 million people open up bank accounts in the last four years, but those aren't bank accounts like we get at Wells Fargo. They're bank accounts that they're going to access through their mobile phones because they now have more mobile phones and mobile subscribers than they do, you know, people with a national identity card, that kind of thing.

So you have a different set of problems, I think. I do think there's stuff we can learn. It'll be a question, though, of whether or not everyone is keeping up with everybody else, or as I was saying, you leapfrog and you actually have sort of every other point of innovation gets achieved in a certain market, an emerging market, as I guess we would call it, versus what we would see here. And if we're going to then leapfrog and go to the next stage or how that works, I think you're just going to have different types of use cases. I think my wallet is happier for this discussion in the sense of like it has something to look

forward to. So you're not a millennial. I'm going to make that really clear to everybody in this room and on the listeners of the podcast. It's how you feel. I have trust, I have hope in this fintech thing, although I think we have to lose the name. You want a better bank. I want a better bank. On that note, we will never say fintech again. Alex, Eileen, thank you guys so much. Thank you.

Thank you.