The a16z Show - a16z Podcast: Money, Risk, and Software

Episode Date: October 2, 2015

Financial services are overdue for an overhaul. With a16z's newest general partner, Alex Rampell (who just officially started), this segment of the podcast explores the world of fintech... How software backed up by data is being brought to bear on lending, insurance, and the science (oftentimes art) of underwriting risk. We also get a taste of what life was like for Rampell running a successful internet business out of his bedroom -- an experience that would lead him toward the world of monetization/ payments and eventually co-founding numerous startups. 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 doing an interview with Alex Rampel, who's our newest GP. And among the things he'll be focusing on is FinTech. And it's about time we had a FinTech pod, so we've been excited to get him on the podcast to talk about this. Welcome, Alex. Good to be here. So, Alex, let's actually just start by talking about your background. I think you break the record among all our GPs for being a serial entrepreneur in terms of how many companies you've started. Well, more is not better. It's quality, not quantity. So it's actually kind of funny. I mean, I fell into all of this by accident. And the way that I started was I got a Mac as a computer. I got the Mac 2, which was the first color Macintosh. Everything up until that point had been black and white. And I was a very ungrateful child. So because all my friends had PCs, all the games were written for PCs. So I, hey, dad, you know what? Why did you get me this Mac? I'm so angry. Like, you got me this, like, massively. actually it was my grandmother who bought it for me. But my dad helped her pick it up. There's no games for this. I can't do this because you literally, you go to like some computer store and 99% of all titles were for PC.

And one, there'd be like this little anemic Mac section, which just made you feel bad about yourself if you owned a Mac in the 80s. And Apple, of course, learned from that mistake many years later and now they really prioritize developers. So my dad said, well, why don't you learn how to make your own program? So he got me a book on C. And I also, there was a program that some people might remember called HyperCard, but it introduced this concept of the HyperLanks.

So I started writing programs in HyperCard and also in C. And then there was this movement called Shareware, where it was kind of the counterculture of commercially shrink-wrap software that would get sold in Comp USA or Best Buy. This was something where you were encouraged to share it. And if you liked it, you were supposed to pay for it, and that was via checks in the mail. This is actually how I got into payments.

So people actually paid you for your stuff. I mean, what were they paying for? Was it a game? So the first program that I think I got anybody to pay for was a screensaver. And I wrote the screensaver called mini screen saver. It drew ovals on your screen. I uploaded it to AOL, CompuServe, a bunch of other bulletin boards. And I said, if you like this, send $5 to me in Palm Beach, Florida. And a couple days later, I got a $5 check in the mail. And then a couple days after that, I got a $20 check in the mail because some company bought four copies.

Actually, I still have, I think I still have the photocopies of all these different checks in the mail that I got. So I was making like $100 a week as a 10, 11-year-old. And I just, I really focused on these utilities. Like, what was an annoying? I mean, screensavers were not a good example of this. But I remember on the Mac, it was very hard to change the sound volume. Not very hard, but you'd have to like go to the Apple menu, go to control panels, and then find the sound one, and then like click somewhere else and then like change it from zero to seven. So I wrote a little control panel.

If you remember that term, you hit control and then a number and then it would change the sound to that level. That was it. And that was like $8. It was called Volume Quick Change. This was not like complicated code, but it solved an annoying problem. So a lot of people bought that and just kept doing things like that. So how did you go from these kinds of products to payments? I was running my business off of AOL because in the early mid-90s, AOL was kind of the de facto internet for most people that didn't have, you know, weren't at a university campus and didn't have access. as to like a T1 line or something. In the, I think it was the winter of 1996, AOL used to charge three bucks an hour.

They used to charge $6 an hour when I started using it. They cut it to three. Then they went to $20 a month flat rate. And understanding the laws of economics, if you lower the price of something, typically the quantity demanded goes up. If you lower the price of something to zero, the quantity demanded goes up a lot. But they kept the number of modems the same. Consequently, it became impossible to connect to AOL.

And AOL would dial each number one time and then give up. So I wrote this program for me that was, called Always Online. It would dialage number a thousand times in a row. So it would guarantee that you connected. And then once you connected, it would keep you online forever by emulating modem activity and dismissing these dialogue boxes that AOL would pop up to kick you offline. Always Online sold tens of thousands of copies, which was kind of crazy. I was 15 years old. And I might get like a thousand, $10 checks in the mail. How long until Steve Case came knocking on your door? So it's funny you mentioned that. So that was actually the best thing that happened was because I was 15

and AOL was like this enormous $100 billion or whatever, how large company, very large company at the time, they banned the product. And Forbes did an article about like little tiny 15-year-old gets bullied by Big Bad AOL and here's his product and then sells another $10,000. So anyway, I needed to figure out how do I get people to pay me? How were people paying until then?

The biggest innovation that I had was a check endorsement stamp. So I'd open my mail, get a lot of mail, open it, I'd endorse every check, and then I'd go to the bank, and then I'd write down, like, the total deposit. I mean, it was fun, but I did two things. One is I bought a credit card terminal on, it was called Auction Web, it became eBay. This was probably in 1996. So actually, I started processing credit cards and how to learn how to do that.

And what I did was with Always Online and all my other products, I'd bundle a little application where you would enter your name, your address, your credit card number, it would encrypt all of that information, and then it would send it to me via email. This was kind of like the early web order form, and then it would get processed on my little tiny credit card gateway, which was actually a modem. It would dial up to the bank and then like authorize the card. You did all this at age 15? Yeah, yeah. So that was... You probably couldn't even get a credit card, but... I could not get a credit card, but I could charge a credit card. And actually, that was very complicated. I had a lot of respect when SWWRWA.

came out. I only got the credit card because my dad runs a small accounting firm, and it was actually in his firm's name was how I initially got the credit card. I think I transferred, like, the credit card processing relationship to my own company eventually because the idea of a virtual company in 1996 was not really well known. So it was an incorporated entity, but like, well, where is your principal place of business? Well, it's in my room. Like, that doesn't make sense. So that was your first foray into payments? Actually, like the real way that I got into trial pay, which is kind of my largest company that I've founded, was most people that were using always online and all of the other products that I came up with, they didn't pay. Because a lot of this

is like, here I am holding a vitamin water, which probably costs $5 at Whole Foods. Oh, yeah, I'll pay $5 for a vitamin water. Oh, I'd never pay $5 for a song on iTunes. That's a rip-off. That's outrage. So people like to pay for tangible goods much more than they like to pay for intangible goods. Even true today? Oh, I think more so true today than ever before because there's so many different types of intangible goods. You're kind of hit a, like if you were to pay full price for every iPhone app that you ever touched, it's like you'd be paying $5 every day for something. And paying for coffee, that makes sense, paying for an iPhone app like not so much, at least not as often. Like even the top games on the app store, like they might only get 2% of people to pay.

So always online varied in price from $8 to $20 and a lot of different changes in between because you kind of get a feel for the elasticity of that demand. So I tried coupons. I tried discounts. I tried this. There's the pro version. There's the light version. So where do the tangible goods part come in? So the idea was, wouldn't it be great if I could let you pay for something tangible? And by doing so, I get paid from the tangible goods company. And then I'm able to give you my product for free. So I started doing this kind of in the early 2000s, which was this was the harbinger of trial pay, which is, okay, you don't want to pay for my product. I'll give it to you for free if you go, shop at Gap.com. It turns out Gap has a 50% gross margin or more. You go spend $200 a gap. That's $100 of gross margin that they have to play with. They, almost every major retailer has something called an affiliate program where they will pay for the referred traffic. So that's

what I started doing. And that seemed like a major problem as well, because I wasn't the only one out there. Little Shareware Alex wasn't the only one that had a problem of most people not paying me. Every major software developer, every major kind of intangible goods maker had this exact same problem where 100% of their revenue comes from 1% of their users. If you can get 1% of the other 99% to do something, whether switching to GEICA, which I try to do, but it turns out you can and send people to switch their insurance, or shopping at Gap or signing up for Netflix. So this actually worked really well and started branching out beyond that. So that's the story of trial pay. Now you're here at Andreessen Horowitz. So what are you going to be focused on? So I think the number one thing is

financial services, which is now commonly called fintech for financial technology, which really can mean anything. It's kind of, it's reinventing the banks because the notion of banks haven't really changed that much in, well, probably thousands of years, but they haven't really met the 21st century very lately. Brokerage, insurance is another category, payments, all of these things have a long way to go and are ripe for disruption. So fintech and disruption all sounds really interesting in theory, but how does this actually play out in practice? I mean, as a consumer, how would something like this affect me personally? So I'll give you an example. If you borrow money, there's a company called Lending Club. And what does Lending Club do? They kind of, they help,

most of what they do is actually refinance credit card debt. So if you're a bank like JPMorgan Chase, you have 250,000 people that work there, you have thousands of branches across the country, you have millions and millions of people that have deposits, and you pay those. people one basis point, 0.01% interest, if even on their deposits, even if they're quite large, then you have all these credit cards that you issue. And when people rack up debt on their credit cards, you charge 18%. And it's kind of a good business because you're paying one side 0.01%. You're charging the other side 18%. And you have a company like Lending Club that actually a lot of what they do is they show up and say, hey, if you have lots of debt on your credit card, we're going to

pay it off for you. You're going to owe us 12%. But where do we get that? the money from. We're going to take one of those little poor guys that's getting one basis point on their savings account deposit, and we're going to give them 8%. So in a small way, actually kind of a meaningful way, because it's a multi-billion dollar company now, Lending Club is helping to disrupt finance. But don't the incumbents have a structural advantage here? The structural advantage that Chase has is that they have lots and lots of depositors. They have a very well-known brand. They have all these different systems in place for managing risk. These structural disadvantages that they, and also the other structural advantages, they can borrow from the Fed for 0%, which is kind of nice right now.

The structural disadvantage is they have 250,000 people. They have thousands of branches. These are all things that were super relevant 25 years ago. That's how you grew as a bank. But if you were going to develop a bank from scratch today, chances are very, very high. You wouldn't say my first order of business is to go sign 9,000 leases at different commercial banking centers across the country. say, I'm going to have a mobile app and that will do it for me. Alex, are you suggesting we're going to start to see new fintech companies directly take over Chase's business? You're probably not going to see somebody who's going to take over and take on Chase directly.

It's more of you'll see minor things like Lending Club that attack little bits and pieces of its business. And there was something I looked at a while ago where it showed a picture of Craigslist in all the major categories on Craigslist. It had little arrows pointing each one of those categories. The unbundling graphic of Craigslist, right? And you're going to find that with banking as well. I think someone already made one, actually. CB Insights did. Yeah, there are a bit a bunch. So like robo advisors as an example.

So this is like companies like Wealthfront and Betterment, which are doing a better job and arguably than some financial advisors and charging a lot less because it turns out that software can do a better job of that. So stuff like that. One thing is you mentioned that, you know, if you had reinvented banks today in the world we live in, can you break that down for our audience a little bit more? What does that mean to reinvent the financials? services industry. I know we're talking, that's a big catch-all category that describes a lot of

things from a mobile native, like a software-centric world. Like, what does that actually mean? And also, you know, you talk about Lending Club, but they didn't reinvent the business at all. They're in the same business. Their margins are just different, right? So how do you reinvent the banking industry and how do you reinvent the business? So at the end of the day, you don't need to reinvent it. If I'm a bank and I can line up, if I can source loans in a meaningful way, I can control my risk in a meaningful way, and I don't have all these, what I would call structural disadvantages, like thousands of leases, hundreds of thousands of tellers, and, you know, no disrespect to the profession of the bank teller,

but it's probably not one that's going to be around in 50 years, much less 15. But I don't have to pay all these people, and I can lower that spread. Lending Club is kind of a bank. It's not a bank for a variety of reasons and they can't call themselves a bank. Officially, right, yeah. Officially. But it really is a bank because they're accepting deposits on one side. I mean, that's the thing that they're not a bank and that most people are not going to want to give their money to Lending Club because they don't want to say, okay, here are the 19,000

loans that I own a small piece of, and here's how much interest I earned today. And, oh, this one defaulted and that one didn't and I can go sell this loan. No, they want a safe place that they can keep their money. They want to know that it's insured and it's protected. but really Lending Club behind the scenes exactly as you said is doing the same thing as Chase, but Lending Club has, I don't know, 1,500 people and not 250,000 people. What Chase, what the new version of Chase for the 21st century, and who knows, maybe it will be Chase. A lot of times companies can figure out how to regrow themselves or become reborn

in a way that's more technologically meaningful, but it's going to be the same thing. Which kind of sucks because people really seem to hate the banks. people hate their banks because it's really not transparent at all in terms of what you're going to be charged. And there's also, there's a major market failure when it comes to lending in general. What do you mean by that? A lot of people have this mental image of they don't want to see their bank account balance drop below a certain amount. And maybe it's irrational, maybe it's not because they can always borrow money or maybe they can't. But they'll say, okay, I always want to have $5,000 in my checking account. I don't want to see it drop below that. So they'd actually feel more comfortable taking out a loan to buy something, then watch that mental barrier get breached. So the market failure that you have happened is I go to Walmart, I want to buy something. It stretches my budget a little bit. And I know that if I charge it on my credit card, I'm kind of going to get ripped off. Or maybe I'm not.

I just don't even know. I know I'm going to get charged a lot of money. And if I pay it late, I'm going to get charged a lot more money. It's not transparent. And the thing that the credit cards, and it's not a credit card companies, because I, I, I think highly a visa and I've worked there for a while. It's not just the credit card companies. It's lending in general.

It's not really based on the item that you're purchasing. So the market failure happens where I would have bought this if I had been offered a loan at a reasonable rate. Instead, I'm offered a loan where all loans are the same size. And you know that they're different, like there are car loans, there are housing loans, mortgages, and there is kind of like general purpose credit. And those are kind of the three major categories. but why does a home have a different interest rate than a car than what you're paying on your credit card? In some cases, it's a secured asset, so that's one reason.

But just people behave differently. They're a little bit different when they think about taking out a loan to buy a property versus a car versus some general purpose credit card items. So the market failure happens where like Walmart wants to sell more stuff. They would sell more stuff. They can't sell more stuff because people are hesitant to buy it because they don't know what going into debt for this particular item has or what that means for them. So that's one area of just lending in general can be made so much more efficient. Right. Well, I do want to talk about the financial inclusion aspect of this as well. Another aspect of lending that's inefficient

in a way that's regressive to people who maybe don't have the best credit history, but actually could be very credible. Totally. This is a huge problem. Like FICO, you know, the Farrisac Corporation has been around for a long time. And that's what FICO stands for. And a lot of this is based on, I would call it the mathematical concept of induction. If you paid your bills on time, you will pay your bills on time in the future. And there are two flaws with this. One, what if you've never paid a bill on time before because you're 25 years old and you've never had a bill? Well, guess what?

You're a terrible credit risk, which is not true. Right. Or what if you pay your bill in cash all the time because you're just not in credit? I remember I could not get a credit card in college. And the reason why I kept getting rejected is because I had never had a credit card before. is the definition of a catch-22. If you look at most people between 20 and 30 years old, they have a debit card and not a credit card. But the point there is that they are known as thin-file customers. They're not bad credit. The term in the industry is thin-file. And how do

you underwrite credit for somebody that has no file or a thin file? And the answer is you can't using kind of traditional FICO scores. The other thing is that you have this whole category of people that went through some kind of hardship in the past. So 2008, 2009 might seem like a distant memory, but it's not for your credit report. So you might have been doing everything right, and you had this double whammy of you lose your job and your house is foreclosed. And it doesn't mean that you were being reckless with your spending. You actually, you are predisposed to always paying your bills on time. You're a very honest, ethical person. And now you have this black spot on your credit rating or your credit score. You actually might have a lot of cash now. Maybe you won

the lottery. And all these good things happen to you. People should bank on you, no pen intended. Exactly. People should bank on you, but they don't because they're looking at this one thing that hasn't really changed. So actually, you have a whole category of consumers that aren't even thin file. They're thick file, but the file itself is misleading. So this is by the way where software does have an opportunity to change the FICO definition of how the signals for FICO scores are swirced. Yeah, it's already changing. Like right now you rely on kind of, they're the three big credit bureaus and they have to kind of redo their own stuff. And like one thing that's actually happened is there's a change in that algorithm for, you know, for what if you go to debt settlement? It's actually interesting.

I've seen a number of companies in this space where they'll say that the highest quality consumers are the super prime or ultra prime. Like that's the category where you have 800 plus FICO and these guys always pay their bills on time until they don't. But they look very good for the time being in there. Induction-wise, they've done very well in the past.

There's another category where imagine you did fall into hardship. It turns out the people that raise their hands that say, I want to get out of debt, and I want to do the right thing. I want to be honest, they're actually very, very reliable people. The signal there is actually quite good because what you want to find is you want to find groups of consumers that, at least at first glance, you know, judging the book by its cover, the cover doesn't look so good, but inside the book is actually quite good and it's going to

perform well. So there's a lot of stuff that is just going to be done much, much better from underwriting, but you do run into, you do run under issues with the regulation and whatnot. By law, you have to explain why you're rejecting somebody for a loan and come. up with, I think it's, I don't remember off the top of my head, but I think you have to provide the three reasons for like why you're dinging them for the particular loan. If you're using complicated machine learning and you're looking at 9,000 different inputs, that's, that's challenging. But the other market failure, just kind of in lending in general is that the reason why

interest rates tend to be very, very high for people that are deemed a high credit risk is because you're counting on half of those people or maybe 90% of those people or a huge number of those people that never pay you back. Actually, I take issue with people. that think that payday lending or just high interest rate lending is this evil, terrible profession. Because imagine that I'm trying to just make ends meet. And I need to pay my landlord on Friday. And my paycheck is coming the following Friday. I owe the landlord, I don't know, $100. I have zero right now. I'm getting $200 next Friday. So if somebody showed up and said, okay, I'm going to loan you the $100, but you owe me $150 the following week. So that's

50% interest effectively in one week. That's considered like super illegal usury. But the problem is that if you were to charge like a normal interest rate of, you know, the max of 36% in the state of Utah or whatever it is, you'd get a couple dollars for making a pretty risky loan of $100 under the hope that it's completely unsecured. It's like, okay, I'm going to count on you of your own recognizance to come back in one week and pay me $102 when I'm loaning you $100, like nobody would be in that business. And therefore, the person that actually really needs the money would not get it. I think the problem that people have with that, though, is that they feel it punishes people

already poor. There's a huge power differential in that system. So I kind of, I see your point, but I also think there's a point to be addressed on the other side of it, which is this sort of euceriousness that takes advantage of that situation as well. I totally agree. I mean, I think this, John Oliver did a really good. good segment on this, which is a lot of the payday lenders are kind of trained to get people to just come back and get more loans. And this is where you run to this problem where the interest

dwarfs the principle, which is bad. But one way of dealing – so one way of dealing with this is regulation. But that can have some unintended side effects, such as nobody will loan to these people because they can't make money. You can have regulation where nobody can loan to these people, but somebody sees an opportunity through software to kind of separate the wheat from the chaff so that by charging $2 on $100 a loan when it's completely unsecured, they actually could make money on that. Right. That's another way of looking at it. But then the other is if you have lots and lots of competition, then that actually takes care of itself.

So actually, I'm in favor of regulation just requiring absolute clarity on what you're being charged. Because a lot of people don't realize this. This is actually what, in my opinion, contributes to that cycle of poverty because you go take out a loan. You don't know what you're getting charged. There's a hidden late fee. So the $100, oh, well, if you don't pay it by, it's actually do it at 11 a.m. You pay it at 2 p.m. Aha, $50 fee.

And then that's what really kills people. If you make it super clear and super transparent, you're not going to run into that problem. And if you have the law being around clearness and transparency and you have lots of competition, that's what will bring the rates down. What you describe, is it sort of just a long-tail scenario where, you know, companies now, whether it's lending tree or something, or Lending Club, sorry, or something else. Is it a question of now finding the right risk and all that and making all those relationships, you know, person to interest rate to risk more efficient

and uncovering the ones that actually work and then finding the right amount to charge for a week where you can make money and they still will be a customer? But how does technology enable all this and how is it starting to change? because I hear you describe the sort of landscape, how do we then come in with new ideas that help change what you describe? So I think software is a huge part of it because this is exactly, like the reason why you charge very high interest rates is you just, it is this regression to the

mean of, or not even regression to the mean, it's like, I don't know. So I feel like I'm protected with a margin of error if I just charge you a lot. Part of this is a regression to, or just going back in a time machine to an earlier place. So, I find this very fascinating. Like 100 years ago, you go to the general store and you left your wallet with your gold ingots and your silver back in your home. And you say, hey, general store owner, Joe, you know me. I'm Alex.

I don't have the money right now, but I live right near the saloon. Like, I'll go pay you back next week. They would have trusted you. And they'd say, or maybe they wouldn't. Right, because they know you, but they know you. You're the one that got drunk last week and ripped off the barbershop. But they, Joe can make a judgment and say, okay, I'm going to. just pay me back next week. I'm going to keep that on my ledger. Can you imagine doing that at

Walmart? You go to Walmart and you say, hey, remember I come here every day and I buy four bananas and a rubber ball. I'm not going to, I don't have the money right now, but I'll pay you back tomorrow. They escort you out of the store. And the same thing goes for like banking and lending. It's kind of like time traveling through software, like back in time, going back in time because what we're able to do today. It's really interesting. If you look at a lot of the microlending operations that are happening in a lot of the developing world, some of it is.

It's like somebody goes to a village, and they kind of just, they know people in the village really, like they know their parents, like their aunts married somebody else and so-and-so was the officiant at the wedding. There's that kind of personal connection, which is very hard to quantify, like putting that in software is actually, like, that's not software. That's kind of the human touch. And that's actually worked quite well. and you've lost that when you go to branch banking,

you've lost that when you go to these like massive, massive stores where knowing if you're a credit risk or not, you can't say, aha, like this is my uncle's best friend's roommate's sister, therefore, like, he's vouching for her, and I think it's going to work out okay. You can't do that with software, but you kind of can because there are other signals out there. Like humans think that they're very smart,

and in many cases they are, but there's a lot of other information out there that can be brought to bear. you mentioned Lending Tree. You mentioned Lending Tree. You mentioned Lending Tree, but actually it's good that you did that because Lending Tree, like, what does Lending Tree do? It's like, okay, I want to look at every mortgage available to me. I want a Google, but for like seeing all the terms, how much I'm going to have to pay, like you have little meta-marketplaces like kayak for lending, which is Lending tree, and applying that to more, I've seen a number of companies in this space as well where they all say, like we're, you know, the hip thing in startup land is I'm the X for Y. So it's the I. am the kayak for payday loans or I am the kayak for whatever you want to call it. And then being transparent around all the different terms there, that's another thing that's going to push rates lower and be friendlier for the borrower. But the main thing that's going to change this is the software to identify, okay, we think that

you are a positive quality payer. We see what's going on in your bank account. We see things that are just much, much better than what FICA can provide to us. We're at a phase in least financial services where it's kind of in the transparency phase, right? It's shining a light on, you know, terms, conditions, rates, and also people and behaviors. And then, you know, eventually it moves on or maybe not eventually, maybe right now it is, into changing how we do things. But right now it sounds what you're describing is still this phase very much of, you know, shining a light on things and describing it and looking for inefficiencies. Looking for inefficiencies and finding these examples where you truly do have a market.

failure where a transaction would happen or something that's very good for all parties involved would happen, but you either have a lack of communication, you have a lack of transparency, you have too much resilience or calcification in terms of why rates are set. And it's like, well, why is the credit card rate one size fits all regardless of what item you're buying? That doesn't make sense, but it's too much work to make it dynamic. When federal fund rates go up, does that change kind of what you might see in the marketplace in terms of like what people are interested in and where the opportunities lie?

So definitely the fact that we're in, it's called ZERP. This is the zero interest rate policy. We're in whatever it is year seven of ZERP. So, and I think we're going to remain in, go to year eight and year nine. That's my own personal opinion. But that does change things a lot. So if you look at SOFI. SoFi is a great example.

SoFi is now a multi-billion dollar company. And they're kind of big innovation. I mean, not to oversimplify it, but if you go to Harvard Medical School, after you graduate from Harvard Medical School, pick on any, like, high in medical school, you're going to become a resident, you get paid very little, then you become a high paid doctor, you get paid a lot more, and across this entire trajectory of your career, your chance of declaring personal bankruptcy is very, very low. The only thing that I need to look at to know that is you graduated from Harvard Medical

School. City Group, on the other hand, so my wife went to, actually, she went to, actually, she went to our business school and had a bunch of loans from city. And they were, they were pretty high priced because it's like, well, they're saying, well, all student debt is at the same relative waiting. Like they weren't looking at this one vector, which is like you went to a pretty good school where the average person makes so much money and this is the average default rate. And sofai did. Because so far will go to say, okay, your city loans are at 7% because they were struck in 2003 or 2004. I don't know what the numbers are, but this is what they were struck at.

Now, interest rates are zero. We're going to come in and do it for three and a half percent, and you'll save $50,000, and you say, holy, holy, moly, this is great. I'm going to sign up for this. That's a lot harder to do if rates go up more. You have less room for somebody to come in and start refinancing debt. So that's one thing that would certainly cause a challenge. Does behavior need to change?

And is that what we're kind of fighting against, why things don't happen as quickly. So inertia is an incredibly powerful thing, especially for banking. So why don't people change their bank accounts to earn more money? So all you have to do is go to bankrate.com or any of these other kind of savings account, like how much do I earn on my money that I have in my bank account? And you'll see, like, I mean, probably 99.999% of people do not have the highest yielding bank account because it's probably the bank of internet or some like crazy name that's listed on bankrate.com. But think about what goes on with your banking relationship. you have your salary direct deposit it into there.

So I want to change my bank. And that means I have to go to my employer, fill out all these forms, bring a voided check. I don't even have a, like, what is a check? I've never seen one before. Where do I get one? I never asked for one. Can my ATM card work? No, that won't.

Then you have, maybe you have a mortgage from your bank. And they'll give you a 25 basis point reduction on your overall rate, assuming that you have a direct deposit salary integration with them. Why are they incentive to even do that for you if you're so captive as a customer? It's actually twofold. One is to keep your banking relationship. But actually, more importantly, it's to watch your cash flow. So they know what kind of risk you are. They know if you've lost your job because you no longer have deposits coming in from your employer.

So they're able to watch them in real time. I mean, it turns out that with companies like Yodaly and Intuit, anybody can do this now. You don't have to own the banking relationship. If you want to see what people are doing with their own personal funds, like non-cash, but actually in a bank account, you can watch that through one of these third parties. So my main thing is that it's just inertia is very, very, it's very powerful. And Chase has trillions of dollars of deposits, and they offer the lowest rates, which seems like that doesn't make any sense.

And any other industry, like if there are like two gas stations, one's over here, one's across the street, and one of them offers gas for three times as much, you'd say, well, geez, it's a little bit of a pain to take a U-turn, but I'm going to take a U-turn because I'm going to save $50 bucks on my gas, and all gas is gas, and it made out of the same chemical compound, so it doesn't really matter. Banking is just you have to get people that care, which is a big problem. There are all of these kind of interconnected relationships, which you have to dislodge. Even if it's painful and inefficient?

It's not kind of point-click efficiency. You can't just say, I'm going to click two buttons, and then I'm done. You know, the U.S. government intentionally, so you have all these KYC and AML, you know, your customer in anti-money laundering laws that require disclosures from a consumer. That takes a little bit more time. So you have all of these things as well. Like insurance is another one where inertia is just, I mean, nobody cares who they use for their insurance.

I know I'll be hated by the Geico's and the state farms of the world for uttering such a falsehood. But I don't think anybody cares at all who they use for insurance. At the same time, they don't even care about getting the lowest rate because once they have it, and Geico spends, I think, $600 million a year on average. advertising the U.S. to convince you that all it takes is 15 minutes to change your insurance. But no one bothers to do it. There's a quote by George Bernard Shaw, which I'm very fond of, which is, every profession is a conspiracy against the laity. And I firmly believe in that because there's actually a law in most states. I know this because we tried getting into the insurance lead generation space of trial pay, where you cannot reward people for switching their insurance. And this is bullshit. So imagine that I'm an upstart insurance company. And I do

everything better than State Farm. And I say, okay, I know that you don't care if you use State Farm or Allstate or whatever. I will pay you $100 right now if you switch to me. And against the law. Against the law. And why can't you do that? Well, because every profession is a conspiracy against the lady. There's no good reason to do that. So that's another one where like, that should change dramatically. Data would make a huge, huge difference in that space. Like, we're still giving people rewards if they go install a lowjack in their car. And that's the biggest innovation that you've had in, like, car insurance, or like you get ADT and your rates are lower for your house. But I mean, just think how much better of a job we can do.

But you have to get people to care. And this conspiracy against the lady makes people, it makes it harder for people to care because you can't reward them in a meaningful way for switching. Let's transition then to something you wrote about five years ago now, I think, which is this concept of online to offline commerce or O2O, not to add another coinage to our list of B2C, B2B, but that's the way you were doing. Yeah, that's what I call the O-to-O. So what is it?

And actually, given that you wrote that piece five years ago, how have things changed since then? Because some of it is maybe not as relevant today. The reason why I wrote that and the reason why I was very interested in that is at trial pay, we had two markets. We had publishers or app developers that would show offers. So you don't want to pay for Zingapoker. You can get it for free if you sign up for Netflix or if you shop at Gap.com

or go to BananaRepublic.com or shop at J-cru.com. Notice the prevalence of the dot com. And the other side of our business was, you know, signing up more guys like Zinga. And I liken this to a wine list at a restaurant. If you're a restaurant and you want to optimize your revenue, I mean, the most important thing is you get more people to sit at your restaurant. And if you only have two wines and both of them are red, the marginal benefit to adding a white wine, your very first white wine is probably pretty high. But if you already have a wine list of 900 different wines, and you add your 900 first, like you're better off getting more people to sit at your tables. So those are the two levers that we had at trial pay.

We either get more publishers or app developers like Zinga because that was more tables or we get more wines on our wine list. It turned out we had kind of tapped out on the online wine list, and it turns out, not surprisingly, that 93% of all commerce happens offline. That's up from 0% 25 years ago. But still, the majority of commerce in the United States and the rest of the world happens offline. And wouldn't it be great if we could say for trial pay, get your Zingo? coins for free if you go buy a coffee at Starbucks or get your zingo coins for free if you go bowling

today. That's what you mean by online to offline commerce. Yeah, so this was the idea of it's kind of a third category of commerce because the U.S. Commerce Department broke this out a while ago, which is there are two forms of internet commerce. There's travel, which is very large. That's Expedia.com, hotels.com, priceline.com, all these different OTAs. And then there's, for lack of a better term, stuff in a box where I go to Amazon, I buy

something, it gets shipped to me in a box, and that's how I actually receive the goods. There is a third category, which means you buy something online. It doesn't get shipped to you. It's not travel related in the traditional sense. That's online to offline. And it's a huge one because all of that 93% of commerce, sure, you might buy your coffee and redeem it, redeem it, it, drink it offline, redemption, right? I think it online parlance. But you go to Starbucks, you go get that or you go to Burger King to actually eat your big mapper. But at the end of the day, these transactions should happen online. I mean, it should be on your mobile phone. Like you're paying for it online that's happening on the internet connected device. And that allows you to do

something really cool, which is actually do performance marketing. Because the problem is if Burger King wants to go advertise on the internet, they don't know if any of those advertisements actually work. Priceline knows every single ad. Did it work? Did it not work? Because people click on the ad. Burger King can figure out. if they clicked on the ad. They don't know if they bought the whopper. Priceline knows that they clicked on the ad, and then they went from that click to actually go buy something atpriceline.com, because they can track that end-to-end on the internet, and you just don't have that for offline. So I thought this was going to be a huge category

that would really redefine online commerce. And did the term take off? It's funny. I was one that coined this term, and if you do a search for O to O on Google, everything is in Chinese. I met this group from China. It was like CEOs of all these large Chinese corporations they came over a little while ago and they're like you invented o to o oh like no you didn't that's not possible because apparently like the rock star of china for coming well not though it's like the term is the rock star of china so because like if you look at bydo if you look at a lot of the big companies over there like a lot of their focus is on enabling online to

offline that was a big theme of a we chat primer that we put out so how have things changed since when you first wrote that i mean that was five years ago the first category of online to offline was really for things that were easily measurable. So Uber and Lyft came about a little bit after I wrote that. Obviously, it wasn't in any way, shape, or form based on my idea, or not, it wasn't even my idea. It was just kind of trying to come up with a canonical form for what was happening. But it was very easy to do, relatively speaking, to do Uber and Lyft because it's time and distance travel. Those are kind of the two variables that you're measuring on. And you're taking something that was originally delivered offline will always kind of be delivered offline. Like moving you from point A to point B will be delivered

offline. But you start that process and you pay for that process online or on mobile. That's great, Alex. Well, thank you for your time on the H-S-N-Z podcast. I'm sure it's going to be the first of many. Welcome, and we're excited to have you. Likewise. Thank you so much.