The a16z Show - a16z Podcast: The Future of Money and Monetization

Episode Date: February 3, 2016

Technology companies are running hard at almost every part of the traditional banking business -- from raising funds to moving money from one person to another. And as you would expect, that has meant change, both in terms of the banking services that are available to all of us, and the pricing of those services. It begs the question of what role banks play going forward, and whether tech companies are partners or competitors (or some combination) to the players in the traditional banking business? And finally, if banking gets unbundled by tech –- if there is a choice of services -- what fees, and at what price will consumers be willing to pay? a16z’s Alex Rampell leads a discussion with TransferWise Executive Founder Kristo Käärmann and Tilt founder and CEO James Beshara on the future of money and monetization. The discussion occurred as part of the firm’s U.K. Tech Summit. The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information. 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.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Welcome to the A16Z podcast. I'm Michael Copeland. Technology companies are running hard at almost every part of the traditional banking business. from raising funds to moving money from one person to another. And, as you would expect, that has meant change, both in terms of the banking services that are available to all of us and the pricing of those services.

It begs the question of what role banks play going forward, and whether tech companies are partners or competitors or some combination to the players in the traditional banking business. And finally, if banking gets unbundled by tech, If there is a choice of services, what fees and at what price will consumers be willing to pay? A16Z's Alex Rampel leads a discussion with TransferWise executive founder, Christo Carman, and Tilt founder and CEO James Bischarra on the future of money and monetization. This discussion occurred as part of the firm's UK Tech Summit.

Alex and Christo start things off. So one thing, just given that the topic is the future of money, How do you think about regulation? Because one thing that I find very interesting is that how did Airbnb and Uber and Lyft get started? They didn't get started by embracing local laws. They almost flouted them. Because you can imagine Airbnb if they were starting tomorrow

and they said, okay, we're going to go to every local town and city and say, can we do this? They'd get a lot of knows. The challenge is if you go into the realm of money and you say, you know what, KYC, know your customer laws, AML, anti-money laundering laws, those are stupid and antiquated. We're not going to follow those.

you go to jail. So the consequences are much, much higher than providing a temporary rental or a temporary car service. So how do you think about regulation? Because when you're touching money, things get a little bit more complicated. But if you follow every law that was established in the 1500s, it's a little bit hard to get business done too. And especially as the laws are usually written for the fax machines, not for the smartphones. So people have told me that I was stupid because I chose the other way. I spent about nine months before showing the product to anyone going through the FCA, then FSA regulation process and licensing. So we took the way, unlike Uber or Airbnb, to be a fully licensed money service in the UK before we even got started.

And now we have a big team, not just doing everything that the banks do for adhering to AML and KYC rules, but we have another team who gets us licenses in every single country that we operate. So recently we got licensed in Japan, we're in Hong Kong, we're licensed in Australia, in the US, et cetera, et cetera. Yeah, I think with us, you know, in contrast to Airbnb or Uber, you know, we actually can work within the system. I don't think, you know, in many cities and many markets, Airbnb or Uber just would not be able to work. There was no system to work within. So they really had their only option was to go outside the system. when it comes to money and money transmission or processing.

And man, there are a lot of, there's a lot to the system and there's a lot of paperwork. But I think we also similarly chose the approach of just get really good at paperwork and work within the system. Yeah. And just to add to that regulation question a little bit. So I honestly believe that regulation is not bad if you look into this. And we're dealing with money. so there should be consumer protection and we all want to catch the bad guys

so in the kind of the essence I think regulation makes sense and I don't feel bad about some particular regulations or the way that they're written but the idea is good and how about customer acquisition so I mentioned this incumbents

I mean if anything you're fighting the incumbents in a very very meaningful way of transfer wise because and it's hard for the income it's not a technological innovation per se I mean, there is. There's a lot to what you do that's technological. But if you're charging a fraction of what they're charging, they can't just roll out what you're doing because it would cannibalize their own fee structure.

So, I mean, how do you think about, I mean, I've noticed a lot of marketing campaigns for you in my limited time here in the UK. How do you think about acquiring customers and keeping customers? So for us, for us, the customer acquisition problem is really explaining the problem. We were talking earlier about pricing models in different parts of finance. And what I believe is it's not that the banks are bad. Banks have a very hard time across the board, across different product lines.

But it's just this pricing model that has evolved where we decide not to show the real price of a service. And then we hide it either into the interchange or into the exchange. rate and then the consumer doesn't really have a choice. And they don't know how much they get charged by making payments, for making payments or moving money around. And that's what we believe is wrong. And when you ask the customer acquisition question, we find that once people understand that, once they understand how they pay for the service, and once they realize that they have a choice, you know, becomes very easy. So these kind of quirky stunts that we do, these are really just a nice way how to explain what the problem is.

Yeah, I think when it comes to money, one of the biggest benefits of having such a high barrier to entry and all the paperwork that we just referenced, one of the biggest benefits is as a young developer, none of my friends as developers were doing anything with money because it's just really hard to do from your bedroom, you know, from your bedroom, you know, working on something nights and weekends. And so when you take on and when you bite the bullet and and get really good at that paperwork, and you introduce an app, which, and when I say it's the easiest way to collect money from a group, so for a Christmas dinner, a Christmas party, for a group gift, for renting an Airbnb with eight friends to fundraising for a community cause with 150 people, it really is the easiest way to do it. And we just launched in the UK three months ago, so you can download the app and see what I mean. And the UI-U-X, it garners a really strong word of mouth, a really, really strong word of mouth,

where the fastest growing app on college campuses in the U.S. And I think it's because dealing with money, there's just, there are not many great, well-designed apps when it comes to money and payments. So it becomes a big benefit for the user acquisition channel. Yeah. So one of the things that's nice about this particular panel is that the, that nobody here is, I mean, neither one of you is trying to be the next bank and kill the current banks. So in many cases, or in all cases, it means that, you know, we need to work with banks.

I mean, I found this with a firm where it was very hard to even open a bank account when they asked us what our business was, and we said, we're going to loan money, and, like, nobody would even take a deposit from us, a multimillion dollar deposit of our first venture capital check. So what would you like to see banks do differently, if anything? Because obviously, You compete with banks a little bit transfer-wise, but also people have deposits at their bank account that they use to then transfer money using you. So there's a lot of stuff where you have to participate

within the financial system as well. What would you like banks to do differently or change? That is a very good question. Yesterday I was in Finland at a huge tech conference, 15,000 people. And I didn't even get... So people realized that banking needs to evolve. like you were you were explaining with the slides how different verticals are being challenged by different lenders and payment companies and so on the question was how quickly is it going to happen

so is it something that's going to happen in the next five years or do we have 15 years or do we have 20 years to go and I don't know the answer but what I see from say Uber and things seem to happen faster than we think and and then And the next question is, you know, what should the banks do? And I think the smartest banks, and we work with banks all over the world, in every country where we are, we have banking partners and infrastructure, so it's about 52 bankers that we pay fees to, and, you know, in total, that's multiple millions a year. And we find that some banks accept and acknowledge that.

the world is going to change, and they get on with it by looking what their role is going to be in that changed world. So going that far, and I don't want to blow my own horn, but there are a couple of small banks who have decided that it's better for them to recommend transfer-wise to their customers than offer them the international payment product of their own, the SWIFT payment, that they can't really support to every single country around the world because they don't know how the Japanese payment system works and they can't guarantee when the money is going to hit the accounts and what the fees are going to be taken on the other side.

So we do see that there are banks to think very hard about what their role is going to be and how they need to evolve to catch up with what you were just describing. Yeah, to the banks out there in the audience, I would second what Chris is saying. Recommend tilt to every one of your customers. That would be great. But I think more pointingly, I'll tell you a story.

A company in the U.S. that has a massive asset. It's not their focus, but they have this massive asset of this infrastructure. Their focus is selling books. Their focus is e-commerce. The company's Amazon, and in 2005 started to make use of this inventory. asset that they had in infrastructure. And that became AWS, and now it's something that we, along with a gazillion other sites, use as an infrastructure.

And I think that banks could use that story internally in recognition of, you know, we have no interest of doing anything in banking. From the licenses that banks already have to the safety, security that they provide, I think the opportunity that A Bank can provide for the world, the first to really take me up on it. James at Tilt is my email, is to be the AWS of money, be that infrastructure that allows for sites and services like Tilt or transfer-wise to be built upon. That way, we were talking about it behind the stage that trying to solve the UI-U-X of an application is really hard. trying to solve the payments back in is really, really hard. And banks that have tried to get into kind of the UI-U-X,

I don't think they'll be able to compete with 50 really dedicated designers, developers that are just focusing on the user experience, the user interface. And those 50 people will not be able to compete with banks that have security, safety at their core. So I'd say that would be a really big opportunity for them. Yeah, it's interesting. the opportunity, it's almost saying an API for banking.

And part of the problem, like at least in the U.S., there's been one new bank charter granted in the last five and a half years, and it was an Amish bank. No exaggeration. So they actually had a drive-thru for a horse and buggy, which is kind of funny because that's Wells Fargo's mascot.

But one of the other things that we were talking about backstage was just where credit cards go. So obviously credit cards are very important for you, because that's how people crowd fund can If people didn't have credit cards, that would be more problematic. But also credit card fees are very high. So I was mentioning Target, big retailer in the U.S., has about a 1.5% net margin, so net income over revenue. If interchange went away, they would double their profit. So it's not a surprise that they're always suing my former employer of Visa because they want those fees to go down. But credit cards have become so pervasive. There are billions of them around the planet right now. MasterCard have become an international duopoly. But it's

like how do you see where should fees be? And the reason I mention this is what we're talking about backstage is that if fees go down then that means that rewards cards go away. And in many cases that just means a giant transfer of wealth from a bank to a merchant

without going to a consumer. It's one of these issues of concentrated benefit and diffuse harm. So are you experimenting with other payment models or methods? If it goes to merchant, then it will go to the consumer. And it might not be a complete 100% pass-through, but I'd

say that the transfer of wealth will make its way to the consumer. It just always does. So if Target is able to save, then I have a feeling that it will make its way to the consumer. But I

I, you know, this has been kind of something, especially in Silicon Valley, people have been ringing that bell that So there's room for, you know, huge, huge room for disruption for credit card processing because that interchange does, I mean, that is a huge pain point. And it's something that I can tell you as a potential customer of this mythical product that banks could provide. Because everyone that has a credit card also has a bank account, you know, we would buy it.

We would jump in, you know, head first because of credit cards. they really kind of work against the merchant in a lot of ways. So I should moderate here because I know that you are of the opposite opinion. Because I agree with James totally. But you don't think that it will go on to the consumer.

I think it's tricky. No, I mean, it's, the problem is that imagine that this water bottle here costs one pound and interchange goes down by 1%. Will I even notice or care about 99 pence versus one pound? And I think that's been the problem historically. So Australia has interchange at 4.

49 and a half basis points by law. And now, I mean, and this is not me supporting Visa. It's more of, it's very peculiar that you have an industry where when prices go down, consumers can be worse off. And in Australia, now there are no more rewards cards. People have to pay an annual fee to get a credit card in many cases versus 15 years ago where credit cards were free and they got 1% cash back.

So it did, I mean, Australia is a case study of how it did become a transfer of wealth. But it's also kind of interesting thinking about as an investor now, you know, what is there a room for another payment player? There's a consortium of merchants in the U.S. called MCX, and they're trying to wean people off of credit cards. And obviously, if nobody used a credit card and you paid zero percent, that would be great for you. What the MCX merchants have found is that to wean people off a credit card, they have to bribe them with rewards and all sorts of other things, and those rewards cost 5 percent or 10 percent. Because if I want to change your behavior and get you to drop Visa or drop MasterCard,

I can do it. But I'd have to say, I'm going to give you 10% if you go switch your payment instrument. But wait a minute, I'm only paying 2% right now in fees. So that's kind of part of the question is like, how do you? I mean, there is a massive opportunity here because the incumbents haven't innovated in a long time when it comes to core payments, but the distribution is just so broad. So unfortunately, I don't know what the answer is, but we founders kind of often use this this method of imagining the future. To imagine the future of, you can't really imagine the future of payments costing even 49 basis points. It just doesn't make sense. You know exactly how, if you know how payments, card payments work, you know, electrons go from the terminal or one

web browser through the gateway to the issuing bank, money gets deducted, electrons go back, and it's done. Doesn't cost 49 basis points. Definitely doesn't. So you can't imagine the future where card payments are going to cost as much as they do. The question is, how are we going to get there? And that's probably the excitement of being a VC, of seeing so many different people trying in different angles, and then taking a bet to which one's going to go through. I personally raise my hand.

I don't know. I know it's going to get there, but I don't know how. I raise the same hand. Yeah, I'd offer the kind of the analogy of, so think about Facebook and making a status update or Twitter and post-react. a tweet, it's free. And so you have this wealth of communication that is happening because it is free.

When you get to making a payment online, any type of payment, there's a tax. So on Tilt where there might be a $3 payment or someone's pitching in $5 for a cause they care about or something that's happening on the campus, there's a tax to that. And so I don't know what the amount is. I don't know what's potential would be unlocked by removing that tax. But I do know that if Facebook taxed you $0.25 every time that you wrote a Facebook post or uploaded a photo on Instagram, they charged you $0.25. There would be a lot less information that would be distributed around the world through Facebook, Twitter. You know, WhatsApp charging you 25%. It's inconceivable.

And I think that that's happening right now when it comes to payments in the transfer of wealth. And we don't know the real cost of it. The closest thing that I can get to is, I know in some estimations, peer-to-peer payments in the U.S. is $1.2 trillion a year. The amount that happens electronically, digitally, is only about $5 billion. So that shows you the delta that is happening digitally versus what is happening through cash and checks where there isn't a tax.

It's a very U.S. thing, by the way. And that could be a very U.S. thing. I'd love to ask, why do you feel it's a U.S. thing? I've never written a check in my life. You use the bank out, right, here. Right. Well, this is one of the peculiar things, which is every, I've seen dozens and dozens of payment companies,

and we'll help you send money to your kids' school or will help you do something. Checks are free in the U.S., and all the newfound business models need to make money. So they end up charging more than this classic infrastructure, which is totally antiquated. Like, you should never be writing paper checks. but it's actually cheaper in the U.S. in almost every case to write a paper check

than to make an electronic payment, which is crazy. What do you guys think about, just a question, about advertising or kind of advertising driven banking? Because you brought the Facebook example. Facebook can't charge 25 cents for a post. They show us adverts. They advertise. What do you think that, do you think that banks are going to be like taking fees from advertising in the future?

So this is right in line with Alex's side of things with trial pay. I love to hear his answer. I think that there is definitely room for a new model when you have eyes on your product. And when you can provide for retailers out there next year is a big focus for us to add in businesses tapping into the millennial consumer group that we have on tilt to where you can start. We have the Atlanta Hawks tilting merchandise with jet blue tilting. deals for their customers on Twitter, things like that. And I think that definitely when you're providing content

for people to consume, it opens up a new avenue to monetize beyond transaction fees. Actually, we're out of time here, but I'll add my two cents. That was exactly what I did for nine years at trial pay. I mean, I still find it, we didn't quite hit it just because we had the innovation, but we didn't have the distribution, which is why we sold the visa.

but if you're buying something, anything that you can show to a consumer when they're buying something, this is why Amazon doesn't sell books anymore. They do. They sell books and they sell 20 million other skews because the point of purchase is incredibly valuable. It's when you go to Tesco why an N-cap is so valuable. So I definitely think that advertising will play a different role, but it's not banner ads. It's not click ads. It's actually things of genuine value and benefit to consumers, and it's something that all of the card networks are really focused on right now as well. because if interchange goes to zero, how do they make money, and how do they provide rewards to consumers? Let's have merchants fund it.

Well, thank you very much, both of you, and thank you everybody for your time.