The New Wave Of FinTech: The End Of Banking

you [Music] I'm going to try and help set a context along with panelists for what you're going to learn at the the rest of the conference just by way of introducing myself very quickly again Mike Siegel I'm entrepreneur-in-residence and head of partnerships for the FinTech program at 500 startups as some of you know 500 is the most active early stage investor in the world and it turns out we're also the most active early-stage FinTech investor in the world with 140 companies in our portfolio in 16 countries I've also spent about the last seven years helping Swift and its member banks learn how to work like and with startup so I have a little bit of context from both sides of the equation here in talking with a panel the panelists getting ready to moderate here we sort of hit upon one key theme and so I created a couple of slides to again create a context for that for you and then what we're going to do is bring up each panelist in turn have them give a bit of their perspectives and learnings and then we'll hopefully break into queue a reasonably quickly sound like a plan for everyone okay so I'm going to start by showing you this little chart which was created by Mackenzie to describe the predictable way in which industries are transformed by digital technology and it basically goes like this new technologies are invented startups are the first to adopt them right they come up with new ways of doing things that customers like so early customers start using it at some point incumbents in the industry begin thinking about wow what's going to happen with the customers there we really need to get on the on the ball in terms of adopting these technologies and then when things shake out inevitably some of those new entrants have become the new standards and some of the incumbents have gone the way of the dodo right so if you want to think for example about the video distribution industry right blockbuster went out of business six years after Netflix was launched and today the companies that are thriving are those companies both new and incumbents who have figured out how to do deal with the new realities of constant new technology and new ways of working coming to market and if you think it can't happen in regulated industries think about the fact that skype 840 percent of the International telecom market in about 10 years right now the other thing and the one thing if you took nothing else away from what I'm going to say is that the digitally native companies are the ones that set the standard for what customers expect now they're not always the winners but they set the standard they show customers the ways that things could work how it could be easier how it could be faster how it can be more convenient how it can be with you wherever you are right so these are the ones that control customer expectations and so many new companies come to market so quickly that it's virtually impossible for any company established or new entrant to keep up with those expectations so thinking about the financial services industry which is one of the biggest in the world right it's basically untouched by digital today and because of things like regulation and interconnectedness and the scale of the businesses they are hugely inefficient 30% of the staff of the financial services industry is on operations and compliance and that makes them virtually unable to service the 3 billion new customers who are entering the market who can't go to a branch and don't have access to a desktop and they really don't have enough profitability to be interesting and since 2008 the financial industry has also squandered the core asset it has that it was built on and so enter stage left FinTech which is to make financial services whether for income new entrance more efficient certainly for customers and there's about 12,000 FinTech companies operating today and they've taken about 50 billion dollars in investment which is up 10x over five years that's astonishing and I want you to think about the fact that the companies which are at the center of customers digital lives also figured out that they can create better experiences and do better for themselves and their shareholders if they Wow that didn't come out did it if if they take the lead on embedding financial services and how they work as opposed to waiting for the incumbent industry to do it that makes sense to everyone so where we are today is that incumbents are figuring out that they need to start moving faster right but there's a problem in financial services that really doesn't exist in other industries think about those giant companies and the regulations and the legacy infrastructure and all of that and the fact that they exist to stamp out risk have a really hard time transforming their culture and those individuals who could help them to transform right the Millennials who understand how all this stuff is going to work the last place they want to go work as a bank so this is the issue that keeps CEOs and board members of banks up at night how are they going to get the talent to try and transform and on the other side of the equation the fintechs they figured out they can be agile but there's no such thing as a Lean Startup in financial services so what's happened that hasn't happened in many other industries is banks have come storming in to try and partner with and learn from and work with startups right they want to depend on startups essentially to outsource key parts of their innovation and so these are just some of the giant companies that that I've encountered some of them have had the privilege to work with who are investing in creating disciplined programs to work with startups to learn how they how they work to work with them or partner with them to invest in them and to transform their organizations and hopefully increase something that I refer to as innovation throughput okay so that's context was that useful for you yeah interesting kind of maybe okay so now I'm going to invite up Ken Reese who's CEO of elevate to give you his perspectives and learning so far thank you thanks Mike hi I'm Ken Reese I'm the CEO of elevate you know disruptions become almost a cliche in fact probably forms the basis of a great drinking game at VC pitch meetings these days question is what does disruption mean in the world of FinTech is it going to be like the kind of disruption we see here on the screen you know Netflix leading to the destruction of blockbuster Amazon leading to not only the destruction of borders but but half of the independent booksellers going away Uber's already resulted in in the bankruptcy of a yellow cab up in San Francisco you've got Airbnb there according to some numbers as our agent taken 2.1 billion dollars of revenue away from the new york city hotel industry we've already got people sort of on both sides of the equation saying who's going to be the winner and the loser and FinTech of course sofa has weighed in saying banks are just going away Larry Summers saying that we're going to see 70% of the small business lending move away from banks to non-bank lenders and even Jamie Dimon kind of weighed in with his his scary comment that Silicon Valley is coming on the other end and more recently I think there's been some schadenfreude from the people saying that well the Penn tech industry's really not as good as everybody says you've got you know online lenders pulling back you see some cracks in the foundation of FinTech lending and then of course jamie dimon weight back in saying well actually what the online layers are doing isn't that tricky after all it's not it's not nothing mystical banks can do it so you know what do we think is going to happen you know we think actually thanks and fin tech lenders at a perfect symbiotic relationship banks have some advantages that are not going to go away in addition to all the customers they have they've got essentially a government subsidy in the form of free capital and a the National Bank Act which allows them to lend seamlessly across the US on the other hand banks are for better force and essentially allergic to innovation they haven't innovated much in the past years and unlikely they're ever going to do it because it's not in their DNA as opposed to fin tech providers which con tech innovators have baked into the DNA of course is innovation we understand how to use technology we understand how to use big data and new analytical techniques we move really quickly and most importantly we understand how to acquire customers online and we understand how to build products that in particular Millennials as Mike mentioned want to see because they don't want to go into a bank branch so you know what are the kind of symbiotic partnerships that are going to win in this market we had elevate would suggest that it's not going to be you know chasing heavily banked customers with me to products which has been in you know for the most part what most of this pin tech revolution has been all about more financial services people who already had a lot of credit products that look very much like other traditional Bank products we'd argue that the most exciting innovations are going to come from serving underserved customers in particular the 160 million Americans that don't have pristine credit and we're looking to products that are specifically tailored to the needs of these customers not neetu products so what's an example well now no surprise a product that we offer calls us call elastic it's originated by republic bank uses our technology and analytics platform and it's really a where we call it a a flexible credit account it's a credit card without a card but quite different from the traditional products that are available not just to our customer but to to the financial community in general it's all online instant decisioning no paperwork it is no origination cost no cost at all unless you use it and it's really meant to be a financial safety net for consumers who don't have other options and then I think in addition to serving the immediate term need that consumers have there's a heavily heavy focus on improving financial wellness and financial health to the consumers that use the product with financial literacy tools free credit monitoring credit reporting so that customers have additional credit options and hopefully can improve their credit scores and their financial options over time so little bit of background looks like that chart is having a little bit of trouble there but as you can see we started out with a very extensive and long pilot program very important when working with banks banks don't like to have unexpected problems so worked out all the kinks got the compliance problems all addressed made sure that underwriting was working correctly then moved into a very rapid scale-up and as you can see you know we're talking about over 75,000 actually that chart isn't quite right but that number by the end of June should be north of 75,000 customers with 300 million dollars of credit originated there are very very few I'm not sure of any other FinTech lenders that are acquiring 75,000 new customers in a year and that's really just the start of this product just out of the gate and I think what we see is that this is a type of product that can lead to true disruption this is a type of product that theoretically can lead to the end of say payday lending as we know it so high levels of customer satisfaction but and probably just as important as a customer satisfaction score that NPS score bankers in the room will sit will realize never happens in financial services that's incredibly unique and it's because customers understand that this is a product that's serving and unique set of needs banks aren't typically serving these customers and worse the options that customers have today payday loans tide loans etc are really not what they need and so they're very excited by a product that banks can offer that's much more responsible than the traditional products they have available for them so just a couple words of wisdom from our side what we learned working with banks it is not a situation that is deals normal to either banks or a FinTech lender both sides have to adopt and evolve to make these sort of partnerships work you know it takes a true partnership a lot of close communication almost continuous communication on the bank side it's really important to have crew skin in the game deep oversight of all aspects of the program to be successful on the syntek side however a deep understanding their compliance requirements that banks are going to have and a change in the way one rolls out new features to be understanding of the fact that you can't have any mistakes and when you're doing financial services with the bank and then finally a disciplined focus we tend to feel that banks Bank branches are an innovation killer in financial services so convincing the bank to state out of the branches and go directly to new consumers we thought made a lot of sense and I think that's part of why we've seen such rapid growth of the product so net net of all that you know we think that the financial services disruption is and will happen but it's not going to be based on the the sort of zero-sum game of previous innovations but much more about partnership and win-win type of relationships Thanks that's great thank you Ken all right I'm going to go ahead and ask Hughie Lin from a firm to join us I don't know if you know the DNA of a firm but comes from PayPal yeah which I think was number one here you go you're going to need that thank you all right hi everyone whoa I am a Hulan I hail from a company up in San Francisco called firm a firm currently lens at the point-of-sale to our consumers through our 700 or so merchant partners a firm was founded by a guy named Max Levchin who also co-founded PayPal I've known Matt for nearly two decades now don't go try to calculate my age and I joined the company shortly after he started in 2012 so on with the show you skip ahead FinTech is hot the fact that there are over 310 DS here trying to see girl what is so hot about it is a testament to that and what I hope to do today is to share a little bit with you about how to stay hot now here's an idea rather than thinking about innovation as a way of producing new things disruptive things how about think of innovation as a way to restore what one's used to be really really good Thanks used to be a really good thing it was a place that people would look to to empower his customers in fact as one of the places people would go to make sure that they will look to guide them for a better tomorrow but along the way Bank got lost regulations piled on and the pressure for growth a growth in an unhealthy way growth in a way in which rather than look to people to pay for the services they provide it decided to turn to profit from people's misunderstandings and mistakes well we all know that bangs aren't all bad I'm sure all of us your bank somewhere they have local presences if you just walked through the financial district where I work at every single corner you will see a beautiful branch and with that they are still able to build a personal relationship which can even elude it too it's something that they do really really well of behind the counters if you were to look you will find systems that most Americans no longer know how to maintain and thus they are slow-moving FinTech on the other hand is Swift and agile it doesn't have to worry about moving to the cloud because many were born in the cloud so I such the biggest opportunity ahead of us is leverage all that new technology to help restore what one was really really good and perhaps along the way reading then what is now the bad so no one will argue that it is very very hard whether it's the regulation there's a whole host of complexity that goes with something as big and a daunting as the banks so what I'd like to share with you today actually is a set of pillars or principles that we look to at affirm to help guide us because we know there will be dark days ahead of us and so while these are the affirmed values I hope that they resonate with you in a way that for all of us in FinTech or in financial services and these are the core values that we look to as part of our journey to innovate Ken alluded to this a business without people is nothing so people must come first so one of the ways in which we behave to this very core value is that in this very moment we are actually taking on building our own CRM we believe that the only way we can actually truly put the best interest of our customers first is that we must have the technology to do just that we have to have an OE mindset we have to know where there at any given time through our journey the next value that we look to to guide us is no fine print fine print scares our customers away this is not the way to build deep relationships it is that clarity that will draw them closer much closer to understanding their money their well-being and as a result you can actually build some true relationships another value we look to this is really a dish at our firm I refer we have a ritual where every single person it's called hashing are required to clean up after ourselves at the end of each day this is part of how we make sure that we behave - this and another way to think about this is really owning up to the outfit tubes of the regulator's yes we are a small start-up we can look away the other way a rather than doing that we decided to own it up from day one our chief compliance officer hails from the CFPB another way of owning up to this is the accounting system oh my god it makes my hurt head my head hurts every time I think about it and it is definitely something that we have considered many times of outsourcing but rather than outsourcing we are taking your on on our own because we believe that managing money is a very very big responsibility and therefore you need to know where every penny is that at any given time simpler is better modern society demands this it is that simplicity that will allow you to actually see clarity and how we behave - this is that we don't hoard hoarding is easy you can hold on to the past so to behave - this one of the ways in which we innovate is that we take the time to get rid of codes that are no longer relevant we throw away processes that we no longer use and in that we hope that we'll be able to run our business efficiently as we embark on our journey towards our North Star finally pushing the envelope I always say e G's have been done right this is like innovation you've got to push so what the heck does this mean and how do you do that a way of doing this is a notion that most of us are familiar with which is known as champion and Challenger so for the very moment that our data scientist shows up with a brilliant idea after having figured out the data that they just analyzed we would demand that they come back with another one to bring it down it is that process of champion and challenging that will help us develop the muscles that we need to get to that very very North Star and it is also that North Star that ones were there that then we actually will have the means to up another level oh sorry so with all that said I will leave you with one final thought and that is of all the things that enzyme there's one thing that we always looked here and that is to make sure that our incentives are perfectly perfectly aligned with our customers and in that process you will be able to join me join us at a firm and all of us in FinTech to innovate but most importantly restore the good the good in banking and perhaps along the way rather than kill the industry is that we embark on a journey to elevate the entire industry thank you that's great doing thank you very much all right so now I'm going to invite up Safwan Shaw who is president and CEO of pay active all right test your microphone there hello god works and you okay yeah okay now that we have been elevated and affirmed I will you know generally agree with Ken as well as Huey thank you very much happy to be here however I want to start by giving you a new idea because I think there is a massive transformation that has taken place rather than be critical of banks Lord FinTech let's think of an idea an idea at the core foundation of what we call movement of money between billions of people in this world and I will use that as a basis and at the end of these three four or five minutes hopefully hopefully in a good way I would have planted an idea an idea which I think whose time has come so what is the world like it is about to just put some stats because we talked about various segments without getting the numbers out very clearly there are about 110 215 million households in the United States a household is house times 2.3 there are 146 million people who work in the u.s. that the employed base about a hundred million of those people live paycheck to paycheck which is defined as follows that you do not have 400 to 500 dollars in an emergency the median salary in the United States is 52 thousand dollars forty percent or thirty five percent of the people live below 36,000 dollars a month the fees paid by and this actually slide will tell you these are the few of the fees that are paid about twenty two point three billion dollars are paid as overdraft fees to banks twenty to thirty five dollars at a time roughly a billion events a year payday lending is a very small fraction of it only about nine billion eight point five to eight point seven billion dollars and they're actually providing a solution and I say it with it ports banks charge about five to six billion dollars as checking account in saving account fees right some of you know that so this is the lay of the land America is gasping for air do they need more installment loans which is one product do they need or more title loans which is about thirty eight billion dollars a year and a third of those title loans convert into that car or title being repossessed do this I leave you to answer that question or think about it and I move along so this is America gasping for air what do we need then I think certain the current situation is untenable there are just to give a framework because God calls them did a great job he said benefit benefit benefit not how you do it but what you do and what benefit do you bring so let's look at it current situation is untenable you can't keep giving loans to people who are already underwater they're drowning or gasping for air so what do you do that's what you would like to achieve right there this is in Philadelphia I don't know if you've seen this but it moves me when I see this so keep that image in your in your in your mind I think there's a way to solve or at least start solving this problem without capitalizing on the walls of the less successful less rich etc and what is that every single person who works gets paid weekly or bi-weekly or monthly as you all know peephole is a batch process which moves every two weeks right it's a push process that comes from employers to employees while waiting to get paid millions of people in this country and actually across the world access payday loans title loans borrow programs charge on credit cards etc we ask I'll put an idea now what if that whole process of pushing salary to people was turned into a full process everything else in this life is now on time on-demand real-time right that's what we've created a new world then why is there the inability for a person making $15 an hour while waiting to get paid about to be hit by a sixty dollar late payment or a $35 overdraft why can't they access the hundred 200 or 300 dollars that they've already earned why not why are millions of employees giving a two-week loan to their employers when they are for that period of time already collateralizing it against a payday loan etc that's the idea so we offer or we propose and I still want to stay at an idea level because I think a slew of products have to be built around it I will simply present one insight and one idea and hopefully FinTech will take a life of its own around this concept let employees access part of their earned wages it is not alone change the velocity of money money is stuck we can stop the gasping the way we do it is the way we are doing it we go to employers and we say a third of your employees are going to payday loans we do zip code analysis etc show that they are spending about $300 a month it is extremely expensive to be poor in the world and certainly in the United States close to two and a half to three thousand dollars a year is being spent extra in terms of these loans and the cost of these loan so we go to them and we say mr. employer on your behalf we will sit between your time and attendance system and your payroll system and yet your employee access their money in real time as they need it as long as they have earned it what a novel concept new money created out of thin air every week a hundred billion dollars are in what is I call the bank of the employers and nobody is making money off of it it just stuck stuck stuck it is wastages the the keynote speaker said we think we can change that we can put a regulator on this oxygen that is being deprived of so many millions of people and give the control to that individual and that is the model that we have I think it's the win for banks we partner with banks today and they resell the service we work with credit unions they resell the service to their CEG's and we work with large employers I think it is an idea whose time has come it works for employers as well as employees and in 1935 I don't know if you remember this but this comment was made that where will Rogers said that money doesn't trickle down money actually trickles up let the poor person have a little bit of money at the end of the day the rich man will still have it but it would have gone through the poor man's hands so that is what I would like to talk about in the next sort of hour or so hopefully you get some interesting insight in this area thank you very much all right I love carrying this theme one of our investment themes is financial services for the rest of us so we I love these so now I'd like to invite up Loveleen to do who is the co-founder chief strategy and marketing officer for Bank mobile go thank you I have no hand as you can see both of women with microphones in our hands these microphones are obviously not conducive for females disruption opportunity right there so I just wanted to start by saying houston we have a problem so it seems that consumer needs and behaviors are drastically shifting but we're seeing that banks have been very slow to adopt to these few different changes we see for the first time that consumers are now interacting with their bank more through mobile devices than through any other channel we're seeing that on average Americans are walking into bank branches one to two times a year versus interacting with their bank on their mobile devices 20 to 30 times a month we're also seeing consumers 48% of them that are switching their banks saying that the main reason the main driver that they're switching their bank is because of excessive fees and we've talked a lot about that and in the last presentation as mentioned by Mike in the beginning we're seeing 75% of Millennials want to get their financial services from the Google's Apple's PayPal's of the world rather than the traditional banking system although this does pose a problem as I started off it's also a huge opportunity for innovative digital banks like ourselves as well as a lot of the FinTech players that are in the audience and my fellow panelists today so we know that the digital banking environment is truly ripe for disruption according to this Accenture report that just came out we're seeing that the expectation is for mobile banking users to actually double by 2019 we're also seeing that the traditional banks revenues are going to be significantly disrupted by digital banks in the future and specifically the expectation according to this report is that 17% of traditional bank consumer revenues are likely to be disrupted by 2023 which is a huge and very exciting opportunity for us so I just wanted to share with you what I believe to be the criteria for disruption in banking and for context in general from what I've learned so far so one is that it's so important to have a 10x better than what exists today in terms of a customer acquisition and retention model it's also really important to have a product that is better than what is it better than what exists today more affordable easier to use to have developed proprietary technology that helps you your first mover advantage in the marketplace but also create barriers to entry to make it more difficult for your competitors and lastly and very importantly is to the point of a speaker this morning but you need to have a sustainable business and that your income and growth model is equal to or better than the traditional banks or FinTech players that exists today so what we learned at Bank mobile and that's really the reason why we created Bank mobile with understanding these criteria for disruption and what we are is truly a fin tech company that happens to be a bank charter and what we realized is that the traditional customer acquisition model via bank branches really isn't working we've seen through reports that Bank branches that have been opened and that exist today typically only have 1500 or less than 1500 checking accounts Bank branches on average are only opening one net mute checking account per week it's an extremely inefficient model and it's being subsidized by overdraft fees and you know I think that the last speaker is actually quite generous to banks but actually the latest report is that 32 billion dollars is being charged by banks to Americans just for overdraft fee's which we believe is outrageous and unsustainable so what we've done at Bank mobile by really leveraging technology this exponential technology that the first speaker spoke about is being able to deliver financial services and banking in a digital fashion on a mobile device for a mobile first bank directly to the consumer and secondly which is a great strategy for us is our b2b to see so being able to identify distribution partners as well as engaging in white label banking to really acquire customers and so far our first distribution partner is eight hundred colleges and universities across the country that are helping us open checking accounts with such an attractive market which is the Millennial Generation so where are we today by being able to institute these two strategies so Bank Mobile has been in business for a little bit over a year and a half today we have two million customers banking with us we have a customer acquisition strategy in place that is helping us acquire about five hundred thousand new accounts a year and this is what we believe Bank of America is acquiring per year with about 5,000 to 6,000 branches and we have zero branches where we have a 60 million annual revenue run rate right now we have about 600 million in deposits we're expected to be profitable by the end of this year and there's significant opportunities for us going forward so really I believe according to you know Ken spoke about earlier is that being able to have this hybrid model having a FinTech company that happens to have a bank charter and combining the best of both worlds is really where we are today and where many of you guys should be looking to create and so I think the opportunities for us going forward are really looking at partnership opportunities let's not try to reinvent the wheel for everything let's find the best in breed partners and really create this Amazon for financial services in this financial ecosystem for our customers under one umbrella being able to use data analytics to be able to proactively anticipate the needs of our customers and being able to surprise and delight them even before they think that they need those things we to move away from just money transactions which is much more of a commodity and is becoming commoditized and much more towards money management and advice and guidance I think that it's not just going to be about selling products anymore which you know is a means to an end but really selling memorable experiences supplemented with a product to really create customers for life and I think that according to the first speaker in the beginning there's so many exponential technologies that have been untapped for us conversational AI biometrics the Internet of Things for all of us to make sure that we're on the front curve of innovation and so I just want to end with that and hope that was helpful and look forward to sharing more insights during the panel thank you join me up here okay thank you all thank you for being patient up there all right so I've got a bunch of softball on hardball questions but I'd much rather have you guys chat with the panel so hands who wants to ask a question you can ask the panel in general you can ask one of them what would you like to do come on thank you I'll repeat if necessary first time I'm hearing of this idea up there is first time so congratulations on coming up there this IDM now you're saying releasing that that money that is trapped in the in a two-week pay cycle can change consumer behavior but what about the backed up demand for lots of other things that these consumers want to you basically give them a one-time $900 boost but they have $20,000 in unmet needs so who's to say the match is going to burn through those $900 and then are deprived of even that reserve that has been built into the model as follows in the interest of time I couldn't go into this so it's no more than 50% of what you've already earned that's number one rule you always get half your salary and that has a been arrived with data analytics turns out that rent is a big expense it's once a month and groceries etc and some insurance childcare are the big expenses so that 50% is always available to you it is in the staggered cycle more as an allocation tool not because I am thinking that people should not be paid under demand that number one number two that amount that they take is either it's five hundred or less they can never go more than five hundred our model doesn't work for anything else the fee for this is the key thing to remember we charge a flat five dollar fee today ATM machines are charging four to five dollars for money that's already yours we are asking you to pay five dollars for something that is not even accessible to you point number one point number two they never pay that fee turns out that employers see so much benefit for their employees they end up paying half the fee so New York Times wrote an article about it Bloomberg they're talking to some of our customers and they basically said that we are getting less calls for payday loans we are getting less financial stress very increasing turnover so that's why the model works okay okay well over here in front and why don't you when you get the microphone won't you tell us who you are and who you work for making it making it making it there we go my name is Suresh nee Jonny and CEO of real assets which is reinventing the way money is invested and realistic especially large good real estate transactions okay I have a question for lovleen the numbers are amazing right I mean if you are getting what Bank of America is getting in a year it's fantastic in a year and a half but the worry is when are they going to come the banking regulations are going to stifle you how are we going to overcome that well I mean we're already highly regulated and I don't know how much worse it could get and despite that we've been able to to really have the growth that we we were experiencing today and honestly I think that it's becoming more and more in our favor because the the reason we were able to enter this relationship with 800 colleges and universities for example for our first partnership with because the player that was originally trying to do this was actually got in trouble by the regulatory environment because they were saying that they're trying to do shadow banking when they're actually not a bank so it was actually an opportunity for us to enter this partnership because the regular regulator said that we want a bank to do this instead so I think that these opportunities to be able to offer financial services you know through telecom companies through cable companies through e-commerce and retailers the regulator's don't want these industries being part of you know the banking system alone and they really want to partner with banks so I actually view right now the regulations to be in our favor to help us really create the right partnerships and opportunities to work with distribution channels yeah just to expand on that a little bit I mean obviously thin Tech's the place unlike you know uber that sort of their whole model was let's ignore the regulators and just do what we want you can't do that in financial services and I think what FinTech has to a better job of is reaching out to the regulators and working with them the CFPB's in the middle of completely rethinking they've are a sort of gone sort of industry by industry financial services practiced by practice sort of reinventing what it means to be a fair and responsible provider of these services but they need more advice from from FinTech and they are reaching out you know we met with them in advance of some of their recent rules we had common ground with with both consumer groups and industry advocates coming up and meeting with them on what we think the rules ought to look like which they largely adopted so we have to think the there's a lot of an opportunity to improve the rules to serve the needs of syntek providers because you write a lot of the existing regulators regulations don't work particularly well for FinTech in particularly in the world of some of the new advanced analytics that are going to come out and they're serving them in the process of reinventing the underwriting particular for non-prime consumers that's not well supported by existing models but I think working with regulators we can make some headway with that - great question back there go elemental from Washington DC and a couple of things I am familiar with elevate and elastic we actually probably helped you get in do some of the beta testing when we said no we don't want to do it we gave you it gave you a lot of feedback on or found a compliance piece which I think you all were ahead of the curve today I don't remember do you all hold your own paper or if you partner with banks who ends up holding the holding the paper for the elastic product much like the way other financial services works the bank retains 10% of the balances that originate it and then it participates out 90% that's largely an answer to the Midland Madden case that had a lot of impact on online lending and I think that's probably what more it's going to it's going to happen more instead of this full sale of the credit that's happened the past I think Bank is going to have to keep skin in the game and their their partnerships with third parties now in for Bank mobile I some of the bankers of the room might write the FIR to buy CVA I said on their regulatory review committee and I actually left an opportunity sit with the chairman of the FDIC to be here so you can tell which one I thought was a little more important but don't tell them I said that I'm shocked that you actually went and you went got a bank charter to do what you're doing no we actually it's really tough to get a bank charter and that's partly why we have the sort of barriers to entry you know Mike spoke about in the beginning like the googles and Facebooks and stops getting into banking and I think they are a huge threat in they're really well positioned to do really well and in this industry but right now there is a barrier to entry which is a bank charter so we're actually a division of custom Bank which already had a bank charter there is New York Stock Exchange Bank but going forward as a bank we have the ability to easily acquire another Charter which is what we're in the process of doing right now and raising capital to be able to divest and become a separate entity okay all right around the world there's models for four different ways of going after this does anyone know who Alibaba is so they've got the world's largest by a wide margin Bank now they started off as doing some of the things that some of these people do with their four hundred and thirty four million customers and then ultimately China gave them a charter I you know the the bank I work for I'm third generation started by my grandfather and I would never go into banking now I went already in it other back there hey good morning I'm Jim x9 from trade rocket I actually want to ask you a hard question because you really picked on this industry when you start out by saying the this industry is inefficient and you pointed out that 30% of the cost is in compliance and things like that whether you can't do this industry without that compliance so I appreciate getting rid of 30% of the cause but the environment we live in I'd love to hear your response on how you get rid of 30% of the compliance cost of what we live in I mean how do you do it well over do you want go for it I mean I've got some answers but yeah I will at least try to address this we are dreaming about getting that banking charter and one of the ways to do that is to do rather than sort of you know like what we're over did which is ignore it is invite them in we all share the same worries right and that is to not screw our customers but how do you do that how do you make sure you actually up the oversight so the one wait one of the ways to do that is really to leverage technology it I know it's simply said than done but rather than having people to have to create the files you know we all know about the loan file which is at times still in paper form imagine if you were to digital digital buys that from day one and that at any given day if your bank partners or your regular leaders like to say something that you would be the first to actually be able to turn things back to them without having them to wait a month or so and so one of the ways we're innovating is I mentioned earlier I held back from Shanghai I actually worked in Asia before coming back to to work at a firm and very familiar with all Alibaba and his growth and I remember my boss tasking me with going to find a chief compliance officer and I was like huh what what do you mean and after speaking with a number of Kennedy's and whatnot I came back and I said max I know what we must do we must not let the two-headed monster scare us we got to invite them in we got to invite them in to help us define the requirements which is actually very much part of our systems today so I feel quite good about it in fact I certainly aspire never ever to run a team of a thousand I had an army of a thousand with my previous company in operations and PayPal even though it is very much you know a FinTech disruptor to this day probably more than 50% of employees are dealing with things related to that because it has a legacy systems and so you have to continue to push yourself to make sure you stay with the latest trends to understand their worries and turn those worries into requirements so I'll give you a little more glib answer first of all many bank systems don't have humans on the planet anymore who know how to fix them so it's time to do some replacement second thing is if you look at where FinTech investment is going there's a rising area called reg tech regulatory technology so some more sort of advanced regulators are looking at things like ok how do we do programmatic and AI based enforcement to make life easier for both existing banks and findex so the technology is being applied as as both an enabler and a disruptor that okay yeah say it loud I'll repeat or can I borrow that much oh here we go I think it is that bomb there you go Thanks so I think I'm about to ask you a very unpopular question the question is for both can and think step one say your name right okay so I think both of you allude to the fact that your companies are trying to serve the underbanked population so does that mean the population you're lending to are inherently higher risk and if so how do you manage that raishin how do you manage it differently than the big banks hobb oh I started it to you I'm glad you're exactly right I mean then I'm back up to that yeah Vanessa has been so hard for the banks to serve them I mean they are inherently higher risk and and in fact FICO scores in our mind are inversely correlated with risk mainly because when we see a customer applied to us with a high FICO score that's probably a crook but once it gets or below 700 and certainly below a 640 by Koh score it's really not predictable all for our customer base so so that's why we see the big opportunity within tech because then you know when you start using the new data sources new analytical techniques it banks aren't very comfortable with typically you can actually build really really predictive models and so so we think that that you know we're just I think it's still learning about really how to underwrite and all the new innovation whether it be you know adding more social media information more bank information you know psychographic information on customers there's a lot of really interesting things that we can put into the underwriting as we continue to evolve it but but that's sort of I think the the dream of what we're all trying to do is to try and provide now a new set of products to these customers that I mean banks just can't serve for just the reason you mentioned no banks have pulled another 150 billion dollars worth of credit away from non prime consumer in the past eight years and that's not turning around and it's getting worse you're getting more and more credit available to the pristine credit less and less available credit to the rest of the continent country and and that's why we think there's a huge opportunity whether it be products like ours products like soft ones or hopefully a whole new breed of more responsible products for non-prime consumers Samiha a great question I think it's very apropos lovely and I asked my daughter to open an account so it's gone up by one thank you very much so Samia let's put it in a framework it's what you're saying is what are your risk adjustment metrics what we're putting is deploying is risk adjusted capital right I'm an engineer so correct me and you learn these things two models so it's wristed risk adjusted capital that we are deploying ken is deploying everyone is deploying so where does the risk come from risk comes from future what will happen is this person going to be able to pay it off or not if that person is living paycheck to paycheck let's unpack it 4900 215 fifty two hundred dollars per cardholder credit card debt $96 a month is the payment one three to four loans or title loans that they are servicing if they've got an installment loan debt servicing that however tricky it looks they're servicing that so about a few hundred dollars a month are being paid off each American is under on an average level at two hundred and forty six thousand dollars so rack risk adjustment capital dip is deployed based on that FICO doesn't work you can keep doing cool mathematics I've done it all my life doesn't work at the end of the day you need real-time data of behavior of these people where do you get it Facebook you believe it yes or no there's a URI out there so I say change the framework for underwriting we bring the employer into the loop so it's a risk mitigant right and now hundred percent are eligible and the way we do it is we change the lifetime time cycle of the loan or if you call it loan we're treated as non-credit and now what you have is a risk profile you know who they are where they work how many hours they work do they pay their bills too and you can now give them right-sized based on the value that you will describe those types of services so that's how we look at it make sense okay yes please I'm not sorry thanks Scott Syphax Nehemiah Corporation of America so in talking about FICO and these analytics that are emerging right now we built the largest downpayment assistance program for underbanked and credit challenged consumers in the United States did 325 thousand homes but yup lower-income families into single-family home ownership every bank in the country now is sucking at putting lower income middle income workforce housing the related families into homeownership how can we use the types of analytics and approaches that you all are talking about in order to increase homeownership rates and the other suite of financial services that the underbanked tend to opt out of or never get engaged with thank you I think this was alluded to it earlier one of the ways is to just make sure is that the contributions whether you call it a FICO score or the responsiveness of the customers is done in as much of a real-time manner as possible because they are getting paid they are using that money towards something all that are in great information to tell you how they're living their lives and it is through those transactions that you can actually decipher from whether or not this person is truly responsible and is ready for homeownership there's one other subtlety here all I would like to do people may not be aware of it so CRA Community Reinvestment Act basically give loans basically that's what it is give loans to people today if we look at the stats these in the last eight nine years because the world changed in 2008-2009 85% of the money we have printed for want of a better word I don't know what the technical word is we've created a lot of money 85 percent is stuck in the banks the banks can't find risk models algorithms cool enough to give money to people so 85% of the money is churning inside banks now it's not sitting there you know what they're doing with it stock markets are going up it's not because these companies have become hyper attractive what has happened is banks have become traders so 85% of the fun stock now how do we unlock that money we find models which demonstrate that there are ways other than FICO and others to find how many moves between people give money to the lower income people it will come back to the rich people automatically it's just good economics so what I'm saying please keep doing what you are doing let's be lots of houses for these people and the money will come back into the economy and I think there's stuck money that we could release did you ever come on tap no hey hands up if you've got one okay let's look keep going I Gary Frank EMF advisory I just had a question it seems like three out of four of you if not all four of you are basically placing yourself between the bank and the customer you're the customer acquire and does this are we moving towards a model or banks basically become the regulated utility and rather than providing telecommunications or electricity they're providing compliance and capital because to your last comment you said about unlocking that capital you guys are all providing ways to unlock that capital and did the banks in ten years really just become the next generations regulated utilities um let me if I may okay so you remember that that innovation curve right it turns out that different parts of the overall financial ecosystem are innovating at different rates payments came first and lending and sort of financial advice are sort of hot right now and full-stack banking and capital markets are lagging behind but they'll they'll end up catching up if you think about what we just heard about money being locked up in banks banks sucking on a comparative basis on acquiring and getting customers and then we think about some of the acquisitions that have already happened BBVA buying two or three different businesses that touch small business customers and consumers what you're going to find again in that that division at the end is some banks become API only right they become utilities others are going to be aggressive enough to change the way that they engage with customers that's how it's going to ultimately I believe follow me I so I generally agree but not entirely good controversy so you've got 200 wonderful the banks actually are they're incredibly important what Loveleen did was brilliant she put the numbers up there that large Bank is getting not getting customers so where did the customers go did they vanish did the aliens abduct them what happened they are not capable of I was sitting in a bank yesterday in New Orleans the EVP says to me that the fauna has launched this new product new horizon and we know we've opened 100 accounts in six months and now suddenly it made sense I would stunned because I couldn't understand and I understood you'd like Loveleen said so imagine millions of people underwater can't come out of it banks don't open accounts for a lot of people for a variety of reasons so what I am proposing and what we are doing is building a ramp for people to come out of this situation and be ready for backs now it could be so this guardrail that we are building the dis ramp will bring these people out we know how much they you know the velocity of money will go in and out we will know who they are once that is there who will we feed them to we will feed them to banks but for God's sake don't make it a $6 a month account and don't hit them with $35 every I'm they blink so that's all that that has to change so that's my answer to your friend so I'm an opposed the last question if that's okay with everyone if you weren't doing this right now what would you be doing I would probably narrow down to a piece of what I do because I think as you know the question you raised is the most interesting thing in financial services right now I think which is how do you build new a whole new analytical capability to serve underserved customers because people have been working on it for a really long time FICO scores not a dumb company but they've got a product that doesn't work for the majority of Americans anymore and it's going to take a very very different approach it's going to take a lot of focus on new data new analytical techniques I think there's a lot of interesting plays going on to put these things together and we're just sort of starting to see the beginning at the level of innovation that's going to happen I think we're going to see a lot of really interesting data providers and data analytics firms that are going to be able to do some very cool things in this area some things yeah I was amazed at the first speaker when he had the list of all these technologies that are growing exponentially and just taking a piece from some of those I think that these are places where we're going but haven't gone yet but really to tap into ai ai and such an opportunity for us to provide better data analytics more advice when I said we're moving away from money transactions to money management and helping our customers improving back office processes being able to eliminate you know to people that can do you can use AI to do those jobs now in a more automated fashion I think that banks are starting to look at blockchain as well and we will continue to do so as well but being able to use that platform for more secure more efficient more frictionless cross-border transactions is definitely a huge opportunity for us great yeah I'd done echo that point I'm an operator through and through I hate when I see waste or when I see humans working on jobs that aren't real jobs per se so while the front office of banks I mean I was being technique before FinTech was turned speak I think the front office has gotten quite pretty if you look at mobile experience and such it's it's pretty darn good I dare all of you to go look in the back office the back back office where they're not here in California and you will still see to this day that hot tea is a thing that we are training agents to memorize hot keys so they can navigate through the black and green screens and God forbid those fast machines are still the way in which we are using to correct problems problems are at keeping people from getting access to their money so have a heart and that's what I would love to spend a good part of the rest of my career to do is that I've been fortunately not be embarked on a journey of sort of putting the beautiful skin on the UM exterior but I would love to have the chance to take a stab of really cracking but back-end all right tough one I would do three things if I could turn back time I would go and work for Sr I I'm a scientist at heart so that's what I would do number one number two since I'm a fin tech guy for 20 years I would actually you know ask for a job for lovely bit lovely and actually build Bank mobile to something what it I think it's spectacular what can happen there compliance notwithstanding but specifically what I would do I would create a decoupled debit card which is tied to that ten percent of money that everybody is earning I would find a way to call the houses of corporations in America as the greatest biggest cumulative bank take a portion of the hundred billion dollars and move it into the economy I don't need Bitcoin or anything I want to make a fundamental rails where everybody in this country does not have to get into a feed trap or a debt cracks that's what I want to do but next life perhaps that were to fix 2008 so if any of you are working on that I have a check for you so come talk to me um so let me thank the panel can lean theory soft one very much thank you all for participating with us and we'll be around thank you [Applause] [Music] you

Channel: Silicon Valley Innovation Center

Views: 52,007

Rating: 4.8362069 out of 5

Keywords: Banking, Silicon Valley, Innovation, Fintech, SVIC

Id: 3UA4CZW689Q

Length: 66min 46sec (4006 seconds)

Published: Fri May 12 2017