Video: Serving the underbanked

In this episode of Fintech Thought Leaders by QED Investors, QED Managing Partner Nigel Morris is joined by Albert CEO Yinon Ravid, Wagestream CEO Peter Briffett, Mission Lane CEO Shane Holdaway and QED Investors Partner Yusuf Özdalga to discuss the need to democratize access to financial products.

Show Notes

Tune in to learn:

• [11:25] Why saving small amounts of money, in a forced, automatic way, is the bedrock of financial health.
• [16:10] How Wagestream's "Save the penny" concept has broken down the barrier for hourly workers to save money through earned-wage access.
• [17:25] The psychology of credit scores among near- and sub-prime customers.
• [23:00] Why main-stream banks have chosen to ignore these customers and how fintechs can fill that need.
• [25:05] The reputational stigma associated with sub-prime lending.
• [27:30] The role of regulators and how they legitimize fintechs while building necessary guardrails.
• [34:16] How to build on a core wedge product with additional services

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Nigel Morris is the co-founder and managing partner of QED Investors, a fintech venture capital platform focused on disruptive, high-growth financial services companies. QED has made numerous unicorn investments, including Credit Karma, Nubank, Avant, SoFi, Klarna, GreenSky and AvidXchange.

Nigel is the Chairman of ClearScore and Mission Lane and serves on the boards of Red Ventures, AvidXchange and Zopa.  He also serves on the board of ideas42, and Scotia’s Digital Advisory Council, and he works in an advisory capacity with General Atlantic and Oliver Wyman.

Prior to QED, Nigel co-founded Capital One Financial Services in 1994. Under Nigel’s leadership as President and Chief Operating Officer, Capital One pioneered an information-based strategy that transformed the consumer lending industry.

Nigel grew up mostly in England and takes immense pride in the fact that he is at least half Welsh. He has an MBA with distinction from London Business School, where he is also a Fellow. He is an avid cyclist, but is happiest when he is at home in Virginia with his wife, four children, and three grandchildren.
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Shane Holdaway is the CEO and Board Director of Mission Lane, based in Virginia. Shane was appointed CEO of Mission Lane in August 2019. Mission Lane is a purpose-driven fintech that leverages advanced technology, data analytics, and machine learning to provide a dignified customer experience to people who are working hard to build or rebuild their credit and improve their financial lives. To date, the company has issued two million of their best-in-class, mobile-first credit cards, and also offers Mission Money, a debit product, Earn, an income management tool, as well as the newly launched Credit Builder Account.

Prior to joining Mission Lane, Shane was CEO of Barclays US Consumer Bank, the 9th largest credit card issuer in the US with $27B of loans outstanding and $15B in retail deposits. Prior to Barclays, Shane spent 14 years at Capital One during which time he held various senior roles in Capital One’s US credit card division, including head of the high-spend customer segment where he launched and grew market-leading products like the Venture Card and Quicksilver Card. In 2013, Shane was appointed President of Capital One Canada, based in Toronto, where he served for 4.5 years leading the business to all-time highs in revenue, profitability, and customer satisfaction. Shane served on the Advisory Board of Mastercard Canada from 2013 – 2018.

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Yusuf Özdalga is a London-based partner at QED Investors with a focus on U.K. and European fintech and proptech companies. Yusuf joined QED in 2017, and his career has spanned roles as an operator, advisor, entrepreneur and investor. His current portfolio of investments include Wagestream, Fidel API, Capitalise, Rest Less, Wayflyer, Weavr, GetGround and Payhawk.

Yusuf started his career at Capital One in 1997 where he helped develop many of the innovative lending solutions in the underserved credit segment. Subsequently he joined the Financial Institutions M&A Group at J. P. Morgan in 2003, advising banks and specialty finance companies on mergers, public listings and capital raising.

He started his professional investing career in 2006, with a focus on specialty finance and consumer credit companies in Europe, including early fintech investments such as some of the first online loan originators in Sweden. Prior to joining QED, Yusuf was an investment director with a growth private equity fund, helping fast-growing companies and entrepreneurs build lasting franchises by leveraging the power of data analytics.

Yusuf holds an MBA from the University of Chicago Booth School of Business with High Honors, and a BS in Commerce from the University of Virginia McIntire School of Commerce with Distinction. He completed his undergraduate degree with a dual concentration in Finance and MIS.

Yusuf is fluent in English, Swedish and Turkish and has a working knowledge of German. He is currently studying Bosnian/Serbo-Croatian.

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Yinon Ravid is the CEO and co-founder of Albert, a personal financial management app with over 10 million users. Yinon started Albert, his second consumer fintech company, in late 2015 to help hard-working Americans improve their financial wellness. Yinon is passionate about design, fintech and simple products. Prior to launching his first two consumer fintech companies, Yinon worked as a credit trader at Oak Hill Advisors, a leading alternative investment firm with more than $50 billion in assets under management. Yinon studied economics and computer science at Columbia University.
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Peter Briffett is the CEO and co-founder of Wagestream, a B Corp social impact business, whose mission is to provide fair financial services, built around pay, to improve the financial lives of millions of frontline workers.

Peter is a seasoned entrepreneur, notably selling a U.K. business to Microsoft and achieving the best post-acquisition metrics in Microsoft history, and heading LivingSocial as one of the fastest-growing tech companies in the world. Some of the companies he has built have become multi-million-dollar global brands and engaged tens of millions of consumers. Some of the others, like his attempt to try and sell the entire global export supply of champagne to China, have been complete disasters.

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Full Transcript

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Nigel Morris:

Hello everybody. I'm Nigel Morris. I'm the managing partner of QED. We are a global fintech technology-focused venture capital firm based in Alexandria. I am really incredibly excited to be opening up the conversation today. I think I'm really looking forward to a spirited debate and some really trenching comments from the panel that we've put together. The focus today is on the underserved, and a key motivator, a key thesis in everything that QED has done, is that there's an opportunity for fintech to be a real force for social good, and to enable more financial inclusion. Our mindset is that whether or not you are in the U.S. where Shane and Yinon are, or where the UK where you Yusuf and Peter hang out, but banks by and large have traditionally ignored half of the population. Pick a number. If you have a Fair Isaac score of under 650, it's really hard to get access to reasonably priced credit.

If you have a score under 650, you probably don't have a lot of deposits, and you probably have a lot of income volatility, or certainly expense volatility, which means that through a bank distribution system, historically branch based increasingly digital, you're just not very profitable for a bank. Then you probably don't have a lot of assets to manage. The banks are saying, "Look, we're just not going to focus on you." With that, the banks have really taken advantage of the information asymmetry that exists with the consumer. The banks know your data, they know more about the customers than many other people, and they leverage that data to create opportunities for themselves. Consumers by and large, don't have a lot of financial education. I think it's a widespread issue. I know our panelists will talk about this.

Therefore, it's hard for consumers to navigate the system to figure out how to negotiate the system. These points of friction have afforded the fintech universe to take advantage of that opportunity and really to serve, if you like, the underserved. Today, I'm joined by three CEOs of three incredible portfolio companies, that are revolutionizing the ways that the underserved is served through fintech. We have Mission Lane's CEO, Shane Holdaway, from Virginia. We have Wagestream CEO, Peter Briffett, joining us from across the pond. Peter, nice to see you.

I should say that QED was quite involved in the building of both Wagestream and Mission Lane. We have Albert CEO and co-founder, Yinon Ravid, based in sunny Los Angeles. I was recently in Los Angeles, Yinon, and I realized that after three or four days, you forget to look at the weather because the weather's the same nearly every day. I hope you're not going to make us feel jealous about that at this point.

Good to have you all here. So, gentlemen, I really, really appreciate you joining. We also have Yusuf Özdalga who looks after the U.K. and Europe for QED, and has been instrumental in working with Peter and building Wagestream with Potman out of the ground. Look, thanks for coming. I'd like to just do a very quick round table, if we can, where you talk a little bit about your company, how big you are, what you do, what your comparative advantage is. Anything else you'd like to share, that way our listeners can get a sense of where you're coming from, and then we'll kick off and jump into some content. Let me go with you Shane.

Shane Holdaway:

Absolutely. Thank you, Nigel, and Yusuf for having all of us. Great to see everyone. Shane Holdaway for Mission Lane. Mission Lane is very much a mission-focused, implied in our name, mission-focused, purpose built fintech focused on credit challenge consumers. Our fundamental foundational belief is that people want to and can improve, and so we start with the thesis of, how can we give people access to better financial products and then help them on the path or the lane forward in their financial lives? We have about two million customers now that we've served with our products, grown quite a bit over the few two years and have had a lot of fun doing it. I guess, we'll talk a little bit more about where we're headed. Won't we Nigel? I'll just leave it at that and I'll hand it to... Who do you want to go to next?

Nigel Morris:

Let's go to Yinon. Yinon, sir.

Yinon Ravid:

Sure, thanks guys. I founded Albert in 2015 with my co-founder Andrzej. We're a personal money manager for the broad American consumer. Think people making 25-35K a year that don't have access to your PWM, private wealth manager, Morgan Stanley, or JP Morgans. Don't have access to financial advisors, don't have access to financial services that do the work for you. We have over 10 million users now. We offer budgeting, banking, savings, investing, credit, and a team of human financial experts that we call our geniuses on answering financial questions. Put that all together, and we were working to replicate what the high net worth customer has always had access to the broad American consumer.

Nigel Morris:

Thank you, Yinon. Peter.

Peter Briffett:

Yeah, great. My name's Peter. I'm the co-founder of Wagestream. Our mission is, as has been from the beginning, from inception, is to improve the financial wellbeing of frontline workers. We do that by partnering with employers and providing a set of financial services that are built around pay and distributed as employee benefits. Through an app, a frontline worker who's the sector we're trying to service or a lower income shift worker, has the ability to track and understand their financial position in real-time. They have the ability to access any earnings throughout a pay cycle to prevent them going into debt, as well as access industry leading savings products provided by their employer, and financial coaching or based around an app to provide a financial wellbeing solution that will help frontline workers access far better financial services than they could normally access from traditional banks.

Nigel Morris:

Yeah, Peter, Shane, Yinon, just a couple of thoughts here. Shane, what you are doing in terms of offering sensibly priced, responsible, clear pricing, is a breath of fresh air for this population who struggled to get access to credit. Yinon, the use of your geniuses to provide advice that only high net worth people get, to do it digitally, and then to leverage AI on top of that has been instrumental to your incredible success. And then Peter, the frontline workers who have gone through hell with COVID, and are now having to deal with energy and inflation has never been a time where the businesses like the three of you are building are more important. This is a great time to really make a huge impact in people's lives who ordinarily would be getting the short end of the stick.

Let's start by just talking about the state of financial health, if we like, and to talk about how your business models are making a difference. Well, two thirds of Americans say that they're not financially healthy, a massive number. I talked earlier about the fact that half of America can't get access to the right kind of credit. There's 131 million people who are struggling with something that's going on in their financial health. Lack of financial health leads to all kinds of other knock on effects in people's lives around their mental health, whether not they end up having to go bankrupt. Certainly in the U.S., how they deal with bills such as medical bills for loved ones. I mean, it has all kinds of negative impacts. There's a huge percentage of Americans that don't have bank accounts, that are unserved. There are a bunch of people who have some rudimentary capability and have come to the fintech, but don't have much in terms of capability. Candidly, Americans and Brits haven't really been able to show the dexterity and confidence around managing their own money.

We've seen companies such as the payday lenders, Peter, that you talk about a lot in the U.K., where they say online it's 1% a day. People like that because it's really clear, not at all recognizing that 1% a day is 30% a month, which is an extraordinary number. I think people are taken advantage all the time by the incumbents who have that information asymmetry and have the power. It's businesses like yours that are looking to address that balance going forward. Let me kick off the conversation with that to say, look, when you think about financial health as an overarching theme, what do you think the biggest issues that your customers face? You said earlier that these... You and I have talked over the past, they tend to be younger, they tend to be part of the gig economy, they tend to be urban. Give us a sense of what's on their mind.

Yinon Ravid:

That's right. A customer is largely the bell over the curve. In terms of age, it's 25 to 30. Median age is about 30 years old. Median income is about 50K a year. I bucket them into three things that basically cover all the themes that you just mentioned that afflict people, their financial health. Saving money, budgeting and planning, and  near term liquidity. Saving money's pretty straightforward. People are generally pretty terrible at saving money because it's a boring, clunky exercise, right? The first step is to help people save money and making it simpler and almost forced. When saving is forced, which is again, going back to what the private wealth managers offer high net worth client, it's a sweep account, is what it used to be called.

They take your money and they move it, so you can't spend it. It works great. We offer that to customers as well, and we've seen that works pretty well, right? If you take the money before you can spend it, you can get financially healthier because it's good for you and you can't spend it. The savings account caught it before the credit card can spend it. That's theme one. If you can get people to save, everything else really pales in comparison to saving, because savings addresses near term liquidity, it addresses budgeting, it addresses planning. You have more money. Of course, you need to make enough money to have that money. But at a minimum, you're able to start to solve from this problem. The second piece is, the really that I don't know what I don't know, and I don't know where to turn.

Things like, "Hey, can I afford more rent this month?" To things as small as, "Can I afford coffee? Those are two of the most common questions we hear people ask Genius, which is our financial advisors. They're a flavor of the same thing. Can I afford X? Which means, have I saved enough? Am I making enough money and is my outflows, my bills and spending larger? There's a lot of that stuff. Those are pretty basic ones. You can go to, should I buy or lease a car? Am I getting ripped off on this lease? The list goes on. Should I pay down my debt? Should I invest? What should I invest in? And so forth. That's this big nebulous area that's hard to quantify, but that goes back to you, creates the financial unhealthy and the mental unhealthy because you're just lost.

Nigel Morris:

You said, saving's boring and savings is a key to this. How do you make it interesting and how do you make it so that your customer actually cares about savings and sees the benefit of it, other than just sweeping the money before they can spend it?

Yinon Ravid:

The thing is, you don't need to make savings interesting. I think that's a complete policy. You don't need to make it interesting. You don't need to make it not boring. Savings is boring. There's no reason you should have spent any time thinking about it. That is the first thing to just dump the grocer. That is completely okay. That doesn't mean you don't save money. You just need a ritual, a habit. What we've done is just try to create that ritual or habit. People really actually want us to never think about savings and from put the money to just save on ultimately. I think the answer to savings is not to make it fun. It'll never be fun. It's a chore. It's just like sweeping, right? It's just like cleaning. There's no fun to that. It's like laundry.

Nigel Morris:

If you wire it up, my words, so that people get into a habit, into a frequency, then it gives them loads of flexibility and don't have to worry about it anymore.

Yinon Ravid:

Yeah, the way we think it's your word, is you connect your funding source, whatever that is, when it has a little extra money, a few dollars a day or a week or whatever, we just pull it and save it for you. You give us authorization to do it, and when you can afford it, it just comes out and you look up in a week and you're like, "Oh, I had an extra $36 this week that I would've spent. Great." There's no joy in that. You don't want to think about it.

Nigel Morris:

Peter, you can find joy. You can build enthusiasm and find-

Peter Briffett:

I find much joy in saving...

Nigel Morris:

So Peter, always access is about giving people access to their own money, money that they've earned hourly, but they don't get paid until a fortnight or end of the month. Do you think you have to make savings interesting?

Peter Briffett:

Well, yeah, I think it's a great conversation. We think it around with savings quite a lot. And because we are partnering with business and we access the sort of workforce management date, so we can see in real-time everyone doing shifts. Our initial savings product was, well, as your salary passes through us, let's deduct a bit of that salary and put it into a high interest savings account for you. About 5% of people did that. And we thought, "This isn't very good." We thought we could get more than that. Then one of our engineers came up with this concept of save the penny. Now, we actually round down shifts. If you've done a shift at McDonald's $40.80 cents or whatever, we round down that 80 cents, put it into a savings account as you earn. And bizarre, like 45% of people did that.

It just reduced the barrier, even though the savings amount that's accrued at the end of a pay cycle's actually more than the salary deductions were. There's smart things you can do to try and encourage people to save and it's around... And once they get in that habit, like Yinon says, it does become a thing that they want to do, and they can start building up savings, pots, et cetera, to enable them to obviously have those buffers. But yeah, there is a barrier to people wanting to save, right? I'd rather have the money in my account and not put it somewhere else, even if it makes financial sense.

Nigel Morris:

And I would imagine the zero to one, getting them started, getting them signed up is the hard, but once they get into the process of-

Shane Holdaway:

Yeah, forget you about that, it's a plan.

Nigel Morris:

Shane, you're the other side of the equation. You are lending money by and large, although you're building out your product all right. What do you see as the biggest issues facing this population?

Shane Holdaway:

That's a great conversation. I think and hit it in terms of what we... When we talk to our customers and we ask them the question of, do you feel financially healthy? And then if not, why not? One of the things that they identify as the ways that they measure financial health? We always hear two things, for better for worse, these are the things we hear in our customer's minds. One is savings. Some version of that. They have some sense of, I should have some amount that I could tap into if I needed to. Then the second is, again, for better for worse, is credit score. That's just our friends here in the U.S. at Credit Karma and other, the bureaus have made the credit score like a headline number that our customers who are near prime, subprime, in terms of that credit score, they know their number. They know that number, and in their minds, as that number goes up, I am financially healthier. Whether or not that's the case, that's the psychology.

Nigel Morris:

They feel that. They track it and they feel that. I go from 620 to 640, I'm feeling like a better human being. Am I?

Shane Holdaway:

That's the psychology of it. There's these two numbers, credit score and what do I have in my savings account, that they point to. But when we dig deeper and talk to them, it gets to some of the more emotional and psychological elements that were mentioned earlier. We hear things about anxiety and stress. They won't say. When we ask them, are you financially healthy? They don't say, "Well, my anxiety and stress is high." But when we dig deeper, we see that's the real consequence. It's a lack of confidence. It's a lack of really knowing my path forward, and that leads to that anxiety and stress. I think beyond the headline metric of a credit score, it's that feeling of, "I know I can make it. I know I can provide for my family. I know where I'm going to go from here." That's the real sign of financial health for our customer.

Nigel Morris:

I know the net promoter scores of all your businesses, and I know that all three of them are spectacular net promoter scores. Your consumers really appreciate what you do for them. Yinon, your geniuses are human beings that help people digitally navigate the phenomenons we've talked about. Do you have any data about how your customers feel better and feel more financially healthy?

Yinon Ravid:

Feeling, it's hard to measure. I can spin something for you, but I think that's a very difficult to measure. I think we try to focus on the more concrete things that can actually affect change. How much money do we save up for people? How many fees did we save? I guess, ultimately that-

Nigel Morris:

Yeah, empirics, how much money they have, what...

Yinon Ravid:

Yeah, you've been with us for six months. Have you saved any money? If you haven't, you haven't done very well. If you have, you're going to feel better than when you did at the beginning. How much better is extremely difficult to pick on.

Nigel Morris:

Peter, what do you say?

Peter Briffett:

Yeah, we just did a state of financial wellbeing survey in the UK and the U.S. with about 10,000 workers, and what came out of that survey, was that 24% of that entire workforce are worrying about money every single day as they work. It is an issue. It's that financial stress that people feel on a day to day basis. I mean, if you're a thousand person organization, that's like 7,500 days of worrying about per month, which can cause people angst in the workplace as well. That coupled with the cost of living crisis that is now being experienced by everyone, but has a more detrimental effect on a frontline worker or low income worker because a larger portion of their paycheck is now going for things that they bought 10%, 20%, less for six months ago. It has a real impact on an organization.

Peter Briffett:

And you know, Nigel, financial product or financial services are emotional, right? They create an emotion within someone. If they're done well, people love you and are very happy with you. Conversely, if they're done badly and you screw someone financially, there's a real negative, they hate you for that type of thing. There is an emotion around money. It's a very emotional thing in many people's lives, and is on the forefront people's minds a huge amount of time.

Nigel Morris:

Yeah, and I think we expect, as we see inflation and energy prices coming out of COVID, these frontline workers are feeling more and more stress, I'm sure. Your 24% probably goes up, Peter. Yusuf, question for you. Do you see the mainstream banks, the incumbents stepping up more to support frontline workers, the underserved, the near prime, sub prime, whatever we call this population, or do you see them really just ignoring them going forward?

Yusuf Özdalga:

Yeah, I mean, not really, Nigel. When we first launched Wagestream in the UK, and we were part of that working very close with the Peter and Potman, it was striking this statistic that we uncovered, which is, more than 50% of workers, of people in the UK, live paycheck to paycheck. That's defined as having less than 300 pounds in your bank account at the end of the month. That ratio is similar if not slightly higher in the U.S. When you live paycheck to paycheck, the slightest unexpected expense can throw your life and mental health into great turmoil, right? There's basically two approaches financial institutions that take into this. One is, let's try to serve them. A lot of them have realized that is very expensive to do if you do not have the kind of technology, like virtual ledgers and integrations with real time payroll and so on, that Wagestream has, it becomes very expensive.

Then they jack up the price, and they get adverse selection, and they jack up the price even more to compensate for the losses. You go down a sort of dark path, or you do what the mainstream banks have done, which is what you were asking, which is to ignore them and do nothing. The traditional path has been either more win-lose, or lose-lose kind of outcome, or let's ignore it, kind of outcome. But with new technology, better credit underwriting that Mission Lane has, or the better fintech tools like virtual ledgers that Wagestream has, you're actually able to serve them 10 times cheaper than the legacy institutions. Just doing the affordability check is very, very expensive for Wagestream. It is free because they have access to the real time payroll and how much shifts the worker is working. The affordability check happens instantly and automatically. Banks can't do that.

Peter Briffett:

Yeah, and I think it's true that the poverty premium is what we're all trying to solve for this underserved population is about $640. Is the more that a frontline or a lower income worker will spend on financial services as opposed to middle income or high net worth earner. That poverty premium. And that's a lot of money, right? Just because I'm lower income with volatile pay, if I do shifts, I'm paying more for traditional banking services, which is completely ridiculous and shouldn't happen. I think all of us in our own ways are trying to solve for that, right? Just because you are lower income, you shouldn't have to pay more than the oligarch who is getting everything for three. That doesn't make any sense.

Nigel Morris:

Yeah, particularly in a world where we're serving customers digitally, and the cost to serve is much smaller than the albatross of a fixed distribution branch network, for example.

Shane Holdaway:

Nigel, can I add something to that? I think Yusuf and Peter have it dialed in, the cost to serve is a big factor here. We also see in the U.S., I think this is maybe slightly less the case of UK, but still a force, which is, there's just a reputational stigma barrier for a lot of financial service providers for credit challenged consumers. Some of it comes from the regulatory regime and how the regulators have approached serving that market. Some of it is just maybe a little bit of a, I don't know, still this sense of radioactive fallout from the great recession where subprime mortgage was the epicenter of that. That had painted a lot of people's perceptions of serving credit challenged consumers, but we see that.

When we talk to larger financial institutions and even some of our fintech peers, there's just this little bit of this like, "I don't want to be associated with serving higher risk consumers," and we see that as unfortunate in many ways, but also an opportunity. If we can do it in the ways that we're talking about here with better cost to serve from being digital first and focused on our cost structure, but also using data in a different way and using technology in a different way to be able to underwrite better, price better, give more access to better products, and that's the way forward. But look, we've got to have... I talk about it sometimes, you got to also have a little bit of thick skin, because someone's going to say, "Oh, you're trying to serve customers and you're doing something to take advantage of them? Whatever. You just got to be above board and make sure that you're doing things in the right way.

Nigel Morris:

Well, I wasn't going to go to a regulatory so early in the conversation, but I think you've opened unpacked all. The regulatory apparatus worldwide makes grandiose statements about, we want to support inclusion. We want more people to have access to transparent products. We want products to be fairly priced. But some of the actions that are taken by the regulatory bodies sometimes can really get in the way of the objectives that all three of you have. Are regulators helping you or hindering you in the objective of pulling that off?

Yinon Ravid:

They're definitely not hindering. What you would like to see from regulators is as new financial products are launched and innovated, you'd love to see regulators adapting them really fast and legitimize them and put the right guardrails around them so that people can't abuse them, but also you're able to legitimately serve customers with new financial products. I mean, the pace of innovation on new financial products is just screaming higher versus what it was 10, 20, 30 years ago. Regulators adapt to the just... If there wasn't a new financial product every year, 15, 20 years ago, today you look up there's a new financial product every, it feels like every month. That's a tall order for the regulators, but the faster regulators can adapt, the better for the consumer ultimately. Most of these products are quite good for the customer.

Shane Holdaway:

I just wanted to add to that. When I spoke to the regulator, I think they're sincere in the goal, in the stated desire to increase financial inclusion. The tools they have, and then not even the tools they have, there's Yinon's point about being able to keep up with all the innovation is absolutely true, but they have a lot of objectives, a lot of things that they're trying to solve for. If the only thing they were trying to solve for is financial inclusion, I think we could probably make more progress more quickly, but there's just a range of different things that they saw for. And sometimes again, probably more in this country than UK, you get political priorities on both sides, that end up becoming the focus and not by on the ground, how can we create better paths for financial innovation?

Peter Briffett:

Yeah, I mean, they, they are sincere in their desire for underserved parts of the population to have access to better financial products. I think we all know that, but we also know government institutions are either regulator. They don't build product, right? They don't innovate, and they're up against a mismatch of incentives really because a bank is there to make money out of financial products. That's their core reason for being. If you're trying to serve a high risk part of the population, it's difficult for them to serve that population in a more cost efficient way. I think what we found is, by redistributing these financial services through employers, well, employers don't have any incentive to monetize individual workers that work for them, right? They take that whole away.

In fact, they will pay for financial services as benefits in order for all their workforce to access fair and financial products. Now, of course, businesses want to see the benefit of better retention, start being more productive, being easy to recruit, but you take away the financial incentive to monetize that banks have had for 400 years and redistribute. Those are sorts of innovations that we can now do with FinTech. Because I don't think that banks will ever naturally want to serve correctly, this population, because as we've seen the last 20 years of banking, they see them as high risk and therefore they'll always charge them all. Whereas an employer has no incentive to monetize their workforce. They have a duty of care for that workforce, it's their biggest asset. If they're getting the business benefits, they will pay for those.

Nigel Morris:

Yeah, and efficiently where you have to compete for talent. Having a really great package of services to your employees goes a long, long way, including given access to their own money earlier. But many other things too. Sorry, Yusuf.

Yusuf Özdalga:

Yeah, no. To tie your question actually to technology, and to use Wagestream as a case study of that, everything Wagestream is doing today from a sort of action perspective, was possible to do 10 years ago, but it would've cost 10 times if not 20 times more to do, and it would've been manual. The latest technologies as we discussed, enable what they're doing to do at a one tenth of the cost. As a result of that, they can pass that cost saving to the consumer, and what the regulator then does, and they do it very slowly because the regulators are understaffed. They have people issues. They have the constraints more so than we have in many ways when it comes to people.

But what they do in their way, is that in the market, they channel the consumer outcomes towards those better ones that they see. If you're not using the latest technologies and you're doing it the way it was done 10 years ago, and have a 10 X cost base to pass on to the consumer, you'll increasingly see the regulators starting to stamp down those business models, sometimes with a very heavy hand. They'll start slowly to get behind the new models that are actually cheaper and meet the better customer outcomes. That happens, but it's a pretty painful and slow process.

Nigel Morris:

Yeah. I think it's well said good points from all of you. Look, the thing I would say to our regulatory friends is, historically anyway, regulators tend to look backwards and regulate problems that existed in the past. I think that with the pace of innovation that you point to Yinon, that you say, Yusuf, a hub, technology can deliver services so much cheaper, and the clear benefits that exist to the underserved if they can get access to the right products and services, I'd love to see the regulatory body starting to white paper and to think about where this is going. And in a sense, provide those guidelines, a priori, rather than being backward looking, and sadly, sometimes feeling a bit like they're auditing what's been done rather than looking forward and shaping the future. But that's okay. I want to move on to a different topic, and that is, all of you have developed business models, starting with a single product.

Nigel Morris:

I know your unit economics, QED is obsessional about that, and I know you all are too. You've now created a core business and you are scaling it and you're growing it, all three of you. The question I have is, how do you trade off scaling your existing or your early wedge business versus building out a portfolio, a Vista of other products that your services want that your customers want. In simple terms, look, neobanks have tended to start either with debit or with lending. Mission Lane, Nubank, Shane, started with lending. Monzo, Chime, Current, Albert, started with a debit product or some version of it. Where do you go from your core product and how are you thinking about the trade offs, Peter?

Peter Briffett:

Yeah, that's a great question. And it's a challenge. It's a daily challenge. I think our core product is earned wage access, EWS, it's known in the business. That is the foundation block of everything we do. I think it's really important for us and our team to be very, very clear that is the foundation block. And the reason that is the foundation block is because, in order to provide that service, we access workforce management system. We have a very, very unique data set. We're the only people that can see in real-time, how much people are earning and their capacity to earn into, into the future. Also we link to payroll systems. So we intersect pay as it passes to our platform. Those two foundation blocks, if you like, are really, really important for our next generation of product to be built on.

I think we are very clear in our geo expansion into the U.S., Australia, Spain and UK being our core market. That the first thing we provide is EWA, because if we don't have those foundation assets of that data set and intersecting pay, we're not able to deliver better solutions on top of it. We have built a muscle in the business to enable us to sign up with large enterprises and provide EWA, but everything on top of that has to be designed around those core assets. I think that's really important. If we went, there's something completely different that didn't require those core assets. Things could get diluted, you'd lose the ability probably to sell what you were doing in the first place and probably lose some of the value of the business. So we are very, very clear around that point and everything we do has to be built and uniquely built on those core assets.

So that's how we think about it, but it is always a challenge because we see open banking data now. We get into the financial lives of our users. All these things we could try and help them with, whether it's insurance, whether it's different types of credit, whether it's credit scores, we have all these things that we could do. But I think it's like with any startup, and you know better than anyone, Nigel, laser focus is the key, right? To get you to where you want to get to. For us, it's making sure we've got those foundation blocks in place. We build on top of those and not do something that doesn't require them. If that makes sense.

Nigel Morris:

Yeah, the need is so great, and the opportunity for other products and services is so expansive. Managing those trade offs is tricky. Yinon, you've always been incredibly deliberate about what you saw coming next and the order of doing it. It's almost like you are laser focused on that, regardless of what other people are doing around you. Could you talk a little bit about what your past product roadmap and what it looks like going forward?

Yinon Ravid:

Yeah, sure. Interestingly, we didn't start with wedge, so to speak. We didn't start with a financial product as a wedge. We started a different part of the food chain. We started with a budgeting app. We started this layer on top that's a budgeting and aggregation app. We said, "Hey, connect your financial accounts to Albert, your existing financial accounts. And we'll take a look and show you what's under the hood. Are you paying too many fees? Is your budget out of whack? Talk to our geniuses. Let's fix this." Then we started to layer into that better financial products to replace the financial products that our customers were using. So we started with savings, which basically said, "Okay, we noticed that your budget's out of whack, the best way to get your budget better is to save more money." So we layered in savings.

Then we layered in earned wage access. Then we layered in investing. Then we layered in checking, and we layered a bunch of other sort of utilities along the way, like lowering your bills, seeing your subscriptions, all these things that would help you manage money. As you mentioned, we did those in a particular order, and the dream is to go, continue to chip away at all the financial products that our customer currently uses. Taxes, insurance products, wills, credit cards. Little by little, you want to rebuild the stack for the customer making 50K a year. Because that customer, the products that, savings, credit, and investment, those products, the incumbents were not built for this customer. In terms of getting customers to use multiple products, we've had a different challenge, different approach, in the sense that, you didn't come to us for the debit card, you didn't come to us for the earned wage access or the savings accounts, and that's your core used in there. Say, "Okay, let's cross sell you this other stuff."

You came to us as your money manager, and you used what you needed at the time. We look at products as this matrix of, how much value? There are really two axis, how much value can the product offer an individual user, and what percentage of the TAM need the product? So when you take savings, it goes to the top of the list because you save money. It's the most amount of value you can offer. And the percentage of the TAM is 100%. Everybody needs to save. You take earned wage access, and your value to the customer is also incredibly high, right? You're replacing a $35 overdraft hit. You're replacing not being able to fill up gas, really high. The percentage of the tip is no longer 100%, it is now a third, whatever your percentages that you think are in a near term liquidity crunch, or whatever percentage you put to it, but still very high.

So it goes very, very high up the list. You take something to the extreme, take a will. Very low percentage of our TAM need a will right now. But for those that do, it's a complete pain, you don't even know where to do it, right? And so, you should probably do that as well. We use the two axis approach to decide what to build next. And of course the best products are the ones... At a minimum, every product you built should have very high value to the customer. That sort of XX, it should never be low. You've really run out of ideas when you're building things that have low individual value. Frankly, there's not a lot of stuff that's low individual value, but high percentage of the TAM, but it does let you weed out a bunch of stuff. Hey, a bunch of people are going to use this, but it offers very little value to the customer, so why should we build it? Our challenge is really building a product that doesn't look like the 1999, yahoo.com home screen. Where you have, think like-

Peter Briffett:

There's nothing wrong with that home screen. It's beautiful.

Yinon Ravid:

It's beautiful. A bunch of iframes and widgets. For what it was at the time makes a ton of sense, but maybe it doesn't make sense in hindsight, but it is what it is. We don't want the financial app looking like that. Financial, if you want a guided journey, it's not a grocery store. You're not picking bananas and oranges and steak, right? You come in and you want a guided journey of what you should be doing, it's our challenge from a product standpoint is you go and ship, check. Think about what people do with money. They spend it, they save it, they invest it, they borrow, those are fourth key things. If you ship, those four key things, plus a bunch of ancillary stuff, you can very easily get a widget machine, which you'll get no usage on, confuse people, and you'll get high churn.

So for us, it's been less of pro sell and more, just how do we create a product that's very clear to the customer what they should do today, and get the high cross product usage. Ultimately, where we send the value in the food chain, being the budgeting, the money management app has let us create... We internally do not use the word cross sell. We call it multi product deduction. Let us create multi product deduction that looks very different than the incumbents or very different than our competitors about, if you look at a new cohort that joins right now, they're generating revenue equally on all of our products. A third of the revenue comes from banking. A third will come from earned wage. A third will come from subscription. They're using each of the products very evenly and episodically, right. You don't always need each of the products at every time, it's usually to be there.

Nigel Morris:

I feel your passion on this, Yinon. For those of you who have heard me bang on about how cross selling is largely a canard and doesn't work and how many an acquisition is justified on the alter of cross-selling only to be massively disappointed. The art of being able to offer other products and services that your consumers want to take up, is about making it really easy, guiding them, as you say. It's not just bananas and apples and whatever comes up in the grocery store. And at the same time, making sure that those products are really valuable to them at the margin and you present it at the right time, at the right place, and it's clicked to get. Those things are prerequisite, sine qua non, and then it's the magic of marketing them. But I think that's well said.

Yinon Ravid:

Well, there's one more concept worth highlighting to the way the customer thinks about this. Customers don't wake up and say, I need a brokerage account, and a checking account, and a savings account, and an earned wage account. No customer's thinking that way. We try to abstract all that joke away from the customer, right? You have one hour, you have one pool of money, you have a balance. That balance should be able to move freely between savings and investing and your cash, right? The underlying fund structure is completely irrelevant to the customer, and yet that's what's largely been marketed to the customer. Customers don't care nor shouldn't they need to care.

Nigel Morris:

From my perspective, consumers don't think about auto loans, they think about buying cars. People don't think about a mortgage, they think about living, how do I get into a house?

Tell us about your journey on product, Shane.

Shane Holdaway:

Well, it's interesting listening to this in many ways, Peter, and there's parallels in our philosophy, but we just started at a different place. We started with the core thesis, looking across. At least in the U.S., 100, and depending on whose credit score frame you're using, 117 million, 120 million Americans with a credit score of 660 or lower, or no score at all. We looked at that, and we looked at how poorly they're served by and large in the U.S. Then we said, "Well, what is the thing that is the pain point?" A different version of value to user and tan for Yinon's framework, and that's access to quality credit. So we started with that. We started with credit cards in particular, because of the dual benefit of the... There's just a ton of utility and flexibility in it. Day to day commerce, short term liquidity. It's not a great long term borrowing tool. We don't like that tool for long term borrowing, but you could use it if you needed it. It has a bunch of utility and flexibility, and it's also just really hard to build and scale.

So from like a competitive moat standpoint, we thought that's a good place to start. If we can get inertia there, get some momentum there. It gives us a platform upon which to build. Again in U.S., anyway, there's a perpetual supply demand imbalance in terms of consumers who want access to that kind of credit and for a decent price, fair transparent terms, and what they have access to in the market. We started with that and they said, okay, that's the first thing. That's the core product, the wedge, the beachhead, and then it becomes our obsession in terms of expansion. Is, "Okay, well, what are all the other products these consumers, our consumers, our credit challenge consumers are using, and how can we give them better points of access to those products, and then how can we help them progress to the other things that they want? If they can't get it today, how can we help them progress to the thing they ultimately want?"

But with a frame of we're trying to solve for this credit challenged consumer and getting them to a place where they have a lot more confidence in their ability to manage their finances. We have then started with, for example, our debit product, Mission Money, we launched last year. It works like anyone else's debit product, but the frame on it is, the more you use it, the better you use it as a consumer, the better access you get to better price credit. It's just the ability to get to the thing that you want by the multi-product adoption approach. That's the way we've looked at, and we've looked at it from a number of different angles to try to get to, ultimately, to get to better products for these consumers.

Nigel Morris:

Yeah. Shane, Yinon and Peter are both doing earned wage access. Will you do earned wage access? Yinon and Peter, will you be doing lending? Are you beginning to cross into each other's products? First of all, Shane?

Shane Holdaway:

Yes, we will. It's on the road now.

Nigel Morris:

Okay. Are you talking to Peter? You should be talking. Okay.

Shane Holdaway:

We'll talk afterwards.

Nigel Morris:

Yinon, what about lending?

Yinon Ravid:

Definitely. Look, access to credit is one of the biggest problems somebody in our income bracket has. Access to credit sucks. Credit products weren't made for this customer in mind? Going back to that first point I think Shane made, that people look at their credit score as a barometer of help, only because it gives them access to credit.

It's an artifact of the system. We don't really need the credit score to give people access to credit. We have your paycheck, your full income history. We have all the info you need to underwrite credit. Giving customers access, giving somebody making 50K a year access to good credit products is what needs to happen. We'll definitely.

Nigel Morris:

Yeah, and that was your third point about the near term liquidity of the need of the population. I agree. And Peter, lending?

Peter Briffett:

Yeah, I think we're going to tackle insurance first. The more we get into the financial lives of our users, the more we see where they're really getting and they're suffering and getting ripped off, and insurance is a big one for us. We're really keen on that, and using the power of the enterprise to enable cheaper insurance products, right? So use corporate risk as opposed to individual risks. But yeah, credit as well. I think Pacific credit, Pacific purposes, things like rental deposits, we're seeing people unable to move house, which they're not able to get that amount of money for a rental deposit, those types of things. I think certainly a lot of our employers are asking us for these types of services. So yeah, we're going to look at everything like that.

Nigel Morris:

And you can leave with your scale to start to negotiate on behalf of your customers against the incumbents.

Peter Briffett:

Absolutely. Our view is, yeah, financial wellbeing or financial wellbeing of an organization's defining issue, people issue of this next decade, especially with the cost of living crisis. Why can't employers pay for these types of services, right? Why can't they be the provider and pay the money that allows their staff to get access to these amazing products for nothing?

Nigel Morris:

Can I say this? An hour has literally flown by here. Final comments from you, Yusuf, anything you would add to this conversation?

Yusuf Özdalga:

No, not really. It's been amazing. I think the underlying thread here is that, technology is changing and that change doesn't amount anything, unless you get entrepreneurs and founders who use it to deliver better customer outcomes. I think Nigel, you and I both, and everybody at QED is really proud to be able to support such great founders, delivering such outcomes.

Nigel Morris:

Yeah, look, I entirely agree. Look, full circle here, I think the three of you and other companies that we're involved in, I'm thinking of Rain and Refyne and OneCard and Jupiter and Summer and Flywire and Caribou. These are all companies that are trying to make a difference in the lives of this population. The opportunity is massive. The time is huge. The appetite is incredible. In a digital technology-enabled world, we can offer these services cheaper and faster and less friction. I think that the more we can keep this issue front and center with the politicians and the regulators and the companies that you sell to B2B, Peter, with various entities that you can all partner with, I think it's going to be really terrific.

Hopefully we start to make a dent in this issue, and really start to serve this population better and better. As you all add millions and millions of customers, it all adds up in a really palpable way. Final comment from me is, I really do passionately believe that fintech is a force of social good. It's a force that will change the lives of millions, tens of millions, hundreds of millions. Credit Karma's got 120 million customers. Nubank's got 15 million customers. This is just the beginning, and it'll end up being billions of customers that are advantaged as a result of the great work that you're doing. Shane, Yinon, Peter, you are amazing entrepreneurs, and we are so blessed to be able to work with you, and in some small way, help you on your journey. Thank you for giving up an hour of your time. I hope our listeners and watches enjoyed it as much as I did. I thank you much and really appreciate it, Yusuf. Appreciate it. Thank you, guys.

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