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every company now as we saw with uber and lyft and Shopify and mind/body should be thinking about how to leverage financial services to better serve their customers better retain their customers and drive more merchants [Music] based on the attendee lists about 10% of you work in financial services I believe that if no one in this room changes jobs five years from now that number will be closer to 80% and that's because in the not-too-distant future nearly every company will be a financial services company and get a significant portion of their revenue from financial services we're gonna talk today about the infrastructure that is driving this fundamental transformation and more importantly how it's going to fundamentally change banking for everyone for startups you'll be able to launch your companies faster and cheaper for existing financial services institutions you might finally be able to launch new products quickly or spend less on IT maintenance for every single company even those that have nothing to do with financial services today you'll have the opportunity to launch FinTech for the first time and finally all of those benefits will accrue to us as consumers in the form of more choice better products and more affordable prices and this change is so badly needed the current state of the industry is pretty poor let's take a look at thank you today many of us probably feel apathetic towards our banks but if you're part of the millennial or Gen Z generation who saw your parents go through the financial crisis 28% trust their banks to be fair and honest these are the institutions that hold their money that is a far cry from providing delightful products and that's if you're lucky enough to have access 50 percent of Americans live paycheck to paycheck and often live in an entirely different financial services system they need financial services more they have fewer options and they're much more expensive in these situations you most definitely don't love your banks so why has the status quo persisted for so long despite extreme levels of customers dissatisfaction innovation in any industry is hard innovation and financial services is very hard we take the existing institutions many of which have been around for over a hundred years they have a large brick-and-mortar retail footprint so it's hard to cut costs quickly think tons of long-term leases and then it's hard to roll out new products quickly you're training thousands of employees across the country then we read about these billion dollar-plus IT budgets but at some of the larger banks seventy-five percent of those dollars are spent on maintaining the products that you don't already love so this is an opportunity for startups but there's huge challenges here too it's a highly regulated industry you're dealing with multiple regulators across state and federal and then as we'll see shortly it has a very complex infrastructure given all of these challenges why am I so optimistic about the future there's a parallel here it used to be really hard to start a software company many of you probably remember in the audience 10 to 15 years ago your first step would be driving to a computer store you'd buy physical servers you probably load them up in a truck that you'd borrowed you drive them back to your office to rack them in a server room you'd buy some software licenses you write some code for a database hundreds of thousands if not millions of dollars later you could finally start building the product that you wanted to bring the market now this sounds totally anachronistic because it is today anybody can get started with a credit card in the laptop sitting anywhere why Amazon Web Services brought all of this infrastructure as a service it dramatically reduced the cost of complexity but what it really did was unleash thousands of experiments think of a company like air B&B imagine of air B&B had had to go to investors and convince them to give air B&B millions of dollars just to build the infrastructure so they could earn the right to run the experiment to prove that yes there's a massive market where we all want to stay in strangers homes it might have turned out differently now this same monumental as a service change is coming to financial services and as we'll see shortly it's not just one company it's multiple companies because the infrastructure is so complex but it'll reduce the costs it'll reduce the complexity and importantly it'll unleash thousands of experiments that will become our large financial services companies of the future now we would expect this innovation to come from startups to come from existing financial services institutions but a great majority of it I think will come from companies that are adding financial services for the very first time and it's already happening Apple just launched a credit card now for the FinTech nerds in the audience this was a highly anticipated move but not that long ago how long was your computer company and now they're hoping you're gonna like their credit card as much as you like their iPhone and it could be easy to dismiss Apple because they're known for launching new products they're sitting on billions of dollars of cash but this trend is already happening more broadly take uber and lyft these are bribed sharing companies right yes but if your driver they might also be your banking companies and this does two things uber and lyft both spend hundreds of dollars acquiring drivers and then they have to make up that cost through margin on rides it's much faster to make up that cost if they also have margin on banking services then if I'm a driver I'm probably more likely to stay with a company that is also providing my financial services ultimately if successful uber and lyft might need to acquire fewer drivers this is not just a consumer phenomenon it's also happening in b2b take Shopify they provide website services for any merchant for a monthly subscription fee or another company like mind/body which will help fitness Studios like yoga yoga studios manage their businesses also for a monthly fee turns out both of these companies make almost 50 percent of their revenue through financial services so why is all this happening now really it's the notion of as a service infrastructure is coming to banking and to understand why this is such a big deal we need to look at how complex the banking stack is today ever wonder what it takes to start a bank here we're gonna take a simplified version of what just looks like on the consumer side starting at the bottom this is a highly regulated industry you need a license you can go apply for a license but that could take years so most of the new companies are doing is they're finding a sponsor banker they're boring a license here's your first set of partnerships then you need a database or a course system to help determine where your customers money how is it moving around your customers probably want to get money out of their accounts you need to integrate with a series of payment systems do you want to make loans you're gonna need to know information about them enter the credit bureaus again regulation multiple regulatory agencies that you need to comply with and then we're dealing with money so of course there's gonna be fraud so now we're looking at probably over a dozen partnerships close to two years to Inc these deals and you've built absolutely nothing new that you wanted to bring the market but what if in the same way Amazon did to compute and storage there were companies that we're taking each layer of the stack and providing it as a service and that's exactly what's happening let's take a look at a few examples to start I want to build a simple budgeting or financial planning application so I'm not trying to rebuild the stock I'm just trying to get data out of the stack sounds easy right not really when you dive into it let's say I wanted to serve everyone in this room I would need to know everything about all of your accounts let's start with the base there's thousands across the US I'm guessing I'd need at least a few hundred to have coverage and then all of these banks have multiple different core systems different data formats there's a whole pile of integrations then I need to know about your brokerage accounts maybe I want more detail about your payroll many of you probably have student loans this is an entirely different set of integrations you can easily see how I can spend all of my time building the infrastructure and I haven't even built this great financial planning application that I wanted to bring the market but now there's a company like plaid that provides all of that as a service instead of hundreds of integrations I now just have one ply builds the integrations it maintains the integrations and importantly it translates the data into a usable format and this has helped accelerate companies like earning that allow me to get access early to my paycheck money that I've already earned or blend which is a streamlined mortgage application so instead of faxing in months of bank statements and brokerage statements like I'm sure many of us have done you can just link your bank accounts and be done what could be coming next anyone with student loans will recognize as beautiful 1970s like interface that still persists in 2019 why is it still so terrible part of the reason is that it was only recently that the connections into the servicers and the infrastructures been built so I think in the not-too-distant future we're gonna see a lot of improvements in this industry let's look at another example you've a great idea for a checking account in a debit card this is going to bring us back to the stack that we just went through but I provided a very simplified explanation to actually pull this off you can need many more partnerships you probably need an ATM network you might want your customers to be able to remotely deposit their checks and then oh by the way a lot of these systems were built in the 1960s and so you're writing a whole lot of code to stitch them together and it's enable you what you want to do but again now we have a company like synapse that provides all of this as a service and this is two things first it enables you as the entrepreneur to focus on what is it that you really want to bring to market that's new and different so for instance mercury which is a small business or startup bank that focuses on fast account opening and providing great cash flow visibility into your business the number one reason that a lot of companies go out of business or second what it does is it places a much bigger importance on do you have a deep customer understanding and hence a really great idea of a product that customers need and a great idea around distribution versus do you come from a banking infrastructure of payments background propel of the company that serves some of the 40 million families that are on food stamps one of their founders grew up on food stamps had a deep deep insights into this market they started with budgeting services and are now layering on financial services so let's take a deeper look at one of the layers regulation many industries are regulated if you don't comply you'll get a fine if you don't comply with regulation and financial services you're gonna go to jail and for anyone who's seen ozark on Netflix you would know the lengths to which criminals go to get illegal money for instance from drug trade into the legal system things like buying a cash-flow heavy business where you can easily cook the books or more creatively you can break up your deposits into tiny amounts so they don't trigger the anti-money laundering systems there's a term for this it's called smurfing so banks are required to comply with a set of laws that's intended to prevent anti money laundering it goes something like this they monitor hundreds of lists around the world sanctions list terrorist lists and then on top of that they have to monitor all of our transactions and as you can imagine this results in two things many false positives legitimate customers trying to use bank that get blocks a very frustrating customer experience or just a ton of manual reviews if this sounds cumbersome to put some numbers around it at one of the large banks 30,000 of 210,000 employees work only in compliance the vast majority of them are processing suspicious activity reports from any money laundering what might be more surprising though is that less than three percent of the dollars are actually caught again big opportunity for technology to provide this as a service comply advantage to start does all of these integrations for you so instead of hundreds you've moved down to just one then what they also do is provide much more granular risk controls so that the banks can spend less time monitoring all of our transactions and more time focusing on people who might actually be laundering money this yields a better customer experience lower costs and hopefully over time a much higher success rate one of the big challenges in this market is that once one bank it's really good at catching money launderers the launderers move to a weaker point in the system and this is also the case with another group the fraudsters many of us think of fraud as stolen identities but there's actually a much more pernicious type of fraud and that is completely fabricated or synthetic identities and here's what the heads of data scientists at a lending company discovered they're looking through the database one day and they see a rather obscure name linked to 13 different social security numbers like well how can this be this is fairly easy to solve let's go see which one of these pairs has a credit profile turns out they all had credit profiles this is easier to do than you might think you can pick almost any nine digit number that doesn't start with nine at random it could be a legitimate social security number then you go apply for a loan the first time the lender will come back and say nope never seen this person but then the next time the lender will ping the credit bureau and the credit bureau will say oh yes there's been an inquiry chances are you can find a lender that for a high enough cost in the low enough dollar rate will actually give you a loan and then these synthetic made up people they pay back the loan they ladder up they get more and more and more until in a certain point it makes sense they've got enough money and they just bust out this is a very difficult type of fraud to catch but now we have a company like Centrelink that does all of this as a service turns out fake people take out loans at much different rates than real people and if you're focused on it you can stop this kind of fraud much more effectively keeping fraud to minimum levels can be the difference between a profitable lender and the lender going completely out of business and they've been able to significantly reduce fraud across all categories from auto to personal the small business now these are just a few examples of the new infrastructure companies that are completely remaking this financial stack and providing it to all of us as a service and this is a massive opportunity in the US but it's an even bigger opportunity worldwide some of these companies we talked about are already going to be global but across the world regulation is different the payment systems are different in some cases the financial services stack will be entirely different take a country like Mexico where 80% of the payments are in cash they're gonna need a layer that helps get cash payments into the online system now what's so unique about this disruption is that often times there's one winner and there's a ton of losers but in this case everyone has the opportunity to participate and improve significantly for startups we've seen some of the examples of the new infrastructure companies that are being built and there's many more opportunities there but there's even more opportunities in the thousands of experiments that are going to be unleashed on top last year alone there were close to 2,000 FinTech companies that were launched for existing financial institutions you might finally be able to replace some of your legacy systems and spend less on maintenance an more on launching new products or potentially launching them even faster by partnering with some of the startups every company now as we saw with uber and lyft and Shopify and mind/body should be thinking about how to leverage financial services to better serve their customers better retain their customers and drive more margin and finally the really exciting part comes to us as consumers with new financial services companies spinning up our existing services getting better and maybe even some of our favorite brands launching financial services I believe that in the not-too-distant future everyone no matter their socio-economic demographic no matter where they live in the world will have access to affordable financial services and we might even love them thank you