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[Music] welcome back to arcs vis 2020 QA video conference as Tom mentioned I'm Brett Winton arcs director of research and I'm joined by a Jackie resis so Jackie you've led Square Capital since 2015 if I went through your whole resume it would take a long time but before that you were Yahoo and spearheaded the Alibaba staff the Yahoo had so quite a tumultuous exciting career can you talk about what led you to Square in the first place and then how an introduced kind of Square Capital but also how to square change from 2015 to today is it expected or unexpected what's happening a lot of good questions there what attracted me to Square was that it's a uniquely inventive company and I think from a culture point of view and a dynamics of the executive team it's a really enjoyable and intellectually challenging experience to be with people who I consider to be incredible inventors and so that it's square really feels like that from the inside out I think additionally I think it's a very well-run company because it's a company that can always look forward acknowledge mistakes be reflective of those mistakes and then continue to push forward and so I think it's really exciting particularly in the world of fin tack where there's not a well laid path before you to be in an environment that's endemically inventive and so that's why I came and it's been fun ever since 2015 I joined right before the IPO which was an amazing time to join in you mentioned thin take it it seems like fin tech should have happened a few times already like during calm you know the banks were all supposed to be disrupted then you know after the financial crisis kind of the financial ecosystem seemed like it was in such a people that was the time that fin tech was going to kind of disrupt things but it seems to actually be happening now like why is it happening now why is square having getting the traction it is as well as kind of your you know competitors and and like what is it about this moment that you think opens up the competitive space yeah well interestingly skill square was started in the last recession and so if you think about when when entrepreneurs step back can often be in times of absolute crisis where they're sitting in a consumer environment and a business environment where they feel intrinsically the pain of a set of customers and that pain point and that appreciation for what's happening and why a need isn't being met is the reason why a company can get started and that was how square got started which was an appreciation for carrying around the supercomputer in your pocket yet not being able to do a mobile transaction for a small business and so that was the catalyst for square I think over the last 10 plus years you've seen those businesses scale to the point where they're now far more significant players in the economy having said that even within the payments ecosystem it's still a highly fragmented industry that's still largely dominated by legacy players and so cloud-based systems are really still a very small part of the overall Tam for that market so there's still so much opportunity for FinTech players to operate today a lot of times people ask well you know surely the incumbents see this occurring now they have and this is this is a question that happens to us across innovation it's like they have essentially unlimited balance sheets you know how have you seen kind of the competitive response to what you're doing and in what prevents them from from reacting to disruptor like Square you know it depends where you're talking in the banking ecosystem like if I were to think about lending banks start with an incredible advantage and you reference it which is this balance sheet that they use and frankly they're valued based on the their ability to use their balance sheet smartly syntek is very different FinTech is focused on the end concern customer the need the problem that they're solving the job that they're being hired for and square for example builds elegant simple products in order to meet that need we don't come at it from a balance sheet point of view in fact we typically abstract away all the value chain elements that a bank typically has from what our customer sees so that they only see how the product is delivered for their benefit as opposed to the rest of the plumbing that sits underneath the banking ecosystem which is how how we all focus on piecing the product together to deliver it for our customer and so I think culturally we come at these products from such different dimensions that it's a bit ships passing in the night I suspect that will evolve very differently in the future as the boundaries between what's a bank and what's a FinTech evolves I think we're a perfect example of that we will own a bank in short order and so there will be a blurring but I think the orientation and the way we think about invention might might still remain very different between the two different types of companies and specifically within capital you know I saw actually a business owner was tweeting the other day that his best banking relationship is is with his credit card processor lol like why should a credit card processor be able to allocate credit better than Bank which has a long history and all kinds of processes in place you know what you're referencing has to be in relation to PPP we participated in the Paycheck Protection Program and we received a lot of public feedback about the experience and how differentiated it was from traditional banks even starting with the same guidelines and the same the same start of the gun I the products look very different from an orientation thing why should a a credit card processor be in the in the banking system I kind of step back and say that squares and ecosystem to support small businesses start run and grow their business and so I don't really think of us as a credit card processor I think of us as a player that builds broader products to support customer needs and if you think about where lending and square capital because I didn't mention it is a small business lender we use machine learning to facilitate loans to small businesses our average loan size is $7,000 so we look very different than many banks that have a million dollar average loan size we facilitated almost 7 billion dollars of loans 6.8 to be exact to 340 thousand small businesses across the United States I think there are a few dynamics that are happening today that make what we do interesting in the context of a payments ecosystem credit happens now in context and that I think is the biggest driver of why lending should and can take place in a differentiated way with the advantages of the payments ecosystem we have billions of data signals that come in every day into our system that allow us to facilitate loans to many businesses that have been unlocked using traditional means of credit and so because of the way that we underwrite and actually operate in those signals we can unlock access and we can aggregate data that enables us to have a better picture of a small business then many other underwriters can introducing traditional means so when you say like credit happens within context you're basically alluding to the fact that having those distribution points then then allows you to to kind of instantaneously be like oh it looks like you need working capital here's an opportunity for a working capital loan so yeah go on so it's an interesting Caymans data is current it's very detailed and it provides a full picture of revenue it's right in a point-of-sale system so it's in context with we're a small business does their business and it enables small businesses to be in their own environment and have credit be available at their own fingertips and so I think that's the future for how lending will happen whether that's in payments the way we operate whether it's in payroll also the way we operate or even broader outside of square on things like accounting and tax data I think the context really matters for being able to facilitate underwriting in a more organic setting in and does your ability to kind of to operate within that context is is the product space or the potential product space opened up to you because of the bank charter that you've just gotten or is is like does that give you more strategic flexibility in the kinds of products you offer or is it more of like a margins accretion thing yeah it's um there are a lot of reasons why we saw it an ILC charter and an ILC charter is an industrial loan corporation it's a bank that's chartered in Utah and today we work with an ILC to facilitate capital loans and so we have this one relationship which underpins the infrastructure within capital and so as we were looking forward as a very significant scaled player in the business we saw a few strategic reasons why it was important for us to secure our own charter first it's just controlling our own destiny we obviously are very large we wanted to be able to control the relationship with our regulators and make sure we had that direct relationship we wanted to make sure that relationship lived and died off of our own cesses and so we weren't beholdin to any bank any other issues related to our bank the next piece of it that was interesting is that we also have a lot of products within square that actually operate with bank partners and so even though the Charter started with capital and it's very significant for capital because it's what facilitates our loans there are places over time where the Charter can be applicable both in terms of core lending and deposit products but also across products that exist at square today it seems as if there is I mean you know if you look at squares entire portfolio of things that it offers it's kind of duplicating though the old bank but maybe in a more humane way you know did like there's an obvious inhumane product set out there which is credit card where people buy our borrow buy accent and they face your spheres terms did it Square Capital restricted to the to the small business space or Square Capital can be a consumer small business employee kind of across the entire company so we focused on small businesses and we believe there's a huge opportunity to serve small businesses if you think about what we do our average loan size is seven thousand dollars it truly is a Main Street product and it's truly a market that is completely ignored by banks both in terms of geography and it where you have little businesses all across the United States and banking deserts where they're no longer is a bank branch or even with regard to scale and so there's so much space around providing credit in a more flexible way even beyond what our core product looks looks like you know we started with a core flex loan we've developed term loans which are just fixed amounts over a month we also finance hardware that you could buy to onboard to square so we've made that process an easier process and then will broaden out to banking services with our bank and so we're truly focused there and you know that'll that'll take us into the foreseeable future yeah it seems like the the one of the unique things about square and some of the other FinTech players is is they have these concentric ecosystems that overlap and and reinforce each other can you talk about kind of how the culture and square enables that and and also how innovation companies like yours have responded to the uncertain environment that they've seen you know for the last three months yeah I think culture and tech companies is the most important driver of invention and I think it's truly what differentiates a lot of the very successful companies whether they're officially called tech companies or not and you have to look broadly at all the systems and infrastructure that you have in a company and by that I mean any element of both stated and unstated norms within a company around what what is rewarded as success and what it is rewarded as failure and whether a company can learn from its mistakes and so in a company like square I think we're able to look forward and pay attention to hypotheses about the future and be willing to make bets on them and be wrong and potentially be rewarded for being wrong so long as we then understand where we could go and pivot in order to course adjust and so we've been able to organically create new products cash up is a great example of an incredibly successful product which is getting a lot of attention recently because of its success and some of the very cool features that it launched and that was when organically built products Square Capital came out of a half week project where a series of engineers and product managers decided on a two-day project that they saw a need and they were gonna build it but the beauty of a company like square and the culture like square is that someone was willing to say that's pretty cool I think we should fund that and actually put people behind it and then go experiment on it and the people who sat in that early on and we're not fearing for their career or their success if it didn't work they were excited to work on something that was new and inventive and to try to figure out what was happening and so that's what I mean by people that are willing to experiment and make mistakes and pivot and so it's an important part of creating a culture and creating systems in place to enable that organically and so then within the context of you know certainly the last post but six months in three months call it you know how is that kind of culture reacted to kind of the series of you know acute events that we've had and and then within to our capital how if you manage the uncertainty particularly on the credit side but generally yeah I'll I'll focus for a minute on the pandemic because I think it touches I think to your credit question where you're going one of the interesting elements of square is that we were already focused on being a distributed workforce before the end of February and so from an orientation of a leadership team we thought about how we were going to set up recruiting hiring onboarding regular team management time zone management team culture technology so that we could build a company that could operate in any distributed fashion and so that got amplified with kovat 19 and we were one of the first companies to go work from home in the valley and so we had our bumps early in the road around you know how do you get equipment home you know we want to hardware development shop in San Francisco and so our hardware team had unique experiences that you know they had to send equipment home to you know and figure out how to get it there and and so we had some very unexpected questions that we needed to solve but having said that we were able to do it pretty quickly and respond pretty quickly and I would credit Jack for his foresight into appreciating and pushing us to make sure that we can succeed at this even before March hit and then on the credit side you know one of the interesting dynamics of a lending business is that you have to understand how to underwrite and underwrite critical to underwriting is models or models that can predict the future well when you have external exogenous interventions that disrupt your typical modeling flow it completely eliminates your ability to underwrite in a safe and sound manner and so we actually at the very beginning of March took a moment of pause because we didn't know what we were underwriting at that particular moment and so as soon as we saw the trends focused on shutdowns abroad we started to spend time planning around how we would manage it in the United States and we were from a manual override about two weeks ahead of where we started to see all of the payments data change and so we were very on a day-to-day basis we were watching the signals and so we ended up housing our models and proving to ourselves that the combination of human judgment and watching the data understanding the economic environment and the nature of our models got us well ahead of any challenges on risk and so I think we were very lucky to be able to manage credit quality and ball Tilla t in advance of any significant problem having said that I would expect credit quality to diminish in some f those cohorts of loans that were last released prior to the shutdown you can expect IRS to be consistent when you have two months worth of reduction in payments but we are seeing a significant change in trends after the reopening mid-april and so it's been very very encouraging to see the data subsequent to that complete shutdown and end of May beginning of April and did you have to like talk this through with your partner Bank on the back end I mean they must have been concerned about the quality of the portfolio right I mean that was yeah so you know we spent a lot of time across the value chain and with our own team making sure that we were taking in payment signals as well as ops and support signals from our capital operations team spent a lot of time with our data science team and we ran on daily stand-ups when we were watching changes abroad around this issue of this is the moment when we all need to be laser-focused on any volatility and changes in credit quality and so we started to meet internally daily and then in addition to that we added other players in our value chain like our bank partner and like our investors who buy our loans and so we were very focused on making sure everyone had fully transparent data or as transparent as we could give them and we really didn't hold anything back you know as we were seeing it we would get on the phone with folks and make sure they understood what we were saying yeah it does seem as if kind of you and your ilk of FinTech player you have real-time data like it seems like you have a live or look into the world as it's happening then others who yeah I think it's um the immediacy of it is really important and the depth of it is very important and so you know signals like volatility and number of transactions concentration and customers active days you start to watch patterns of behavior that become concerning and you can also see it in different geographies different size of company different different types of environments like rural suburban and urban and so we watched all of it to see you know at first we were just watching for four overall patterns whether there were places we could continue to underwrite in places where we couldn't but as more and more governments government local governments were stepping in to make decisions about whether commerce could happen it became obvious that we weren't able to participate in a forward-looking underwrite at all during those moments the one challenging dynamic though is that decision sounded really smart and we were well ahead of the game with regard to managing risk versus data in the model and probably ahead of our are many of our peers but it's a really painful decision for people who want to deliver a service for sellers and when they absolutely need the credit we spent hours on the phone debating whether there was any way that we could keep credit open and how we do that for the better of our sellers but because we had to focus on the long term delivery of being able to provide credit we've had to manage all the players in that ecosystem our sellers first and we always start there but we also had our bank partner regulators and it and investors and so with all of that we were forced to pause and make that decision even though you know I think from a seller point of view I know we disappointed people and it's frankly one of the reasons we pivoted so quickly to PPP because we didn't want to disappoint our sellers and anything we could do to make sure they had access to we absolutely wanted to deliver on no matter how painful it was in processed right right and and it was interesting that that the tech players got in were eligible to participate in PPP and people had a great experience with it you're still on pause on the traditional credit product at this point right or yeah as of today yes where we're trying to finish delivering PPP and make sure that gets completed with forgiveness application out and so we're focused there first got it got it so you know potentially forthcoming but it's as that's the modeling that you do fundamentally changed over the five years in like a profound way or is it been a continuous series of improvements have there been like injections of new technology for credit modeling or is it you know interestingly our models still do a great job of ranking volatility and the credit risk of merchants and so I don't see us changing our underlying models because our data set is so large on small businesses we have a really good read on the underlying health of small businesses and so I don't foresee any changes to those models I think to get us started we would have to make some adjustments to those models because we have to deal with what just happened and making sure we're managing out that volatility over the mid-march to end of April time period but beyond that fundamentally I don't see anything changes changing I think the one benefit we have from this dynamic is that the blind spot we always had was that around an economic downturn and I think we've just felt that in spades and so as much as we ran every scenario for playing out a downturn I think this will give us richer insight into how our models could be adjusted for future downturns going forward and so I do think we'll have insights into variations in product structure that we could deploy and I think we have more confidence in our ability to underwrite it in turbulent times uh in terms of the future you have you have a lot of I mean really fascinating experience here on the board of NPR you're on the board of the SPAC that became Virgin Galactic gotta you know can can you talk about both within Ventech what what do you see is the the the major kind of not things to expect but but but changes that you would anticipate over the next five years and then more broadly within kind of the economy markets yeah I I you know I do think you've seen the evolution of how fin tech has made banking services more intuitive and you might not think of them as banking services because you're interacting with them and they experience and says elegant and beautiful but I think we you really have seen a significant evolution in those products proliferating on the consumer side think on the business side they've been less forthcoming and that's why I'm so excited about what we're doing there's still a dearth of products that supports services for small businesses and even though the sqaure ecosystem feels like a a wide berth of products between customer loyalty and our developers products and payroll and retail point of sale and restaurant point-of-sale and our invoices product and all the capital products around instance if I incent deposit lending there's still some so much space to offer those services in the future and you know I mentioned where credit happens in context I think businesses will start to see these products to Bella at their at their fingertips a few other points I touch on but didn't quite mention is that we also have seen in data science become at the under the underpinning of new systems that allow credit to open up to businesses that have never been served and I think that aperture is finally widening to many who were perceived as too risky and have previously been been locked out of the financial system small does not mean on credit worthy and new does not mean on credit where thee and I think will prove that to the world and it's great to be a part of that process I also think the aggregation of data will be very interesting because it'll give a new holistic picture of businesses that has never been perceived before and so that enabled the delivery of new products so I think with all of that it will bring together financial products that are the right size and the right place in context for businesses versus searching for these piecemeal and silo products that have otherwise been challenging to get took credit you know credit reports and all kinds of personal guarantees and things like that in order to secure even though they seemed like very basic products do you think I mean I like the idea at credit happens within context doesn't investing also happen within context do you think that you could enable kind of your cash app ecosystem users to invest directly into the small businesses in some way and some kind of credit instrument is that a possible direction yes you know cash app is a very large large ecosystem of consumers and so I would say broadly of course they could invest in lots of different asset classes I think fixed income is one of them you know if you think about credit to small businesses it's a it's a fixed income product to small businesses whether there's a retail market or not you we focus on an institutional market versus a retail market it's an easier market to scale which is why we focused on it but you can absolutely see a world in which cash up customers or any financial you know ecosystem of consumers would want to invest in very strong healthy returns and a fixed income product and so it absolutely makes makes tons of sense yeah it's kind of if you think about like a loyalty program it's kind of like you're investing in the business right this you could just directly invest or even during this crisis the restaurant bonds where they sell off a gift card and then you get you know a discount when you actually use it something like that you want us to to create bonds for our small businesses would you like to invest in you know XYZ coffee shop in New York City and we can aggregate coffee shops to create a to create a fixed-income poll of uh of urban coffee shops I like that idea oh my god Lee exactly and then you become an advocate for the business you're invested in so it's a way to kind of stitch together the local community you know when we went public one of the things we did was led sellers invest in square and it was such a wonderful moment to have this kind of shared belief an appreciation for wanting to see each other succeed I love that it just made made me feel like we were all emotionally connected to each other but I like the fixed-income idea well we'll you know we'll think about coffee shop bonds there's a lot of product iteration that has to help before that ever sees the light of day yes that's it would require some operational execution I think okay I would be remiss if I didn't ask your opinion on Bitcoin and is there any kind of way in which Square Capital will plug into that do you anticipate that any blockchain technology will appear on your product roadmap within kind of the capital employee your side of the business right now we have a Bitcoin product and cash app yeah you by Bitcoin in the app it's a great experience if you haven't used it I highly suggest everyone use it it's super easy I think it really democratizes it makes it super easy to use and you don't have to sign up for another app or you know send your penny back and forth in a different experience than the the peer-to-peer network that you're already a part of with your cash tag you know as it relates to lending we don't really talk about what's on our roadmap I think we'd have to see you know our seller seeing it seeing a demand there and we'd want the experience to be a great one and so you know today we're very focused on opening up square financial services come next March and making sure that we could deliver on our lending products and on deposit products for small businesses that's our that's our first priority even though I do think it's pretty cool to have a Bitcoin lending product but I'd like to make sure we could deliver on our bank as well right okay well thank you so much Jackie for your time and and congratulations on on you know running and spending up a really incredible business line in Square Capital we're gonna take a one-minute break when we come back ARC's founder CEO and CIO Cathy wood will interview dr. Jennifer Doudna on everything from her Co discovery of CRISPR gene editing to the future of healthcare thank you [Music] [Music]