Invest Like the Best with Patrick O'Shaughnessy
00:02:27 · David Vélez
[00:02:27] S1: If you look at global consumer financial services, it's about a $10,000,000,000,000 industry and still something like 90% of that industry goes through banking branches and is owned by incumbent banks. So while there is a lot of neo banks and fintechs across the world, a number of different areas, we are all of those fintechs and all these neo banks together, we're less than 10% of that entire market. Still in financial services is still almost as if 90% of the world was going to blockbuster to get VHS and DVDs. And Netflix like services still had something like 10% of that industry. So that transformation, that migration that you've seen in our industries, in media, with Netflix, in retail, with Amazon, with the Barnes and Noble, in transportation with companies like Uber, that migration from incumbents to digitally native companies is still very, very early in financial services. I think NewBank is very unique, specifically in Brazil and Latin America, because we are really the only new bank in the world where we've fully surpassed the biggest incumbent bank. In terms of scale, we now have in Brazil close to 120,000,000 customers. So up to 65% of the Brazilian adult population is a customer of us. So in terms of sheer scale is very large, but even more than that, we become the primary bank account of the entire country. So about 60% of our customer uses us as their primary bank account. Replaced the incumbent bank. We're not a secondary wallet. We're not somebody that you leave that. We are the primary institution where people are really banking day to day. And that is very unique to NoBank in Brazil. And increasingly we're doing that also in Mexico and Colombia. We think that this is a little bit of seeing the future of what will happen around the world over the next ten to twenty years, where you would expect a lot of shift from market share from the still incumbent banks to the detainative companies. And that is just migration of market share, but also you'll see a significant increase in market size as billions of people across the world entered the banking system. You still have 3,000,000,000 people that are completely outside the banking system, don't have access to credit.
00:04:31 · Patrick O'Shaughnessy
[00:04:31] S0: I'd love to break this into two components. You could imagine if you froze the product today and just worked on getting it in more people's hands, that could be one dimension of expansion. But then of course, I'm sure you're thinking carefully about all the wonderful things that AI will allow you to do and technology will allow you to for customers that you don't yet do today. Can you talk through each of those levers to achieve this blockbuster to Netflix transition?
00:04:54 · David Vélez
[00:04:54] S1: The first phase of transformation that enabled a lot of the immigration in our industries was the smartphone. And this is the same thesis you see repeating through the smartphone is the moment that we get to serve consumers without all that physical infrastructure, we have such a gigantic cost structure advantage that we can pass that efficiency to the end customer via lower fees and better product. Just to give you a data point, we have 140,000,000 customers with 10,000 employees. Our competitors have 100,000,000 customers with 100,000 employees and 6,000 branches. And you start thinking about what the cost of real estate of the branches is gigantic. So our cost to serve a customer is about 3% of what a traditional incumbent bank is. That means we have so much margin to give back to the customer via no fees, better experience, better interest rates, and overall a better product. That's pre AI. We're still here in phase one of what is smartphone enabled. AI will be an additional multiplication on that efficiency to that, because then you get to choose whether you want to have much more efficiency and you could automatize a lot of areas of the bank. You could imagine banks that have 500,000,000,000 customers with 5,000 employees just within sight, or you can just decide to increase your level of ambition. For somebody like us, especially when we look at how early it is in the transformation for us is why don't we go to a 100 countries and try to accelerate this transformation by NewBank being one of the leading digital financial services firm in the world.
00:06:26 · Patrick O'Shaughnessy
[00:06:26] S0: What are the craziest things that you can imagine the product or a bank like yours doing for the customer in three or five years because technology has made things possible that weren't before just like mobile made a lot of new things possible. We've got a much bigger wave now. Like if you really dreamed about what could be possible, what are some of those ideas?
00:06:45 · David Vélez
[00:06:45] S1: We like to categorize the problems that we're seeing franchise services in three buckets. One is access, second is cost, and the third is intelligence. On the access side, again, you still have 3,000,000,000 people in the world that don't have access to a credit product. It's crazy. It's almost half of the world does not have access to credit. Even countries like Mexico or Colombia, 13% credit card penetration. Why hasn't that happened yet? Because you needed the creation of a lot of data. You needed sophistication and credit underwriting. You needed the digitalization of these systems to happen. And this is happening. Cash goes away, disappears, enter a number of real time payment systems, as you've seen in Brazil with PIX or India with UPI. So there is a lot of transformation and catalysts that are accelerating the rails on which you increase access to consumer banking for the world. And this is going be a massive opportunity. Ten, twenty years from now, 100% of the population has access to banking services. 100% of the world population have access to credit. 100% of small business have access to credit. This is an insane push to global GDP. I don't think it's really understood how big of a model this could be for every single economy as you get half of your entire population in some areas access to banking. So that's access side. Cost is the one that tends to be more hidden, especially in developed economies. US is generally a well served banking services, especially if you're high income consumer. But when you look at the cost of that banking system, it's pretty significant in ways that are not readily apparent. So for example, there's about $15,000,000,000,000 of retail deposits in The US banking system. But banks pay on average about 40 basis points on yield a year. In a world where your interest rates are 4.5%, 5%, you look at the calculation of those $15,000,000,000,000 that's more or less $600,000,000,000 that are going to banks to pay for banking branches that in a digital banking environment would actually stay in consumers' pockets. So these are massive wealth tax, the fact that banks don't pay any yield. If you're high income, you do. The lower your income, the less you get paid. That's a huge tax and that's a huge cost. And then you look at remittances, for example, in The US. 100,000,000,000 go out of The US.
00:08:55 · David Vélez
People pay 5% to 10% per transaction. That will go to zero. Remittances, moving money is you're moving bits. That will trend towards zero in a more competitive environment. Monthly account, people are paying $5 to $10.15 dollars per month in The US banking system for a bank account. And you look at Europe or developed economies, Japan, same thing. You see a huge amount of cost that consumers are paying that will eventually with models such as ours that come to compete, will also compete away. And then finally intelligence. I think this is also the one that is less understood and is beginning to be discussed with the advent of intelligence. If you're in the top 1% of income, you have access to the best financial advice. You probably will have a private banker. The private banker is understanding all the bank accounts that you have, is optimising your deposits, is thinking about what is the right tax efficient structure. If you need a loan, they're going to go and compete a bunch of different banks with each other and get you the base yield. But if you're in the other 99%, especially the more you go in the bottom, you have access to nothing. Historically, there's been a lot of conversation about education is the answer. You just got to educate people, people don't have financial education. That never worked. People don't sit down to do classes. You're not going solve this problem of intelligence through education. You're going solve it through AI. And that's where I think AI is really transformational in financial services, because it's almost providing every single person around the world super intelligence to be able to optimize their financial life on their behalf and remove a lot of these profit pool that exists today in banking, in an environment with intelligence will be competed away.