Invest Like the Best with Patrick O'Shaughnessy
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.
00:10:35 · Patrick O'Shaughnessy
[00:10:35] S0: But flesh that last piece out a little bit more. Wealthfront used to have this idea of self driving money, which comes to mind like, okay, I've got some money, either I don't have it in the banking system, which is the worst. So I come into the banking system, I'm earning 40 basis points instead of 4%. So I'm in a lousy starting position, but I certainly don't have investments or tax loss harvesting or all this other fancy stuff. What do you think that ends up being for the average person in a couple of years because of this intelligence bucket?
00:11:00 · David Vélez
[00:11:00] S1: The first obvious rearrangement is those 600,000,000,000 that banks are keeping in the balance sheet to pay for banking branches, get rearranged, get forwarded to all the banking consumers. Because suddenly they realize, what am I doing with my money leaving it at zero? Especially when you think about compounding, what that means for savings and compounding interest. This is a lot of money being sent ultimately to pay banking branches. You look at really any country around the world, any structure you look at, Mexican banking balance sheets, for example, or Brazilians, we're exactly the same thing. Big incumbent banks, about 70% of their deposits, they pay zero. And 30%, they pay some yield generally to the highest income population or the corporates. One of the things that you see in banking is in a perfectly competitive environment, the best product should win. If you're charging no fees, if you have the best experience, Banking is a commodity product ultimately. So you should be able to get 100% of the market share. That doesn't happen because there is a lot of inertia in the system. And with the combination, the multiplication of intelligence with open banking, for example, Pled. Can connect 120,000,000 accounts and you put intelligence on top of that. You're effectively allowing each customer to know how to optimise their financial life and where are the fees coming. So I'll give you an example. We're doing this in Brazil today where about 50,000,000 of our customers every day, we're telling them, Hey, your bank account, your credit card in that bank is due tomorrow. You don't have any money there. And they're going to charge you a 15% interest rate per day. Let us give you some money so you can pay that credit card. Or refinance, you have this loan at 10% interest. Let us refinance that at 5% interest. It's ultimately a drive towards optimizing and removing a lot of those profit pools on behalf of the consumer. In some products, like small businesses do want to sit down with a banker, with a human and have that conversation. If you have millions of dollars to invest, you still probably want to see a human on the other side of the table and have that conversation. For certain consumer segments and for certain products, if you want to get a mortgage or certain sophisticated products, there is value in having a physical space.