London Fintech Podcast
00:07:51 · Tony Clark
[00:07:51] S2: Yes. We're at Level 32 now, which is three floors above Level 39, which is one of the places where a lot of fintech started, it was one that was certainly associated with a lot of hype in that. And chancellor wise, came on the show. Well, actually, never almost came on the show. There were about three conversations I had with them, but the problem I always had with them, which is, as I say, in terms of a marketing machine, I couldn't see what they were doing that was new. And To the extent they had propaganda about what they were doing was new, it wasn't true. So the propaganda was that they were just doing peer to peer stuff, but actually 60% or 80% of it went through currency clouds at the back end. The propaganda was, Oh, banks are terrible, blah blah blah. Well, we know banks aren't perfect, otherwise there wouldn't be a Fintech around today. But the reality is without the interbank market, the transfer was deals wouldn't have got done because you go from the front end through the back end like the currency plan into hitting HSBC's API in a big enough scale. As you've said, were plenty of brokers around and that kind of thing. And so just in terms of advice to other people, so as you say, you can grow a business quickly if you're really adding value. So if you're giving them in demand creates, then you'll add value to them and you'll get lots of customers. But how do you avoid that costing you a complete fortune? Because if I give you wholesale rates on bananas, for example, I'm going to lose a lot of money giving you the wholesale price of bananas as opposed to the retail price of one banana.
00:09:12 · Nik Storonsky, Tony Clark
[00:09:12] S0: I mean, the rate is our huge advantage that we own the whole infrastructure. We we build it all in house, the whole back end, all all the connections. Right? And for us, it doesn't cost anything to exchange money at the moment because we are connected, you know, to multiple banks, multiple brokers. Also, this is some of customer flows. So they're being asserted. Right? So for us, I mean, the cost of exchanging money is negligible. Right? And we we chose to give InterbankRace to customers as a benefit. Right? And then effectively the whole business model, we cross sell, you know, other services. So by giving away free FX rates, we're able to drive, you know, incredible customer acquisition growth with zero marketing spend. Right? And then we're effectively cross selling our other products to our customers. [00:09:55] S2: Right. And from a technical perspective, I'd understood that the problem of this sort of wholesale retail thing about exchange rates was in part that, of course, a bank is very happy to deal with people, but they're only happy to deal in a certain size. I don't know what the number is. For the sake of argument, let's say it's 10,000,000. If you've got 10,000,000 US dollars, I'm looking out the window at HSBC. If you've got 10,000,000 US dollars, maybe HSBC will give me the best rate for 10,000,000, but if I've got 10,000 US dollars, even if I'm doing it via an API, they're not going to give me that rate, in the same way that a wholesale seller will sell me 10,000,000 bananas for a very different price of 10,000 bananas.
00:10:28 · Nik Storonsky
[00:10:28] S0: Yes. It's true. And the reality, you know, why it happens is just because the bank is I mean, I've been inside. Right? So that I know a lot of departments. IT department is separate from, you know, a fax department. Fax department is separate from a relationship, banking department. Right? And, frankly, they they all need to make money somehow. Right? So what happens? IT department, you know, builds a system rather than sales will sell and they will take commissions. Traders will hedge it and take their commissions. So so company adds up. And a lot of things are not automated, but that's another problem. You need to run big teams, a lot of people to support the whole infrastructure. So that's why it becomes quite expensive in the end. But yeah, you're right, with $10,000,000 you'll get a better rate, but it will be interbank rate.
00:11:15 · Tony Clark, Nik Storonsky
[00:11:15] S2: Yes. And in terms of offering interbank rates, which was what you became known for first and now you've got half a million people, I can offer people bananas at the wholesale rate and I can sell them one banana at a time at a wholesale rate, but it would be very expensive for me because the price of one banana is very different from the price of a banana if you buy 2,000,000 bananas. How did you organise that? How did you give people interbank rates without having to spend a fortune yourself buying bananas not at the wholesale, let's call it wholesale. How did you get around the problem of you have to buy bananas at the retail rate yourself, but then you then sum them at the wholesale rate, is the opposite way around, of course. [00:11:55] S0: So, we effectively build a system, right, which is fully automated, which is connected to a few banks and a few equity providers, which also manages risk, right? So, the way it works, we have, you know, risk book with different cash balances and then there is hedging coming effectively like a few times a day when we hit certain risk limits. And it's all fully automated, we don't require army of people to run it. So that's our edge, right? That allows us to give to people interbank rates at no cost. [00:12:26] S2: And so you didn't go down the route that TransferWise always alleged that they did, but they didn't actually do in great size of trying to do it on a peer to peer basis. Apart from when you can do it, you know, if you've two people doing it at the same time, it gets crossed.
00:12:26 · Tony Clark, Nik Storonsky
[00:12:26] S2: And so you didn't go down the route that TransferWise always alleged that they did, but they didn't actually do in great size of trying to do it on a peer to peer basis. Apart from when you can do it, you know, if you've two people doing it at the same time, it gets crossed. [00:12:39] S0: One of the advantages of being in financial services, right, I just know how it is done in any instrument, right, in a bank. So, banks run, you know, automated market makers, right? It's a combination of, you know, peer to peer matching. But in reality, you know, the system is much more complex and advanced compared to peer to peer matching and produce, you know, much, much better results. So, we just implemented the same system on our side.
00:13:03 · Tony Clark
[00:13:03] S2: Yes, exactly. Which comes to the advantage of having a background in it. So originally the idea was that Fintech would do one thing really simply. So you know, foreign exchange or peer to peer or something like that. And everybody swore that's all they would ever do. But of course, as time goes by, things change. And the example that sticks in my mind at the moment is SoFi in The States who started with student loans. They've just raised a typical American fashion 500,000,000 US dollars, which is quite a lot of money. And roughly speaking, they seem to want to do everything for everybody. Actually And $500,000,000 probably gives you a chance of doing that. On a more modest scale than raising 500,000,000, you guys have raised some money. And you started by doing one thing, as you say, but then you're adding things on the side. So the brand started like that and we'll come back to the software side of it but then the brand has changed in terms that if you go to iPhone, iTunes, whatever the Apple thing is or Google Play, you can tell which one I am, you can download it and try it for yourself. And you add more and more services. So how does that go from a brand perspective? Because one day people are saying, oh Revolut, yes, they give great interbank rates, you've to go there and do your FX, to another day, oh yeah, do a current account and they do lending or whatever. Services do you offer at the moment if someone downloads you today and signs up with you?