[00:00:00] Ben: Morning, everyone. Welcome to the seventh edition of Talking Hedge. My name is Ben Robinson, I’m your host for this special episode where we’re going to be discussing the super topical subject of embedded finance. For this episode, we’re joined by Nigel Verdon, who is the co-founder and CEO of Railsbank.

I think it’s fair to say that Nigel is a FinTech superstar. He has started three successful FinTech businesses already, and probably will start more over time. They are Evolution, Currency Cloud, and now Railsbank. He sits on the board of FX Options Hedge Funds LCJ, and was previously partner of FinTech VC firm, Finch Capital.

Nigel kick this off. I wanted to start by asking you a bit about the background of Railsbank. For anybody who’s been following FinTech, 2021 has been the year of embedded finance. But you started Railsbank back in 2016; you were very early with this trend. I wanted to ask you: what were the insights that led you to start Railsbank, and why do you think that the concept is now starting to get much more mainstream traction?

[00:01:30] Nigel: Thanks for your invitation as well.

[00:01:33] Ben: Thanks for coming on.

[00:01:37] Nigel: Why did we start Railsbank? Well, an observation from colleagues who started TransferWise, Revolut and other names within the first wave of FinTech, was the tools that you needed and the infrastructure. Everybody had to go and build the same core infrastructure to send and receive money, to issue accounts, to issue cards, all those pieces, which are just fundamental building blocks so you can sign up customers. That normally added on about 15 to 18 months of build time before you can launch a business.

In terms of what we set out to do initially, it was to build all that infrastructure so you could launch FinTech businesses super quick. We took it down to 6 to 8 weeks, rather than 15 to 18 months. We also have a banking network that is already pre-configured and pre-approved for people to work on top of. We started literally initially as a software-only API layer on top of a network of banking and contact capabilities. It’s pretty much exactly the same as what people at SyApps are today. There’s a ton of them that are just literally software layers.

Where that’s gone since then, what we learned more than just FinTech, what we were looking for was tools to create embedded financial experiences within existing customer experience. Buying a car, people don’t wake up and say, “I’m going to buy a car loan.” They wake up saying, “I’m going to buy a car.” The car loan experience using the same tools, same API that we have already can be used by non-fintechs to put a financial experience embedded in existing customer journey.

That’s where we went to. The thinking behind this over the past two to three years has, to be able to do that correctly we also needed to learn the value chain between us and the central banks. We became regulated. We direct clear as of Sterling, of euros, and other currencies. What that’s done is remove the legacy of the existing banking industry from our stack. We want the experiences just as software business. The legacy imposed operational risks; it’s imposed a third party saying which businesses we could and couldn’t take on board, et cetera. The real learnings now, to be successful in creating embedded finance experience in the platform is you need to own the value chain all the way to the central bank, or all the way to Visa or MasterCard and other payment schemes in Southeast Asia.

That’s the genesis of it. It was to solve the problem of getting fintechs to market fast and coming up with prebates network. It’s now moved into what is called embedded finance, allowing anybody to have financial experiences in their customer journeys.

[00:04:56] Ben: That’s the way that the market’s evolved, which is it was a way for FinTech businesses to start up faster, and that what’s happened is that more and more brands see the opportunity to embed finance into their user journeys and their buyer journeys? Why is that? Why do you think it makes more sense to embed finance into consumer channels rather than driving people to banks?

[00:05:22] Nigel: Sure. First, banks rarely partner with brands. There’s very rare occasions, which is like Goldman and Apple. But that is a pure bespoke product. It’s not by principle. Banks generally don’t partner because they impose their processes, their views, and their capabilities on the customer. Normally you’ve pinged out from your customer journey into a bank’s customer journey, to complete a financial transaction of some sort, and those journeys are not good. If you’re very cautious about something – like McLaren, Formula 1, for example, are very cautious about the customer journey – you don’t want to be going out to white label or an embedded form type of thing which lets your consumer down. Also, it means data stays at the bank and not with the brand. Data is super important, especially in the retail world.

Then there’s the other side; a lot of banks are very siloed. The card business is separate from the capital markets business, which is separate from the retail banking, and everything. You may be able to issue them an account, but the card doesn’t actually work as an account. There’s a silo behind the APIs of the bank. Even if the bank offers APIs, there’s tons of products which are all connected.

The other piece of it is we have a single ledger, and that ledger you can put money in by cards, by bank transfers and many other mechanisms. But it’s still the same account, so it tends to be desiloed behind the scenes as well.

We see that working with banks with brands together. It hasn’t been a great success. You looked at in the UK, I think it was Tesco’s Chevette relationship, John Lewis Chevette relationship, and others, because the banks were taking majority of the margin as well. We’ve turned it on its head; we let the customer take margin. We massively reduce the cost. We give the customer the ability to embed into their journey, so they own the customer journey, to own the data. Then we just handle all the stuff on the backend: the regulation pieces, the settlement, declaring, all those pieces behind the scenes for them.

It is very customer focused as opposed to bank focus. The general genesis of banks is you come to, rather than I come to you. The banking app is just the same. It’s a branch just wrapped to the phone. You come to me to do finance. Whereas the consumer, going back to buying cars, if you’ve got something like Auto 1 in Germany, the consumer goes to Auto 1 and buys a second-hand car and does the financing in two seconds. Financing is at the relevant points of time as the other parts to do embedded financial experience. It’s relevant finance when you need it, rather than you getting marketing emails saying, “How’d you like some car loans as well?” “I don’t like cars.”

It’s about relevance as well. That is important.

[00:08:37] Ben: Listening to you, it becomes very much more contextual. I think that’s relevant because the way you describe your value proposition, I don’t know if it’s slightly changing, it’s just evolving. I wanted to talk a bit about the announcement that you made at web summit. You’re now talking about embedded finance experiences rather than just embedded finance. What do you mean by embedded finance?

[00:09:05] Nigel: Consumers have experiences with retailers, with other brands, with their car dealership. When you make them embedded finance part of an existing experience, that’s what it should be. It’s not just about doing a car transaction. It’s not just doing all the features, which you find a lot of the embedded finance people are going to bandwagon. Just, like, “Oh, you can do an account.” Well, who cares?

What you’re doing is an experience, for example to purchase a McClellan for e-racing, if you’re doing it online, that’s an experience. The way finances are embedded to Fortnite, for example, is an experience. The way your car loan is purchased at Auto 1 as part of the car buying experience, is an experience. You make the finance and the embedded part of the whole experience, and it becomes an embedded finance experience.

It makes us think also about the tools we deliver on the API is to the customer, to learn to build experiences rather than financial transactions. That’s a super important distinction between a transactional view of the world (which is just making better digital transactions), and an experience where you owning it pretty much all the way to the central bank. You’re getting rid of the legacy and everything like that, by using our tools.

Then there is a hook in the API is to give a flow that works with the experience you’re delivering to the consumer. The 90-second car purchase, or say you’ve had a car loan for six years with a dealership, being able to say, “Show us your finances through open banking.” It’s really the experience of giving you data to the car dealership. “You can choose these types of cars. You can take us over your credit history with the six years with you. Which car do you want?” And it does all the loan capabilities for you. That becomes a super experience of a car loan, as opposed to paperwork, which is a bad experience. Giving the tools to create digital financial experiences is what we’re all about.

[00:11:20] Ben: Got it. You’re saying that the embedded finance, clearly what we’re doing is putting finance into channels where there’s high engagement. The consumers are already using those channels; they don’t have to switch channels. But we were using were not enough, because that’s still serving our banking products into new channels, if like. What you’re saying is we need to prepackage experiences, so that it becomes much more engaging and interactive. Essentially you’re saying 1.0 of embedded finance was just doing that; making the products available on the channels where people were living their digital lives. You’re saying now it’s about embedding experiences into those channels more than just making products.

[00:12:03] Nigel: Exactly. There’s different products, like an account. It could be a bank you put up, but it can also hold a loyalty. You can create a loyalty experience using the tools. For example in e-sports, if you can get McLaren skin and then you win games, they can give you McLaren points. Then those McLaren points later on you can use on a card. You’ve got a McLaren card, and the experience is you’re given access to the paddock on race day and you can spend on things you’d want on e-sports.

You turn finance into things that are moments for the consumer, which raises engagement for our customers to their consumers. We really do think through all the way to consumer. Well, what would be a great experience for them, and how do we deliver the tools to our customers to deliver that experience?

[00:12:59] Ben: You did a lot of proprietary research before you launched the product. I saw in your press release that you surveyed a lot of young people about their attitudes and so on. Is that what they’re telling you? That they’re telling you, to use your analogy, they don’t want to just buy a car. They want something bigger than that, because it’s not just about a purchase; it’s about brand loyalty and an affinity with the service you’re using. Was that the insight from the research you did?

[00:13:28] Nigel: Some of the insight of the trust curve, as you might say, is high for over 50s to traditional finance, and it goes down to the people in their teens and 20s to the bank. I think the bank has started playing different roles, especially since 2007 around the world. Most financial services companies in the world all have massively low NPS scores, pretty much every single one. Yes, a lot negative. Then why switch from one low NPS to another? That’s why this account switching stuff isn’t majorly taking off just the same product.

The conclusion from researching is seeing that the consumer of tomorrow and today, the consumers that will drive over the next 10 years, are trusting brands more because they have a high NPS scores, which is a direct measure of the trust in the brand. They’re saying that these people deliver to me all the time. Amazon delivers stuff onto my porch every day; I trust them to do that. I pay them lots of money each year, and they have lots of money. Why can’t I have other more relevant products at that moment in time that I need from them? Could I have the Amazon experience embedded into buying a car, for example? That’s an extreme example.

There’s more trust towards brands that are able to give you a better relationship with the consumer driving this. Then there’s, what’s in it for me? You’ve got a bit of cashback for some of that with bank cards and things. But that loyalty I think is in the past. What people want, for example, on the rollout hall, they launched out a Clapton card; that if you spend with it and we’d top up everything from lost two pence up to the pound. You can then stop funding the rollout hall, because it is publicly funded. The Clapton card, if it goes out, if you use it in the venue you get faster cues. You can use all this.

Our goal is using financial experiences to better engage, raise capital with the consumer, and the consumer’s happy with it. It’s not just about the cashback. It’s about, that’s what I really love. I love going through all the whole full music, and especially when Clapton plays each year. If you’ve got your Clapton signature cards and you pay with your buddies, you’ve got a bit of cash with that.

[00:16:03] Ben: It feels like it’s a mixture of things. It feels like part of that trust is moving away from banks to other brands. It feels a bit about, as you said, the utility, one of these things that they can bundle in to the more of a subscription service.

The last thing is about signaling. You almost want the signal that you’re helping them have a whole lot more. You want to signal that you’re using McLaren in a way that it’d be difficult to imagine we’d want to wear like a Lloyd’s bank t-shirt or something.

[00:16:35] Nigel: That’s actually spot on. It’s the tribal behavior of the consumer. It’s the reason brands work, the reason for the Nike Stripe and the hat. They believe in the Nike vision and the brand values of Nike. That’s what drives consumers. Finances, as you say, people don’t really wear like financial logos and stuff like estimates. It’s something I’ve got to do. It’s a chore as opposed to something that I do as part of a daily experience of what I’m doing.

The classic one is Starbucks. It’s has done a brilliant thing with Starbucks cards and pre-ordering and taking all the dwell time stuff. Uber is another one. If you don’t think that they’re an embedded finance company, they really are. When you got out of the cab before Uber, did you have change on you? Did they take cards or not? Did they have change to be able to give it back to you? All that type of thing was stressful. Uber just closed the door, because the finance thing, just part of the exiting the cab experience, and it’s embedded into it.

You can see where this has been happening already. That’s why we view the world of a consumer experience and give the customers the tools to do the ‘Uber moment’ of making finance relevant at that point in time, without realizing it’s a financial transaction as an exiting the car experience.

[00:18:06] Ben: It feels like it’s almost like a sliding scale. Things like Uber, it’s all about utility, it’s just so convenient. Whereas some of the other examples you’re giving where you talk more about experiences, it feels like it’s moving more towards what you call tribal signaling type benefits for the consumer. Is that an evolution? Or would you say it depends on the brand and the use case?

[00:18:30] Nigel: We see it as different economies. For example, a fan base economy. if you look at the embedded finance economy, I think San Antonio has numbers $7.2 or 7.6 trillion market. That’s all good, the little sub economies. One of the fun economy is very tribal, very cyclical.

Then you’ve got the grocery shop or economy, which is a different thing. It’s not so much a tribal thing; it is, what do I need? We have a hierarchy of needs, and so how are we going to get those embedded into that?

These different economies which make up the embedded finance economy all have different characteristics. Your sliding scale is probably a whole load of different economies; some of them tribal and some behavioral. That’s how we look at the world as well.

That what the sports world is really looking at, and the music world and stuff. How do you look at your fan base? How do you engage with them and how do you create that tribal loyalty? That’s the north star for embedded finance experiences in that economy. In the economy of the grocery shopper, how do you understand and stop going to the competition, and then you got visibility of the full wallet share so you could open up a loyalty points? You see where the wallet share is going. It’s a deeper data issue. It’s data engagement, so it becomes a marketing experience to the consumer.

[00:20:11] Ben: I want to switch gears slightly. Back in July, you raised, I think it was $70 million. I wanted to ask a couple of questions about funding. The first question, the $70 million, where did you invest that and what did you use that funding to do?

[00:20:36] Nigel: We’ve been investing a lot in our product team and the product. We have Gregory who joined us from a TransferWise, or Wise, and he’s doing a cracking job of building out that team and building an app from a global basis and capabilities. The sales and marketing capabilities, we’ve got our customer success and customer support. We know we can do better than; so investing in that so we have most of Amazon type capabilities.

Then it’s developing the market: UK and Europe, North America, and Southeast Asia. It’s more for development. If you look at it, we’ve got three businesses. The UK and Europe business is like a Series C type business. The US market is a pre-Series A. the Southeast Asia business is a post-Series A business. We’re investing appropriately in those areas.

[00:21:41] Ben: It seems to me, because we’ve spoken to a lot of brands, the embedded companies or whatever the right expression is, about providing embedded finance internationally. It’s quite difficult, right? The providers are quite siloed. Is the idea of international expansion as much about you gaining new clients as you being able to service international clients across all the geographies where they operate?

[00:22:03] Nigel: Yes, it’s exactly that. We set out when we started the business to offer that. Our initial strap around was access to global bank with five lines of code. It’s quite a hard sale when really working on the platform, from operations all the way from Santa Monica to Melbourne. There is sport grounds going into different countries, and delocalize their experiences in those countries. Yes, exactly. I think we’re the only guys in the world who’ve got such a large footprint at the moment.

[00:22:36] Ben: I suppose the danger otherwise, and that maybe speaks to your point earlier on about having the full stack, which is if you’re not careful and you move in you brand and you move into this space, you can end up with different providers by geography and you can also end up with different fighters through the stack. It becomes quite complicated.

[00:22:58] Nigel: Exactly. We look at AWS and the way they’ve done it. We can use AWS services pretty much anywhere in the world. In some countries they are still developing, in Southeast Asia. But AWS is the same wherever you use it. The data may be stored locally, or the processing maybe to keep up with local data protection laws and things. We have the same mindset. It’s a single platform that is localized, same API, but localized for the local market. It’s UK Faster Payments in UK, it’s Fast in Singapore, it’s Set for instance in the Eurozone, for example. But the API is exactly the same as send money and receive money into a ledger.

Markets are opening up to give access to the central clearing of the currency. Singapore opened up. TransferWise were the first guys in Australia to open up, and other markets are opening up. I think US as still a good 10 years behind everybody else, because it’s pretty much a cabal running the financial services industry over there. Eventually, hopefully it’ll open up.

[00:24:09] Ben: This is now the third FinTech company you’ve started up. What would you say has changed? That’s the big question. Has funding become easier since you started? Has hiring become easier? Is the end-market more amenable to the FinTech proposition? What would you say has changed in the landscape since you started Evolution all those years ago?

[00:24:34] Nigel: In Evolution we didn’t need funding. We were profitable our very first year. The learning in there was that we could have grown as a lot bigger business if we’d actually taken funding.

[00:24:52] Ben: Funding is almost like a competitive weapon right now.

[00:24:54] Nigel: Yes, it is. Things have changed. Funding is a lot easier to get at this moment in time, primarily driven by yield curves, et cetera, turning things in other markets. There’s a lot of money going into private markets and the startup world, because there’s better predicted yields from that. It’s not money chasing yield.

Number two is the finance industry is changing. Some of the music industry changed where previously the record labels were the gatekeepers to do industry. The iTunes and Spotify, Deezer, SoundCloud, YouTube and everything, has removed them as the gatekeepers to the artists. The artists can go direct to consumer. The role the labels play is really custodian of catalogs.

You see the same thing happening now in the finance world, because the brands and others with embedded finance experience platforms like ourselves are able to go direct to consumer. We see that in the finance at same moment; that the banks were the gatekeepers. The central banks were gatekeepers to capital markets, gatekeepers to clearing. That’s all changed.

[00:26:11] Ben: What’s the equivalent of the music catalog in the banking world?

[00:26:16] Nigel: Banks are still great places for making credit decisions. They’ve got a ton of data, they’ve got a ton of experience of lending and getting money back. It’s an important part knowing how to lend to the right person so you get your money back. Banks are particularly good at that, and I think will continue to be.

If you looked at the way Marcus and the Apple card operates, Marcus is a balance sheet with APIs and regulations behind it. The regulation of banking means you take the deposit and leverage it up four times into four assets, which are loans. That’s the basics of banking. That’s what we see the banking world has moved. It is very much credit warehouses or credit balance sheets with APIs aligned with then, because it’s changes the economics to the benefit of the banks. At the moment, the cost of acquisition of an asset is about $50-53. Whereas if they did it through this new wat that Marcus is doing, and I think SEB and others are moving this way as well, it is about 10 bucks in origination of the asset.

You’ve come literally 20+ times of change in the economics of the industry. Banks, if they operate that way, get a much better return on equity and others, so your share price would go up.

[00:27:38] Ben: In theory they do, because of customer acquisition. But at the same time, they lose some of their power around pricing and up-selling and so on. What do you think the industry looks like if that assumption is right? Do you think we could see massive consolidation in just a few number of very large balance sheet banks?

[00:27:57] Nigel: Yeah. When you’ve got the US model, 6,000 banks and credit unions and stuff. It comes to 300 million people. They have more than any other country with a similar size. Europe and the UK together are at 720 odd million people, while we’re under 6,000 banks. There isn’t a real need for so many banks balance sheets and sub-scale operations.

What will drive those returns of equity? Look at the equity of banks, the share price of banks in the past 10 years. It’s been underwhelming, is the best way to describe it, regardless of the profitability. The operational cost of running an account is about 10 cents. The origination costs of an asset, if you deploy your balance sheet against that you, you get much better returns for your shareholders. You also don’t have the systemic risk of so many banks with sub-scale operations, which eventually have go bust and the regulators having to look after so many banks.

It doesn’t mean it comes on monopoly. It can create a big enough market. In the UK, there’s now Sterling and others, have opened up away from traditions. That’s an open market as well. We do believe that the future of banking is they’ve got to open up and the economics will change it. The problem, like everything else, is human beings and the compensation structures. Saying to somebody, “Hey, you lose control over the consumer,” but the consumer doesn’t want you anyway, because you have a massively low NPS scores while you’re trying to find that. You keep saying you’re putting banking on a customer, and yet you’re still forcing people out of the app or the branch. You’re not thinking customer-centric.

[00:30:04] Ben: Inevitably there will be consolidation. The earlier you react to the new reality, the better your chances are, right? Because otherwise you’re going to have an awful lot of cost infrastructure for distribution that you don’t need anymore.

[00:30:18] Nigel: Yeah. The cost infrastructure for operating the consumers, the cost structure for the marketing side, if you look at it fundamentally, the products offered by most banks are exactly the same. It’s a zero differentiation product. The marketing spend, I think from JP Morgan and Chase just in the US is more than Apple globally, because Apple has a highly differentiated product.  It’s insane that you’ve got to spend so much marketing dollars because the product is so undifferentiated and their NPS scores are so low.

But when you look at it through the eyes of the boards of majority of banks and senior leadership, when you’re having to appoint a chief digital officer you haven’t understood digital and what it is about. Amazon doesn’t have a chief digital officer, and neither does Google, Facebook, 10 cents, Alibaba or anything. They are pure digital businesses. I think that’s why the real change, the struggle, is there isn’t the leadership on the boards or the single-agent companies that actually think digital. Only about 3% of bank boards, if anybody, has actually got any real digital experience.

There’s a whole immersion of people which is like against the change. People are smart, like Goldman, Marty Chavez who is the CIO of Goldman, have that that mindset of doing something totally different, savings only. They originate the liabilities and then open up the APIs, regional assets, and then we’ll go on the full layer of level business behind the scenes. We don’t even have to touch the customer or consumer.

[00:32:10] Ben: I think we’re pretty much out of time, I’m just going to finish with one final question. 2021 has been a real landmark. You’ve had this big capital raise that we referred to, you’ve got this new global HQ in London, you’ve launched the embedded finance experiences. What’s the next big milestone for Railsbank?

[00:32:35] Nigel: The next thing, this year and next year we’re very much focused on credit markets. We’ve launched credits in the United States already. It’s a credit card experience. We’re launching in the UK and Europe as well. We’ve got a capital markets business that we’re building at the back end of Railsbank.

[00:32:59] Ben: I think we probably have time for me to ask if there’s any future in credit cards. It seems to me that the use case for credit cards is disappearing with time.

[00:33:08] Nigel: Credit card is the original Barnard highlighter. It’s essentially paying by installments. The credit card, the way we look at the world is there’s credit and there’s mechanisms for deployment the credit. The card is one way of deploying the credit, because you can deploy credits through a debit card, for example. You have a credit line on your account, which works like an overdraft but you can make it like buy now and pay later.

We’ve decoupled credit from the credit itself, and the credit issuing itself from the payments mechanism to use that credit. That’s how we look at it. I agree with you; credit cards in some countries, for example France, don’t really have a credit card market. They have credit cards, but they don’t really use them. US is huge, because you need to build up credit and people live off that. Germany is big, UK is big. Some of emerging markets, the adoption rate is about 5%.

As a product I think it will change more into credit line and ways of deploying credit line decoupling those two. That’s the way we look at it, rather than just a credit card.

[00:34:21] Ben: One concluding point would be, the other thing about embedded finance is it starts with the demand side, and the consumers are much less wedded to the existing product forms. It’s really about solving jobs to be done, rather than pushing credit cards.

Nigel, I’ll let you go because I’ve already taken up more time than we should have done. Thanks very much. That was an absolutely pleasure. We covered a lot of ground in a very short period of time, and I am very grateful for your insights.

Thank you everybody for listening. Just to say that the next Talking Hedge will be in two weeks’ time. Please join us, if you can. Nigel, thanks again.

[00:35:07] Nigel: Thank you, Ben. Thanks for the invite.