An Interview with TransferGuru Founder Omid Pakseresht - Part Two - The State of Fintech
Jan. 13, 2016
After covering a hectic move to the UK, learning English by watching Friends and learn his trade selling biker clothing, Omid turned to his thoughts on UK fintech and the power of financial networking. An always fascinating vision of the future: Part Two of our sit-down with TransferGuru Founder Omid Pakseresht.
“We’ve just got rid of that massive middleman, which was the bank. You don’t need that any more.”
So before TransferGuru you had this finance experience, you had this business experience, you had this higher education experience (Part One). Why did you choose fintech specifically as the thing to put your energy into?
I think for a country to actually develop, and this is particularly the case for developing countries at the moment, you need the financial infrastructure to be able to build other industries. Besides, you know, primary needs, like, health and water and whatever it may be, I think the next most important thing would be financial networks, because that would be the infrastructure that needs to get set up for everything else to follow. So in a way, if you don’t have the financial infrastructure to do something, it’s blocking the way for a lot of other industries to grow.
So finance is a skeleton you hang everything else on top of?
This is the beauty of fintech at the moment, because there is a very social-good driven side to it – look at peer to peer, look at the not for profit initiatives. Microfinance in parts of Africa has fundamentally changed things. You have farmers who are actually able to now get small loans. You have people who have access to banking before they get internet access, because they can do it on their phone. It’s fantastic.
You couldn’t open a bank branch in every village on the continent. It’d take decades. By the time you build the same financial infrastructure that you’ve built in the UK over the decades, you would have lost a lot of potential in other ways. Agriculture, food, tech. Any sort of industry that requires some capital, or any other financial product, is much slower. A farmer couldn’t borrow £500 to go and buy a crop for their farm without the financial ability to be able to do that. Now, they’re connected to people in the UK who say, ‘Okay, yeah. I will give you that £500. You can go set up a farm.’ That’s absolutely beautiful.
And I’m not saying this is happening enough. But I’m saying the possibility of this is now there, and it wasn’t, and it came very very quickly. And it can go much, much further very quickly.
There’s a phrase that’s you see quite a lot at the moment, banking the ‘unbanked’. Can you discuss that a little bit - the idea is to get people plugged into this giant financial network?
Absolutely. I mean, think about the population of Africa, and what it’s going to be in 20 years’ time. Think about how rapidly it’s growing in every industry, the amount of big investments in education in a lot of countries, big investment in production. This all relies on an infrastructure that supports it, and that’s a financial infrastructure.
It’s going to become more and more crucial. And I think fintech offers exactly the kind of type of tool that you could use in these places, and very easily. It relies on trust, and it relies on the community working together to build something. It relies on a little agent in the middle, like peer to peer loans and so on, that just facilitates that happening between people, rather than taking a load of money and putting it at the bank and investing in whatever they want to invest in. Which is what the banks did. Whereas if you’re just an agent that connects two people together, you haven’t sat on people’s cash, and you haven’t simultaneously leant it to other people who are paying you large interests.
So we’ve just got rid of that massive middleman, which was the bank. You don’t need that any more. And you manage to make banking available without needing the bank. I mean, international money transfer is a perfect example of it. It’s no wonder the older providers charge such fees, because for users: if you don’t have a choice, that’s what you gotta do. Pay up. But once you’ve set up mobile pay, things like that, they become irrelevant.
“It’s so far from being done, so so far.”
Okay. So Transferwise are now a unicorn, which is…
It’s got to £1 billion valuation within 5 years.
And their ads are absolutely everywhere in London. WorldRemit, Worldfirst you see. Remittance companies are everywhere. Why do you think that is? Why has remittance all of a sudden become such a big deal? It’s always been happening, right?
This is the thing. It’s fintech! I mean, I’m not saying Transferwise is doing something absolutely revolutionary by doing peer to peer, it’s not a new concept. It’s just balancing the books. So it’s not a revolution in thought - It just wasn’t possible to do that before. It wasn’t possible to build a payment infrastructure, build the digital money transfer infrastructure.
So technology has caught up with our ideas?
Yeah, absolutely. Money transfer ultimately is essentially almost costless. If my pound is in digital pounds, and I want to move it to digital Euros, nothing should happen to my money. If someone’s doing that service for me, it’s absolutely minimal cost to them. And that’s why they can offer it so cheap to the consumer. Because for them, the biggest costs are marketing. The biggest costs are customer service. That’s why a few of them are saying, ‘Hey, pay us what you want. We’ll still do it for you’. It’s fine. They still make money. They’re still happy. Everyone’s happy, as long as there is enough trust in them to do their job.
So is there a future where everyone just does this automatically, and they don’t need to spend the money on marketing, and it will be costless, or cost of staff?
Well, I mean, we are decades away from that. And I think I’m quite optimistic with this kind of thing. Because if you think about it, only a maximum 6% of global flow happens digitally.
Yeah. And that’s growing, and growing for everyone. They’ll probably invest everything that they have in customer experience and marketing, or that’s what I imagine they would do. Because it’s so far from being done, so so far. Look at the G8 targets. Look at the UN targets. They want to drop these costs. Transferwise is not the first one, and it’s not the last one. We’re still seeing new people popping up every month or two.
And one day are they all going to be on Transferguru? Is that the plan?
Within the next month we will have at least 25 options, UK companies, listed on our website. And that’s just the first step. We’ve started comparing rates from the UK to the US. When you do US to UK, we’re already comparing 5 of those companies, because some of them do the other way round as well. And that’s fantastic. And all of these companies want to work globally. Very few of them are specific to corridors from country to country. And I imagine, if I was those people, I would be using that as a test case for building something much, much bigger. So this is by no means the end of it.
What do you think Bitcoin, for example, would do to this?
I’m quite a big fan of bitcoin, but let’s just say that even if bitcoin doesn’t exist in 5 years’ time, there will be a digital currency that is as prominent as bitcoin is now. If that assumption is true, then I think money transfer will essentially become costless. There are people who are using bitcoin to set up money transfer corridors. I think there is one from Mexico to Argentina. There are a couple in Africa. It has solved problems in corridors that were almost impossible to tackle - The costs were too high, the logistics, and so on.
“Everywhere we are in Central London now, we are 500 metres away from tech startup’s, and 500 metres away from some of the most influential banks in the world.”
There is a narrative at the moment that the banks’ days are numbered, and that fintech companies, bitcoin etc. are going to replace the banks. It was something that I think you could always sense in the Transferwise message, until they started teaming up with them. Is that a narrative you buy into, and is that something you think you’re a part of? Or are the banks going to stick around?
I think in some ways it’s just too late for banks already. They’ve been ignoring customer experience for a long time - whether that’s slow phone lines they set up, their internet banking experience, even the high street branches. There’s the statistic that people would rather go to a dentist than go to their high street bank.
So it’s not going to take long for customers to switch banks. There are already I think 5 challenger banks who have got their licenses and are starting to operate, and that is going to fundamentally change banking for us, because they are going to open APIs and say, ‘Go build whatever app you want, and I’ll just be the backbone of it.’ And some of them are doing that. They haven’t managed to create the experience for people, so they only route that they have is to become the backbone and let other people create the experience. And that will happen, and that will make fintech grow rapidly. So it’s not necessarily banks being dropped, it’s just banks taking a passive backbone role and allowing other people to do that stuff for them. And that will be fintech.
Do you think you benefit from a backlash towards major financial institutions after the financial crash?
This is actually something that bothers me a lot, because – as a guy who worked in finance – I think we’ve massively failed in finance in terms of regulation, and I think we’re really, really behind. We allowed a lot of stuff to happen that we should never have. And I don’t think that’s an opinion that I hold by myself. But it’s too late with regulations and it’s too slow to change things with regulation. So yeah, absolutely, fintech benefited from that, in the sense that it saw the opportunity and it did what it needed to do.
But I wouldn’t say that was being opportunist. I think that it’s exactly the other way around. The banks failed, the governments failed.
So there’s this unmet problem that someone needs to meet?
Yeah. This happens with any industry, right? This is what you get told at lesson 0.1 if you do anything entrepreneurship-related – that, ‘Hey, what is the need that you’re solving, or what is the problem that you’re solving?’ This is the problem. This was the problem that everyone’s trying to solve. And that stranglehold that banks had over the consumers is not there any more. They are losing grip, and they’re okay with that. Perhaps not just as much with b2b products in fintech, but from a b2c perspective, they have lost their grip and rightly so.
Interesting. So you mentioned earlier that the UK is the hub of fintech, and London specifically. Why do you think that is?
London is the perfect combination of tech knowledge and finance hubs. Everywhere we are in Central London now, we are 500 metres away from tech startup’s, and 500 metres away from some of the most influential banks in the world. So that obviously creates the hub for it. That doesn’t happen in every country, and obviously there is government support for this. They are trying to do what they can with regulation, but they are also trying to do what they can by allowing new people to come in and fix some of the problems as well.
Will that last? Will London always be the hub, or is there already a new London ready to take over?
There are new ones popping up. I’ve heard things about Barcelona. I’ve heard things about Amsterdam, and heard things about Portugal. We’ll see what happens. They’re all trying, and they won’t be far from London. But I think one thing that there is in London is these little fintech movements and the circles have been formed, and people working together. And a lot of these companies, a lot of these startups, want to work together, because they realise they can solve a lot of bigger problems if they did stuff together. It’s reached a critical mass of companies being able to look around and say, ‘There are 10 UK companies that I could go and see to work with’. So if you wanted a payment solution, the best new company is actually two doors down. So that kind of thing creates more of an opportunity, sort of like a little bit of a critical mass, so that the more there is, the easier it gets for it to survive as a scene. There is an ecosystem in London, and they benefit from each other’s existence. And that’s fantastic. We want to work with Transferwise, Azimo, Xendpay. They’re all in London.
“Look up what a mortgage looks like 30 years ago, and you can compare it to now…It is orders of magnitude more complicated.”
A broader fintech question. As a financial layman and outsider to this stuff, there’s a feeling, I think, that finance is unnecessarily complicated, or it’s this big complicated behemoth by design. And we’re told that only a certain well trained group of people can interpret it for us, and we need to leave it to them. At the same time computers are now running more and more of the stock exchange – so I want to talk about financial literacy – Is tech making it easier or harder to really understand finance? Is it bringing it to the people or putting out of everyone’s reach?
I buy into the idea that a lot of stuff could be semi automated, and it’s not. So essentially we need banking agents, rather than banks who do a lot of stuff now. I think that’s – you know, when you talk about financial markets, and how computers do a better job than us, there’s fund managers who’ve been studying economics for 30, 40 years, there’s a team of 20 of them who do research into the stock, and try to invest, and the computer still beats them, based on an automated algorithm.
So how about: Do you think people are under-trained in financial management? Do you think, say, that more financial training would be useful at a younger age?
Well you have, on one side, a lot of people paying less attention to financial decisions. Maybe they’re more impulsive. Less worried about what happens in the future. Often it’s because it’s just got so complicated that people got fed up. I did - I never looked at my rates for my credit card. It was a stress worrying about why I’m getting charged for what I’m getting charged for, and why my money has gone into whatever place. It’s a big problem, and people get fed up.
There is also a big education gap, I think, that can go further back into the early years. And I think there is a certain level of financial education and financial capability that we don’t have because of that education.
But you can look up what a mortgage looks like 30 years ago, and you can compare it to the options there are now. Tell me it’s the same level of complication. It’s not. It is orders of magnitude more complicated. So there is a huge gap that has just been opening up more and more. There is a need to simplify this stuff, and help people answer these questions. And if that happens, and if that meets somewhere in the middle, then you’ve solved a lot of problems. And that’s ultimately what we try to do at heart, exactly that.
Present complex financial data simply and clearly?
Exactly. I worked in currency, and I did money transfer, and I saw that there is a margin, and a fee, and I thought, “Hey, wait a second. I mean, they’re trades. We have to think about this properly”, and so on. People who actually do fx trades think about these things. You can’t expect a consumer to know enough about currency, or where these costings come from, to be able to break this down. Particularly if you actually hide the fact that you’re charging a margin from them!
Why has it become more complicated?
I mean, you’ve got 5 banks who have massively sticky consumers, so very low switching rates. They’re not competing on customer service. They’re not competing on retention, because their customers don’t really go anywhere. There is no other real alternative. And you come to the stage where they have to compete on something, and that’s making more money out of each consumer. And that means they just produce hundreds and hundreds of nonsensical products that make sense to no one. But they think that’s creating products that means something to the consumer. If they created a nice app so I could check my balance, I would appreciate that. But they‘ve just been producing more products. They’ve been making it more complicated. Consciously or unconsciously, that’s what happens if you have an oligopoly. They will try to make more money out of each consumer. But that’s not the case any more. There is no 5 banks anymore. There are a lot of new banks.
Who are the challengers? Who are these new banks?
This is really exciting, actually. I keep checking every month or two to see how many of them have been awarded a banking licence. Fidor is quite a nice one. Mondo is the API first one that I told you about. They want to start as a backbone service and let people build the ecosystem around it. That’s quite exciting. I mean, to me, that’s as exciting as it can get, because it’s a big shift in something that’s been going very, very sluggishly for a good 30 or 40 years.
But is that not going to be more confusing? Whereas before you chose between, as you say, three or four banks, now there’s 10, 20?
No - they’re not competing on the products any more. This is not just a question of products. It’s not a question of how much money you can get out of a consumer for these businesses any more, because they have a risk of losing the consumer. If you have a risk of losing the consumer, then you care about retention. You care about customer service. You care about marketing. You care about making that experience as nice as possible for your consumer, because you don’t want to lose them. You make things complicated, they will go somewhere else.
Part Three tomorrow – Life as a start-up founder, challenges for the future and what TransferGuru are doing to help.