1045. Insights: Has the banking battlefield evolved - and is Revolut built for it?

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24:12Ross Gallagher:all right welcome back um in this half of the show we're asking whether the banking battlefield has evolved and whether it's effectively gone 3d that sounds exciting um david you've talked recently about the battlefields now being almost 3d um with an infrastructure layer playing a significant role beneath the front facing brands and institutions worth i think probably maybe double clicking on that um and sort of what it means yeah i think um i think it sort of talks to

24:38Richard Davies:what we were saying in the first part really which is often you know what is the saying sort of beauty is only skin deep i think actually beauty in the sense of what you can achieve from a financial services perspective goes like all the way down to your bones you know i mean and and the bones are sort of like the underlying rails and capability that you've got to to build software to build technology to kind of make these things happen and and there's been different and interesting challenges underneath that with you know the advancements in tech and you know the newfound core banking systems and the you know the rise of bass and all these different types things that are going on there but but fundamentally i think it's like how do you ship code underneath this because you know what you can do with digital or you know how many customers you can acquire and you know the revenue model and the structuring all of those things are uh you know hugely important to determine who you are, but almost the speed in which your organization oscillates, you know, your approach to talking to customers and doing stuff for them, you know, like, these things seem so fundamental when you're, you know, five or six people building a startup, but actually, often the sort of purpose of the organization wanes, you know, and don't worry about 300 year old organizations are, you know, well and truly entitled to sort of stumble a little bit on the successes but um sort of re uh igniting some of those things in those organizations is i really think fundamental to them sort of remembering who they are and and then giving people purpose in those organizations to get out of bed every day and work hard to do these things so uh so yeah it's a it is a it is an interesting dynamic that actually we sit at but actually with all of the pressures of the successes that organizations are having you know uh damn sure they feel the people breathing down their neck now it's interesting

26:30Ross Gallagher:isn't it because all of the stuff that you mentioned is is so obviously the right thing but um it is hard and so i suppose there's always the choice of do we do the hard thing or do we go out to the market and acquire and effectively cheat right and i suppose we've seen quite a bit of that

26:45Richard Davies:as well yeah i think the the sort of strategic being thrown away for the the sort of tactical like is a age old as time isn't it because of chasing you know this year's targets versus dealing with yesterday's problems you know and it's uh it is an interesting balancing act to get those things right but um but that's the job isn't it that's the the task of making these shareholder pressure for you know performance and today's numbers versus you know building the foundations for sustainable success it's um i think chief executives of big organizations have got to be held accountable to both of these by their board because actually they're the things that what is it jam today and jam tomorrow like uh i won't jam forever you know like uh don't give me a scenario where i never get jam would be the uh the ask from uh my perspective but um but i think getting that balance is uh you know it's hugely important yeah i would like uh actually

27:38Sophie Guibaud:to uh jump in and double click on a couple stuff you have been mentioning david on the board side I think there has been basically a lack of fast evolution of the boards to actually reflect the need of commercial focused people at the top that could actually enable for the culture to evolve like all the product cultures. So I think that's something that's happening. That's what I'm personally doing with like as a board member being the commercial person. But I also see that there is like lots of legacy boards that are really very much focused on risk and compliance. And that's just not the right fit to compete in today's world.

28:29Richard Davies:Just on that one, Sophie, I think that's such a great point. such a great point because actually the people that are put on boards to basically center check whether the organizations are moving them forwards if they don't have the experiences or the right skill sets in order to go hey guys that sucks like yeah i know you're thinking about this and those those experiences that they have like often what you're finding is it's like obe somebody or mbe whatever and actually they you know their experience is like 10 years ago you know 20 years ago 30 years ago in terms of when they were doing the thing and that that changes the dynamic of the challenges that you're going to get from those board members doesn't it so yeah do you have the right people marking your homework is a really good uh you know really good sort of question in the first place because if not all you're going to get is uh you know yes or when i was doing it

29:18Sophie Guibaud:that type of narrative so i completely agree even step further giving you the homework right yeah

29:23David M. Brear:it's it's like i think particularly challenging right banking because generally there is certainly in the uk right but i think most regulators expect a independent board right where you have got people that are not management not shareholders uh that their job really for the regulator is to ensure safety and soundness of the bank um and they have no motivation really for anything beyond that unless and this is something we try very hard at okay people have a sense of purpose right i mean because if you're doing the board role just to get a nice med fee and whatever and maybe it looks good in the cv but you don't really have a sense of purpose about what the organization is doing yeah you're just really there to ensure safety and soundness and that is going to maybe be tricky around some of the transformations they're trying to be done because you want safety and soundness but you also you want to grow right and you want to do great things for customers and so i personally think that sort of point about purpose and having like the entire company, including and particularly the board, really aligned around the mission of the company is super important.

30:25David M. Brear:100%.

30:26Ross Gallagher:Yeah, I completely agree. It's so much of sort of what we talk about, David. And, you know, we've got the, what we describe at 11FS as the culture pyramid. And I think everybody gets sort of wrapped up in technology. But as we sort of touched on a couple of times, it's not always necessarily technology. Actually, it starts from the purpose and the mission and everything sort of washes down from there.

30:47Richard Davies:Yeah, I think the bad thing about pyramids is everybody thought loads of people died to make them but that wasn't necessarily the truth but

30:52Sophie Guibaud:um sophia i interrupted you got a second point yeah um so like yeah my second point was um that i'm very curious and i'm sure you are too about uh what it's gonna look like in a world when um revolut and new bank are ipo'd because as much as they have like um this culture of going fast building things, doing all those experiments post-IPO, you just have different goals for your shareholders, like giving your dividends, like your bold place cannot be maybe the same bold place that used to be. So I think there will be, yeah, it's going to be interesting to track. Like we have seen that Revolut has plans to IPO.

31:38Sophie Guibaud:I don't have the timeline, but soon. and I feel it could actually be an opportunity for other players to jump in.

31:49Richard Davies:Yeah, I think it's going to be an interesting one, isn't it? Particularly given, you know, the recent IPO, something like Klarna, you know, might put people off for a little while, you know, but the pressure that when you get to a scale of somebody like Revolute and the amount of investors that they've had and the pressure that they get for, you know, continuing the scaling from a valuation perspective, I think just because you move to a public shareholding shouldn't if that's done correctly. But I think it depends on how well that goes. I think Klana is an example. I can see them chasing valuations for a little while to kind of stabilize, which actually, there's nothing quite like prioritizing your product roadmap when you're chasing public valuation versus things that fundamentally affect your customers.

32:38Richard Davies:And, you know, in a perfect world, those things are one and the same, aren't they? But in reality, they can often be different. I think it goes a little bit back to that point of like, IPO should be at a point where you've got great product market maturity. Because, you know, if you are monoline, the pressure will be to do more things. If you're balanced as a business, then actually profitability is an eventuality, isn't it? But yeah, it's interesting growing pains.

33:07David M. Brear:I get more than that, right? Because, I mean, NewBank actually has been listed now for quite a few years. And generally, the share price has gone up pretty well over that period. Klarna's has not. What's the difference? Well, NewBank's very consistently grown its profitability at a very rapid pace over that period. Klarna is still heavily loss-making. Hence, the valuations look very different. I mean, it's simple as that, right? Public markets have a very clear lens on not just current profitability, but future expected profitability. And I think people extrapolate new banks' profitability now quite a once in the future because they've kept delivering, whereas Glanders, it's negative surprises like big credit losses, which you can argue is attached to a loan product, whatever.

33:50David M. Brear:Sure, great. But yeah, I guess you create very different valuation outcomes in the public markets through that. Richard, what are your sort of reflections or perspectives on Revolut?

34:00Ross Gallagher:I know you've sort of, you touched on this briefly in the previous half, but I think it's worth probably double clicking. I mean, specifically within the context of what we've described as the banking battlefield, it feels like maybe their approach is slightly different.

34:13David M. Brear:Yeah, I mean, so I actually worked there quite a while ago now, so I have no insight particularly of where they are today, but it was always, and I'm pretty sure still is, right, the most impressive sort of product engineering machine I've seen in any financial services company anywhere in the world. And I'm pretty sure that still holds true today, right? The ability to execute a very wide range of geos, products, and customer segments is like unparalleled. And people think Monzo is good, right? but it's essentially doing kind of one geo and a much narrower range of segments and products than than than revenue is so it is like unbelievably world-class i'd say at that and that that's powered it right to be able to have just so many different bets and yeah sure a bunch don't work out but a bunch do work out and yeah uh i think you've then seen that because it's very much about eng the kind of marginal cost of the growth is then very low so lots of bets into lots of different kind of that 3D of like geos product segments and then low marginal cost you've built with tech like it is now driving very very serious like revenue growth and profit growth and i guess that's why it's being valued very highly right and back to the ipo conversation i think they're doing the right thing because they do they do seem to be kind of like diversifying the investor base a lot so they're kind of getting secondary for like early investors and whatever because i guess last thing you want an ipo right is a bunch of people that usually want to sell all their stakes um and just push the price down so uh they do they're they seem to be doing all the

35:47Ross Gallagher:right moves from what i can say i mean when you just look at you know the the valuations when you look at the customer numbers the global reach i mean david i suppose reflecting back on when you and jason were sort of sitting down and coming up with the axes and designing out the um the banking battlefield sort of how does how does revoluts success and revoluts approach uh i suppose

36:09Richard Davies:what are your reflections on that yeah i mean the the bubble was a lot smaller and it was a lot closer to the zero line that when we drew the diagram the first time for sure um but i but i think that you know speaks to like do really good things and enable them to be done and have like a i mean i feel like they announce another ceo of another country every you know three weeks at this stage in terms of but that speaks to again look if you set out an agenda and you you know you pursue it in that way and you build on the momentum of the things that you're doing in other ways like is there going to be is there going to be a point where there's you know a problem here or there and something comes unstuck in one country or another and like yeah sure like you know but i don't see them slowing down is the bit that sort of excites me about it you know i think they're probably weirdly you know we used to talk about google being the the best uh sort of example of shipping software globally with a unified technology capability and I think Revolut are up there now like and to to be doing that as a financial services organization that's just that I think it basically takes away all of the reasons why a big global bank will be like oh yeah yeah but we're doing it in like 80 countries and it's hard and it's like sure but it's not impossible you know like and actually if you're you know your core capabilities are about you know, shipping things and making things happen, then there's pretty much, you know, nothing you can't overcome at that stage.

37:34Richard Davies:So, but I, you know, Nubank and Monzo and, but, you know, all of these other, the VAROs of the world, you know, all of these people around the world who were acquiring customers really effectively. I think the core capabilities is, you know, building software on top of great technology. And, you know, the rest is, again, it's the Stripe thing. It's, you know, listen to customers and do that thing you know and you know maybe even somebody like stripes a great example like actually ipo is not really that's not the end of the story uh for them ever like seemingly they can just keep you know solving problems and getting the opportunity to solve more problems because they do it really well and you know it is revolute destiny uh you know an ipo um i don't know i'm not sure i think there's maybe more effective ways for secondary market stuff to happen to allow people to you know cash out some of the things while maintaining their foot on the accelerator at the same time but yeah it's we do get very fixated I think in the US and the UK on you know an IPO being the the exit or the end but but in reality I think you know it's it's often a quite an interesting test of the fundamentals of the businesses when they do it which is kind of the point you were making Richard as well right and I would add just that I don't

38:54Sophie Guibaud:I think, and I believe we all know it's not the end, right? I wouldn't think Nick thinks IBO is the end for him. But what I would like to also add is that he's just talking a little bit about Revolute Journey from a macro perspective. So he started as a startup, was using modular back then for the payments, then starting building. And what I find very interesting now is that it took them some time to get the UK banking license. They have got a few compliance issues, but now they are actually going to the infrastructure layer and they just joined the stablecoin sandbox that shows that now it's not about fighting regulators.

39:38Sophie Guibaud:It's actually really shaping the future of our payments. So this move has been quite interesting and this is the way to actually control the future.

39:50Ross Gallagher:This is going to sound like a weird question. I'm not going to direct it to anyone in particular. So whoever wants to answer it can just jump in. But do you think we're still talking about banking? Or have we sort of gone broader? Like an example that stands out to my mind is, if you look at what Klarna have done recently by introducing into their own app, their own environment, a sort of natural language AI model that you can just say, hey, look, you know, I'm looking for this product. I want a green dress. And then it just goes out and it uses all of that language and it looks at all of the providers and it looks at local stock levels and all of that sort of stuff and it comes back and goes we think based on your previous purchasing history and all of that sort of stuff it's one of these three options and you know when you think about we so often think about embedded finance and maybe the financial services provider embedding their products into say the retail experience kind of flips that on its head so is there a is there a conversation here that we're moving beyond what we've traditionally considered as banking and sort of this becoming an awful lot broader?

40:53David M. Brear:I think it is, if I go first. I mean, but equally, we do need a separate kind of hype from reality as well. So I come on to the, I do think I agree point, but let me just kind of make that first. So Clann, for example, right? Because one of the reasons they've taken valuation hit is they've actually moved right into consumer term lending, which is kind of very classic banking product to try and drive revenue growth. So the promise of like the, we are, we're at the checkout button, we're the data, we can do retail sales essentially, which was where the valuation was very, very high, right? A few years ago.

41:29David M. Brear:It hasn't played translation of revenue in some way, right? So I do wonder how much is real on that, right? Because they wouldn't be pushing hard into traditional banking products if that was like really motoring, I'd assume. But it is true, right? That clearly people are moving beyond banking i mean we've talked about revolute and actually for a while now i've been going to stays and the kind of rev points avios type thing and all that which is adjacent i think people generally are doing adjacent things aliquid will be in the same right the kind of um spend management uh cash flow insights type tooling but i think it works best when it's adjacent rather than completely uh kind of different um but but yeah for sure if you can solve adjacent problems why wouldn't you and i know do you think kind of like a payment account is a very good basis for that because it's a high frequency engagement product right to then attach things

42:20Richard Davies:to that adjacencies thing i think it's it's interesting when you start talking about the difference between sort of the products and the services side of things there so because actually to your point the you know spend cards and you know uh you know frequency flows of payments and things actually you know not really ever going to be lighting the world on fire when it comes to be adding profitability, you know, major profitability to it, but actually the opportunity it brings you to create services. And, you know, I got, I go back to my sort of Apple pieces is like, I'm so far down that ecosystem now.

42:52Richard Davies:There's no, you know, help me. There's no way, there's no way I'm getting out. You know what I mean? Well, it's not even about the products anymore. It's about all of the services that tie together to create the thing I use most every day, you know, and it doesn't matter if it's my watch or my phone or my laptop or whatever, then actually, or how I manage access for my kids to screen time, like all of these things, you know, like it's a, it's a service layer that actually makes the products more effective. And, you know, I think we're starting to see people think more like that now, which for me is the sort of the tipping point behind, I really, you know, I big, big believer that actually people will be much happier with less price sensitive products if they've got a really good service that ties them together you know and actually that relationship you have with customers at that level becomes a a fundamentally different um a fundamentally different thing and that won't be the same for every different type of customer but but on the whole i i really do believe that's the way forward it's a it's a services industry at the end of the day isn't it and those who do that most effectively will create the best level of trust from your consumers.

44:06Richard Davies:And ultimately, that'll lead to much better things for the businesses.

44:10Ross Gallagher:All right. Given that the banking battlefield was kind of a point in time, this is what we're seeing, this is what's going to happen. I'm going to ask each of you to close out with a prediction. Given what we're saying is that the banking battlefield has evolved, what do you think is sort of the next structural shift that we should be sort of mindful of and watching out for. Sophie, maybe I'll start with you.

44:32Sophie Guibaud:I would say under the hood, AI everywhere. And I think it has happened in the most technology advanced banks already, like specifically to decrease cost when it comes to customer service, credit decisioning, like fraud compliance pricing. So for me, like it is the one that really can help banks massively decrease their cost and as a result basically win versus their competitors because they just can do more with less.

45:08Ross Gallagher:Awesome. Richard, what about you?

45:09David M. Brear:I certainly agree with what Sophie said about AI. It does feel like we've entered a sort of new game, right, with particularly the last three months, maybe, 4.6 and 5.2 models. and yeah very excited by like the potential for that to both we talked a lot about execution right like small teams win like you should be able to have very small teams with this technology right and therefore deliver massively more than you did in the past and then yeah cost transformation business process transformation via organic ai i mean we're working very deeply on that on sort of the complex smi lens we do and see like large opportunity there it's cost yes but actually i I think the biggest thing on what we do, for example, is immediacy, like just make it super easy for a customer to immediately get to an application and a result from that.

46:01David M. Brear:And I guess if we are then saying like AI is like dramatically going to 10x some players, I do think the other massive ingredient there, right, is then customer trust. Because I can see kind of the future, right, that it's already happening. You have like AI slop content everywhere. you're getting bombarded and like so people might get much less open to new things right because they're like getting scammed and they don't trust it and it's all way too like smart for them so i i suspect there might be something quite big right about actually having good customer trust and established relationships to to build off spot on um david it feels only fitting to give the final word to you yeah i mean i i think it's um i think the thing that

46:45Richard Davies:we'll see um for me is like the market pressures right now are leading to really interesting opportunities for people to cheat you know and i mean in a really nice way which is like you know if you look at lloyd's acquiring somebody like curve uh they've acquired you know a team and a capability that they you know would have took forever to to sort of build so so i think it's sort of a bit of a buyer's market so while a lot of these fintechs have actually you know done really amazing things to get tech into the market that customers are engaging with, then, you know, they're not maturing the same way as a gigantic bank is, you know, and that, if you are the gigantic bank, the best thing you've got is just, just crazy amounts of money to buy your way out of this situation.

47:29Richard Davies:So, so I think there will be more and more we see of fintechs being, you know, bought up by organizations. I think the challenge to that is always back to what we were sort of saying earlier on is, you know, do you really understand what it takes to make these things work? Um, there's been plenty of organizations, uh, you know, buying fintechs and, you know, the first thing they do is, you know, okay, you're gonna, you're gonna integrate with our HR systems and our finance systems and all, you know, and now you're reporting to this thing. And it's like, well, that died really quickly, you know?

48:01Richard Davies:So I think it can be an amazing strategy to accelerate their learning and, you know, understand how those things can, you know can evolve them from a cultural and a technological perspective but i think you've got to be very eyes open to um what it takes to to integrate something without breaking the core thing that made it successful so so yeah i i think we'll see a lot more of that but i think you know truth be told this is a an amazingly changing landscape you know whether it's the big banks or the fintechs or the big techs or whatever then you know i think the minute you think you can predict the future on it, then somebody does something amazing in that space.

48:40Richard Davies:And away we go again to how the market reacts. So it's been a fun journey talking about it. I can't imagine we'll be stopping anytime soon.

48:48Ross Gallagher:No, I think that's the beauty of it. That's why it's so exciting. All right. Well, look, that does wrap up today's discussion. Firstly, a huge thank you to our panelists for breaking this down with me for all your amazing insights. And just thank you so much for joining me. Where can people connect and find out a little bit more about you,

49:05Richard Davies:David let's start with you not really LinkedIn anymore those guys suck um if you want to email me email me on david at 11fs.com awesome thank you David how about you Richard yeah I mean listen

49:15David M. Brear:uh you can email me but I mean I am still uh doing some of LinkedIn um though yeah definitely a bit more slop going onto that platform recently yeah so yeah do reach out excellent thank you

49:26Ross Gallagher:Richard Sophie how about you LinkedIn awesome yep and likewise uh you can find me still lingering about on the slop invested LinkedIn. All right, well, look, thanks for listening. If you like what you've heard today, please follow our podcast on your favorite platform of choice. And if you really like what you've heard, why not share this episode with a colleague or friend? As always, if you want to join the conversation, find us on social media, just search for 11FS or FinTech Insider or email podcasts at 11FS.com. Thank you very much again and goodbye.

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