Fintech Fuels Global Payments

0:00Across the world every year, 5 % of global GDP is actually monitored every single year, which is a crazy number. We did this exercise where we sum up all the regulatory changes that happened in a year and we divided it by all the days, like 365 days. And on average, you get two to three changes per day. It gets really, really complicated, really, really fast. Many companies are correctly focused on, all right, how do I more or cheaply attract my customers, how to why retain them, how to why better monetize them, the answer in that case in many cases is... Money predates software by 50 centuries.

0:41Yet, while software transcends borders, money movement remains fragmented to say the least. Not only do companies have to deal with country -specific rails and banking partners, but they also have to navigate constantly evolving regulations and compliance requirements. But, at A16Z, we believe all of this is about to change. As the company of the future turns default global, the demand for Fintech infrastructure that enables companies to integrate payments, lending, and other financial services globally will grow with it. And, we're already seeing the shift to play out all over the world. From Brazil to the UK to India, driven by tailwinds and innovation and regulation.

1:21Just to put some perspective around this opportunity, every day $8 trillion are sent around the world in multiple currencies. That is almost 30 times our global daily GDP, making it the biggest market in the world. And despite its size and importance, there are still so many stories of money getting lost, delayed, at prohibitive cost, or even unavailable. So today, we're joined by A16Z Fintech partners, Angela Strange, Josh Mitt and Gabriel Vasquez, who see the opportunity on the horizon and are actively investing in startups, fueling the rise of global payments. Together, we discuss how we got here, how unmet demand is attracting top entrepreneurs to build global FinTech infrastructure, how countries like Brazil and Mexico have catalyzed financial innovation, and the opportunity for founders to turn payments global.

2:13If you'd like to learn more about this opportunity to create a more integrated, financial of the world, check out our full package at a16z .com slash global -payments, which by the way includes an amazing interactive global payments map. Alright, let's get started. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16z fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast.

2:51For more details including a link to our investments, please see A16Z .com slash Discoachers.

3:02Alright, so I feel like a good place to kick things off is this idea that software is inherently global. I mean, the three of you made a great point in your package that the Google Brazil is just Google. But money for some reason feels different and global payments feel so complex. So given the fact that we do have new technology, maybe just give us the lay of the land. Like why has this been such an intractable problem for so long? Yes, and you kick it off software crosses borders super easily. It often is just language translation, which in today's day of AI is even faster. And obviously money moves around the world.

3:39People travel. it just moves very clumsily and it has become increasingly problematic for global businesses and you know as we're in the post -pandemic age, businesses are in multiple countries faster and faster in their life cycle and so two big primary problems and you know the whole reason we're digging into problems is because those presents opportunities for new companies that we're excited about. So problem one, if you're a business with a presence in multiple countries, you have multiple bank accounts. Sometimes more than one per country and investment account, banking account, you have expense opaque for an exchange going back and forth between countries.

4:16It is unpredictable when that money is going to land, especially if you're transferring money from the U .S., down to Brazil, for payroll, you can be late. As a result, finance teams can spend more than a month just to close the books. So ask many companies in multiple countries, Hey, how much cash you have on hand? Their answer might be, oh, let me check what the intern whose job is to log into multiple bank accounts twice a day, and to record manually our cash position in Excel. So just clumsy, financial accounting, big problem that lots of smart companies are tackling, but this is increasingly top of mind for many CEOs.

4:53Problem -slash opportunity to, as I'm fond of saying, every company wants to be a FinTech company, software companies that are global that want to add financial services, this is extremely cumbersome. And so the example that I love using is let's say you're an operating system for electricians or plumbers, and you have operations in the US, in Latin, and Australia, and you want to add text messaging. Well, it's really easy. You can just partner with Twilio. If you want to issue credit cards for your plumbers or bank accounts for your plumbers, that's likely multiple providers per country that you need to stitch together to do that.

5:30So this has gotten us really diving into the areas of R .A. software moves easily. Money should move much more easily. There's great companies to be built here. There's a growing customer base that just has demand for better solutions here. Maybe you could just double click on why that is. It does seem intuitive to me that money should move as easily as information, but that's not the case. Angela, can you just give us a quick breakdown of how money really moves? Like we're both Canadian if we're trying to transfer money from Canada to the US. Again, it seems like it should be intuitive, but we both know that that's not always the case.

6:07Yeah, and our partner Alex says a great video of this that breaks it down. Let me use an example. I want to move money from my US bank to my family back in Canada or maybe to my brother down in Brazil. And the simplest version would be let's say I bank with Chase in the US and my parents bank with the Royal Bank of Canada. Chances are Chase and Royal Bank of Canada have a direct relationship and Chase would even have what's called a no -stroke count, which means ours, which is an account at the Royal Bank of Canada where they keep Canadian dollars. And so I can just tell Chase, hey listen, I want to transfer, you know, X amount of Canadian dollars to my parents, they can take it out of the no -stroke count and put it into our account.

6:49Now, that might be a little bit faster. How much is that going to cost? Well, as much as they can extract as possible, is it going to be immediate? No, is it very transparent? Definitely not. Does money move on holidays? No. So there's problems there, but that's not the most complex case. Most cases occur because most banks don't have direct relationships with every bank around the world. So, insert what's called a correspondent bank or sometimes more than one correspondent bank. And now your money has to go through this not transparent, expensive, hot, multiple times to get to its destination.

7:24I didn't realize before seeing that example and seeing the wonderful explainer from Alex, which will also link in the show notes, just how complex money movement can be. This team also put together a map of different countries around the world to kind of gage financial health of these different countries and you chose four metrics. They were banked populations, smartphone penetration, credit card penetration, and local payment rails. Give me a sense of why those four metrics were chosen and how they really represent the health of the Fintech ecosystem. And then also, if there's any countries that you're paying attention to, are there corridors that you think are doing things maybe differently than other countries around the world?

8:04We included these four kind of general categories. And I don't know if we want to call it health of the Fintech ecosystem, but more of like the state of the Fintech ecosystem in each of these places. And so we really wanted this show is, hey, obviously the first thing you might be able to do in one of these countries is help a person get a bank account, which is where they're storing their paycheck, and it's the on -ramp into all of these other opportunities. Generally speaking, a smartphone is pretty critical in terms of whether it's paying for a good or having that make account on their smartphone.

8:32And so we wanted to show the opportunity that maybe a more digitally native country versus a less digitally native country might have, which is obviously very different. Credit cards are either super prevalent, like you see that many European countries are here in the US, but in certain places there really isn't serious credit card penetration. And so we wanted to kind of show the differences there. And obviously that might create an opportunity for mobile wallet or a different type of payment method that we see maybe in Africa or Southeast Asia or Latin America and then really calling out certain local payment rails.

9:03And so, you know, for example in Canada, they have Interact, which is like the Canadian ACH. I know you're Canadian, so we have another proud Canadian on this call in Angela, but you look down at whether it's Brazil with PICS and really the local payment rails that maybe a country that's operating multiple Chios is going to have to leverage to issue local payments. And so we wanted to basically call out some of these unique peculiarities because each one of these markets is so different on that interactive map. And I think this is something that we've been ideating on for a really long time. And we were excited they'd make it interactive.

9:36You know, we've talked about Canada a few times, but I think when people say, You know, hey, what quarter is might you be most interested in across the world from a cross -order perspective? People think of what maybe a bank or a regulator might call like a higher risk Gord or right maybe it's an unbanked part of Africa to the UK or Southeast Asia to the Western world something like that Where banks might not understand the risk profile of the end business as well But you look at Canada to the US. This is just as big of a problem in an absolutely massive market So Canada, US is a $1 .7 trillion corridor annually.

10:14US and Canada moved $2 billion of goods and services every single day, and this is still a massive problem. And you would think, oh, the Maple Leafs are in the NHL and we have the Blue Jigs, this is gonna be a soft problem. No. And so, you could take this example of maybe it's a small business that is producing maple syrup. Maybe their suppliers are on both sides of the border. You've got a Canadian supplier and you have a US supplier. of the maple syrup or the chemicals that go into the maple syrup. They need to figure out how to pay that supplier. And then also if they're distributing in the US, they need to figure out how to receive money from that US distributor.

10:49And obviously you're going to have multiple entities, as Angela mentioned earlier, where you're managing bank accounts in the US, bank accounts in Canada, hedging your FX risk, moving money between entities, understanding your cash position. And so something as simple as a small or mid -sized Canadian maple syrup manufacturer, It gets really, really complicated, really, really fast. And so I think that's a core that we're super interested in. It's not the only one, but I think people oftentimes ignore the really obvious opportunities hiding in plain sight. We could have picked 10 metrics. Those were just four of the more illustrating ones.

11:23One of the interesting things is to watch how they've changed over time. And my particular favorite contrast is credit card penetration in many countries, contrasted with smartphone penetration. For instance, I'm the strove one of our investments in Latin America in Colombia, where the credit card penetration had saved flat for a decade under 20%. Smartphone penetration went from 10 to 8. And so now all of a sudden the entire population had potentially a mini bank in their pocket. And that's exactly how a lot of the new companies are delivering these financial services. And so versus the US and many banks are still opening branches and that can be a viable strategy depending on your market, just the increase in smartphones has been a real driver for being able to offer banking services in many countries around the world.

12:11That's such a great point. As you're looking at the map, are there other things that you're looking for where you're like, oh, I see this one metric surging and another sting flat or stable? Is there anything else that you're paying attention to as you see maybe the confluence or combination of certain metrics put together in a certain region? One of the aspects that we take a close look is also how regulation can sometimes push forward innovation. So I'll give you the example of Brazil. Let's go back in time to 2010. Brazil had a non -legal bully of five banks that were also among the most profitable in the world.

12:46And on top of that, only half of the Brazilian population had access to financial services. But fast forward to today, this has changed dramatically. You know, like now above 85 % of the Brazilian population have access to bank account, the main payment method is PIX, which is this electronic instrument system owned by the Central Bank. And it also has one of the most driving free and tech ecosystems in the world. But this drastic change was not driven overnight. It is the result of a decade of regulatory changes that have happened in Brazil. So let me touch a couple of examples. It started with the merchant and choir inside.

13:23So in 2010, there was this duopoly between Cielo and Reda, which were the largest acquires in Brazil. And they had a specific partnership with Visa and MasterCard. The Presidents and their bank ended this exclusivity. And that allowed other merchant acquires to come into the competition, and it also enabled to lower the fees, which enabled SMBs to adopt the merchant acquiring services, which led to the rise of large companies like Stone and Paxiguro that serve the segments of small businesses and micro -merches in Brazil. So then is another big portion that happened was the bundling of the banking licenses in Brazil.

14:01I'm going to touch on the two most important ones, which is the payment institution which enables basically companies that are not banks to offer digital money transfers and opening of digital accounts. So this led to the rise of companies that are very famous now like New Bank and Neon. And in 2018, the Brazilian Center of Bank also launched a new license called the SCD license, which basically enabled startups to operate directly in the credit market. So before that, they had to partner with the legacy financial institutions to offer financial services, especially on the credit side. But this license enabled them to bring this economic scene house and have a more dynamic competition.

14:43On top of that, Brazil has continued to innovate. They offer now open banking, which is enforced. And in 2021, they launched PICS, which within a year achieve 100 million users, which is incredibly the adoption that it has had. But it's also a result of a lot of regulatory innovation that happened within Brazil. And for what we're hearing, it's not stopping there. They're thinking about regulating crypto. They're launching their own digital currency that has plans in 2024, the word is, they're expanding picks to Colombia, which is also a testament of the innovation that Brazil has had and how other countries are used as an inspiration in the region.

15:25So I think that is super impressive what Brazil has done in the last decade or so. Yeah, I think one doesn't generally think of regulation as a tailwind, and I'd say when we started investing in financial services, right? If you contrast that to other markets, It's like you look at the rise of Uber, for instance. They explicitly broke the taxi regulations and soon enough all the regulators were in Uber and laws had to change. From a thin point of view, like you can't ignore KYC and AML, you're gonna go to jail. So you have to comply with the regulation. And thus, when a country does something very specific, which encourages new players, or at least makes the process to enter very clear, we definitely pay a lot of attention with that from an investment point of view because it creates an interesting new tailwind and you can look at a lot of new companies have been started at the point of some of these regulatory changes.

16:20It's because they really catalyze and capture on those. That's such a good point because we really don't often think especially about financial regulation as a tailwind. We often think of it as the exact opposite. I'm sure a lot of people in America would think to Dodd -Frank and the thousands of pages and hundreds of new rules that were enacted from that. But Joe, can this be applied to America? Like, if we look to Brazil or some other countries like the UK that are introducing regulation, like open banking, can we just copy and paste those or is there some other dynamic that we should keep in mind?

16:53Is the US fundamentally more challenging? It's an interesting question and maybe I'll answer it in a slightly different way. You asked, like, how does money actually move internationally? How it talks about, you know, okay, the money is moving this way through whether it's a global bank and then a no -stri -votior account, a corresponding bank and then to the receiving bank. That's really one part of money movement. The other side is really where the regular is really care a lot about is basically the compliance workflow around moving money. And so for each one of the parties in Angela's example, there's a major compliance overhead aspect to that where they need to onboard a customer or they need to understand who the customer is, right?

17:32And then communicating that between all the different parties in that transaction. And as Angela said, that might be many hops between many different banks or financial institutions. And so one really interesting, kind of regulatory tailwind that's being driven here in the US has been the broad de -risking that's happening being driven by the US Fed. And so what I mean by that de -risking process is there are across the world every year, 5 % of global GDP is actually money laundered every single year, which is a crazy number. And so in response to this, the US Fed has actually terminated many no -show -of -o -show accounts for corresponding banks.

18:08And so what we're seeing right now is this massive increase in demand for cross -order transactions. We've talked about the company to the future is the Paul Global and there's data on cross -order transactions doubling of the past decade. That's on the one side. And on the other side, we've seen a massive decrease in the number of corresponding banks that are available. And so this is creating this really interesting time where one, you can help banks actually solve this problem. And we have a company called Payal that actually does that, where it helps unoriginating and receiving institution communicate basically the onboarding and compliance information across that entire chain in a holistic fashion.

18:43So that's the one end, as you could solve solutions to the traditional banking environment. Or two, you could go and sell as a net new business, right? You might build new infrastructure or a new company that might acquire it and use it in a different way. And so that is a really exciting tailwind on the regulatory side that's being driven here in the US, but it's relevant globally as many of the corresponding banks, you know, the money moves in dollars, and the US Fed controls that from regulatory standpoint. Absolutely. And I think maybe before we get into opportunities, let's just address why this matters now, right?

19:15You mentioned a lot of companies are becoming default global. That is a thesis that Angela, I know you've presented. And what I'm trying to get at is the fact that money has been around for thousands of years, software has been around for less time, But is there really a why now like in 2023 where things are fundamentally changing where we need to understand or change our approach to global payments? You hit on part of it, which is it's the default global company and I think it used to be you know a company would start in one country You'd hire 50 people generally very close to where the founder lives and then expand gradually over time And then as you get to be a larger and larger company, you know, you can hire lots of Treasury people you can have that fact's people.

19:54You can figure this out. It wasn't smooth, software driven operating, but probably less top of mind. Now companies are facing these cross -border challenges much earlier. And then also just expectations of the quality of software has gone up dramatically. We have great experiences in so many different areas. And the experiences of software in the treasury and finance and functions that often the CEO has to deal with earlier and stages are just not at that level. So there's lots more demand and there's lots more great entrepreneurs going into that space. Let's just bucket one. And then bucket two, we're coming off extreme growth in 2021.

20:37And in 2023, many companies are correctly focused on, all right, how do I more cheaply attract my customers, how do I retain them, how do I better monetize them, the answer in that case in many cases is financial services. And so we're seeing a large uptake in larger companies and sometimes even older companies that have been around for 20 plus years in wanting to add financial services and the demand for modern infrastructure. Like there's definitely not cross -border infrastructure in many cases, but many cases don't even have modern infrastructure just for that single country. And if we're thinking about specific countries, maybe one more thing to address before we jump to opportunities is why the rails in different countries differ, why the payment preferences differ.

21:29Maybe this is obvious for someone in FinTech, but it reminds me, it wasn't there some stunt a while ago where people were like, why don't we all just speak one language? And someone tried to invent one language and they're like, everyone's going to speak this and it'll all be good and it'll simplify so much. Why is it the case in Fintech that so many different countries have so many different systems also to your point, Angela, at different levels of innovation or integration of software? I think the example that I love to give here is related to Latin America because there's a huge contrast between the two largest economies.

22:02So Mexico and Brazil, let me give you an example of this. Mexico, 90 % of the population use cash transactions below 500 pesos, which is about $30. above that threshold is around 80 % but still extremely high. In Brazil, it's completely different. The main payment method, as we discussed before, is picks. And 75 % of the consumers in Brazil have access to picks, or have an account that enables them to use picks. So that is a huge country between the two. And if you think about it, we talk about the Brazil as an example of how regulation has pushed forward innovation in the country. Mexico has had similar issues, but have not flourished the same way because it has not been enforced the way that it was enforced in Brazil.

22:45There's also a lot of dynamics that differ between the cultures and dynamics within the country and infrastructure. For example, in Latin America, there's a huge fraud rate. Mexico, the charge bags are around three times higher than the average global. and it's harder to prosecute because the legal framework doesn't support online evidence. So this is like a huge problem when we talk to Mexican founders when they're like, you know, fraud is a huge problem. So payment providers in Mexico are super focusing on the education, right? Then creating the tools to assess fraud and make this more efficient, the same goes in a lot of other countries in Latin America.

23:24So that is one thing to highlight. In Europe and Asia, priorities are a little bit different, right? Because you have a higher fragmentation within the payment providers or payment preferences. So managing this fragmentation requires infrastructure providers to not only accommodate this nuances to each of the countries, but also have access to the right licenses to operate in these countries. And that can create a lot of complexity because each country might have different requirements that take several months and then to offer the solution regionally can take up to years. So that's one of the complexities that us.

24:03I think Gabe's hit the nail on the head. And the simplest way that I like to say this is the local payment rails really at the end of the day, how the money actually moves, is governed by central banks. And the central banks are part of the government. and the people that are obviously elected officials that control how things actually happen in a country, you know, the people with the guns effectively, that is who controls how the money ultimately is going to move. So it's not as simple as, hey, we're going to build some new thing that's going to be beautiful and seamless. You've got to navigate all the different intricacies that Gabe just called out.

24:39And that is going to be inherently different across each and every country because the regulation is so different, which is what creates this global compliance problem is the issues within one are different as they are on another. So I think that was extremely well -played. And I mean, Angela mentioned this before, but for every problem, there is an opportunity. So I think that's the perfect segue to talk about the fact that we have a few trends intersecting. We have many companies now becoming default global. There's higher demand for some of these cross -border payments or services, but to this group's point, every country is different.