ICR314: Warren Hogarth, Replacing Your Banking App
My guest on the show today is Warren Hogarth.
Warren spent eight years as a Partner at the number one venture capital firm in the world, Sequoia Capital.
Sequoia have invested in companies like Square, LinkedIn, WhatsApp, and AirBnB, and Warren stood shoulder-to-shoulder with founders to build large, enduring businesses; three of them went from zero to over $1 billion.
While at Sequoia, Warren saw first-hand how fintech startups were changing the way people approached managing money, payments, and investing.
He launched his startup, Empower Finance, in 2016 based on the belief that all people deserve access to expert financial advice.
As well as talking about Warren’s experience funding startups and early stage companies at Sequoia Capital, we get into how fintech has the potential to save us money and make our relationship with money much simpler.
Here’s my conversation with Warren Hogarth, founder of Empower Finance, in episode 314 of Informed Choice Radio.
Martin: Welcome back to Informed Choice Radio. Delighted to welcome Warren Hogarth. Warren, maybe you could introduce yourself. Tell us a little bit about you.
Warren: Certainly. Thank you for having me today. I’m an Aussie, I live here in San Francisco, in the US. I started life as a chemical engineer, I came to the US to be an entrepreneur. I had a few slight deviations along the way. I went to business school, I was a venture capitalist for eighth years, I was a partner at Sequoia Capital, which is a venture firm that amongst other things, was one of the earliest investors in Apple and Google and LinkedIn, and more recently, in Dropbox and Airbnb, when the companies were a few people, and an idea.
So, I had this apprenticeship and time to learn how to grow very large and enduring companies, and then about two years ago stepped back and founded a company called Empower which is really supposed to be the app, it’s a US focused app, for today anyway, to be the one app on your phone that you use to manage everything in your financial life.
Think of it like having a personal advisor in your pocket that’s always looking over your money. Our average users are finding 3 or $400 of savings a year to well over $1000 of savings a year because of the kind of money that gets left on the table. I’m in the process of building that business.
Martin: And you mentioned your time at Sequoia, so perhaps we could go a bit deeper there. What does a venture capitalist do? I think a lot of people might just have the impression they get from watching TV shows like Silicon Valley. Is that the reality of it or is it very different to that?
Warren: You know, like all good satire, there’s some truth in some of these things. I think if you peel the onion on things, your goal is to … Again, I was focused at the very early stages, so think of three people or two people walk in with a business plan, and or a professor has just had some discovery and filed a provisional patent, and we’re supposed to assess that in three, five, seven years from now, do we think we can partner with this founder to turn this into a business that could materially change people’s lives? We would like to say make a dent in the universe.
That would generally mean, is this a company we think could grow to a billion dollars or more of market cap? 3 or 400 employees? And if it is, partner with those founders from both not just a capital point of view, so we would write an initial check of anywhere from half a million to 10 or 15 million dollars, to recruit the executive … Pardon me. To recruit the executive team and the people that can then attract other great people and build this business and scale this very, very rapidly.
Just to give you a sense, a few of the companies I’ve been involved with, one of them is a company called Guardant Health which is developing an early stage cancer detection technology. It’s the leading company in the space and has now raised about 400+ million dollars, and is in unicorn status. First Christmas party was seven people, second a year later was 70 people, a year later was like 250 people.
You just think of that, that’s like a doubling a company every three months in size, and so it’s just tremendous scale, tremendous challenges and opportunity, and it’s a wonderful time for people to grow, and you certainly have some hiccups along the way as well.
Martin: You mentioned that phrase, unicorn status, so that’s when a company reaches one billion dollar capitalization. How rare is that? Is that something that’s happening more and more often? I know Sequoia had a fantastic track record of success doing that.
Warren: Yeah. These days it’s more common, but I mean, it is in the sense … I know there was a list a while ago I think that identified about 100, I think it was a bit over 100 startups that had reached that status. But I mean, you’ve got to realise that often those companies take 7 to 10 years to build, many of them won’t stay there as that status, just like the public markets go up and down. Fortunes go up and down.
It takes a lot of determination and time and good fortune to be able to do that, but we are at this moment in time historically where there’s a saying, “Software’s eating the world.” It’s not just software, but software enabled businesses. Everything from, people are very familiar with Uber, but if you think about what Airbnb has done to the hotel industry in many ways by making it possible for anyone to be an entrepreneur or rent out their place.
Even what we’re doing in financial services right now is being enabled by, what would you call it? APIs, but basically banks allowing us to connect into the data so that we can provide the user a single view of their finances, and then we can write all of the algorithms and software and artificial intelligence that sits on top and provides advice to users.
But we’re not actually a bank at the end of the day, we’re the intelligent layer that sits on top and actually digests that information, tells you what to do, and then allows you to do it in two or three taps.
Martin: And thinking specifically then about the space you’re now operating in with Empower. FinTech I guess is the broad term for it. What sort of developments are we seeing more generally in the FinTech space? Particularly from startups and what was your experience at Sequoia with FinTech startups?
Warren: Yeah, you know, FinTech’s been, like all spaces if you look over time, so I started in venture capital 10 years ago, and I mean, it was a disastrous time. The global financial crisis had just hit, most companies were trimming headcount, doing whatever they could to get their burn rates, basically make sure they’re not burning too much case. Ideally getting to breakeven, so they’ll survive through the downturn. That was a really tough and lean time.
FinTech wasn’t doing well at all, but out of that, it created a lot of opportunity as well, because banks were attracted in very significant ways and they also, both in terms of the product offering for consumers, so basically, people started to, basically the whole consumer lending business has shutdown completely.
But also customer service, everything else just completely plummeted. That really created a lot of opportunity for people to come in and be disruptive. It also, if you look at what mobile’s done, you’ve got to remember it’s the 10th year of the iPhone as well, and think of that also in terms of Android and what was a very offline experience going to online.
You’ve got this massive circular trends, and so on the Sequoia side, we led a seed round in a company called Stripe which is a company, if you’re a developer or if you’ve gone online, on most eCommerce businesses with the exception of perhaps like Amazon and a few of the largest businesses, power all of the payments infrastructure, and that’s what’s made that a seamless experience for merchants.
Another company called Square in the US here, and a few other places around the world now, which is changing the way point of sale payments is done, peer-to-peer payments with Square Cash. Another company in Europe called Klarna, which has done lending for eCommerce businesses as well. So, all of these places where banks just hadn’t innovated or stepped back, or where mobile’s been able to make a disruption, and all of those businesses I just mentioned are also, it’s publicly known off in unicorn status, very large valuations.
I mean, they’re generating hundreds of millions in revenue now as well, which is fantastic. So, we have seen … And those were all founded eight years ago kind of timeframe, and so we’re still seeing that same change, but now hopefully it will really make an impact to consumers in terms of better experiences. Again, in Europe, you’re seeing the whole startup bank, which you might be familiar with, a concept going through with Monzo and N26 and others, with this open initiative that’s happening in Europe, and similar things are happening in the US as part of the Dodd–Frank Act opening up data access.
So, you’re continuing just to see this amazing innovation that will hopefully mean the consumers stop getting screwed the way they do, and finally we get some better technology. I mean, it’s kind of one of those industries that’s still in the dark ages in many ways. The fact that you still have to write a check for some things. If you’ve ever gone to do a wire transfer in the US here, I mean, it’s the most asinine process you can imagine.
Martin: But you mentioned startups like, or established companies now like Uber which is disrupting transport and Airbnb disrupting the hotel industry. Why do you think we’ve seen FinTech startups like Stripe, like Square, like PayPal and others who have disrupted payment processing, but we’re yet really to see any banking app that’s really cracked that nut and allowed consumers to allow their own money effectively? Why hasn’t that been forthcoming yet?
Warren: So a lot of that I think is data access related, and the other half is regulatory related. With the global financial crisis, with a US lens, they shutdown all new banking licences over the last 10 years. In Europe, it was similarly extremely difficult until they really changed the regulatory framework about two or three years ago.
In the US here, you’ll still see a really difficult regulatory framework to be a bank, so banks are very much being protected. But what’s different now is, again, in Europe you have this new regulatory framework and this open data initiative. In the US, you have startups like ours that are trying to fight like crazy to get access to data, and we think that rather than necessarily building a new bank, you can build this new experience on top of a bank, which is really what matters at the end of the day, from the consumer’s point of view.
It really has been, there were there regulatory moats and data moats, and some of them were there for good reason. A lot of them are there created out of paranoia, like there’s this … Again, with a US lens, every time you put a check in the mail, you’re giving your account number and your routing number out, and yet there’s this paranoia, in many ways, I think it’s far more secure the way all of the digital connections are done these days, than obviously all of the mail fraud and other things that have happened in the past.
Martin: A few months back we spoke to Tom Blomfield who’s the CEO of Monzo Bank here in the UK. He described a hub and spoke technique, where they view themselves as a hub, but they’re expecting lots of providers to develop their own apps and use the API from that bank. That’s obviously a disruptive new bank, challenger bank, that’s coming out, doing that with that approach. Do you think that we can trust the establish banks to release as much data, or are they going to be forced to? Will they be forced to push that API out there and give you all the data you need to develop an app that has a meaningful output?
Warren: I think it’s very clear that the banks are fighting, kicking and screaming, to release data. I mean, we’ve seen it in the US with even Capital One being one of the more progressive banks, but TD Bank, Chase has been notorious at rattling the cages here of closing down access. Even though, again, as part of legislation, the Dodd–Frank Act that came out 2010 or whatever, after the financial crisis, put into law over here that consumers must have access to their data.
The banks, they know … I mean, up to the CEO of Capital One, they know this disruption’s coming and they’re doing whatever they can to keep their moats up and protect things for as long as they possibly can. It is a tricky water to navigate right now, and then also again, over here with the administration and everything, the Head of the Consumer Financial Protection Bureau just changed, so that really slowed down a lot of the progress and gave banks the confidence to, again, be difficult.
It’s an interesting game of cat and mouse, but fortunately right now we still have very good access to the data, but they’re trying to make it as difficult as they can.
Martin: So if businesses like yours weren’t developing apps to consolidate that data and provide easy access to it and easy use of it for consumers, do you think we could rely on banks to do it for us? Or, have they got no interest, no incentive to do that?
Warren: I mean, if you go into the App Store and look at the ratings of most of the banking apps in the US, they’re two or three stars. Your ability to transfer money, I mean, Venmo’s been around for whatever, seven years or something like this. They’ve finally got their own initiative together to transfer money and it’s from a consumer experience, it’s just subpar.
So, for whatever reason, the competition, it’s not just … For good reason. Banks are very, very risk averse. You go chat to these banks, they’re very worried about a regulator stepping in and saying, “Hey, you did this tiny thing over in this corner of your bank to change something to be better for consumers, but we don’t like it for reason X, Y, or Z” and therefore, the risk is, “Hey, we’ll shutdown all of what you’re doing as a bank.”
The regulators here, there’s been no new banking licences. To me, this is this great irony. As an Aussie, I can look at it from the outside hopefully, I suppose technically the Queen’s still our Head of State, but we won’t go there, but you’ve got Europe who’s supposed to be a little more conservative than the US, and a little less capitalist than the US, that are really actually promoting competition, and being very forward thinking. And actually, from a regulatory point of view, creating an environment for startups.
And you’ve got the country that’s supposed to have less regulation, et cetera, et cetera, making it really, really challenging and it’s to do with lobbying and incumbents, and all of these crazy things.
Martin: I see you’ve written before about how banks are very good at building walls, and Silicon Valley is good at building windmills. Can you explain that analogy for us? What does that mean?
Warren: Yeah. When you’re a large business and you’ve got massive revenue streams, you generally become conservative and you’re incented to protect those as best you can, and that’s really about erecting walls. I’d say from my point of view, having been an investor in this space, almost with the rare exception do we ever worry about the incumbent being able to respond from a technology advantage. We only worry about them creating … There’s a lobbying advantage, there’s a regulatory advantage that they often build for themselves over time that is I think extremely perverse and kind of sad.
So, the only way to get around this is, “Okay, how do we” … And this is what Silicon Valley’s done is, “How do we come at this from a point of view that they just can’t” … It’s either distributed, like if you look at what Airbnb did with the hoteling industry. In many ways it wasn’t very happy, even though again, if you think of an ultimate American tradition of like, “My rights, and it should be my right to do what I want with my home,” there’s this big lobbying going on behind the scenes from the hotel industry to try and drive all these local governments, with fear and what have you, to make certain things illegal to do with your own home.
You see that backlash, but if you build a product that just has so much consumer value, eventually hopefully consumers rise up and drive through some of these things. That’s really what … How do you build something productive? Which is the windmill. How do you build something that skips over a generation of technology? That’s what mobile has done. What we’re hoping to do here is like if the banks haven’t, if you look at your banking experience today, again more with a US lens, no one tells if, “Hey, it looks like you forgot to pay your bill.”
No one’s telling you, “Hey, it looks like you’re overpaying.” No one says, “Hey, your income went up, your credit score went up. We can refinance your loan now.” Or God forbid, “Hey, you’re lower risk, now we’ll just automatically reduce the interest rate on this loan for you.” Like, none of that thinking ever happens because they’ve got you locked in. They don’t want you to change, yet if you think of people from when they graduate, you’ve got no income, no credit score, no job, and all of a sudden you have your job and you start to build.
You start to build your income, you start to build your credit score. Everything from your student loans to home loans to auto loans, through to your credit cards, all of those things you should be, as you become lower risk, as you evolve and there’s more information about you, you should be getting access to better and better products over time, but none of that happens. So, that’s hopefully, as we think of building a windmill as building this intelligence layer out there that just provides so much value to consumers.
We don’t want people to think of us like a bank. We want people to think of us as something new, as this new service that sits on top, that just helps me take care of my finances. A bank is just simply a place where you store your money. That’s it.
Martin: You talked there about an intelligence layer. At the start of our conversation you said that users of Empower were savings hundreds of dollars to a $1000+ a year. Where are those savings coming from? How is the app identifying savings opportunities?
Warren: Yeah, so I mean, there’s at least four or five different buckets that go on. One big bucket is simply again, if you look at cable, internet, phone bills, et cetera, our average user, we’re able to help them negotiate those bills down about $260 to $280 per year in savings, because they’re just overpaying.
Insurance is another huge area. It varies by insurance company you’re with today, but average savings are about 460 bucks a year, but it varies from 200 to like $7-$800 a year. Another big area is just like is your money in a place where it’s earning its most interest and its least fees?
Some of it’s consolidating credit cards. You’ve got all of these credit cards out overtime, the annual fees of 100, 200 bucks a year are all adding up. Then, this other big area which we’re really starting to lean into heavily now is the loans, where as I said, people throughout their careers, they should be getting access to better products. So, we’re doing all of the algorithmic work to say, “Hey, looking to see if incomes are increasing, looking to see if your credit profile’s improving.”
We can do all of this based off late payment, not sufficient funds information, volatility of your income. By looking at all of these things, we can assess risk and we also plug in on the other side from your data, this Switzerland middle person. We don’t share this data back and forth unless you want to refinance, but on one hand we’re looking at your data, on the other hand we’re connected to the top dozen lending providers, and we’re saying, “Okay, this is what’s happening with you personally. These things are getting better. Okay, you’re currently, in the US, maybe you’ve got a loan with Avant or Lending Club” and, “Hey, but things got better. If we move it over here, we can save you 200 bucks a month.”
Then we’ll give you that alert and say, “Hey, we think you can save 200 bucks a month for these reasons. Would you like to take action on that?”
Martin: And what’s the business model behind this? Where does Empower take its cut and make its fees?
Warren: So, the app and the service, we really believe in democratising access to this concept of sound and great financial advice, so that’s available for free for everyone in the app. There’s two main ways we earn revenue. One way is on some of these things, like bill negotiation, if you actually achieve savings, we might take a … We will take a percentage of that saving. Let’s say we can save you $400 a year or something on your bill, and you actually realise that, we’ll charge a percentage of those savings that we’ve found for you.
If you want to go and negotiate it yourself, that’s completely fine. If we negotiate it for you, we take a cut. The other one is we will recommend like for example, high interest savings accounts, about 20-25% of our users can save 50 to a few hundred bucks a year by moving their money to GS Bank or Capital One 360’s high interest saving. We make that recommendation independent of what we will get paid, but if there’s a way for us to get paid to pay for this service, we will take a cut from the banking partner.
But I always frame it as are these products that I would recommend to my mother-in-law or to my brother or to my sister? That’s how we always frame our recommendations, and they’re pretty much today, they’re all products that people within the company, Empower, use or have used.
Martin: Any plans to expand beyond the United States? Can we expect a UK version of this in due course?
Warren: To be perfectly honest, in the very short term there’s a lot of work for us to do still here in the US. We would like to, that’s probably thinking around 2019 timeframe, which is not that far away now. But that’s the rough cadence for us. I believe very strongly in this concept of … Well, there’s also something else we want to do here in the US first, which is we want to give people better loans and lending.
What we’ve also realised is for a millennial population that FICO, this is this credit scoring system, it really serves them very badly. Because traditional finance, you’ve got to have three trade lines of credit for three years or more, plus two years of W2 income, plus, plus, plus, to be able to get a good loan. Yet, if people don’t want to borrow money just to be able to build their credit score, there should be other ways to determine whether people are financially responsible.
We think there are, and so we’re also going to be doing something interesting stuff there, in the US, later this year. Then, if that all goes well, we plan to expand internationally.
Martin: Fantastic. Warren, I’m conscious of your time, so I’ll finish up there, but just before we finish up, could you let us know where we can find out more about Empower, and how can we connect with you?
Warren: Yeah, certainly. Right now in the US App Store or Google Play Store, if you search Empower, or Empower Finance, or go on the line to Empower.me. I’m on Twitter, @WarrenHogarth, or you can just shoot me an email, firstname.lastname@example.org. Very happy to be helpful to anyone in the community, whether it be building companies or answering financial questions. It’s a deep passion and excited to help.
Martin: Warren, thanks for your time. We’ll make sure we put links in our show notes so people can find you nice and easily. Thank you very much.
Warren: It was a great pleasure. Thank you.