Yusuf Ozdalga shares why embedded finance, back-office automation and international payments are key themes QED's European team is excited by.
Yusuf Ozdalga shares why embedded finance, back-office automation and international payments are key themes QED's European team is excited by.
Nigel Morris:
You are listening to the Fintech Thought Leaders podcast from QED investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. Fintech Thought Leaders brings together the most talented entrepreneurs tackling today's biggest problems. If you're looking to learn more about the hottest trends in fintech, you are in the right place.
Hello everybody. I'm Nigel Morris, I'm managing partner at QED Investors. I have with me today Yusuf, who looks after Europe. Previously at Capital One when he was a youngster. He's still a youngster actually, but he was at Capital One and been involved in lots of UK and European based investments that I'm sure he will tell us about. The subject today is building off the QED, BCG study, Boston Consulting Group study that talks about the future of finance. And the question that we kept getting from our investors was, where are we in the evolution of fintech? Are we at the end? There was Stripe, and Square, and Klarna, and Credit Karma, and NewBank, and look, all the innovation, low hanging fruit has been already taken and now the incumbents will take digitalization from there versus an argument that says, look, we're just in the early stages of a long book. We're in chapter two, not chapter eight.
And there's lots of friction and customers are not being satisfied, and there's new data streams and there's embedded finance and there's creative ways of putting the value added chain together. And we're just at the beginnings of this and we're going to see innumerable breakthroughs over the years. The study, I think strongly comes down on the side that we are in chapter two, not chapter eight. In fact, the study mentions that today the revenue in financial services worldwide, that's banking and insurance is running at about $12.5 trillion. And of that a measly $250 billion i.e. 2% is coming from fintech. And the study articulates that fintech is going to grow much, much faster than the incumbents and that fintech will grow at a rate of about 6x during this period for the whole of the world.
Now if we look at that for Europe, it's a very similar pattern, a growth rate that would be consistent with what we'll see around the world that fintech revenues in Europe are running about 35 billion and will go up to about $190 billion, up 5.5x, and we will see what is $35 billion on $2.8 trillion. So that's just a bit more than 1% in Europe. These numbers of course, are very, very hard to project, but you have to start with the premise of how much velocity will there be and how much opportunity is there for breakthroughs going forward. So I think the question I want to kick off with Yusuf as you examine the chapter two verse, chapter eight framing, where do you think we are?
Yusuf Ozdalga:
It's a great framing and clearly we're at chapter two, very much at the beginning. We can take a global example now, which is ChatGPT and generative AI. Six months ago nobody even talked about generative AI. I mean at least nobody this broadly, people working on it clearly did. And now everybody is talking about it and what kind of new business cases and new business opportunities that's going to unleash. And who knows, maybe that's chapter three or maybe that's just chapter two and a half, but something that wasn't around six months ago is now being talked about constantly. So that's a very good example I think.
Nigel Morris:
Tick off some of the breakthroughs that you have seen in your six years in looking at Europe. And I mean some of them look like breakthroughs and have been, some of them look like breakthroughs but haven't maybe been able to crack the code on sound, unit economics and business models. How do you characterize the state of play in the UK and in Europe?
Yusuf Ozdalga:
Yeah, I mean if we look at the UK and Europe and Nigel, that's a great question. So much has happened. So six years ago digital payments, maybe Europe was on the cutting edge. As you know in the U.S. paper checks are still used quite commonly and not so in Europe. Europe has always been on the sort of leading edge of digital and automatic payments. But let's look at what happened just in that arena. If you go to Sweden today, for example, many bars, many restaurants do not even accept cash, right? It's easier for them just to do digital payments only, safer, easier to deal with, cheaper. That's happened.
If you look at open banking, it was just being talked about six years ago. To some extent, that promise hasn't really been fulfilled. You can criticize open banking as not having delivered everything. On the other hand, a lot of other countries around the world have adapted open banking. There was sort of a new thing six years ago. It's part of the landscape now. Those are just two examples in payments. In credits, embedded credit is now everywhere. Klarna was a bit more of a cutting edge. Now that's been accepted. Now people are looking at new ways of doing credit, even talking about having ChatGPT do the credit policy so.
Nigel Morris:
Klarna was an early investment of ours and we watched them ascend from Sweden, the Nordic to Germany, UK and U.S., and really have been at the forefront of embedded finance as you put it. So as you look across geographies, bringing up your own Swedish, Turkish heritage, which markets are the most interesting? We tended to think about the UK as the first landing point, certainly for any U.S. company that wants to cross over into Europe, and we were recently in Paris where we were tapping into the vibrancy of the fintech market there. How do you think about Europe in general?
Yusuf Ozdalga:
I think a lot of countries are really interesting, but they're interesting for different reasons. So if you look at UK, that was our entry point as you said, and you did some amazing investments there in your gap year, right? In the UK with ClearScore is now a big, big consumer franchise, not just in the UK, expanding from UK globally. And it was the right market to pick, not only because your heritage is British, but also because it's the biggest VC market. UK gets more VC investment than any other country in Europe. So that's interesting for that reason and also the regulator and the innovation happening there. But then you look at Sweden where you as you pointed out, sat on the board of Klarna and now that's an interesting market because they really punch above their weight. Companies founded in Sweden, go outside of Sweden very quickly and expand globally.
You've had Klarna, you've had Spotify, you've had iZero, Skype. There's been a lot of examples of Swedish companies going global in the tech arena, and many people relate that to this tech investment that happened in the 90s, better broadband, kids in school getting more computer education in Sweden. There was a big bang of sorts that happened in the 90s. That's why that's interesting. Then we have Bulgaria where we are on the board of the only unicorn in that country,
Nigel Morris:
Payhawk.
Yusuf Ozdalga:
Yeah, Payhawk, which is doing really well, competing all across Europe with some green shoots in U.S. We have Wayflyer in Ireland, another very vibrant ecosystems. So when we look at all these countries, Germany, the biggest economy in Europe and I believe third-largest economy in the world. When we look at all these countries, it's quite interesting to see that they're all interesting for different reasons and have different competencies and different comparative advantages.
Nigel Morris:
That is a challenge and an opportunity for you, isn't it? Being based in London means that you have to put your tentacles into each of these markets. There is a common European community that the Brits just decided to leave, but you have to look at each country separately and look at the opportunity. So how do you do that practically Yusuf, and to what extent is there the opportunity for what we internally colloquially call geo arbitrage, i.e. if a business works in country A, the null hypothesis is that with augmentation and tailoring, it can work in country B too.
Yusuf Ozdalga:
Yeah, that's correct. I think it's very much a case of different horses for different courses Nigel. So as we talked about earlier, UK quite similar to the U.S. in terms of the legal framework, the consumer mindset and everything like that. So taking a U.S. model and seeing if it would work in the UK makes a lot of sense for that reason. And UK is also not a small market, it's not as big as the U.S. clearly, but it's still the size of California, which you could say is a point of making it small or big depending how you look at it. And we've had many good investments that are just focused on UK alone. Now on the other hand, you look at Germany, very interesting insurance markets, lot to happen there. That's still very much at chapter one, one would argue in terms of insurtech revolution in Germany. But we're seeing a lot of interesting things happening. And then you have these small countries, the Baltics, Eastern Europe, Sweden, the Nordics, Ireland that punch above their weight.
Nigel Morris:
Talk about talent Yusuf across the different geographies. I mean I've seen lots of U.S. companies around the world invest in tech in Portugal, for example, Berlin, in Germany of course, and a spillover and an exodus of talent from Russia in the last couple of years with what's been happening there with Putin's aggression. When you compare a Europe and say the UK or other geographies, what does talent look like?
Yusuf Ozdalga:
Yeah, I mean as you know better than all of us, Nigel, we're in the people business and what makes a good VC fund a good company or a good founder is how you'd relate to people and talent. Right. So that's always top of mind for us. And it's really interesting to see the different talent pools. So if you go back to Bulgaria for a second, they're the Payhawk team were ex Telerik, and unless you were a developer in Silicon Valley 10, 15 years ago, you would not have heard of Telerik. But a lot of our tech founders know that company because they start in Bulgaria, but they were selling their product in California. Big exit at the time in Bulgaria, 150 million exit. And the ecosystem in Sofia, the capital of Bulgaria is very much defined by this ex Telerik community and that's led them to be very product and tech focused and there's a very strong engineering talent and pool in that country.
So it's a very good place to build very strong product led, tech led businesses. Now if you look at Ireland slightly different, Ireland has been an entry point partially for tax reasons, partially for language reasons of the big tech into Europe. So Google, the FAANGs if you will, set up their offices for Europe in Ireland. And that's meant that in Ireland you have a very strong sales culture. So if you want to build a sales force, they can sell in 10 different countries in Europe speaking 10 different languages natively, you can find that talent pool in Ireland. So that's a nuance for the Irish market. And if you keep looking like this, each country has its own flavor and nuance and it's very important to understand that talent differential in each country because that's the talent on which you build your business. And going back to different horses for different horses, a business that may work really well in Ireland, may not work in Bulgaria and vice versa.
Nigel Morris:
If we go back to our shared Capital One days, we took the U.S. model to Canada, to the UK, to France, Italy, to Spain, to South Africa, and we had to augment it, the business model itself, [inaudible 00:11:00] the rails, interaction with the regulators, cultural issues. But we also had to make sure that we had people running those businesses that were native. They understood the culture, they understood how the systems worked and could attract talent. Is that the case across Europe where you have to be able to tap into local talent to be able to drive local businesses?
Yusuf Ozdalga:
Yeah, I think it depends. It's a very good question. As a generalism that is certainly true, but there's a lot of interesting exceptions where what we see a lot is people building businesses with the engineering talent in one country and the sales talent in another country given how diverse Europe is. And there is pros and cons to both and there's risks and challenges with both approaches, but it's certainly possible to set up a business in the UK, have your engineering team be, many people used to pick Ukraine or Portugal historically for example, and then have your sales be in Ireland.
It's like this is a very feasible thing. Now it's very remote and has challenges culture wise, but it's possible. So I think the key thing is understanding talent, how to find it, where to look for what kind of talent and how to motivate them. And again, going back to what I was saying, this is something I think we did quite well at Capital One with your vision there, Nigel, and we continue to keep our pulse on this at QED and think about talent in a pretty unique way compared to other people.
Nigel Morris:
Yeah, thank you. We think of Europe because there's so many different countries, different cultures, different histories, and we forget just how small Europe is compared with the U.S. I mean flying from east to west across Europe is very easy when you look at having to fly from Los Angeles to New York. I hear the nuance in that and how you organize those things. One of the themes that came out as the BCG study, Yusuf was that the role of the regulator is really important and public policy. Regulators can either cannibalize, suffocate, or encourage and galvanize innovation and fintechs.
And key to that is that with the history of the incumbents, innovating is really pretty clear and quite poor in terms of what they've had to deal with and the breakthroughs that have occurred in the last 20, 30 years across financial services. Presumably you're an advocate that the breakthroughs are going to come from the fintechs, and if so, how does the regulatory tapestry look across Europe and are we seeing regulators step up and being promotional and slightly promiscuous about helping think through where the world is going rather than just focused on Credit Suisse and Deutsche Bank and looking to the U.S. at Signature and SVB and FRB and saying, we're going to make sure that doesn't happen here. Talk a little bit about that regulatory climate and how important it is.
Yusuf Ozdalga:
I mean, if you're an operator, innovator, entrepreneur, you're never going to love the regulator or regulation that much. And I sometimes use this analogy of a referee in football or soccer, but it's important to have good ones. Making sure that the rules are well known by everyone equally enforced and enforced in a way that makes the game beautiful is really important. And I think UK and Europe has done a lot of good things. So they've been forward-thinking, they've been very focused on fostering innovation and competitiveness. So open banking is an example of that. They've been focused on creating a big market of this sort of mosaic of countries. So EU passporting is a good example of that.
So there's instances where the regulator has been, I would dare say, best in the world in UK and Europe. Now there's also instances where they're not perfect, but on the balance, I think regulation is a differentiation point across Europe where you have pretty friendly regulators, pretty forward-thinking, and they're balancing consumer protection in a pretty sensible way. So they're not going overboard, but they're also really always thinking about the consumer, innovation and thinking about why are we regulating the industry in the first place? It is to foster competition. It is to help the consumer. It is to create chapters three, four, five, six, seven, eight, and I think the regulator is again not perfect, but focused on it pretty well in Europe.
Nigel Morris:
That's great to hear. And in that, the regulator and the actions can create substantial multiplier effects economically, GDP and of course helping the lives of the people that live in their countries. The role is not just defense of protecting the infrastructure, the franchise, although that's really important. While you're thinking about that, I just want to shout out to you, Yusuf for your leadership and to Ally who works alongside with you, and then innumerable QED people that have worked alongside you in building what is a really terrific portfolio. But so as we close Yusuf, we're having this conversation in 2030, of course I'm much older and grayer, then where have the breakthroughs occurred?
Yusuf Ozdalga:
Yeah, I mean that's a great question and as venture capitalists, our job is indeed to think about exactly that question and the future. So just to pick a few examples quickly here. One is embedded finance. So embedded finance basically says that if you have a customer franchise, maybe you're a travel agent or an online booking agency or you're an Expedia, let's say you have access to all these customers, or maybe you're a hotel group and you have lots of properties. How do you embed lending and payments into your app and into your product, right? And if you're an Uber maybe you can have a lot of engineering resources and a lot of money to do it. If you're a big hotel group, you may not be able to do that. So there's companies emerging that exactly embed financial solutions, payments and lending into these apps.
And there's a second category of infrastructure providers that help those fintechs embed those solutions in a much more easier and seamless way. So I think embedded finance is one big area and we have some good investments there like Weavr and many others as you know. Another one is back office automation. So if you're a CFO, a lot has been automated, but a lot also hasn't really changed since Microsoft Excel. And that's about the change and Payhawk there is really leading the charge in how to automate the back office for CFOs across Europe. And that's a global theme, but that's a very good example of that in Europe.
Another area we're quite excited about is international payments. Across the globe, the cost of international payments is still quite high, and in domestic markets it's come down a lot, but for cross-border it has not, and there's still a lot of friction. And we have investments in Israel like Cedar that's doing exactly that, helping with cross-border payments. So these are just like three examples and if we had more time, we could talk about 30, but very exciting and I do hopefully look forward to a version of this conversation 2030 where we can look back on all this.
Nigel Morris:
Let's hope that we are still alive and kicking and so enthused in 2030 as we are in 2023 about the future of fintech. Now Yusuf thanks so much for joining and wish you all the best and look forward to talking to you in seven years.
Yusuf Ozdalga:
Great, thanks, Nigel.
Nigel Morris:
Bye. This has been the Fintech Thought Leaders podcast, your deep dive into the world of venture capital and financial services with today's digital disruptors. QED is proud to provide the best advice you can get. To learn more or to read the full show notes from today's episode, check out qedinvestors.com and be sure to follow QED on Twitter and LinkedIn at QED investors. And thank you for listening.