Vinay Palathinkal: Fintech & Web3 Boom & Bust, Avoidable Founder Mistakes & Enemy vs. Partner Banks - E237

Vinay Palathinkal is Regional Head, Wise Platform at Wise. Formerly known as TransferWise, Wise is a leader in cross border money movement, moving more than $132 billion every year and employing 5000 people across 14 global offices. Wise Platform is the third and newest pillar of Wise’s products, allowing platforms like Google Pay and banks like Monzo to integrate and benefit from Wise’s global payments infrastructure.

Jeremy Au: (00:51)
Well, Vinay. Excited to have you back on the show, you have a great point of view, obviously, on Fintech and Southeast Asia, I'm so excited to talk a little bit more and dive into what's driving the recent boom and bust cycles that have been happening. So I think this will be a masterclass and hopefully a deep conversation and let's go from there. Vinay, could you introduce yourself real quick?

Vinay Palathinkal: (01:10)
Hey, Jeremy. I'm excited to be back again. Firstly, I also want to say congratulations on how far the podcast has come since the last recording. It's so cool to see that we're almost at the top of the charts in terms of business podcasts in Southeast Asia. So I feel like I'm speaking to a much larger audience than I probably did in the past, which is scary, but also fun. Quick intro on me, in case, this is the first time we're meeting, so I have had a career mostly in Fintech. I currently work as the regional head of Wise, and specifically, I take care of the API piece for Wise, which is called Wise platform. And I've been involved in Fintech for a while.

When we first met Jeremy, we were both in New York. That's when I worked at a company called Arcus. I used to head up the North America operations and was director of North America for Arcus. We exited that company to MasterCard in 2020. And I decided to take a journey to Singapore to start something new, which is when I joined Wise, which is then TransferWise, and TransferWise went public and rebranded to Wise and it's been fun times at Wise. Company's grown, when I joined us 2100 people to 5000 people in just under two years. And it's been wild. It's also been really cool to see how Southeast Asia has taken on Fintech. How regulation has been changing. The other piece that I also do, I think this might be relevant to maybe conversations around startups and founders is that I run an angel investing syndicate called Fintech Angel operators, which I co-founded with Chia Jeng Yang who does a ton of podcasts and you may have seen him or heard him and Kang, who is the co-founder of a leading Southeast Asian Fintech company. So glad to be here.

Jeremy Au: (03:09)
So what we've seen is there's been a huge boom of Fintech companies in Southeast Asia. And now there's a bit of a bust going on, where a lot of Fintech startups are starting to close or the time to fire folks, especially in Southeast Asia. So what's happening here from your perspective?

Vinay Palathinkal: (03:25)
So I think companies are going through this painful but probably necessary step of downsizing after probably three years of easy money in Fintech. Many went public in the last few years that like, I think are pretty unrealistic valuations. Jeremy, you and I can probably think of one or two. And I've seen pretty sharp corrections. And while I think this sucks, it'll probably free up a lot of Fintech fluent talent in the market over the next year, which means we'll have one thing fixed at least, which is that there'll be a broader hiring pool available to founders. Founders have always complained that hiring is a problem, they can't get the right talent. So it's also probably going to be a lot cheaper to hire due to less salary inflation from these late-stage Fintechs that have had the money, had the capital, and deployed it mostly on hiring the people they wanted to. So I think that's probably what's going to happen. The other piece is it's also going to open up a lot of founders who maybe were not thinking of being founders, they found themselves in this predicament of not having a role that they were leaning back on, and need to figure something out. And they've realized that they've actually been sitting on their back with a problem in the Fintechs that they've worked at, but maybe didn't get the resources, maybe didn't get the bandwidth, maybe didn't get the interest from the founding team, or the executives and the team to actually push it through. So I do think that there's probably going to be a lot of promising strong Fintechs that are founded in the next few years, as a result.

Jeremy Au: (05:04)
So what went wrong? You said it was easy money and so forth, like what does that mean?

Vinay Palathinkal: (05:09)
So I think for the first half of the 2010s, Fintech wasn't even really a word. It was a pretty unproven product. It also wasn't an attractive founder space. But Fintechs increasingly found this PMF in the last, I'd say, five years. So what happened, as a result, is that it created a pretty strong signal to new founders that Fintech is actually this very viable product category. So that coupled with the fact that the venture has just been flush with cash in the past few years, has just made it really like easy money, for Fintechs. So as a result, we probably caused too many Fintech founders to come up. So two out of every five YC founders were Fintech founders, believe it or not, for the past few cohorts. So it just caused way too many people to get into Fintech, way too many Fintechs to be probably born without enough problems to be solved. I think that's probably how I'd sum it up. And on the plus side, it's also led to a lot of super intelligent people from financial services. So traditional finance or Trad-fi as people like to call it, taking that founder leap. And I've seen a lot of these folks actually become fantastic founders. So that's the other side of it as well.

Jeremy Au: (06:32)
What's interesting is that you said that there are too many founders and not enough problems. I don't think any founder really works in the morning saying, Well, I'm working on a problem that doesn't make sense. So what's the adding structural mismatch, like you said, from your perspective is too many founders chasing problems that don't really matter versus, other founders who think they're solving a big category, a big problem, a strong approach?

Vinay Palathinkal: (06:54)
There's a lot of founders that get into Fintech without having quite understood what they're solving for or what necessarily the market looks like. So it could boil down to two things. So one is, does the industry need it? And secondly, is it something that's possible to be done? And so I'll break it down from those two, so that the first one is like, does the industry need it? So I think a lot of people sometimes wake up in the morning and say, I want to create this product that solves for this vertical, because I think it'd be great. So it could be trying to create a neo-bank for creators. But before you get there, are you a creator yourself? And have you maybe understood the pain points of creators and what they might need? So I've seen this time and time again, where at least in the past two or three years founders have come up with ideas that they don't particularly relate to, or have awareness of. So what that's led to is big gaps in terms of what the product offers. And also in terms of, say you're a creator, like you know that there are certain channels, certain group chats, certain conversations that you're a part of, and those are the best distribution networks to get sold to. If you're a founder that doesn't quite understand, that doesn't quite relate to that. You're going to not figure that out. And you're not going to be able to distribute to those networks. So that's the first one.

The second one I said is like, is it possible? Founders trying to solve problems that probably might be too hard to solve. So that relates to what I previously mentioned about Fintech fluency. And part of Fintech fluency relates to your understanding of payment regulation and compliance. And also how financial institutions work. So if you want to start up, for example, some sort of company that accepts crypto globally, or you maybe want to start some cross-border crypto company, the first thing you want to do before you start raising money is to understand from a regulatory perspective. Is this possible? And maybe a question to ask before that is if nobody's done it. Why is that? Is it because it's such a hard problem that people haven't cracked the nut on it? Or is it just that regulation just isn't there to actually build against it? So if founders approached those two angles before getting into Fintech, they probably have less stupid problems to solve in my opinion, the thing is that you could actually still be rewarded quite handsomely in 2020, or 2021, or maybe even 2022, at least the earlier part, with stupid problems like that, because, frankly, the money exists. And if Fintech is tied to your founding story, it's sufficient to get that raise. So that's probably what I think. What do you think Jeremy? Do you think that there are founders coming in to solve problems that are not worth solving?

Jeremy Au: (10:10)
Well, I think founders are always looking for problems to solve. And if the problem is worth solving, there'll be customers who will pay them to solve it. I think what's interesting is that the threshold of that pain can be masked if you have a lot of easy money. And so you will have easy money, you can find people, customers who are willing to pay for it, because it's their number three, number four, number five problem, but not necessarily the number one problem. And so to some extent, the problem of easy money is that it causes adding a threshold of what the problems they are searching for, the quality and the size of the problem, ends up being adding an order of magnitude smaller, versus what's needed to build a high growth startup. And that's how a lot of founders got caught out. Which is that, they felt like it was a big problem. But it wasn't, but to some extent, it wasn't as big as they are told, because the money made it easy for them to acquire customers and so forth. You've seen a lot of startups as an angel syndicate and these are smart founders who are working their ass off to solve it. So customers, build a pitch deck, pitch to you. What are some common mistakes that you see them make? That they don't necessarily understand that they're making?

Vinay Palathinkal: (11:21)
I'll try and think of that as like, what are early problems that founders make? And probably what are mid-stage founders’ problems? So probably like the early problems that I think founders make, is tied to what we were talking about earlier, which is, what kind of problems are they looking to solve. And if I look at some of the founders that have come up with startup ideas, typically around consumer-led products, it's not really informed by what consumers want, but rather their perception of what consumers want. And typically, what they've done is they've taken a mishmash of various infrastructure pieces that they can find. So they might get a corporate card that's issued by someone in the space, they would take an account product and build that right and then they get some lending product from somewhere else. And take that and then assume that by putting it all together, they've actually solved for convenience and they have solved for what someone wants. But really what they've just done is, they've just taken a bunch of apps and built it in one single app. So what really needs to be done is to think more highly of the customer. Because the customer is not going to be fooled by your bundling of basic services. The customer fundamentally needs more. So one way to do that is actually trying to build maybe better efficiencies around each core product. Like, how can you make lending to that customer better? Like, what decisions need to be factored, into the lending process that allows this customer to receive credit, where they previously didn't get credit? And so on. So I'd say that that's a main one that I think needs to be addressed, which is, how do you stop underestimating the customer and just re-bundling things so that they can have what is effectively just a few apps grouped together. So that's the first one that needs to be considered a little bit more.

The second one is what I'd say is a big issue, which is, how do you make more partnerships happen in the space instead of fighting against the fact that there is a big need for financial institutions, especially to support. So a lot of Fintechs come into the space. And I think this is the same with crypto, wanting to be unique and wanting to push against the financial system, without understanding that there are these true OG’s in the space that have actually built really good products and really good and well-built rails. So how do we understand that like that bank and Fintech partnership is something that needs to be developed? So this could be through being involved in corporate accelerators with banks, it could be through trying to sell deals directly to banks, trying to understand that most money actually moves with banks. So how's it possible, that we can actually distribute our services through the banks, to the end customers who invariably would be financial services customers. And that embedded finance experience is something that founders need to try and invest more in and try and figure out, because I think that's a big gap, especially in Southeast Asia, at least, what I've observed is that there's a big focus towards consumers. There's some focus towards enterprise, but there's little focus towards selling directly to financial institutions. The main thrust has been, how do we take from financial institutions, data, on customer patterns, whether it's on spending, whether it's on credit lines that have been issued, and selling that towards say and not so much the other way around? That's a big focus that probably needs to shift. And then I think finally, probably like the distribution channels need to be worked out a little bit better. At the moment, founders really focused towards some of the usual suspects in terms of customer acquisition, which is AdWords, Facebook, influencers. And this causes, especially if you have the same cohort in terms of what you're trying to sell as Fintech products, overcompetition. So, it's like, who can name all the six payroll and income verification API providers that launch around the same time? This is just way too many. So how can we create at least in these new market conditions where there's probably going to be fewer? How can we create that space for companies to actually come in and try and make an actual name for themselves in terms of that distribution? How do you brand yourself in a way that's actually unique and strong to customers without being in the same space, so I think that's probably what I'd say or what I'd advise to founders.

Jeremy Au: (16:20)
Feels like partnering with banks is like sleeping with the enemy. Because, all these startups are really saying that, we're going to be a billion-dollar company and the only way to be a billion-dollar company is to become the new Visa right of x. I need to become the DBS of y. And the only way to become a billion-dollar company is if that pie comes from the financial institution or implicitly. So what's the approach? What do you think? I think you can definitely build an agency or something that consults or sells to these financial institutions with their long sales cycle, can provide some data advantage so far, but how is it that founders are trying to build that billion-dollar company? How are they going to figure out how to share pie or take pie or create pie?

Vinay Palathinkal: (17:00)
Firstly, I think it's stupid when founders all want to build a billion-dollar company, because that's unrealistic, and probably ill-advised. But for the founders that do want to think about how to succeed in this space, I'd say that banks are not necessarily the enemy. They’re just the incumbents. And I would just view it as that. And, if I was to take an example of like, Wise, I think, Wise is probably founded very much on this principle that, like, banks, probably not doing the best job in terms of being transparent to their customers, probably could be a little bit clearer in terms of how they're doing FX and what they're actually costing customers. So that was the initial impetus for the founding of the company. But sooner or later, realize that like, actually, most money actually moves with banks. So what might be better is just to get them on our agenda, rather than moving customers away from banks. Because ultimately, when you have your loan with a bank, when you have your credit card with a bank, when you have your salary paid into the bank, and that's maybe your own user experience for your financial life, that's probably the best place to also then remit money or have your global money experience. So how do you then take that experience to the next level with, maybe better speeds? Better costs? So that's been the experience, at least for Wise, which is that banks have such deep moats that it's just better to build with those moats, put in a few yachts in that moat to make the experience a bit more pleasant than try and throw sand into the moat and try and build something of your own instead. And the same goes for every single Fintech that's trying to build something incredibly unique or incredibly new, which is how can you integrate into the user's financial life instead of standing out as something of your own.

There's always this desire to capture the entire user's life and entire user's journey. And if you're building something, especially in the early stage, it's just not realistic. So what might be better to think about is, how do you embed that incredibly cutting-edge experience that only you have the edge on building, only you have the awareness of this particular niche, and that you'd like to make sure that that experience is tailored towards the user. And that a bank that maybe has 250 products, is not geared toward solving that. So for Wise, it is cross-border payments, 5000 people focused on just making your cross-border experience better. So that's why there's that edge. For another company, it could be, maybe improving the lending experience. How can we make an end-to-end mortgage, ultimately, a more delightful experience for customers and sell that technology to banks? Where I can give an example is Upstart, so Upstart is a US-based mortgage provider and they have this product called Upstart for banks. So it's effectively selling what they've sold direct to consumers, have labeled it as a B2B product, and selling it to banks. So effectively, they're dogfooding the product, they're saying that we have uses, appreciating and loving this product. And I think that your users will love the product as well. So it's a win-win. If I could continue down this track, I also think like, this is where my last Fintech that I worked at Arcus also did a major pivot. So started off as a consumer brand, consumer product, attempted to do bill payments for consumers did reasonably well at it, I wouldn't say it was like the killer category for bill payments in the US, where it really shone is where it started doing distribution to banks and also to Fintech’s and lenders in the US, particularly, the larger lenders in the US. And that's where the traction actually started picking up. That's where one CAC, is not just one user, it's actually a whole bank with an entire cohort of users. So that really allows for scale, that really allows for the investors that have backed you to see the types of return, especially on revenue that they would be expecting, especially at the early to mid stages. So that's where I probably say like, it's not quite sleeping with the enemy. It's finding that collaboration that ultimately sparks a win-win.

Jeremy Au: (21:45)
But I think so many startups just end up dying because the sales cycles are too long, they get stuck in pilot hell. And even in the two examples, you mentioned both of these startups actually started out attacking or taking away a slice of business that could have belonged to the bank, for example, cross-border payments. Same thing for Arcus and so many examples you shared, they seem to be like Build at some point, David is attacking Goliath at something and then after a while, it's like okay, maybe we'll get team up with Goliath at some point? So maybe all the founders are right, they should continue attacking the banks until there's a certain point where they add on a product where there's B2B?

Vinay Palathinkal: (22:21)
I suppose that's an interesting trend that you pointed out, a lot of Fintech founders, even successful in this type of start out trying to fight Goliath and then trying to pivot towards helping Goliath instead, I feel like we could learn from experience potentially, we can learn from seeing that a lot of companies have realized that B2C revenue can exist concurrently with B2B revenue. So why not start off with that standard, why not start off with two distribution channels, one through your direct-to-consumer, which will ultimately help you also have the heartbeat towards what customers want and build towards that, and at the same time, also distribute on a b2b level. I don't think that it needs to live in two separate paradigms. I feel there's a lot of overlap in terms of learnings. Certainly, there's a lot of challenges, especially in the long sales cycles that you'd have to endure. But if you're able to have a compelling product, sales cycles will show for themselves to not be too long. Procurement can be moved quickly if you have the right product and you have the right hearts and minds to be one. Someone said recently that in the era of like Chat GPT and kind of more and more like generative AI and text-based selling happening that wining and dining and the traditional methods of sales actually come back and I couldn't agree more, I think relationships and actually fundamentally dialing into how can you help people is going to become really important today.

Jeremy Au: (24:04)
And what's interesting is that web3 had this promise of replacing all web2 Fintech. What do you think about that promise?

Vinay Palathinkal: (24:15)
I was skeptical from the start, at least in terms of replacing everything. Let's be clear, I still believe in some of the tenants of web3 and crypto for sure. Would, do I think it's going to replace the entire ecosystem? I kind of doubt it. So one core thing that some people, at least the crypto diehard say is that crypto is going to replace cross-border payments completely, or crypto is going to become the de facto way that we transact from customer to customer. The recent movements have shown that it's a pretty volatile space. There's been huge reputational damage at least for crypto in the past few months that will probably take a long time to reverse, it's really unfortunate. And what it means is that regulated and especially like, well, acclimatized Fintechs, can actually fill the space pretty well. So what are the problems effectively that crypto and web3 are trying to solve? So probably web3 was trying to really solve for ownership. And how do you make sure that there are linkages between users and their assets? That piece is quite uniquely solved by the decentralized approach of a blockchain, I don't think that Fintech can come in and solve that, that's probably something that will be uniquely a web3 piece that will continue to grow, I think it's still pretty niche. People currently look at their NFTs and consider that to be their assets. And that's it. But it will grow into more things. So your car will be registered on the blockchain, your luxury goods will also be on the blockchain, it will be verified in a way that if you go to any store, instead of pulling up your serial number, you should have something of a blockchain ID, maybe even stored on your MetaMask, that can actually correlate to whatever goods you own. So that piece I don't think is going to be solved by Fintech or probably any web2 solution. The piece that I think that probably crypto and web3 tried to solve that will be challenging to solve is payments. I remember on a podcast Chamath said that by 2025, Visa and MasterCard will be gone because of crypto. I firmly believe that to be quite false. And it's a bold bet. I love Chamath. I loved his bold positions. But that's one which is tricky because firstly, I think payments require a lot of buy-ins. So it requires buy-in from regulators and it also requires buy-in from financial institutions.

The first piece is well understood, you need to have the licenses, you need to have the compliance, and you need to have the AML and processes in place. The second piece is I think a bit less understood, which is how do you make sure that your financial counterparties that might host funds and hold funds, are willing to contract with you, willing to receive money from you and have risk tolerances that will allow for you to be part of the payment and settlement journey. So at the moment, there's a huge amount of skepticism that we can have crypto firms in any part of that payment and collection journey. For example, if you're just sending maybe acquiring funds via a POS terminal. Are we going to trust that if those funds come directly into a crypto balance or from a crypto balance? Will we want that? If it's not coming from Fiat, it's coming directly from crypto. Or, on the other side, cross-border payments. If you're funding directly from a crypto balance, and it's going through a global cross-border flow, are we going to allow for that? I think some companies say yes, I'd say a vast majority currently say no. So I don't believe that with at least that sentiment on the market in the next five to 10 years. There will be widespread, I'd say, replacement. Will there be adoption? I think so, there might be some companies that pick it up and associated consumers that also, therefore, pick it up. But I'd say the notion of replacement is tricky.

Jeremy Au: (28:28)
Do you think crypto will end up sleeping with the banks and just like every other Fintech company that you felt like had made a sizable position?

Vinay Palathinkal: (28:46)
Well, firstly, banks will want to understand where the value comes from. So there are some elements of where crypto or particularly blockchain companies have become useful to banks. And this is particularly in the trade finance space where there's a need for an intermediary to sit, where funds might be collected from one piece, and then there's like an escrow account where funds sit, and then a collection order or some sort of Purchase Order has to be fulfilled on the other side. And in that use case, I think crypto and that type of permissionless system have been quite useful to mediate. And I've seen that there have been a few banks that have adopted protocols as such. And so when there's that element of utility, that's where I think there's a bit of a push for where banks might be swayed to get into a partnership. But when it comes down to things like hype, and it comes down to maybe accelerating your value or getting rich type, ideas, or products, I think it's a bit trickier. With do I think crypto assets will become more tradable with banks? I think absolutely. Like I think there's definitely a need for banks to expand their portfolios for consumers to be able to invest in more than just your penny stocks and S&P 500 stocks. So that's probably going to happen, there's probably going to be companies that provide that service to banks, provide that ability to provide that custodial experience to banks, without them having to touch any of the funds or any of the ledgering required. But yes, customers will still want that element of crypto, but summarizing, I would think that utility is key, at least in terms of adopting protocols. But customers ultimately sometimes don't care about utility. So those sorts of things will still become important to banks but not with them directly touching their hands.

Jeremy Au: (30:59)
Awesome thank you so much. So I'd love to summarize the three big takeaways from this conversation. I think the first was really talking about the boom and bust cycle in Fintech and web three. So we talked about easy money, but also some of the talent inflows that were attracted by the early successes in the space, and how the bust cycle is causing, more talent to flow around and potentially start new startups as well. The second is really about avoidable founder mistakes, from your perspective as a syndicate leader, and as a Fintech executive. So it was interesting to hear you bucket it between early-stage mistakes around product market fit and the viability of the actual solution, whether it's a one-stop shop or a bundle of random services, or whatever it is, are you actually adding true value? And are you truly empathizing with the customer, versus any middle-stage founders, about what their go-to-market really is, when you're at scale? So I know there's an interesting conversation about the third point, which is banks, as either seen as the enemy, Goliath or are they seen as distribution partners, as well as potential customers. So there's an interesting debate there that doesn't seem to be resolved but it sounds like a common roadmap to success is really starting out by tackling something that the banks haven't really solved, and then eventually making a decision about where they can actually scale that enough to compete with them or to partner with the banks and use it their services, their customers instead. So really interesting. So thank you so much for coming on the show Vinay.

Vinay Palathinkal: (32:24)
Thanks for having me, Jeremy. This is fun.