Dividends and Understanding Fintech with Alex Rampell

In every industry there seems to be people who understand or at participating in the business more than others. In the Fintech space, one of the people who understand what people are trying to do and is Alex Rampell a partner with the venture firm of Andressen Horowitz. You are encouraged to both check out the venture fund’s website and his talks on You Tube.

The first aspect of Fintech is you may reflect to how manufacturing works – the first product costs the most money, then every other product costs less because the costs go down. In Fintech, the important elements are cost of capital and distribution – how do you acquire the customer? This is when you hear about the use of big data, reflection points and algorithms. The advantage the big companies have are a low cost of capital and large distribution or customer base. How they use the customer base is the key.

If you are a saver, you likely are getting a little more than 1% on your money. If you distributed credit cards, the average rate would be in the 18%. If you are JP Morgan Chase  who is the second largest distributor of credit cards, you are making 17% spread on your money. When that type of spread they can do many things and are profitable.

The trick for fintechs is to start with one of the big categories of debt – consumer, student, auto loan and mortgage. In each of the areas, similar to bell curves, there are wonderful customers, average customers and some who the loan will be written off and sold to collection agencies. The idea of fintech companies is to go after the wonderful customers and learn to pick the customers who repay their loans who feel they are unserved.

In the US, the most expensive words on Google search are insurance words. For example Geico spends about $1 billion a year to Google. However in the eyes of the insurer, people feel they are better than average and looking for lower rates – whether they drive their vehicles in a normal fashion (accident free); they try to keep themselves healthy – good genes when they were born; whatever the case they are looking for lower rates. The big insurance companies have distribution, but they also have customers looking, who are willing to change, which is different from older customers who tend to be more loyal to their original purchase. This is an opportunity in the market, if people are looking to change.

In one of Mr. Rampell’s talks he says when you look at new entries in the marketplace and there are many, the start up has innovation, but how do they do distribution – how much does it cost to find and turn a customer? the existing companies (typically the big ones) have distribution, how are they innovating?

For example, companies have identified HENRY or High earning not rich yet; people who may make lots of money but they are recent graduates. One company targeted student loans payments and now that they have distribution are adding other features such as making loans and mortgages at zero costs.

What Andressen Horowitz likes – inflection point – low or very low cost for customer acquisitions; companies which operate the operating systems or back office of the apps; companies which own the end user – the people come for information, and are willing to switch users; in payments business company like Stripe; Back End Payments such as Square and offer mortgages such as Blend.  In addition, if insurance companies are spending billions to Google, you can buy Google.

Linking to dividend paying stocks, in every company which you invest in you need to know how it operates to make a profit. In every company that makes a profit has people looking and trying to find ways to pick up the best customers of the company. Understanding the business allows you to see how sustainable it is or how well it is protected. If protected by government regulations, until they change the business can be profitable for many years to come.

There are more questions than answers, till the next time – to raising questions.

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