How Open Banking Can Unlock Greater Access to Capital

Transcription:

Penny Crosman (00:09):

Hi, how are you?

Bernardo Martine (00:10):

Good to see you.

Penny Crosman (00:12):

Alright, so Bernardo is Vice President of micro businesses at PayPal. Kind of a partner competitor, a big player.

Bernardo Martine (00:23):

I like to think I was a partner.

Penny Crosman (00:24):

Partner, exactly. Can you tell us a little bit about the business you run and what do you mean by micro business and what kinds of businesses are they?

Bernardo Martine (00:35):

Yeah, so I think people will get surprised for what we do in PayPal because typically we're recognized with that yellow button that we typically click when we're buying things online, but we're broader than that and we serve a very big spectrum of SMBs in large merchants. So we serve that really, really small with selling online in eBay or anything like that. Or you have actually large merchants on Walmart that actually, so we do everything from that small to the big one. And when we think about micro businesses, think about the longest tail of SMBs, typically we see basically anyone who is less than a half a million dollars or sales a year or lower. That's our sort micro business segment. And we typically see due type of sub-segmentation that we look at. One is sort of the full-time owner, typically less than 10 employees. That's sort of the typical, I like to say the creamery shop in your community that we settle POS services or you have sort of the side hustlers, which is basically a segment that is very popular these days, which somebody's just have a job but have a side gig on it.

(01:48):

And that typical side gig is just, I like to work in marketing, but then I do marketing services for SMBs and start selling 30, 40,000, but I haven't left my job yet. I'm just trying to make a job afterwards and create a company. So we're trying to serve those two. And what you think about what we do as a company, where we're trying to do is try to help them in three needs if you will. First we want to help them get paid. So think about that side hustler. They're basically starting their job, starting their new businesses, selling services, and they need to actually request money to get paid. So we provide invoicing solutions for those, a very easy one. You go log in quick, your invoice, very professional one, and the customer receive an invoice and you can actually click and you can pay with PayPal, you can pay with Apple Pay, you can pay with credit cards, anything.

(02:40):

So that customer now has a business that get paid. We also offer POS solutions like Square. We have our own brand called Settle and we serve those customers and restaurants and things like that. And then we also, so that's sort of the first get pay segment. So the second thing we try to do is really help them in the cashflow. And we have been very focused on lending and sort of a basic payment services. So think about it, the merchants start selling online, they get the money in their PayPal account, and we have a debit card product that they can use in partnership with Bangkok. So that's what we work with banks and they can actually pay the daily things with that so that we offer debit card products. And we actually have a robust lending proposition around all the customers. So we have a PayPal working capital product, which is a proprietary solution for us, PayPal business Loan, which is a traditional loan.

(03:37):

And we have a business card program, all of them in partnership with banks. And the ultimate goal is we believe, as the slide was saying, the lending is critical for businesses. And what we have seen is when we provide credit, we see growth in actual our payment business. So we are not in the credit for credit business, we're actually in the credit business to support our payment ecosystem and therefore help them then get more sales in the payment side. So it's sort the ultimate goal is in the major use case we look at is we lend them a hundred thousand dollars, they buy an inventory, they put it in eBay, they get sell that. And that's sort of why we like to see that robust proposition. So we have been doing that. So we serve those sort of three main areas, if you will. There's more that we're thinking through as we continue to see, we're trying to see how we can help them with other things like how they can manage their business from a business inside perspective that's coming.

(04:41):

But that's sort of the general theme, how we serve and we have a complete robust set and we continue to invest and see how we can do more. And we have been in lending in particular, I would say is where we have spent a ton of time. We started lending in 2013. And just to give you a scope of what we do, we are in six countries with our proprietary product, UK, Germany, Australia, Netherlands, France and US. And it's actually, it's incredible. It's a proprietary system that is the same across all the countries with variations of the legal that you have to do in order to actually provide credit and with the partners that we work with. So we have done a million, more than a million loans, we have done more than 25 billion in lending since the inception. And it's an amazing program that use only proprietary data for the most part.

Penny Crosman (05:37):

And that'll change I'm sure. But before we get to that, do you think these small businesses see PayPal as their primary financial services provider or do they have a bank or two and then they use you for lending?

Bernardo Martine (05:50):

I think we are a complimentary relationship for them At the end of the day, we are typically primary when it comes to payments and we observe if they actually get their money in their PayPal account and that money gets out to a primary bank. Typically that's what you typically see. That's sort of the normal we serve. Just to give you a scope, we serve 35 million SMBs or around the world today. And at the end we see that common theme, if you will, that they typically use as sort of a, we get the money in from their sales and that money typically gets out. There's a portion that stay with us in order to do a few things. One, to repay their loans they have with us. Number two, they're using their debit card program, which is running in 15 countries. Or they can actually pay other customer, other businesses within the PayPal ecosystem. And sometimes they use that as well.

Penny Crosman (06:47):

All right. So you mentioned you're just using proprietary data today and our topic is open banking or what I call data sharing, which is getting data from other businesses to help you with your decisions. And it's primarily been something that fintech's do with bank data. Banks are also doing a little bit too, but what would be on your wishlist for types of data or data streams that you would like to be able to ingest in these loan decisions?

Bernardo Martine (07:18):

Well, if you think about it, are one of the beauty of this segment, it's that it's very difficult to say, this segment is sort of like in everyone fits that box. It's very hard to fix people in boxes like this. So what I like to be able to do is being able to have a health picture of that business and have that 360 dimension to understand that performing, understand their customer base they're going after, what are those customers are feeling, and therefore being able to predict how they're going to perform in the future. So that's sort of the ultimate goal. And we believe that we have a great insight in PayPal because we see how the payment volume come through. But however, we know that we don't, sometimes we do not process a hundred percent of the payments. We know that sometimes when they're clicking, they click cards, we may not process that card payment, it may be processed by somebody else. So sometimes we do not have a complete picture of that relationship. And we believe that there is an opportunity for us as a PayPal to continue to improve our service to that customers to really expand our ability to offer them better lending solutions because today are not complete. And the reason why it is not complete is because I cannot see the total number of sales and therefore I cannot price the loan or provide access to the loan or actually give the right loan amount for that customer.

Penny Crosman (08:44):

And what do you think about the state of being able to do that today? I mean today you have to sign up with Plaid or Yodlee or somebody like that and then you get them to build a plumbing for you. How well do you think that what works in today's scenario and what really doesn't in your view?

Bernardo Martine (09:02):

I think at the end I've seen, the positive trend I've seen is that we're seeing more asset restriction taking place. So we're seeing more, especially major, your banks are adopting APIs and they're forcing Joly, PLA and others to kind of use more of an API framework, which actually help us from a FinTech perspective to help create better experiences. And we have launched already in our proprietary solution. We already are connecting to a vendor that help us sort of connect to that banking and we use it as a augmentation tool basically, Hey, this customer sells a hundred dollars, we see that he has three X in their bank account, then I can do a little bit more because I know there's more sales. So we're using that as an augmentation, but we are not yet in the sense of using the full spectrum of the data because the customer's still not confident enough in the services and therefore they're not willing yet to sort of sign up at a great scale.

(10:03):

And secondly, some of the data is not necessarily uniform across all the banks. So if you go to your lead, yes, they give you sort of the same parameters, but the length of the data may be different. They may not be a bank, especially when you go to smaller community banks, they don't use API protocols or they basically, or they don't have enough length of the data and therefore it's hard to build a service that can be replicated. So what we're seeing is a positive trend towards a standardization but not enough yet to create a common framework across all players. I would say it's not only PayPal across all banking service providers. So help us sort of innovate and use the data in a more cohesive way and also explain the customer how we're using the data, how we're storing the data and how they should expect.

Penny Crosman (10:50):

And when you say you're not getting enough data from some of the banks, does that mean not enough transaction history or what are you not able to get today?

Bernardo Martine (11:00):

Sometimes we don't have enough transaction history or it's not uniformly speaking. So when we think about how we approach lending, we try to approach lending in a very systematic way. We do not. We try to be very, we don't have branches, so we cannot afford anyone walking into a branch. So our process typically start online and finish online and we apply, just to give you a sense of our proprietary product. You come in, you do a five minute application or three minute application, and we give the money within seconds up to $200,000. So no questions, literally just completing that. But the requirements, you have to have payments with us. So we know you, we know how you transact, we know your customer base. So we need to be very structured standard so we can build models that help us sort of create the same things that we can do with our own data. And that's why we don't see that today. It's getting much better. If I look at our journey, the last two, three years have changed quite a bit, especially when it comes to screen scraper technology to really more API driven, I think everyone is moving to API, which is actually pretty good.

Penny Crosman (12:09):

And do you feel, I noticed that in the CFBs new rule that data sharing, they are requiring banks and possibly some fintechs too to provide not only transaction data but also rates and fees and such, which kind of surprised me, but do you feel like you need that? Is that important?

Bernardo Martine (12:30):

I'm really more about the data to drive the innovation. I don't think we need to see what price other banks has to get offer. What I really want to see is the health of the customer. I think at the end of the day, I believe sincerely that if we can see a 360 view, we're going to be able to offer a bigger set of customers our solutions at a bigger loan amount. And we probably will price it a much better because we understand them better. So that's what we're gaining, that's what we want to do. And I think as you start seeing that new stream of data, what it's going to unlock is innovation. If you think about it, it is unthinkable. I was in a bank back in the early 2000, I couldn't think of having a couple hundred thousand dollars without talking to a banker. I may remember I was starting PayPal in 2015. My boss told me we're going to go to a hundred, a hundred thousand without talking. I was like, no, you can't. Its like it's impossible. We cannot do that. And now we do it and it's pretty, actually it works, but we need to have a depth of data and a depth of information. And I think that will unlock a tremendous amount of innovation from a product and services that today are not available in the marketplace.

Penny Crosman (13:43):

And do you think about other kinds of data too? Something came up yesterday about it was actually Manny's Bank thinking about being able to collect data on how many clicks on a website, on a small business's website per month or something to give you a fuller sense of the kinds of business they're doing. Are you looking at that kind of stuff?

Bernardo Martine (14:07):

Yeah, we're exploring a thing through how we can use it and how we can use, I would say there's probably two or three things that we're thinking through. One is sort of the health of the online front, if you will. In some cases you can get some cases, you can see mobility data also with Google and you can see traffic in certain areas and you can assess that. So what I would call sort of the health of the space, if you will, from a customer perspective. We also also look at a lot of things related to how customers are feeling about the service they're providing. So you can see it's difficult and we haven't used it. We're just exploring. That's another area that you can think through it if you will. So what are the reviews are that help you to the services is poor or not?

(14:53):

And if there's a poor service, most likely the customer will not be in business. So there's a lot of things we're looking at to think through that. It's a ton more data. The other one that I'm really, really wanting to help is really IRS data. That's the one that I think it's incredible today. Then in the US we cannot do basic things that we should be doing. It's very difficult. Anyone have done lending, one of the hardest things to do is validating an EIN. It's almost impossible. There's no service online. You can do it in a perfect way and it's super difficult. Understanding that IRS will help you quite a lot on that. So that one is a very important one for me. I think my former areas have been pushing hard on that one. I think utilize, the RS data, you can do it today, but it's a form that customer have to sign and you get it, but it's hard to build it in a digital way. So that one I think is very important. And I think the other one that is actually out there is when it comes to secretary of state type data, it's a little bit not very digital I would say, and therefore there's a lot of effort. So when you think about experiences, you always rely on third party sources, but when you get kicked out for whatever reason about digital flow, there's no good ways to do it. So I would say those are sort of the areas that I would like to see more of that.

Penny Crosman (16:25):

I remember during the PPP program, a lot of lenders wished they had IRS data to help prevent fraud by being able to verify identities and so forth. And you mentioned being able to measure the customer service at some of these small businesses. Where do you get that from Yelp and such?

Bernardo Martine (16:45):

I mean there's definitely your Yelp reviews or other ones like Google reviews and others. So it's an exploratory work. I think there's always the galleries you got to work through it to ensure that you can use that data or not. But I think the ultimate goal is you can start seeing, if we think about 360 of the customer, the banking data plus your payment data can give you the financial health of the business. You can talk about the service reliability through reviews, things like that. And then you can think about the health of where they're located through either an online, you can go to traffic data or you can go to Google Mobility if you're thinking about onsite premise type thing. So you can start thinking through through 360 picture if you will, that helps you understand what is that customer sits and how my lending can help that customer. And ultimate, as any banker or anyone who provide credit, giving credit away is very simple, trust me. Hard is collect the payment so you actually be able to forecast in a more accurate way the ability for repay. And when you do that, you can offer better terms for that customer. So that's the ultimate goal.

Penny Crosman (18:06):

I was just thinking a company might get a lot of website traffic because something's gone wrong as well too. So you have to figure that out too obviously. So you mentioned standards, the need for standards. What would good standards around data sharing look like in your view?

Bernardo Martine (18:25):

I mean, I think at the end we got to think through for example, that there's an API driven. We understand what data we're getting consistently, the length of the data, the structure within each of the data fields is sort of consistent. We want to ensure that the data is passed in a way that is secure, that transmits confidence from a customer perspective. And the one thing that probably one of the things that's probably more broken is consistent treatment. When you connect to a banking services, if you look at today and you connect your bank to any other services today, sometimes you have a second verification, sometimes, sometimes you don't. Sometimes they change it and things broke. And that's create inconvenience because if you're really going to do a innovation of a product that relies on having the data at the origination stage and at the portfolio stage, breaking the connection breaks the innovation of the product. And therefore we need to ensure, however, when that customer is changing their password or changing any connectivity to that account, that the system works in a significant way. So I would say it's standard from a data structure perspective, length and field setting, but also sort of how that connectivity is managed in the backend after the connection style, which is where we see a lot of breakage afterwards.

Penny Crosman (19:57):

So even when you're using APIs, that's still a factor.

Bernardo Martine (20:00):

It's a factor. It breaks quite a lot actually more than people think.

Penny Crosman (20:04):

And why do you think that is? If there's an agreed to API?

Bernardo Martine (20:08):

I think at the end, I think at the end, all of us are trying to beat a lot about account take covers and things like that. And so I think security is really at the core. I think all banks are not that they're doing, they're trying to protect their customers in a way. And sometimes that create a disjointed processes.

Penny Crosman (20:33):

So a standard for to your mind would include data types, length.

Bernardo Martine (20:42):

Security. How should we all share in data? Sure. People would like to have the PayPal data, which actually is an open API you can access to. And at the end of the day, you can make sure that the customer who is the owner of the data at the end of the day can provide the data and be secure. The data's being managed appropriately.

Penny Crosman (21:01):

Do a lot of banks use PayPal data?

Bernardo Martine (21:04):

No, but I know other lenders do. Other competitors of us.

Penny Crosman (21:07):

Okay, fair enough. And are you working to help create standards in some way or is PayPal?

Bernardo Martine (21:14):

I mean we work through our associations to help sort of frame some of those areas mean we're still reviewing the new law and starting to understand where we like it, we don't like. But at the end of the day in general, I think the opportunity for us is to, as a group of sort of institutions working, helping as small businesses, I think we all have to work together to really frame data sharing capabilities so they can get better products and services they have today. Because the reality, the needs is real. They're struggling quite a bit and get access to capital and notice not only in the US is across the world. And the better we can frame the data sharing capabilities, the better they will be able to have the need, the capital they need in order to grow their businesses.

Penny Crosman (22:04):

I think if I read the CFBs rule correctly, they did include the right to be forgotten. So if somebody doesn't want you to keep their data, they can say, erase all my data. How hard do you think that will be to do for businesses like yours?

Bernardo Martine (22:21):

I think it's always difficult. I mean it's difficult because at the end of the day you have to parcel the data in a specific location. And sometimes people think data it's, it's a great asset, but it's very difficult to organize and sometimes you have multiple areas accessing that banking data in a way or that data and therefore has to create extra steps if you will, in order to be secure and be able to erase it. But it's definitely, you can see that in Europe and other parts of the world. So it it's been taking place but it take extra costs at the end of the day to comply with.

Penny Crosman (22:58):

Yeah. All right. We have seven minutes left. Does anybody in the audience have a question for Bernardo? All right, do you, okay, hold on, coming.

Audience Member (23:23):

Bernardo, you touched on this a minute ago, but contrast what you're seeing in terms of banking and doing business, financial business in other countries versus the US.

Bernardo Martine (23:34):

I think we're actually in a sense, I would say from a performance perspective is very different in terms of on the lending side that definitely the European markets are doing much better than we all anticipated. Given the economic crisis that it's taking place and the war taking place there. We're seeing more stress in the US. UK is having a little bit of stress, but generally speaking I would say the general need of capital access is across the world. It's unbelievable. I can cite you feedback from people in France when we launch our paperwork capital program there. They said, I couldn't believe I can get a loan this fast, this good. So people are just surprised. Surprise. I would say the one item, I would say there's definitely differences in how customers think about things. So for example, I would say in the US, everyone is digital minded. I would say Netherlands is actually phenomenally digital minded.

(24:39):

They adopt, they're like digital first in face-to-face ever. Never. They really want to do everything digital. So they're actually one of the highest adopted of digital type solutions. So they're very, very different than other countries. I would say there's basically, you see a lot of folks in Germany more cautious I would say, than the typical US and UK market. They to don't talk because we don't have sales folks necessarily, but they apply, they wait and then they take the loan so they feel that they do more of their stuff. So it's a very different sort of mindset, but at the end the core is the same. And when you look at the payment side, I think we're seeing an adoption of services in a significant way across all our invoicing services and settled services. The one item I would say that we are seeing better is probably we're seeing a ton of growth in our German proposition. They like to pay in cash or with banks they don't like credit for the most part. And so we are seeing a tremendous growth in our PayPal ecosystem, payment ecosystem there.

Penny Crosman (25:58):

Interesting. Any other, so can you tell us anything about PayPal's plans for the coming year? Like product plans or new services?

Bernardo Martine (26:11):

Yeah, well we now have a new CEO, so we will let him do that in the future as he's coming in. But I do think at the end what would like to see more, you will see more in our segment. I would say it's we are going to be rapidly trying to develop capabilities to serve and in a better way through an app the customers. So most likely in Q1, similar to the citizens person, we'll be launching a new framework where the customer can engage with us and today they can but in a much better and much robust way. So they will able to get all their payment services, they will be able to really access their debit in working capital solutions in a snapshot in a very simplistic way. And we feel that that's going to start creating a toolkit for a side hustler to be able to sort of in one click on a couple clicks, being able to get their invoice out, get paid, basically use their digital card on, tap it on without Apple Pay or the digital card or basically get access in a few clicks the loan they need in order to buy the equipment they need in order to provide, to get the equipment for their businesses.

Penny Crosman (27:35):

So more products in one place and easier to navigate.

Bernardo Martine (27:39):

Easier to navigate. Today you can get it, it's just more primary. It's a web driven approach and you're going to see more of that in the mobile experience.

Penny Crosman (27:49):

Interesting. And I don't know if you're here for the last session, but there was a slide about what people want to go, what small businesses want to go to online most for our simple account questions or simple questions. Do you find that true and does that mean you need to offer, what does that mean in terms of a product? Do you need to offer chat with a human? Do you offer a virtual assistant? Do you just offer FAQs?

Bernardo Martine (28:16):

I think we will see an evolve solution relating to generative AI in chat bots. I think we're starting to see that. I think the customers are really trying to solve that in one click, if you will, with that experience. I do think that one area that we miss typically is that the easy problems have been solved online or the harder problems have been actually solved by a human. And that's one area that I think we underestimate as as servicing customers that when they reach a human they really have a big problem and they just need to have a different servicing people serving those customers. So I think that's one area that I think we all overlook according ourselves and I think there's a lot of work to be done and how we create that hybrid approach between technology solving that FAQ or chatbot type solutions with sort of like a phone call away or we would have branches so that they can solve that problem from a customer perspective.

Penny Crosman (29:18):

Alright, last question. A lot of people over the last couple of days have been a little bit doom and gloom. I would say this is going to be a tough year. Small businesses are struggling, they're not taking as much credit. The Wall Street Journal had an article yesterday that basically said small business lending has dropped significantly. What do you think, what kind of a year do you expect to have and how do you think small businesses are going to be affected by the economy, et cetera?

Bernardo Martine (29:45):

I would say the struggle is real. The struggle is real. I mean we all have been tightened probably in some way or form for s and b. It's not going to be an easy year, I would say. I think at the end they're getting hit by a lot of things. There's lack of capital coming in. For those who actually get access to capital, the price is going significantly higher and a lot of them are facing what we call ING risk. So they're really coming in, they used to have capital X and now they're going to get capital at Y costs and that kind of throw it away their economics. So I would hope that things will change, but I would say the first part of the year will still be a difficult one. And when you look at some of the statistics from Goldman and other research that have been lately, I mean you're seeing bankruptcy chapter five, which is a new subsegment on bankruptcy court. It's through the roof compared to last year. So I think it was higher as of October is already higher than 2022. So the struggle is real. I think the goal is to work as an industry to continue to work and create better services for them. But it's not going to be an easy year for sure, especially H1. I think H2 may be different, but I think H1 definitely is going to be a difficult year for SMBs.

Penny Crosman (31:12):

Alright, well hang in there. Well thanks so much Bernardo Martine for joining.

Bernardo Martine (31:18):

Thank you. It's a pleasure to be here.