“Why am I fintech heretic? I must get bored easily and so I always look for what’s the edge. Where’s the place where people are breaking things and re-imagining how they could be? Even in a situation where 99% of the industry is the same, I’m always going to look at that 1% that is behaving in a different way. And so this is why I’m interested in how crypto assets repackage financial instruments and asset allocations and automate everything around manufacturing financial products.”
— Lex Sokolin, Global Fintech Co-Head, ConsenSys
After Lex Sokolin launched one of the first robo-advisors back when he was still in grad school, he learned that if you’re right in your business hypothesis, you don’t have to chase the market. Eventually the market comes to you. I spoke with Lex about how robo-advisors and mobile apps like Robinhood have blown up the status quo, about whether the Eastern or Western FinTech models will be the ultimate winner, and a whole lot more on this episode of the Wealth Management Today podcast.
Now hit the Play button!
Companies & People Mentioned
- Acorns [23:16]
- AdvisorEngine [09:25]
- Autonomous Research [10:25]
- Betterment [08:05]
- Chime [16:52]
- DriveWealth [18:55]
- MoneyLion [16:53]
- Personal Capital [19:22]
- Robinhood [16:24]
- Wealthfront [08:08]
- Wealthsimple [13:50]
Topics Covered in this Episode
- What is Consensys? [04:00]
- The FinTech Blueprint & Growth of Technology FinTechs [13:35]
- Monetizing the User Base [23:25]
- Comparison of the Eastern vs. Western Model [35:45]
- Lex Sokolin, FinTech Heretic [42:10]
Complete Episode Transcript:
Craig: Thanks for joining me here on another fantastic day in the wonderful world of wealthtech. My guest for this episode was Lex Sokolin. And while we were both in London, when we recorded it, we couldn’t be in the same location due to the additional levels of lockdown being imposed here in the UK. But we made the best of it and leverage the power of both the internet and Zoom calling to bring this to you. Of course, I’m your host, Craig Iskowitz and I run a consulting firm called Ezra Group. We’re experts in everything related to wealthtech. And this is the part in the program where I usually give our standard marketing pitch, but I’m going to go off script a bit so I can get a plug in for our market research team that has been doing some incredible work led by our head of research. Jean Sullivan. If you’re running a FinTech firm, looking to expand into a new market in wealth management, what you need is data and insights on the client segments you’re targeting. You need to know what those prospective clients are looking for, the size of the attainable market revenue, potential of the top competitors and any functionality gaps in your product that need to be addressed. You can get all of this and more from Ezra Group research. So if you’re on the executive team at a growing FinTech vendor contact as a group right now, by going to our website as EzraGroupLLC.com and clicking on the button that says, schedule a complimentary discovery session at the bottom of the homepage.
And I’d like to welcome to the program our guest, I’m happy to introduce Lex Sokolin, Global FinTech Co-head at ConsenSys, a blockchain software company, Lex, how’s it going, man?
Lex: It’s going great, wonderful to be back on.
Craig: I’m glad to have you back on. I could have you on every week, but
Lex: Let’s do this. Let’s just, let’s go to an island, where there are no politics and no health scares and there are no fire tornadoes and just do a podcast all the time.
Craig: No murder hornets.
Lex: Geez. Yeah. I would say there’s a checkbox next to every symptom of the apocalypse right now. So let’s see how 2021 looks.
Craig: Well you know during Passover, you always read out the 10 plagues in Egypt, you list them out during the Seder. The fire, blood, boils, locusts. So we’re checking them off. Right.
Lex: We got em, we sure got em. Yeah. which is a great transition to investments and markets.
What is ConsenSys?
Craig: Exactly. I’m always looking for the segue. So, can you give us the 30 second overview of ConsenSys?
Lex: Absolutely. So, ConsenSys is an open source, programmable blockchain software company. It’s 30 seconds, not easy to say. Right. So what does that mean? That’s Ethereum, is the name of that open source, programmable blockchain, and that means both building software that is on the next computing paradigm, which is programmable, decentralized ledgers, and also just the concept of financial infrastructure. So you’re combining this next generation computing paradigm with a concept of next generation, financial instruments, whether they are funds or trading or investments. And so you’re kind of in this world of both applications and digital assets. And so ConsenSys lives at the intersection of that. Some folks might know our products like MetaMask, the crypto wallet, Infura which is the developer platform, as well as the group that I co lead called Codify, which focuses on digital assets, decentralized finance, and then blockchain for large financial institutions.
Craig: All good stuff. I’ve done a couple of blog posts and podcasts about the whole crypto space and I’m really excited by it, I’ve been for a couple of years. Haven’t made the move like you have to jump fully into it with both feet. I’m impressed you did that. But I love talking about it, I like to link it to the wealth management industry and key to everything. This is so much going on that overlaps between the two. And if we can also do a quick dive, I know you’ve been on the program before, and so people can come back and listen, but in case they didn’t hear that one and don’t know much about you, you’ve got a long history in the wealth management space. Can you just give a quick overview of your history from there and how you got to where you are now?
Lex: Absolutely. So I vacillate between kind of frontier technology and the edge of entrepreneurship for what now is broadly FinTech. And then on the other side, I spent my time in the large incumbent financial institution. So I started my career at Lehman Brothers in a strategy role for a fairly chunky wealth management business. It was, I’d say about $200 billion in AUM in about 80 of that was private wealth and the rest was institutional. So I spent a couple of years going through the McKinsey approach to figuring out how to run a business like that, which means fire all your small clients, charge everybody a $5,000 minimum account fees and sell them a whole bunch of private equity so that you can book your revenue upfront and live off the trailer, you know?
And so having that experience early and then watching the whole thing deconstruct and reconstruct again into Barclays was very formative because, Barclays could buy different assets from Lehman. It could buy the capital markets business, which was the investment bank and the broker dealer attached to it. You know, so it’s like the brokerage trading culture and all the commission-based stuff that went along with it, or they could have bought Neuberger Berman, which was also inside of Lehman and was the asset management side with a much more fiduciary approach and I think Neuberger’s results continue to tell that story. And watching that come apart and then come back together was really informative for me and gave me very early on the courage to say this stuff, it looks hard, but you could just do it.
I mean, there’s nothing special about any of these people. I mean, they’re all good at their jobs and they’re smart, but there’s nothing particularly special about being in finance. You can try it. And so in my early twenties started a robo-advisor called NestEgg Wealth. I was at Columbia at that time, doing a grad degree and started NestEgg in 2009, 2010. So spent a lot of early time looking and connecting with whether it’s Betterment or at the time KaChing prior to Wealthfront or any of the other digital plays in wealthtech. And I think we were all in this dark forest for 3-4 years, until about 2012, when the theme really hit the mainstream and the word robo-advisor, regardless of how people feel about it, really helped the public imagination understand what the purpose was of digital finance.
And at the same time, I got a lot of demand. Again, rightly or wrongly, a separate point, but a lot of demand from RIAs for, Hey, can I get this for my business? Can I private label it? Can I put my logo on it? And we know that’s not a straightforward journey, but in 2012 there was just an overwhelming amount of demand, 50-100 kind of inbounds. And you can imagine me with a small team kind of trying to scratch this thing together and it was very empowering. So we took the company in the direction of going from B2C to B2B2C, and I partnered up with, Rich Cancro as an entrepreneur, he ended up acquiring NestEgg into a new entity and I was the chief operating officer of that entity, which is now called AdvisorEngine.
And we had built from scratch essentially a full wealth management platform across the advisor experience trading, rebalancing that acquired a CRM. And similarly on the B2C side, the client experience and all the check boxes of financial planning and billing and integration into custodians. So for me, that was a really interesting journey into seeing how to be right over a long period of time, right? So if you’re correct in your hypothesis and you stand still, the market comes to you, but you also need to sort of adjust to where the waves are going and I think working with financial institutions around 2014, 2015 was the right bet and even more so today. After spending a few years doing digital wealth, I joined of all things, an equity research shop called Autonomous Research, and in part I was trying to figure out there there’s digital wealth and that’s the automation of the front office, or the automation of the experience. What else is there? What is there in banking? What is there in lending? What is there in payments? What is there in insurance? You know, it’s not an isolated vertical with a bunch of regulations around it as just one point and a continuum of what people do with their money. And then similarly, like putting things on a phone is great, but that’s again, not the end all, there were much bigger platform shifts around the corner, those being artificial intelligence and blockchain, which I’m sure we’ll talk about in some form, and virtual reality and the sort of like the balance between the East and the West.
Ao I spent three years at Autonomous building out a FinTech practice that looked at public companies and looked at what they were doing in the space and went deep into these themes to really articulate a coherent view, a framework that I can use over and over and over again, to have an answer for myself. Lucky for me, and despite probably all my efforts to the contrary, the business was acquired by Alliance Bernstein about two years ago. And I was excited about getting back to operating and found what I think is honestly the most promising and transformational part of financial services today, which is decentralized finance and ConsenSys being kind of the gorilla in that space, joined it in 2019 to help figure out the direction and help stand up that business.
Craig: Good overview. I didn’t really, you started NestEgg while you were still in school.
Lex: Yeah. It’s a little bit of a hack there. Okay.
Craig: A little bit is right. He, so now that you’re at ConsenSys, has it been a year yet?
Lex: It’s been a year and a half, and in crypto years it’s been, you know.
Lex: It’s like in Inception where you’re on the planet with the giant waves and your spaceships and the black hole, and time’s going by a thousand times faster. And you’re one second in the wave is like 25 years of your life, that’s basically how I feel.
Craig: I was thinking the exact same thing, but it’s not Inception. That’s that’s the Matthew McConaughey movie.
Lex: Ah, yes, it’s got the same soundtrack, but it’s not Inception. You’re right.
Craig: I was thinking the exact same thing there on that water planet for, for an hour 25 years goes by. Yeah. Right.
Lex: And everyone’s super sad at the end of it.
The FinTech Blueprint
Craig: That’s all we remember is the emotion. I was going through some things to talk about, we were bouncing some ideas around. I want to get to decentralized finance, but first I want to talk about the sort of the large technology fintechs and how they’re managing to grow and where this is all going. So can you talk about some things you just posted in there and I’ll give a pitch for your newsletter that you have. So this is called the FinTech Blueprint it’s a great newsletter. I read it all the time, very interesting stuff. So you had two robo-related type of news stories. One was about Wealthsimple hitting unicorn status, and then M1 Finance closing another round of financing. So they’re both robos but they’re very different. So can you talk about what you mentioned with large tech fintechs and how they’re cloning other other vendors and offering all these different services and where you see that converging to?
Lex: It’s really interesting to try and pull apart the dynamics of these things. You can always go one macro level higher, and you can often also go one micro level deeper on many things, but going macro and trying to understand the causes of these things can be really fruitful and when I primarily wore my wealthtech hat, it was very much this conversation of well, the TAMPs do asset allocation and if we just repackage asset allocation and put a mobile experience on top, that’s what the product should be. Or it’s this pie chart that is, I forget all the words, like a sub-advisor and what you’re really offering on top of that is financial planning, and that’s the value like your tax advice or whatever it is.
You’re presupposing the question. The answer that you’re finding, which is like, Oh, in 2015 or 2014, Betterment is just a pie chart, or Wealthfront is just a pie chart. You’re asking a question, you’re asking an uninteresting question, and you’re getting an uninteresting answer. Which is the uninteresting question is how can you automate an asset allocation? And the uninteresting answer is, well, you have a questionnaire and it spits it out, and then you figure out which custodian to implement it in. The interesting question is what happens when bottoms up, you boil down every single financial function and financial instrument into its digital form and not in a sort of window dressing way of what does it mean for a custodian or a broker dealer to “digitize”, but if you really rethink how that comes together, and then you’re able to repackage it in a very integrated way, and by the way, the whole thing feels like a video game.
And so you’ve seen this happen now in a number of different verticals. You’ve seen this happen with retail trading and Robinhood, advisors have a lot of things to say about Robinhood. Robinhood makes $600 million and destroyed commissions for the whole industry and made it clear that the only thing that actually makes money in capital markets is market making. Everything else is there, there’s no other value in trading other than market making, you know? That’s what Robinhood taught us. Similarly things like Chime, or MoneyLion, which are these point solutions for the underbanked or various permutation of banking services focused on injecting credit into people’s lives, right? So, I get my paycheck every two weeks, but my bills are continuous and so I need credit throughout the weeks, and I don’t want to go to a payday lender.
And by the way, most Americans don’t have anything saved or debt, we know the statistics, right? And so these digital companies have done something about it, which is they’ve rearchitected what it means to be a bank or a broker dealer, or a payments company. For example, I believe it’s Chime, although I might be wrong, it might be MoneyLion where the whole point of the free debit account is actually not the debit account, it’s the interchange fee that you get from card spending. So you’re giving somebody a bank account that they can access all the sort of cash flow services, but the fees that the company earns, which can be 1% or 2% come from actual spending. So imagine if you’re a financial advisor and you’re giving advice on spending, you can charge $200 for a plan that nobody ever reads, or let’s say, you can charge 1% on that client’s spending because you also give them the card, right?
So, you’re having these shifts in the packaging of the products underneath, and that’s happened in all these different verticals, including wealth and lending and so on. And now where we are is that it’s fairly trivial to put them all back together. So it’s fairly trivial for Wealthfront, the RIA, to say, we also offer a bank card, even though they don’t offer the bank card, but they can say it. It’s trivial for Robinhood to do it. It’s the same thing for for folks who do the banking services to offer trading. They just plug into DriveWealth or another trading as a service provider, and these financial APIs re rewire and reconnect the existing ecosystem. And so when you look at Wealthsimple, and you say, how can Wealthsimple have one and a half million users?
I think if I go to the robo days, I think my comp is still gonna be 100,000-200,000 users would be fantastic and Personal Capital had their 10 million users, but they were all basically leeching off data aggregation and using that as a candy to manage the money of maybe 100,000 people. So how does Wealthsimple have one and a half million users, which makes it worth over a billion Canadian dollars, over a billion dollars. And the answer is they’ve bolted on two things on top of the asset allocation, they bolted on free trading like Robinhood in Canada, and they’ve bolted on crypto trading. So, they have this high penetration because they’re giving people something that is not just the right thing, which is the wealth journey, but it’s also sort of like the candy that actually sells, which is the activity of trading and then the sort of lottery option value of holding some percentage of your assets in crypto.
For me, that bundling that coming together of the different pieces explains a lot, and it almost looks like the Citi Group of the 80s, except it’s much, much faster, and it’s digital at its core and it’s distributed digitally. And so it has much bigger outcomes in terms of the audience that it can capture. You know, I think for M1 it’s a similar type of news, except it’s the asset allocation that I believe is free. And then the firm is structured as a broker dealer and partners with a bank, right? They could be making money on interchange, so the payments that, the payments that come from offering a private label card, and then giving away asset allocation for free.
And so if you’re sitting in the wealth bubble and you’re like, ah, my fees suck. Well, you could be making 1% on cash deposits. You could be making the spread on the commerce and payments that your clients are putting together. If you look at the tech companies that are doing it, you have no choice but to go that route because, the economics are so thin.
The final thing I’ll say is just, I remember how difficult it was to raise any amount of money for these plays, and it’s just mind-boggling, to me the speed at which the capital is flowing in this space now. If I were a traditional wealth firm, I wouldn’t feel more relaxed and say robo’s dead, I would feel much more anxious to see my competition come from digital lenders and neobanks and Coinbase, which has got 30 million users, and basically all the incumbents. I would see it as a much more competitive space because the industries that in the past didn’t touch, this are also in there as well.
Craig: All good stuff. So that was a lot to get in there in one time I was taking some notes.
Lex: I’m not trying to make it easy for you.
Craig: Now, I don’t want you to. So I think that what you were talking with Revolut, with the debit card, with the interchange fees, you just posted it on LinkedIn. I just reply was replying to you earlier about how they claim it’s a savings account, and they’re giving you 5% on your savings, but it’s really not. It’s really a bonus, it’s really a cash back reward.
Lex: It’s super weird. Yeah. It’s super weird.
Monetizing the User Base
Craig: Well, the point of the interchange fees is important because that’s where all the revenue is coming from, but you’re picking up on a couple of things that I talk about a lot, that Wealthfront and Betterment than any advisor or robo advisor, they’re just an RIA because that’s how they make their money. And they’re only going to be valued as an RIA, but firms like Acorns, MoneyLion, Chime, just a couple of them put together have 30 million users, which is more than a lot of big banks have. They’re much more likely to monetize their user base than a Wealthfront or a Betterment is. Would you agree with that?
Lex: Yeah, for sure. I think we are the frog that’s being boiled slowly, right. Where it’s like, Oh, this doesn’t matter. This doesn’t matter. It’s only this much, it’s only this much, 10 years passes and you’re dead. I mean, and you don’t even have to be a bad player in order for that to be the case. I think TD is a fantastic custodian and a really interesting brokerage player and it’s hard. There has to be consolidation in the industry and you can see the Schwab-TD deal. You can look at, Morgan Stanley E-Trade and Eaton Vance, right? So like, if you want to look at the other adjacent categories, it’s going to be FIS and Fiserv, all integrated with payments players. You can look at Visa and Plaid and MasterCard. There’s basically a consolidation in the manufacturing of financial product. And the reason is as basic economics as you could have. It’s not that robo-advice set the price of 25 basis points. It’s that demand is flat and supply is up. Everybody is offering asset management and investing and banking and payments because it’s easy because technology has lowered the barrier to do that. And so you have price collapse and with price collapse, you need consolidation.
The second dynamic, which I think again, if you’re talking about macro, this is what’s on top of it. The second dynamic is the high-tech firms have won. It’s over. Ten years ago or five years ago there was this question of, is it the financial incumbents or the fintechs. The answer is it’s the financial incumbents. Okay. Is it the financial incumbents or the high-tech firms? The answer is it’s the high-tech firms. It’s already over. There is no chance. There’s no going back.
You know, maybe Goldman or BlackRock, the consolidated footprints, they might have a shot. But you’re in a world where Deutsche Bank is worth $15-20 billion, and Apple is worth $2 trillion and has $200 billion on its balance sheet. You know, the question of are the tech firms in finance, it’s an absurd question because the only way that you can access any financial product is through this object, right. Is over here through the phone. You bank with Apple, you don’t bank with your bank, you open up Apple and that’s your bank. And then you click on an app inside of Apple and guess who authenticates you? I think if you look at the broader sort of dynamic then of, okay, it’s the high-tech firms that have won, because there’s nothing the banks can do at this point, other than provide the risk capital and the product, the financial capital underneath.
Then it’s the question of, is it the Western model of the Eastern model? And the Western model is high-tech, sits in media and sells advertising, and is disallowed by the government to participate in financial services and therefore has flowed around it into financial APIs and embedded finance. But at the score, is this sort of this betrayal, right? You sign up for a high-tech product and you become sold for all these purposes, which are divisive. Or there’s the Eastern model, which for me, the Ant Financial is the key example, and in the Eastern model, the high tech firms are payments companies first. So they’re either a payments chassis or a commerce chassis. So they’re closer to Amazon, but if you have a combination of Square and Amazon together, the payments identity lives inside of this platform, which has 80 million businesses on it, right? So instead of it being Apple, it’s actually a payments money management company, which is the tech provider.
And so I think that’s going to be the next 10 years, the war between can the West integrate finance quickly enough into its tech, and then for the East, will it be contained and blocked, or will sort of like the national spending that China and India are doing to grow those industries, will that be sufficient to push into Europe and the middle East and Africa? I think you’re starting to see some of that in how TikTok and Tencent and potentially Ant Financial are being handled by, or attempted to be handled by the current administration.
So again, we started kind of really narrow talking about, well, this is your wealth app, and it’s your asset allocation, why do people use it? And it very quickly goes into these industry dynamics, which are much bigger and I think much more complicated.
Craig: Yep. It does. It does grow pretty quickly. Ao a couple of things you’d mentioned, is everything consolidating? Is everything converging? Will there ever be a company that can live with just one of these components, whether it’s wealth or banking or lending or saving, they all seem to be adding everything at once. Wealthfront, and this has been said by many people, that Wealthfront can’t possibly make enough money at 25 basis points to pay back their investors. They’re going to need more revenue streams, and they’re doing it by getting into banking, they realize they need that. It’s not enough to just offer asset management services or investment management services. So, will every app or every financial provider have to offer the entire suite, or can some go with just one?
Lex: I think the question has these interesting built in assumptions, right? Which is like, what does it mean for one of these businesses or one of these apps to have to do something? Like, why does it have to do something if you and I are on our safe island and we have an app with a hundred thousand people and a billion in AUM and that technology has become so cheap that through APIs we’ve integrated some version of open source wealth management and we’re just milking that as we would any other sort of non-growth, cash cow, then that’s fine. We don’t have to do anything. I think if you do have this venture pressure and the venture pressure has gotten worse than it has ever been before. I mean, the blitz scaling the SoftBanks, the DSTs that are putting $250 million checks every six months into Robinhood, are creating super weird dynamics in the market.
And this is all fueled again by the interest rate environment and the stock market and the broader weirdness about where money has to go. But if you’re trying to get to a place where you have enough touch points and economics from your clients to equate a $500 million burn, then you have absolutely no choice other than to go across every single feature that you possibly can and get there as fast as you can. But here’s the mistake that people make, including me, which is to think kind of linearly about what’s possible. In your financial model Betterment hits breakeven at $25 billion and therefore to get their money back to their investors, it’s gotta be at $100 billion and is that going to happen and what timeframe, is totally the wrong question. Who would have predicted that that Plaid would sell for $5 billion to Visa. Why would a payments network not even a card provider or somebody that is primarily in the business of doing rails, why would a rails payment company purchase a data aggregator that largely does authentication for FinTech apps that aren’t making money?
And the answer is, because if you build out the logic tree, they can be existential threats, right? So, if you can move data around, you can move money around. And specifically in Europe, you have PSD 2.0, Which bundles the data with the money so you can actually use data aggregation to permission interbank transfers, which puts the card network at risk. And then it also gets Visa into all of the fintechs and therefore into all the bank accounts of nearly every American. It’s hard to imagine being there in the beginning for a data aggregation company and this is the issue that I think Envestnet with Yodlee and certainly like Intuit with their internal solution has, is yeah, you can get $50 million in revenues or $100 million in revenues, but that’s not the game. The game is how do you expose yourself to these platform shifts where all of a sudden you’re in wealth management, but a tech company is willing to buy you for 20 times the industry norm. And so for things like Wealthfront or Acorns, I would expect their acquisition to be not Goldman or Wells Fargo or Citi. I would expect that require to be a Tencent or some version of TikToK or some other odd, but in retrospect, obvious candidate.
Craig: So if I could paraphrase, what you’re saying is that there’s firms that are going to be buying into the space aren’t going to be traditional financial firms, traditional wealth management firms, but firms looking to add that Tencent being primarily an entertainment company with games and other media such that they’ll say, well, now we want to be in the finance business because we’ve got a lot of cash on hand.
Lex: They are in the finance business. They’re the number two payment processor in China. They power a thing called WeChat where again, the it’s like the social network with 500 million people or something like that. But the secret power is that I can send you money in my text messages, and I can also go in and shop using that interface. And so my payment identity is my social media identity. There is no behavioral difference. And so money market funds and wealth management funds live in there. Ant Financial’s biggest initiatives going forward are distributing Vanguard. The soup is different going forward than it was in the past.
Eastern vs. Western Technology Models
Craig: The soup. I liked your comparison of the Western versus Eastern model. So can we talk about that just a little bit more? Can you explain what you mean when you say, the question was, can the West integrate finance quickly enough versus can the East grow quickly enough? So why is it integration versus growth? Why do you see it that way?
Lex: Well, I think the West is starting from a very different place where behaviorally, people don’t really want to adopt new things. It’s a friction, right? So I think large parts of the US are still swiping their credit cards, or they’re still sending in paper forms to their financial advisor, thinking that is a reasonable thing to be doing. And the regulatory environment in the US puts precedent and consumer protection first in a way that is largely blocking of what are they trying to prevent. They’re trying to prevent Facebook destroying the banking industry to put it into stark terms.
Craig: Yeah. So it’s not consumer protection, but it’s their constituents’ protection are the ones who are the banks that are giving them campaign funds.
Lex: You use the words of one to do the other, so you we can revisit, for example, the reaction to the fiduciary rule. And I’m going to get this wrong too, but it may be the Transamerica’s of the world or similar firms LPLs of the world might’ve had an allergy because they have commission-based businesses, to the fiduciary rule, whether from the DOL or the SEC. Whereas the robo-advisors were all about the fiduciary rule and thought it was good change. And it’s this conversation about what does an individual need, what does a human being need to be taken care of, or to have the freedom to buy stocks for too much commissions? And so the conversation is about the consumer behavior, but behind that is really I think the incumbent interest.
You see the same thing with the banking industry in the States. So the OCC keeps trying to put out this FinTech charter, which would let Square and PayPal, and other Stripe have easier access to holding people’s deposits and then local states, kind of banking organizations just keep suing the OCC for overstepping its mandate. I think that’s just inherent in our society.
Craig: So we’re running out of time, but I want to hit a couple more topics. So the news that Robinhood’s valuation hit $11 billion. Do you see that ever ending? Is there no end for that valuation as they’re going to hit a wall, are people gonna realize that they’re not making any money day trading and it’s going to fall off, or is it just going to keep growing?
Lex: I’m somebody that comes from an asset allocation and modern portfolio theory background, putting aside that none of the numbers work anymore, but regardless. Like a diversify and hold, like sure, I believe in that. So for me, Robinhood was always a sign of kind of selling candy, and especially giving away candy. It’s both delicious and addictive and bad for people in the long run. And so I continue to believe that, at the same time, you have to observe what Robinhood has done, which is it has thrown so much money at user acquisition and training people in certain ways, that the net effect is retail trading is something like 40% of market volumes now. That’s 2-3x over the same as last year. I think Covid has played a large part in that because we’re all trapped in our houses and so everybody’s in these digital experiences.
There’s also, I think underneath the trading sort of like this, it’s not a sadness, but everyone is trapped in a terrible financial situation. So what do CEOs of failing companies do, they take out a whole bunch of debt that the firm cannot possibly repay, but it’s like the moonshot to try and get out of it. And so I think for a lot of Americans, this is why you buy crypto assets. This is why you kind of, you take out too much lending it’s because you have no choice. You’re in such a hole that you need something to give you a narrative to get out of that. And I think Robinhood has amplified that to such an extent that it eradicated the previous industry equilibrium around commission pricing. And so there is no commission pricing anymore for anybody.
And then it exposed it generates $600 million in revenue or a billion in revenue. It’s not a FinTech struggling to make money. Where does that revenue come from? The revenue comes from high-frequency trading shops that act as market makers in capital market. What does that mean? It means that they buy and sell on both sides and they take a spread in between. They don’t take really exposure to any asset, they do it really fast and you know, they get retail flows from one side and that gives them liquidity to close out trades on the other side. And you can have super funky outcomes. It’s the equivalent of advertising for Google, right? Selling the product of attention in this case, it’s selling the product of waterflow.
We’re in a transition to a different equilibrium for equities, and that transition benefits Robinhood in a strong way and makes it much more difficult for firms that want to be fiduciaries, and want to do well by the client because, the only revenue pool left is either cash accounts and interest on that which is very low, or trying to incentivize payments, through interchange, or trying to incentivize, trading, and kind of churn in accounts. So I don’t think there is necessarily a cap on that to answer the question more directly, and I think that’s at the expense, it’s like a social cost that has been born as a result of that.
Lex Sokolin, FinTech Heretic
Craig: Can you give me a one minute answer, why are you a fintech heretic?
Lex: Why am I fintech heretic? I must get bored easily and so I always look for what’s the edge. Where’s the place where people are breaking the thing, and re-imagining how it could be. So even in a situation where 99% of the industry is the same, I’m always going to look at that 1% that is behaving in a different way. And so this is why I’m interested in DeFi, this is why I’m interested in how crypto assets repackage financial instruments and repackage asset allocations, and automate all the things about actually manufacturing the financial products. How they break global regulation, how you custody and hold them in a different way. And I think we as people have only so much time to spend, and for me spending my time on things that are curious and different, is where I get the biggest payoff. So yeah, that’s always been my frame.
Craig: Lex you’ve said it all. We’re out of time, we went right up to the end, right after the last minute, the last second of time available. Thanks so much, chock full of information. I’m sure everyone’s going to get a lot out of this and really appreciate your time spent with us today.
Lex: My pleasure. I’m easy to find on the web, @LexSokolin, or if you want to see ConsenSys, it’ll be ConsenSys.net and also of course, install a Metamask play with it, Mask.io. Thanks everybody.