Hans Morris is a name to know in fintech, and as finance and tech sectors prepare for tougher time next year, he has some incisive thoughts to share about the kinds of companies that will succeed (or not) in a financial downturn. The managing partner of investment firm Nyca Partners, Morris also serves as the chairman of the board of Lending Club and is a director of other startups, including AvidXchange, Boomtown, Payoneer and SigFig. At Nyca, which is on its third fund, Morris spends much of his time meeting with entrepreneurs focused on payments, credit models, digital advice and financial infrastructure.
But unlike many successful fintech VCs, Morris doesn’t have to read about how Wall Street’s history influenced the trajectory of those sectors. He played an active role in shaping them. His experiences — heading Smith Barney’s FIG effort (at 29 years old), overseeing Citigroup’s institutional businesses, serving as president of Visa and advising companies at General Atlantic — have also provided him with an unparalleled financial services Rolodex. And for those who believe that financial history rhymes, Morris’ opinions are now especially welcome. Fintech may be entering a new, post-financial crisis phase in which the low-hanging fruit has been picked and macro headwinds outweigh tailwinds. In the discussion below, Morris talks candidly about how he’s approaching investing next year and how he’s viewing fintech M&A possibilities. He was also eager to share his thoughts on ethics in financial services (a favorite topic), the prospects for challenger banks, why he’s branched out into real estate tech, the future of blockchain and some of his favorite bank CEOs.
Gregg Schoenberg: Hans, it’s always good to see you, but I’m especially glad to be sitting down with you now, given that the financial world is convulsing at the moment. Before we get into that, though, I want to kick off with something else: Do you buy into the idea of techfin versus fintech?
Hans Morris: I don’t. My basic organizing principle, which you and I have discussed before, is around declining information costs. As these costs decline, it disrupts the traditional profit pools in financial services. It’s always been like that. What I would say is that in recent times, some tech companies have done a very good job at building a trusted relationship with consumers, and in some cases with businesses. That trusted relationship obviously provides a significant competitive advantage of information. But that advantage lessens later on. There are so many examples we could point to of companies that were “it.” Then, suddenly, they say, “Oh no, our tech is expensive, creates a bad experience and will cost a lot to fix.”
GS: Let’s talk about the present. As you know, the Fed has been tightening, equities are hemorrhaging, the yield curve is getting spooky and talk of a recession is intensifying. To me, Lending Club, right or wrong, was one of the original poster children of the post-crisis fintech boom. But now, I think we’re in a regime change and that the next crop of successful financial innovators will look a lot different. What’s in store for an area like credit delivery?
HM: In credit delivery, I think it’s now pretty well-realized by investors, and certainly realized by capital markets investors, that credit delivery requires capital. So today, I feel that anyone who’s going to be successful in credit intermediation needs to have a very good understanding of balance sheet risk, liquidity risk and capital requirements. I pay a lot of attention to capital requirements, and the ability to fund something in the teeth of a crisis.
GS: Let’s say we enter a recession next year and see continued volatility across the capital markets. I understand that each recession and bear market is different, but with the fresh capital you’ve closed on, where are you looking to go on offense?
HM: Among the thousands of fintech companies that have gotten some funding, there are companies that are really struggling to get their Series B or Series C done.
GS: Names that have lost their momentum?
HM: Yes. They’ve lost their momentum, and they’ve lost the perception of momentum among venture investors. But in some cases, these companies still possess some very good fundamentals, yet the valuations are a lot more attractive. If that dynamic becomes even more extreme, I think there could be some good opportunities.
GS: Isn’t it also true that the fintech names that suck up a lot of the venture money aren’t always the best underlying businesses?
So when you talk about high-valuation companies, I think it’s unrealistic for banks to be acquirers.
HM: It’s an interesting dynamic. Generally, as long as companies can continue to raise capital, they will keep going even if that isn’t necessarily a rational thing to do. But in some cases, where you see a bunch of companies pursuing a similar strategy, it would be better to pursue a merger because we don’t need tons of companies doing personal financial management, etc.
GS: Do you see the big banks with strong balance sheets, the JP Morgans of the world, getting the green light from regulators to be more aggressive in M&A?
HM: Regulators have clearly been one reason there hasn’t been more activity. The second thing is goodwill. Keep in mind that for a bank, goodwill is a 100 percent reduction to tangible tier-one capital. So even for JP Morgan to say, “We’ll take a billion dollars of our tier-one capital and invest it in a company with no income and maybe positive EBITDA, but maybe not—”
GS: —That would take a ton of capital or a ton of conviction.
HM: Well, that company would have to be a very powerful growth engine or solution. So when you talk about high-valuation companies, I think it’s unrealistic for banks to be acquirers. Where banks can be acquirers, and this is what we’ve seen, is where you have a company valued at $60 million, maybe a $100 million, etc.
GS: A Clarity Money.
HM: Yes, a company where the acquisition moves a bank much further along in a development cycle. Where the the bank can say, “Instead of us taking two years to get our real product out, we can get out a state-of-the-art product right now, and it comes with a great team and DNA.” That’s appealing.
GS: Appealing, but realistic?
HM: It’s hard to pull off. Often, the team leaves, everything dissipates and the acquirer ends up writing off the whole thing.
GS: Moving forward, who do you think is poised to make M&A work?
HM: There are a couple of examples where it’s worked. One is PayPal, which in recent times has done an excellent job of acquiring things and integrating talent into the company. I’m quite impressed in terms of how Bill Ready, who is now COO, Dan Shulman and the management team have changed the tech profile of PayPal.
GS: Well, they’re not a 200-year-old financial institution founded on a winding alley in downtown New York.
HM: Yes, but it was very old-school Silicon Valley, and they had a lot of technical debt. Of course, they had this great mafia 20 years ago, but all those people are gone. I don’t think there’s a single person in the top 100 at PayPal that was there 15 years ago.
GS: Let’s talk specific themes. You’ve already mentioned personal financial management, which I share your skepticism about. What’s your take on the prospects for challenger banks?
HM: I think we’re likely to have a war for deposits with too many different types of firms competing for deposits. Just look at the United States last year. All of the deposit growth we saw was explained by Bank of America, Wells Fargo and JP Morgan Chase. Everyone else shrank. But if you have Monzo and Revolut come to the U.S. and you look at Acorns, MoneyLion, Chime and 15 other prepaid models or fully chartered bank models, they’re all going to have a pretty slick interface, and they’re all going to be out there competing for deposits.
GS: How about the robos and free trading platforms? As you know, a lot of the younger customers on these platforms haven’t experienced a sustained period of tumultuous equity market conditions.
I pay a lot of attention to capital requirements, and the ability to fund something in the teeth of a crisis.
HM: I think a great majority of American households should be using a roboadvisor. However, the question is around the relationship between the customer acquisition and the revenue opportunity. In fact, a big part of our thesis with SigFig was to really help drive the pivot over to enterprise-based customers. But generally, and without knowing the details, my sense is that Betterment, Wealthfront and maybe Personal Capital have enough brand to get to the scale necessary to be self-sufficient. I think most of the others are not in that position.
GS: Turning to the mortgage and broader real estate sector, is your view that even if we have a deepening downdraft in housing, the real estate startups backed by you and others can do well anyway? Because they are essentially taking an industry stuck in the 1980s and ’90s and dragging it into the modern era.
HM: There’s a lot of room for tech improvement in real estate, and that includes residential real estate as well as institutional real estate. The problem with real estate, and mortgage-related models, is that the capital needs are also significant. So if you end up owning property, the bill adds up very quickly.
GS: I guess it depends on where a company buys them.
HM: True. Look, we remain bullish on them, but I share your concern that if activity stops or if you start having real decreases in property values in certain sectors, some of these companies may end up holding the bag.
GS: When I saw the Ribbon deal, I was wondering how you and other backers looked at the opportunity at this point in the cycle.
HM: Well, for one thing, you can estimate the likelihood of someone getting a mortgage pretty efficiently. You can be right 99 percent of the time, but even if you’re only right 90 percent of the time, you’re going to be fine. That’s because the certainty that the company offers to the customer is worth it. They also have a great management team and a CEO who is really smart. They’re not naive.
GS: So given all the hype and ups and downs we’ve seen in blockchain, I’m wondering if you remain a long-term blockchain guy.
HM: Here’s the simple fact: The whole financial services industry is composed of ledgers. The reconciliation between entities of that information is a significant expense, particularly in the capital markets businesses. But I don’t buy into the view that it’s going to work better in all cases. The evidence so far is that it works well in some cases.
GS: Where can it work well?
HM: Distributed ledgers can work well when having synchronous data is an essential attribute, and when speed is not necessarily a central attribute.
GS: So, even if the implementation takes longer than the hype machine suggested it would, financial institutions will get there?
Because money attracts crooks.
HM: They will get there. The cost of change is very, very high. The benefit of it is real. The question is, “How’s that cost of change compare to the ongoing benefit?” In enterprise applications, the ones that will succeed are not ones where you say, “Lets rebuild everything within the core functions,” because the cost and complexity are too great. The much better way is to start at the edge of an enterprise delivering immediate value, and then become an architecture for more things to move over to that.
GS: It’s easier said than done…
HM: If you take the capital markets area, I think it often requires an individual who has a bigger-than-life personality and the leadership skills to match it.
GS: Speaking of leadership, let’s talk about that within the context of fintech, where, as you know, we’ve seen mixed outcomes. You and I have talked a fair bit about how fintech isn’t like other tech sectors, because you’re dealing with money and livelihoods.
HM: Yes, and the activities are regulated, for a very good reason.
GS: When you look at a deal, does the character of the leader trump everything else?
HM: I’d say that the character and capabilities of a leader make a big difference. And to me, in financial services, the errors made, whether it’s 10 years ago or today, are similar. I mean, you have to tell the truth. You have to.
GS: Why is it so important to you?
HM: Because money attracts crooks.
GS: On that note, when I look at some of those who subscribe to the whole blitzscaling ethos, I see it as incompatible with our current climate and especially problematic to financial services. Blitzscaling doesn’t endorse breaking the law, of course, but this whole idea of consciously letting fires burn is a recipe for disaster in today’s financial services sector, right?
HM: Yes, I think so. I’d add that we have a rule in our firm: Don’t invest in any business model where you’re tricking the customer into a profitable relationship. But unfortunately, I feel that there are many business models that do just that.
GS: That’s a bold rule given that terms of services agreements remain dark dens of iniquity.
HM: Well, it’s more than just that. Look at Robinhood. I think it’s a remarkable company made up of unbelievable entrepreneurs. But I do feel that if you say, “Payment for order flow is the business model,” or “Margin lending is the business model,” you’ve got to spell that out. I mean, “payment for order flow?” Most people would be like, “What does that mean?”
GS: You might as well be speaking in Ancient Greek.
A VC once said to me that we have too much knowledge about some things. I think there’s some truth to that.
HM: Exactly. I feel, in financial services, the best companies, the most successful long-run stories, will do the right thing for their customers, always. That also means not making a high-profile release of a new product, like a high-interest checking and savings account yielding way above anyone else, before you’ve actually checked with the regulators.
GS: On that latter reference, how accountable is Robinhood’s board for the company’s recent blunder?
HM: I honestly don’t know in what way the board was involved in this, but I think it’s a good example of where a board should put the brakes on an idea until the risks are clear. Sometimes management teams, and investors, don’t want to hear that, but it’s an essential role for financial services companies.
GS: In your career, you have seen your fair share of financial icons rise and fall. Have you ever passed on a deal that wound up being a huge success because something didn’t smell right?
HM: Yes, we have passed on things that turned out to be really good investments, but that’s part of our equation.
GS: In 1997, Howard Marks—
HM: —He’s fantastic, isn’t he?
GS: He’s phenomenal. In one of his famous memos, he asked “Are you an investor? Or are you a speculator?” Given that there are quite a few VCs who have come to fintech in recent years, I’m wondering if you see a lot of speculators.
HM: Most of the folks that I interact with are investors, not speculators. The crypto stuff is pure speculation by almost everybody.
GS: Yes. I wasn’t implying that we discuss crypto.
HM: To the core of your question, I’ll tell you this: There’s this very, very successful VC investor I had a debate with over a deal. My point was that the company in question would need to raise a lot of capital to scale. But that long-term consideration wasn’t especially relevant to him, because he felt the company would have options down the road. We passed on the deal, but now, I look back and regret that decision.
GS: Are you suggesting that you could benefit from having a little more of a speculative instinct?
HM: A VC once said to me that we have too much knowledge about some things. I think there’s some truth to that.
GS: I’m sure that your institutional knowledge has been an important asset on many other occasions. I’ll move on to our last topic, Hans, because I know you have a fund to manage. You know all of the big bank CEOs, right?
GS: There’s Jamie Dimon, who defies easy description. At Goldman, you’ve got a banker as CEO. At Morgan Stanley, you’ve got an ex-management consultant. At Citibank, you’ve got—
HM: —You’ve got Corbat. Michael is just an excellent manager who gets things fixed. It’s interesting: Jamie is a fantastic manager of people too, but Jamie brings in his team. Corbat is very good at taking on an existing team and just making them better. Brian [Moynihan] is also really good. I mean he was a lawyer, and when he got the job, I had no idea what he was like. But I’ve noticed that the people who have worked for him are really loyal.
GS: I think the CEOs of the big banks tend to be a reflection of the times in which they operate, right? We went through the period of the trader CEO, which is now gone. As you look down the road, what are the heads of the big banks going to look like?
HM: I’ll answer that question by turning you to Microsoft. What explains the turnaround there? Is it because Satya [Nadella] is such an amazing engineer? No; he’s a great people person. He’s a fantastic manager who put in place a high-quality decision process, which is key to managing a complex organization.
GS: Implicit in my question is whether or not these organizations are going to be as big and complex as they are now. Specifically, I’m referring to the supermarket model that you were involved in helping to construct. Does that remain in place?
HM: Keep in mind that liquidity is a very, very important aspect of a financial marketplace, and having access to core liquidity that doesn’t change frequently is very important. The professional money obviously switches very quickly. But things like core deposits, pension flows and corporate cash tend to have the longest time-frames to build access to. But when a bank has access to deposits that don’t move much, it enables it to fund the liquid financial assets. That’s so important for when you hit a liquidity crisis.
GS: So the big bank model is here to stay?
HM: Yes, I think it’s going to be around for a long time.
GS: Well on that note, Hans, I wish you luck in navigating whatever the future brings. Thanks for sitting down with me and sharing your wisdom.
HM: It’s always a pleasure speaking to you, Gregg. Thank you as well.
This interview has been edited for content, length and clarity.