This episode of Fintech Layer Cake podcast features a a contrarian take on Visa Flex, Fintech VC, and more with Lithic’s Nikil Konduru. Listen to the show on iTunes, Spotify, or your favorite podcast app and find the transcript, below.
Intro
Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, Senior Product Lawyer at Lithic. On today's episode, I chat with Nikil Konduru, who's a colleague of mine at Lithic. Nikil has worn a ton of hats. He currently leads our expansion efforts looking into what verticals and products Lithic should dive into. Nikil is one of the sharpest folks I've ever met in fintech, and I've been pestering him to come on the podcast for a long time. As becomes clear from the episode, he has a lot of very well-informed but also very contrarian takes on all the stuff that's currently happening in fintech. He and I cover the state of fintech venture capital, Visa’s Flex announcement, Visa’s focus on push-to-card recently, and much, much more.
Fintech Layer Cake is powered by the card issuing platform, Lithic. We provide payments infrastructure that enables companies to offer their own card programs. Nothing in this podcast should be construed as legal or financial advice.
Full Transcript
Reggie Young:
Nikil, welcome to Fintech Layer Cake. I've wanted to get you on as a guest for a very long time. I try not to make this podcast too Lithic, salesy, promoting whatever. So I tend to stray away from Lithic guests. Though, folks should listen to the next episode after this one because it's going to be a pretty big episode that might include Lithic’s co-founders for a very specific celebratory event milestone that the company is hitting. So listeners should stay tuned for that. But Nikil, I wanted to get you on because I think you are one of the rare types who can handle both high-level strategic questions, but you also get very in the weeds and thrive in the weeds. And that's a rare combo. I know you have a lot of fascinating, interesting thoughts and opinions and views on fintech. So this should be a great episode, and looking forward to it. Maybe the best place to start is what it is that you do at Lithic?
Nikil Konduru:
Great question, Reggie. Thank you for having me. I've worn many hats at Lithic over the roughly three and a half years that I've been with the company so far. Originally joined as our first growth hire, and then spent a lot of time working on customer success, on product marketing, and more functions across the go-to-market side of the business primarily. I'm currently head of expansion at Lithic, which means I get to focus on launching new business verticals as well as some new product commercialization.
Reggie Young:
Yeah, I can definitely support that you have worn many hats at the company, which is part of why I wanted to get you on because I know you've been exposed to a lot of interesting stuff. First question, because I know you have opinions on this, why should payments not be free?
Nikil Konduru:
I have many, many thoughts on this one. But I guess maybe the simplest way of thinking about it is that delivering a great payment experience is not free. It's also not necessarily cheap. And so whoever is providing those experiences needs to get compensated appropriately for delivering a high-quality payment experience. For example, providing customer support is expensive, right? You want to be able to help people file disputes and chargebacks in case someone took over their accounts or stole their cards, or whatever it was. Providing credit is not free, right? There's cost in underwriting. There's the actual cost of interest, obviously. And then you're going to do statements and things like that as well. That is also expensive to provide.
And then you want to think about fighting money laundering and preventing fraud. All of those things have costs associated with them. Anyone that is providing a payment experience, ideally, you want to incentivize them to do these things because if you zoom out, you really want a payment system in which consumers are being given protections, in which you are fighting fraud, in which credit is being extended. And so you want to incentivize the right folks in the appropriate ways.
Now you can ask separate questions about whether it ought to be capped or not on how much folks are earning across the ecosystem for providing these services. And that's obviously a much harder problem to solve. I'd say, in general, that's why payments aren't free. This is a segue we don't really need to get into, but sometimes you'll see people coming out of crypto trying to argue that, oh, well, the costs are actually a lot lower. And it's like, yes, but that's only because no one has come to you and said, hey, you need to fight money laundering, or hey, you need to do KYC, or, hey, you need to provide statements, or hey, you need to provide customer support in the event that transaction happened that someone didn't actually approve. All those things are expensive.
If crypto ever becomes mainstream and gains really mass adoption, you can be pretty confident that the regulator is going to come in and say, you need to be doing all these things the traditional payments ecosystem is doing. And at that point, there's going to be costs involved. And so they're going to try to figure out, either the merchant is paying that or they're making money in different ways, which has to happen.
Reggie Young:
Yeah, crypto is an interesting one. I think, yeah, you're right. Crypto is a good comparison to draw. It's often talked about like, oh, they have so many benefits, like immediate settlement, whatever. But that can be a feature, not a bug right? It helps fight fraud to have a little delayed time in the ACH system, for example. So to fill out some stuff there, I've been thinking a lot about the interchange angle, too. I mean, folks have heard me tons in the podcast talk about how important the fraud protections are that the card networks have. And that's a big piece of what merchants pay for when they're paying interchange on purchases. And we're seeing now states- there's been a movement for a while, well over a decade, like a pro-small business movement at the state level to pass laws that say, hey, you can assess interchange on sales tax or gratuity, things like that.
There's some bills that just passed recently in Illinois on this point, haven't been signed yet by the governor, I don't think, at the time we're recording this. But that's cracked this possibility back open. These bills have always failed in the past, and now we're seeing more of them. I think I actually saw something on payments dive this morning about another state that is gaining momentum to implement these bills.
But what happens if these bills get put in place, then you have this patchwork of states where the whole card ecosystem needs to spend significant resources building operational infrastructure to carve out Illinois? And do you really think that the whole card ecosystem is going to say, yeah, we're going to do this for free, we're going to completely blow up our road map and invest resources in this thing that we're legally required to do in this one state? No. What's going to happen is they're going to find ways to make that money back and this cost back. It could be increased interchange rates or network assessments for whatever operations in Illinois. And the bill comes from a good place if we want to help small businesses.
But to your point, payment should be free because there's a lot of benefits that come with those costs, like when merchants pay those interchange fees, they get all these benefits. And if you start eating away at the interchange, that interchange network segments, all that, merchants are going to get less of those benefits, or the card networks, card ecosystems are going to find ways to make those costs back. And realistically, what I think is going to happen in the long term is if these bills get implemented, costs are going to increase for businesses in Illinois because they now have this bespoke system that requires extra work and extra maintenance. And are those businesses going to keep those costs? No, they're going to pass them on to consumers and higher prices. Actually, my theory is, in the long term, all these bills are just going to hurt Illinois consumers or consumers in whatever state they're in. I know there's a lot of initiatives to push back on these bills going on right now, so I'm curious to see where they shake out.
Nikil Konduru:
I 100%, fall in the same camp as you, by the way, around this idea that you can't really get rid of the fees. They will rear their ugly head in some different place, basically. You're just going to have unintended consequences, but the fees will just move around. A really good example of that right now is around this movement to put a cap on late fees. I think they just passed a bill that says late fees or capital are $8 now. It used to be the case that, in general, banks, lenders will charge something like $30 to $40, generally, to consumers if they basically paid back whatever they borrowed late.
The only thing that's happened now is some of the big lenders have just started to charge consumers higher fees in other areas now, literally exactly like you said. Synchrony used to be one of the bigger players in this space that lends to a lot of subprime borrowers. And they said, fine, we're going to make late fees capped at $8 now. But guess what, we're going to charge you $2 a month if you want paper statements now. Didn't used to be the case.
Oh, actually, they did do this. They're charging higher APRs now, so basically higher interest rates on the actual borrowing. And it's an interesting question of was that good policy or not, because what you've ended up doing is basically making it more expensive to borrow now for practically everyone else in aggregate because there's higher interest rates. Meanwhile, the folks that really should have been paying on time maybe get to pay less for paying late. It's interesting. We can maybe draw an analogy to insurance and not make any moral judgments on this whatsoever, but there's this idea of, hey I'm healthy, why am I paying higher in premium just because the insurance company has to underwrite that. In general, people are more unhealthy than I am. Now we're talking about private lenders having to basically create a structure that similarly now punishes good borrowers because of these caps on late fees. So yeah, there's always going to be unintended consequences. It's always going to be difficult to go into what is effectively a free and open market and try to put caps on fees in this way because something else is going to break or you're just going to pass the buck around, unfortunately.
Reggie Young:
Yeah, I agree with that. Would love to shifts to the fintech venture capital market because I know you've previously worked at Nyca, if I remember correctly. And you have some thoughts around you've some great [inaudible] that I have heard and I also agree with. So would love to hear, what do you think about the current state of the fintech VC market?
Nikil Konduru:
My favorite brand these days is that a lot of VCs basically started to say, well, what has fintech really done? And they'll point to the deposits that like a Chime or a Cash App have gathered and compare that to Chase, and say, look, it's not even a dent. It's like, what are you comparing right now? Because JPMorgan Chase has literally been around 225 years at this point. If you go on their website, they will tell you that it's now basically this amalgamation of over 1,200 institutions that have come together over time through acquisitions, mergers, and that today is what Chase really is. So if you're going to compare a start-up to 225 years of legacy and try to say, oh, they should be in the same place, that's the benchmark. That's not how any of this works. It just takes a long time.
For me, I think why I'm so bullish on fintech is there's just a fundamental structural cost advantage to a lot of these fintechs that are operating. The really simple model if you think about it is that a lot of these traditional regional community banks, credit unions, are held hostage really by their core banking software providers and ended up paying a lot of fees to actually maintain an account on file and provide a debit or a credit card and service that account on an ongoing basis. It's really hard to solve that problem no matter what you do, because if you try and put a pretty digital front end over that experience, you'd have this idea of core wrappers, basically. You're not actually solving the cost problem. Yes, you've created a better CX, maybe your cost is still awful, and so you can't really pass through any savings in that sense to your cardholders or your account holders.
Okay, so what if you actually had to modernize the core? What if you had to rip and replace that? That doesn't work for a host of different reasons. And the one that actually makes the most sense to me is there's an incentives problem there. The senior executives at any of these banks are 50, 60 years old, 5 or 10 years away from retirement, why would they ever make this incredibly risky decision to do a core migration, because it's all downside for them. If there's upside, it's going to take five to seven years to do a full migration and get a new system in place. By then they're retired, and so they don't get to see the P&L benefit. Meanwhile, if there's downside, everyone points the finger at you and says, you messed up, consumers are out of funds, we have 5,000 complaints coming in, the FDIC is choking our throats. Why did you do it?
So there's an incentive problem there, unfortunately. And so basically, what ends up happening is that a lot of these fintechs are going to come in no real technical debt in the same way, better infrastructure, better consumer value props, and they will basically start to outcompete, I think, a lot of these folks. That's my theory, at least, and my thesis on what's going to end up happening here is they're going to be holding out of that middle primarily. Again, the US doesn't need to have 5,000+ banks. Canada doesn't have [inaudible] or something. Most of the world doesn't have this type of structure.
Reggie Young:
Yeah, I always love seeing those charts of the per capita bank by country, and the US is just an astronomical outlier. You see all these headlines now about the death of small banks. Maybe this is just a reversion to where we actually should be.
Nikil Konduru:
Exactly. And the last point I'll make about that is people like to quote the fact that, look, there’s still so many accounts at these traditional banks, and people haven’t switched that much. I think people are switching. There's 70 million consumers in the US that are teenagers, basically, and under the age of 27. Many of them do switch. I think payments intelligence research came out recently saying that 40% of Gen Z has opened an account at a new bank from whatever their parents first went and opened an account up.
Now you can ask a lot of questions about, okay, I have two accounts. Which is the primary and where you're actually doing most of your payments activity, your borrowing, your deposits, your payroll, whatever. It is happening, though. The switching is really happening. It's not going to happen overnight. It's not going to happen over a year. But if you look back, if we go to 2034 and look back 10 years, I think it's going to be pretty crazy to think about how much has actually changed. Who in their right mind today would bet against Nubank, for example? You'd have to be nuts to do that. The trajectory they're on versus some of the four big regional banks in Brazil, in a way.
Reggie Young:
Yeah.
We're taking a quick break from this episode to give a thank you to Privacy.com, which supports the podcast. Privacy.com offers convenient virtual cards that protect you from credit card theft and fraud online. Ever had your card info stolen? I have, and it sucks. But now that here's Privacy.com, I don't have to worry about the stress of fighting fraud charges, replacing my card, reentering my new card info at every business I use online.
With Privacy.com, you can instantly create privacy cards that mask your real card info so you can pay with cards that are unique to each place you shop. You can also set custom spending limits for privacy cards and pause or close cards at any time to prevent overcharging and hidden fees, and help you stay on top of your subscription payments. So if you want to better control your spending and protect yourself online, head to Privacy.com. It can take less than three minutes to sign up, and you can create up to 12 virtual cards per month for free. Now back to our episode of Fintech Layer Cake.
Reggie Young:
I love your point earlier about JPMorgan's actual amalgamation of over 1,000 institutions. It’s such a good, useful way to think about it. Whatever, over 1,000 institutions versus one time, very different way to compare potential fintech investments than viewing JPMorgan as a unified company.
Okay, next topic, Visa Flex. Visa Flex announcement came out maybe a month ago from the time we're recording this at the end of June. There have been a lot of hot takes on social media and whatnot on the interwebs about what this Visa Flex is going to enable. But I know you have a little bit of a different opinion. So I'd love to get your thoughts on the Visa Flex announcement.
Nikil Konduru:
I love that the theme of this podcast is just how can we run [inaudible] things.
Reggie Young:
All the things Nikil disagrees with everybody else about.
Nikil Konduru:
I guess the big thing here is that I think there were lots of people commenting and hypothesizing what might happen here that maybe weren't necessarily practitioners but coming more from the investment side of the house. I get it, I was on that side before, and you're an inch deep but a mile wide. I think now I'm slowly starting to finally appreciate the real merits of being on the operating side as you're in the weeds, and you can form a real hypothesis with just more context and more background knowledge of what's actually happening here.
Basically, people were all over Twitter and LinkedIn saying things like, I'm going to have one Visa Flex credential, and it's going to automatically optimize all of my card spending. When I buy on Amazon, it's going to route to my Amazon card. When I go and buy air travel, it's going to route to my Chase Sapphire. When I go to, whatever, Target, it's going to use my Target card. No, that's not how this works, unfortunately. If you look at the actual Visa Flexible credential, issuer participation requirements talk came out April 2024, very clearly, on the first page, the thing it says is that you can dynamically link to funding sources within a single financial institution. That's the first thing it says.
The second thing it says is that, basically, the cardholder has to specify ahead of time like for what kind of transaction, what funding source they want it to route to. And so that was the second thing people were hypothesizing around. It's all a consumer can go and spend money, and then if actually they want to take a loan on that specific transaction, they can point it to the credit line that they have instead of the debit account. No, that thing needs to be specified ahead of time, again, first page.
It just wouldn't make sense really if it worked the way people were hypothesizing, because just think about it for a second. Just the fundamental business model and the logic of credit card rewards is that at the portfolio level, the economics have to make sense for the card issuer. If the Amazon card was only ever seeing transactions at Amazon giving 5% off, they'd stop issuing that card. They're not making money on that. If every single person was supergame theory optimized and only using the Chase Sapphire reserve for travel and dining and not for any other expense, they're never going to make any money. They're going to stop doing that.
So the idea that you could route this to multiple different issuers, it couldn't have made sense. And indeed, if you look at the requirements doc, they don't allow that because issuers are just going to go to Visa and say, what are you doing? Are you making your economics? Absolutely not. Anyway, that's just my two seconds on people getting very hyped up about some of these things and are really thinking about how that could possibly work, and also not reading the actual docs that have come up that explain these programs.
Reggie Young:
Great example of what I was saying at the beginning, that you were one of the rare folks that understands high-level strategy, but you also read the actual doc releases, which a lot of folks do not. Actually, there's the kind of product friction angle. The best products you don't even realize are products that you're engaging with. And if you're having to set rules for every transaction before or after the fact, that's a very high friction-intensive process. Even if you're setting general rules, that's going to be for the subsegment of Reddit that has the whole maximizing their credit card rewards spreadsheets built out.
Part of the beauty of most credit card rewards is just, yeah, Amazon's going to give you X percent on everything. You never have to think about it. You just look one time at what your array of rewards are. That's all you have to put into it. I'm curious, some potential there but I think a lot to be worked out before we see material programs evolve around it.
Nikil Konduru:
Yeah, totally. If you get in the weeds, you think about it, it impacts routing, it impacts surcharging, it impacts chargebacks and disputes. So how could it really be as flexible as you're claiming? It is, it just wouldn't really work.
Reggie Young:
On the topic of Visa, I know Visa has generally seemed to be pretty gung ho about Visa Direct and push-to-card lately there. What's happening there and why?
Nikil Konduru:
This is a really good question. You know Matt Levine has a recurring theme in Money Stuff where he's basically talking about should index funds be illegal? You have the same set of big shareholders, BlackRock, Vanguard, whatever. Owning all the big firms in a specific industry is that bad because it reduces competition. There's a lot of research that goes back and forth. But the simple idea is that if it turns out that one owner owns American Airlines and United and Delta and Southwest and everything else, it probably makes sense for that one owner to basically have all the airlines just charge really high prices and not actually compete. You make more money that way. Pretty simple logic.
Now just take that analogy and put it on a Visa or Mastercard. They don't actually care that much about intraissuer competition. Let's say Visa takes 7 bps dibs on all card spend, just call it that, simple model. Whether that volume is coming from Chase or from Wells or from Bank of America, it doesn't matter that much, it's 7 bps on whatever the volume is. Hypothetically, there's some simplification model there because you could argue, smaller issuers don't get as many network incentives, and so we would actually prefer for smaller issuers to have more volume and take it away from Chase. Anyway, the simple model still works, right?
Visa doesn't care so much about intraissuer competition. What they do care about is interrail competition, meaning if you can convert volume away from ACH, away from checks, away from cash, away from RTP, and get that on the card rails, now they're all yours. Now they're super excited, and they will help you no matter what you want. Push-to-card is I think the main use cases that it can be for are P2P transactions, which predominantly today are via rails. I think that's why they're really excited about it. If you look at all of Visa's earnings calls, they're just talking about Visa Direct, left, right, and center. They’re obsessed. They want to push this really hard. And it can make sense that they would because there's some use cases that card rails are just not big for today, and if you can convert more of that onto Visa Direct or Mastercards, and therein.
Reggie Young:
Yeah, it makes sense. There's also the additional pressure of like, oh, RTP and alternative rails coming in the future that I'm sure the current networks are thinking a ton about and is putting more pressure on these sorts of, how can we capture ACH and other spend movements? My favorite wrap-up question, is there anything you've been thinking about a lot lately but you think folks aren't talking about enough in fintech?
Nikil Konduru:
This is funny. By the way, knowing that this question was going to come, because I listened to all of the podcasts, somehow makes me [inaudible]. Just reflecting on this conversation even, I think maybe something that I've started to appreciate more is the merits of sticking it out with one company. I have a lot of friends, and the big thing to do these days as a young to mid-career person is switch jobs around a lot, which there's pros and cons. But I'm starting to feel like there really are some great arguments to be made for sticking out with a company three, four years, really hit your stride, earn a bunch of trust, responsibility. You build real relationships with people both inside and outside the organization that you can then call on later on.
And really, even for me at Lithic, I came from the investing side, had no real experience working at a start-up, but somewhere around year two, you really feel like I'm adding a ton of value and I'm learning a lot now. And understanding the ecosystem, the value chain, how the business gets built, that doesn't just happen overnight. It takes some time and some investment of time. I've just been thinking about that a lot. I love my time here. I love getting more in the weeds around payments. I could potentially see myself just being a start-up guy indefinitely. Who knows how that might change? It's been pretty nice for me, I think, to be committed.
Reggie Young:
I love that answer. It's funny, it's something I've also been thinking about, because I've been at Lithic two and a half years now. And I feel like that two-year your point in tech is, okay, what's your next company? What next company are you going to enjoy? I'm not thinking that way at all right now about the company. I've enjoyed being here. But I also think part of what a lot of folks in tech, they get that impulse to move because you have to eat it on a regular basis. Start-ups, you just have to deal with a lot of unpleasant stuff regularly, like fire drills. There's probably somewhere around the two-year mark where most people are like, okay, it's gotta be better somewhere else.
I'm endlessly impressed with the good judgment, how well things are built and how smoothly they run generally. But I've come to appreciate that those hard, unpleasant times when you're like, well, here's a problem we got to fix or solve or whatever, those are actually some of the best learning, best career advancement opportunities. To your point, I think you start hitting more of those somewhere around the two-year mark. And so there's a lot to be said of like, oh, it's harder, you up-levelt that because you're bringing so much value and you're helping solve so much bigger problems and pave the way for the future in a much bigger way. So I love that answer.
If folks want to find out more, get in touch with you, I think you're on Twitter. Nikil Konduru. I think it's just your Twitter or X, I guess.
Nikil Konduru:
Yes.
Reggie Young:
And folks can also find you on LinkedIn. So thanks so much for coming on the podcast, Nikil.
Nikil Konduru:
Thank you for having me, Reggie.
Thanks for listening to today's episode of Fintech Layer Cake. If you like listening to the podcast, please leave a review on Apple Podcasts and Spotify to help other folks in fintech find the show. The podcast is powered by Lithic, the modern card issuer. If you're hungry for more content with hard-to-find fintech insights, check out our other episodes as well as the blogs and other information we have at Lithic.com Thanks for listening.