We believe that many SMB and vertical SaaS companies are starting to exhibit the platform characteristics. Some of these companies are starting to build consumer and supplier networks that are expanding the SaaS model dramatically.
We recently brought the pioneers of these new SaaS models together and were fortunate to have Jackie Reses share her thoughts on the emerging lending opportunity for SaaS. Witty, wise, and incredibly insightful, Jackie is a total superwoman. In addition to running Square Capital, Jackie is serving on the board of Alibaba as well as the San Francisco Federal Reserve Bank. And she worked in private equity for 20 years.
Dave: Great to talk to you, Jackie! Is it true you started your career on the dark side, as an investor?
Jackie: Yes, I worked in private equity for 20 years. I just kept going forward. I had a mid-life crisis without the crisis, as I like to call it. I ran parts of a large private equity firm, but I much prefer being on the operating side. I still invest and that’s my fun side project. But I love working at Square. It’s a really fun place to be.
Dave: Square is certainly on a tear. Maybe we could start and just talk a little bit about that. Very few companies reach your scale, and then accelerate. But that’s what you’ve done at Square.
Jackie: Yeah, it’s exciting. We have driven strong revenue growth at scale since we went public. It’s interesting to think back to when Square was starting with payments and building on that. That really was the catalyst for what we should build in an ecosystem in a very different way. Since then, we have built ancillary products around payments like point of sale, loyalty, employee engagement, lending, and payroll around an ecosystem.
Dave: You mentioned that every one of your products is an onboarding product. You don’t think of “land and then expand,” it’s all onboarding, it’s all “land”?
Jackie: Like lending we consider it to be a product that will onboard into Square. We have two parts of our lending business. One is the business lending, and that’s something we launched with Square sellers, and we extended it outside of Square in the United States.
And then we also have an Installments product which has been incredible. Installments is a consumer lending product that can have a customer pay for large purchases with installments, which provides the buyer with payment flexibility.
That said, I think about Square Capital first. My job is to grow Square Capital. That should stand on its own. The product itself has to be remarkable.
When we launch a new Square Capital product, we launch it because I think about all inbound customers into Square for lending and then create a cycle throughout our ecosystem to evolve as they learn about other products.
Dave: You talked about Square and the multiple product lines and high rate of self-onboarding. How core is self-serve to Square?
Jackie: It’s the way we start on every product. It has to be self-serve. It’s one of the elements of our operating principles and what we do. And so self-serve, fast, elegant are core principles for us. And I think that’s what made the product great. We’re a broad platform.
Dave: You’ve described several different businesses that have arguably very different DNA. SMB, point of sale, consumer cash, credit, etc. How does that work in the same organization?
Jackie: I think lending is the one that everyone has the hardest time with. If anyone thinks that payments are regulated, lending is like 10x that.
Managing risk and the dynamics of a high-growth company are very different disciplines. I think that’s probably the hardest thing I deal with as an executive at Square. The dynamics of credit risk can really hurt sellers, and they can hurt us, and they can hurt our ecosystem of investors.
And so top line growth on a lending business is not the goal. I think you have to have a very different level of responsibility and a discipline that is almost the inverse to payments, where topline revenue growth can be the goal.
You need to remain focused on what’s good for the end merchant. There are some lenders out there that have a goal of maximizing loan size. I think that’s irresponsible. We try to maximize a loan that helps sellers grow. That’s a very different mindset. We are also very fortunate that we don’t have channel or customer acquisition costs which helps us take a pretty responsible approach.
Dave: Right. There is a real tradeoff between growth, risk, and merchant health. How do you measure your success, what are the metrics you report on?
Jackie: It’s originations and different views of defaults. We could double our loans if we wanted to tomorrow. Yet, you double it at the loss of small businesses who can’t afford the debt that you’re giving up. The one limitation of credit is that there is a natural debt capacity of what these companies can afford based on their cash flows. And you’ve got to make sure you’re really good at how to predict that and then manage it so you’re not putting companies at risk.
Dave: Let’s talk about the risks side. Companies in an earlier phase want to learn. They want to train their algorithms. So in some ways having defaults is actually a data point to trigger. How do you get through that initial learning period?
Jackie: We do the same thing. Although I have to say models aren’t machine learning models when you’re working in signals of thousands.
It’s hard to train models when you have a really narrow data set. I don’t think most people are actually training models. They’re using optics to limit who they lend to. It’s usually basic heuristics around payments. That is not a machine learning model, that’s like addition and subtraction in a ton of excel. You have to be willing to deal with loan losses. We know exactly who we are lending to. Fun fact is that women are much better payers than men. I always say I like our industries that have higher rates of women business owners better. Beauty and health care, and retail are very good channels for us.
My advice to everyone working in credit is to be prepared to lose a lot of money if you want to start the business yourself. If you look at all the public lending companies, very few of them have actually been successful. It’s a hard business and takes years to do. I would think about lending as a service to help your sellers grow, unless you really want to go all in and go into the business, because the regulatory environment and the amount of capital required to do this is just really high. There’s a reason why there are very few credit card companies that are upstarts. There are very few lending companies that have evolved. It’s a harder business because the natural cost of capital.
Dave: What about payments data?
Jackie: The payments data is super useful but you have the fidelity of it and that matching with risk data is the piece that’s really helpful.
How people de-activate off of our system and the risk signals that we see are equally as helpful as payments data. My comment about behavioral data is pretty important to us.
Dave: You mentioned just how different being a lender is than the rest of Square and orientation around growth, versus risk management. How did you actually set it up so that it was able to perform this task culturally? Did you wall it off?
Jackie Reses: I thought about it every day. To be honest I think we’re very unique and lucky at Square because the way we are owned and run is with a long-term orientation, which most public companies are not.
Being focused on the long term, you can set up the ethos of what you need it to be. Because it’s the right answer for that kind of business long term. But we talk about it every day because it’s really easy to lend money, and it’s really hard to get it back.
And then the compliance is huge. I have everything documented in a way that’s profoundly non-tech. And that’s in a product that’s highly automated. We practically have a lean lending team. And then I have to have all these policies and reviews and committees. It’s the only product at Square that has a board committee.
We’re growing fast, but you got to be really strict about it and stand up if you see issues.
Dave: Let’s switch gears a little bit. I’d love to take advantage of your experience with Alibaba. The dynamics in China seem totally different.
Jackie: Totally different. QR code based, facial recognition based, sound based.
Dave: Do you think there’s a future state in China where you do have to worry about some sort of disaggregation or actually consolidation of the payment infrastructure?
Jackie: The dynamics in China are really different because there was an escrow system that existed 10 years ago in China because there were no logistics, and there was no trust. If you were going to order a package in China, you never knew whether you were going to get it, how you were going to get it, because neither system existed around credit and shipping. They just didn’t exist. And so the idea of an escrow system was the genesis of how Alipay got started. It really became a predominant payment rail. And it did so in an environment where it matched its sister company which controls 60 percent of the eCommerce in China. So those dynamics are really different than the dynamics that exist in the United States today, where the proliferation of credit options is extraordinary. In the U.S., there is no logistics issue with the way we think about freight and the multiple players. You can trust that if you send a package by FedEx it will actually show up.
All these dynamics of eCommerce that we take for granted in the United States are really the reason why there’s such a tight band of competition in China. I think WeChat is interesting. WeChat evolved after QQ started. Tencent built an unbelievable business and their second version of it has just been extraordinary because it’s become like a full utility app for everyone in China.
So now you have these two non-bank players in China competing with one another. Neither have really been able to get into the United States. I don’t know whether you noticed, but you’ll start to see Alipay showing up at a register. Go ask how many transactions have actually happened at that counter. There’s the notion of these Chinese tourists that are coming here but they use UnionPay.
It’s a great sales tactic but then a month later you go in and realize it’s gone. And it’s no longer at the terminal because it’s kind of a pain and it’s really hard to make its way here. I think we should take all tender types, we should take UnionPay. Why not? Our business goal is to make transactions seamless and easy. So any tender type should be accepted.
That said, there’s not a lot of demand for it at this point in the United States. I think they’ll have a better time in Southeast Asia where they’re more connected and Japan, because they’ve got the Softbank connectivity that still owns a huge portion of Alibaba and Alipay. I just think it will be much harder in the United States.
David Yuan: Well Jackie, that was incredible! Thanks so much for taking the time to share your views.