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- [00:00]
Eric Lyman
I don't know if we need, if we want to do this, but I.
- [00:03]
Alex
Already look like that, naturally.
- [00:05]
Kevin
Oh, this is Kevin from the office. Yeah, yeah. Eric Lyman is the co founder and CEO of Ramp, the corporate card and finance automation platform. Founded in 2019, Ramp has taken the industry by storm.
- [00:17]
Alex
Oh, cheers. Oh sure. Hey.
- [00:21]
Kevin
Can you describe maybe a good framing just the Ramp business today? What's the biggest part of the business in terms of where you make money? What are the new growth lines? Any metrics you can share on the scale? But I think Alex and I have a million questions. But maybe you can start by just framing it up for us.
- [00:34]
Eric Lyman
Yeah, of course. So first, just the pace that this has come together has been pretty remarkable.
- [00:43]
Kevin
Seven years.
- [00:43]
Eric Lyman
Yeah, I think by the time we were six years and change, the company had passed over a billion a year in revenue. The largest portion of that is card. And so that might be a classic kind of interchange based model.
- [00:59]
Kevin
But behind this is people in their business, they have spend cards. Everyone walking around the company has a Ramp cards. And you earn exchange on those.
- [01:05]
Eric Lyman
Yeah, that's right, that's right. Next you can think about bill payments and software. Software, it's a two something year old business line. Just about two years and some months. That's over 100 million a year business line in and of itself. And that can be advanced functionality to maybe manage lots of entities to automate aspects of accounting, maybe aspects of procurement, bill payments. So this can be sending checks, wires, ach. And that's predominantly a float as well in some cases foreign exchange transaction, business, treasury, you know, that's a product that is about a year old, several billion dollars of deposits. Some of that is checking like products. Some of that is more of an investment and money ladder type product. And then the last, the other ones are procurement and then travel, which is a bit of an in kind. And what's been so interesting is that if you break down and towards maybe let's say contribution profit, gross profit of the business, a few years ago it would have been 90 plus percent card. I think by the end of this year the second, third, fourth, fifth lines of business will comprise in aggregate the majority of Ramp's business. And so it's evolved into this platform by which if you're trying to operate your company, it's just a lot more efficient, you know, you spend less. I think people know Ramp for, you know, we help the average company cut their expenses by about 5% per year. The thing that's been really fascinating is as people are starting to Use these products in aggregate. Not only they're not paying for five, six sets of point solutions, but they're also not wasting time. They're growing faster. I think that the average customer last year on Ramp grew their revenue by, I think it was 16%, which compared to in the United States, the average business. Yeah, I think it's 5% in the US and so I think in some sense what we're trying to do is be not just a better platform, but a better almost kind of digital brain for organizations to allocate resources and make sure spend is not wasted.
- [03:15]
Alex
Yeah.
- [03:17]
Kevin
So you start by selling say spend cards into a business. The CFO likes it, the employees like it, and then that gives you permission to go sell some of this other functionality. And so it's kind of a classic multi product cross sell. Is it always starting with spend cards or do you now have kind of multiple front doors into the business?
- [03:37]
Eric Lyman
That's been the big story of the past year. I think there was over the last quarter thousands of businesses that came in just for bill payments. There was accounting firms that you know, are becoming into, they say like, you know, we're a ramp shop here. If you want to work with us, you know, we'll bring in bill payments. Treasury just, you know, you know, we use Ramp to go power that and they can manage, you know, 10, 100, 200 clients all through one platform. And we're excited. I mean probably the fastest growing line of business is procurement where there's single clients that are looking to kind of bring in and do full scale, you know, purchase orders across, whether it's single or dozen plus entities all the way through. And so that's been, I think, the really fun story of the past year.
- [04:27]
Kevin
Do you have a view on what the right policy is for employee spend within a business?
- [04:33]
Eric Lyman
I love the policy.
- [04:35]
Kevin
37 signals. Or someone will say companies are so lame. You just give everyone a credit card and trust people and it's fine. And then meanwhile, large companies are like, well, this hotel is in a tier 2 city and therefore there's this dollar limit and must be booked 14 days in advance. And, and so you see companies operate at really two ends of the spectrum in terms of how much flexibility they give people. What is correct for a company or does it just vary by size?
- [04:58]
Eric Lyman
I love this question. And the interesting part, if you really kind of dig into Ramp's businesses, we have ways of back testing and actually understanding based on how strict your policy is, how things are running. Does that have an impact on how much Time your employees are, let's say doing expenses, how quickly you're growing. And you can start to actually compare based off of the operating hygiene of the company, what are in margins, what is like a pace of growth that occurs at the company. And I bring this back to.
- [05:35]
Kevin
You can do a correlational study between expense policies and company growth.
- [05:40]
Eric Lyman
Yeah, and look, it's pretty interesting. I mean the first there's an aspect of in most companies, particularly high growth companies, it tends to resemble something closer to the no rules rules Netflix approach of we're going to trust but verify and shine a light on it. Spend tends to be reasonably permissive. But then part of the breakthrough of the past year is you could basically take an expense policy, let's say it's written in plain English if the flight is more than five hours, you can take business if it's under things that would have been horrible to go and you know, have your managers go and verify this stuff. Now you can run that through an LLM. I think that we're processing over 100,000 expenses a day that are being reviewed agentically. This is a very fast growing subset of the business.
- [06:31]
Kevin
So sorry, like you give the ramp agent this company's expense policy and then it applies it to the transactions that are going through.
- [06:37]
Eric Lyman
Exactly. And so you can start to do things like I think about the episode you'd had with Susan Lee was like incredibly instructive where you know, you, she sort of says like it would feel so silly and it's not a great use of my time in some sense to be a very expensive machine learning algorithm to do to review expenses. But yet somehow a lot of people and companies are reduced to that thanks to Sarbanes Oxley and the rules around it. Now you can have an agent functionally that does that, that takes that aspect of the job. And so it has access to the full set of data that you would all the transaction related metadata, the receipt data, the timing data, the policy data. It then can go in real time review, you know, was this in or out can have the full audit trail explaining its reasoning. And today it's over 99% accurate, which turns out it's much more accurate than people are. Yes, people don't know the expense policy and expenses are pretty automated. And I find this thing super interesting in part because I don't think it really is should be anyone's job to go and review people's expenses. But somehow while it's in, no one's J.D. the law kind of requires everyone to waste an Hour of their time every month. If you're a manager and does the.
- [07:48]
Kevin
Law allow for it to be reviewed agentically and then just signed off off on being human?
- [07:52]
Alex
It does.
- [07:53]
Eric Lyman
It's like the goal of this is separation of duties, that you yourself are not reviewing your own expenses. There needs to be a set of procedures that govern and actually are effective through the action of. Okay, the rule says this. Did you take some steps to do this? It can be a system.
- [08:11]
Kevin
Yeah, you kind of self certify.
- [08:12]
Alex
The funny thing is that, I mean, one way of doing this actually we used to do this is why not just post your expense reports in the public eye? Right. So. And the reason to do this is actually it could go wrong. You could say, I'm going to spend, you stay at the Four Seasons, I'm going to stay at the Five Seasons. You could go that direction. But what you want is you actually want a moral code. Yeah, right. It's like if you are the owner of the business, it is your own money.
- [08:34]
Eric Lyman
Yes.
- [08:34]
Alex
So if you are staying at the Five Seasons, I've just made that hotel chain up. It's like, you're nice on that hotel, you're stealing from yourself. Why would you do that? So it's like the problem is that once you get to tens of thousands of people, how do you impose that moral code? And actually like the two like tent poles that you just mentioned, they're both bad, right? Because it's like if you have to stay at a crappy hotel and you're about to sign a $2 million contract, right? And you didn't get any sleep, it's the Motel 6 and you take a two hour taxi, it's like, all right, you saved the company money. Like that does not make sense. Stay at the Four Seasons. But you can't really embody that in like if this, then that. Because what you want is you want this moral code. Like that's what you want. And like how do you actually instill that? And there's almost a behavioral psychology way which is like, hey, we'll just show what people are spending. If you're at the top of the leaderboard, we might trust but verify and verify a lot more. But that's the hard thing to do and actually preserve as the company goes from like the founder to the founder, plus the founder's brother to like, you know, many, many more people. How do you keep that same, you know, esprit de corps or you know, kind of this informal code.
- [09:39]
Eric Lyman
I think it comes back to what was the Name of the movie like 12 angry men. Yeah, I think it was where, you know, as you're watching the film, you get some level of detail and someone seems very guilty. You know, it's a dead shut case. And as more evidence emerge, you realize actually this may be different. Different. And you need more context in order to arrive at maybe a moral conclusion. Did it relate to closing a project? How does it relate to an outcome that maybe you'll see emerge one month, two months after this? You stayed at the five season, closed the deal that changed the company. Whatever the example is, I would argue in favor of tool that have more context, that do more jobs of work. Because it both. Not only can you do the narrow job better, but you can start to get at the answer of what actually is right for shareholders. Where should we be allocating capital?
- [10:36]
Alex
Because it's so interesting to hear what. Because every company approaches this differently. Like I'm on the board of Wise and Christo flies coach everywhere. Everybody flies coach. Like that's just the policy. But you know, it might be pennywise pound foolish. Again, not for me to say, but I also really admire the corporate code. It's just like you actually that is cultural.
- [10:57]
Eric Lyman
Yeah.
- [10:57]
Alex
Like it's kind of weird to say expenses are cultural, but they are for sure. Yeah.
- [11:01]
Eric Lyman
It's shared.
- [11:03]
Kevin
Shared belief system.
- [11:04]
Eric Lyman
It's a shared belief system. It's like what is the culture of the company?
- [11:07]
Kevin
You talked about your expansion into bill pay. It seems like bill payment has proven over the past 40 years uniquely resistant to automation and modernization. If you look at how a typical business pays their rent, or if you order a keg of Guinness, you'll get a PDF now emailed to you by some person who has a relationship with you and there'll be bank account details which hopefully are correct and you kind of send a payment to those and even like bill payment products. You guys have a bunch of technology here, but it's like we scan the PDF in an automated way or we ensure that the bank account details were mistyped or something. But it's kind of putting a little bit of lipstick on the pig of the whole system being super antiquated. Why is the system so antiquated when it comes to bill payment in particular?
- [12:03]
Eric Lyman
I think this is some of what Alex was bringing up. The constraints of programming things in an if this, then that kind of world are very heavy. There's a lot of complexity when you think about kind of the nuance and algorithms that govern why do companies spend money under some circumstances, how hard it can be to record, I wouldn't overlook, let's say that you're a manufacturer and you're buying some asset which you're going to use for five years and it's going to depreciate. It's a very different accounting treatment versus I'm buying a pay as you go SaaS app. All the complexities around that that might govern whether or not you decide to spend. And then finally once you get all this detail like how do you review this and decide where to allocate your next marginal dollar is very complicated.
- [12:52]
Kevin
But like many systems are in place upgraded, despite the fact that that's pretty complex. So credit cards started with no real time authorization system, which is crazy and you just hope that they were good for it. Exactly.
- [13:04]
Alex
Carbon calculus.
- [13:05]
Kevin
Yeah, yeah, exactly, exactly. The machine with the pleasing sound to the ima, it would be too great in the current ASMR environment.
- [13:11]
Alex
But.
- [13:13]
Kevin
But then they added like you could call up and get an authorization and then they obviously added kind of the current systems. We know where the modems pay for. Exactly. Yeah, yeah. And then the modem. And so kind of in place. Credit cards were upgraded with much better capabilities. And similarly, if you look at kind of checks and how they work, even though we kind of think of checks as antiquated, it used to be the case that physical checks had to be flown all around the country to be like physically settled. And then there was the check 21 act and what was it the year 2000 where they said a scan of a check is good enough and so they could be digitized by the banks and then shredded. And then there was the. You can take a photo of a check with your phone. And so we've like managed to take this super old timey check system and despite the fact it's super old timey in some ways it has actually been meaningfully upgraded. And with if you looked at the bill pay system from the outside, you would say we should have DNS for companies. So rather than a company like sending you their bank account details, you should like look them up in some central clearinghouse and that way you confirm that you're not being phished. And a lot of spear phishing kind of attacks.
- [14:11]
Alex
Although you referenced this. So like there's actually an indifference point that you can graph like if interest rates go up high enough. If I send you a check. Right. Which is like a paper mail check.
- [14:20]
Eric Lyman
Yes.
- [14:21]
Alex
And that takes five days and hopefully the USPS goes on strike for two more weeks. Right. So I've got the postmark I actually benefit. It's actually cheaper for me.
- [14:29]
Eric Lyman
Legally paid.
- [14:30]
Alex
It's crazy. Yeah, no, it's crazy. So like this is the problem, like credit cards, everybody, like I'm in the store, I want the tv, you want to sell me the tv. We both want this done right away. And in the knuckle crunching, ASMR carbon copy days, they might not have been willing to sell that to me because they didn't know if I was good for the money. They'd never seen me before. And the interesting thing is that AR and AP are almost an adversarial process. You mentioned this. It's like, what do you want to do as a controller? Well, you want to pay as late as possible and you want to collect as early as possible. And then you have this weird thing where checks like it's not just an accident that they stick around for a long time. It's like there is a financial incentive for one party.
- [15:11]
Kevin
So that's true. Unpinned timing. I agree with that. But there are some things that are just a deadweight loss, like the ability to fat finger a bank account. You know, detail. Like no one benefits from that. Like everyone has a horrible time.
- [15:23]
Alex
Nigerian guy. There's some people.
- [15:25]
Kevin
Nigerian princess.
- [15:26]
Eric Lyman
Think of everyone.
- [15:27]
Alex
Yeah, think of everyone.
- [15:28]
Kevin
I will posit that many networks have been upgraded in place, but somehow kind of the loose network of businesses paying each other via PDF invoices has proven very resistant to in place upgrades Also, if you understand.
- [15:41]
Alex
I love your notion of like DNS for payments or for expenses. So I don't know if you saw this. Google wanted to issue a 100 year bond.
- [15:49]
Eric Lyman
Yes.
- [15:50]
Alex
Yeah, yeah. So why is that interesting? So imagine that I am owed money by Google. I am one of the small businesses that you reference. Their job is to pay me as late as possible.
- [15:59]
Eric Lyman
Yes, right.
- [16:00]
Alex
They can borrow money for 100 years at like 3% or whatever. It is like cheaper than the US government probably. I mean it's, yes, a little more expensive than the US government, but they are borrowing. That's crazy. I can borrow money at 20%. But why do I need to borrow money? Because Google's paying me late. Those jerks. Right? So I should be able to borrow money kind of at the rate at which Google is borrowing money. Because my ar, my AR is their ap. Yes, but the problem is unless you put all this together, you would just look at me and you're like, well, you're just a little schmuck. I'm gonna charge you 18%. It's like yeah, but, but it's Google. They can borrow money at T plus, you know, whatever, you know, library SOFR plus 100%. That's not fair. But the only way to really solve that is with more data and actually entangle. Not entangling but just kind of connecting these things together for sure.
- [16:52]
Kevin
What's your vision for once? AI is doing a lot of software engineering. What does that look like in three or four years time? Like, is the competitive equilibrium similar? But just the expectations for the amount of software and functionality businesses are shipping is much higher. Are software teams similar looking, different looking? Again, you're doing a lot of AI engineering. What does the future hold?
- [17:20]
Eric Lyman
It's all blurting. It's totally crazy. There's designer shipping code marketing at Ramp reports into our CTO Kareem, my co founder who's doing some of the best marketing I've ever experienced and seen. We have customer support agents like shipping code to production too. I just think that the half life of you see a problem to how long it takes for you to go fix it and do something about it is shrinking immensely. Or if you want to change the color of a button, you can just say rampinspect. Can you change the color of this button? And it goes and spins it up and it does it within minutes. It verifies and validates it. And so I actually think in some sense, you know, kind of these classic barriers that software businesses had are clearly going to erode, right?
- [18:14]
Alex
Yes.
- [18:14]
Kevin
But you know, there's the old joke of it's much more fun to write code than read code, which explains a lot of software engineers behavior and it becomes easy to change the button. Is that like another instance of it being more fun to write code than read code where like lines of code are a liability and not an asset because you know, they are something you have to reckon with. And so are companies at some level incurring some tech debt now where they are adding a bunch of code which will maybe be harder to reason with later. Or do you just get bailed out by the models getting better?
- [18:47]
Eric Lyman
It's really interesting. By the way, one of the other interesting kind of sub conversations I'm hearing a lot too is when you think about where tech debt comes from. There's a set of conditions and trade offs. You make you write things in a, in a kind of a discrete and deterministic way. Under these circumstances follow this code path, under this circumstances follow this other one. In a world where there's LLMs and kind of the models themselves are improving I think it's entirely possible that the way that code is written is you say here's what I'm solving for under these kind of conditions, here's what I want to occur. Go write the code that drives this outcome. And maybe with the models such as they are today, can get it done in sort of a spaghetti code written fashion, but it kind of works even though it's some kind of Rube Goldberg machine underneath the hood. But at these models get much smarter, you might write your code base in such a way where you say every year, rewrite the underlying code, but here's the outcome I can drive. And today you accomplish my outcome 90% of the time. 95, 98, 99, 100. And do you just have kind of self healing and writing code all the way through. And this notion of underlying code does goes away because we're writing things in this different manner. Obviously there's real conditions in which that won't occur. If you're kind of writing code that needs to have four nines of accuracy and uptime, that's probably not the methods you're using. But if you're a growth engineering team, that's probably what you're doing today. If you're on the leading edge of the stuff. I find this stuff very fascinating. And when I think about the deeper implications of this stuff, I think that if you are completing a small amount of cognitive work, let's say you just are an expense app, the spend has occurred, it needs to go write it down somewhere and get someone's approval. And that's all the knowledge work that you're doing. That's like very few tokens in order to accomplish that, both to create the infrastructure in order to facilitate it, like that probably evaporates. I think anyone can probably custom write that kind of app. Whereas if you're doing much deeper kind of work such to underwrite a company, provide financing, automate areas of accounting, I think kind of the fitness function for companies becomes can you actually do things in such a way where even if you could kind of spend tokens on it, it would take more tokens to create the thing or do that than the system maybe that you've built to kind of drive that outcome. So I just think the rules of what it means to be a software company are changing. I think network effects and what you're building is more important than ever. Like if you think about kind of the classic set of moats that are there, I think that this question of where are there moats in a world where I like Dario's way of putting this. If you have a country of geniuses, data center. Yeah. You know, living somewhere and they're writing code and they're incentivized to compete with you too, you know, if you're not really kind of following what are the classic four moats and building towards that, like, I think just life gets a lot harder.
- [21:58]
Kevin
Yes, yes. I mean, do you have a view, do you guys have a house view on the new competitive equilibrium with a lot of AI engineering really working?
- [22:09]
Alex
Well, I think there are a couple things. So, like, I think Mark talked about this a little while ago, but what is an EPD team? Engineering, product design team, product development team. So you'll normally have one product manager. Maybe you have five to eight engineers and one designer. And now everybody has cursor or Claude code. So the designer's like, I don't need any of these bozos.
- [22:28]
Eric Lyman
Right.
- [22:28]
Alex
The product manager is, I don't need any of those bozos. And each of the engineers, like, I don't need any of these bozos.
- [22:34]
Kevin
It's like the start of the Dark Knight.
- [22:35]
Alex
Yes. And they're all right. It really is the. Exactly. And they're all right. It's like they're all wearing the Joker mask. Or the Joker mask is Claude code or Cursor. But the problem, problem is because I was talking to one of my CEOs. This is a pretty scaled company, lots of revenue. And it's like they use all these tools, they're not more efficient. And he's like, why aren't we more efficient? And it's two things. Number one, it's like, it's a real company, they have real customers. They can't just push things and hope for the best. But it's like you actually have an HR problem in that if you're building from scratch, granted, you have no tech debt, you don't really have to worry about customers. You don't have any. But you wouldn't have an eight person EPD team. Yeah, you would probably just have like each person. You would have like, all right, we have eight different product managers, slash engineers, slash, whatever. Like each one is a pod unto themselves. So that's one thing I totally agree on. The data modes where that has become more important. I'll tell you a story that you might like. So I met this company, velex. It's a 25 year old company. This guy Alex bought up every legal record in Spain, like probably going back to 1492. Like buys the. Here's the Ferdinand and Isabella. Like, you know, here's the document. Like, I'm going to take a picture of that. I'll sell it to every law firm. And he built like he was like a $20 million a year SaaS business bootstrapped for 25 years, and then it went to like 100 million in one year. Now why is that? Because he used to sell this document or like, you know, he used to sell a subscription to Kirkland Nellis and Lathan Watkins and all these big law firms, and they would take. A paralegal would take that, they would turn it into like a document. They'd charge the client $10,000. And, you know, ChatGPT can't do that. Like, Genlai can't do that. But you know who can do that is Velex. And now another good example of this of, like, who has proprietary data. A lot of times the data is free. This is the really cool thing. Or like, it's sitting like, I wouldn't call your data free, but it's not like, for sale data sets. So do you know DomainTools.com is my favorite business. So Domain Tools runs a cron job. Every day on every single Internet website, they do a whois lookup. So whois lookup every single historical record.
- [24:48]
Kevin
Of that which no one has.
- [24:49]
Alex
So if you want to see who owns stripe.com in 1999, well, it was free in 1999. So if you invent a time machine, go run that whois query in your terminal. But you can't do that, so you have to pay. But all that data is free. Or FlightAware with ADS B data. So you have a lot of these weird businesses. And of course, this is not a new idea like factset, Bloomberg, you have aggregators of data, but that becomes so much more valuable totally, because your 10,000 geniuses cannot do that.
- [25:17]
Eric Lyman
100%. 100%. And you always experience this of you hire someone extraordinarily talented, top of the class at mit, and you say, all right, join the engineering team and go ship the code. And they ship something kind of crazy on the first day, and it's sort of slow. And it's like, you know, you can have someone who is like, intellectually like an absolute giant, but learning kind of how a company does things the way it does, learning the kind of the procedures and nuance of an organization, like, takes time. It's part of what makes working with interns or junior engineers, like, fun. I think their learning curve is obviously immensely steep. And I think that the speed at which with sufficient access to the data and the procedures of a company, they're going to get there very, very fast. But, you know, these moats are real. You know, anyone who's had the other.
- [26:05]
Alex
Moat, I would argue is the dark matter moat.
- [26:08]
Eric Lyman
Yes.
- [26:08]
Alex
And what I mean is like, you know, like the Milky Way. Nobody could figure out why the mass is the mass. Because it's like all the observed stars and planets and everything else. It's. No, actually, the vast majority of the matter or energy, because they're the same thing, is dark matter, dark energy. And what does that mean? Nobody the hell knows. But it's just like we don't know it. And for products, it's like you built. Like if I go tell Claude, go clone ramp. Right. Because this is the SaaS apocalypse that's happening right now. It's like, oh, of course. Well, I just went to the website and now I have a website that looks like ramp. No, no, no. There are like 9 million edge cases. Like, the tech debt sounds bad because it's a pejorative debt bad, but actually it's good because what you've done is you've uncovered every single problem that can go wrong. Like the fact that, I mean, a great example. Remember when the power went out in San Francisco a month and a half ago? So we have this amazing thing called Waymo. Waymo had not figured out this corner case of what if the power goes out.
- [27:02]
Kevin
It was a thundering herd problem with the customer service or the human overrides.
- [27:05]
Alex
Yeah. But just they had no idea. And it's like, that's actually great that that happened. You need these problems to happen for sure. And just because my background, I used to write shareware. You know, just try before you buy software. Shareware was a big thing. That's a blast from the past. It's a blast from the past. So there's a website that's part of.
- [27:22]
Kevin
Exactly.
- [27:22]
Alex
Well, but it's freemium. But this is where I'm going with this. And you'll like this. So download.com was the preeminent site for downloading shareware. It was like, you know, CNET was one of the most popular properties in 1999, 2000. So all the top downloadable software products were there.
- [27:38]
Kevin
Download.com sounds like a company that had a Super bowl ad spectrum.
- [27:41]
Alex
They would have. I bet they did. Actually.
- [27:43]
Eric Lyman
They probably had two.
- [27:43]
Alex
I'd be shocked. They probably had five. Right. Between pets.com and something else. But so download.com had all the popular products and then this site Called Elance shows up. And Elance is now called upwork. This connected you with work that you would want done by very smart people, basically in the developing world. So I want a software product built. Here's everybody in Romania and Russia and India. I want translation. I want graphics. So what ended up happening is people would look at the download.com top list because before it was a very cottage industry of who wrote shareware, and it was very profitable, like ID software, shareware company, McAfee shareware company. Actually, CyberSource started off processing payments for shareware companies.
- [28:24]
Kevin
Ah, okay. I thought you were.
- [28:26]
Alex
That's how they got McAfee. Very, very interesting history to this, and we talk about some other time. But basically what happened is people found Elance, like, oh, I could pay anybody $500 to clone anything on this list. Everything on this list makes tens of millions of dollars a year. Let's go. And the cloning never worked, right? It functionally worked. Because if I say I'm going to clone Eric, I might not know that you have a pancreas. Yep. Right. I'm sure you do. Right. I might not know that you have two kidneys. So the problem is that the cloning just. It goes skin deep. And like, that's. That's the embedded advantage of these companies now.
- [29:00]
Kevin
So do you then think the SaaS apocalypse is kind of irrational?
- [29:02]
Alex
I think it depends. I think some of it is very rational because if I want. If I have a feature that became a company and I don't. I know this sounds like a very negative thing to say, but, like, I want to get paged if my server goes down. It's a very, very logical reason to build a company called PagerDuty that now has a lot of stuff around it. But I might just say, like, hey, whenever my servers, like there are corner cases, there is the proverbial the power goes out in San Francisco. Do something differently that's very, very different than like, netsuite, which is. I have a saying that I like, which is the best companies have hostages, not customers. At least in enterprise software. Not for you, because you actually have INPFs, but they're much, much harder to go rip that out. And a lot of it is kind of like the Goldilocks zone that you operate in, right? It's like, if you're too expensive, of course I'm going to try to rip that thing out. If it's so cheap, then, like, I forgot nobody even used it. So you have to be in this Goldilocks zone. You have to have enough complexity. And ideally the front end is different than the back end. So like workday I think is like nobody's going to get rid of workday.
- [30:06]
Kevin
Yeah.
- [30:06]
Alex
And I actually credit David ricardo with this 1870 comparative advantage. Like sure, you could grow your own food, right. You could plumb your own plumbing, but you're not going to do that.
- [30:19]
Kevin
And somebody, you could do your own HR system.
- [30:20]
Eric Lyman
I think the one maybe pitch for Stripe and others that I would say here is I do think that that is right and there is a lot of complexity in local tax law for payments and things that make workday and you get extraordinary business. There is this overarching macro question of how does work get done. And if you believe that works can get done through tokens and models, presumably it probably doesn't go through payroll, probably goes through a credit card or check to these types of companies. And so if kind of the share of. It's almost this sort of simple math. If you X rayed the P and L of most companies, the majority of it classically at least for asset lice firms is payroll. You're paying for people to do things and SaaS is maybe a small percentage of company's income or company's cost base. Does that suddenly that share grow to high single digits, low double digits, significant double digits and does a share actually move where the payroll economy itself, even though maybe it grows, becomes less relevant? I think this is the really funny part of even as this has been going on, what do I know as a private company other than seeing our own payment data. But you start to see these companies beating their earnings in a way they never have before where the terminal value perhaps is falling out. But they're saying shareholders we're re accelerating. We haven't seen this since 2021. We're going faster and you're gonna have multiple progressive quarters of this this actually occurring for certain types of businesses. And so it's a really interesting time to. What I very violently agree with your view is like yeah, it depends. There's something.
- [32:13]
Alex
It depends.
- [32:14]
Eric Lyman
They're doing really well.
- [32:15]
Alex
It's my brilliant comment. It depends.
- [32:17]
Kevin
Yeah, you mentioned too very Howard Marks of you as you're hearing from Eric, Ramp has become the default way a lot of American companies manage spend. Stablecoins allow that functionality to work in many countries all at once. With Ramp stablecoin backed corporate cards, businesses can fund a balance with stablecoins, issue cards against those balances instantly and allow employees to spend anywhere cards are accepted without the business having to Think about stablecoins all the time. Same card experience, same controls, just a much more global set of rails underneath. This is one of the many practical ways we're seeing businesses on Stripe use stablecoins by launching card programs in many more countries and doing so in much less time than it would have taken otherwise. If you're thinking about using stablecoins to expand Stripe can help. You mentioned your spend data. What does the spend data that rampsees tell us about the economy?
- [33:13]
Eric Lyman
I think it is stronger than many people understand in lots of ways. First I'll go back to one of the things that perplexed maybe our team for a long time and our economist Ara on the team saw this data even as recently as last year where the Census Bureau would do this periodic surveys where they got and asked.
- [33:41]
Alex
How.
- [33:41]
Eric Lyman
Much is your business? Using AI to produce goods or services is very refined economic way of wording the questions. And they would come back with these pronouncements saying a single digit percent of businesses in the US have adopted AI. When we looked at our data and we support over 55,000 businesses, we lean a little bit towards tech, but not heavily. It kind of resembles the distribution of businesses you would see in the states. And well, the majority of businesses have used AI. You look at businesses whether they're paying.
- [34:15]
Kevin
As in they subscribe to ChatGPT or Anthropic or something like that.
- [34:18]
Alex
Exactly.
- [34:19]
Eric Lyman
Or maybe a business that is a true agentic cognition or cursor or something like that where this is kind of vertical application. And so one there is this disconnect between kind of the use of tools. If you look at how quickly businesses are adopting and responding to these new tools versus what maybe people report on next growth. I think it's been clear over the last few quarters is the U.S. itself is re accelerating GDP growth has gone from maybe the 1 to 2% area to 4 to 5. And you could argue how much of this is a little artificial with subsidies. But it's been pretty significant but subsidized by what some of the big beautiful bill as well as some of the tariffs and where that's been reallocated. I think some people, I would argue on the whole maybe unfairly said this. I think that there's more durable growth inside the businesses. But I would say overall business health is much stronger. And I think that the really interesting thing and again some of this is specific to the data that we see, but I think that businesses are generally getting more and more savvy about finding tools that help them be More efficient. And I think what skews our data is maybe the savings we drive for people. So the way of explaining it is like people know the Ben Franklin would say this phrase of a penny saved is a penny earned. And this awesome aphorism, but average American business has an 8% profit margin. And so mathematically speaking, a penny saved is equivalent to 12 pennies of revenue earned. And so if you save businesses a lot, you end up with these outcomes of the average ramp bases materially outgrowing kind of the regular US Average. And while we think that we can clearly see this and demonstrate this for our own set of customers, I suspect these types of things are occurring at businesses adopting these new sets of technologies. I would argue probably faster, very clearly than what the US Is maybe the classic sources are seeing. So I think it's much healthier when.
- [36:25]
Kevin
A business saves money on ramp watch. Happens like the CFO comes in and says, oh my God, we're spending way too much money. Exactly. On confetti. We don't need this much confetti.
- [36:36]
Eric Lyman
Who's buying the confetti?
- [36:38]
Kevin
Yeah. And we have huge stockpiles that we don't need. What happens when a business saves 5%? What are you actually cutting?
- [36:44]
Eric Lyman
Yeah, so there's two pieces of it primarily. One is like these hard dollar cost savings. And then some of this is time. And I'll start with the time because it's the squishy one. But I think that it's in some cases actually much more important.
- [36:56]
Kevin
Oh, sure. They save time on their expense reconciliation. That makes sense. So they're no longer going through line by line. And therefore there's one person who is freed up to go do something else. Yeah.
- [37:06]
Eric Lyman
And I think kind of one of the classic biases that people forget is people chronically undervalue their own time. You know, is maybe a principal business. You know, everyone, you know, everyone has an hourly within a business.
- [37:21]
Kevin
Human time is incredibly expensive. I think the lean companies got this right in eliminating the bottlenecks there. So, okay, that's one form. What else?
- [37:28]
Eric Lyman
That's one form.
- [37:29]
Kevin
Next.
- [37:29]
Eric Lyman
All right, when you start to have these fine tuned kind of controls, this part has been, I think, probably the biggest lion's share of this. Let's go back to maybe one of the earlier conversations of why do people use checks, this horrible system and purchase orders? Well, one of the advantages of checks is unless you mail it to someone and you sign it, no money can leave your company. And whatever maybe person knows who's ever had a credit card and gone to a gym once and had a good New Year's resolution. But is you go a couple times and you're like God damn it, this gym is charging me.
- [38:02]
Kevin
The difficulty of sending a check is a feature, not a bug.
- [38:04]
Eric Lyman
Yeah, exactly, but part of what ramp was the first to one time use cards, single use cards, but also more than that, merchant blocking. So you can, whether it's on one card or 10,000 cards at once, build in a kill switch to say okay, we've signed this new deal with this merchant. We're only on Uber, we are no longer taking lifts. And anytime someone goes and tries to go on merchant A or B, you can do this. Or you sign a new contract and you say I'm going to spend $10,000 only with Salesforce and on the 10,000th and $1 they try to charge you, it declines. And what gets to happen, you get to have a conversation with their sales team who really wants to make their budget. And if you look at this mathematically for most companies that come over a low end, maybe a very hygienic company that is more giving out few cards in the old world could durably cut their expense of about 2% a year by doing this. Some of these very laissez faire businesses are saving just 10% just through these types of things. Next you start ending up with these more fine tuned kind of controls where you can say under these circumstances I want to go and have kind of charges that occur. Maybe you have an Engineer Stay till 8pm at night, you can go and buy a meal. But if you take an Uber on a Saturday that should turn off and so you have the cards. If it's like an Uber on a Saturday auto decline. But you can text and say actually it's for work, you send back a yes, it turns on and so it's all these little tiny paper cuts that actually start to go into run. Next, it's vendor data. One of the unique assets of Ranch is anytime you spend money, you upload a receipt, maybe you upload an invoice or an msa. This kind of takes us back to the paribus days we know across hundreds of millions of purchases every year, not just that you spent money at a software vendor, but what did you spend per seat? And so if you're a customer on ramp and you're about to go and pay this large bill on random SaaS vendor, we can show you in real time before you kind of send the funds, you are paying 20% more than the rest of the market. You know, here's kind of the cost curve, what others are paying. And actually by going in, empowering your.
- [40:14]
Kevin
Procurement team, do you have enough data to do that? Because like, my AWS bill is not like your AWS bill. And so. But don't you need to know how many instances we're running to know if this is a good deal or not?
- [40:25]
Eric Lyman
You can, but you can still kind of get down to the level of is there a bulk discount or not? And start to know of is there a negotiated aspect? There's other types of things where I'd argue maybe a lot of classic software as a service ends up in this way. It's like your pricing is really dependent on did you sign that deal on January 1st or on December 31st, when the sales team really needs to hit the quota and you can actually see down to the seat level. You're paying $30 per seat.
- [40:54]
Kevin
It's a great time to be signing a Salesforce contract.
- [40:57]
Eric Lyman
Exactly. And so you can actually get down to the seat level and say, okay, you're about to auto renew the market. Prices actually move for this set of service. And so it can be very, very useful to procurement teams to know where they compare with the market.
- [41:12]
Alex
And yeah, that was my question. So if you remember Groupon, a much beleaguered Groupon. But Groupon started off as a site called thetippingpoint.com Groupon originally it was like, hey, I don't like the fact that Starbucks uses paper cups. If I get 10,000 other people that donate a dollar, we'll fly a plane in front of Howard Schultz's house, which also emits carbons. Bad example. But you only want. It's a collective action thing. That's right. So, and then down, because I met Andrew Mason and Brad Keywold when they were first starting this business. It was like eight people. It was tipping point. And downstairs there was a pizza restaurant or something like, oh, well, if we get like 50 people to agree to buy pizza, maybe they'll give us a lower price.
- [41:53]
Kevin
The cause became discounts.
- [41:55]
Alex
Yes. But then the thing is, Gripon wasn't known for this. Like, it has to tip because they always had the demand. So they never had to worry about it. Because before it's like, you've got supply, you've got demand. Right. So I guess my question for you is, can you be the arbiter of pricing? Can you aggregate the demand? And the same way that like Costco, who shops at Costco? Every small restaurant shops at Costco. Right. And Costco uses that collective bargaining power, if you will, to say, hey, Coca Cola, give us a very, very low price. They take very, very little of that. Because right now I'm using RAMP to buy stuff.
- [42:27]
Eric Lyman
Yes.
- [42:27]
Alex
But I would imagine that, like, if you could say, hey, I have $100 billion. I didn't know it was that high. That's amazing. I have $100 billion to spend. I can hopefully direct it this way or that way. Please give me a 20% discount. Can you do that? Or is that kind of like more further in the funnel of, like, the purchase process?
- [42:45]
Eric Lyman
There are this large swath of businesses that I've been fascinated by called these group purchasing organizations. A lot of these, you know, this. Well, it came out of the healthcare world, where it's a very small set. Exactly. Supplier. But if you can go and aggregate demand, you could say, okay, for these type of purchases, you're gonna offer this procedure at this account. For this type of equipment, you're gonna give this level bulk kind of discount. And you've gone and you've done that. And I think these are very popular now in the private equity world. When I look at RAMP data today, there are dozens of, you know, more and more every year of merchants where, you know, there's. We are sending billions of dollars. You know, it is truly. It is the client's money. They are going where they're going, but we have a sense of actually, okay, where is this actually going? And can you go and say, you know, across the ramp buyer base over the next 12 months, this is how many dollars will go towards you? Can we negotiate a discount the other way? Which maybe starts to, you know, sometimes these businesses veer closer to advertising. But where it gets really interesting is we see the fastest growing businesses. What are the businesses that people are getting really excited and are adopting really quickly? And we might have a signal of these are actually good businesses and good tools. And actually, most businesses should move towards that. Could you go and actually start to say, hey, your renewal is coming up in 90 days. Have you considered this other business who has provided a 20% complimentary welcome, lower price to you? And so there's multiple forms that can take place, but the short version of it is, I think, one, it's, yes, I think you can offer a bulk discount. But two, you end up almost getting closer to. Back to this other theme of like, can you start to go and maybe show businesses that directing their next marginal dollar will lead to this outcome?
- [44:41]
Alex
It feels like there's even like a. A third thing which is, I would call it merchant specific balance. So imagine that it's December 31st, I'm buying something at Whole Foods and then I see an offer. Not donate a dollar to the, you know, whatever charity they're pushing. But it's like, why don't you commit $2,000 of spend for 20, 26 for $1,800.
- [45:04]
Eric Lyman
Yep.
- [45:04]
Alex
And the nice thing there is that they lock in that spend for me. They actually collect it. I mean, I know it's, you know, there's escheatment law and all this complicated stuff, but. But the key thing is it's almost a risk management and a loyalty play for them at once. Because the problem is that they don't know how much celery to buy. They don't know how many. So it kind of goes back to the ARAP thing that we were talking about earlier. Because the other thing is not just saying, hey, I'm in a group bargain on behalf of all the different customers that I work with, but it's an ancillary thing, which is you might want to just pre commit your spend to a particular vendor. And that vendor would love to have that spend pre committed, even if they're Amazon and their cost of capital is very low for sure. Because they know they don't have to worry when they're planning their budget for the next year that you're going to churn in month nine. And that seems like another, like the closest that you can get to that is gift cards.
- [45:56]
Eric Lyman
Yes.
- [45:56]
Alex
Strangely enough, which I'm sure you know well from your age.
- [45:58]
Kevin
Gift cards for business.
- [45:59]
Alex
Yeah, because it's like you go to Costco. This is actually a big business at Costco. You go to Costco, they sell gift cards. We were just talking about this. So they sell gift cards. You can buy $100 of Starbucks gift cards for 80 bucks. Is Starbucks dumb? Like, why are they if they're worth $100? No, because they basically have in the ecosystem money that is going to be spent at Starbucks. And yeah, there's breakage and other stuff, but it's actually quite, it's quite a valuable value proposition for the receiving merchant because they know that you're going to spend your money with them.
- [46:27]
Kevin
But I want to go back to your previous idea where McDonald's, every five years or whatever does a big bake off between Coke and Pepsi and they always renew Coke and they have a long standing. Or maybe a movie theater chain is a better example where all the big chains, like they don't serve Coke and Pepsi, they only serve one and they do a big bake off between the brands every five years. And you have lots of small businesses that are buying from Coke or buying from Pepsi. And so it feels like you just do a bake off between them. Saying Ramp is going to have a preferred vendor and you can obviously use a Ramp card on either. It'll work. But we have preferred rates with Pepsi. Is that a thing Ramp should do?
- [47:04]
Eric Lyman
It's a really interesting question. Shortage, I think, over the, you know, long duration of time. Like, I'm kind of bit of a crazy person. I'm like, we should try everything.
- [47:13]
Kevin
Is my.
- [47:14]
Eric Lyman
Is my actual answer Claude code. Yeah, let's go.
- [47:17]
Alex
Let's go make money for Pepsi.
- [47:19]
Eric Lyman
Go negotiate. You know, the cost of the phone call and negotiation has never been lower, but there's this almost philosophical question of like, all right, where is the differentiation? What makes Ramp different?
- [47:32]
Kevin
But isn't that increasingly to scale?
- [47:33]
Eric Lyman
Scale it is. And I think that you're right in that, like, at the very beginning of the company, the answer was very easy of like, look, our cost of capital is nowhere close to a bank's. The interchange that we could make is nowhere close to it. We have all the disadvantages of scale. And kind of the only thing that we could do to compete with these people was we could, you know, everything was slow at the bank that I worked at before. It was hard to ship things. We need to move fast. We need to kind of have this emphasis around velocity to ship product and just kind of blitzkrieg faster than maybe others could respond. What it's evolved into, and I think is today probably the largest point of differentiation at the meta level between Ramp and maybe the financial service providers that we compete with is they sell money and we sell time. They'll sell you a lower, like a loan at a lower cost of capital, you know, rewards at wherever they set it. We will sell your expenses. Done.
- [48:39]
Kevin
And so are you naturally skeptical of this idea because it's selling money rather than selling time?
- [48:44]
Eric Lyman
I wouldn't say I'm naturally skeptical. I would say that it's okay.
- [48:47]
Kevin
We're not precious. We have lots more ideas.
- [48:49]
Eric Lyman
No, no, it's good. There is this question of, you know, I think back to our roots. Like, I don't know, like, how do you build a product that is 10 times better than other folks? And I think when you get really large, actually just a line drive is good and a 2x or a 3x is better kind of thing is actually good. But how do you find These set of things that your product offering is so different than what you can find elsewhere. And I think that we can conceivably, and I know this, you can negotiate with kind of like the largest logistics companies a deal with like a FedEx that would be better than what most companies are paying. And I think that that's interesting. Then you have all the sub levels of how to get people to know about the offer, to sign into the offer to deal with all these sub things. Or you could just go and spend that next marginal hour to go and say like, let's just automate all of accounting for these customers. Let's go and start doing financial work for these customers. No financial institution is able to compete on that kind of vector. And so I would say it in kind of the fullness of time, we want to do both. I think that you want to save people the maximum amount of time, the maximum amount of money that you can. But I think part of what makes us so different in this kind of world that we operate in is we have this obsession of sources of drag, of the things that slow down purchases that lead you to overspend versus other companies.
- [50:13]
Kevin
But just to push on that. I feel like the differentiation for companies often has to change as time goes on because they start in one competitive equilibrium and then as time goes on they are in another competitive equilibrium. It's dynamic. And it feels to me that ramp got its start with very fast product velocity and having this great product experience. And as you grow up, you can just build scale into the product and scale the scale derived product advantages. Not just like we're big, but like Costco, you know, the advantage comes from the scale and they really pass it back to the customer. And it feels like there could be a second stage to this rocket where you get going with faster product velocity, but then there's actually a pretty different set of product differentiations as you scale up.
- [51:02]
Eric Lyman
I think it's true, I think it's well said. And there's this almost question of like in every line of business that we're building, where are we in the S curve?
- [51:13]
Alex
How far.
- [51:15]
Eric Lyman
Is this a product that is serving these tinkerers, early adopters, Are we in the early majority, are we in the late, where we need to shift the business to kind of harvesting, optimize price, not quantity in it or towards the end. And the thing which is so shocking and I think maybe as part of why I love this business and I think even too I think about Stripe and many of the great businesses and payments that have been built. I believe today ramp powers more than 2% of all corporate and small business card transactions in the United States, which is amazing for a business that the product, you couldn't even sign up for it six years ago. And yet that's a really fancy way of saying 98% of spend is not unramped. It is unramped. And let's say we do it again. We grew faster last year than we did the year before. I feel very good about the way this year is starting off and maybe it's closer to 4. 96% is still big. 92% is still big. It is so large. And by the way, there's more ways to buy things than just gardening. You know, you think about bill payments and so, and I think that there is an aspect of for most people, there's so much drudgery around. Like, I think people are doing artisanal expense reports. You know, it's fun to be like a hipster and spend an hour making coffee. But like it's a little crazy that.
- [52:44]
Kevin
It'S the blue bottle of expense resorts.
- [52:45]
Eric Lyman
But unfortunately you're in concur and you know, like this spinning wheel, it's a.
- [52:49]
Kevin
Pour over expense report.
- [52:52]
Eric Lyman
We love it that way.
- [52:52]
Kevin
Single origin.
- [52:53]
Eric Lyman
You know, you try it, it's the, the experience.
- [52:56]
Alex
But no, you're the Nespresso. Much more efficient.
- [52:59]
Eric Lyman
That's right. But like what I would say is like this aspect of time is most people have not experienced of like, you know, this thing, you know, you know, is just a fact of life or building a business that's been hard doesn't need to be hard. Doing your books doesn't need to be hard. And so I still think in some sense in where we are on the S curves of our business, I lean that way. But you're, you're totally right. When you're at this level where in the not too distant future, I mean, you're there processing trillions of dollars per year in economic activity and we aspire to be there in the not too distant future.
- [53:38]
Kevin
Sounds like you'll be there pretty soon.
- [53:39]
Eric Lyman
We're working our hardest.
- [53:40]
Alex
But exponential growth is a hell of a thing.
- [53:44]
Eric Lyman
It's definitely given me good things to think about and work towards.
- [53:46]
Alex
So I was thinking about when we met when you were running Paribus and it kind of feels like one of the first or second or third order effects of AI is the marginal cost of arguing has gone down to zero.
- [53:58]
Eric Lyman
Yes.
- [53:59]
Alex
Right. No, I'm serious. It's just like my wife got into an argument with some company. And it's like she used ChatGPT to argue with them. They used it to argue back with her. And it's like I just saw the future. This is incredible. And like, we won.
- [54:12]
Kevin
Your agent will talk to my agent.
- [54:14]
Alex
Yeah, but it's like you think about this like from a chargeback or it's like, you know, hey, this price went down. I mean, this is how I remember you're like, this is such a good idea. Like the price went down. You have these breakage models that the card networks had and Best Buy has to write you a check or Visa has to write you a check because that TV fell by 20%. But like nobody does that. And now everybody's going to do that 100%. Or it's like you do a chargeback for $5, it's just not worth it.
- [54:39]
Eric Lyman
For sure.
- [54:40]
Alex
It's like I thought it was Pepsi that I was buying at McDonald's. It was Coke chargeback. Right. Nobody's going to dispute that because the cost is too high. But now the cost goes to zero.
- [54:50]
Eric Lyman
That's right.
- [54:50]
Alex
So I'm just kind of, what do you think? I mean, it's hard to picture five years from now what the actual full effects of this are. But if you kind of think about that as the macro abstraction, it's like marginal cost argument goes to zero, what changes?
- [55:03]
Eric Lyman
I think, to be really explicit, I think what's happening is the marginal cost of time, of knowledge.
- [55:09]
Alex
That is a much better abstraction is.
- [55:11]
Eric Lyman
What'S going down so rapidly. And I think about our customer base. Most of our customers don't have a single software engineer, let alone a software engineer for their finance team. And if what we are very good at doing is selling functionally sets of work, maybe it's embedded in a financial operating platform. But expenses done, accounting done, some type of knowledge work done and you can deliver that. That is immense high leverage value for these customers. If, let's say it costs $5 before they didn't do it, now they can get $5 of value. But maybe the cost of it's a software type cost, maybe it's pennies of tokens to actually go and do that. That is a great business to be in because it's very high customer value. We can capture just a small amount of that and build this business. And when you go back to kind of the original insight of ramp, we entered into this industry where it was very profitable, but it was, not only was it misaligned, but people were fighting over like basis Points. You know, every last dollar that went into rewards could have meant like tens or hundreds of millions of dollars in profit for the business, you know, for them. But you know, if you think about for a customer, let's say that in order to make one extra basis point as a business, you would try to incent them to spend 100 more dollars for that customer. Let's say they buy something that gym membership they didn't need or that subscription keeps going, they have lost $100, it's gone out the door. And maybe they go to the gym, maybe they don't, but that is out of their bank account. And if you just try to say I'm going to have a better rewards program, sure, maybe you can get that customer a dollar or a dollar ten back or some amount that pales in comparison to just helping them just not spend that hundred dollars, cancel the subscription. The economic leverage of that activity is much higher.
- [57:07]
Kevin
You sold your last business paribus to Capital One. Capital One is one of the biggest founder run financial firms that people in Silicon Valley don't talk about. What should we all be and has been extraordinarily successful. What should we all be learning from Capital One and their success? Actually just sorry, how did they, what product really broke out for them? Just what is Capital One success?
- [57:33]
Eric Lyman
I think there's a lot that makes them amazing as a company. Both the founders are excellent. Rich Fairbank, Nigel Morris. I think it's worth people reading up on their stories.
- [57:45]
Kevin
It's founded in 90s, is that right?
- [57:47]
Eric Lyman
So not quite from a legal standpoint.
- [57:52]
Kevin
I'm very woolly on my Capital One history.
- [57:54]
Eric Lyman
I think that legally the incorporation in some sense for Capital One financially I think it was in 1994. But the actual start traces back to the 80s. At the time Rich and Nigel had met, they were consultants and they had this insight that the business of credit cards was, while it was lucrative, was not serving most of the country. The way you could kind of think about credit cards back then, you know, Diners Club, maybe others have heard of it, it was sort of, it was a way for like rich business people to get together and have lunch and like they put the car down and you know, the, the restaurant would pick up the tab and they could go and pay the restaurant back later. And, and they had kind of navigated that and, and kind of the, the simplification is if you had a very high credit score you could get one of these cards with the benefits that it had. And if you didn't have a credit score that met that, you could have a debit card. And that was basically it. It was like a very kind of linear cutoff. And what Rich and Nigel, the insight that they had had is there must be some curve. We should be able to test this. Maybe we give people cards that have above an 800 credit score or something like that then. But what about 790? There might be people there that can go and pay for this. And the way we could go and take on the cost of this, maybe we charge them a somewhat higher interest rate until they prove kind of their efficacy. And if 790 works, let's go to 780.
- [59:27]
Kevin
So it's kind of the BNPL of its day. There is a population who are, for whatever reason just below the threshold where banks are giving them good access to credit, where you can actually very profitably lend to them.
- [59:38]
Eric Lyman
This is right, exactly. And so they in the 80s were functionally pitching all these different banks to say, we should go on this exploration. We'll even run this for you. Let us go and run this. And they went door to door to door to door to door.
- [59:55]
Kevin
And the banks didn't buy it.
- [59:56]
Eric Lyman
They didn't buy. And then finally there was a bank in Virginia, Signet bank, that said, fine, we'll let you run it. You can come join, we'll give you this crew and some resources to go build this. So they built this as this division inside of it. And it started to work. As this was going on, the computer revolution was taking off. And they. It was sort of an unfortunate acronym, but they called it ibs. It's not.
- [60:24]
Alex
Something something.
- [60:25]
Eric Lyman
Yeah, yeah, it's information Based strategy. And they said we could use different pockets of data and run these. You know, before there was big data, there was this kind of data we could go and test. You know, maybe this person has a balance of $8,000 at this bank, we could send them an offer at this interest rate or this kind of, you know, you don't need to pay back interest for six months or 12 months. And they could start to go and see the mathematical return against this. And this division started really working and it got so profitable, it became a problem for the business and they convinced them to spin it out. And so in 1994, that is the founding, as people know, Capital One today, but it actually was, I think, almost a decade in building to actually go and do this. I think that there was a lot that they got really right. One, I think that they took a much more of a first principles view of the business. Whereas others said this is a profitable product, I'm going to do it like the other person and use kind of scale and distribution advantages. They said, well let's think about the product nature itself. There's different. Everyone's making money on interchange. Maybe there's lending could work and you could kind of have different strategies for different types of populations. They did this so large where I think at one point they were the largest Customer of the U.S. postal Service. Sent out so many offers. I think until Amazon took them over. There was a period of time that they, they did this so incredibly experimental. Yeah, they kind of carved the path and showed how do you go from credit facilities to for fintech founders eventually maybe you become a bank or buy a bank and carve that path. So there's some tactical lessons. I also think they've done a great job of building a great and durable brand. One of the things that Capital One has done very, very well I think has focused on like what is the consistent visual message, what is the aesthetic and how do you stand out in this kind of busy and different world. And so there's a lot of pieces to what's made that company work.
- [62:22]
Kevin
And they've also remained focused, which a lot of banks haven't, right?
- [62:26]
Eric Lyman
I would say so. Well, I think that's, that is a rewrite of history. They were doing like cell phone financing, healthcare financing. They were a part of.
- [62:38]
Kevin
They've come back to focus after wandering in the woods.
- [62:40]
Eric Lyman
They had some jv. It's like America one I think it was called with like competing with Amazon. They were actually like the most experimental business ever in a lot of ways. And I think it was Hibernia bank in Louisiana. And this was after Hurricane Katrina. I think it was maybe during it or just after they were able to buy and it was like it was an existential question for them. And I think that many people worried about. You knew this like well too from the BNPL businesses where if you're kind of a lending based business and it's fine when interest rates are low, but if there's a crisis and people don't want to lend to you, it can just break your business. And so they had had these kind of like scares and they said we need a stable kind of cost base. Eventually they bought a bank which was in a lot of ways very good. They had kind of the deposits as this durable, stable, low cost of consistent capital base. But the flip side of buying it was they had to reconcile their culture of like crazy experimentation of trying Everything to we're a regulated bank now. We gotta be bank people. And it's more than just an attitude thing. Like if you are, you know, a nationally chartered bank.
- [63:54]
Kevin
Yeah, it's real strict shirts. Yeah.
- [63:56]
Eric Lyman
You know, like look, it's to the level of, let's say the bank fails on Monday night. There is personnel, those guys in windbreakers in your office and they've probably been working there for some time before, you know. And so it's. I think there was a change in some sense. There was experimentation. I think within certain constraints would be how I would describe the Capital One post. Buying a bank versus before would be my read of it. But when you look at them in the 90s and 2000s, it was like them and in some ways, like name the high flying tech company. They were right up there in terms of share price growth and they started re achieving it I think in the late 2010s. But it's a fascinating company.
- [64:48]
Alex
I mean I think the talent pool so at a firm, our first like really good risk person. But this is true for every fintech company. It's just like actually this is kind of cool.
- [64:56]
Kevin
I played Billy Alvarado, our first co op. Grew up in Capital One.
- [64:59]
Alex
I play the piano and my teacher was taught by somebody who was taught by somebody. There's actually a chart. You can look this up up. Czerny and Beethoven taught everybody who ever taught anybody. So like Lang Lang or Yujo Wang. Like pick any famous pianist today, they can always trace their lineage 100% of the time to Czerny, Carl Cherny or Beethoven.
- [65:20]
Eric Lyman
Yes.
- [65:20]
Kevin
Capital One is capital.
- [65:21]
Alex
Capital One is like the churn.
- [65:23]
Eric Lyman
Our head of risk, Sri Srinivasan, he's amazing. Came from Capua, the same boss, 10 years apart actually in some sense. And, and all the heads of risk for all modern fintechs that came from Capital One.
- [65:38]
Alex
Well, because it's one of these things where you know that you don't want to just hire for intercept, you want to hire for slope. And this is the problem. It's like you find oh here not to pick on bank of America or Chase or somebody. But it's like, all right, this person clearly knows how to do their job. The bank that they work in is worth a lot of money. But like they don't necessarily have, how do I put this delicately? The slope. They won't know what that means because they don't know what slope means. But seriously, like the guy that we hired just so he was very, very smart and that was the key Thing about Capital One is that like they didn't hire banking people, they just hired smart people. And it became known as the place where smart people went. And actually the fact that companies would poach people from Capital One actually added to the alert. It's like I want to work at McKinsey because at the end of McKinsey I'm going to get a better job somewhere else.
- [66:24]
Kevin
Capital One, job market.
- [66:25]
Alex
Capital One actually had, it did have that imprimatur and I think part of it is it's the only founder led institution.
- [66:32]
Kevin
Last question, Eric. We're talking about banking here. You have a Treasury product. Yes, in five years. Where do businesses keep their money? Is it with, I mean statistically mostly, you know, you mentioned 2% on ramp. It's even higher today in traditional banks like a Chaser or bank of America. There's also Neo banks, you know, the, I mean kind of bank like entities like Mercury or Revolut or Monzo or things like that. That there are companies like Ramp, where you started in spend cards but maybe moving more into Treasury. How do you think that shakes out as a market?
- [67:07]
Eric Lyman
So as a macro point, I think there is an incredible amount of money made by institutions who are enjoying the profit pool and sharing very little with their end customers. If you think about the implications of like the federal overnight funds rate, this is basically saying hey, if you want to go and just.
- [67:29]
Kevin
It's insane that there's so little yield sharing in the current market.
- [67:32]
Eric Lyman
It's crazy. I think that the national average for businesses, right, these are sophisticated entities with personnel. They're supposed to be able to manage and put their funds in some place that's more high yield. I think the national average on checking accounts is 0.07% in the US and.
- [67:49]
Kevin
So I'm guessing you don't believe that bank of America and JP Morgan and all these folks will wake up more altruistic one day. And so what is the competitive process by which you think we'll get there?
- [68:00]
Eric Lyman
I think that new businesses, whether it's they have their own charter or they work with banks too, that you know, they're, you know, this is not a monopoly. Like people like they have competitor, everyone has competitors. And it is a market that evolves. Like I think that that rate will go up that the easier it is for people to, whether it's to you know, create depository institutions, create accounts at these institutions or create stores of value maybe even outside of these systems, maybe in a stable currency. And so I think that rate goes up. I Think part of what's driven the extremely rapid growth of ramp treasury is it's just a vastly better deal for customers. Like, why are, you know, maybe you keep three months of just walking around money in your checking account, but. But if you know the funds you're going to receive and what you're paying out, well, we can move funds on the day payroll is coming due into that account and then every other day make sure the funds are earning the highest rate possible. And so I think from a macro perspective, these things tend to go up in terms of the relative yield. I think there's another question of slack in the system. If you have more and more money, can think, right. If the dollars in your company have some level of intelligence, right? Like it's able to kind of determine when can it be spent, under what circumstances. It's increasingly recorded in real time. And there's some reasoning around this, some ability to kind of opine of where should the next marginal dollar go. And you have systems that are able to think infinitely about these things even at 3am in the morning when most of your team is asleep. Well, once you determine, like, maybe you'll determine I should keep the funds in some level in like a 2% or a 4% yielding account. But I think more of those dollars will go in flight actually to go spend to. If you have a business that makes an 8% profit margin a year, that's a lot higher than what you can earn in the overnight rate. And so in some sense, I think.
- [70:07]
Kevin
You have the dual effect capital allocation.
- [70:09]
Eric Lyman
I think more dollars will be put to work. I think I agree with Alex's macro point of if you kind of understand counterparties, you understand more information. I think that one, the cost of financing should go down. And I think more dollars should be in the system. In some sense, it's actually a waste for everyone to have your dollars just sitting in a bank account who does that benefit?
- [70:29]
Alex
But it goes back to your time point. And it's like the reason why I got mad at Chase a while ago and I still have a Chase account. And like, why is that? It's like I have a life insurance policy. I don't rem. It's just too much work. This is a true story.
- [70:42]
Kevin
Isn't this an issue if you die?
- [70:44]
Alex
Yeah, I mean, well, but they'll pay my wife. I just don't know how to log in and change the bank account.
- [70:48]
Kevin
Right.
- [70:48]
Alex
So they'll send her a nice letter, I'm sure, some flowers. But you know why? Actually, this is true story. I wrote a check for somebody's bar mitzvah.
- [70:58]
Eric Lyman
Mazel tov.
- [70:59]
Alex
Has not been deposited. Do I want to be the schmuck who has the bounce check?
- [71:04]
Kevin
Right.
- [71:04]
Alex
No, I don't. So it's like I.
- [71:06]
Kevin
This kid is keeping you a chase.
- [71:08]
Alex
Yes.
- [71:09]
Kevin
Well, great to see you.
- [71:10]
Eric Lyman
You too.
- [71:10]
Alex
All right. Thank you.
- [71:11]
Kevin
Yeah.
- [71:11]
Eric Lyman
Thanks for the Guinness. It was a great.