305: What is Decentralized Finance?

Catch the full episode: https://www.wealthformula.com/podcast/305-what-is-decentralized-finance/

Buck: Welcome back to show everyone. Today my guest on Wealth Formula Podcast is Brian Hartzer. Brian is the chairman of a fintech startup for pay and a senior advisor to Sayers, an investment advisory firm and Quantium, a Sydney based data science company. He’s also author of The Leadership Star, which we will talk a little bit about later in the show. But, Brian, welcome to Wealth Formula Podcast.

Brian: Thanks. It’s great to be here.

Buck: So, Brian, obviously, you’ve done a lot of things. You’ve been involved at high levels as an executive in financial institutions and all that. One of the things that my audience is going to be very curious about is this technology sort of the big phrase, decentralized finance or just defy? Can you talk a little bit about what exactly this technology is and how it’s potentially altering the current banking system?

Brian: Sure. Well, let me talk about default, but I might just go a little broader first, to put it in a bit of context, if that’s all right. I think we’re in an incredibly so I was previously CEO of Westpac, which is one of the world’s biggest banks. And going back ten years ago, we were looking at the growth of technology and how it was changing finance and concluded that this is one of the biggest changes periods of change for finance that we’ve seen in decades. And broadly, there’s two reasons for that. So one is on the demand side, the way customers want to be served. And we’ve seen with Coba, the acceleration of people moving to digital channels has been huge. People are likewise experiencing new businesses like Uber, and they’re using Afterpay to buy their fashion. They’re using Canva to create their presentations. And they’re expecting that everything they do in life is going to be incredibly easy. And so that’s changing what people expect of their financial institutions. And then on the supply side, which is predominantly about the technology side, you have standardized platforms that are bringing down costs and allowing new competitors to come in. And then you also have new technologies like the blockchain, which essentially allow information to be stored outside of the control of one central authority. And so what DFI is is sort of putting those things together and saying, well, what if we don’t have to rely on a central bank or individual institutions to tell us how much money we’ve got and where we’ve got it and when we can transfer it? What if we embed that technology broadly in the blockchain to allow people to run their money essentially on autopilot? And will that allow us to bring down costs and bring down for some people, it’s this idea that you won’t have the oversight that regulators and banks would have of transactions. And what’s going on now. I personally think a couple of things about this. One is, I think betting against regulators and governments to be able to keep an eye on what’s going on in financial services is a bad bet. I think generally governments are going to win is my view. However, there are some really interesting concepts that this creates. And one of the ones which I’m sure you’ve probably talked about in the past, this idea of smart contracts. Sure. And when I thought about this, I think if you think about it as to what’s the actual problem that you’re solving rather than is this a cool technology? There are definitely examples of places where there are middlemen taking cuts along the way of financial services, which could potentially be taken out. And my personal favorite example is music where you think about the royalties that get paid from, say, a radio station up to a middleman to another middleman to another middleman to an album company, which eventually trickles down to the artist with decentralized finance, you could theoretically get rid of all those middlemen and allow people who legitimately want to pay to use a digital asset like a song, pay that money just purely directly to the artist that created it. I think that there’s some interesting developments in this, but I think this idea that the financial system is going to break down is probably fantasy.

Buck: Yeah. And along that line, when you talk about all those middleman and the commissions and that kind of thing, I would also think that you being part previously of a very large traditional bank. I mean, that’s probably not viewed as a particularly favorable technology if your business is banking. Right. I mean, financial institutions largely run on those kinds of transactions. Is that fair?

Brian: I think there is a sense a lot of people make the assumption that banks are afraid of this and that they’re fighting it personally. That was not the case for me because I think so much of the business is in legitimate needs of businesses and consumers to do things that continue to need banks. So I didn’t spend a lot of time worrying about that. But I did think this is quite interesting, particularly as it potentially takes cost out of the system. Banks spend huge amounts of money maintaining all sorts of infrastructure that new technology can potentially cause to be reduced in cost. And so I think there is a potential transformation of the cost side of the banking industry, which this stuff could enable.

Buck: When you talk about the regulators and the fact that betting against the regulators is not a good bet. And I think that’s a reasonable thing to conclude. Let me ask you, is that there are projects, there are protocols that are trying to work within the framework. I know in particular, even in protocols specifically, that I have an interest in, like Hedera that’s working with institutions and that sort of thing where they’re taking a significant amount of time on compliance. Do you think that those kinds of things are going to pay off for the cryptocurrencies and the ledgers that are actually paying attention to it?

Brian: So I think there’s no question that something is happening with crypto in a lot of respects. And then, as I say, there’s a lot of legitimate use cases like international trade, for example, or foreign exchange or these other things that are very costly that can be reengineered. And as a result, I think that from an investment point of view, investing in the infrastructure of crypto in all its different ways seems to me generically like a good idea. The difficulty I certainly have is judging which of these things is going to be the one that works. When I was at Westpac, we made an investment in Coinbase very early on that did incredibly well. Sure. And my rationale on that, I remember having a conversation with the CEO at the time of Coinbase was, look, I don’t really know whether Bitcoin is going to work or Ethereum is going to work, but I can see that something’s going to happen here, and you guys seem to be the best prepared to play that whatever ends up happening. And I think for an investor, that would be my personal tip is don’t bet on the exchange, but picks and shovels at a gold rush was my rationale

Buck: If you would, I want to get to Beforepay in just a moment. But let’s kind of again continue to outline sort of how would decentralize finance in the way you think about it, with regulation and all that? How would it function? Because now you’re not talking about having a chase or Wells Fargo or the bank that you’re involved with in Australia. You’re talking about a decentralized system. So how does that look and how do you regulate something like that?

Brian: Yeah, well, the interesting thing is, as people are thinking this thing through, there’s been some interesting papers written recently about the fact that actually you still end up having some level of centralization in terms of the tools that people use, the clearing houses where they keep track of what’s going on or can access each other marketplaces and the like. So I think I can’t quite get my head around how you couldn’t end up needing some form of central coordination. And once you have that, I think you have an ability for regulators one way or another to keep an eye on what’s going on. I do think there’s going to be some I don’t think we know what they are yet, but there’s bound to be some sort of platforms that emerge in this.

Buck: So really the thought is that technology realistically may not be there to replace the banking players, but to make the system more efficient.

Brian: Quite potentially. Yeah. And I think there’ll be winners and losers in that. Sure. I don’t think you necessarily end up with the same number of banks doing the same amount of things with the same relative profitability. I think there are going to be winners and losers.

Buck: What are your thoughts on the Fed and the Federal Reserve banks, the decentralized tokens and those kinds of things? What role do those play?

Brian: Hard to say. I mean, it seems to me like the Fed is really focused on the money supply generally and keeping an eye on local and regional economics and having input into those Macromonitor decisions. So I wouldn’t necessarily see the Fed there. I think you’ve got other regulators. The SEC is an obvious one that will take more of an interest in it over time.

Buck: But specifically, we’re hearing a lot about decentralized tokens, the central bank tokens, and I’m just trying to figure out what kind of role

Brian: Are you talking about nonfungible tokens here?

Buck: No. Talking about the decentralized the US dollar.

Brian: I see. Sorry. Crypto dollars and so on. Yeah. I haven’t thought deeply about this, but the extent that I have, I think a dollar, a digital pound. I think those sorts of things seem to me like the logical extension. Why would you continue to print physical money if you had confidence in the reliability and the security around the digital dollar? I think that’s certainly a likely development

Buck: Although one might argue that we already have credit cards and other types of digital forms of money, and largely it’s not a cash based society. Right. So maybe it’s again, just an efficiency issue.

Brian: Yeah. I think that’s the well, the debate becomes do they want to have visibility on where the money is going? I mean, the advantage, obviously, of physical cash is that for some people is that it’s portable and you don’t necessarily it’s untraceable. So the question is, is there a legitimate need for untraceable currency? And that could be a digital dollar.

Buck: Right. So let’s talk a little bit about Beforepay. This is your company. What was the idea? What was the problem that’s solving?

Brian: Yeah. So we call it a pay on demand service. And essentially this is recognizing that there’s a huge portion of people who live paycheck to paycheck and don’t necessarily have access to an overdraft line or a bounce protection or whatever it might be from a traditional bank. And so want the ability to take a very short term loan when they get an unexpected expense come along. And the other part of the idea was that payday lenders who are out there, who a lot of people go to are really a pretty egregious business. I mean, when I was at Westpac, we stopped funding that industry altogether because we were really uncomfortable with their behavior. You can get people into a debt cycle and so on. So the idea of Beforepay was to interrupt that idea by having this notion that you can take a short term loan, but you have to pay it back when your pay comes in. So as soon as your pay comes in, the money is debited, plus a small fee, and then that’s it. As we say in the industry, revolve the debt. You can’t accumulate more and more debt. It’s a one off. You pay a transaction fee. That’s it. And we felt that that was a nice way to solve a genuine customer need someone’s car breaks down or their registration bill comes in, or they get an unexpected bill or they’ve got a medical bill or something, and suddenly they need some money, but they don’t have the ability to go to a bank and get a loan. We don’t want to send them to a payday lender or a loan shark. And so this is a nice ethical way to solve that issue. And using technology, you can sign up in five minutes and you can have the money in your account instantly. So it’s quite convenient.

Buck: This is not really related, I guess, to the decentralized finance per se. Or would you say that it is kind of an arm of that?

Brian: No, it’s a different thing. It’s all part of the broad sweep of the new technologies that are becoming available because of the advances in technology, though.

Buck: Right. How about I think there was also on the Beforepay there’s some use of artificial intelligence. You want to talk a little bit about how that works?

Brian: Yeah. Well, I mean, we’re making a credit decision, so we’ve got to have a look at the transaction history of people and come to a view as to their credit worthiness for a short term loan. But the other piece that we use artificial intelligence for is to understand when people get paid, how frequently they get paid? Because we’re essentially relying on the predictability of their income stream to come in. True. And artificial intelligence has made that very possible. It sounds like a really simple thing, but when you actually look at the complexity of the different ways people get paid and how often they get paid turns out to be a reasonably tricky analytical problem to solve.

Buck: Are these algorithms a lot different from the typical automated stuff that somebody is applying for a credit card? They find out within a few minutes. Is it a lot different from that?

Brian: It’s on the same lines, but the technology that people use for that sort of analysis keeps advancing. And so we’re using the latest tools, which have made it a lot easier and allows us to give people an instant decision.

Buck: I want to shift gears a little bit because you’re obviously a former CEO of a major bank and all that, you’re pretty plugged into the economy in general. Take this opportunity to kind of get your sense of what’s going on, your forecast for the economy and inflation in 2022. The Fed is obviously looking to raise rates potentially in March. How do you see all the economy right now in the big picture?

Brian: The way that I think about this is it’s like someone has chucked a big rock into a pond, and you’ve just got all these different parts of things going up and down, and the Fed is sitting there trying to you’ve got supply chain interruption, you’ve got shifts in demand, you’ve got shifts in the labor market. You’ve had this massive, great resignation going on with people not wanting to go back to work in the same way or shifting jobs. That at a macro level creates a really interesting challenge for them to try to understand the economy. But it’s very clear that there’s been a lot of demand in many areas, and the supply chain constraints mean that we are seeing inflation, inflation in wages, inflation in goods, and so they have to go to their normal toolkit, and we have to expect them to raise rates. And I think it’s also worth recognizing that we have been living in a bit of a fantasy land for the last couple of years with the amount of money that governments and central banks around the world have pumped into their economies to keep things going. That party had to end at some point, and now seems to be that point.

Buck: I guess the question I don’t know. I haven’t really been following so much on if we’re making any progress on the supply side or not, but I would think that over time, as this pandemic starts to hopefully settle here this year, that supply change would level out. Do you feel like that’s going to happen, too, or do you feel like that’s not really likely to catch up and we need to get on top of inflation before that?

Brian: Well, I think it’s a bit of both. So I do think there will absolutely be some level of normalization, but there are still other issues going on with the issues in China, the relations between China and the rest of the world. That’s leading to some interesting dynamics in shipping around the world. But you do also have countervailing factors as well, because technology is driving huge productivity in many areas. It’s reducing the cost of a lot of goods. So you’ve just got these different dynamics going on. I do think it seems sensible to withdraw the extra support that’s been going on for the last few years. That had to normalize at some point. So I do think things will settle, but I suspect we’re in for a bumpy ride for another 12-18 months.

Buck: Yeah. And it’s unusual in that. Can you think of a time in your career when we’ve had so many different variables to deal with at the same time, the Fed is basically kind of making up things as they’re going up going on right now.

Brian: Well, that’s true, but you go back to 2008, and that felt a lot more confused. That was a truly scary time, and they were making it up as they were going along then as well. And in a sense, we’re at the tail end of that period because this extra liquidity that’s been pumped into the world economy really is still the legacy of 2008. And I guess arguably 15 years later, we’re finally starting to see that taper off.

Buck: Let’s talk a little bit about your career in terms of a lot of leadership, and I guess it kind of brings us into the book you wrote. It’s The Leadership Star. What led you to write this book and tell us a little bit about it?

Brian: I spent my first ten years as a management consultant, and then I was put in to run a credit card business for a bank in Australia, and I suddenly found myself managing 1000 people. And I don’t have an MBA. I wasn’t trained as a leader. My first leadership job was running an ice cream shop, which I did very badly. And so I found myself having to figure this out. And I had one idea which was if I could get the best people in this industry to work for me and create a culture where they could be their best, then we’ll probably win. That was my simplistic idea that took me to thinking about, okay, well, what do I need to do to get great people to want to work for me and what’s the environment that’s going to make them want to put in an extra effort? And so I heard about this concept of engagement, staff engagement, and I started paying attention to it. And I asked my HR team, who were telling me that they do a survey, and they say, okay, well, here’s your engagement score for the year. And I said, okay, that’s very interesting, but what do I personally need to do? And they just looked at me and they couldn’t help me. And that really bothered me. And so I started paying attention to other leaders, both within my company and other companies, who seem to be doing a really good job at getting their people engaged, getting good people to work for them, and just going, what exactly are they doing? And I started paying attention to that over a series of years and making lists and then trying things out in my own business. And it started to work. And we started to have, in my credit card business, really high staff engagement scores. Our profit performance was fantastic. We were the standout business in our industry, in the country. And so my colleagues started saying, what are you doing? Can you come talk to my team about what you’re doing? And one day I was asked to give this little talk. And so I sat down and I made a list of all the things that I had picked up. And then I thought, being a good management consultant, you can’t have a list with 50 things on it. So I started boiling it down, and I realized that it really boiled down to five things. And so I went in and I talked to the guys about these five things, and it turned out that they all started with C. And I had this little thing, which is I read a lot of books, but I often forget them as soon as I’ve finished. And so I had this thing about how do I make this memorable for people so that when I’m done, they can remember it. And it was for me as well. How do I remember what I’m doing? And I thought, okay, five things, five C’s. There’s five points on a star. I’ll call this the leadership star. And so my idea was, if I give you that visual image of a star, it’s got five points. And you think five points were five CS. What were those five CS? And then you can Unspin it in your head and use it as a reference. That’s where it came from. Engagement is not the only thing that matters. Obviously, in leadership, there are so many other elements of running a successful business. But in any business, small business, if you’re running a corner store, you’re running a big company. Particularly in this environment, if you can’t give people emotional connection to their work, then you’re going to struggle because people are going to go elsewhere. And so it felt, particularly in this environment with this great resignation going on, that it was worth sharing these ideas, because my argument is the great resignation is really a big indictment of leadership. It’s saying that people aren’t getting from their leaders what they need. Hopefully this book will give people some ideas about what they need to focus on.

Buck: You were at one of Australia’s biggest banks. What did you learn from that experience that you can, I guess, just give us an anecdote in terms of your book and how some of that worked out.

Brian: So where this all started for me, we started a credit card business in Hong Kong back in the early 2000s. And after 18 months, the timing was terrible. It often happens to these things. Hong Kong went into a big recession, so it’s a really bad time to have a credit card business. And so we decided after trying a bunch of things to shut it down. And I sent a young woman who was working in my business in Australia up to Hong Kong to shut this business down. And a month later happened to be when the annual staff survey was done and her results came in. And I thought they were going to be terrible, obviously, because everyone was losing their job. And she had 100% staff satisfaction in a business where everyone was about to lose their job. And so I rang her up and said, Miriam, you have 100% staff satisfaction. How is that possible? And she said, I speak to every staff member every day. And I said, okay, well, tell me about that. And she said, well, we’re not that busy because we’re in shutdown mode. So I go up to each person each day and I say, how are you? How’s your family? How’s your job Hunt going? Do you need anything? And I have a conversation, and I just let that conversation go as long as it needs to go. And then I go to the next person and I say, how are you? And she said, I have that conversation 35 times a day, and the next day I start all over and I do it again. And the result of that was 100% staff satisfaction of people who were all losing their jobs in a recession. And I heard that, and I just went, okay, there’s something different going on about leadership here that I’m not thinking about, because that feels completely counter to what I would expect. And the crux of it was caring for the individual. So the first C of my five C’s is care. But specifically, it’s about treating people as individual human beings and making them feel that they matter, that you’re interested in their success, that you want to help them do well in their own context. And I think if people genuinely believe that, it’s amazing what they will do. And just as a little sidelight on that, I caught up with this woman, Miriam, the other day a couple of months ago, actually, and she told me that she’s still in contact with all these people that she fired 20 years ago and still goes to Hong Kong to see them. They still have reunions. And just imagine you’re in a business where you’re shutting down a factory or you’re shutting down a thing. Can you imagine that 20 years later you’d still be in contact with those people. I mean, it sounds really simple, but leaders often treat human we use the phrase human resources as if people are bricks or two by fours and they’re not. They’re individual human beings, and you have to find ways to connect with them in that way.

Buck: Probably a lot of lessons that you can apply outside of business as well. In this book, again, it’s called The Leadership Star Presume. It’s available just about everywhere then.

Brian: Yeah, everywhere. You want it, Amazon, you name it, and then you have a website. It’s theleadershipstar.com. Tell us what’s on that website.

Brian: Yeah. So it’s basically focused on the book. And if you go on there, give us your email address, you get a free chapter from the book. So the first chapter gets sent to you and you can decide whether the rest of it’s worth reading. So it’s a freebie.

Buck: Again, the website is theleadershipstar.com. Brian, I want to thank you for being on welfare. We have podcast very helpful for us to understand what’s going on in the tech world and your take on the economy.

Brian: That’s a pleasure. And look out for Beforepay coming to the US soon. Hopefully.

Buck: Fantastic. Hopefully we won’t need it. But Beforepay is there actually

Brian: That’s right. Your listers won’t need it, but they might know somebody does

Buck: That’s right. Thanks again for being on the show. We’ll be right back.