The Grant Williams Podcast: David Fergusson

Grant Williams (00:10):

Before we get going, here’s the bit where I remind you that nothing we discuss should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now on with the show.

Welcome everybody to another edition of the Grant Williams podcast. Something a little bit different today. I’m actually talking to an old friend of mine and I think for the first time in the history of this podcast, I need to make a disclaimer here because I have a private investment in the company about which we’re going to talk. Atlas Consolidated. It’s not listed, you can’t buy shares in it. It’s a private company. But the story is fascinating. And having been chatting with my guest, David Fergusson, the CEO recently, it felt a very good idea to actually talk with him and get an update on what’s happening in the world of digital banking because it is a fascinating part of the financial ecosystem. Without any further ado, here is my conversation with my friend and the CEO of Atlas Consolidated. David Fergusson.

Great to see you, my friend. It’s been a while. How are you?

David Fergusson (01:31):

I’m very well. It’s been years actually.

Grant Williams (01:34):

It’s frightening actually. We had a lovely Japanese meal in London, but you’re right, it’s probably two years ago now. It’s incredible how the time flies. You don’t look like a man who has been on an entrepreneurial journey. You look rather too hale and hearty for that.

David Fergusson (01:48):

Oh yes. It’s what happens when you eat your stress. You get very hale and hearty. I’ve certain what the scales to prove it.

Grant Williams (01:56):

Listen, let’s talk about what you’re doing with Hugosave because it’s a phenomenal project, as I’ve said before, but I guess the smartest thing to do is just to set stage as to the things about banking that made you want to do this in the first place. And then we’ll get into what your goals were ultimately when you founded the company. So let’s go back to before the beginning when you were looking around for a problem that needed a solution.

David Fergusson (02:27):

You mentioned the word Hugosave, which is a good start point here. Actually because of the way the company’s expanded we’ve gone past that name now. We call it Atlas Consolidated because it’s just a much bigger entity now. I’ll explain this as we go through, but ultimately our big interest in the space came from the fact that frankly, a lot of people don’t get great service from their financial institutions. It’s expensive, it’s not particularly flexible, it’s just not a great experience. And one of the things that became very clear to us is that the technology was developing at such a rate that we would be able to provide much better services to much more people at a much lower cost. Everyone’s taken a look at their pension pot and they’ve worked out, well, if I pay this amount of money in over a lifetime and my pension provider is charging me these fees, if I think about the aggregate amount of money I put in, they end up with 40% of the compounded return at the end of my life. That seems like a lot.

And so you reverse the calculation and you think, well actually, what does it mean for an individual who gets an extra half a percent on their investments or savings and half a percent less on their mortgage, for example, and over the course of a lifetime they’re 80, 90% better off. And these are the sorts of numbers that we looked at, we thought, this is just unassailable. We have to be able to do something here. And that’s what led us to the original project, which was Hugosave in Singapore, which is the investments in savings app. And then as we built out that it became clear that there was just a need for a better mousetrap, for want of a better word. The banks of financial institutions needed a better, more flexible platform that allowed them to provide these services and we unwittingly built one as we built Hugosave.

And so we quickly looked at our platform, we thought, okay, hold on a second. How does this work for the full bank? We ended up building HugoHub, which is a core to customer digital banking platform. We go right the way back into the central bank reporting the real-time general settlements with the central banks, the payment rails, the central ledgers that people need to run a bank all the way through the product factory up to the user experience layer with the app. So it’s an entire end-to-end platform that we built with HugoHub. And so when we think about the larger business now, Atlas and Hugosave, which is the Singaporean non-bank financial institution, and now a meaningful chunk of this bank in Pakistan that we’ve started with some partners there, HugoBank. And that’s the first deployment of a full bank end-to-end solution. And it’s great. That’s how we ended up there.

Grant Williams (05:18):

Let’s go back to Hugosave and start with the beginning because that was the first product that you guys launched. What were you trying to achieve and how did that journey go? Because you certainly didn’t end up with what you set out to build. But just talk about that journey and also the actual building of something like that. Because to most people, the idea of trying to force your way into the banking sector sounds impossibly expensive, impossibly complex, but you managed to do this with a small team and at much lower cost than one would’ve thought were possible. So walk us through that journey because it’s fascinating.

David Fergusson (05:55):

Look, again, this all comes to delivering value in a flexible product. And we just looked at what was on offer and we thought, look, we’ve got to be able to do better than this. And it was candidly pretty naive when we started, although I’ve come from a banking background, I spent many years in financial services. I hadn’t really delved into the operational aspects of service delivery before. And with all the arrogance of someone who’s not focused on that area and I thought to myself, how hard can it be? Turns out very. So we built a solution. Our big idea was based around open banking. There’s no point reinventing the wheel, pulled together a load of different services offerings in this case, cards, bank accounts, savings products, gold, precious metals, ETS, and put them all into one platform that enabled a really good user experience.

Now, as we were trying to build that, the platforms did not exist to pull together these different services. It’s very easy to do a single product solution. Brokerage, well, a brokerage is a brokerage. Time management’s time management. But if you try and put together cards, bank accounts, foreign exchange, precious metals, ETS, every single one of them has a completely different settlement process. Every aspect of the completely different. And in order to blend user journeys together, you need a much more powerful platform. And that was the real genesis of the platform itself and that’s how we built it.

Grant Williams (07:28):

What were the barriers to entry as you went through the process, not just in terms of the complexity of what you’re trying to do, but also the licenses you need trying to get a license for a bank or understanding the problems there. And a good friend of mine who you know as well, Rick Rule has just managed to get Battle Bank up and running in the US after I think four years of strife, basically pushing a boulder up a hill. So talk us through those complexities, the licensing and the big issues that you faced.

David Fergusson (07:55):

Let’s be clear. Licensing of financial services is a huge barrier to entry and a difficult arduous process. The more powerful the license, the harder it is to get that. I spent many years in financial services and being a responsible officer for big financial institutions, which helped. And prior to starting this entity, we’d already started to fund management business in Singapore and variety of other regulated entities here. So we were well known to the regulator. So when we applied for the license that underpinned Hugosave originally, it was made easier by the fact that we was relatively known quantity I think. One always supposes these things about regulators, but as you might be aware, they’re pretty guarded about their opinions that you find out really in an afterthought. But the regulators here in Singapore are very good and they’re very procedurally driven. It’s a very disciplined process and we knew to expect that. And so we followed the process that applied for what we have here, which is an MPI license, which is notably not a bank license.

But our thoughts in relation to open banking was, look, if you are trying to achieve anything in financial services, it starts with two things, an instruction of some form or other which software deals with and a payment for which you need a payment services license or a major payment institution license. And so we thought if we can build a software platform and get a major payments institution license, then we can provide services that mimic just about anything with this one license as long as we manage the compliance of all of the other areas of business in an appropriate way with the various different counterparties that we brought together. The genesis of it was to have a very infrastructure-like business while being compliant in all aspects of operations of our business and making sure that we’re compliant with everybody else’s and making sure that we should really drive down the cost of operations. And that was it really.

Grant Williams (09:56):

The Singapore regulator, the Monetary Authority of Singapore, the MAS, as you say, they’re a very good regulator, but also Singapore … If you’re in Asia looking to set up anything remotely complicated and it needs a license, Singapore in many ways may be the worst place to start simply because it is so good. There are plenty of places in Asia where you probably would’ve found a much more lenient regulator, a place with far more ways to get around blockages in the pipes, I would imagine.

David Fergusson (10:22):

That’s probably fair. But what I would say is that if you want to set out to start a global business, you want to start up with the lowest common denominator. And while the MAS are strict … And it’s good that it’s strict candidly. We like that they are. They are very accepting of innovation as well. They look to what we were doing. It’s certainly innovative. And as long as we convinced them that what we were going to do was appropriate for consumers, they were happy to accept it and then they did. And we practically had nothing off the back of it. And again, the benefit of Singapore is that when you go to other jurisdictions, it’s highly regarded. And of course we’re applying for a license in the UK at the moment. It’s very clear that as a result of the business that we’ve already got in Asia, it’s just not a start-up, in’s not a first-time application. The same was true when we applied for the bank license in Pakistan. The barriers to entry from a regulatory perspective are enormous, and being able to manage that on a systematized basis has been an enormous competitive advantage that we’ve developed.

Grant Williams (11:27):

So let’s talk about the nature of open banking because there are plenty of … And people who listen to this will be familiar with the Revoluts of the world and the Wise and all the various … Starling and Monzo. There’s so many of these platforms now, and it is extraordinary actually. Once you use one of them, you realize what a racket the whole thing has been your entire life basically. Talk about the ability to deliver these banking services essentially free for most of the simple ordinary things that we’re so used to transacting on and getting charged for all these years. Talk about the rise of that and where you think that goes from here.

David Fergusson (12:07):

Look, it’s absolutely fascinating. And I will say we are moving into Europe as we speak. We look at some of the service providers in Europe and they are really phenomenal businesses. Revolut is a great business, Monzo is a great business, they’re very good. And one of the things that they’ve taught, frankly, the rest of the world is that to start with people like them because they’re convenient, but they don’t necessarily trust them with large amounts of money because it’s a small business. But the reality is that over time it’s high velocity activity when you operate at a card-based business or a payments-based business, you are always interacting with it. And so the reinforcement that the consumer gets by having a good experience time and time again means that they build trust actually quite quickly and they then start migrating with much larger amounts of their financial life to these platforms. And again, it becomes self-reinforcing. So I mean, it doesn’t surprise me that Revolut is the way it is because if I was a CEO of a high street bank in Britain, I would be very nervous about someone like Revolut starting to offer things like mortgages or car finance because it’s just going to be so much more convenient to use than your existing provider.

So to us, there’s a diffusion curve that you have with the adoption of any product and the diffusion curve for digital finance. It was slow to start with, but now it happens very quickly. Nine to 12 months, you start to see people move large aspects of their financial life onto these new platforms. I’m not a huge social media person, but on a LinkedIn post a few months ago, I basically waved around one of those children’s passbooks that you have for your initial, your first savings. So I had one. I opened my first account at the Chartered bank in Singapore, which was a precursor Standard Chartered when I was two and a half years old. And I’d had a bank account with Standard Chartered uninterrupted for the following about 50 years. And I shut my accounts with Standard Chartered and finally about six to nine months ago, just because you know what, Monzo does what I need better, and that’s it.

Grant Williams (14:32):

To be honest, that’s been exactly my journey with this as I’ve used really for convenience, one of the digital banking platforms. And I’ve followed the exact journey just laid out. So I’ll put a little bit of money in there and I’ll top it up and when I need to use it, I’ll put some money in there and it’ll make life easier. If I’m in London or whatever, I want to use a tube, I can just … Stupid little things. And over the last year and a half, I’ve done exactly what you said. I’ve begun to trust it more. I’ve used it for a lot more stuff and it makes everything so much more straightforward. But I’m curious to hear about when you launched Hugosave in Singapore, how did that go? Because most of these open banking platforms were European based, so talk a little bit about bringing that to Asia and the reaction you got from people.

David Fergusson (15:19):

The reaction was very good. Customer acquisition costs was pretty low. That was our biggest concern was that it was going to cost us a fortune to address consumers. It didn’t. The consumer adoption was good. It was a convenient, cheap platform and they liked it. They got access to different products that they couldn’t get otherwise. They just liked it. But it’s a small part of the overall business. Now, if I go back and think about the journey you’ve talked about in relation to yourself and using a bank similar to me moving onto these digital platforms, one of the things that’s really important to consider is that although the technology does drive the convenience, it also drives the fact that you just don’t need to charge so much anymore because it’s so much less expensive to operate. And again, being able to offer these services that used to be really expensive for nothing is the thing that consumers love.

And what’s fascinating about it, whether it’s with Hugosave or HugoHub or any of the customers that HugoHub has, it’s that ability to price the traditional institutions out that is driving the consumers to this industry in their droves. And I think that what’s fascinating about it is we’ve seen this all before. If you go back and think about the brokerage industry and 25 years ago you’d pay one and a half percent buy and sell stock, you go back 15 years or 20 years, an active fund manager would charge you one and a quarter percent for his active fund management service and you’d go 1% in and 1% out in order to buy the funds. Today, the online brokerages mean that you basically pay virtually nothing for your online brokerage activity. The ETFs have made sure that cost pressure on the fund management industry cycles you down to about 20 basis points for most funds these days. And that’s happening to banking right now. And it’s platforms like ours that allow that. And the people who benefit are the consumers.

Grant Williams (17:17):

That throws up red flags for the banking industry and its future. And the banking industry is obviously the most entrenched industry there is. Now you’ve had plenty of experience on the other side of the wall in investment banking over the years. So what does this mean for the banks? Do they have to get their arms around this and start hoovering these things up because they’re not going to go down without a fight and they can’t change their own infrastructure. There’s no way they can cut the costs to compete. So what happens from here?

David Fergusson (17:47):

There’s been a journey for the banks to get to this realization, and it’s the classic entrenched oligopolist position, which is the internet, it’ll never work. No one will like it’ll never take off. Then it’s oh, we’ve got an internet strategy as well. Basically started off by saying, “Oh no, there’s too many risks. No one will ever trust them with their money.” And then of course they started to. They didn’t have a particularly sophisticated product and people still need to come to us for their more sophisticated products. And then of course the sophistication increased and then suddenly it’s a case of, oh, we’ve got to do something now. At which point they start to do things very aggressively. Now there’s some very interesting charts that if I can describe them, it would be useful, but I can’t, so I won’t try. But look, the critical thing is that these banks, particularly the medium-sized banks that have always had a slightly competitive disadvantage to the larger banks. They are certainly able to change out or modify their infrastructure in order to get these cost benefits in.

And so one of the things that our platform does is allow financial institutions to run what we call a parallel core so that you can effectively hold your existing core there, your core banking platform there, you can gradually build up what I would call digital solutions alongside your core and then migrate the activity over time. Because the terrifying thing, the most terrifying thing for a bank is the idea that someone says, “We’re going to force you to migrate from one system to another,” without describing how it can be done in an easy way.

So look, it is possible, and increasingly the solutions are being delivered by people like us with a wholesale platform and they will simply have to be implemented. So the pressure is there that the acceptance is very clear amongst basically every single bank CEO, that they need a solution and they need it right now. And there’s also a realization that it might not be as expensive or as painful as it needs, which is one of the reasons why we’re so involved in the wholesale side of things, IE the platforms itself rather than just the retail side of things. But if you think about the numbers, you remember the days of the three six banker, the guy who had taken deposits at three, lend out at six and go off and play golf at three p.m in the afternoon. Those were the numbers. Now that 3% net interest margin spread came down with that period of quantitative easing and very low interest rates. And as interest rates have started to rise, it’s stayed low. Banks are basically stuck with a lower interest margin now than they’ve ever had before. And as a result, ROEs are through the floor, which is why a bank that used to have a three six model used to trade at two times book because it had an ROE of 20%. Now these guys have all got price to books of .3, .4 because there are ROEs 3% if they’re lucky.

And so the only way to address that is non-funded income. That comes through really great services, typically digital services. You look at people like Revoluts, Revoluts accounts and they’ll tell you that they’re getting fee income through the door like it’s going out of style and then carry low operating costs. And that’s the solution. You have to reverse the bank P&L and you go, okay, what’s your start point? The start point here is an operating costs, and then you divide your operating costs by your net interest margin, and that’s how big your balance sheet needs to be. That’s how you work your way through these things. But again, the critical point is your start point is your operating costs and making sure that you manage for that.

Grant Williams (21:22):

The big part of that operating cost is obviously fixed infrastructure and staff. These banks are massive. It’s fascinating spending some time in the UK this year and seeing how many banks are closed, how many towns now don’t have a bank. Not a physical branch of a bank anymore. And that seems to have happened very quickly. As I sit and think about it when you realize that the reasons that you would need to go into a branch these days are minimal, people my age might because they want to have all their pennies counted and put into rolls or whatever. But the need to go into a branch is almost gone. So when we talk about cutting their overheads, then their OPECs, that’s going to be potentially significant. We got what? Probably three, maybe four major banks in the UK, each of which probably employs, I don’t know, 30,000 people maybe. I don’t know, but it’s in the 10s of thousands. It may not be 30, but that’s potentially a significant problem.

David Fergusson (22:20):

It absolutely is. This is an area that most people don’t understand, although branch networks, they are expensive for sure. They have a lot of people working in them. Actually the biggest cost of running a high street bank are the old legacy operational systems that have been built up over time by acquiring one system after another, patching it together, sticking it together, and then having all the people that sit there and make sure the wheels don’t come off the wagon on a daily basis. That’s where the real cost lies. It’s all went and good these banks going, okay, we’ve got this digital front end, great, I’ve got this app, and Barclays got a good one and Lloyds has got a good … They’re all pretty good now and that’s all well and good. But unless you can actually fix the Frankenstein’s monster that you’ve created that is the operations of the bank, you’re really only touching the sides of the cost reductions that you need. And that’s the hard part.

And it’s also has been traditionally quite risky, which is why CEOs have avoided it like the plague. But now people like us are coming in and we’re presenting solutions which say to people, look, it doesn’t have to be that risky. You don’t have to do it all at once. You can do it carefully and deliberately and with certain sub-segments, certain products .I think you can move it across in a gradual way and you can get those benefits over time in a way that doesn’t risk your financial institution.

Grant Williams (23:42):

So what’s the journey? You mentioned earlier on that the missing component was car loans, mortgages, that kind of thing. What are the impediments to that happening? Because the banking lobby is extraordinarily powerful as we all know, and one can imagine that if this is the last hill, they’re going to die on that hill because if platforms like yours end up with that ability to offer those products, it’s almost game set match at that point.

David Fergusson (24:09):

It is. There are some really difficult challenges that come around in some of the nuances of financial services. So look, a machine has been able to do binary calculations for very long period of time. That’s not novel. But there are areas where you need to be able to have a very flexible rule sets and frankly, very empathetic rule sets in order to either abide by certain types of regulations or offer certain types of services. So in Singapore, one of the things that we offered was a trust. Now a trust in Britain, it’s a terrible word when it comes from a tax perspective, but in other parts of the world it’s just a fiduciary activity. Now these fiduciary activities are typically quite nuanced in their approach, so it’s actually quite difficult to set up rules to manage the system at scale. We built that in a logical way to allow for that. And being able to manage these fairly nuanced activities has proven to be a very powerful tool when it comes to the broader banking sector.

And I’ll explain why. So imagine in the UK that you’ve got people who’ve got a mortgage and the guy’s lost a job and it’s been a tough time and having difficulties facing the bank when it comes to paying the loans that the due, these people end up being quite vulnerable sometimes. And the last thing on earth, you want to be seeing is your customers getting involved in things like self-harm and other dangerous things. And there are very specific regulations that involve a duty of care from a financial services provider to their customer. Now that’s very difficult to do in a digital format, but these days with these learning models, we can actually start to identify who are vulnerable customers and then you can stream them into different processes where there are actually non-digital solutions. You take them through an escalation process and someone who is trained to deal with these sorts of situations suddenly gets involved in the user journey and it becomes actually probably better than one that is purely human, IE a traditional bank approach. These are the things that are now enabled by technology. They’re obviously compliant, which is important. They’re very sensitive to the needs of consumers and obviously they’re very expensive. These are things that candidly, even when we started the business, we had absolutely no idea that this would be possible. And so these things are the fascinating but little use cases that just no one considers.

Grant Williams (26:45):

When you think about the adoption of AI, you’ve led me onto my next question perfectly there because it does seem that this is absolutely perfect for AI. Perfect for using what AI can deliver in terms of putting the customers into the right place, getting the right products. So as you say, when you started this with Hugosave AI was something in science fiction books. It wasn’t something you could actually think about. As you’ve built this, you’ve built it in parallel with the rise of AI. So how has that journey been with implementing AI and bringing it into the platform?

David Fergusson (27:20):

It’s been nothing short of absolutely staggering, staggering. There isn’t a day that goes by where I don’t think, oh my God, that’s a game changer. We knew that having a very clearly architected data regime behind platforms like ours would be absolutely critical, and it was obvious that within the existing financial institutions infrastructure, that was a major problem that most banks were having. They had all the information, they just didn’t know where it was or how to access it on a timely basis. It’s not that they don’t have the information, they just couldn’t access it. So when we started the platform, we knew we had to have a very powerful data taxonomy, so it was always accessible. Now that’s the start point. Because we’ve got this accessibility, the data, we know exactly where all of the data is, and it can be any form of data, whether it’s fraud behavior or how people navigate through the apps it’s all available and more importantly, because it’s all available human-based analysis, like a traditional statistical analysis that someone would do or allowing an AI tool to reach into the data and learn the start point is the accessibility of the data and making sure it’s all ordered in a relatively structured way.

And frankly, increasingly even unstructured data is something that AI can handle very well, but at least it’s the accessibility of the data, which is incredibly important and allows for AI to learn from … Literally, you can think of it almost like a spy sitting over your shoulder and just watching what let’s say customer services people do. Sits there, watch it and learn, and then pretty soon you’re at a point where you can turn the human off and turn the AI on. It’s amazing, absolutely staggering. And it doesn’t matter whether it’s from some form of customer experience through to fraud detection, anything to do with money law and any aspect of the bank is open season for AI now.We’ve just developed something which is pretty groundbreaking. We haven’t deployed it yet for regulatory reasons, but in effect, you can speak … And this is for the platform, but also we’ve trialed it with the Hugosave app in Singapore.

I’m going to be unflattering here. If you remember Clippy, that incredibly annoying thing that Microsoft tried to roll out with Windows years and years ago it’s a little bit like Clippy, but actually it works. In the sense that you can in effect speak to the app now and it’s not a scripted response, it’s a response where you say, “Look, tell me how much gold I’ve got.” And it’ll tell you. “Do you think I should have more gold?” And it’ll reach in and it’ll look at your overall portfolio. It’ll then go off and learn very rapidly what’s a sensible gold allocation? And it’ll tell you. And then you say, “That sounds like a good idea. Maybe I’ve got not enough.” And then you say, “I’d like to buy some.” At which point this conversation with the app will then continue until you’ve actually bought some gold that’s been settled. This is literally … It’s gone from the concept of information flow to do it for me and we’re doing it. This is not in the future, this is now. It’s staggering that we can do this given where we were as an industry three years ago. I just can’t imagine where we’ll be in three years time because the pace of this is so astronomical.

Grant Williams (30:51):

It’s funny because I listened to that with my former hat on being in the industry and all I can hear is, okay, you need to regulate to do that, you need to regulate, to do that, you need to be regulated to offer that advice. How can you offer someone advice about, yeah, you need more gold without being regulated? And banking regulators are notoriously slow. For sensible reasons they have to be careful. And yet the innovation, the technology is moving so fast. I wonder how that experience has been and how it’s changed because the two doesn’t seem to work together to me.

David Fergusson (31:26):

Well, that’s can why we haven’t deployed it for the consumers yet. And the reason for it is that we don’t want the AI response to alter something that they think is relatively logical but might sit outside the bounds of the regulatory environment. So industry before this gets really mainstream needs to learn how to put guide rails around this activity in a constructive way. But then also because there is such a significant amount of liability involved in this stuff, that you’ll really want to test these models over a very long period of time before you deploy them. But those are mechanical things and they’re possible. I guess the point I’m making is this isn’t an if it’s a when.

Grant Williams (32:09):

I remember going back 30-something years when they first invented the fixed system. And I remember at the time how long it took because once you said, we can do this … We need working groups, we need this, we need that, we need to set this stuff up, we need to study it. And the pace that something like that moved at, which is now the background of a lot of these systems, the pace it moved at was beyond glacial. Yes, I understand it was 30 years ago. But the industry is set up in such a way that as a fiduciary based industry, they have to be careful. They have to be. So if you are telling me on the one hand every day you’re getting an oh my god moment with what we can do, I look at the regulatory framework of the financial industry and think there is absolutely no way that is geared for this kind of pace of technological change. There’s a massive bottleneck there it seems to me.

David Fergusson (33:02):

There’s a load of ways I could answer that question. Firstly, I was in the telecoms finance industry for a very long time. I used to finance telecoms companies. And we looked at the impact of data, data services and bandwidth in the mobile phone industry 25 years ago, and we were very enthusiastic about the prospects of digital banking. And I wrote reports about this 25 years ago and 25 years later we’re actually doing it. It’s like an overnight change 25 years in the making. But what is very different now is the license environment allows for new entrants and the new entrants don’t start with this legacy position. So they come in and they can disrupt very, very quickly.

The second is that a lot of tech-based businesses are entering this industry and ours is very much a tech fin business rather than a fintech business. And the attitudes and their approach to agility is just very different. And so again, they are disrupting. Of course, you then have what I would call the inert status quo and what drives them at the end of the day, their net interest margin position and their price to book is clearly one of them because it doesn’t take a genius to look at your average bank and go, there’s not much wrong with this bank other than it’s cost structure. Okay, it’s trading at 0.3 times book. We can persist with this and it can have an ROE and destroy capital from an ROE perspective for the next 10 years. Or I’ll tell you what we can do is we can shut the thing down, get book value back and start a digital bank. And somewhere in between that approach and migrating towards digital activity is what will actually happen. And it’s firms like ours and platforms like ours that enable that shift, that will be part of the process.

What we really talk about here is commercial imperative, and the commercial imperative is very obvious. But look, there’s also a regulatory one as well. So although the regulators are very wary and rightly wary of aggressive change, they’re also wary of entrenched systems not keeping up with the requirements of the industry. And you’ve seen it very clearly as you move from Basel one to Basel two to Basel three, and ultimately what will be Basel four, five, six, I had no doubt. Existing systems have a real problem determining things like operational risk and quantifying them. So while prudential regulators can sit there and go, yes, we’re all Basel three compliant, there is a degree of … I’ll be slightly careful about how I put this. But there’s a degree of see no evil, hear no evil in some of the reports from the banks that come in that says, “Our operational risks are this and we’re allocating this amount of capital for that operational risk.” They just simply don’t have the data to really justify that calculation.

Now, I don’t see the banks as having any choice other than to report in that way, but ultimately you go around the world, but there are banking problems that show up constantly, whether it’s an ATM network going down because of some form of technical problem or another technical problem being caused here, there and everywhere. The regulators are starting to look at this and go, look, okay, we appreciate we didn’t have much of a choice before. We’re leading the industry with Basel three and the expectation that people will quantify their operational risks. But guys, it’s not acceptable now for you to say that it’s not possible to do this because we know it is. There are new solutions in the marketplace that allow for much greater granularity on your operational risks, use them and use them now. And that’s another impetus that sees things change.

Grant Williams (36:55):

You threw in a line a long time ago in this conversation about Pakistan and talked about the bank. So in parallel with what you were building to Hugosave you went to Pakistan to get a traditional banking license and build something in Pakistan. So talk about the numbers around that decision and the journey down that road.

David Fergusson (37:13):

So it was a fascinating journey. So one of our shareholders has a very large business in Pakistan and we were having a conversation with them and they said, “These digital banking licenses are being issued in Pakistan.” And we said, “No. Why would we know?” And they said, “Well, we’re thinking about getting involved in one.” And I said, “Oh, we can help you with that.” And they said, “Oh, really?” And I said, “Yes, of course. Do you not read your shareholders letters?” And no came the response. Anyway, long short is we had a very convivial discussion about wouldn’t it be nice to start a bank? So we applied for the banking license and there were about 30 applicants. It was a very rigorous process by the state bank in Pakistan. They were and have continued to be a very impressive group of people. I’ve got to say I’ve been genuinely impressed by the caliber of the people that we interact with or the bank interacts with now. But at the outset, I was involved in the licensing process.

One of the things that drove us there was obviously we had a partner and the partner has a huge business at Pakistan. We’ve got 180 million customers and that type of thing. It’s a very big business. So we thought market access to the customers won’t be a problem, it’s just the banking license and the technology. We’ve got the technology, so let’s get the license. But one of the things that … Again, this goes back to the original genesis of this type of activity, and it goes back to my thoughts in relation to the telecoms industry. Mobile telephony when it first was introduced, people thought, this is great for A CEO driving to the airport and feeling important with this mobile phone in the car. And again, the idea that 98% of Indonesians would have a mobile phone, it was a ridiculous concept. And now of course in 98% of Indonesians do have a smartphone, and that penetration had an enormous impact on society and a massively beneficial one.

Now, banking has traditionally lacked this sort of thing. It was expensive to operate these branch networks. It was expensive to operate the infrastructure behind the branch networks. And so it didn’t really work for most of the average people. I mean, GDD capita is below 2000 then the reality of is that anyone below 2000 is not a profitable customer or is specifically an unprofitable customer for the banks. And even in Britain today, if you got to speak to the large high street banks because of their cost structure, 60% of customers will be on a fully costed basis, loss making. So when you look at the technology and what it can deliver, ultimately the cost of operating at a bank account for a consumer we reckon will be ultimately about a 1.50 per year. Anyone can afford that. The cost burden can be afforded by anybody.

Now, we have no idea that this would be possible until we’ve built out a retail business in Singapore. We kept on expecting our systems to need more humans. At the end of the day, we’ve got a hundred and … I don’t know how many thousand customers in Singapore now, but 110,000 customers in Singapore and it’s business being run by 10 people. And these are incredible efficiencies. And if you take that across to a country like Pakistan where there’s 240 million people and 180 million don’t have access to bank accounts or they have very suboptimal financial services provision, should we put it that way, the ability for a sophisticated system like ours to offer a really good broad set of products to the consumer at a cost that is negligible means that the whole of society can benefit from things that they’ve never had access to. Like small amounts of consumer credit, like safe payment systems. These things are absolutely game changers from a societal perspective and it’s incredibly exciting to be a part of all the things that one does in a lifetime. If we can change the nature of finance in developing economies, then that’s a real impact.

Grant Williams (41:27):

It’s funny hearing you just throw out number like 180 million customers here because most people, the west don’t think in those kind of terms. That’s one in two Americans, that’s three times the population of the UK. These are enormous numbers. And even though as you say, these are very small payments, but still, if you’re looking at a margin business and you have that kind of potential customer base … And we’ve all got sick of the whole TAM nonsense over the last 10 years. But this is not a pie in the sky TAM for … this is to be able to make payments through their mobile phone, etc. Which is a basic thing now that everybody really needs. Particularly someone in Pakistan, you can’t go into your local branch of your bank in Pakistan because that network doesn’t exist all over the country. So it’s just an extraordinary landscape.

David Fergusson (42:20):

You are absolutely right. So let’s not talk about the TAM of Asia because we’ve all heard the old chestnuts about what, 1.4 billion Chinese people, that’s 2.8 billion shoes. We’ve all had that discussion. But having said that, if you look at the old Mercator map and you look at where Suez is and you look to the east of Suez, the reality of is that more than half the world’s people are there, more than half the world’s economy, more than half the world’s savings come from these locations. And as a region, if I can say I speak remotely for this region, which of course I don’t-

Grant Williams (43:02):

Not in an official capacity anyway.

David Fergusson (43:03):

Not in an official capacity. Self-appointed. But where the region falls down is that it saves 35% of domestic product across the region and at the moment it’s sending that capital to fund deficits and companies in the developed world. That’s literally what’s happening. It is going straight into the European and US bond markets and European and US stock markets. Now, when can improve financial system like the ones that firms like ours are creating in countries like Pakistan, Bangladesh, Indonesia, various is other places. If they take those domestic savings rates and deploy them more effectively in these economies, then well investment driven booms result. It’s fabulous for these economies. The impact of this activity is incredibly exciting. It’s one of those things that when you see behind the scenes of this activity, you just have a real understanding of the impact that this industry has.

Grant Williams (44:10):

So what’s next? You started Hugosave, you turned into HugoHub, you’ve now had to broaden out again into Atlas Consolidated. Where do you go from here and can you keep up with the pace of change that seems to be coming at you from every conceivable angle?

David Fergusson (44:24):

Look, at the moment, we’re still an early stage business. So for us at the moment, we’re taking on customers for HugoHub, whether they’re banks, fintechs, insurance companies, fund managers, all of whom are looking for these either full banking or neo banking style solutions. For us, it’s just taking on customer after customer at the moment. There’s some astronomical numbers that one can throw out there, but in effect, the global banking sector is $180 trillion balance sheet there or thereabouts. If you look at that about… We only really deal in retail banking, so about a hundred trillion of that is retail banking. The cost of operations of the average retail bank is about 1% bank assets. At this point we’re talking about … What are we talking about?

Grant Williams (45:12):

A trillion dollars a year?

David Fergusson (45:13):

Yeah. In terms of operating costs, about 12% of those are tech spend. We’re talking about 120 billion a year industry, and 99% of it sits on Frankenstein’s monster of infrastructure. So there’s a green screen somewhere and someone with an abacus and some duct tape and some rubber bands holding it all together. It’s not compliant and it is not efficient and does not achieve what consumers want. And the 1% is new companies like ours. And ultimately as we continue to roll out that one percent’s going to become 90%. And in that process, firms like ours, hopefully it’ll be ours, but firms like ours will become very large indeed. They’ll either be bought by the legacy players or they’ll be bought by the hyperscalers. Let’s be clear, it’s a very obvious use case for cloud banking is financial services. We have no idea where this is going to lead. What we do know for certain is that the entire financial industry needs to move to systems like the ones we’ve got, and there’s going to be a lot of disruption that comes out of it. There’ll be fortunes made and there’ll be fortunes lost as a result, hopefully we’ll do okay.

Grant Williams (46:32):

Brilliant. David, it’s been absolutely fascinating. I’ve watched you take this journey for the last several years now, and it was fascinating to hear about it at the beginning. It’s even more fascinating to see what it’s morphed into now because this is not what we spoke about five years ago at all. But it’s just amazing the speed at which it’s all evolving. And as you say, the landscape you’re evolving into couldn’t be placed better for this kind of business.

David Fergusson (46:56):

It’s fascinating to us.

Grant Williams (46:57):

For people listening that if they’re in Asia, obviously Hugosave and stuff has a presence out in Asia. So how can people find out more about the company and the business and what you’re doing?

David Fergusson (47:07):

So look, we’ve got a few websites. Obviously the group company is called Atlas Consolidated, so the website is called atlasconsolidated.com and HugoHub is the wholesale platform, and there’s a lot of information on the website about that. www.hugohub.com

Grant Williams (47:21):

And Hugosave is strictly Singapore.

David Fergusson (47:25):

Hugosave is strictly Singapore right now. We shall see what comes of that.

Grant Williams (47:31):

Okay. Phenomenal. All right my friend, listen, it’s been great catching up. I wish you continued success and lots of it and I’ll see you for a beer soon at some point.

David Fergusson (47:39):

Thank you very much.

Grant Williams (47:40):

Well you have it folks. Truly an interesting space. David is a fabulous guy and excellent CEO and boy oh boy, am I seeing the work he’s put into Atlas Consolidated over the last seven or eight years, probably, maybe more. If you want to find out more about the company, that’s easy to do. As David said, atlasconsolidated.com. You’ll find out everything you need to know about the company there. Again, this is not a recommendation. I do have a private investment in the company. It’s not listed. You can’t buy shares anywhere and it’s certainly not a recommendation on my part that you should do so were they to become available. But I think it’s a fascinating story nonetheless, and the team there at Atlas are exceptional. So they have it. That’s it for another episode. I’ll be back with another guest in the not-too-distant future. In the meantime, as always, thank you so much for listening.

Nothing we discussed should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.