In The Embedded Finance Blueprint Episodes 1, 2, and 3, experts shared best practices for setting a strong foundation for a profitable, sustainable embedded finance business, including a thoughtful business model, smart product design process, and valuable partnerships.
In Episode 4, you’ll hear about the real-work journey to bring a human-centric product to market. Empower Co-founder and CEO Warren Hogarth talks about his personal experience, and the empowering effect of empathy—on people and business.
Hey there, welcome to the Embedded Finance Blueprint, where we get past the noise to help you navigate the landscape, unravel the hype, and actually build a sustainable embedded finance business.
Today, there's no debate anybody can build these products, but who should? And if you should, how do you do it correctly? That's what this series is about.
I'm Ahon Sarkar, general manager of Helix by Q2, and I'll introduce you to a few friends, who will share their real-world lessons for success and help you avoid the potholes along the way. In just six expert conversations, you'll learn everything you need to get past getting to market, and get to growing your business.
So, let's dive in.
Welcome back for Episode 4: The Real-world Journey to Market, where we dive into how to get to market with a human-centric product.
So far, we've talked about how to define your business model, how to create a product that delights your customers, and how to pick the right partners for the long term. But once you've gotten all that together, then what?
That's exactly the question we're here to answer. And we're going to talk today to Warren Hogarth, the CEO of Empower Finance, a company that's reimagining the relationship that most consumers have with their money and helping them better understand their finances, build credit, and get to a happier financial future.
Warren has had a depth of experience across the industry, both as an operator—running companies like Empower Finance—but also as an investor. In a past life, Warren was a partner at Sequoia Capital, where he worked shoulder-to-shoulder with founders to build large, enduring businesses like Guardant Health, Carbon, SunRun, FutureAdvisor, Lifecode, and many others.
So, suffice it to say that Warren knows quite a bit about how to build a successful business and the kind of decisions you have to make along the way.
Warren, thanks so much for taking the time to join us today.
Ahon, it's a real pleasure. I'm excited to be here.
Awesome. Well, we're going to open with this question that we've asked everyone, and I'm really curious to hear your response because Warren—and you guys won't know this—kept it as a surprise and didn’t share with us prior to recording. So, I have no idea what we're going to dive into today.
Warren, what's the biggest embedded finance myth that you just want to debunk immediately?
That trying to build a neobank based on a checking account can be profitable.
I love that. Say a little bit more.
I think it's interesting that the whole neobanking craze has been founded on reimagining what the checking account could be. I think that's great because it's made the checking account experience much, much better. But the other half of that is people have tried to do that by living off interchange.
So, that 1.3% that you make every time somebody swipes a card. I'm not aware of any new bank that is able to subsist off that as their sole revenue stream—not in the US, not in Europe, not in Latin America or anywhere else.
And yet everyone continues, I think, to still try and do this. And I think it's important to not make that the number-one thing that you're doing because, at the end of the day, it's a utility. And, arguably, one of the best companies in the world, Amazon, lives off a take rate of more like 4% or 5% rather than 1.3%
For sure. It's interesting, too, because as Banking-as-a-Service and embedded finance kind of came to prominence, interchange was almost like this promised land, right? You can suddenly earn this revenue that's going to drive your business. And what people pretty quickly realized is, first, there are a whole bunch of costs in getting that revenue—both in operating it and managing fraud—and paying for your own expenses. But, also, to your point, there's only so much margin coming from that. And, so, if you're not catalyzing other, higher-margin activity, it's going to be challenging for you to get to a point of sustainability.
So, we'll put a bookmark in that and come back to it in a later question. But I want to rewind the clock a little bit into when you were starting Empower, the problems that you were seeing in the world, and why you decided to take off your investor hat and put on your operator hat to build this business that today serves so many people.
Yeah, there are many parts to that question actually. I think there's the personal side, which is I just had my first kid—makes you rethink your values and your priorities in life.
And while I realized I loved being an investor, I liken it to being on a swim team, where much of the time, you're swimming your own race. And then you sort of come together as a team—like once or twice a week—to make decisions. But you spend more time with your portfolio companies trying to help them than you do necessarily as a team or a partnership. And I wanted to go back to—and I'm an Aussie, so I'm going to use rugby as an analogy—the sporting team where you're all on the same team, you're all fighting in the trenches for the same goal. You rely on each other's different skills. You're together each day. You share the highs and the lows.
I wanted to go back to that camaraderie and that experience, and that form of leadership as well. So, that was one reason to go back to operating.
As to why Empower, a little bit of the backstory there is I'm also an immigrant to the US. When I came to the US, I thought I did all the right things with money. I was a PhD student. I was living off $20,000 a year, but I was living well within my means, and I was getting to travel. I was paying all my bills out of my savings and cash flow, just like I thought was the right thing to do.
Kind of the ideal candidate. Yeah, for sure.
I think so.
But four years later, I get my first job in the US. I go to get a car, and I need to borrow some money, and I was rejected for that loan. I couldn't work it out.
I never missed a payment in my life. I would've thought I was the best person in the world to lend to. And I was told I hadn't borrowed money to pay my bills and, therefore, I wasn't going to be underwritten.
What was right by first principle was wrong. It happened to me over and over again when it came to refinancing my home loan, or applying for a home loan, or when it came to joint finances. It impacts your ability to borrow.
And, so, that bothered me a lot. And then, through the global financial crisis and a few other events that I witnessed over time, I really got to see that the pain that I'd experienced was much, much more acute for people living closer to the margins. And that's ultimately where I also wanted to focus my time.
It ended up being a combination of those two things: The personal experience of having thought I was doing things right and recognizing I was fortunate—there are many less fortunate, where it's much, much harder. And I also wanted to go back to the leadership and camaraderie and operating lifestyle.
One of the things I find really inspiring about that story is that it starts from a place of pure empathy. It starts from living in the problem to some extent. And, if nothing else, wanting a better world, and then kind of working back from, okay, well, given what the problem is and where I want this to be, asking, “How do I get there?” And then you put on your investor hat, asking, "How do I build a sustainable business?”
I guess my first question for you is: You started this journey from that place of empathy, from understanding that journey, but then you wanted to go and solve the challenges of the folks who were living closer to the margins, and you wanted to do that at scale, right, in a way that impacts not 10 people or 100 people, but hundreds of thousands of people. So, how do you think about taking that empathy—that personal approach and this sort of human-centric way of looking at the problem—and intertwining that with the DNA that built Empower over the subsequent years?
Yeah, I think the biggest thing that combines it all is mission. And so today, our mission is to enhance access to fair credit so that we can improve financial security and social mobility. And everyone who comes to Empower, that's the first thing we go through is the mission. It's often what attracts them to Empower, and it's what we use as the guidepost for our decisions.
So, I think the first thing you have to get right is the people side. In building the people side of things, you have to have people there for the right reasons. The second side of things is there's actually a lot of power in the data that you see, in the way that users behave.
And I remember, for me one of the early, really big aha moments was with a different banking partner—before we worked with you guys. They made two mistakes. One was somebody wired in a very large sum of money to one of our savings accounts—well into the six figures.
And it had gone missing for a few days.
Yeah, people made a mistake when they put in the account number or what have you, and you have to go and locate it. It doesn't completely disappear, but you have to go look for it because it doesn't end up in the right place.
And that person wasn't very stressed. In fact, they were perfectly fine corresponding via email. The tone of their emails was firm but not overly stressed.
And then the second occurrence was we had some times when payroll wasn't quite run at exactly the same time. So, let's say it was normally run at 7 am on a Friday morning, and it, instead, ran at 9 am. In that two hours, we'd have 300 or 400 people writing into customer support saying, "Where's my money?”
And it was because those people were looking to put food on the table, gas in the car. They had some kind of emergency, and they needed that money right now. And even if it was as low as a $20 or $50, it was really, really important to them. And I think those were sort of the ahas from the behavior and the data.
And we see that over and over again. You make a change, and you can very quickly see how people respond and whether it helps them or whether it hinders them.
It's not as easy to tackle as you're making it sound. I mean data can be such a challenging and daunting problem because you have so much of it that sometimes finding the signal in that noise can be difficult.
But to your point, understanding context is probably one of the biggest competitive advantages you can have, particularly in something like issuing credit and the ability to better understand your trustworthiness, your credit worthiness, etc. Because the other things I'm looking at are going to ideally lead me to getting you a little bit better product offering in the long run.
When we first met in 2018, and you were working with that other provider at the time, one of the things that I found so interesting and so appealing about the ways in which you guys tried to bring empathy into your users’ day-to-day lives and into your business was how you thought about something as specific as ACH settlement times.
At the time, for the uninitiated, all ACHs had the same settlement time, and basically you would send an ACH, there would be a limit at the bank, and that's how long it would take for funds to show up. And at the end of the day, when you're deciding what a settlement time is for a transaction, you're effectively trying to get a sense of what's the probability that these funds are actually going to show up and not going to disappear—that there's going to be sufficient funds and all that kind of stuff.
You guys were doing a lot of really clever things to understand the consumer situation better and could settle those funds earlier to give people access to their funds earlier, so they can go put food on the table or put gas in the car. You would do that in a way that was fully auditable, in a way that actually understood the customer. And I just found that so fascinating.
One of the challenges I find a lot of companies are dealing with today is how to use that context to help the consumer without creating a massive fraud problem. Right? Because it's almost like engagement and fraud are related insofar as if I go and try to have really stringent rules for fraud across my entire customer base, I could actually hurt my most active and most engaged users, which is the opposite of what I want. If instead, I decided to maximize for engagement, I could go create a whole bunch of fraud possibilities that then cause me losses.
Can you talk to me about how you think about balancing those things with the type of personalization that you guys use across the business?
Yeah. Well interestingly in finance, these things are sort of inextricably linked because usually as the startup, you bear the cost. So, you find out pretty quickly that you can't just pay for engagement and that, at the end of the day, it’s often vaporware.
But I think that it's actually much easier to speed up and do something, speed up a transaction, for example, or lend to somebody who's prime, because the risk is very, very low. But the value to that person and the utility that you bring them is much, much lower.
Where it's much, much more meaningful is for the person—about 50% of Americans—who is living paycheck-to-paycheck. And the challenge there is the data is much more complicated, margin for error is much, much smaller. So, your ability to make a difference or to implement change is very, very impactful. But you’ve got a lot of noise to sort through.
But it is very important in this space because you can lose money very, very quickly. And so, we would start small, we would try and be very humble. We would build systems to create all kinds of alerts. As founders, you have to be on 24/7. I remember many Sunday mornings at 5 am being on the phone because something had triggered, and we had people trying to attack our system. They don't work 9 to 5 U.S. east coast or west coast hours. They're all in a different part of the world and choosing the most opportune time to go in and hit you hard.
And so, I think you have to really go with your eyes wide open, and just tiptoe your way in. And you have to have circuit breakers as well. One of the most basic circuit breakers is if you're speeding up users’ transactions, you're probably funding it out of one of your own accounts or some kind of FBO reserve account. Don't overfund it, so if it runs out of money all of a sudden overnight when you're not there, it stops.
At times, you need to do those things.
For sure. One of the nuances is in how to approach these smaller pieces: Test it, set appropriate limits. It requires really deep collaboration with your bank partner too, right?
Because you guys are kind of working side by side. We had your bank partner on the last episode talking about the importance of that kind of relationship. But how do you navigate that, and how have you navigated that over the last few years?
Well, first of all, we talked about it upfront. For us, it's a very, very important part of our value proposition to try and make finance as simple and as seamless as possible for our users. And “instant” is a really big part of that.
And that's not the way the U.S. financial system is built. It might get there with Fed Now over the next three to five years, but it's not where it is now. And so, someone has to hold the risk of that if you want to do something meaningful for folks, or if you want to underwrite customers, which is, again, another big part of our business.
So, a lot of it’s upfront discussion. A lot of it is transparency, a lot of it is building trust over time. A lot of it is when mistakes happen, how you interact and discuss things. And so, I think it's all of those pieces that go into earning the trust so that you can then take risks together.
Absolutely. Someone once told me that trust is the integral of interactions over time. Right? And so, to some extent, each of those little tests—each of those little examples—and each of what you take away from it is kind of a signal to your partner as to the type of partner that you are.
I'm reflecting on the journey that you're sharing. And I think it's such a beautiful journey that starts with living in the problem, wanting a better world, finding people who are as attached to that mission, understanding where the root causes of that inefficiency are, and tackling those root causes one piece at a time in partnership with a partner that you can really trust. But once you go through all that—you've brought this product to market—you're constantly dealing with this tenuous relationship between engagement and fraud. My guess is your brain probably went to the thing that is consuming every single neobank’s mind—and most folks who are going into embedded finance—which is, how do I make this sustainable, right?
How do I make this into a profitable business? And I go back to what you opened this podcast with, which is that if you're banking on interchange alone to build a profitable business, you're probably going to have a hard time. How have you and Empower navigated this path to sustainability over the years? And maybe to tie that to our closing question, what would be one piece of advice that you'd give to someone who is trying to figure out embedded finance—listening to your podcast and trying to figure out what that means for them moving forward?
Well, I think the piece of advice is you have to get the unit economics right before you try and scale. You can't pretend that you're going to solve that later on. And I think that's what's tripping up many of the companies today. I've interviewed growth marketers from most of the big names that are our competitors or adjacent to where we are. And when you ask, “Well, how did you choose to scale?” they said, “Well, we sort of worked out what the NPV of a customer was and sold for two years.” And then you ask, “Okay, do you have positive gross margins?” And they say. “No.”
And then we’d ask, “What’s the NPV of the customer?” And they just said, “Well, we came up with one.” So, a lot of it is also honesty with yourself.
It's very easy to come up with metrics that are vanity metrics, but they don't help you because then you're not solving the right problems. Fundamental unit economics and being honest with what, at the end of the day, is real is very, very important.
On the other side of things, it really comes down to sort of what's your reason to exist. What is the unique problem that you're solving for users that they can't get anywhere else? And, for the most part, in the checking account example, they can get a checking account somewhere else.
We chose to focus on lending because there are about 100 million people in this country that lack access to fair credit because they’re new to credit, or they made a mistake sometime in the past. But we didn't believe 100 million people were financially irresponsible.
We just thought the way the system was built, the way traditional underwriting worked, wasn't optimized to solve that pain point for that user. And it turns out that the other part of this human-centric design is spending the time on customers, like being a customer success rep. And the other half of that data story I didn't mention earlier is we were on customer support. I was on, my co-founder was too. We all were, in the early days—all of us took shifts. And so, we also got a lot of customer time, and we really got to see the feedback from users.
When we started actually solving this problem around access to credit, or access to cash, and then credit building, that's when things took off and we saw things also then change in our metrics. We saw our customer acquisition costs come down 80 to 90%. We saw growth rates just take off in phenomenal ways.
It was like no one else was serving the customer very well, and I think that was when we got real, and we solved that problem. And then we also realized that was a global problem. One of the exciting things today is we feel that although we've done a really good job solving that problem in the U.S.—the access to real-time data through bank aggregation data, the access to instant payments, etc.—that's coming online globally in many countries at the same time.
So, from our mission, we're very focused on how we can do that. How do we underwrite the next 100 million or the next billion people who aren't served today? And that's kind of exciting too.
“Kind of exciting” is the understatement of a century. Honestly, Empower is a masterclass in how to build a genuine organic business that still has solid unit economics and actually thought about what the business model was—at the onset. But you didn't do that in a way that compromised your mission.
I think that's the thing that I find so inspiring about the way in which you guys constantly iterate, and the way that we've gotten to watch you evolve—over the last, I guess what will be five years, which is crazy. And I'm so excited to see you guys bring that thought process, that methodology, that intentionality to other markets that really need it. Because you're right, access to fair credit is not something that most people get today, and it can make the difference between you getting to where you want to get to in life and you being forced to either stagnate—or, worse, go into a downward debt spiral that takes control of your entire life.
Thank you so much, Warren, for taking the time and for sharing the lessons with everybody on the podcast. I know I'm taking something away from this even for our own business. And I have no doubt that everybody who's listening is doing the same.
If you're still listening, check out the next episode in just about a week, where we dive into program management and how Bank Mobile has tackled that problem for many different kinds of businesses. And you can too.
It will be a great one. Until then, thanks.