Talking with Nigel Morris, cofounder of QED Investors

When Nigel Morris started QED Investors with Frank Rotman in 2007 to support high-growth financial technology companies, the fintech world was just beginning to blossom. Today, the venture capital firm provides funding and hands-on operational support to more than 250 fintech start-ups in lending, payments, insurance, and banking. In this episode of Talking Banking Matters, Nigel speaks with McKinsey partner and payments industry expert Uzayr Jeenah about how the fintech landscape is shaping up in the face of AI and a younger demographic. This is an edited transcript of their discussion. For more discussion of the banking issues that matter, follow Talking Banking Matters on your preferred podcast platform.

Uzayr Jeenah, McKinsey: Nigel, you’re a remarkable founder in your own right. You cofounded Capital One. You built it into an amazing data-driven institution. What made that model work? And what still holds today?

Nigel Morris, QED Investors: It’s very interesting, because one of the people who was around in those early days just sent me a manuscript of his book that has several chapters on the origin story of Capital One. And I was nostalgically looking back on it over the weekend.

It was the right place, right time, in that the economic rents in unsecured lending were massive and that the banks had not leveled the kind of analytical artillery at unsecured lending that they now do. Securitization allowed you to be able to fund the lending business without having a branch distribution network, which was crucial. And you could leverage off Visa’s or Mastercard’s brand name, and you didn’t have to build your own brand.

[Capital One cofounder] Rich Fairbank and I consulted extensively in insurance, where we, of course, realized you could do something called risk-based pricing, which banks had not done. It’s extraordinary that they had not done it. Banks had been around for hundreds of years, and there were data sets that could allow you to very powerfully predict risk.

Those were some of the critical ambient ingredients. Then it was having a platform with Signet Bank that was willing to take us on.

Rich and I talked to and worked for all the big players, and they either said, “Look, we’re doing this already”—which they weren’t and still aren’t—or “It can’t be done, and if it can be done, you two clowns can’t possibly pull it off.” And there was some validity in that, because I was only three or four years out of business school—Rich was a bit older—and I’d never done anything. The biggest thing I’d ever managed was two case teams of four or five people who looked a lot like I did. So they were quite right that we didn’t have any bona fides to make that work.

But what we did have—and this is so crucial in fintech land when you’re picking entrepreneurs—is enormous passion, enormous energy, and enormous belief that we could pull something off. There was a lot of ambient serendipity and, at the same time, a lot of energy and passion and being around at the right place, right time.

Uzayr Jeenah: In some ways, you were almost one of the original fintechs, in how you describe it.

Nigel Morris: It’s interesting. Does it start with Capital One? Or does it start with PayPal? That’s the debate. I think Capital One was the quintessential fintech. And I think you can measure it by how many spin-offs have occurred from that original Capital One platform, not just in terms of ideas but in terms of talent. As you go across fintech land, there are Capital One people liberally spread everywhere.

We’re seeing the same thing now with Nubank, incidentally, where Nubank is starting to spin off cohorts of talent that are looking to usurp Nubank—once the attacker, the disruptor, now in some ways the incumbent.

With Capital One’s acquisition of Discover on the one hand but also of Brex on the other, Capital One is still an aggressive disruptor but clearly now massive in terms of scale.

Uzayr Jeenah: Let’s explore this idea that fintechs are moving from being challengers to actually being institutions. How do you think that’s going to evolve as you look forward?

Nigel Morris: It’s the right observation. Basically, fintechs represent about 4 percent of worldwide financial service revenue. The fintechs have been growing at low 20s in compound growth rate, and the incumbents growing at 5 or 6 percent. That 4 percent in, what, five years becomes 8 or 9 percent, depending on what you assume in growth rates. So fintechs are clearly on the ascendancy.

But thinking about that in homogeneous terms doesn’t pull out the insight that there are now spaces—partly spaces that have been created by fintechs and/or spaces that fintechs are now dominating—where incumbents aren’t playing at all. And I would argue that the moat, the comparative advantage, wrapped around those spaces is now virtually unassailable. The fintechs are able then to be able to scale substantially, building off product–market fit with one idea and then building from that.

Some examples include buy now, pay later as a category. There isn’t a major bank I’m aware of that’s really competing. In some ways, Capital One would have been the perfect company to have done buy now, pay later. Digital brokerage: We don’t see the banks playing in that space. C2C [consumer-to-consumer] money movement now increasingly embracing stablecoin: Where are the banks in that space? They’re not playing at all.

It may be that the banks say, “Look, we don’t want that business. We don’t want to do that.” And that’s OK. But my sense is that the banks are not saying that. The banks are not saying, “Wow, we really think buy now, pay later is interesting but it’s not a good fit for us.”

I think these innovations, these new places to compete, are emerging out of the ground, and the incumbents are focused on managing the regulatory climate, getting through COVID, thinking about their treasury risk, and at the same time—in a more progressive, more open regulatory environment—looking for opportunities to buy versions of themselves and smoosh them together. It’s the old playbook we’ve known and loved, certainly in the US, for 30 years.

The report we collaborated on with McKinsey [The next age of fintech: AI, digital assets, and new paths to success] talks about how many fintechs now are in the space of being able to knock on the door of $100 billion in valuation. Nubank has over 50 percent penetration of Brazilian households; Klarna is a little bit behind. We see these entities that have unassailable competitive advantage, have a product–market fit, and are now rapidly expanding both geographically and in terms of product vista.

Uzayr Jeenah: If fintechs are scaling so quickly, why are incumbents not responding more effectively?

Nigel Morris: We’ve not seen a tremendous focus on driving scale economies with the large incumbents. I think it’s a real challenge, and why is that? Where are the economies of scale coming? And where are the diseconomies of scale coming?

As I look at fintechs, I like to think that in so many ways, the incumbents are really good at many things, one of them being staying in business, by and large, and not making mistakes. The people who end up running the banks, in my experience, are the people who don’t make mistakes, not the people who actually ever created anything different or remarkable. So it’s about not making a mistake; it’s about being buttoned up, and it’s about being predictable.

There’s nothing wrong with those things, but a culture that promotes those kinds of attributes is not one that innovates. It’s not one that’s ingenious. It’s not one that takes risks.

What you have with the 4 percent penetration of all these fintechs is the Galapagos Islands going on in front of you. You have Darwin. You have thousands of companies, often funded by people like QED, that are fighting to survive, fighting for oxygen, fighting to reproduce.

What you have there is outsourced innovation. The fintechs want to talk to the incumbents. The incumbents have profits. The incumbents have regulatory access. They have low-cost deposits. They’ve got brand. They’ve got proprietary data. They’ve got distribution pipes. What the fintechs have is the innovation, the creativity, and the IP [intellectual property], and the embracing of AI now at a much greater level.

And you have the opportunity to watch it and study it like Darwin did. You have the opportunity to partner with it. You have the opportunity to invest in it, and then you have the opportunity to buy it. By and large, the banks are not doing that and are somewhat self-isolating from the Galapagos Islands in front of them.

Uzayr Jeenah: That’s an interesting point. I think a lot of bank executives would say their culture is incompatible with the culture of fintechs.

Nigel Morris: They may say that, and in the world where you don’t want to make a mistake, don’t buy a fintech, and make everybody wear a suit to come to work on the fifth floor. I agree with that. But most of them haven’t tried, and most of them have not said, “How do we make our culture elastic enough that we can protect this nascent thing and not suffocate it, and at the same time be able to tap into its vitality? How do we do that? How can we be really intentional about that?”

I don’t think those discussions occur very often. It can be done. It just requires you to be much more flexible in terms of your culture and be intentional about it.

Uzayr Jeenah: One of the things we saw in the report research is this idea of an evolution of the VC [venture capital] funding and funding rounds more generally toward more of a barbell-type funding with a real hollowing out of the center—so plenty of money at the start and at the finish for late-stage companies and early-stage and seed-stage firms. How do you think that changes the dynamics?

Nigel Morris: The observation is correct, and the question is, “To what extent is this a short-term phenomenon, and to what extent is it a structural shift?” If we go back five years, the average fintech valuation was between four and five times revenue. This is when so few of them were profitable. Now many more are profitable, and they could use a PE [price-to-earnings] multiple, but four to five times revenue. Then COVID hit, and money was flushed into the system. We saw that Putin invaded, interest rates fluctuated, supply chains were disrupted. And just before that happened, when the money was coming in, valuations went to 20 times.

It went from four to five times to 20 times, up four or five times. Why? Because it was too much money chasing too few ideas, classic inflation, culture, SoftBank, Tiger piling money in. We have companies that have grown many times over, that are still worth less than they were four years ago. Imagine managing the motivation of your team through those ups and downs. What I’m pointing out is how volatile valuations are, how fragile some of them are.

Valuations have now fallen back to that four-to-five-times range, but valuations are not homogeneous. In some businesses, where there’s a fundamental spooking and a belief that AI is going to disintermediate the business, middle-stage PE is frozen and petrified for fear that they invest in something that’s going to be usurped by two 17-year-olds in their basement, writing with AI.

Which brings us back to the structural question: What is the moat in fintech? And what is sustainable and durable? One is a banking license, even though we’ve seen over 20 companies, many of them in our portfolio, that are now chasing various forms of banking licenses, which would have been unheard of 12, 15 months ago. And there was basically a moratorium on banking licenses under the Biden administration. Now it’s open season, and our friends that are helping people navigate that are enjoying enormous revenue enhancements. A banking license gets you a balance sheet, access to proprietary data that really splits risk, understanding of AML [anti–money laundering] and KYC [know your customer]—phenomena and nuanced capability that are part of the infrastructure layer that hardwires you into functionality, rather than the application layer, largely product design, which can be very easily and quickly duplicated.

Uzayr Jeenah: That’s interesting, Nigel, because what you’re arguing is that people will need to own the entirety of their stack. The banking-as-a-service [BaaS] type players are actually not going to be that relevant in the future, because it’s open season on the banking license. I can get directly plugged in on the payment side. I will need to own my own AML if I have a banking license. That direction of travel says, “BaaS as an idea is probably not one that’s going to be long for the world.”

Nigel Morris: I think that’s right, but renting my bank charter might be a less interesting business model. Now, not everybody’s going to get bank charters, and not everybody that would like one is going to apply for one. And I think that people that don’t get to the finish line before there’s a new administration run the risk of being left in no-man’s-land. I think this is a very interesting window today that we can’t count on ad infinitum.

And we’re going to see casualties. If 20 or 30 entities get banking licenses, if we have a conversation in three to four years, 10, 20 percent of them are going to have a problem. And in a world where regulators were admonished if they ever made a mistake, there are going to be mistakes, and there’s going to be finger-pointing and retribution and all that stuff. But by and large, I would argue that giving fintechs a banking license is going to be good for the consumer and good for our business.

But I think there is a role for what, in the report, we call horizontal players—those that provide unique functionality independent of a banking license. In the report, one of our portfolio companies, Footprint, is using advanced AI to do AML and KYC analysis, and they’re doing it at scale, and they’re doing it by very quickly being able to say, “Watch out for Nigel, because he’s a high risk for these reasons, and let’s delve into him. And here’s so-and-so, and everything is clean as a whistle with that person. Don’t spend time on that.” They are very quickly being able to allocate resources where the underlying risk is using these AI algorithms. We’re seeing people like that do incredibly well. We saw how Plaid, for example, five years ago created a whole new alternative data set for banks, which very few of them are actually deploying, that provides orthogonal data to credit bureaus.

So the horizontal game is not over. The horizontal players largely serve the fintechs first, because the fintechs move with much more alacrity, and are much less worried about making a mistake, and—back to the Galapagos—are fighting to reproduce. The incumbents follow. And we’re seeing that with AI across the board now.

Uzayr Jeenah: You’ve asked this question, “Is AI alchemy?” And I think we’ve seen very clearly, at least in the SaaS [software-as-a-service] world, in the “SaaSpocalypse,” that it’s been certainly reverse alchemy in the sense of destroying industry profits and destroying market valuations for the SaaS players. How much of that do you think plays out in financial services? Do you think we’ll see the same kind of scale of losses?

Nigel Morris: We have a very privileged perch because we’ve got 150 active companies, and I’d be very surprised if any of them are not now massively leaning into testing and deploying AI. So where is it making a difference? We have companies like Lorikeet, which is providing the functionality to go from inbound call center to AI-driven digitalization, and specializes in understanding compliance and the regulatory rules.

I think the call center is going out of style really fast. And the fintechs are moving more quickly because they have to, and they are more technologically adroit, but we’re seeing AI really go after that space. We’ve seen businesses that without AI would be much more clunky and much more difficult.

We have a company called April. April basically provides next-gen tax advice to consumers. They just signed a number of the fintechs. Incidentally, fintechs sign up for this, when it should be the incumbents because the more complicated the tax reporting of the individual, the better April is, and they tend to have older and more creditworthy people. But the banks are slower. Now AI can do that much faster and much cheaper. So businesses like April would not have been possible at scale, with the same kind of cost structure, without AI.

Uzayr Jeenah: In this disruption—as you describe what April is doing, for example, democratizing fairly complex tax advice and bringing that down market—all of this is going to move economic surpluses. Do you think customers are going to benefit? Or is it just going to be a transfer of those rents from one set of companies to another?

Nigel Morris: That’s a good question. I think fintech is a force for social good. There’s no doubt in my mind that Capital One in its early incarnation 30 years ago was providing high-quality digital products to consumers that the banks didn’t want. Forty percent of Americans struggle to get a credit card. There are large swaths of the population with branch infrastructure allocation costs that are underwater. Fintech provides access and democratizes access to customers who ordinarily could not get the products that I think are necessary, basic Maslovian requirements to lead your life. So that gets a tick.

Now, do you believe that, in time, the economic rents that get beaten up by the fintechs lead to that being shared back to the consumer? Yes, I do believe that.

Let’s go to branch deposits, particularly in checking accounts. Something I read recently said that between 30 and 40 percent of bank revenue is inert money lying around. And I can’t be bothered to move it because I’ve only got 200 bucks in my checking account, and where am I going to move it to? Run the clock forward two years, where fintechs are saying to me, “Look, instead of giving you 20 basis points, Nigel, even though it’s worth 400, I’m going to give you 200 basis points.” At the click of a button from one commodity to the next, I’m going to do that.

Will that accrue to the consumer? Absolutely. Will it accrue immediately to the consumer? No. But if I’m an incumbent, have I raised my game? You bet I have. Am I much more consumer-centric than I was? Absolutely. Have my customer satisfaction scores gone up? Absolutely. So you think that customer satisfaction scores have gone up across the incumbents? Is that because they wanted to do a better job? Maybe. It’s the competition in the marketplace that’s forcing the incumbents to raise their game.

Uzayr Jeenah: We obviously can’t have a podcast about fintechs without talking about digital assets. Where do you see the broad digital asset universe going?

Nigel Morris: The two big themes, which have really dominated our new investments in the last 12, 15 months, have been stablecoin and AI-native plays—either businesses that are created as a result of AI or AI businesses that are horizontal players supporting the overall ecosystem.

But if we’d had this conversation 18 months ago and you brought up stablecoin and tokenization, I probably would have rolled my eyes and said, “Yeah, yeah, it’s going to happen at some point, but I don’t see any industrial-strength application. A number of people are dabbling, but nothing’s really happening.”

But it is happening now. If we talk to Wise or Remitly—who were using old-school rails to move money, to pipe money from the United States to the Philippines, United States to India, United States to Mexico; they’re the big three pipes—we’re now seeing them massively embracing stablecoin. We’re seeing Visa and Mastercard realizing just how important these pipes will be and investing in the space. I can’t tell you whether stablecoin’s going to be 10 percent of payment volume in five years, but I certainly wouldn’t be surprised. We’re really in that S-curve now.

Uzayr Jeenah: Do you think it’s going to be more about stablecoins? Is it going to be more about tokenized deposits or other forms of new assets?

Nigel Morris: I tend to focus on stablecoin because it’s happening now and it’s real, and it’s moving to industrial strength, and everybody’s embracing it. But, yes, the tokenization of other financial products, particularly on the deposit side, has to come.

When you take a step back and think about the digital representation of physical assets, the more we can get that digital representation, the more we have the system that allows us to be able to move it in real time with AML and KYC security, where the cost can be de minimis. It’s coming, and it’s coming at us like a train.

Uzayr Jeenah: How do we think the future of human interaction with financial services evolves? There’s one version of the world, where very large AI firms are going to build personal assistants for consumers everywhere. Then those personal agentic AI assistants will go out and interact with financial services firms, but they will be completely disintermediated from me.

There’s also a different thesis that says large institutions, large banks and other financial institutions, have actually got tons of data on customers. And as a consequence, they can use that to be the ones who build these agents. How do you think that actually plays out going forward?

Nigel Morris: These kinds of questions are the trenchant ones at the margin that we’re wrestling with and trying to make sense of in a future where technology is moving so quickly. I think our belief is, where it is a commodity product and where you’re moving from commodity supplier A to commodity supplier B, you will see the agents playing a much bigger role. So, yes, you’ll commission your agent to go off and optimize your checking account price for that.

You will probably give your agent some parameters such as, “It has to be FDIC insured,” and you want it to be a local bank or not, you want it to be a big bank or not, and you want to exclude bank X because you had a horrible relationship with them. Looking at the ability to be able to tailor what the agent can and can’t do for a product like that, I think you can see how agentic AI is going to play a huge role.

Where you have lending involved, it’s much different, because the algorithm of the issuing bank—be it for an auto or an installment loan or a credit card—is not known to the AI agent. So the AI, the agent, can act on your behalf and say, “Nigel wants a credit card,” but it has to talk to the other agent to see if Nigel can really get a credit card. It has to interact, which means that the opportunity for disintermediation, where it’s not a clear give-and-get, straightforward black-and-white commodity, will be much clunkier.

We believe that because each bank will have a different algorithm, which will not be known by the AI agent, there’s going to be a significant moat there. Also, the entity is going to have to confirm that the provider has the balance sheet and the legal representation to be able to do that and is not some other intermediary in the middle of it.

Uzayr Jeenah: One thought that we’ve argued certainly is that banks that don’t build that machine-to-machine channel, that agent-to-agent communication, are going to be left completely in the dust. Because they’ll never get to see the client, because all the search and discovery will happen through the agentic advisor.

Nigel Morris: Then each bank will come back with a different price. The agent’s going to have to say, “Look, I think, I think …” If you go to Credit Karma today, and you say, “I’m going to apply for this card,” basically Credit Karma can give you an odds prediction of your chances of getting that. They’ll say it’s high, medium, or low. The agent might be able to do that and say, “Look, I think you’ve got a very good chance of getting this Capital One credit card, and we think the price is 9.9 percent APR.” But it’s not going to be able to consummate that without your authorization and without a series of follow-on steps anytime soon.

Uzayr Jeenah: We’ve talked about deposits and lending and how that might evolve. How do you think this plays out on the investing and wealth management side?

Nigel Morris: You know the data on wealth and how much money is moving between generations at the moment. I think it’s really an exciting space. I go back to fundamentals here. I go back to, look, is there a real problem you’re trying to solve? What evidence is there that people will pay you to solve it? Is the market big enough to be interesting, the TAM [total addressable market]? And does the team look like it’s got any real permission to be successful in the space?

I think one of the things I have learned in 20 years of trying to be an investor—I still think I’m much more of an operator masquerading as an investor; even after these 20 years, don’t trust me with a term sheet—it’s that, in the end, the market is fashion based, and it’s up and down. We were told by the Chicago School that it was an efficient market. It’s not an efficient market. It’s up and down, and you can’t count on that. What you must count on, though, are the fundamentals. Is it a real business? Will people really pay for it? Does it really have a moat? What is the competitive advantage? Can it scale?

These are the things that matter. And I find in venture, so many people who are in roles like mine don’t come at it through that lens. They come through the lens of “Here’s a really hot company. Look how much it’s growing. We can invest at this price, and we believe that we can sell it to the next company, to the next venture or private equity firm, at four times in 18 months.”

I think there are a lot of people who are going to get caught out in that game of musical chairs unless they’re really laser focused, intentionally focused, on the fundamentals of these businesses. So much of it in the end is about being able to execute and being able to deliver. Of 200-odd investments we’ve made in 20 years, two companies hit their numbers over the first three years—two.

Why is that? Because we make them come up with fantasy projections in spreadsheets. And I think the spreadsheets, when somebody’s pitching you, can be an insight into their soul, and that’s good. How do they think? How do they trade stuff off? But they’re an exercise in wishful thinking.

Uzayr Jeenah: Coming back to what winning looks like in the future, we touched on this question: Is it distribution? Is it product? One of the things that’s fairly provocative in the report is this idea that it’s all going to be about distribution in the future. Products are going to be all fully commoditized. How does that change how you think about underwriting some of the new businesses you’re seeing, and about investing and going forward?

Nigel Morris: One of the things we learned, that Rich Fairbank and I talked about in the Capital One days, was the leveraging of the kind of scientific methodology of observation. Observe is watching consumers, watching the competition. Develop hypotheses, test hypotheses, find out where the hypotheses work, and then go back to observation and have these sorts of scientific loops around the track. Yes, one of the benefits of financial services, unlike manufacturing, is I can develop a product digitally and I can now do it in virtual real time. Even people who are as technologically maladroit as I am can actually start to do some of these things. But the challenge is: Does the product make any sense? How are you thinking about the product? Who’s your consumer? And whose shoulders are you standing on? I think the scientific methodology still works in product design. It’s just that it’s much easier to turn the product into digital form, to then push it through the distribution channel.

But yes, the branch distribution channel we’ve known and loved in banking for generations is very quickly going out of style, competing with digitally native, AI-empowered channels where proprietary data and moats begin to emerge around the size of the companies. But also, there’s this word “velocity”—how quickly you’re able to turn idea into action, action into empirical data, and then go back to idea again. Because that is real comparative advantage. Much more than operational scale is how quickly you can learn and turn things into reality in a world that’s changing so fast, where you have almost infinite segmentation variables.

Uzayr Jeenah: I like the idea of velocity being the true moat. You talked about the kinds of investors you want to back. What are the defining qualities or characteristics of the founders you think are most interesting and most successful?

Nigel Morris: We’ve had a number of people knock on our doors in the last few months, basically saying, “Look, we can turn the decision of investing in our venture capital into an empirically derived AI algorithm. So give us all your data of all the decisions you made on the 200 companies you invested in and on the 20,000 you didn’t invest in. Let’s go through that data, and we’ll build an AI algorithm that’ll allow you to make better decisions.” And where we’ve gone back and dabbled with that, it’s not showing slope. So maybe it’s the wrong data. Maybe we’re not feeding it in the right way, but there’s a lot of art that’s not captured in any of the obvious empirical data in who you choose.

So what do I fall back on? The entrepreneur has to be obsessed with solving a problem. They have to get up every morning and be, “I’m going to solve this problem. It’s really eating at me. It’s the most important thing in my life.” Because the talent that does this is the same talent that works with me and the same talent that works with you in terms of capability. But they have to be willing to be in a much more unstructured environment where the odds of success empirically are poor but they don’t believe that. They believe that somehow they’re going to trick the statistical odds in their favor, and hopefully with QED at their side helping to bend those odds in their favor. They have to believe and be obsessed with that—often to the point where we’re working 80-hour weeks and are incredibly driven.

That’s the first thing.

I like it when you have situations where you have two people involved in trying to build a company—one more visionary, more sales, more mission driven, more charismatic, the other one more technical and operationally capable and mindful of how to make the trains run on time. And the two of them have worked together in certain ways before, so they don’t have to go through the old storming, norming, and performing.

I like founders that listen. I like founders that think in terms of decision trees and have if-then statements in their logic train. Because as I said, only 1 percent of them ever hit their numbers, so 99 percent don’t. What are you going to do when you hit a decision-tree point? And to have thought about that a priori—that’s really important.

The founders have got to be able to recruit and infect other people virally with their mission. They’ve got to be able to have people come along on the journey with them where their salaries are a third or a quarter of what they would make, but they get paid in equity. And, of course, that attracts a certain type of person who’s willing to do that.

All these things come together to make the odds better. But still, there’s a huge amount of serendipity. As somebody said recently to me, “Serendipity doesn’t happen just by luck,” which, of course, it does, but the point is that you make your own luck by putting yourself in a position where you can take advantage of the opportunity as it emerges. Very seldom does the company that’s successful align one-to-one with the idea that was there at the beginning. The ideas evolve and mature and become more and more tailored as companies go through this observe, test, hypothesize learning process and do it at incredible velocity.

Uzayr Jeenah: Nigel, thank you. It’s been a pleasure getting to hear from you.

Nigel Morris: Thank you, Uzayr.