We are pleased to continue our ongoing series "Lessons in Innovation Leadership," which showcases the experiences of business leaders who have led, and learned, from significant innovation initiatives. We conducted our most recent interview with Chris Larsen, co-founder and CEO of Ripple Labs, creators of Ripple, an open-source technology for simplifying cross-border payments. Mr. Larsen is a leading entrepreneur and innovator who has consistently been a pioneer in developing electronic marketplaces for financial services. Before co-founding Ripple, he previously co-founded and served as CEO of Prosper, a peer-to-peer lending marketplace as well as E-LOAN, a publicly traded online lender.
At E-LOAN, Mr. Larsen was at the forefront of the open access to credit scores movement by making his company the first to show consumers their FICO scores. He had a pivotal role in the passage of the strongest consumer financial privacy law in the nation and serves at the Board and Advisory levels at the Electronic Privacy Information Center (EPIC) and numerous other organizations and companies including Progreso Financiero, Betable and CreditKarma.
Mr. Larsen holds an MBA degree from Stanford University and a BS degree from San Francisco State University, where he was named 2004 Alumnus of the Year. In this interview, Mr. Larsen shares his candid and insightful views on a range of topics, including challenges he has faced and overcome as an entrepreneur, his perspective on the rapidly evolving area of mobile wallets and payments, and his vision for Ripple as a new platform to make cross-currency transactions faster, better and more accessible.
Q: Could you begin by telling us what led you to become an entrepreneur, and especially an entrepreneur within financial services?
Chris Larsen (CL): It probably goes back before we formed E-LOAN, so it probably goes back more than 25 years ago. I had a bad experience personally with buying my first house. And I thought we were sort of fooled by some of the terms. A lot of financial products are sold like used cars as opposed to as the complex products they are. So that experience directly led to us creating E-LOAN, and trying to make a more transparent product using technology. That was definitely the inspiration: A personal anger that I had and a mistreatment in the consumer process of getting a personal loan. And the ability to start something new is always stressful, but it is also incredibly satisfying if you can block out the stressful days – the good days are just incredibly satisfying.
Q: As you have tried to re-shape markets, what are some of the big challenges you have encountered as a leader? What led you to some of the solutions you identified for these challenges, and what kind of lessons might be learned from that?
CL: There are a lot of challenges that change over the years. When you first start, one of the biggest challenges is simply overcoming all the advice from people you respect to not do what you are thinking, what you think you can do. Really the notion is that any new project, any new product shouldn’t really be possible because if it was someone would have done it already. I think that is one reason that a lot of new ideas just don’t get going right from the beginning, so you almost have to suspend reality and not listen to people you respect—otherwise you’ll never do anything. Then number two, once you get past that first period, the biggest obstacle is just finding a team, people who will follow the vision, bet their future on you, and be good team members. At first you struggle to get people’s attention. And then once you get their attention you struggle with are they the right people to have on your team. If you are too selective up front, you’ll never get critical mass of a team. At the same token, if you are not demanding enough about who is on your team, you won’t be able to have the quality of talent to scale where you need to go. So there is a funny chasm you have to cross in those early days.
Q: If you are going to create or re-shape a market in an impactful way, that clearly requires large scale behavioral change among consumers and also other participants in the market. In your experience, what are the best ways through which this kind of behavioral change could be accomplished? What works and what doesn’t?
CL: Simple works. In a consumer company, keep it super simple, and do not try to do too much. The tendency is to over-complicate things. There are a lot of smart people in the world, particularly within technology, and there is thinking that only the smartest things bubble to the top. It is actually quite the opposite. You definitely have to have the smart technology, but you have to be smart in how you sell it and how you present it. How you present it has to just be incredibly simple. Then once you find that simple formula, then you repeat it and repeat it, just over and over again. So those are just some of the things I think that are easy to get wrong. You can’t bring about a big change with something that is really, really hard to get your head around.
Q: That is very interesting to keep it simple. Are there some actual examples from E-LOAN or Prosper or what you are doing now that actually illustrates that?
CL: With E-LOAN, for example, there was tons of complexity going on when you are trying to take out loan agents, and you have a self-serve thing and you are trying to be really, really thorough. It is super intensive in data, and you might think that is what consumers want. But no, the consumer wanted something that was very, very simple, [a service platform] that quickly figured out their needs and gave them the right answers very quickly and very easily to digest. Something they could trust certainly. Something they felt was fair. So, it just takes a long time to nail that and get that message right. And Prosper was the same thing. It’s peer-to-peer lending, the details of that are super complex. But it’s best to boil all that down to a very simple message. In that one, it turns out that there were two messages, and you couldn’t combine them. There was clearly a lender message and a borrower message. Ripple, of course, is a completely different story because it’s an enterprise company. Here we are really trying to go into the guts of the payment systems and valuation systems with people who know how this works and to reach them.
Q: In the context of keeping what you communicate simple, are there differences between a consumer side and a business-to-business proposition?
CL: With the consumers you don’t have time; the 8 second rule applies. Things have to be super clean, super simple. With the enterprise, it is more about reputation and scalability and reliability. Communication is definitely finding one message that works, and then finding the right people within those organizations. On the business-to-consumer side, there is definitely the trust factor—certainly if you go online. So, we work a lot on our brand to make it a trusted brand. And E-LOAN was one of the top 25 trusted brands. We worked a lot on that, and demonstrating that with proof points. So, essentially, it was about being very simple and trusted. With enterprise it’s more about whether you can get experts to validate what you are doing. It’s a bit about following the leader in enterprise. If you can get your first critical customers all the way to the end, then others will use that as a proof point.
Q: If one looks in financial services or outside, there is a lot of interest in the Millennial generation, born between roughly 1980 and 2000. Do you see his group as being fundamentally different than previous cohorts? Are there different approaches that businesses need to adopt in order to address their needs?
CL: On a consumer side, the Millennials’ expectations of service are higher; they have less of a tolerance for things not working. You definitely have to follow the 8-second rule, as you don’t have much time to show Millennial consumers what to do. Millennials are consistent with the process of where the world is more broadly—things like believing in diversity, being very community oriented, comfortable with change, optimistic, not cynical. [As employees, they like] flat organizations, less of a command-and-control, and they’re more apt to be led or convinced that this is something that makes sense and something they should really be part of, maybe a little more sensitive. But it seems to me that those are all things that are consistent with the ways that people behave generally. In the financial industry though, Millenials are skeptical. Many view banks as irrelevant, and they see finance as an area for disruption. They don’t understand what differentiates their bank from any other, and they don’t understand why finance has yet to offer them the variety of choices that they get from other industries.
Q: I’d like to turn next to retail payments, such as consumer credit cards, debit cards, mobile payments, prepaid cards and so on. There is a big expectation that such payments will be greatly transformed in the next 3-5 years or so. Is that an expectation that you share? And do you see retail payments evolving in a particular way?
CL: Well, yes and no. For consumer use and wallets, using your cell phone as a wallet has pretty much failed simply because swiping a credit card is actually as easy as it gets. Particularly in the U.S. and markets that use credit cards, that entire push has basically been a big failure. As for the quality of wallet—I don’t think that will change. What will change will be the underlying infrastructure. So, for example, when you swipe your card, it might be pulling off a totally independent payments network that is pulling in gold instead of dollars. That is how you will actually change things. It may be that the consumer doesn’t really notice much of a change; they just notice they have more choices and they can do things faster and cheaper and with better exchange rates. You might see in the developing world that you are skipping cards altogether and jumping to cell phones, which is a different story. But so far the front end changes, particularly in the U.S., have pretty much been a disappointment.
Q: In that case, what kind of factors do you think might drive such an evolution? Is it going to be from the merchants? From independent players? How might this be driven forward?
CL: You can see that it originates from the idea that payment systems will move from pre-Internet to post-Internet. As a result, you have this notion of an Internet for value exchange. That starts way at the bottom. But it could manifest itself via merchants; suddenly, the merchant reward points programs are as fungible as full blown currencies, that is one thing that could happen. It could be banks being able to just do things that they can’t do today; things like move money in seconds, at way better exchange rates.
Q: You also see a distinction between what happens in developed countries vs. emerging markets?
CL: Yes, simply because of the muscle memory of card swiping. People who are currently swiping cards are just super used to that, and it is super easy already. Clearly, a lot of complicated things happen in the background, but nobody really notices it. As a result, nobody can really see that change. But, you can have what happens when you swipe be very different while your act of swiping probably continues. In countries where you don’t have swiping yet, maybe there will be a shift to phones because there is not as much muscle memory on the swiping.
Q: There is both anticipation and apprehension about such potential changes that could happen, whether it be developed or emerging markets, and it looks from your assessment as well that there is a fair amount of potential for market disruption. Is that correct?
CL: Yes, that is right. Disruption is true but we have to use that word carefully. So it doesn’t necessarily have to disrupt the incumbents, it is just that incumbents will have different capabilities available to them. Banks don’t just go away, but they have other things they can do now that they couldn’t do otherwise. I think you’ll see that players who are integrating new technologies will gain a big advantage. That could be because they have more efficient ways of moving value globally.
Q: Tell us something about your more recent endeavor at Ripple Labs.
CL: Sure. We are using some of the ideas that were born around the crypto-currency movement; think about Bitcoin over the last four years. But we are using it not to introduce a new currency into the world, a currency without a counterparty. Rather, we are using it to build an internet for value exchange, by building a distributed peer-to-peer value exchange system. The analogy would be the internet of value exchange that is parallel to our internet of information exchange we’ve had for 20 years. Moving value is new; we couldn’t do that years ago. At Ripple Labs, we are trying to use it to move existing things of value faster and cheaper and at better exchange rates. That would allow anyone to send value globally in seconds instead of days like it works today. And that basically is at no cost versus wire fees of $35 per transaction. Everybody should be able to compete for cross-currency trades to not only give the sender the best rate possible but profit from the spread. Within the world you have today, it is only the top 10 banks that dictate what that exchange rate is. So consumers and small businesses are paying 5% plus for the exchange of dollars into euros, while at the same time some hedge fund is paying five hundredths of a percent for that same exchange. In the new world of real-time settlement systems everybody ends up paying a competitive rate. Everybody is competing for the same exchange.
Q: Is this something you see that people participating in this exchange would be mainly institutional players, or also consumers directly?
CL: It could certainly move to consumer, because these systems are open-source and available to everyone. They are just like Http. Any consumer, of course, can search for any search term online. However, there are search engines that do it better than they could possibly do. So, a way to look at these things are that yes, everyone is free to do what they want, but the movement of value is still likely to be dominated by either existing companies, banks, institutions, market makers or very skilled new players. So yes, they are open systems, but it will probably emerge that you will have incumbents or new large players moving value, but in ways that are far more efficient for consumers and small businesses. Just like searching for information is fundamentally different now than it was 20 years ago. The same thing will happen with value. No situations where a consumer pays 100 times more than a hedge fund. No more situations where the rails themselves have a huge toll.
Q: That is very exciting. One of that is that it is different from existing arrangements because of pre-Internet vs. post-Internet. What are some of the big changes you expect versus what is currently prevalent?
CL: Even the smaller banks will be able to move value faster and more efficiently at lower cost and with better exchange rates. Which will mean that remittance payments will change fundamentally. So we think those are the big beachheads initially.
Q: There will likely be resistance to this change from some quarters. How do you see this being overcome?
CL: Well, likely the largest 10 banks will resist this, but the smaller banks that are really burdened by correspondent banking today will really embrace it. We think there will definitely be some regulatory resistance, but we think that can be overcome particularly as new technology is seen less as some weird new currency and more as a fundamental banking infrastructure, like a global web of value.
Q: In the context of cross-border transactions and needing it to be relevant to consumers, how do you see the impact of this in the remittance market?
CL: Yes, that should really address those 5% costs that people are paying, so the rail costs will go down and the foreign exchange costs will go down quite dramatically. I still think though that money transfer companies have a very strong play just because of their cash-in, cash-out networks. It is important to note that there are some things that in this technology don’t change at all. Cash-in, cash-out presence doesn’t change. Dispute resolution doesn’t change. The settlement, the free rails and the access—that is what really changes.
Q: I'd like to touch on the topic of cryptocurrency, such as Bitcoin. What is your perspective on where that will go? Will that become mass market?
CL: On a consumer level we don’t think so, not now. The value proposition for consumers is not strong. It is strong for merchants because they don’t get chargebacks, but that just takes a benefit [dispute resolution and protection] away from consumers. We don’t see the need for the world to have a new currency; we see the need for a better way of moving existing currencies. Market makers will find it very efficient to use a digital asset or cryptocurrency as one part of their trade, but only if that cryptocurrency allows all things of value to be exchanged. Bitcoin doesn’t allow that. That's why we built Ripple—mostly we exchange dollars, euros, yen, etc. We see ripple (XRP; the currency associated with the Ripple protocol) becoming the universal bridge for all things of value, and market makers will use it to make markets.
Q: Looking at all the different entrepreneurial ventures where you have been a leader, do you see any commonalities in terms of creating a significant market impact?
What I’ve learned through my entrepreneurial ventures is that it’s best to build within the framework of the existing market. A lot of entrepreneurs try come in and disrupt an industry. In the financial industry especially, most of the existing players have been around forever and they have established trust with their customers. So it’s more efficient and effective to build a venture that works in collaboration with the institutional players and their customers rather than starting from the ground up.