Please give a warm Georgia Tech luck and
John Hayes.

Thank you very much.

How do I get my slides to come up next
the there we go OK Super Thank you.

And good that's perfect
you know actually on.

The I was asked to come over today and
talk about innovation and

I thought it might be fun to talk about
innovation in the context of financial

services in part because that's how I
spend sixty or seventy hours of my we and

also because it's something that
touches every one of us every day and

lastly Georgia is the home of
the payments industry which a lot of

people don't know and there are actually a
lot of opportunities in the state both for

employment and for entrepreneurship in
the field and what I'm going to do today

is talk about three parts of
the financial services world and

how they have been impacted by
technology the first is branch banking

The second is the credit
card payment system and

third is trade credit which is the area
that my company is now working again.

Many people don't realize that it
Lana Wood Georgia is the home of

a very large fraction of the important
payments companies in the world

I've heard the statistic and I can't
find any really authoritative results or

support for this but they say tag
the Technology Association of Georgia

says that two thirds of the world's credit
card transactions are processed by Georgia

companies what I do know is
that the big five processors

are all here in Georgia First Data
pieces on Global Payments and world.

And in addition to that there
are hundreds of smaller companies

that are involved in the payment space but

as you see as we go through this we're all
primarily involved in the consumer credit

payment space which is what's
creating some of the opportunities.

To make this a little bit more fun
today I like to do a pop quiz for

you you're not actually going to be graded
in fact I'm going to ask you to do your

own grading and that's why we handed out
cards and pens because when we get to

the end we're going to see who has got the
highest score and you get to stand up and

receive the accolades of your peers
which ought to be rewarded enough and

I put the third point that this is
not a machine graded test there may

be more than one answer to
any particular question don't

think inside the box I was very tempted as
an systems engineer to put an input and

output arrow on the box and put a function
inside but I didn't do that for you.

The first we're going to start by the
first question and what I'd like you to

do is rank in the order that they
entered commercial service for

communication technologies
the fax machine the telephone

the electric telegraph and
Pony Express and

I say electric telegraph because
some people consider the symbol for

windmill system used in Europe as
Telegraph that's not what we're talking

about would come out electric telegraph So
if it everybody would take a minute

put down the correct water you're ready.

The answer is the electric telegraph
came into existence first it was

in use in France as early as
eight hundred thirty eight.

Samuel left the Morse developed
similar version here in

the United States about the same
time what's interesting is that he.

As a professor at N.Y.U. and

an artist not necessarily on the course
there were no electrical engineers at that

time Pony Express came next and the funny
thing about that is everybody knows

the Pony Express right you've all got this
mental image of riders across the plains

it lasted eighteen months it was
a commercial failure and what put it out

of business was that they completed
the telegraph wires coast to coast and

you no longer needed the expensive
overhead of riders and

horses when you could send
a wire by telegraph and

then the fax machine came along about the
same time surprisingly people think that

faxes were not really readily available
until the one nine hundred fifty S.

or sixty's they actually were available
much much earlier than that and

then finally the telephone
Alexander Graham Bell and

others introduced the telephone starting
about eight hundred seventy six

said What is that got to
do with financial services.

I'm going to explain in a minute but first
I want to ask you the second question and

that is what is the function of a bank
what is the social contract between banks

and the public and
the reason I'm asking that is that there's

a lot of controversy today about whether
banks have been allowed to get to be

too big to fail whether banks are serving
the roles they should serve and

in order to have that discussion of
what's happened in financial services and

what I think is going to happen it's
important for us to have sort of a common

ground in talking about what the what
the proper role of the bank is and

what's important about this
is that there's one really.

Interesting aspect about regulated
financial institutions in this country

it's important to understand is and that
is that our government guarantees them

we have whether they
are whether their banks.

Or thrifts or
credit unions the government provides

an insurance program that
insures the posits and

what that basically means is when you go
make a deposit and insured institution

the federal government is saying you're
going to get your money back and

what that enables the bank to do
is to get capital at an incredibly

low rate for example most banks
today are paying about seventy for

their cost of funds today is about seventy
five basis points seven tenths of one

percent compared to the cost of
capital for most other enterprises

which is easily six or seven times
that if you're a big company and

ten or twenty times that if you're a small
company so this social contract from

the government says we're going to insure
your deposits so which of these things I

have listed here ought to be part
of that framework Well I have said

that clearly A through D. are what the
traditional role of the bank is whether or

not you agree that the bank is there
to make money for investors or not

is open for debate because the interesting
thing is in by the way if you did

not how you answered it is long as you
got a D. should give yourself two points.

We have institutions in this
country called credit unions and

we have a few municipal
mean Islam soi mutual.

Savings and Loan mutual thrifts that
are not owned by investors their own by

the members and they're operated more from
a service standpoint than they are for

return to investors which.

Sort of puts him in a little bit different
category in terms of their orientation but

not quite enough OK So let's talk a little
about banks in the country everybody

knows what a bank is it's where you make
a deposit and where you can get a loan.

You can get your money back out of
it easily by writing a check or

by using a debit card or
they might make you a loan and

you get money out of the able to spend
it on the credit side of the transaction

rather than it coming out of your deposit
there are basically three kinds of banks

in the U.S. there are commercial
banks which originally were

chartered to serve businesses there
are thrifts also called savings and

loans which were originally
chartered to make loans to consumers

primarily home loans in fact in many parts
of the country they're called Building and

Loan Does anybody watch the movie at
Christmas time it's a wonderful life.

If you have seen it.

It's played repeatedly at my house at
Christmas time there are actually two

great scenes in that movie that talk
about the role of the Bailey Building and

Loan one of them is when there's
the one on the bank and the and

he's standing there saying
the money is not here your money

is in his house your money is in her house
and that's what buildings and loans did

they took in savings they turned around
and made a longs out for long term and

then finally their credit unions which
are relatively new in this country they're

about eighty years old they were created
in the one nine hundred thirty S.

originally and they are member
own did they were primarily for.

A company or a community group
could organize a credit union

because there was very little credit for
consumers during the Depression all

of these organizations have either
a federal charter or a state charter and

even the ones that have a state
charter can get federal insurance so

they're all insured through
some kind of a federal program.

The problem that we've got I
think in this country today

with respect to capital for small
businesses is the result of two changes.

That have taken place over the last
forty years which have been enabled by

technology one of them is a scope change

in the thrifts were merged with banks so
that today it's very hard

to tell the difference of whether it's a
commercial bank or it's a savings and loan

in fact some of the larger banks
that we talk about here in Georgia

like sonobuoys for example thank you
note Georgia is actually a thrift.

The other change is
Geographic in that originally

banks were only in a limited
geographic area and

that change of allowing banks
to go nationwide has created

a very interesting problem what this
graph shows is two things the green line

is percentage of bank loans
that go to real estate the gold

line is the percentage of bank loans that
are made to businesses that are not for

real estate that's called C.N.I. lending
or commercial and industrial lending and

what you see is and toll from one nine
hundred thirty eight when the F.B.I.

See started reporting this data until
one nine hundred eighty eight for

fifty years Banksy and I loans were
higher than real estate laws and

then as a result of scope deregulation and

geographic deregulation in
the seventy's and eighty's.

What you saw was a a switch in that
banks are making a much smaller

portion of their assets
in loans to businesses

on the other hand they're making a lot
more in real estate which obviously was

a large part of the problem that
we had over the last eight years.

Let me explain where this came
from home a technology standpoint

because before computers were
introduced processing and by.

Thanks was all manual you might have had
an adding machine to tally things up but

processing transactions
processing loans was all manual

processing it check it was
a huge labor component to it and

it was the same amount of labor
regardless of where the people were and

so there was really not much on a fish and
see in and branching

because you still it still took the same
number of people per chance action.

There were some companies building
machines to try to speed this up

the the it was a company called
the computer Tabulating Recording Company

that made punch card machines that
were widely used in the US census and

they were used to a very limited degree
in banking that come in change his

name Di V.M. in one thousand nine hundred
four and continued to build machines

trying to serve financial services.

So question next question
this is a hard one I've got

a companies listed up there
which one of these companies

were manufacturing mainframe computers.

And I'll give you a clue everyone
that should be on your answer list

was manufacturing mainframe computers
trying to sell them to banks and

other financial institutions.

Give you a minute.

Everybody got their answer down.

The answers all of them.

The they were called I can remember
back a long time ago they were

called Snow White the Seven Dwarfs
because I.B.M. dominated the market but

the other seven were out there and
as you can see with the exception

of Univac which is is operating
under a different name and

to a very limited degree control data not
ever in the computer business anymore.

They all exited the mainframe
business over time but

they were all focused on that same Holy
Grail by the way if you answer them all

three points two points if you got six
of them one point if you got four.

They were all focused on the same
Holy Grail which was to help reduce

the headcount in financial institutions
to help reduce that labor component

of processing transactions.

The most successful machine
to do that was the I.B.M.

three sixty which I.B.M. came out with in
actually announced in the late fifty's

put it on the market the early sixty's and
it really did well in financial services

if you're very attentive you'll
see that's actually an I.B.M.

forty one that's in the picture but
you have to be a real nerd to know that.

The other thing that happened that
came along at the same time was data

communications in that you hand mainframes
were very expensive very big and

it made a whole lot more sense to
be able to put a terminal remotely

someplace else and communicate with
the mainframe computer over a phone line

we call that cloud computing today we
called it timesharing forty years ago.

Very almost the same thing but what
happened was all of a sudden you had two

things going on here one is you could
reduce the cost of the back office by

putting computers and and
you could consolidate banking operations

from many different offices into a single
office and still give the ability

of having the information out because
they had a thirty to seventy terminal and

a data controller in some remote
office that allowed banks to start

the pressure of branching across
state lines and county lines.

In most states you either had what
was called a unitary bank says.

Or in Georgia we had county by
county in fact when I finished

tack I I went to law school I graduated
from law school in seventy seven and

I went to work for a large law firm
downtown and C.N.N.'s National Bank was

our client it was a large spank in Georgia
and fact the four largest banks in Georgia

are all in downtown Atlanta all around
Woodruff Park Trust Company Georgia which

is now Sun Trust First National which is
now part of what cobia and national bank

of Georgia which doesn't exist anymore
we're all in downtown Atlanta and

only in Fulton County we could not
cross a county line with the bank and

what that meant was that banking
was very local I mean if you

wanted to get a loan for your business
you went down to the bank you sat down

with a senior banker who understood how to
read financial statements who understood

the cash flows and businesses and
you negotiate alone in fact Mills Lane who

was C.E.O. of seeing this national bank
made a habit of being on the banking for

personally at least two
mornings a week and

would meet customers who came in and

he had a famous line cannot
sell you some money today.

An exception by the way to this was
North Carolina which never imposed

limitations on state wide banking you
couldn't cross account state line but

you could expand your bank throughout
the state in North Carolina and

that's when when the bank merger
started the North Carolina banks one

that's why in C. and B. came bought
CNS bank created nation's bank and

they would have bought Bank of America and
rename the whole bank Bank of America they

were North Carolina bank why Kovi it was
a North Carolina bank which then failed in

the in the mortgage meltdown is now part
of Wells Fargo but the North Carolina

banks were much larger much stronger
when the consolidation started.

There were two things going on in.

In the seventy's that were
putting pressure on regulators or

causing the banks to try to put pressure
on regulators and on legislators to expand

banking one was the Arab oil embargo
in the recession that came out of that

the other was the technology was starting
to become available to actually do branch

making A.T.M.'s were introduced which
is essential way an automated branch

it's an automated teller machine that
sits someplace away from the bank and

which the banking regulators all viewed
as a branch you couldn't put an A.T.M.

in unless you license that is a branch.

This basically made
the states including Georgia

relaxed their regulations allowed
the banks to branch state wide and

then ultimately allowed the banks to
enter into compacts with other states and

move across state lines and
finally by the mid ninety's banks

could go anywhere in the country and
they could they wanted to economically and

that was all enabled
because of the computer and

data communications so one of
the things that really helped the banks

do this particularly with operation
of A.T.M.'s was the invention of

the smart modem the modem of
course is a device that translates

the data into an analog signal so
it can be put over a phone line and

the modems before this was the smart
modem was invented were pretty dumb and

so the question is Where did
the smart modem come from did I.B.M.

do it to expand the products
it was selling to banks

it in C R Do it to expand what
it was selling to retailers and

also to banks Motorola who was the biggest
modem manufacturer in the country and

they were selling to governments
the military and a lot of folks or

did a twenty something
Georgia Tech alumnus created.

From the snickering in
the room I can tell the.

You all pretty much know the answer
of course it was Dennis Hays same

last name as mine no relation.

Dennis finished TAC I'm
not sure he graduated but

I know he was at tech at the same
time I was and then he worked for

national data on him a guy named
Dale Hetherington were national data and

national data was a health
care information processor and

a credit card processor out on the.

Access road on I eighty five and
Dennis and Dale working out there and

saw all the kind of modems they
were using to communicate with and

like all good entrepreneurs said we
can do it better and they got up and

they left and they started Hayes modem
Hayes microcomputer on on Dennis's

dining room table and the three points
about this that I want to emphasize one

in addition to the basic fact that if you
go to Georgia Tech you can do anything.

One is that most innovation
comes from the demand side.

Not from the supply side Dennis and
Dale were working for

a user of modems not
a manufacturer of modems so

many times you'll see the demand side
have a better understanding of what

the shortcomings are in the marketplace
as opposed to the supply side who's got

a vested interest in the products that
are out there second is small companies

innovate more of them are much this is not
always been the case at one point most of

the innovation in this country was
coming out of western Bell Labs of of

General Electric and
other wards organisations but

certainly since the fifty's
you've seen that shift so

that more innovation happens in smaller
companies it's not that they're smarter

people working in smaller companies I
think it's because smaller companies

aren't burdened with the processes that
a large company has to go through for.

And to catch hold and to prosper we're
actually doing a project right now

with a large company wonderful company
very smart people they have a very formal

process for managing innovation and
not surprisingly it's taking two to three

times longer for this project to come to
life through their process than if and

if we were doing it without and
finally I should be poor all engineers but

I am an engineer I can't always put
the right ss engineers innovate more than

bankers and so you're going to see a lot
more innovation come out of places that

you've got engineers then pure bankers
that's certainly true and what we're doing

if you've got Dennis please give yourself
three points the result of all of this

the result of the adoption of technology
the march of technology in banking

is that we now have about one
third the number of banks in

the US today that we had thirty years ago.

And those banks have four and a half
to five times as much in deposits so

we've got fewer banks and they're much
larger What that means what's not quite so

evident from that is that this
old way that CNS bank operated

where you had a senior banker sitting on
the banking floor who understood financial

statements understood the cash cycle
of a business isn't there anymore to

do the loans to a small business that's
not real estate of course banks are very

happy to do real estate lending because
as we all know you can't get hurt dirt

real estate never goes down in value so
it's always a safe line.

This is this chart shows what's happened
in the last twelve years if you actually

take this chart back several years
before this it looks even worse but

this is a chart of how much bank assets

are being loan to small businesses for C.
and I love those non real estate long.

As to small businesses and the F.B.I. See
definition of this from where this data

comes from is loans of a million
dollars or less and so

that's you've got to be a medium sized to
small business to be in this bracket and

what it's basically saying is that the
total number the total percentage of bank

assets going to see not lending
of all banks has dropped from.

About three point six percent to less than
two percent and the worst part about it is

that those banks under ten billion
in sales those community banks that

used to be are expected to be the primary
supporter of small businesses or

even wharfs they've gone from two point
seven to about one point four percent.

And what this is causing we think is

the perpetual high unemployment
in many areas we don't think it's

a coincidence that Georgia has the highest
unemployment rate in the country and

also had the largest failure of community
banks over the past five years.

Banks have retreated from
supporting small business and

you don't see that anywhere clearer
than than here in Georgia and

that's happened in part because
the banks were able to get

larger because the technology
enabled them to do so.

The technology innovations that you
saw in branch banking also gave

rise to a whole new system out
there called the credit card and

the payment system which is said earlier I
showed you the map is extremely important

for Georgia and let me talk about that for
a minute so Question number five what is

this thing on the screen and
what does it use for.

Valve vacuum tube amplifier
switcher white ball.

All right everything but a white ball.

It's made like a light bulb it's got
a it's got glass it's got a vacuum and

it's got a filament but
the important part about it is

that it can be used as an amplifier or
a switch and for

fifty years that was its
primary application from

one thousand nine hundred six one
thousand zero seven until the fifty's.

It's what made electronics possible that's
what made radio radar the first television

the very first computers long distance
telephone amplification huge advances in

electrical engineering understanding
about about how electronics works

the problem with it is it's like
a light bulb and it's got filaments and

the filaments are fragile and
they burn out and

so they're not all that useful
in certain applications and so

the result that came out of it was a huge
investment in trying to develop a better

alternative and that better alternative
was the transistor So question number

six is who invented the first transistor
I.B.M. who need an electronic switch for

computers you Nevada who had done one
of the early to base computers and

now needed a better way of building
computers Radio Corporation of America who

needed more reliable radios Bell Labs
who wanted a better amplifier and

switch for telephones or
Intel to make a less expensive memory.

I hope everybody knows of
course it's Bell Labs.

Who in December one thousand nine hundred
seven created the first transistor which

they did a primarily to improve
long distance service and

to reduce the cost of being
able to deliver long distance.

Let me give you a quick history
on what about telephones.

Telephone connections originally were
done by operators through switchboards

in the early part of the last in.

One thousand tendon one hundred
twenty eight hundred eighty

installed relay panels throughout
the country and switching stations so

that a rotary dial phone as you doll
the phone it would send pulses down to go

could click and those pulses would trip
relays which switch the lines which

means you could eliminate the operator
which means you could do a dial connection

much much cheaper The problem
is that the complexity of doing

that when up every time you added
a number that had to be switched so

you could do pretty good
woke ole dialing with a doll

phone they really never got it
working right for long distance using

the relays they tried vacuum tubes
example fires and switching but

the wife of the vacuum tubes was too short
and really didn't work that's why they

invented the transistor which they did
amazing thing with is they wanted it for

their purposes they had a monopoly
on telephone service in the US or

a near monopoly but they licensed
to a lot of other people they

basically made the patent technology
on the transistor widely available and

dozens of companies licensed it and
started building transistors.

Of course the transistor led to
the development of the integrated circuit

which basically is just a whole lot
of transistors and resistors and

capacitors on a single piece of silicon.

But what it did was it allowed them to now
do what they had done fifty or sixty years

before with local service and that is
to make long distance electronic and

switchable and they did it with a touch
tone phone so when you push the button on

a touch tone phone you get two
frequencies sent out and the circuitry

that changes to be circuitry can then
switch that which made it no longer ness.

Sorry to have a an operator
place a long distance call

Have you ever seen the movies from the
thirty's or so where somebody is going to

call across the country and people have
to plug together the telephone call and

then they say Your call the West Coast
is ready it used to cost fifteen

dollars to call San Francisco
from Atlanta and

that was fifteen thousand nine
hundred fifty dollars and so

if you're trying to do
a credit card system.

And you want to approve
a transaction you can't approve

a transaction outside your local area
with very expensive phone service and so

what the electronic switching did was it
dramatically reduced the cost of long

distance which made it possible to
place calls to verify a credit card and

initially it was all done manually you
call a number you tell me merchant number

tell the card number and they give you an
authorization then they got to the point

that you could actually punch in the
number on the phone so you had a six or

seven digit merchant number you had
a twelve digit card number you had

the amount you were approving and

if you got it wrong and stood up the
transaction it was very frustrating for

merchants then I B M And this by
the way I should have made the comment

that Bell Labs creating the transistor and
I.B.M. creating the mag card is an obvious

exception to what I said that most
innovation comes out of small companies

because here were two great innovations
that came out of large companies but

I B M developed the first mag
card in the early seventy's and

very quickly after that dozens of
companies created the mag card reading

terminals so that now all you have to do
with a credit card just to do a swipe and

what that allowed is for
the credit card to become ubiquitous so

that today we have more than ninety
eight percent of all consumer

transactions are managed by
financial institutions and.

Heart because the credit card is
now able to be done so quickly and

inexpensively at the same time the same
kind of technology has helped other

consumer lending come up that same curve
so basically in the current system there

are three primary technologies that I'm
able to to happen one is digital computers

to process the transactions The second is
the inexpensive long distance that was

created through the transistor and
then eventually migrating to be

able to use mag stripe terminals and
finally a third technology and

that is consumer credit score which like
many things wasn't developed by bankers or

by credit bureaus it was developed by
an engineer in a mathematician named

Bill Fair and Earl Isaacs who created
fair Isaacs which is the FICA score that

we all are tagged with like it or not.

This.

Progression dramatically
impacted Georgia because we

happened to be in a very favorable
situation we didn't develop any

of the core technology this was all
developed other places what we had is

some companies here that were in the
business including national data Remember

the company that in a Ses work for
an Columbus Bank and

Trust down in Columbus who had done
an in-house credit card operation

that became total systems or T.C.S. which
is now the second largest in the world and

all of this sort of came to the forefront
in one nine hundred eighty seven when

Jimmy Blanchard the C.E.O. of Commerce
Bank and Trust came to the governor and

said If you'll help me change the state
law so that you don't have to be a bank

to process credit card transactions then
card processors all over the country will

flock to Georgia because of the easier
regulatory environment the governor did it

the legislature passed it and within
two years we were the home of the pain.

It's industry many other states
passed similar legislation later but

by that time it was too late they come to
Georgia and they have pretty much state.

Let me take just a minute and talk about
trade credit I don't want to take too much

time on this because only plenty of
time for questions trade credit is

a huge market in GA that
a huge market period and

I think it has a lot of interesting
implications for the state but

to ask the question let me start by
asking what's the total annual sales

of businesses in the U.S. ten trillion
about the math amount of the G.D.P.

or fifteen trillion
the amount of the G.D.P.

Obviously you've got to know what
the G.D.P. is to answer your B. C.

about thirty five trillion more than
twice the gross domestic product or

one hundred gazillion dollars
just too big to be measured.

It is late in the afternoon and it has to
be a little bit humor that's my one joke.

The answer is C..

About thirty five trillion and people are
surprised at that sometimes because they

say I thought G.D.P. was a measure of the
size of the economy gross domestic product

is only a measure of in use consumption
which is sales to consumers

about half of which is done on credit
which is about ten trillion a year so

roughly five trillion of those sales
are done on credit credit cards

automobiles mortgages etc sales
to businesses and governments for

their interviews consumption those
two numbers together make up G.D.P.

And then you've got sales to businesses
for resale the mind sells the your

to the smelter who sells the machinery
who sells it almost below and

you factor sells it to the dealer
who sells at the consumer each one

of those steps along the way is a sale and
they're all done on credit so

what you end up with is
about twenty five trillion.

A year which is not quite one hundred
kids Illian but it's close to twenty five

trillion a year in trade sales.

Are part of which is not on credit and

five trillion a year of
consumer credit sales OK.

I said a few minutes ago when I showed you
that chart of the credit card growth that

ninety eight percent of consumer
credit in the U.S. is done.

Through financial institutions managed and

the risk taken by financial institutions
so an ass of a five trillion dollar

market of the twenty five trillion
trade market what percentage is

managed by financial institutions four
percent twenty percent forty percent or

more than sixty.

The answer surprisingly is
less than four percent.

Trade credit unlike consumer credit
is still the old fashioned peer to

peer system that's peer to peer not appear
to be yours using peer to peer system

that's been in place for
four thousand years.

And it his never been fully adopted by
financial institutions at least not yet.

Of that twenty five trillion about
a third or a trillion is trade credit

trade transactions originated
by small businesses.

So about a third of the total
is small business originated So

if you've got a please
give yourself five points.

Let me go back to my slide earlier and

talk about why this particular
side is such a problem and

that is see an island doing concerts
commercial and industrial lending

which is loans to businesses not secured
by real estate is primarily secured by

trade credit receive a bull's eye of the
biggest asset most beat of the businesses.

More than property plant
more than inventory.

For most of them.

And banks won't loan on it banks will not
use it as collateral which is creating

the problem out there this these
two charts show how much bank

debt is available in the market if
you're a large company you can fund

about fifty some percent of your needs for

trade credit with C.N.N.
loans from banks if you're a small company

it's twenty four percent the large
companies also have another eleven or

twelve percent that they can fund in
the asset backed securitization market

the commercial paper market
which small companies can't so

what this basically does the problem we
have is that we've got a five hundred

billion dollars gap in
the credit market in terms of

just equalizing the percentages between
large companies and small companies you

can make the argument that it's actually
more than that because large companies

can fill in the rest of that gray area
more easily than a small company so

we have at least half a trillion dollar
problem out there in the credit market.

So what we've done my business
partner war Hobson And

she's a one thousand nine hundred
ninety three Georgia Tech grad.

Who then went off to business
school in the northeast

we sat down four years ago and we said.

What would we do differently she
came from the demand side she and

Stacy Abrams have a small
manufacturing company and

I came from the supply side
understood how banks manage this and

we looked at the card system we looked at
asset based lending we looked at all of

these things and we basically did
what good engineers do we figured

out where the friction was and
we reduce the friction.

And what we do.

Did was we looked at the current system
which is basically to say on the left hand

side you've got a merchant service system
a credit card system that works for

both the merchant and the consumer
consumers are willing to go buy things on

a card in order to get credit
to buy now and pay later and

ninety eight percent of consumer
credit is outsourced as a result but

that same thing doesn't work for the B.
to B. transaction the reason is hoops

getting ahead of myself
the reason is that.

The old fashioned system the accounts
receivable accounts payable system that's

been around for four thousand
years is free to the buyer and

flexible you send an invoice to Koch for

services the invoice is net thirty you'll
get paid in sixty to ninety days and

they don't pay interest.

And you asked why it's not just because
they can it's not just because they have

economic leverage that
capital that free accounts

payable is a huge part of their capital
structure if you want to do an interesting

exercise some time take a walk at
how much a particular company house

outstanding in accounts payable and
ask yourself the question how much with

their earnings go down if they had to pay
interest on accounts payable The answer is

significant we did this a couple years ago
Home Depot's earnings of the gun on twenty

two percent Wal-Mart's twenty two percent
Boeing's twenty eight percent free

accounts payable is critical
to most businesses and

so what we did was basically design
a system which doesn't change the free and

flexible nature of accounts payable for
the buyer but

it looks and feels to the small business
seller just like its merchant services and

we did it by looking at
four major areas and

we illustrate this is years
because we are engineers by train.

And they all work together none of these
could stand alone they all have to

work together which is basically
the way it's price and

position the way it's
distributed the way it's funded

all of which is you know walked
into the risk management system so

that's what we're doing we had a very
nice compliment paid to us a month ago

we were in the office of one of
the largest banks in the country and

our distribution partner had taken
a stand and this particular guy.

Million small businesses for
that particular bank they're all under his

purview and after an hour and a half
he said Now account is a singularity

it will change everything like
the first credit card and

I was thrilled now our head of marketing
said I could not use that slogan anyplace

but it Georgia Tech because nobody
knows who the singularity is.

But we're very proud of that So at this
point let me stop there are twenty five

possible points if you answered everything
correctly who's got twenty five.

Twenty four.

Twenty three.

Twenty two.

Are you bashful a nobody
keeping score twenty.

Nineteen.

Up please stand up.

We're going to bearish you can we
embarrass you OK and you had how many

twenty that's bad thank you.

We have a few minutes for
questions and I open it up.

In factoring I'm sorry say
what's the diff between now and

factoring we only have
ten minutes left the now

account is a merchant service
like the credit card system.

As opposed to factoring which is primarily
a lending product is the simplest

it gets much more detail than that but
it's it is very different.

And by the way that's one of the issues
out there because factoring has a very

bad reputation of the market so it's very
important for us to be a drug store and

not a drug dealer so.

Yes.

Since it is such a technological company
what type of leadership styles do you

employ to keep everything on
par it's kind of relaxed.

You know I mean it's really.

The key the key to any business

I don't care what it is the key to any
business is having the right people and

having people that understand what's
expected of them and they do it.

I would say the other thing is that
we are very quick to make decisions

to correct things you can't do things
later if the name of the company is now so

I would say our leadership
style is very relaxed.

Yes I'm you mentioned that bank lending
has decreased a lie too in small business

is especially in Georgia is that the case
in any other state and if so is anything

being done like to provide to small
businesses or anything you guys do or.

Like now you know it's Georgia's not
alone in that it's a national problem

Congress put some legislation in four
years ago in the small business jobs bill

to create this called a state small
business credit incentive program.

It's done a little bit up
the fundamental problem.

However is that making loans to
small businesses is expensive

both in terms of the underwriting and
monitoring so

that you don't have excessive losses and
it's a much more expensive kind of lending

than a lot of other things like
automobiles or or real estate even or

whatever the problem is the banks
aren't lending I mean this huge

increase in assets that you see out
there is not turning around and a loan.

It's back into the communities it's
being maintained at the banks and

invested in securities and in treasuries
not in long so George is not unique and

I and I you know I've been asked a lot
because I spent some years on the hill and

I've spent a fair amount of time involved
in in government relations you know what

can the government do and I'm not sure
it's a government solution because I don't

think you can fundamentally change the
economics problem I think it's going to

get change through technology and I think
it's going to get changed through the kind

of things we're doing which
is improve credit management.

And there's a really innovative companies
out there like on deck again and

Lending Club and
some folks like that that are trying.

Those kind of things in the lending
space we're not in the winning space

where merchant service we're
actually buying the assets but

we have the same kind of credit issues.

Yes Or do you come here was
the other company you could

have the business model of
trans insurers now account and

also be happy it's that there's enough.

Space F. trans which is across the street
or was across the street was an A.T.C.

customer as an A.T.C. company but
they've now moved out Alpharetta.

Is trying to solve this problem
internally within banks and

they're doing it their largest shareholder
is the venture capital Phillips the Novus

novus was their water largest lender for

a long time they're trying to solve the
problem within the context of banks and

I would say the biggest
difference is that.

When some novus hook up with
real estate lending say I went

in kind of any arms in South Carolina that
hick up blue Afghan's out the door for

six months so survived but
it was really a tough time.

Now account is not we'll
line on any single

financial institution we have one
of the things we did is redundancy

across the board including
where the cash is coming from.

Cabbage is a lender and
they are loaning on future credit

card receivables primarily all of the
trying to do some of the small business

lending today they are a lender they're
not a merchant service they are lending on

consumer market service receipts
very different business model.

Tell us a little bit more
about how the now account

operates and came to where it is now for

example I'm interested in where do you
get the money to buy the assets and

how how big are you how long did
it take you to get to where you

are now we get in the early going you
know we get the money to buy the assets

from financial institutions because
what we're basically doing is building

a structured security vehicle all the
assets are owned by a special purpose and

of the whose only reason for
existence is to own those assets and

to borrow the funds from financial
institutions and we're in the process of

selling bonds into the capital markets
on that so it's a straight asset backed

securities ation vehicle which follows
traditional A.B.S. structure kind of

guidelines we've done a little over forty
five million in transactions so far we

incorporated a company almost four years
ago in December of two thousand and ten we

did our first commercial transactions in
the spring of two thousand and eleven so

we've been actively in the market for
about two and a half years.

Which is.

Twice as long as we expected but
it always takes longer so.

Now we're going to grow at a much faster
rate we actually closed on a round

of funding in the past few months that
was six X. what we had in place before so

we will be growing much much faster in
the future than we have in the past so.

Yes Sir John you talked
a lot about the history of

innovation with financial services and
fairly nice a.

But cryptocurrency in big going how you
see that potentially disruptive I don't

know you know I got to be honest I don't
have a clue I don't I mean my initial

reaction was the only reason for
bit coing existing was

to evade government supervision which
means it was probably illegal use for

illegal transactions understand tech
is now accepting it in some places but

I don't I don't know enough about it
to really have a fair comment although

I guess it could be a hedge against
currency fluctuation maybe I don't know

I don't know enough about it to
really be able to say and telegenic.

Yeah I have a question on how no accounts.

See that the current in
the year to peer lending.

But if we.

Actually we we've had the opportunity
of working with two large organisations

one a collection of financial institutions
looking at that question another a large

service provider to financial institutions
looking exactly that same question and

the first observation I would make is that
a lot of these companies out there being

called peer to peer lenders are in fact
not peer to peer lenders they're simply

unregulated institutions in that they
are aggregating dollars on one side and

lending it out on the other.

There are very few real peer to
peer lending platforms out there.

Except the one that we're trying
to distant to mediate and

that is trade credit trade credit where
one business gives their customer credit

is pure peer to peer lending and
has been for four thousand years and

we think it can be done much more
efficiently if you aggregate the middle

component where you aggregate the assets
into a single pole that can be managed and

you fund that with money from the cap.

Well markets so.

I guess we're kind of we have a skeptical
view of the you know the label peer to

peer lending now by the same token a lot
of the companies that are being labeled

peer to peer lending
like cannon on deck and.

Lending Club and those folks they're
actually doing a very valuable service

because they're stepping up and
trying to make capital available for

small businesses that
the financial institutions Walt.

That they're that respond that.

I have another question
What are you what unity is

in the tank industry financial technology
in the industry and then he's famous for

like how should Tech students prepare for
the opportunities.

I guess I would have two comments for that
one do not take Ritalin and number two

keep your eyes open for opportunities and
just look I mean there may

be a street here at the eighty D.C.
and throughout the whole.

Area there are great small companies and

one advice I give to Tech students is
don't feel like you need to go work for

a big company your first job out of
tech doesn't need to be working for

a large company be open
be willing to go work for

a small company even if it fails
because with your degree in your

training you're going to get another job
and you ought to take advantage of that

flexibility to see what you can learn
you'll learn a lot more in a small

entrepreneurial company than you will in
most large organizations in my view yes

ma'am can you give your opinion on micro
lending and how it can be better utilized

in the United States you know I know what
it is but I have so little knowledge of it

that I really couldn't veteran
opinion I don't really know.

John thank you come to Georgia Tech
to thank you very much thank you.