Thinking in primitives — 2

The story from day before yesterday would have given a perspective on Why Hypto exists and that we want people to dream big. The opportunity cost of dreaming small or making incremental improvements is extremely high today and at almost the same level of risk.

So, when we were documenting our future plan, we broadly had 4 motivations —
1. Think from 1st principles
2. Optimize for long term
3. Remove/reduce dependencies
4. Build the best tech company in the world

I am sharing the document that we had shared with investors last year prior to our seed funding. This is to give you context on where we were 1 year ago when this document was written. And when we break down what we are building today, it will help you fit all the pieces in what we are building today seamlessly.

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Vision: Build a world class tech company that banks & banking users love

In a low trust country like India, banks have a huge moat in terms of trust. Any new financial service that requires handling customer funds is automatically considered risky by users.

● Institutions are able to get away with providing poor service, experience, UI/UX and literally every other sub-optimal practices due to this huge moat. Banking experience for customers today sucks, for a lack of a better word.
● But this does not mean banks don’t have their strengths. This trust of banks comes from:

○ Regulation — Customers believe that regulated entities are safer
○ Banking operations — There is still a huge amount of manual effort that goes on in a bank today and banks have the systems in place to operate without any bottlenecks
○ Evaluating risk & underwriting — Customers believe that banks will not issue loans to risky assets and hence their funds are safe, although this view is slightly changing over the last few years

The above mentioned strengths cannot be displaced or replicated by a new company easily i.e. banks will continue to hold their trust factor with customers in the long run. However, this does not mean that banking cannot change. How would the ideal bank look like -

○ One click onboarding/account opening with interoperability
○ Secure — funds held in the bank are guaranteed to be safe
○ Reliable — always available
○ Fast & accurate
○ Understand financial requirements of customers and fulfil them instantly
○ Transparent in every way
○ Empathetic customer support
○ Prevent fraud and be compliant with regulations
○ Underwrite risk accurately and manage collections

One thing we are assuming and betting on is that the “Extreme Trust” moat of banks will not change in the coming decade. So the problem we are looking at is not ‘How the ideal bank would look like’ but it is ‘How can existing banks be enabled to provide the ideal banking experience’.

For this we need to break down the banking experience into multiple parts

○ Infrastructure & Technology — also includes information security
○ Data analytics
○ Risk management — includes all types of risk including credit, fraud, AML
○ Operations & compliance
○ Customer interface — branch, support, digital, SMS, phone

Customer interface is the problem that most neo-banks/financial apps today focus on. They ride on existing infrastructure & technology (that banks are bad at) and try to improve the way banks interact with customers.

This still leaves a large part of the problem unsolved. Why do we think that?

Internet evolution has gone through phases. In the 90s, it was just a text & image content delivery pipe that people could connect to and view static content thrown by a few institutions — Web 1.0

Then in the early 2000s, the era of web 2.0 started with focus on dynamic, user generated content, and interoperability. This caused a splurge of social media sites and also the era of ads driven business models started.

Late 2000s is when we saw a huge change in the background infrastructure with the advent of AWS compute & storage services in 2006. This blew up the internet and resulted in multiple innovations and business models on top. We think the financial services space is ripe for a similar disruption. Neobanks are solving for the web 1.0 to web 2.0 problem which will get more customers to adopt digital banking modes.

We are looking to solve the background infrastructure problem and build a banking platform that can help other companies build innovative financial solutions on top. We think this has the potential to grow financial services exponentially by enabling banks, then neo-banks and eventually any company to provide the ideal banking experience

How do we then go about solving the infrastructure problem?

To do this, we have to drill down deeper into the tech stack of a bank. Banking stacks were built 25–30 years ago and do not even use any of the modern technologies, let alone being at the forefront.

On premise mainframe -> Core banking system -> Middleware layer -> API layer -> Fintech layer -> Customer interface

This depicts the tech stack of a typical Indian bank. The major issues with this stack -

1. Low reliability
2. Poor latency
3. Multiple points of failure
4. Scalability due to physical on premise infrastructure
5. Slow development

This leads to a huge disconnect between anyone above the API layer and the tech teams involved in maintaining the stack. Even the API layer of banks is currently not usable by end developers and it takes anywhere from 8–10 weeks to integrate with the API layer of banks leaving us to ask ‘what’s the point of these APIs?’. This also means an additional fintech layer that converts bank APIs to usable APIs is required.

The problem with the API layer is not standalone and it comes from the background that the legacy infrastructure has caused. You keep building things on a bad foundation, it will eventually result in the building falling down in spite of tweaks that can be done to remedy the issue.

We are building a tech stack that can solve this problem -

Cloud infrastructure ->Core banking system with ready to consume APIs -> Customer interface

Our vision is to revamp the entire banking tech stack and replace it with a cloud native API first modular system that is

1. Secure
2. Fast
3. Resilient
4. Scalable
5. Provides quick development times

How do you go about building this?

The strategy of Hypto is to enter at the top end of the stack, where customers are prepared to pay for the developer friendly APIs, and then drive down the stack as fast as possible to better infrastructure with each successive drop.

It is imperative to make revenue for the bank at each stage. We are not selling software to the bank. We are modernizing banks with technology that enables them to open revenue lines which we make a share of.

The question could potentially be asked why not start straight at the bottom of the stack and not the top. The problem with that is -

1. Requires enormous amount of initial capital
2. Partnerships and sales cycles with banks are unfathomably long
3. Does not solve for the disconnect between customers and tech providers — “IT vendors who work with banks, treat the bank as their customers. They have never really built for the bank’s end customers. They are incentivised by change request (and not customer satisfaction).”

So, we are looking to tackle this problem through -

1. Building a sustainable high growth company that starts at the top
2. Focus on supply and partnerships with banks and delve deeper at every step.
3. Starting at the top helps us understand the end customers to solve for the disconnect and build a product that enables rather than hinders.

Where are we today ? — this was approximately 1 year ago

We are currently building a high growth profitable venture that will help us move from Step 1 to Step 2. We have built a strong foundation — a cloud based API first core banking system that has a much higher success rate, reliability and speed compared to existing service providers. Our system is optimized in all aspects, from caching to DB optimization which allows us to handle a scale that banks would require at the same efficiency. Our product and customer success team has enabled us to serve close to 875 clients, process over 4.7 Million transactions and over INR 12500 Crores payment value within 10 months of launch. We have also built and forged relationships with 11 banks and are integrated and live with 9 of them.

This focus on building a much better product and banking partnerships allows us to execute Step 2 from a solid foundation built on sustainable high profit margin & growth. We are raising INR 15 Crores that will be utilized primarily for technology hiring and expanding into the next suite of financial products.

So in short, to start building your own banking service

Step 1: Build dev friendly APIs on top of banks
Step 2: Build APIs with banks (A development center for banks like Master/Visa has)
Step 3: Build a cloud native API first CBS for banks
Step 4: Enable others to build on top of our APIs for banks

Build a sustainable high impact company while doing the above