Aron Schwarzkopf of Kushki

Welcome to the Fintech 1-on-1 podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I've been doing this show since 2013, which makes this the longest running one-on-one interview show in all of Fintech. Thank you for joining me on this journey. If you like this podcast, you should check out our sister shows, the Fintech Blueprint with Lex Soklyn and Fintech Coffee Break with Isabelle Castro. We'll listen to everything we produce by subscribing to the Fintech Nexus podcast channel. Before we get started, I want to remind you about our comprehensive news service. Fintech Nexus News not only covers the biggest Fintech news stories, our daily newsletter delivers the most important Fintech stories into your inbox every morning. Special commentary on the top story of the day. Stay on top of Fintech News by subscribing at news.fintechnexus.com/subscribe. Today on the show, I'm delighted to welcome Aaron Schwartzkopf. He is the CEO and co-founder of Kushki. Now, Kushki is a really interesting company. They are building the payments infrastructure for Latin America. They've been at this for a few years now. Wanted to get Aaron on the show just to delve deeply into this infrastructure that they're building. We do talk about what Kushki does and how they work, the type of companies that are using their services. We also talk more broadly about the challenges of building a Fintech company in Latin America. We talk about the prevalence of cash and how that is impeding or not the growth of Fintech. We talk about instant payments. We talk about regulation. Their acquisition they did last year in Mexico. We talk about the recent report they did with Statista and also about data in general and why the data in Latin America can be misleading. It was a fascinating discussion. Hope you enjoy the show. Welcome to the podcast, Aaron. Peter, thank you for having me. My pleasure. Let's get started by giving the listeners a little bit of background about yourself. I know you've been doing Kushki for a little while now, but what do you tell us some of the highlights of your career today? 35 years old. I'm a parent of three beautiful girls and I was raised in Latin America in Kito Ecuador. I had to log to my studies both in the United States and China. As I was finishing university in the United States, I accidentally encountered payments and I started my first company there when I was 20 years old. That company ended up growing and sold to an acquiring bank in the United States when that chapter ended. Myself and the founder of that company is also another Ecuadorian living in the United States called Smash. We're very curious about back home, basically, how the tech scene in general or how can we get innovate in the region. That's kind of the underpinnings of how Kushki started. Back in Latin America, what was the drive to start Kushki as far as launching? What did you launch with? Yeah, so before launching, it was probably first. We were first very, very excited about the region as a whole. We saw it kind of like the promised land. In our lifetime, it's going to be a billion plus people. Most of the population, more than half are millennials and younger. When the order of the population are genes, the population that forgot about analog, and forgot about all these conceptions of the world of being mobile or analog or payments or cash or what that is. Just people are early adopters and African tumors and anything they do. We actually got their first investing and as we were going around investing in technology startups, we saw this giant decole, which was a payment infrastructure. For some odd reason, in Latin America, it's kind of the last corner on earth where we haven't commoditized this, like everywhere else. There were three big problems there. The first one was fragmentation. Regardless of its cards or some sort of account-to- account-based payment, it incredibly fragmented within the region, within countries sometimes as well. The second one is the actual technology. Most of the stuff that carries all over the volume of transactions in Latin America was built by people and languages that don't exist anymore. They've either retired or dead and those languages are not used anymore. They're just holding on to this old infrastructure that won't last. Here come us. We actually know about payments. We actually know about Latin America. What are the odds? As we continued thinking about Kuski, that's how we said, have this big ambition to turn Kuski into one of the pillars required to the new economy. If Latin America is going to prosper, it's going to need really good infrastructure to move money from one point to the other. That was the whole premises of Kuski. It's incredibly broad to be quite frank. It ambition, but that's how we started it more or less. The idea was we would like to be one of the pillars in which the new economy is handled in Latin America when it comes to being able to accept payments and transact. Great. Before we get right into Kuski, I want to step back and let's look at the payments landscape over the last five, six years since you launched Kuski. There has been a lot of things happen in the payment space in Latin America. It's a very different space to what it was when you started. Maybe you could talk about just describe how has it changed overall in Latin America? How has the payment landscapes changed? The thing I like the most is that there's no optimism around the payment evolution in Latin America. What we started was all monopolies, regulation that didn't exist and pretty much cash will be king forever and nothing else works. And today, even though there's still monopolies and there's still some regulation that can improve everybody's an optimist and the numbers are starting to show. Latin America is one of the fastest growing digital payment in the world. In some countries, cash usage has dwindled so much that in comparison to places like the United States and some places in Europe, there's less cash usage in some of the countries in Latin America. You can actually start seeing the evolution. In terms of the payment landscape to what we do, I do think that there are some things that remain unchanged quite a bit. It's still incredibly hard for businesses to navigate payments in Latin America today. I think it's just the beginning. And the reason is the fragmentation continues to be there. There's very few of us who have tried to consolidate the region to kill the fragmentation. There's very few of us that are truly local in helping the businesses figure out what local nuances required to operate successfully as well as to have a next generation pipeline. Today most of the commerce goes through monopolies that still exist and those monopolies sit on very bad technology are incredibly closed, mind-day. There's some things that remain unchanged, but probably the biggest thing is evolution's here to stay. There's kind of like a consensus and optimism that this is changing quite fast and everybody's incredibly excited to do it. So that makes me really, really happy. Other than being incredible success launches in things that reduce cash outside of credit cards and wire transfers, you know, we have a lot of real-time payments, rails launching and while it's launching, Latin America that are gaining crazy amounts of success as well. Right. Sure. We'll talk a little bit about that later. Let's get into Kuski. What? How do you describe the company? What do you guys offer? The company is very simple. Kuski was made to be the infrastructure of the company in Latin America. And the whole mission of the company is to come to any of our offices or see our email signatures is connecting Latin America through payments. That's essentially what we do. And we started bottoms up. So literally we've gone to build our own process or requires, you know, our own connections into all the local switches that is figuring out all the local to one says, so making, you know, creating all the underwriting and compliance. So it was vertically integrated player that sits locally in every country where we operate. And as you zoom out, right, kind of kills the whole fragmentation in the region, right? What do we provide for clients? It's usually APIs for them to be able to do either a pay-in or a pay-out, right? To their customers and between businesses. And we do that in many payment methods. In terms of credit cards, credit cards, even though, you know, they've gotten overshadowed in the news by things like PICS, it is the highest growth region in the world for credit cards. By far, right? You know, they're actually probably the biggest contributor today of cash reduction, credit and debit. And we do real-time payments and we do other types of APMs as well. And we provide that the clients in terms of pay-in. And we also do pay-outs where we allow people to disperse cash in a compliant legal technological way around the region. Right. Okay. So then, do you tell us who some of the companies are? companies that you're working with that is using Kluski, maybe give us an example of what they're actually doing. - We focus on two types of clients. The first ones are local, large enterprises. So we serve local to local payments for the top enterprises regionally or locally in the countries where we work. And the second one is we serve everybody else indirectly, or less. One of the big things that we've tried to correct in Latin America other than there was very little technology in terms of infrastructure for payments. It's also been a very closed environment controlled by monopolies. And we do the opposite. So we have a lot of clients, which are other payment players, which are ISOs, ISVs. There's a lot of platforms being built on top of Kluski, that attack SMBs indirectly, that attack cross-board payments, things are such. So those are the two key clients that we have. In terms of integrations, even though we're kind of invisible, if you go to Latin America, or when you went to Latin America, and you were hailing a ride or buying something online, or making an appointment somewhere, most probably you use Kluski in some of these countries already. So it's mostly API based in what we do. And in terms of the rest of the indirect market, it's a crazy amount of stories, right? 'Cause we're kind of opening this very close cocoon of distribution that was payment, especially in acquiring cards, for example. So we have a ridiculous amount of different types of platform using us from like a cross-border player that reaches kind of Latin America locally, right? And where they're first or last mile, if you will, to a bottling company, right? That is trying to build a lending product for like little merchants in Peru or in Mexico to inventory systems, to healthcare appointment systems that are building a payment scheme on top of them, right? And we are the underlying acquireer or provider of infrastructure, right? So we are super excited about that second portion of our indirect business, because we're the first ones to open for business, right? And allowing people to literally build an ecosystem. - Let's just dig into it a little bit. So you, there's a small business in Colombia, for example. They've got, they've been selling locally for years and they now have an online store and they want to sell to Peru or Mexico, for example. How easy is it for them to accept payments from those countries to their online store in Colombia? - But the majority, it's been really, really hard, right? Because of the fragmentation, we today, unfortunately, we don't do any small business directly, but we do have indirect channels. So website builder is card makers. - Right. - That basically uses us. And now, you know, it's like a plug and play, right? As soon as they do that, right? They're local in all these places. So it literally, it seems like a simple effort, but took years and years. - No, I can appreciate it. - Restructure and compliance and regulatory stuff at the end as well, right? You know, we are the first in many licenses in several countries in Latin America, basically to be able to stand alone by ourselves and be able to do this, right? So I think it's just the beginning, though, period, right? In terms of regional payments, cross-border payments, as to our scale, it's kind of like Latin America, grows, you know, most payment volume is growing between 25 to 30% year over year, right? Non-Cas ones, right? So it's already a crazy market that every three to four years, right, depending on the country, it doubles. But in there, right, you know, we've counted the billions of dollars, right? That we move yearly and we're always like a drop in the water, still. - Right. - So it's, and there's very few kushkis today in Latin America who are actually companies that are tech forward and are trying to connect the whole ecosystem, right? And making it very, very easy for people to navigate and, you know, very democratic access to the ecosystem, right? Most of them are legacy companies that are monopolies controlled by conglomerates that are in a single country, like, you know, and have a lot of limitations technologically as well, right? So what countries are you operating in today? - We focus primarily in Spanish-speaking Latin America. Some of our largest countries are Mexico, Chile, Colombia, Peru, Ecuador. - Okay, so then I want to just talk about, you mentioned cash. I was in Mexico not that long ago and still seeing people lining up at the ATM on a Friday afternoon and cash is still everywhere it feels like in Mexico. Is this a major impediment to growth to the growth of digital payments? - I actually think it's the opposite, right? You know, it's, when you think about land of opportunity or green field opportunity, having a large amount of population using cash for mundane activities, right? So, you know, for paying something in retail or paying their, you know, utility bill or whatnot, it's like a dream come true for entrepreneurs like me, right? Because there's everything wrong with it and, you know, it's uncomfortable, it's unsafe, it's dirty. It's, it's everyone. And all around the region it's starting to change quite fast, right? So even though Mexico today's probably the one that needs the most improvement, right? In cash reduction, the amount that cash is being reduced year over year in Mexico is really, really fast. So actually one of the fastest, right? And then you have examples, you have examples of things that were crazy fast, where like, you know, kind of this exponential effect, like in Chile, for example. In Chile they went into lockdown because of COVID and after COVID now the usage both on and offline of cash and big box retailers is less than 6%. So actually, you know, people use less cash in Chile within, you know, a year of lockdown than in the US now. And then you have phenomenon, of course, it's not in every fraction of the economy, but mostly on Pita P stuff, but you have phenomenon like Yapa and Peru or Pixand Brazil, which basically have made cash be, you know, completely eliminated from like a whole portion of the economy, right? You know, in terms of usage, right? So a lot of payment flows were cash in the longer it exists, right? Like in Brazil, it's funny in Brazil, you can buy a coconut in the beach and nobody takes cash. And but it takes picks. This is something that, you know, five years ago would have been unheard of. Right. Would have been considered impossible. Correct. I don't see it as an impediment. I actually see it, you know, it is completely correlated to the payment that the electronic or digital payments industry growing 25 to 30% year over year in Latin America. Just picks, I mean, obviously not in Brazil, but you mentioned Yapa and Peru, which hasn't quite got the traction of Pixand still has pretty significant traction. Are those things helping as far as, you know, once you digitize payments, I imagine for a company like Kushki, then you're open to other digital methods, right? Yeah, absolutely, right. So credit and debit card is our core today, right? But the whole infrastructure was created to be able to take any payment method in general. And today in terms of APM is be a real time payments, wallets and whatnot. We have over 20 in the, in the company and we're always adding more, right? So it's actually part of our mission. The only thing we don't do is cash basically. So, right, these things are actually very, very helpful, right? And we actually move, move a lot of volume out side, you know, with APM's things such as real time payments and wallets, right? So, and then some, in some countries that's quite, quite fast, right? Okay, so then you're originally from Ecuador and, you know, the government of Ecuador has designated Kushki as the first payment aggregator. Maybe explain what that means and what is the significance of that. You know, we started the business in Ecuador. It was the first country we started operations in Latin America. And it was one of the countries that it's probably the furthest behind in regulation for payments, right? So, it's not uncommon in Ecuador to, you know, wait months to be able to accept payments on our offline, right? Having to go to different providers locally to be able to have all the payment methods you need, right? You know, or acceptance, but those that you need. So, we've been trying to innovate there for a while and we were able to open and democratize access for the ecosystem to have technology companies, right? So now, a technology company, someone is not a bank and actually participate in the system. That's what the payment aggregator means is it's similar to payment facilitator in general. But it was the first win that, again, brings the optimism. You know, we've been kind of doing the hard work in each of these countries building the plumbing and trying to educate and, you know, create an evolution in the ecosystem. And well, we did in Ecuador was fantastic, right? Because it's not open now. You know, we were the first ones, obviously, but I think there's 20 now, right? You know, within the year that we built this, we started creating the ecosystem and there's a lot of examples like that. Where some of the fintechs get together and the nice thing in Latin America is that, in most part, the regulators are really, really interested in evolving this. They just, you know, didn't have the knowledge for it, right? So I think it was a match made in heaven, you know, of getting payment experts and technology experts to speak with regulators to make this happen, right? We could example that's Brazil. Brazil is at the head of the curve of payment innovation in Latin America and democritizing assets, right? So, give me an example of credit cards, Brazil 12 years ago had a duopoly basically and payment acquires and today there's more than 50, right? It's a booming sector, right? You know, most of Latin America was still behind, right? There's, you know, now there's two players in some of these markets, right? Not only in us, right? So, so we're further behind, but I think it's going to move much faster, right? And we're really happy what we did in Ecuador and you know, there's a couple more coming, right? I think we've been working for years, you know, with the regulators to try and point. Actually, the central bank of Brazil has a quite big right? Because I think they're probably one of the, the best examples globally, not only of Latin America, of collaboration and knowledge basically, the stuff they're doing is fantastic. No, I mean, they're very well respected. In fact, I was at an event at the Federal Reserve Bank of Philadelphia and they had a guy from the central bank of Brazil speaking there, very, very well respected internationally these days. So I wanted to talk about Mexico. Last year you acquired the payment tunnel provider called Bill Pocket. Tell me about what was the thinking there and what they actually do? Yeah, absolutely. So Bill Pocket was actually the first payment facilitator or payment aggregator in Mexico. It was about an 11 or 12 year old company. That didn't Mexico this fight to be able to have technology companies start up to join the ecosystem about a decade before Kuchite and that, of course, maybe. And the company started as a small business and pause player, right, with in Mexico. But eventually turned out to become the first company in Mexico to have the other opinions of an ISO and ISV program. So by the time we came across them, right, we were as I was telling you before, we really, we really tried to endorse this indirect channel for us to be able now that we're vertically integrated, control the infrastructure control kind of all the licenses. We've always wanted to open this up so other people could build on top of Kuchite, right? And Bill Pocket's team were doing that successfully in Mexico, right? And we're kind of the first player that we had seen in that time actually that, you know, had something similar to ISO and ISV in our ecosystem. And that's the reason we we we'd want them basically. And it's been great because the team is in super talented, right? And it's helped us basically to not only accelerate their plans, right, but standardize them regionally, right? So we are bringing into Latin America in the months and years to come. A lot of programs, right, for companies that before had no access to, you know, no easy access, right, to be able to connect or embed payments into their offering all the way to actually being able to build payment businesses, right? You know, payment distribution or verticalized payments or whatnot on top of us, which was kind of it's still kind of unheard of in Latin America. Like if you want to build a payments business, you have to know a lot about payments, have a lot of money or a lot of connections, right? And a lot of patients to to basically connect into like the legacy grids in different places, right? So we want to make it as easy as possible. If you want to build a payments business on top of Kuski, you should be able to do it in a month, right? In the whole region, right, right, right? Okay. I want to switch gears and talk about a recent report that you released with Statista. It was on the growth of the digital payments ecosystem in Latin America. You know, you have the Kuski Talk series that you were kind of enough to invite me along to one of those sessions recently. What are some of the takeaways from this particular report that you that you did with Statista? Overall, it kind of pinpointed more detail where the growth and trends are happening in Latin America. And the whole movement around us doing reports with third parties and starting this series like Kuski Talks could, by the way, thank you so much for for being part of the last edition. I pledge. We find that in Latin America, there's very little data and very little content when it comes to Fintech and payments. As a matter of fact, when you compare some of the reports or data that are created by very big brands, they contradict themselves, right? Because they use old data sets and you know, I have this huge debate where you know of sudden, you know, the cardbrancing, the front is gigantic in Latin America. It really isn't by the way, right? It's kind of funny because they're all using different sets of data and the data is not very useful. In Latin America, what we're trying to do with Kuski Talks and reports like the one we did with Statista is to be able to educate, right? And to actually be able to sponsor some real data in each of the countries. And specifically when it comes to Statista, we're speaking aloud a lot about the growth in Mexico and the trends that are happening. So I was telling you about, you know, Lauren Cash usage among other things in Mexico. If your listeners want to pull that report to Statista, they want to learn more detail than what you would read about Mexican payments. It's a great way to start there. Right. I'll make sure to link to that in the show notes. Okay. So you mentioned fraud. I mean, how big of a problem is fraud in Latin America? And what is Kuski doing to help reduce it? Yeah. So I have a good anecdote. I met with the president of this large card brand and he was telling, yeah, in Latin America, the fraud rates are insane. And I was like, no, no, they're not. He was so shocked that we actually, you know, kind of went deep on it. And the issue is, it is twofold, right? The first ones, historically, the fraud rates in Latin America have been above average places like Europe and the United States. But it's because data is on standard days, right? And how you send data in the infrastructure, right? In many ways. And the second one is because no one did anything about it. When you have players that are actually managing fraud and standardizing data, right? In terms of messaging and infrastructure, there really isn't that much fraud. And we're a proof of that. I think there's only a single country we're in where we hit 10% of what the visa mastercard average of fraud for the country are, right? So we're like 10 times or better less than that in fraud, right? And it's not like we're geniuses. We literally have various, you know, just like modern technology. And we have local competencies. So things are simple as being able to control error codes and being able to whitelist bins with the assures locally that had, you know, very old technology to be able to accept payments, right? So we do little things that are very anal, actually, right? You know, to boost acceptance rates and lower fraud. It's just ecosystem building. And then it comes with a little bit of fraud technology at the end, right? You know, we we spend a lot of time in terms of compliance and fraud, of making sure that our clients have the best they can get in Latin America. And it's new to the region. Like so. So yeah, there is still today's, when I was telling you, Latin America is this weird place where it's like year one. And then the rest of the region has been completely commoditized. Right? You know, so things as fraud rates and acceptance rates, we see these gigantic jumps right where, you know, someone will move from from the old pipes to to our new ones, right? And all of us are in date. They have a 50% improvement in something or, you know, a couple hundred percent improvement, something like that that still exists in Latin America. That's what I mean, right? Like you could still do that. In countries like like the US, it's hard to get double digit improvements on any new technology these days. Anyway, last question. I'd love to kind of end with you peering into your crystal ball and talking about the the future of digital payments in Latin America. I mean, you've talked about some of the downward trend of cash. But what's the future going to look like? What are you trying to build and what's what when you think of that future? In terms for us, the the role that we have is an infrastructure one, right? And being a provider for large players or or other payment businesses to be able to use us, our licenses, our infrastructure, regardless of the payment method to move money back and forth, right? So we don't see Qushji as an active participant in doing user or small business stuff, right? So I don't see us moving into anything that has to do in terms of attacking users and doing initially wallets or things. So, right? In terms of the crystal ball and what I think will happen in Latin America, I think the future is bright. I think it's a bit messy because everybody's trying stuff and trying to see what sticks on the wall and you know, what gains a lot of traction, right? So Latin America will not be a place where you will have a homogenous payment evolution like you had in China in a couple of other places, right? I think you'll have a little bit, there will be fragmentation, but it all points that cash will exponentially, right? Start disappearing from payment flows in this decade, right? It's already happening, right? Some countries faster than others, but the data's there. As of today, what I can tell you is you have these phenomena, like pigs and yapa in certain places, but consistently what is delivering, you know, the most cash reduction is actually dividend credit cards, right? And they come in different forms, sometimes not plastic anymore, but it's the same pipelines, right? You know, things that these direct or most neo banks and wallets systems that are gaining traction in Latin America. our build on credit and David Rails today, the majority of them, right? So I do think that they will continue to be a relevant player in Latin America when it comes to payment methods that are trying to reduce cash usage. And I think real-time payment is, I think Latin America is the place for real-time payments basically. Okay, it's a good place to end Aaron. Thank you so much for coming on the show today. Best of luck to you and let's keep in touch. Thank you. Thank you for having me. Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening and I'll catch you next time. Bye. [Music]