Hello Erik, Hello Alessandro, thank you for taking the time to join us today for this coffee chat. To begin with, can you introduce yourselves and walk us through your previous professional experiences?
Erik: My name is Erik, and I am the founder and co-CEO of Scalable Capital. I have studied in Germany, the US and the UK and I started my career in 2006 at Goldman Sachs in London. I worked on the trading floor in London and later in Frankfurt. After 7 years in the financial sector, I left Goldman Sachs to become Co-CEO of an e-commerce startup in 2013. I founded Scalable about a year and a half later in 2014.
Alessandro: My name is Alessandro. I studied Finance at Bocconi and I also started my career at Goldman Sachs in Zurich in the private wealth management division. I was making money for people who already had a lot of money. “The anti-Robin Hood”. I realised this was not where I wanted to be 10 years from now so I transferred to something where I would be able to provide financial services to everyone, not just to the wealthy. I am now at Scalable Capital, managing the expansion into Italy.
You have already talked about your past experiences, and we would like to understand better how these experiences have influenced your work in Scalable Capital, especially when it first started. Also, how did you initially get the idea for the foundation of Scalable and how did it begin?
Erik: The original idea for Scalable Capital was not one single idea. It was rather a feeling that my co-founders and I had that we should do something on our own. Even though we had the drive for a while, we were still ‘wantepreneurs’: we discussed the idea, but went back to work the next day, so we never pulled the trigger.
However, we knew the timing was right because more services were moving online and to apps. And we knew that we wanted to do something in the Fintech space. Eventually, we got to a point where we agreed to meet in Berlin over the weekend and discussed our business ideas. The very next day, all of us who wanted to be the founders of the new company, including myself, quit their jobs. This was made a requirement for getting the status of founder to prevent it from never happening.
We know that Scalable Capital managed to double its assets on the platform to 10 billion euros in only one year. Could you please tell us what are the key features that differentiate Scalable Capital from its competitors and what contributed to its huge success. At the same time, who do you think are the most important competitors of Scalable Capital?
As you mentioned, we doubled our assets within one year and clients now invest on our platform more than 10 billion euros. The year 2022 was challenging because all the markets were down, but even against the tide, we were still able to achieve a net growth of 5 billion euro client assets. One core difference is that we are an investment platform. We offer a broker where people can themselves create their portfolios and invest in ETFs, stocks and funds and we offer a digital wealth manager, where clients can let their money be professionally invested. Historically, we have started as a wealth manager and launched the brokerage in 2020. Meanwhile, we have launched our broker in five more countries in Europe. Normally, trades cost around 10 euro in most countries. We come in with a significantly lower pricing, so when people buy a stock or ETF on our platform it costs between 0 and 0.99 euro. We focus on providing an easy-to-use fully digital service and are continuously innovating. We are constantly looking for ways to make the process easier and more transparent. Furthermore, we offer a very high interest rate of 2.3 percent on the cash balances in our PRIME+ membership, that comes with trading and unlimited savings plans without order fees.
Our biggest competitor is actually “doing nothing”, meaning the money that only lies on the bank account without even getting interest rates. The traditional bank, the “incumbents” only come second, but also all the small banks and online brokers.
In June 2021, Scalable Capital raised a series E funding round of €150m led by Chinese tech giant Tencent, making it the sixth German Fintech unicorn. What were the biggest difficulties you had to overcome to reach this result? Since then, what has changed in your development and strategic plans?
Erik: This was a big milestone for us. In 2021, we closed a funding round at an all-time high for fintech and start-up funding. Our numbers and growth spoke for themselves. We added hundreds of thousands of customers and added billions of euros. I think investors saw that there is a chance to build, let’s call it, the “European Charles Schwab”. Charles Schwab is the biggest investment platform in the United States.
In Europe, most people do not invest via specialist investment platforms, they invest via their local house banks. In Germany, they go to typical savings banks and in Italy, as you have one of the oldest banks in the world, a lot of people trust these institutions. Banks that are hundreds of years old take care of their banking business, credit business, and investing business for them. Now, it is time to really build a special platform focused on investing which has a modern user experience and better pricing. That is what the investors saw.
One challenge was that normally, when completing investment rounds, you need to travel. If you want to get investments, you travel everywhere to meet people. Since in the year 2021there were times of complete lockdown during the round, everything was arranged via video call. Yet Tencent invested in us without ever meeting us in person.
Scalable Capital arrived in Italy in 2022 and Italians are characterized by a high propensity to save, historically via bank accounts and government bonds. Although this is aligned with the goal of Scalable Capital, which is to make the financial world more accessible and transparent to all the potential typologies of investors, what are the reasons underlying this move into the Italian market and what were the greatest challenges before entering and after?
Alessandro: When it comes to why the move makes sense, I think Italy has massive potential for three reasons: two coming from the demand side and one from the offer side.
Firstly, we have almost 1.8 trillion euros sitting in cash accounts explaining the high propensity to save. Half of all that is currently sitting in cash accounts will fade away in just 10-15 years due to inflation. People will therefore have to invest.
Secondly, we have the most aging population in the world and the lowest birth rate. These two aspects generate the least sustainable pension system in the developed world. You cannot rely on the national pension scheme only, therefore people must save for their retirement.
Lastly, from the supply side, when I look at how people invest, they mostly do so into very expensive active funds, which have non-transparent commissions of 2 to 5 %. As a comparison, ETFs have 0.2-0-3% costs on average.
When it comes to the challenges, the #1 challenge is being “global but local” and realise that different countries have different paces, and you should not just copy and paste what you are doing in Germany also in Italy. This is the most natural course of action, the easiest one to pick, but for example, when it comes to financial education, we still have some grounds to gain in comparison to Germany. When it comes to trust, in Germany you do not need to speak much about Scalable Capital, while in Italy, we are still in the trust-building phase and need to build our brand of being a secure and trustworthy investment platform.
Nowadays there are so many platforms and services that made investments more available to a greater part of the population when before it was considered more reserved for an élite. Do you think financial markets have become more accessible? And what do you think should be done to overcome the obstacles related to the spread of financial education?
Erik: I think the biggest struggle, apart from money, is education. And I am talking about basics. We learn lots of things at school, but do not even receive a minimum knowledge about investing.
If someone comes to you and promises a 20% risk-free rate, in an environment where the nominal risk-free rate is 0%, you must understand that something is wrong. If there is a higher return, there is a higher risk. This is just one example, probably the most important. I think the government and the school system do not do well enough to educate people and that lately, people just took it upon themselves to educate through the huge amount of content coming from the market, especially on YouTube and Social Media.
Alessandro: Regarding financial education, in Italy, a lot in terms of financial welfare is already state-organized and ready for you, this partly undermines the development of thinking about how to manage and save your money independently, how and where to invest your money. Although private saving is likewise important, but people are not well-equipped. Think about the 401(k) plan in the US. If you think about your pension, you must select where to invest and what investments to do; you do not have the national pension system. Financial education is a way to be less insecure and to be able to take your financial future in your own hands. The majority of our content is educational across all of our channels. We have organized Webinars to have a deep dive on ETFs and investing. Moreover, we are partnering with some platforms (such as Starting Finance), to contribute to the spread of financial education in Italy. If you give people the tools to invest but you do not explain how to use them, it is like giving a knife to a baby and not teaching how to prevent him from cutting.
To conclude, what advice would you give to young students that want to break into start-ups and the fintech world?
Erik: There are three options. One is going the classic way, which is typically, when you study at a good business school, Investment Banking, Consulting, or work for a big brand. Then, secondly is joining a start-up that already exists. Third, founding one by yourself. I think all three are valuable paths, I am not going to say you should choose one over another. What worked out for me was to first join a company, because you get a network, it opens a lot of doors and then they teach you how to work professionally. But do not stay for too long, otherwise you get too used to that living style. Another possibility is joining a start-up or founding one yourself. Founding one yourself is the toughest one if you have never done it. My advice would be to first join a start-up, learn, and then do your own thing.
Alessandro, I assume your path was different from Erik’s to get to work for Scalable Capital. What was your journey to get into the fintech industry?
Alessandro: At Bocconi you grow up with a framework which leads primarily to some pre-defined paths. The focus might not be on entrepreneurial thinking when it comes to approaching a career. So, I was a diligent student at first and ended up joining Goldman Sachs. While I learned a lot from smart colleagues, quite immediately I realized that was a path I did not want to pursue in the long term.
If you go to established corporations, you learn how to be accurate, and on time, and why “formatting matters”. It gives you a framework which you can apply to everything, but you can easily end up in the so-called “golden handcuffs”, with the risk of ending up being fifty, having a good career, looking back and thinking “I spent my career not doing something I like” and this is more common than usual. I therefore decided to leave at one point in my career, as I have always been interested like you in Fintech. My advice is to take risks, not follow blindly the predefined path and pick the industry where the overall market is going up as there are much more opportunities to improve if the overall market is supporting you.
Thank you so much Erik and Alessandro for taking the time for answering our questions, we really enjoyed this moment.