Category Archives: Stuff

FinTech / SpinTech Spectrum

It is hard to suss out what is real progress and what are simply projects doomed to repeat the forgotten lessons of financial history.

I haven’t heard the phrase SpinTech before but enjoyed this piece as a reminder to keep a critical eye on projects that have a Classic Finance>???>FinTech! business model: https://www.linkedin.com/pulse/fintech-spintech-patrick-mcconnell/

This twitter thread from the Doge coin creator is also worth keeping in mind. Copy and pasted below with my bolding:

After years of studying it, I believe that cryptocurrency is an inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight and artificially enforced scarcity.

Despite claims of “decentralization”, the cryptocurrency industry is controlled by a powerful cartel of wealthy figures who, with time, have evolved to incorporate many of the same institutions tied to the existing centralized financial system they supposedly set out to replace.

The cryptocurrency industry leverages a network of shady business connections, bought influencers and pay-for-play media outlets to perpetuate a cult-like “get rich quick” funnel designed to extract new money from the financially desperate and naive.

Financial exploitation undoubtedly existed before cryptocurrency, but cryptocurrency is almost purpose built to make the funnel of profiteering more efficient for those at the top and less safeguarded for the vulnerable.

Cryptocurrency is like taking the worst parts of today’s capitalist system (eg. corruption, fraud, inequality) and using software to technically limit the use of interventions (eg. audits, regulation, taxation) which serve as protections or safety nets for the average person.

Lose your savings account password? Your fault.
Fall victim to a scam? Your fault.
Billionaires manipulating markets? They’re geniuses.

This is the type of dangerous “free for all” capitalism cryptocurrency was unfortunately architected to facilitate since its inception.

But these days even the most modest critique of cryptocurrency will draw smears from the powerful figures in control of the industry and the ire of retail investors who they’ve sold the false promise of one day being a fellow billionaire. Good-faith debate is near impossible.

For these reasons, I simply no longer go out of my way to engage in public discussion regarding cryptocurrency. It doesn’t align with my politics or belief system, and I don’t have the energy to try and discuss that with those unwilling to engage in a grounded conversation.

I applaud those with the energy to continue asking the hard questions and applying the lens of rigorous skepticism all technology should be subject to. New technology can make the world a better place, but not when decoupled from its inherent politics or societal consequences.

https://twitter.com/ummjackson/status/1415353984617914370

Values

Matthew Zeitlin wrote a stirring book review of Patrick Radden Keefe’s Empire of Pain on the Sacklers. “This pattern of elite, mainstream institutions enabling the Sacklers and Purdue is a constant throughout the book.” And also lots of other places…

The Mafia these days, for what it’s worth, operates at a far smaller scale than Purdue did at its OxyContin height and doesn’t usually get former senior Justice Department officials to represent them in court.

They also don’t get the privilege of declaring bankruptcy, another process that Keefe depicts as essentially captured by a bankruptcy bar where everyone knows each other and prizes “efficiency” over the kind of stuff mildly oleaginous plaintiffs lawyers talk about in front of juries: justice, fairness, right and wrong.

https://zeitlin.substack.com/p/criminal-defense-lawyers-and-the

Payments Digest

Alex Rampell (GP at Andreessen Horowitz, co-founded Affirm) touched on an interesting risk factor for card networks like Visa during a deep dive Visa’s history and business model on Patrick O’Shaughnessy’s podcast.

[Increasingly frequent occurrences of where the issuing bank and acquiring bank are the same entity] is the biggest risk factor, and the reason why, going back to what I said before, which is the only thing that really drives Visa MasterCard’s business is issuer relationships.

Visa (and Mastercard) sit between issuing banks and acquiring banks (who maintain relationships with cardholders and merchants) to facilitate transactions. The card networks collect an interchange fee to complete the transaction. This make enough sense if a customer with a Citi-issued Double Cash Card buys a coffee from a BAML merchant services-acquired coffee shop. It makes less sense when the issuing and acquiring bank on both sides of the transaction are the same entity.

Rampell goes on:

Chase is actually the biggest acquirer of online merchants. So Amazon.com I believe uses Chase payment tech, which is their payment acquiring division or merchant acquiring division for online payment processing. But wait a minute, Chase is also the biggest issuer of Visa cards in the US. The Amazon.com credit card is issued by Chase, Chase issues the Sapphire card. They have tens of millions of customers that actually have Chase cards. Why the heck am I Chase paying Visa to talk to myself? That doesn’t really make sense. And the reason why is because it was in my contract, but when Visa says, “All right, Chase, please renew with us again for the next 10 years and don’t go to MasterCard,” Chase is like, “Wait a minute, I have an idea. I don’t want to pay you anything, if I’m talking to myself,” which is a pretty reasonable request if you think about it. This how a lot of acquiring and issuing relationships work outside the US. This is called On Us Transaction. So it’s perfectly easy to do, it’s not that hard, technically, it’s just a contractual thing, and then a very easy snippet of code to say, “Hey, 414720 go, just send it this way, the other part of our building.

This seems like a good example of how the tech part of FinTech is often overstated. As Alex stated, this is legal/contractual problem, not a technical one (i.e. Chase does not need #theblockchain to do this).

And apparently Chase sort of does this with a product called ChaseNet (which Alex mentions). From a plausible sounding reddit post:

Chase does have their own payment processing network. It’s called ChaseNet. It runs on leased space on the Visa network. So technically it is everywhere, for Merchants who bank with Chase. It is alive and well, growing marketshare. You’ll never hear about it because it’s primarly a B2B endeavor. Chase makes agreements with businesses to process Chase cards on ChaseNet which is leased space on the Visa network. What this means is that Chase is the issuing bank, Chase is the acquiring bank, and Chase is the payment processor. Because of that, Chase can charge the merchant a lower fee, yet still get a larger profit on the interchange since they don’t need to share it with as many people now than they would if the Merchant was running Chase cards on Stripe, or Paypal. Think about it like this: Chase might be getting 30% of 3% interchange fee when they run Chase cards on Stripe or Paypal, but now Chase could be getting as much as 70% of a 2% interchange fee when they run cards on ChaseNet. So in the first case, chase is getting 0.9% of the transaction on Stripe or Paypal swipes. In the second case, Chase is getting 1.4% of the transaction, even though the total interchange fee to the merchant is lower. That is the beauty and the masterstroke of the ChaseNet business. They managed to increase their interchange profit, without having to go full on Amex/Disco, by simply leasing space on the Visa network which is quite clever.

I am grasping here a bit as I educate myself about the payments space but could this be glide path to a different payments model? Instead of card networks collecting the majority of their revenues from interchange fees, they begin to shift to a model where their primary revenue model is driven by large issuer/acquiring banks leasing their network?

Question for myself: What are the technical constraints on the card networks? Is “leasing space” merely a contractual change or is it closer to the physical constraints of spectrum bandwidth?

J.P. Morgan’s “Key Trends” for payments: What sort of framework does this point to?

I stumbled across J.P. Morgan’s Merchant Services Division’s “Key Trends to Drive Your Payments Strategy” report which outlined 10 trends. Some thoughts on each: are below but one underlying observation is that most is that most of these except maybe 7 (and maybe maybe 2) seem better served by centralized systems rather than decentralized ones. Obviously JPM is selling its own book here but still…

  1. Cashierless tech has arrived: I am tempted to be dismissive of how important check-out free retail would be, I am open to the idea that it could unlock new forms of commerce that might be hard to imagine, like walking down an airport terminal and snagging a water for your flight without having to stop.
  2. Faster payments for consumers and businesses: A reminder to myself to revisit FT Alphaville’s RTGS series of posts. My suspicion is settlement times are features, not bugs.
  3. From subscriptions to recurring relationships: I get why recurring revenues are so valuable. But I wonder if non-recurring transaction could end up being a premium product for certain product categories. The luxury of not having subscriptions for consumers. the luxury of buying or building rather than renting for firms.
  4. Payments simplified: I have better come to appreciate the last few months how numerous and important API solutions are. I can also see how this leads to operational debt. Is this the toehold for acquiring banks to shift the competitive balance in the payments space?: “The provider offers one integrated package of payments, treasury services and commercial cards, and the client gets one set of APIs, one set of analytics, and one integration into the underlying technology. J.P. Morgan can manage the full range of complexity in payments and provide an integrated view into companies’ entire financial picture, from pay-in to pay-out.
  5. Relentless fraudsters: Will card-notpresent (CNP) related fraud become a standard accounting line item? See Fintech’s security/access paradox problem. Another True Tradeoff Tension. Maybe this is another space for acquiring banks to run hard at?
  6. Key insights, big impacts: Data science!
  7. Payments in context:Drivers love the idea of interacting with brands directly through the vehicle’s infotainment system, either with voice or through touch.” — help…
  8. Integrated payments: “PayFac as a Service”
  9. Customer-centric, seamless payments:In any transaction, the payment is the moment of truth. It’s when a customer transforms intent into action.” — We are meeting people where they are, et cetera.
  10. What happens after Covid: Contactless; ecommerce; credit rebound versus debit; BOPIS inventory management.