4/ "We" thought that the primary use of technology in finance was going to be adding up numbers really quickly without making mistakes. This was only the first order effect. The second order of effect was enabling cheap transfer of risks over abundantly connected networks.
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15/ For instance, the United States does not have a strong opinion on the right number of tech companies in it, but it *does* have a strong opinion of the right number of banks, and it sets that number about 100X more than Japan does or 1,000X what the United Kingdom does.
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16/ Strong opinions on the polity for the number of banks are downstream of opinions as to what degree the financial industry should be an executional instrument for policy preferences. Saying that outloud in as many words is uncommon, but the industry is that, too.
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17/ (We appear to be in the early stages of a societal debate, conducted largely via misunderstood proxy questions, as to what degree the tech industry should be an executional instrument for policy preferences.)
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18/ There is a tension between bundling and unbundling in financial services. These are generally thought of on a services level, but you can also think of them in terms of customer segments and subsegments, which is probably more illuminating.
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19/ Because the most important thing for large financial services firms is distribution to customers and the cheapest customer to reach is one you already have, firms who might have once had a core product for a core customer now offer many, many non-core products to them, too.
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20/ Startups said "Aha, here is an opportunity. If there is a 100x100 matrix of broadly consumed financial products and potential customer segments for them, we can compete on product for one cell of that matrix, win by utter domination, and then start expanding from there."
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21/ Startups which did this found, much like the finance industry did, that it is rare one can build a freestanding business (and extremely rare that one can build one on the venture growth trajectory) by chipping off a few percent of one of those cells.
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22/ This is further complicated by incumbents being able to both dynamically alter their allocation over that 100x100 matrix and also being able to dynamically alter their pricing, because they *also* read Innovator's Dilemma, thank you, and didn't get this far by not mathing.
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23/ Which is not to say there are no opportunities and no obvious opportunities, but I think I feel comfortable with "there are almost no obvious, popular, consensus opportunities."
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24/ One "obvious, popular, consensus opportunity" is "Gee, wouldn't it be swell if we just had a no-fee bank account made for folks in economic precarity. There's lots of them; clearly this is a business worth being in." If only banks had good people who are good at math, right.
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25/ (Though, on that exact subject: Square's Cash App is one of the most impressive product innovations I've ever seen, because it managed to basically deliver a thing that the industry thought rounded to impossible by making it a side effect of a bigger, better opportunity.)
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26/ Let's talk discount brokerages, which I've talked about at length before. https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ … This is a case where startups had interesting product innovations for 3~5 years and then incumbents said "Cool ideas. We will yeet these into being, as you cool kids say."
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29/ The opportunity that most startup brokerages are really going for, and it usually isn't messaged as this (probably for talent management reasons), is: "We're building a book of business to a point where it is attractive enough to warrant integration and digestion costs."
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30/ A lot of the interesting bits in brokerages are actually a layer beneath, in e.g. custody, routing, KYC, etc etc, sometimes caricatured as being "arms merchants" or in the "selling shovels in a gold rush" business. This lets more firms experiment with marketing/UX cheaply.
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31/ It also opens the intriguing possibility where someone might successfully launder better internal X systems into Schwab (or similar) by making them indispensable to a particular distribution engine and, hopefully, winning argument on which system survives acquisition.
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32/ Deposit pricing is, like taxes, one of the largest line-item bills on a household or business, and this is underappreciated because of how the bill is delivered to you and the relative level of sophistication required to understand that there was actually a bill.
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33/ Geeks who grok this the first time often think of deposit pricing as being, if not outright theft, theft-adjacent, but partly it's tradition for how financial services are priced and partly it is a progressive cross-subsidization of some customers by others.
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34/ One of the issues in finance to have an opinion on is whether increasing velocity of money, and ease of allocating it via a swipe (or, in B2B, by a computer doing it for you) will cause most deposits to migrate to cheap-to-the-customer places or not. Not obvious, either way.
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35/ Maybe zooming one level back for comprehensibility purposes: There's a risk-free rate for deposits. Your bank or brokerage doesn't give you that. They give you a much smaller number. The spread is deposit pricing.
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36/ "What are you paying for with deposit pricing?" I don't know, what are you paying for with software? The engineers or the person who will answer your email or the beautiful pixels on the website or the person awake at 3 AM to deal with security issues?
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37/ But different firms can allocate the bill differently, via pricing, and so it matters *quite a bit* if you think that customers and businesses discover price sensitivity in deposits in the next 10 years, because that implies that the price of non-deposit services is going up.
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38/ I used to be freaking mystified why it seemed like all the banks went out of small business lending at traditional rates after the 2008 financial crisis, and would only offer credit on credit cards to that segment.
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39/ This is *essentially* a pricing decision, with some regulatory background. Non-intuitively, a bank would far prefer to give you access to a credit line at 9% APR if you access via a credit card than a 9% APR unsecured line of credit.
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40/ The reason for this is that the credit card would generate interchange revenue, which effectively acts as a kicker to the APR (potentially a 10%+ kicker depending on your behavior!). I never understood that when I was on the customer side of credit cards / loans / etc.
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41/ Here's that complexity again. This is a bank relying on a four-party agreement between them, a credit card brand, a supplier, and a small business to facilitate what a lot of people think is the #2 reason banks exist, to provide loans to businesses for cash flow needs.
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42/ Effectively the conceptual negotiation, which critically never takes expensive human thought because all parties have pre-committed to their position, is: Bank: "I can't take all this risk to build restauraunt." Town hardware store: "They're my customer. I'm good for a bit."
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43/ If you *can't* have the town hardware store, or somebody else, agree to subsidize your risk (via interchange revenue), your traditional options at banks either dried up or got much more expensive, or you now go to OnDeck/etc wrapping private capital providers for much more.
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44/ One of the big opportunities in financial services are places where fees are theoretically supposed to pay for unconflicted advising by expensive people but where the quality of the advice is, ahem, highly variable.
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45/ You can often find these opportunities where it is literally illegal to read the industry's uncontroversial best practices to the customer accompanied by the words "You should" unless you are a licensed professional.
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46/ For example, under some regulatory regimes, I can probably say that whole life insurance has fat margins, that it embeds extremely suboptimal investment decisions, that the most valuable part of it is the actual life insurance, and that term life is a better vehicle for it.
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