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patio11's profile
Patrick McKenzie
Patrick McKenzie
Patrick McKenzie
@patio11

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Patrick McKenzie

@patio11

I work for the Internet, at @stripe, mostly on accelerating startups. Opinions here are my own.

東京都 Tokyo
kalzumeus.com
Joined February 2009

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    1. Patrick McKenzie‏ @patio11 22 Dec 2019
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      8/ This is a bet most startups offering financial services will, bluntly, lose horribly, but that's startups for you.

      2 replies 7 retweets 133 likes
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    2. Patrick McKenzie‏ @patio11 22 Dec 2019
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      9/ Geeks both underestimate how #%()#)&ed the engineering practices of large financial firms are and underestimate how impressive they are. They make radically different tradeoffs than a startup would, including routinely spackling over technical debt with thousands of people.

      5 replies 34 retweets 282 likes
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    3. Patrick McKenzie‏ @patio11 22 Dec 2019
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      10/ One of the biggest problems in financial services qua tech is that the entire technical universe changes over every national border (sometimes within it, too) and that there is a weird goldilocks zone in terms of scalability on approaches for going international.

      1 reply 7 retweets 96 likes
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    4. Patrick McKenzie‏ @patio11 22 Dec 2019
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      11/ The goldilocks zone goes something like: you can't go international without truly massive resources, which you can never justify allocating to you in a small market.

      2 replies 2 retweets 65 likes
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    5. Patrick McKenzie‏ @patio11 22 Dec 2019
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      12/ The upper end of the zone: If you have truly massive resources, it is tempting to use the difficulties of international as a barrier to protect margins of some of your business lines (you have a lot, almost by definition), causing you to avoid international cooperation.

      1 reply 2 retweets 43 likes
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    6. Patrick McKenzie‏ @patio11 22 Dec 2019
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      13/ For this reason, historically the really interesting international businesses in finance happened when they were young and hungry. ("Who?" You can trivially name four global businesses in finance. It's surprisingly hard to count to eight. More are under the hood though.)

      1 reply 2 retweets 53 likes
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    7. Patrick McKenzie‏ @patio11 22 Dec 2019
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      14/ Finance is a much, much more regulated industry than tech is, and a surprising amount of the competitive landscape is downstream of the preferences of your polity-of-choice and their elected representatives, which sometimes look irrational. They generally are not.

      1 reply 10 retweets 83 likes
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    8. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

      4 replies 12 retweets 95 likes
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    9. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

      2 replies 5 retweets 75 likes
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    10. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.)

      2 replies 29 retweets 158 likes
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      Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

      4:35 PM - 22 Dec 2019
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      2 replies 5 retweets 51 likes
        1. New conversation
        2. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 13 retweets 64 likes
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        3. Patrick McKenzie‏ @patio11 22 Dec 2019
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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."

          1 reply 5 retweets 68 likes
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        4. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 3 retweets 91 likes
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        5. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 6 retweets 144 likes
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        6. Patrick McKenzie‏ @patio11 22 Dec 2019
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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."

          1 reply 3 retweets 77 likes
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        7. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 6 retweets 81 likes
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        8. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.)

          4 replies 10 retweets 127 likes
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        9. Patrick McKenzie‏ @patio11 22 Dec 2019
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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."

          1 reply 5 retweets 87 likes
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        10. Patrick McKenzie‏ @patio11 22 Dec 2019
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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."

          1 reply 3 retweets 52 likes
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        11. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          4 replies 4 retweets 54 likes
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        12. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 2 retweets 32 likes
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        13. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 6 retweets 56 likes
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        14. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 3 retweets 38 likes
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        15. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 4 retweets 43 likes
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        16. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          4 replies 4 retweets 61 likes
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        17. Patrick McKenzie‏ @patio11 22 Dec 2019
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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?

          1 reply 3 retweets 43 likes
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        18. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 3 retweets 37 likes
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        19. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 2 retweets 28 likes
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        20. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 3 retweets 43 likes
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        21. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 3 retweets 75 likes
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        22. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 1 retweet 34 likes
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        23. Patrick McKenzie‏ @patio11 22 Dec 2019
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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."

          2 replies 2 retweets 29 likes
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        24. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          2 replies 3 retweets 26 likes
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        25. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 5 retweets 51 likes
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        26. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 3 retweets 49 likes
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        27. Patrick McKenzie‏ @patio11 22 Dec 2019
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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.

          1 reply 1 retweet 42 likes
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        28. Patrick McKenzie‏ @patio11 22 Dec 2019
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          47/ But I'm probably legally prohibited from saying "You should buy term life insurance" or causing a computer program to do so if I'm anywhere near a transaction, at least under some regulatory regimes. I haven't passed the test.

          1 reply 1 retweet 31 likes
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        29. Patrick McKenzie‏ @patio11 22 Dec 2019
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          48/ (I also haven't posted a reputational bond which would allow a regulator to threaten disproportionately severe punishment if I were to exceed their tolerances for salesmanship, which is an intended component of regulatory regimes that tech has insufficient appreciation for.)

          2 replies 5 retweets 46 likes
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        30. Patrick McKenzie‏ @patio11 22 Dec 2019
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          49/ Regulatory compliance is a fun area for financial companies, largely because the regulations aren't the regulations and the regulations that aren't the regulations aren't static.

          3 replies 5 retweets 50 likes
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        31. Patrick McKenzie‏ @patio11 22 Dec 2019
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          50/ On the extremely suboptimal side of the house, successfully grokking the *real* regulations is treated as a proof-of-work, such that if you're capable of talking the talk and walking the walk you've earned a bit of a buffer around your activities. Few would admit to that.

          1 reply 6 retweets 69 likes
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