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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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      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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    2. 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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    3. 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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    4. 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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    5. 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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    6. 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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    7. 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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    8. 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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    9. 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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    10. 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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      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.

      5:07 PM - 22 Dec 2019
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        2. 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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        3. 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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        4. 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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        5. 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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        6. 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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        7. 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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        8. 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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        9. 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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        10. 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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        11. 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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        12. 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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        13. 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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        14. 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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        15. 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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        16. 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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        17. Patrick McKenzie‏ @patio11 22 Dec 2019
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          51/ On the better side of the house, regulators are not uniformly clock-punching value-destroying intermediaries (like geeks often assume) but are frequently informed professionals with lots of institutional memory and some level of appetite for listening to proposals.

          3 replies 5 retweets 55 likes
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        18. Patrick McKenzie‏ @patio11 22 Dec 2019
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          52/ Firms largely choose one of a couple engagement strategies with regulators. The dominant one is Enthusiastic Compliance (TM). "Break the rules until you can make the rules" is extremely, extremely not the norm in financial services, except in the cryptocurrency economy.

          2 replies 3 retweets 80 likes
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        19. Patrick McKenzie‏ @patio11 22 Dec 2019
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          53/ There is, as of 2019, more paper, and more *required* paper, than you would think in financial services. This is decades after frontpage stories about Paperless Offices. But there has been substantial improvement, even in the last few years.

          1 reply 0 retweets 26 likes
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        20. Patrick McKenzie‏ @patio11 22 Dec 2019
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          54/ The same goes of phone calls, faxes, API-via-secure-FTP, harddrive-over-FedEx/couriers as an encrypted API transport, etc.

          1 reply 1 retweet 30 likes
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        21. Patrick McKenzie‏ @patio11 22 Dec 2019
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          55/ Costs of customer acquisition in financial services are routinely in the hundreds to thousands of dollars for *retail-facing* accounts, because they anticipate customer lifetimes measured in decades and growth in the value of those accounts over times.

          3 replies 4 retweets 47 likes
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        22. Patrick McKenzie‏ @patio11 22 Dec 2019
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          56/ When e.g. Chase paid $1,000 apiece for signups to their new top-tier credit card, there was widespread chortling by competitors, not because they thought that was unfair or unseemly but because they thought it was *unwisely calibrated*.

          1 reply 2 retweets 25 likes
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        23. Patrick McKenzie‏ @patio11 22 Dec 2019
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          57/ This is unfortunate for competitors to financial services, which want to grow explosively but want to do it on extremely light marketing budgets, relying on e.g. product quality, social amplification, and better understanding of App Store SEO to drive adoption.

          1 reply 0 retweets 36 likes
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        24. Patrick McKenzie‏ @patio11 22 Dec 2019
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          58/ Startups don't want to spend hundreds of dollars on customer acquisition with razor thin margins because then sustaining their growth ramp will cause them to lose more money every year, costing them more dilution every year.

          1 reply 1 retweet 42 likes
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        25. Patrick McKenzie‏ @patio11 22 Dec 2019
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          59/ This is as true of e.g. mattresses as it is of financial services, but startups in finance have a problem that other startups do not: in finance you can pay the cost of customer acquisition *directly to the customer* without this looking like accounting shenanigans.

          1 reply 3 retweets 53 likes
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        26. Patrick McKenzie‏ @patio11 22 Dec 2019
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          60/ Ever wondered why "Silicon Valley preferentially makes products for rich people in the bubble" is widely believed and yet Chase and Amex probably have 90% wallet share of SV participants? This is basically why.

          1 reply 0 retweets 43 likes
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        27. Patrick McKenzie‏ @patio11 22 Dec 2019
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          61/ When AppAmaGooBookSoft think of financial products they think of ones which can be distributed virtually universally over their userbase (e.g. Apple Card). When startups think of them, they often are forced to look at customer groups that Chase et al don't want.

          1 reply 2 retweets 52 likes
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        28. Patrick McKenzie‏ @patio11 22 Dec 2019
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          62/ The toothbrush test is approximately as applicable in financial services as it is for marketplaces. (The toothbrush test: no marketplace you don't use twice a day will be a massively viable business. Uber for X is a lot worse than Uber for Uber.)

          1 reply 11 retweets 119 likes
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        29. Patrick McKenzie‏ @patio11 22 Dec 2019
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          63/ The exception to the toothbrush test is originating extremely, extremely valuable set-it-and-forget-it transactions, ideally ones which are hugely backweighted. Unfortunately these are limited in number by nature and switching costs are extremely high.

          1 reply 3 retweets 36 likes
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        30. Patrick McKenzie‏ @patio11 22 Dec 2019
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          64/ I think you will find many more interesting startups in financial services either at the toothbrush test or at the "giant, compounding transaction with multi-decade time horizon" than you will in the No Man's Land of e.g. credit card refinancing.

          1 reply 3 retweets 42 likes
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        31. Patrick McKenzie‏ @patio11 22 Dec 2019
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          65/ In the No Man's Land you have to pay essentially your entire customer acquisition cost over again to reacquire customers you already won, while not having them increase in value in interactions with you, and also not materially decreasing in risk or operational costs.

          2 replies 2 retweets 30 likes
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