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

      5:29 PM - 22 Dec 2019
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        2. 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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        3. 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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        4. 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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        5. 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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        6. 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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        7. 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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        8. 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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        9. 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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        10. 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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        11. 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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        12. 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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        13. 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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        14. 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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        15. 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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        16. 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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        17. 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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        18. Patrick McKenzie‏ @patio11 22 Dec 2019
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          Taking a break for family dinner; 35 more coming later.

          5 replies 0 retweets 58 likes
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        19. Patrick McKenzie‏ @patio11 22 Dec 2019
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          65/ Wealth management historically sells a small amount of very expensive labor (portfolio allocation math, done by expensive professionals) with a large amount of medium expensive labor (counseling delivered by a salesman with greater facility with numbers than most clients).

          2 replies 3 retweets 54 likes
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        20. Patrick McKenzie‏ @patio11 22 Dec 2019
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          66/ Computers will entirely replace the first bit. The big question for the industry is to what degree the second bit ends up being provided by an app, by brand positioning, etc, and to what extent it gets provided by an actual human.

          3 replies 2 retweets 40 likes
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        21. Patrick McKenzie‏ @patio11 22 Dec 2019
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          67/ Many startups bet that there has been a fundamental shift in buying behavior around the thermocline created by "Did you grow up with the Internet?" and that people on one side of that thermocline have preferences which are *unrecognizable* on the other side re: sales.

          1 reply 4 retweets 43 likes
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        22. Patrick McKenzie‏ @patio11 22 Dec 2019
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          68/ The incumbents believe something closer to "Well, our cost base assumes that we put modestly expensive professionals in expensive real estate whether we like to or not, plus we've met young people before and heard Oh God They're Nothing Like Past Generations before, so."

          1 reply 0 retweets 28 likes
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        23. Patrick McKenzie‏ @patio11 22 Dec 2019
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          69/ Good sales people in retail-facing financial services are paid tiddliwinks by comparison to good sales people in tech, and almost everyone capable of selling mutual funds at a wirehouse should be selling B2B SaaS instead, ironically often to the same demographic.

          1 reply 10 retweets 87 likes
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        24. Patrick McKenzie‏ @patio11 22 Dec 2019
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          70/ "That won't happen, they don't understand software" say some commentators, who probably overestimate how competent in distributed protocols one needs to be to sell workflow SaaS and who underestimate the intelligence of people who have passed the Series 7.

          3 replies 1 retweet 67 likes
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        25. Patrick McKenzie‏ @patio11 22 Dec 2019
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          71/ Much like in other B2B services, at certain tiers of sales in finance, people stop calling you a sales representative. Now you're an investment banker / consultant / etc. Their productivity likely improving due to both CRMs and business processes which augment capabilities.

          1 reply 3 retweets 47 likes
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        26. Patrick McKenzie‏ @patio11 22 Dec 2019
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          72/ A large theme in investing is bringing capabilities which used to require bespoke, artisanal work and making them available to the mass affluent. Tax loss harvesting is one example. One question is whether, if you build it, they will come.

          1 reply 1 retweet 48 likes
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        27. Patrick McKenzie‏ @patio11 22 Dec 2019
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          73/ A trickier question is whether all products of the financial services industry can be offered to substantially everyone, in a way described publicly, without attracting extreme adversarial attention or causing excessive amounts of brand risk for too little revenue.

          1 reply 4 retweets 37 likes
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        28. Patrick McKenzie‏ @patio11 22 Dec 2019
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          74/ In financial services as well as in adtech, the accusation "sells your data" is made extremely frequently and accurately descriptive of a transaction extremely rarely. Imagine the meeting. "Interesting idea, but could we just take their money instead? We're set up for that."

          1 reply 3 retweets 46 likes
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        29. Patrick McKenzie‏ @patio11 22 Dec 2019
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          75/ Scaling computer systems is scaling computer systems, but an interesting limiting factor in scaling of computer systems in finance is "Does this system have rate limits controlled by human interaction?", in which case scaling from a technical perspective rounds to trivial.

          1 reply 4 retweets 43 likes
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        30. Patrick McKenzie‏ @patio11 22 Dec 2019
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          76/ That didn't used to be the case. Visa volumes used to be big numbers requiring some of the smartest engineers on the planet to use the biggest iron available. But Moore's Law compounds faster than the global birthrate does. By a lot.

          3 replies 3 retweets 52 likes
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        31. Patrick McKenzie‏ @patio11 22 Dec 2019
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          77/ There are still extremely non-trivial scaling challenges in financial systems where computers talk to computers, such as e.g. adtech (which isn't a parallel system of financial exchanges but isn't not a parallel system of financial exchanges), stock exchanges, etc.

          1 reply 0 retweets 31 likes
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