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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 Jan 23
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      You can mitigate this, as a consumer of credit (B2C or B2B) by having multiple independent funding sources and, of course, by keeping a cash buffer around.

      1 reply 0 retweets 12 likes
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    2. Patrick McKenzie‏ @patio11 Jan 23
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      Historically it was operationally difficult for banks to adjust credit lines, but that better adoption of technology (data sources about credit risk, data science applied to your transactions and bank's proprietary data, overall better IT posture) allows this to be *fast*.

      1 reply 0 retweets 10 likes
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    3. Patrick McKenzie‏ @patio11 Jan 23
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      This makes the process more efficient and less risky for lenders, which at the margin should counsel them to offer higher limits to more marginal customers than they'd otherwise be comfortable with. But those limits "mean less" than many people might assume they do.

      1 reply 0 retweets 15 likes
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    4. Patrick McKenzie‏ @patio11 Jan 23
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      Example: there is one particular US bank that I've used in a personal capacity for a very long time. I'm a pretty good credit risk. Back in I think 2012, when I was also a pretty good credit risk, they were uncomfortable giving me any more than $X of total exposure.

      1 reply 0 retweets 7 likes
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    5. Patrick McKenzie‏ @patio11 Jan 23
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      Over the last few years, I've not had bank-legible changes in circumstances, but should still read as "Yep, still a pretty good credit risk." Their messaged appetite for exposure to it is something like 3~4 times more than $X, and $X wasn't a small number either.

      1 reply 0 retweets 8 likes
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    6. Patrick McKenzie‏ @patio11 Jan 23
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      That is likely downstream of "Well, we're not *really* taking on 4X of risk from you. You barely even saturated the $X for most of your years with us. If your financial circumstances change extraordinarily rapidly and you go crazy with charging things, we'd derisk *in seconds.*

      1 reply 0 retweets 12 likes
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    7. Patrick McKenzie‏ @patio11 Jan 23
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      So why do banks offer you "more credit than you need"? I mean, to make money, but the mechanisms are more interesting than that. One is to protect their share of wallet.

      1 reply 1 retweet 15 likes
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    8. Patrick McKenzie‏ @patio11 Jan 23
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      Banks broadly do not believe they have material edges in underwriting consumers: if you are a) a very good credit risk and b) use a lot of credit, banks perceive that it is highly likely all of their competitors will believe the same two things about you, particularly over time.

      1 reply 2 retweets 16 likes
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    9. Patrick McKenzie‏ @patio11 Jan 23
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      (An interesting market opportunity for banks is specializing in people whose circumstances are specialized such that the technology which enables the last tweet, such as credit reports and FICO scoring, does not correctly bucket them as low-risk but where they still borrow lots.)

      2 replies 0 retweets 22 likes
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    10. Patrick McKenzie‏ @patio11 Jan 23
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      So if banks think "Well, if we don't extend credit at the margin our competitors certainly will", whereas previously they might be OK losing the opportunity for your business to protect their risk profile, these days they want you to *know* you have headroom on your card.

      1 reply 0 retweets 14 likes
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      Patrick McKenzie‏ @patio11 Jan 23
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      "I don't want to lose a single business trip worth of expenses to Amex just because they were worried about going over and MOST PARTICULARLY I do not want Amex to get their transactions *next month, too* because of an opportunity to change habits or stored cards."

      7:58 PM - 23 Jan 2020
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      2 replies 1 retweet 17 likes
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        2. Patrick McKenzie‏ @patio11 Jan 23
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          That is also downstream of the increasing computerization of user spending behavior: previously, the jargon was literally "We want to be 'top of wallet'; the card our customer habitually reaches for first." The expectation is all other cards are a short distance away in wallet.

          1 reply 0 retweets 13 likes
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        3. Patrick McKenzie‏ @patio11 Jan 23
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          When your business runs transactions monthly on AWS or you personally have a card installed on Apple Pay, though, the difference between "top of wallet" and the next card is *gigantic*. Your "next card" isn't on the system charging you money and probably isn't on *you* either!

          1 reply 2 retweets 22 likes
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        4. Patrick McKenzie‏ @patio11 Jan 23
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          You'll note that "Ahah, they are trying to trick you into spending more than you can afford" is a very different narrative from "Ahah, they are hoping you concentrate more of your transactions on them this month, pay back quickly, and come back for more next month."

          1 reply 7 retweets 24 likes
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        5. Patrick McKenzie‏ @patio11 Jan 23
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          There exists a heterogeneity of strategies and a wide distribution in customer behavior. Some banks (and some products at a particular bank) might be caricatured as being more of the first, and some more of the second. And some are both, for different people.

          1 reply 1 retweet 8 likes
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        6. Patrick McKenzie‏ @patio11 Jan 23
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          Financially unsophisticated people, including very smart financially unsophisticated people, often believe "Banks can't make any money from you if you are a responsible user of credit. They want you to get in over your head." This is false as stated.

          2 replies 2 retweets 34 likes
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        7. Patrick McKenzie‏ @patio11 Jan 23
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          Banks sell financial services. Sometimes the pricing is a little opaque to the end user, because it is subsidized by someone else. If you consume a lot of financial services, and banks are eagerly courting your business, it is *probably not* because they're bad at math.

          2 replies 6 retweets 37 likes
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        8. Patrick McKenzie‏ @patio11 Jan 23
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          A concrete example: which of the following two customers is more lucrative? A: Spends $10k. This strains them; they can pay back the minimums, but it will take them years to pay off, at a 15% APR the whole while. B: Spends $10k monthly. Never pays a cent in interest.

          2 replies 6 retweets 35 likes
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        9. Patrick McKenzie‏ @patio11 Jan 23
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          Answer: depends *almost entirely* on what it cost the bank to acquire and keep B's business, because B is *printing money* via interchange. A contributes about ~$1.3k of revenue per year (plus $200~$300 in month 1). B contributes about $2.5~$3k annually.

          7 replies 7 retweets 50 likes
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        10. Patrick McKenzie‏ @patio11 Jan 23
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          (Should insert a *plausibly* before "contributes" because there are actually a lot of different interchange rates the issuer could be receiving depending on product, jurisdiction, card brand, regulation, etc, and I should clarify "I'm being very handwavy on math here.")

          8 replies 0 retweets 20 likes
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        11. End of conversation
        1. TProphet‏ @TProphet Jan 23
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          Replying to @patio11

          ...and yet @chase just jacked their annual fee $100 which will drive away their Sapphire Reserve cardmembers in droves.

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