The a16z Show - 16 Minutes on the News #5: Fed Real-time Payments, Death of Retail

Starting point is 00:00:00 Hi everyone. Welcome to the A6 and Z podcast. I'm Sonal and this is our fifth episode of 16 minutes, our new news show, where we cover recent headlines of the week, the A6 and Z way, why they're in the news, why they matter from our vantage point in tech, and share our experts' views on the trends involved as well. You can catch up on past episodes at A6NZ.com slash 16 minutes or subscribe to it as a separate feed in your favorite podcast player app. This week, we have two episodes since we'll be skipping next week. This episode covers these two topics that came up in the news, a quick take on Barney's filing for bankruptcy and what that means in the context of the death of retail. But first, we go deeper into the Federal Reserve announcing Fed Now, which is a

Starting point is 00:00:43 much bigger deal than it seems. What, why, and how. Okay, so the first segment this week covers some news that came out of the Federal Reserve, which is that just this week they announced that they are going to create something called Fed Now, a real-time payment service. So it would be open 24-7 days a week that would allow people to get access to their checks faster. And even though it was announced this week, it actually is not out there in the wild yet. It aims to launch in a few years. And just to give you some more context, this is really targeted over half the population who live paycheck to paycheck and paycheck and need access to their money sooner. And right now, they're forced to pay a lot of late fees and overdraft fees. I mean, overdraft fees alone were $34 billion in just

Starting point is 00:01:28 the last year alone. And of course, many big banks are lobbying to stop this. And some of them have an alternative that they've proposed. Citibank, U.S. Bank Corp. and J.P. Morgan Chase have their own instant payment system, which was launched in 2017 and operated by clearinghouse payments. Now let me introduce our expert, A6C General Partner, Angela Strange, who is on the FinTech team. Welcome, Angela. Thank you. Happy to be here. So let's first talk about this news. Like, first of all, is it really news? This is actually a very important announcement. So for the, you know, call it top half of the population, like from a personal day-to-day use, like you probably don't care. Like, you use your credit card most of the time. You never hit zero in your bank balance. If someone gives you a check and you're waiting for it to clear, like you probably don't notice if it clears in two days or four days. Like, that doesn't matter. But for the other half of the population, like, there's more than 40 percent of Americans that don't have $400 in savings, you're living paycheck to paycheck. You care very, very much when funds hit your bank account. And right now, there are these totally unpredictable, untransparent delays. Like just for instance, your company decides to pay you and they send the notification to the

Starting point is 00:02:38 Federal Reserve. And if you're a contractor and you're getting paid by check, that check could take two days to clear. If you've had a bunch of overdrafts in your account, it could take seven days to clear. So everyone that lives like this is in their head doing this juggling act of, okay, my paycheck's going to land in two days. I just put out my rent check, but it posted for a few days, so maybe I can afford to pay my cell phone bill. This check that I deposited, maybe that's going to land. And oh, by the way, every time you screw it up, it's a $30 overdraft fee. So you have this whole unpredictable juggling act that every time you screwed up, it costs you money. And so I think we should very much care because while this does sound like a nuanced regulatory

Starting point is 00:03:15 issue. It's probably the biggest financial regressive tax that we have in the U.S. Just for broader context, how does this compare to the rest of the world? The U.K.'s had faster payments for the last 10 years. I heard somebody compare it to these. Like, I've had 10 versions of the iPhone since faster payments came out in the U.K. And we still don't have in the U.S. It's in Singapore and Canada and Mexico. And so many, many, many countries are just leap years ahead of the U.S. Now, if you look at what do the rails look like in the U.S., obviously you've got Visa and MasterCard, and they take a percent. of transactions. Luckily, you've got all the peer-to-peer networks that have come out, Venmo and

Starting point is 00:03:50 scratch and square cash and the likes, and those actually operate fairly instantly, but they're using ACH. What's ACH again? The automated clearinghouse. That's basically what we have. And the best comparison, I think, is comparing like ACH is snail mail to faster payments is email. And it's literally almost analogous. ACH batches all of the payments. And this is great, for banks because tiny payments, small payments, it's all sent off usually once per day. And the big innovation there is, oh, sometimes we'll batch them twice per day, which is a far cry from real-time payments. Your point is that we might dismiss real-time as like a minor future improvement if you don't really understand the scope of the problem. But actually, if you do understand

Starting point is 00:04:34 that scope of the problem, this is extremely significant that you can actually go faster and current technology is not serving it. What's interesting here, and you mentioned this, is that we actually do have a real-time payment network of sorts in the U.S. So the 26-largest member banks own or part of an association called the Clearing House. And they launched real-time payments in 2017. And why is that not working? But for really to work, you need all 10,000 financial institutions on this network. And that includes smaller banks.

Starting point is 00:05:04 Smaller banks, regional banks. If you think, like, who needs this most, it's probably not the people that are banking at the major parts of major banks. And this network does cover 50% of direct deposit accounts, but not broad enough. So then you ask, okay, so what's stopping all of the smaller banks from just joining the network? Because, like, definitely the clearinghouse wants everybody to get on board. And it's two things. One, the Fed for a very long time has been making noises that they are going to get into the real-time clearing business.

Starting point is 00:05:36 Which they clearly just made a louder noise. Which they clearly just did. And there's precedent. Like 40-plus years ago, they got into the ACA. business. So there's actually two ACH networks and the people that support this say it's good to have competition and that this is such a critical service to the nation that you would want, not just a private network, you actually want the government involved. So then if you're a small bank, you're like, okay, do I spend the expense to get involved in this network? Well, I'm just going to

Starting point is 00:06:02 wait to see what the Fed is going to do. And then the other piece is just a lack of trust of joining a network operated by larger banks. You're like, well, am I going to get priced out? being able to do these real-time payments. But the big policy debate is right now the Fed provides both a operational role and a regulatory role. There are people arguing that just do the regulatory role and why don't you regulate that this technology run by the clearinghouse that already exists can't charge exorbitant fees. You should regulate that everybody has to join.

Starting point is 00:06:34 Like this technology is already here. Right. And so that could, if it was done, get this real-time network going, much faster than Fed now, which is now being called Fed five years from now, because it's going to launch in 2023 and 2024. When I hear that kind of conundrum of do you have them regulated or wait for it, I'm sort of wondering, why would we do either? Why aren't there other alternative technologies that can solve this problem? I want to know where tech comes in in this. You need both the technology, but the harder piece to do is you need to get everybody to participate in this network.

Starting point is 00:07:07 They should figure out a regulatory framework to get more people on the technology that already exists and get this problem that we're talking about that penalizes half of our population fixed faster while also building their network. Could a new startup come in and create a new real-time rail? Not in the same way, because what the real-time rail is saying they're going to do is interconnect the 10,000 financial Fed Reserve institutions together. So we do have things like peer-to-peer networks, and this is where PayPal and Venmo and those come in, but that's very different from, you know, I bank at community bank in Kansas, and I need to have my checks clear immediately. And so what FinTechs are doing is they're figuring out how to solve point problems that are

Starting point is 00:07:52 very, very valuable to consumers. So for instance, if you're living paycheck to paycheck, you are watching by the hour when your paycheck lands. And what most people don't know is that banks are holding on to their paychecks or not delivering them as fast as possible. So for instance, your bank will get the notification that your employer has told the Federal Reserve that they're going to pay you X dollars. Those X dollars won't land in your bank account for another two days usually. So there's a startup that can see, that is your bank, and they can see that your employer has said, hey, pay Sonal $500, and they'll give you $500 immediately. You don't have to wait two days.

Starting point is 00:08:30 Even beyond that, you could argue that if you're working eight hours a day at Panera bread, for instance, it is somewhat anachronistic that you can only get paid on the first of the month and the 15th of the month, even though you're earning eight hours times your hourly wage every single day. If I've worked four days of that week and therefore I should be able to get paid at least those four days. Or if there was no cost in payments, like why aren't you just getting paid at the end of every day? That's a good question. Exactly. So the reason that's not the case is infrastructure.

Starting point is 00:08:58 So startups like Ehrnan are enabling people to get access to money that they've already earned in a much more frequent manner. So that was super helpful for understanding the nature of the problem. Tell me a little bit more about why the Fed is even involved with checks in the first place. Because every time we talk about the Federal Reserve and checks, I'm so confused at why this cannot just be handled at whoever holds the money is where the money comes. Why is there even this player involved? I don't know how a check is cashed. So the Fed is involved in regulating most aspects of payments. Let's say I write you a check and I have $0 in my bank account.

Starting point is 00:09:30 If your bank gave you that money, then they would then pull it back from you and the whole system would just be a mess. And so someone needs to make sure it's called good funds are actually available on both sides. And so it is for the protection of both consumers across the side. The problem is that this system was invented literally back in the days when people wrote checks and you would have to mail them to like a previous instance of the institution where they were coming from to make sure that you could actually check that the funds existed to then send it back. And so just the infrastructure has not progressed to where it should today. The technology is today.

Starting point is 00:10:03 Yeah. Like the big innovation on checks is, you know, that bar at the bottom where now they can be electronically led and you can you can send it back and forth at least the checks electronically but we've got a long like we can progress a long way from there okay so that's great angela super helpful context so bottom line it for me how should we think about this recent news announcement about fed now or as you said fed five years from now how should we think about it i think we should be excited and push towards our industry making a much faster move towards real-time payments and i think of the broad

Starting point is 00:10:35 broader population really understood who this was affecting most, which is the more than half the population that live paycheck to paycheck, there would be more pressure on either banks to join the existing network and the existing network to behave well and treat everybody fairly. And for the Fed, if they decide to go their direction to move as quickly as possible, while also maybe regulating faster participation in the existing network such that we can, to be honest, catch up with the rest of the world who's been here for over a decade. Thank you, Angela, for joining this segment. Thank you for having me.

Starting point is 00:11:07 Okay. Our next segment on 16 minutes on the news is about the death of retail given the news that iconic retailer Barneys filed for Chapter 11 bankruptcy this past week. So just to give the specifics and quickly summarize what the news is, Barney's plans to close 15 of its 22 locations, which means it then only has seven remaining stores, including its flagship on Madison Avenue. Barney's, and this is what makes it even sadder, is that it's been around. since the Great Depression. And they were pioneers for trends such as relaxed suits and menswear, so by bringing Armani to the U.S., putting perfumes in the back of the store instead of in the front of the store. And most iconic of all, building windows instead of covering walls with extra racks. So these are some of the things that Barneys has done. And Barneys has actually filed for

Starting point is 00:11:53 Chapter 11 bankruptcy before in 1996 when they fell out with some of their investors. But this year's filing is due to higher rent, obviously, more online retail shopping and direct to consumer marketing, all of which are connected to tech. So now let me introduce our A6 and Z expert, Jeff Jordan, general partner, managing partner, and a deep expert on all of this. Welcome, Jeff. Thanks, Arnold. Great to be here. So you're the person I want to tell me how to think about this news. Like, is this more of the same? Is it something new? I mean, I should point out that Barney is also a dinosaur. And unfortunately, the offline retailers, a lot of them are dinosaurs. I mean, actually, I first started blogging about this and I went back and looked today, 2012, about

Starting point is 00:12:35 e-commerce, taking share and being advantaged over offline commerce. And so there's just been a steady drumbeat of bankruptcies, restructuring closings. And unfortunately, I don't think it's going to stop. Really? Yeah. I think it's long. I thought Barney's had a chance because in this world of e-commerce, a lot of these physical stores would have a really special role to play, especially in showrooming and being able to really have a customer experience and the trend is more now towards experiences. So why Barney? What retail chains, physical retail chains are really highly leveraged. They take enormous amounts of capital and they have enormous basically fixed costs, rents of fixed cost. Inventory is a quasi-fix cost. And if sales start declining, they can go from profitable to unprofitable,

Starting point is 00:13:24 extraordinarily quickly. And I actually watched this happen at the Disney stores. When I was there, Disney stores were minting money. And then they did a different strategy. The top line went down 5, 10 percent and they started hemorrhaging money. But it wasn't because of online. It was just a different strategy. That was a different strategy. That for me was self-inflicted. New management came in and tried a different strategy that didn't really work. Just the 5, 10 percent change in the top line made the chain go from profitable and unprofitable. So as e-commerce, nibbles away at the, at share, all the stores in aggregate lose a little bit of sales and in some point they just become unviable. The flexibility and an opportunity that software-based companies have

Starting point is 00:14:06 is that they don't have the legacy of fixed costs, which is the dinosaur around the neck, the albatross around the neck. Yeah, I mean, now, e-commerce has other problems, which is largely showrooming also happens off online. If you want to price shop, you can price shop. And then that then caps, competition for the same consumer and that window shopping caps the opportunity for online players to charge a lot. So one of the most baffling things is that there are only a few true winners in e-commerce in the United States, but no one's making money. They're just all competing for the same consumer with essentially the same product.

Starting point is 00:14:44 So nothing works? Like, is there any place where it does work? So grocery is the largest single category of U.S. retail, more than apparel, more than a peril more than personal care or things like that. And it had historically been completely immune to digitization. So, you know, web van was the iconic failure of trying to do groceries electronically. The big difference in groceries is the inventory is better served being close to the consumer. And so what grocery chains are essentially are distributed warehouses. Physical grocery is a way to combine kind of a hybrid both offline and online, helping, you know, the,

Starting point is 00:15:21 the grocery chains around the world deliver to people in their area. Fred Smith famously said when the internet came, he didn't think groceries could be delivered through the internet because you know you put your eggs in a truck and it bounces around all day and it comes, you know, 10 hours later or whatever, that doesn't work. It does work if it's the grocer down the street. Okay, so bottom line it for me. How should we be thinking about all of this news that the retail?

Starting point is 00:15:46 People have been talking about it for years. On one hand, I see lots of, lots of cars in the parking lot on all the malls. On the other hand, I see news of bankruptcy and I also see a lot of internet shopping going on. What you're seeing is the, the best malls and the best stores continue to thrive. Now, all the marginal change and the marginal malls are closing. I did a blog post years ago about the demalling of America, because if all the stores dies, the malls end up dying. And my favorite quote was a reed owner who said, we're not a real estate investment trust. Yeah, real estate investment trust. He goes, we're not overbuilt in malls. We're just underdemolished.

Starting point is 00:16:19 malls are being repurposed. They're either being torn down or they're being repurposed into town centers. But, you know, that's changing. In your previous episode, we talked about how e-sports are now taking over certain malls. So who knows what the future here is? That could be. Yeah, that's Stanford E-sports Center. Thank you for joining, Jeff. It's a pleasure. Thank you.

The a16z Show - 16 Minutes on the News #5: Fed Real-time Payments, Death of Retail

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