The a16z Show - a16z Podcast: Fintech Revolution or Evolution?

Episode Date: June 22, 2016

How far along are we towards the vision of a "cashless, cardless, walletless, frictionless future" for fintech? We're not quite there yet, argued BuzzFeed News technology reporter Charlie Warzel in a recent feature story -- for which he got a microchip implanted in his finger while trying to go cashless for an entire month. But as revolutionary as the chip tech seems, the reality may be that fintech innovation is much more incremental, evolutionary, and still only disintermediating the physical world than truly doing new things (given what's natively possible with web, cloud, and mobile). Will that change now that Apple Pay is coming to the web? Speaking of, what is the platform and what is the product? Especially given a highly fragmented digital wallet and payments market (Warzel eventually ended up with 64 apps just to get through one month). And where, exactly, are the banks in all this? The problem, observes Warzel -- who is joined by a16z Partners Alex Rampell and Angela Strange in this episode of the a16z Podcast on all things fintech, payments, wallets, and more -- is that the customers/consumers aren't at the center of any of this. And that's a big deal given the (lack of) trust and expectations for user experience that savvy users will have for all their tech. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi, everyone. Welcome to the A6 and Z podcast. I'm Sonal. And today we have Angela Strange, a partner on the deal and investing team monitoring a podcast on FinTech trends, including our general partner who's an expert on all things FinTech, Alex Rampel, and special guest Charlie Wurzel, senior technology writer at BuzzFeed, who recently wrote a deep feature on the topic. So let's just get started. Hello, everyone. So maybe we could kick this off, Charlie. You just finished a month-long experiment of going cashless, which actually. actually landed you in a quasi-surgery office getting a microchip implanted in your hand in Sweden. So you can tell us what led you along this journey? Sure. So it started really with a very simple question, which is what is the future of money? And with regard to all the buzz about mobile payments and the death of the wallet and a cashless society, how far along on that timeline are we actually?

and sort of what does that future look like and who wins, who loses, all these sort of vague or hard to answer questions. And so we thought that a fun way to approach that rather than, you know, the traditional, talking about finance can be dry sometimes and also very interesting. So I decided to do an experiment where I lived for 30 days only using electronic money or I got rid of my wallet, left it at home and only used, you know, mobile apps and the internet. and started kind of going deeper and deeper into cryptocurrencies like Bitcoin. And eventually I went to Sweden and got a chip implanted in my hand. So, I mean, it kind of... How did you pay for that? You know what?

Actually, the fine people at Calm Body Modification in Stockholm did it for free because they are real evangelists for this biohacking movement. And they're really excited to just have somebody who was going to, you know, push the experiment to the furthest level. That would have been a great first test transaction. It would have been really hard. Right? Because how do they know the service?

Like you go pay them with your hand after they've been planted the thing in your hand. Yeah. And it was really hard to find somebody who could help me, you know, wire my hand. And there are a lot of people who do it and, you know, like we can hook this up to, you know, this experimental cryptocurrency that, you know, isn't really in use anywhere that's, you know, we're just trying to, like, play around with. And it was very hard to find someone who could sort of find a practical application for it. Alex has already trademarked this human pay versus Apple Pay or Samsung's pay.

There you go. Perfect. One of the things I thought was interesting is you decide to leave your wallet at home. And it's not like you can just pick up your phone and use Apple Pay. There's a huge startup cost in terms of all the apps that you need to download. Can you talk about the wide variety of things that you had to install on your phone so that you could actually shop at what turned out to be a fairly limited number. of places after all. Yeah, it's really interesting. Basically, the first thing I noticed was the limitations of Apple Pay. That was really the first thing. It really sort of pushes you to two ends

of the spectrum. You either have sort of the big box retailers, the, you know, Best Buy, or, you know, like a big supermarket, whole foods, things like that. And then you have the other side, which is, you know, a coffee shop that has a $6 latte that, you know, that only accepts Square or Apple Pay. And there's really not a lot in the middle there, like what most people are, you know, where most people are going. And so I thought that that was interesting sort of being pushed to that extreme. And then it's really such a fragmented marketplace out there. Everyone's sort of trying to, it felt, get a piece of that. And so I created a folder on my phone called Cashless. And it was every time I saw something, an opportunity, I would download an app.

and it ended up being, I think, like, 64 apps and, you know, just scrolling through, like, okay, I need to use, I need to, you know, get somewhere, I use a New Jersey Transit app. It was difficult. And you're inputting so much credit card information then. I mean, I'm like, I ended up memorizing my credit card number for the experiment so I actually could leave my wallet at home.

But I just felt this sort of sinking feeling of, you know, I keep taking all my very, you know, sensitive payment information and just sending it to different corners of the internet again and again. And while that may be more of a, maybe something that I worry about and it's not actually a huge concern, it feels like, you know, average people who don't know a lot about this space, I mean, they're going to be intimidated by that. It's funny. I had a, you talk about the broken end user experience. I always order ahead my coffee and so I can be cashless.

But if I show up in the coffee store like I did the other day and I wanted to buy breakfast, there's no way that I can be cashless while in the coffee store, but I can be cashless before I get to the coffee store. So I end up using this order ahead and showing it to them and saying like, hey, I paid this way, like, please give me my, because they don't accept Apple Pay. And it's just from a consumer standpoint can still be kind of a pain in the ass. Yeah, I think it speaks to how far we really have to go and how much of the mobile payment or the contact list revolution or whatever you're going to call it, how much of it so far is just experimental. is just a lot of these places saying,

okay, we want to be in this space, we want to try it, but we maybe, it was funny, when I went to Sweden, you know, is a cashless society, supposedly, the only place that didn't accept

a mobile app was Starbucks. And Starbucks in the United States is, you know, has a wonderful mobile payment solution. So I think, you know, there's the continuity is not really there. So it's actually talk about Starbucks. Alex, this is something that you talk about often

and the motivation on the retailer side. It's not necessarily that consumers pay faster because sometimes it takes them longer to get out their app. They don't necessarily, it's not necessarily cheaper because to get somebody to use your app, you probably have to offer a lot of loyalty points and free coffees, but that the real values and the data that they're collecting and being able to influence user behavior.

Well, sometimes. So two interesting anecdotes. So right now the number two app in the App Store as of June 15th is the Chick-fil-A app. which was kind of brilliant because it's very, very expensive to get millions of people to download an app. I mean, Facebook has a multi-billion dollar a year revenue stream from cost per install ads. So Chick-fil-A said, okay, we'll solve that problem. I mean, how much, what are their cogs for a chicken sandwich?

It's probably like 50 cents, 99 cents, something in that range, maybe even less. So we'll give you the chicken sandwich for free if you download the Chick-fil-A app. So that was like their solution to hack that particular problem. And now it's the number two download of the app in the app store. So the main thing is that all of the... the retailers do not like the credit card companies or the credit card company complex, because especially if you are in, if you're a resale company like Target, Target has some private label stuff, but by and large, they're selling other people's things, and their net margin.

So their net income, after tax income as a percentage of total revenue is probably between 1 and 2%. So very, very low. Their credit card fees are between 1 and 2%. So if their credit card fees went to zero, they would double their after tax profit, which is very, very significant because that's what shareholders care about. So they want people not to pay with credit cards, but then to your point, Angela, how do they get people to not pay with credit cards? Oh, we'll make our own payment system. So this was the MCX currency experiment, which just basically got shut down, because it doesn't solve a problem for people. People like paying with their credit card, or even if they're using contactless, if they're spending $500 on something,

they want the miles, they want the points, they want whatever kind of comes with that. And if Walmart wants to displace that, and they're saying, hey, you're not going to get 1% cash back anymore and you have to go switch and we're going to give you a chicken sandwich. They can't give you a chicken sandwich. Like what's actually worked for Walmart and others is giving you 5% back or 7% back, which guess what is dramatically more expensive than the 2% that they're paying right now. So it's why the credit card companies are so valuable because they have a very, very defensible position in this ecosystem. You touched on there in the middle of that, a thing that I really and truly felt this entire time, which is that so little of what's out there

has a consumer in mind, really. And so, you know, it's all marketed that way. But I think that's one of the big hurdles here that, you know, it's not really that the U.X of the specific app looks bad or is hard to use, but it's this idea, you know, it's being built for the lifestyle of a person that maybe, you know, doesn't exist. I mean, what I sort of learned, Throughout this entire time, a wallet is a really efficient piece of low-tech. And a credit card works wonderfully. It's amazing battery life. Yeah, exactly.

And, you know, you can't scratch, you know, you can't drop and scratch the screen of your credit card. You can't, you know, if it gets wet, it's probably going to be okay. All these things. It feels like we haven't, you know, so much of it is just this abstraction layer on top of technology that's, you know, really tried and true. It doesn't do much to improve the user experience. Well, the other thing is that in many cases, when you switch modality, you often end up emulating the old modality. So think about the web page.

What is the second word in web page? It's page. So you have eight and a half by 11 piece of paper, and then when the web came out, it basically was taking like the piece of paper and putting it on the web. Or, you know, apps initially looked like bookmarks. You can actually do better than that.

So, I mean, I actually think it's funny. If you look at Apple Pay and how it works right now, when you bring it up, it tries to emulate what your old-fashioned wallet looks like. So it is this abstraction layer, but it keeps that form factor. So it is this skeuomorphism for the physical wallet, which seems like we're in V.01 beta of what actually it should be, because if you have a phone, you could do a lot more with it. I mean, like the phone already has the five, I imagine that you have the five different payment types that are in your wallet on your phone.

you shouldn't even have to choose your payment type at the type of purchase. At the time of purchase, you should be able to choose after the fact. There are so many things that you can do when you electronify everything and you have this kind of master pointer in your phone. Whereas when you have this old-fashioned wallet, I mean, the old-fashioned wallet, to your point, works great, great battery life, great, all of these different things. It's waterproof. Like, I use my credit card for everything. I haven't yet found a situation where using my phone is actually better, except in the order-ahead situation, but that's saving me time. And the time is not the card swipe versus the card tap versus the phone tap.

The time is waiting in line at Phil's coffee in your case for half an hour to go order coffee. That's the big benefit. And I think you're not going to be, just because it takes so little time to tap, in your case, your hand. Or in my case, by a phone or in Angela's case, her visa or a master card, I think the main thing is actually on the back end. How do you make that back-end payment experience better? simply because the front end of the payment is so easy and takes a fraction of a second. Somebody said in my reporting something that really stuck with me, which is that, you know, for all of the buzz of these mobile payment apps and the idea of cashlessness, when they're

purchasing something, people care about the thing that they're purchasing or the experience that they're about to go into. They don't really care how they pay. They just want it to be efficient and just be done. And so I think that that's, and I think that that, that, that will go away with, you know, when the idea of waving your phone across, you know, a terminal becomes a little more standard that that sort of, look what we did, look what we did, will go away and there'll be more of an emphasis, you know, on that, hopefully on that, that back-end Well, the real example is like, you know, what can a piece of plastic that does not have a battery that does not have a screen not do? Well, I can't keep all of your receipts with itemized

information on them. So the fact that whenever I do my expense report, I have to find all these crumpled up receipts and I lost one. Oh, damn, I don't get paid back for that thing. I mean, that is an anachronism and yet I'm paying with a credit card. And even if I pay with my phone, my phone can't receive the itemized information of what I just purchased. And that would be a big game changer. I mean, for the entire business traveler segment, that, like people would use it just for that, as opposed to right now, like the best innovation that we have is, hey, the phone also has a camera so you can take a picture of the receipt and then make it into a PDF. and then use that for your expense report. So there are things that I think will improve this quite a bit,

but you have to take advantage. You can't just make this skeuomorphic experience. You have to take advantage of the fact that the phone is now a two-way communication device and not just a holder of a 16-digit account number. I want to come back to the user experience point. I think we agree that offline is still pretty clunky. But there's a pretty interesting announcement this week around Apple Pay coming online that I think is going to make a really big difference,

Prior to Andreessen Horowitz, I worked at Google on the Chrome side, and we spent a lot of time wondering how we could make the user experience of paying for something online faster. Like right now, whether you're in an app or you're in a web page, you're typing out your credit card number, and really the best that we ended up with was a turbocharged system of auto fill, really, that could save across your profile, and that improved it, but it wasn't a massive step function. Whereas what Apple Pay just announced, maybe you guys can talk about what you think the implications will be there, but I imagine we'll make things much smoother across apps and across

the web eventually online. Well, I think part of the reason why Google got there, and obviously I'm talking to the masters, correct me if I'm wrong on this, but you didn't have to get merchant participation to do autofil. And Google had struck out a number of times doing, at first it was called Google Checkout, then it remorfed his Google Wallet, and then Google Wallet didn't work because that was entirely focused offline, but then this little thing called Android took off. And then The reason why Google Wallet now, I think, has not just a fighting chance, but a very, very good chance, is because Android brought Google to, I mean, it's probably nearing in on a billion credit card credentials. They don't disclose it, but my guess is it's going to get there eventually. So now you can have a predefined format, and here's an API for actually accepting Google Wallet, and if you do it, it means that the person enters one set of credentials and then, boom, they're done. as opposed to like with form filling,

I use Chrome for everything. With form filling, I'd say the hit rate is maybe 50%. And then I forget my CVV. I'm sure you've memorized a lot more than that. But it's like, is it this, is it that? I forgot what it is. I still have to go back and actually reference the original document.

But I think Apple Pay online is going to be a really big deal because whereas offline, the problem, the order ahead stuff, that would solve a problem. The two-way communication with your phone, for, for example, itemized receipt information, that would solve a big problem. But the whole, I'm tapping my head stuff. my phone to the terminal to pay, and then sometimes it doesn't work, and it takes me three

times more, and then the person behind me gets angry at me that I'm holding up the line. Like, that doesn't solve a problem, in my opinion, for the offline world. But the online world, part of the reason why Amazon is dominating, part of it is logistics, and that they can deliver anything in one day and anybody else takes a week. So that's very, very powerful. But the other part is friction for the order experience, and a big part of the order experience friction is entering your payment credentials. And if Apple Pay eliminates that for everybody, that is a not very first.

frequent use case, you're not going to go download the, I don't know, what's a very infrequent purchase random shirt company app. You're not going to go download the Brooks Brothers app. I'm sure they have one. However, you go to the Brooks Brothers website and now you can pay with Apple pay. That solves a massive problem. It's not waiting in line. There is no line online. There's a line, there's a friction that's imposed upon consumers for checkout, and Apple Pay eliminates that. It was funny. I was in the audience at the developer conference when this was announced and these events are just like these rapid fire check out our new thing and you look around and you see and you know the developers are there cheering it was a really sort of low key moment and

as I you know I could tell that you know this isn't going to get a lot of outside of the fintech blogs and the fintech world like really get a lot of buzz but it's huge I mean to that point it's just the staggering amount of of data to be collected and I feel that it is the way millennials or people, you know, thereabouts that I know are not necessarily that interested in signing up for Apple Pay outside of that experience of, oh, cool, you know, I wave my phone. And I think that having something like this that really actually truly becomes a utility instead of a gimmick, I think, you know, then you start building up this kind of trust with the consumers and you start, you know, you really become this financial passport. I think just even from the opportunity of the data that they can gather, it's going to be... Well, but Apple is notoriously anti-data. That's the funny thing about Apple versus Google is that Apple says, we don't collect any data, we don't use any data, we'll never store any data. This is part of the

reason why their advertising efforts have not been successful, and Google's the opposite there. So it will be interesting to see how they do that. I just think that their platform advantage is very significant, and they have what Google didn't have 10 years ago in launching checkout, which is they have also probably about a billion credentials, so very, very relevant. All of the execs that work at the Williams Sonomas of the world, they probably all use iPhones. So this is going to be priority number one. And normally, whenever a new payment method has launched in the past, the amount of time that it took to diffuse through the market, I mean, it could be 10 years. I mean, Bill Me Later was around for a very, very long time, and they got up to a pretty small percentage

of the market that used it. I think what's going to be really interesting is who is the biggest merchant online? Well, it's Amazon. Will Amazon use Apple Pay? Will some of the others use Apple pay? Because there is an advantage. Think of it from not the consumer perspective, but from the retailer perspective. So I want you, I can't control what my competitors do, but I want you to have your card number stored with me as opposed to a tokenized variant of it. There are a lot of advantages to actually having like the true card number. So it's going to be interesting to see how it proliferates, but I think the adoption by December time, I can imagine, like normally what retailers do is they will freeze all development, maybe August, September, because it's called

Black Friday for a reason. That's when they go in the black, right? So so much of their effort is really maximizing sales in November and December. And typically, they'll cut off all development of new features for their website in at the very latest September. So I would imagine that right now, June, July, August, whatever September remains for them, it's all going to be. about implementing Apple Pay. It feels like another example to me of this world of ecosystems with big technology companies. And you buy into a specific ecosystem and you just keep drilling down. Okay, I have my Android phone and now it makes sense for me to be part of all the Google suite

of products or the Apple suite. As these companies build out and their tentacles of their system go move into finance and move into any other realm that the consumer is left with this situation where, you know, they have to sort of pick a lane and choose it. I don't know. To me, that feels like if, if Amazon chooses, you know, not to go through, that's a big thing sticking out there. And I'm curious what it makes you guys think about, you know, this idea of, of ecosystems and everyone having, you know, trying to make a land grab. The nice thing from Amazon's perspective is that they don't have to. They already have enough people. Amazon probably has more.

cards on file, then PayPal has cards on files. So Amazon is very, very big. And the number of people, just because you can buy everything from Amazon, it's not a one-off type of purchase. They probably don't need Apple Pay as much, but they should be internally rooting for it to fail. Because if it fails, it actually helps Amazon sell more things at a higher markup vis-a-vis the competition. So I think the answer to your question is kind of what is the platform and what is the product? Because everybody wants to have the platform. And when Amazon got a lot of pressure for failing with their fire phone, their fire phone actually

made a lot of sense because the problem is that, well, what do they sell? They sell books in media. That's where they started. They started off selling books. Then they eventually went to other forms of media. And they are banned from doing that on this thing called the Apple device. And they have that similar problem, not quite as bad, with Google devices as well, with Android devices. So it makes a lot of sense for them to control the platform,

but it's very, very hard for them. Like, the guys that I think are the hardest hit are the guys like PayPal, where can you imagine the PayPal phone? Seriously, this is what they would need to have. Like, to beat Apple Pay, they would have to build their own phone. And I find it really interesting.

It's like the kid's story of the old lady that swallowed a spider to swallow the fly and then ends up swallowing an elephant at the end to swallow the other animals that she swallowed to eventually get that fly. And Google initially, like the iPhone was an iPod with a radio transmitter. That's what the iPhone was initially.

And Google said, hey, we're going to go build this Android phone. They're not going to build it, but they're going to get all these manufacturers to do it. Oh, wait, nobody wants Android because it doesn't have music. Okay, we're going to have to build a music player. You build all these other forms of functionality, and it's just this, it's this search that never ends. And each one of these things, it's a feature, and you're doing it to kind of make sure that you have control of the platform. And then once you have the platform, like now, and how many things does Google have, they have their own browser because, well, what if they had a phone that they made and they didn't

have a browser for it? Well, that wouldn't work out so well. But all of these things that you have to do to basically exert control as a platform. And then everybody else who doesn't have that capability and or doesn't really meet a consumer need, like hence the PayPal phone, which wouldn't work. But that would be their only way of really playing here. The fire phone would be the only way of Amazon really being able to control the platform and hence their destiny. So I think it's really interesting. I think like Google with Android, Apple, with Apple pay, if you have a phone and a plate, you have such an advantage in the payment space. And looking at how are other people creating advantages.

Take Uber, for instance, right, which is probably one of the larger apps with the larger payment systems to drivers and users across the board. And they're trying to create like a platform within themselves and releasing their API to create more apps on top of that. And I think it's an interesting but pretty challenging game to create the platform on top of the platform to not completely seed control to the Apples and Google. Right, depending on how aggressive that initial, that foundational platform is, because there's nothing really more foundational. You could argue that Amazon, if Amazon had a, if this were like the Soviet Union and they were the only store that was allowed to sell anything, then they would have the ultimate

platform because the only way that you could get a phone, whether it's an Apple phone or a Samsung phone, would be from like the ultimate buying platform, which would be Amazon. So there would actually be a step up in the chain. But fortunately, for us, I think there were many, many places to buy things such as phones. So, yeah, I agree. I think the amount of control that we have, it's like for the PC ecosystem that existed for a long time. You know, Microsoft was obviously the big gorilla and the only game in town. But Microsoft, in my opinion, never really, they never did the same amount of control.

Like they never said, hey, this software product cannot be downloaded onto your Windows PC. They did a lot of things that were anti-competitive and monopolistic, and they drove WordPerfect out of business, and they drove Netscape out of it. They did a lot of things that were very, very aggressive. But they never said that you can't download Netscape. And Apple is saying, hey, you want to go buy this streaming video from Amazon? Uh-uh. Can't do it on an Apple phone. The Amazon app will not let you buy certain types of things because otherwise Apple would remove it from the app store.

So the degree to which the platform owners are being amazingly anti-competitive and controlling everything within their ecosystem is strong. But in all fairness, it's not like Microsoft. with Windows, like there are multiple parties that you can use. I mean, social is probably the most closed in that there is not really an alternative to Facebook, but for everything else, there is an alternative. It's interesting. We're talking a lot about Apple, Google, Facebook, Uber, who's going to win in mobile payments absent in this discussion are any of the banks. And they're probably pretty worried right now about being disintimated in all sorts of ways. Like, number one, just in the offline space, if you're using your phone, then you're not

looking at your credit card anymore. Alex, you've written about this. The mobile wallet decides to order your cards alphabetically, and all of a sudden the card you used to use all the time is now the card. You don't because it's at the bottom. How do you guys think about what the relevancy of the more traditional players here? What are some of the things that they can do to stay at the forefront of all this change going on? Well, I know what they think they're doing, which is, you know, Chase has Chase pay. Everybody is trying to come up with their own little walled garden as well. And I've often found that big companies do things that make a lot of sense strategically, but don't actually address the consumer need at the end. If they're not solving a fundamental consumer problem and they don't have widespread adoption, then it's just not going to work.

My issue with the banks is that, I mean, the nice thing is that they have this regulatory position where it is very, very hard to become a bank. So there have been precisely, I think, one new bank in the last six years, and that's it. So if you want to become a bank, very, very challenging in order to actually charge interest and do a lot of other complicated things, you need to be a bank. But exactly to your point, and this is the article that we worked on, which is I think of this as a pointer where the wallet, the old-fashioned dead cowskin wallet is not a pointer. You just open it up, and then your brain decides you pull this thing out, and Samuel L. Jackson was on a commercial last night for Capital One. I like him. Okay, I'm going to go pay with my Capital One card. and then tomorrow I decided to pay with my Bank of America card because I saw I was I was impressed by

some other form of marketing whereas in the in the strictly online world if Apple Pay works really, really well, if Google Pay or Google wallet works very, very well, they have more flexibility in assigning which payment type you're using. And then I think what's even a bigger deal is how the whole interest stream works. So there's a trillion dollars of credit card debt in the United States and this is on average yielding between 15 and 18 percent for the bank. So that's the That's a lot of money for them. So every year, they're making $150 to $180 billion in interest on these revolving credit card lines. And many of them charge too much.

And I'm not saying this from a like usury-is-bad kind of perspective. It's more of like there are much lower rates in town. How do you find them as a consumer? And this is what the smart wallet should be able to do. Is it saying, okay, you're taking out a loan or you're not paying your credit card bill on time. Apple pay should say, hey, just like you're adding five cards to your wallet, you can also add five-fine. funding sources to your wallet, and all of them happen to be at a third of the cost of Chase or Wells Fargo, that's a really big deal. Because then the banks make money in two different forms. They make

money from the interchange themselves, and that mainly goes to the issuing bank. So about 1% of the credit card fee. So maybe the credit card fee is 2%. Half of that 1% typically goes to the issuing bank, and the rest is split up between different parties, and then they make a lot of money on interest income. And the interchange is already under pressure in different parts of the world, like Australia and Europe where it's regulated by law. And then the interest part, I don't think, I mean, you already have regulation on the high end, so you can't charge more than 36% interest. But for many customers that are prime or near prime, their rates can fall a lot if they have a wallet that helps them assign them to a lower rate. One thing, too, no normal person also has,

like, has an affinity for their bank. And in fact, negative affinity. Yeah, exactly. I mean, you know, it's really fascinating. And I think Apple Pay for the Web, I got a demo of it yesterday. and in switching your cards through the interface that they have, unlike Apple Pay on your phone, they've even taken that, it's just a drop-down menu with words, you know, Chase Freedom, this, that, the other, it's not, you know, oh, you know, the sleek, blue metallic background of your card that, you know, might make you think, oh, this is the alphabetical is going to win. This is a progressive. Yeah, this is a progressive card because it looks like stainless steel, you know, like, it has sort of become,

we keep moving back in all this to this idea, sort of, that the consumer is just like the afterthought. And I think that that's so indicative of my experience. If you're going to innovate, you might as well try to get some people on board. You mentioned Uber. And however they are portrayed in, you know, the press at certain times, like you feel some kind of affinity. It's an experience that makes you feel like you're living in the future a little bit. There's something there doesn't exist with banks.

I wonder, I think a large part also of why the consumer experience and payments is so crappy in the U.S. It's in part just the complexity of how the payments ecosystem has grown up. The rail's, it take three days. You can't do real-time payments. So I want to come back to your experience in Sweden. And one of the things as stats that I thought was pretty interesting was that only 20% of the payments in Sweden are cash.

Whereas if you look in the U.S., that's actually 90%. And one of the ways that's credited with accomplishing that is that the Swedish actually created new real-time banking rails. And so you can pay somebody electronically and have those funds deposited instantly the same way as just handing over a 20, whereas in the U.S. it's not really that way. And so I wonder to the extent, like if we want a real leap forward in the U.S. in payments, is it also going to require new infrastructure? The problem is that cashless payments end up being a very, very regressive tax for a lot of people. So if you can get a credit card, then great, you've got 30 days afloat. If you can...

can't get a credit card, well, maybe you have a debit card, and then you have to pay in real time. Well, what if you can't even get a bank account? So banks don't just give you checkwriting privileges. I mean, if you have no credit score, or if you're on a particular list, and this is not like the no-fly list, like a lot of people are on this particular list, if you've bounced three checks before you're placed on this, I forgot what it's called, it's called the check systems list, you can't get a bank account. So your only option is to go get one of those prepaid cards from Green Dot, and guess what, they charge you $3 a month just to have the card. So if you have a $100 on your card or $50 on your card.

I mean, you're paying, you know, crazy. This is not interest. This is just, it's a highly regressive tax for people to use something that is digital and not use cash. So cash ends up being the cheapest form of payment for people at the low end of the spectrum. At the high end of the spectrum, sure, people are, you know, using their Amex black cards and whatnot. But at the low end, it's really unfair. One company I visited in Stockholm, or it's a publication. It's called Situation Stockholm.

And it's a magazine that is sold by the homeless on the street. And they experimented probably seven or eight years ago with being able to have people like SMS text something. But they have actually been able now to set up accounts using this service switch, which is sort of like a bank-inspired Venmo type situation. And it feels like a little of that friction. I mean, these are often people who don't have a permanent address, plenty who probably have never had a bank account or not in a while. And there seems to be a little more of that friction doesn't seem to exist there. And I think that that is huge. I think that there's

so many things. People I talk to, you know, there's just sort of an embrace of technology that is kind of woven into the culture a little bit. And it's also a smaller country, nine million people versus three to 50. I agree with Alex. We'd be living out a massive portion of the population if if we just decided to go completely cashless. But there are other solutions, you know, Sweden, Kenya, with M-Pesa, like, it would require a pretty massive infrastructure change to have an inclusive cash-free society. Well, also remember that Sweden has, what, 9 million people, and there are 11... Even smaller than Canada.

Well, it's also even smaller than the number of undocumented immigrants in the United States. So you have 11 million people where they don't have Social Security numbers, like, what do they do for payments? So, and you have many other people where they're just at some... So you probably have tens of millions of people all in that really can't use the banking system. They use check cashing services. Like if they get paid a check, they just go to someplace. They charge massive fees for that.

So I don't think it's about the real-time stuff because that's probably not the biggest problem for people. I mean, there is the irreversibility of cash, which is kind of nice. So if you're buying something on Craigslist and the person pays you with the credit card, well, the whole chargeback system is a little bonkers so they can take back their money. in 60 days or 90 days. Actually, you have six months really to file a chargeback, so that's really problematic. Whereas there is this nice permanence to cash. So there are a lot of things where, I mean, getting back to where credit cards really emerged from, like the whole system of having like an embossed plastic card that has a primary account number on it, which is in the clear. It's like your password

doesn't have asterisks on it. It's just like in the clear. And anybody can charge just based on that card number. And that's been around for 50 plus years. So it hasn't really evolved at the times because initially, you would take a carbon copy of that. That's why it was embossed. So you could figure out what the 16-digit card number was from that embossed, you know, imprint when the little knuckle cruncher went over it. But then mail order came out. And then you were just reading your number over the phone.

And now the internet came out. And the other thing that's actually not, this is not really a consumer reason to use Apple Pay, but the fact that your card number is not passed in the clear. And instead, there's a tokenized variant. That's also very good for fraud screening. Because there is a consumers only have this problem when it happens to them. But it's really annoying. This has happened to me a number of times, probably five or six times, where I see bogus charges show up on my credit card.

And then I call my credit card company like, oh, yeah, that was fraud. It's like, okay, well, I wish you would block that, but you haven't because I'm clearly not flying to Egypt on Egypt air. One time there was a $5,000 ticket purchased on Egypt air. And it's like, really like, who's going to, I know. So I then have to get a new card. They mail me a new card. I get that five days later. Can't use my card in that five day period.

And then I have to go change my network. I have to go change my, like everywhere that I, my AT&T account, everywhere that I have this card number stored, I have to change it. And that could all be fixed under a better paradigm than using this like the credit card number is in the clear. And if I just have that 60, like you've memorized your number if you told it to me, then I could go use it for whatever I wanted until you decided to block it, which is crazy. If you would never invent that today if you were inventing this whole idea of like a payment

system. No, and we've seen this way lately a journalist wrote about their routing number. And I've given out my routing number and the last four of my Social Security to my employer, to my landlord for every time I write a check. And all you need is that, you know, out in the open credential. And, you know, people can make massive withdrawals from your checking. I've already bought my Egypt Air ticket on your account. Thank you. Well, I hope you have fun.

Coming back to the wild gardens we talked about, about how now consumers feel like they need to choose the Apple ecosystem or the Google ecosystem, Do you think there's a possibility that either Google Wallet goes cross-platform or Apple Pay goes cross-platform? Is it going to try and be an attempt to take it all by one of the larger players? Well, Google already is in as much as they can. So they can't really get into the hardware or the operating system of Apple devices. But Google Wallet is much more of a cloud layer, and it has support at an operating system level and potentially at a hardware level except for the fact that Google doesn't make the hardware, so it makes it a little bit harder for them.

Or they did, but they didn't. So that's a complicated story. For Apple, I think the question is, what is the platform and what is the support products? And I think that the best way of thinking about this is really the iPod. When the iPod came out, Apple also came out with iTunes, and iTunes only worked on the Mac. And the iPod was designed to sell more Mac, so therefore, why are they going to bother making a Windows version of iTunes? But then the iPod actually started dramatically out selling the Mac. And it became this cultural icon with the white headphones and the dancing, like, the background screen.

everybody wanted one, and you saw everybody on the subway in New York wearing the white headphones. So they decided, you know what, this is actually no longer a support thing for our Mac. This is actually our biggest business. So we're going to make this cross platform at this point. And you can see the analogy, potentially, with Apple Pay. I think right now Apple Pay is yet another reason to buy an Apple phone versus somebody else's phone because it has all these great things. And one of the great things is Apple Pay.

Or the same reason, if you're using a Mac and you have Safari, it's another reason to use their ecosystem. But you could imagine that changing if Apple Pay became a big enough deal and or if Apple wanted the show massive, massive volume to the Nordstroms and the Neiman Marcuses and the Brooks Brothers and all these other guys that now implement Apple Pay by December, the best way of doing that is saying it doesn't just work on Safari, it doesn't just work on an iPhone, it works anywhere. But then they have to make this conclusion that it is a product. It is a product just like the iPod was a product, just like iTunes became a product and not a support vector for their main moneymaker. The one thing, though, that seems like there's difficulty there is when you mention, you know, the iPod, like, it's sexy and it's like a stat—like, the white headphones are a status symbol, and it's a thing that you can sort of, like, get swept up in the idea of, like, all my music is on this device now, and it's just, like, you feel some kind of affinity for it. Again, I'm going back to it. Like, payments is like, like, I can't imagine a generation of people who really can move the dial, you know, like a younger generation of people. you know, like a younger generation of people,

having any affinity for any company like that, which I think is a big barrier to it. Like, I don't know if anyone in that audience on Monday at the Worldwide Developers Conference, if anyone was like, this sells me on Apple. I think it's more internally from the Apple perspective. I'm sure there were many heated arguments for whether or not to make iTunes available for Windows

back when they did. Sure. And it really, it probably just was more of an internal classification which is what is the platform and what is the support product. And they realized, wow, the iPod is the platform. And we need to make sure that as many people use the platform as possible. Yeah, whatever dumb PCs is who cares about that. In fact, if the iPod does well, people use the PC initially,

they'll be infected with iPod virus, and then they'll go buy a Mac, and that's the halo effect that Apple was really going for. And you can imagine the same thing internally going for payments. But I agree with you. I don't think people really care about how they pay. They just want to be done with it. They want the object that they're buying. And they want that as quickly and effortlessly as possible. Apple makes that easier. Google makes that easier. What's the best way of achieving that? And then internally, from Apple's perspective, if they gave, I'm sure because I'm sure if you asked the Apple Pay team and they were totally divorced from the iPhone team and everybody else, like, do you want more people to use Apple Pay or less people to use Apple Pay? They'd probably go for more people. But they're not working independently. They're part of a larger company that has an objective.

That's actually a good segue into when I close. Charlie, you brought up a good kind of summary of your article talking about how a lot of the innovation that's gone on in the last little while has been more evolutionary versus revolutionary. Like even Apple pay. Like, yes, you can touch your phone. It makes it a little bit easier. Some subset of consumers use it. Payments is not something in of itself that really motivates and gets people excited. It's kind of frustrating when it's broken. But what do you see, like, do you see the involvement being slow step functions till, 10 to 15 years from now, we're like, hey, this is a lot easier. It's a better consumer experience. Or is there going to be something more revolutionary or bigger step function that comes along to really drive this up? I think that there's a real generational component to this, especially with the idea of, you know, if you want to talk about cashless or walletless. And I think that it has

to be sort of motivated by a group of people who grow up understanding and feeling comfortable with contactless payments and mobile payments as not just a gimmick, but as the entry point to their commerce experience. And I think that that's going to take some time. My parents just see it either as a gimmick or as something that's a little bit inaccessible. I know that an older generation might feel that way. So I think that's going to take some time. One thing that I wanted to ask you guys about and get your take on is it seems like this is,

like this conversation is we're all kind of in agreement, but it's a little pessimistic. I feel like this is one of those spaces, whether it's healthcare or education, they're really entrenched. And movement in this space is like a kind of glacial. And so a lot of the innovation tends to be this hood ornament kind of stuff.

Or simply we're just, you know, we're throwing things against the wall that look like things that exist now, but shinier as a very mixed metaphor. But I'm curious, you know, I mean, do you guys feel sort of the same way that I do in this? I think there's,

the U.S. and Western Europe, Australia, like there are very, very developed markets where I agree with you in that, especially if you're going after the banked credit card holding customers and giving them a new shiny way of already exchanging the payment credential that they already have, is that solving a problem? No, it's kind of a nice ornament. It makes things a little bit prettier. You could solve little problems, like as I mentioned, with the item level detail on receipts for business travelers and whatnot if you make a two-way communication. Whereas, I mean, the first investment that I made here was in a sub-Saharan African lending company called Branch, where what's really interesting is if you go to parts of the world that don't have any infrastructure, you can just, you have a clean slate and you can do, you can skip all the existing infrastructure. I mean, sometimes that's bad. Like the fact that California has really crappy trains is because we said, ah, we've got the car now. We don't need to build the train tracks. And meanwhile, in Europe, they have these like trains that go 300 kilometers an hour and they're on time in most countries. and they're much, much better. So sometimes when you leapfrog the old-fashioned infrastructure, that's bad.

But sometimes when you leapfrog it, that's good because you're able to rethink how it's done. And it's really amazing. Like you take all these people in Kenya that have never had access to credit. And actually, I think a lot of Americans don't even realize when they use their credit card, every time they use their credit card, they're buying something on credit. Even if they pay their bill on time, you have 30 days to pay.

That's like an imaginary universe for a lot of people that did not grow up in the Western world. where it's like, wait, I can buy something now, and then I can pay back after I've already gotten, like, two paychecks, this is awesome. And they don't have that right now. There are no merchants. Like, you're basically displacing cash, and you're not doing it in, like, a little iterative fashion. I mean, the other thing that I find in the U.S. is that there's a lot of hocus-bocus around, like, what's actually happening. So now, I mean, we were joking about this earlier, but, like, there's this magic term of machine learning.

So in the 1990s, if you wanted to show that you were innovative, you put an E in front of your name. So it's like, oh, it's like e-commerce or e-analysis or e-whatever. Then it was dot-com. Then it was algorithm. Then it was big data. Big data was really big. What does that mean, right? And then it's machine learning.

And a lot of what machine learning is. I mean, machine learning is real. Like there is real, real stuff there. But a lot of people, it just means like I have an algorithm. And the algorithm does something. I say, if this, then that, that's not machine learning. And there is a lot of powerful stuff that can be done for, again, solving a real problem, not iterative, is the big problem with credit, not payments,

but credit, is you can't get a credit score unless you have been granted credit. You can't get granted credit unless you have a credit score. And going back to the tens of millions of people, even than, or hundreds of millions of people in the developed world, they don't have access to anything. And you do need machine learning. And also you need some more regulatory leniency in terms of making loans to people that, by and large, are forgotten by the financial system, because you just can't figure out if they're going to pay you back. There's a great New York Times magazine story that I was looking at doing in my research from, I think, like, 1997, and it's like the end of cash is what it's called.

And it has, it's just such an interesting way to look at today. I mean, it's so similar. Instead, like, everything has e-cash, e-bucks, e-whatever. And it's just sort of this idea and this hope that, you know, oh, we're going to do it. Five more years, ten more years, it's happening, it's coming. and we're having this conversation now. The big difference is that plastic domination today versus the 90s, it's so much different. I mean, the percentage across the world that's now going on payment networks,

because, I mean, if you look at how fast the U.S. economy is growing, I mean, what is it, maybe one and a half, two percent, it's not really growing that much. A lot of it is almost the population growth. Whereas if you look at how fast is on Visa or MasterCard, which published their numbers or American Express, how much transaction volume is growing much, much more than that. So there is a continuous displacement of cash for plastic. And then the question is, you know, what percentage of that plastic is kind of purely digital and or biometro, whatever you call your hand thing?

How much of that is purely digital versus kind of in this plastic incarnation? And that's where, like, there's probably not that much of a difference there. Like cash will go away. It seems almost inevitable, except for like, you know, black market activities, perhaps. I don't think Charlie has totally sold us that it's time to get implanted with a chip in Sweden, but we'll have them back 10 years from now to see if that's changed. I just want to thank Alex and Charlie for a great discussion. Thank you.

Thanks for having me.