Category Archives: Strategy

Banks, Commerce, Finance, Fintech, Payments, Strategy, Tweetstorms

The Future of Payments…is Red?

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Originally posted as a Twitter thread on January 12, 2023

The Future of Payments…is Red?

What could disrupt Visa/MasterCard/Amex? How might a new payments Goliath start?

Let’s talk about the Target Red Card. Target did >$100B in revenue last year, 20% of which happened on its own cards:

You’ll see “Target Debit Card” and “Target Credit Cards” (source: Target 10Q)

Many retailers have what are known as co-branded credit cards. Target’s is issued by TD Bank; Amazon => Chase; American Airlines => Citi. Some retailers make more on cards than on their core biz!

But what is extremely interesting, and has compelled me to scan every Target 10Q for years, is the Target Debit Card, which makes up over 11% of Target’s entire revenue. The Debit Card just pulls money directly from your bank account — allowing Target to not pay interchange.

It should be self-evident why this is important. Look at Target’s Q1-Q3 revenue last year — $76.6B sales, $2.4B pretax income. Imagine every Target transaction was credit card (not the case) @ a blended 2% fee => $1.5B in incremental income if shifted to ACH, 63% more profit!

Target has impressively shifted 20% of their *entire* sales to their own cards. The only “illogical” part of this is that to save 2%, they are…giving up 5%, albeit to the user directly in savings at Target, which is the primary benefit of Red Card.

Target isn’t an outlier here. Most “frequent interaction” or high frequency billing companies do the same. Here’s Verizon and AT&T, which give you substantial savings monthly for moving your bill pay off credit cards and to ACH (or sometimes debit cards, given lower avg fee)

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When you sign up for a Red Card debit card, you link your existing bank account and let Target pull funds from it. It’s just a “router” to your existing bank account.

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So effectively the Debit Red Card is an abstraction layer around payments, mapping a POS transaction at a Target store to a subsequent low-cost ACH debit from an existing checking account.

This is harder than it seems. For anyone in Credit/Debit payments, you might recognize the “verbs” of payments: Authorize, Capture, Settle, Void, Credit. Not to mention things like chargebacks. ACH has fundamentally different “verbs” and Red Card is a Rosetta Stone of sorts.

Why is this potentially the future of payments? For one, tools like @Plaid have made the connection extraordinarily easy. You don’t have to remember your bank account number or “routing code.” Just log-in to your bank account ONCE and you’re done. Consumers are used to this.

Every “high frequency biller” should be doing this, and experimenting with pricing and benefits. Albertson’s, Netflix, Walmart, Costco, Safeway, Microsoft, Disney, etc. It’s likely trillions of $ of “frequent merchant-consumer interaction” payments that *could* shift.

While I think Target has been smart to roll this out, it seems paying 5% to save 2% (and justifying it by showing increased engagement, which likely reverses cause and effect / shows sampling bias!) is not smart. Better to provide one-time benefit to switch, I would think.

To wit: Log-in to Netflix. See a message: “Switch to direct debit, get $2 off this month. Just click here!” -> long term savings of $100M+/year to Netflix in North America alone based on projected interchange costs.

The “hard” part of this, not surprisingly, is software. What’s needed is “Red Card as a Service” for retailers — and in particular, “frequent interaction” retailers. This would likely sit alongside the existing payments stack, or maybe above it…

Because ideally the one team (at the merchant) that handles dispute resolution/chargebacks, or refunds, or store credits…doesn’t care about the tender type. All of that is just abstracted away into whatever tools they already use.

The other thing that’s needed is a much better onboarding experience. Frankly it’s shocking that Target is at 20% given how complex they make the onboarding and how much information they gather…better software/CX/UX would make it much more compelling.

The truly magical experience would be what I would call the “Customer IQ Test.” An automatic mapping of their credit/debit card to their *existing* checking account could be done in the background…credit bureaus and other players already have this.

The IQ Test would thus be: “Do you want to save $5 right now by switching your Visa Card ending in 2655 to your Bank of America account ending in 7688? Click Yes to confirm and your’e done.”

Because fundamentally, the reason “Red Card as a Service” hasn’t taken off in the past is because of the twin moats protecting so much of banking. Inertia (hard to switch) and Rewards (merchant fees fund customer benefits, with banks in the middle). Inertia is now decreasing.

There are other huge benefits to a “frequent interaction biller” introducing this. E.g., “Pre-pay $1000 of spend at Safeway for $950” —> ensures that that person buys all of their groceries at Safeway. Or maybe a quasi subscription.

Not to mention all of the other “fintech” cross-sells available if you have a link to the customer’s checking account and a dominant/frequent relationship with them.

There’s a good question of how many frequent billers does the average customer have, what merchants might this make sense for, etc. But in general, the tools are coming/exist to make this easy, fast, and low-friction…and the economic incentive for merchants is MASSIVE.

M&A, Startups, Strategy, Tweetstorms, VC

How to Sell Your Company

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Original Post here: https://x.com/arampell/status/1610761687547940864

Companies are (almost always) bought, not sold. This means somebody needs to *want to buy* your company. Ideally this happens organically. But how do you, as a founder/CEO, expedite this…particularly when you KNOW you’re hitting a wall?

“Planting an idea”

Inception is one of the greatest movies of all time (watch the clip). The whole premise is about implanting an idea in somebody’s mind…the inception of an idea. “If you’re going to perform inception, you need imagination”

There are probably three types of acquisitions:
A. Acquihire (want team, not business or product)
B. Product/“Trade Sale” (want product or to repurpose product, acquirer has distribution)
C. Business “left-alone” (give existing business more resources to grow faster)

Especially for Acquihires and Product-oriented sales, you need to get to know your prospective “buyers” *far in advance* of “needing” or wanting to sell your company. Two independent variables exist: when they can/want to buy, and when you want to sell…rarely do they align!

Buyers aren’t companies, they’re *people at companies*, and generally people with P&L responsibility. Often somebody climbing the corporate ladder who wants to make a big splash and is anxious to ship something taking way too long internally. Or a new VP who needs a team ASAP.

Almost every large company has a corporate development person/team. Their job is to close deals, not to ideate – once you are “bought” you’re not working for the VP of Corp Dev. You’re working for whatever division and whatever person wanted your product. Focus on GMs/PMs/VPs.

Focusing on product/trade-sales: the key thing is to figure out where 1+1=3, or how your product might fit within the org. At TrialPay we showed ads around transactions — what if PayPal could stick our ads in every purchase receipt? Would generate >$1B…that was our pitch.

The goal is not to approach the company (or person) with “please buy me” — it’s not like a fundraise. That’s massively counterproductive. It’s to propose a BD deal that is just standard operating procedure for your independent company. Which hopefully happens regardless!

You CANNOT PUSH A STRING. This was a lesson I learned very painfully. Do not be aggressive; this isn’t like closing an oversubscribed funding round. Articulate a vision for how your product fits and is a win-win for both, try to get a test/integration/contract in place.

The true “inception” for the more valuable product-oriented acquisitions is “wow, we shouldn’t let this be a BD-deal…we NEED to own this.” *That* is when you can (possibly) sell your company for a lot of money.

Even so — most companies have a culture of “anyone can say no, nobody can say yes” — you need to sell horizontally, deal with people who are threatened (“we can build it ourselves!”), and recognize you’ll be judged “on the present”.

“Being Judged on the Present” is a very big deal (see blog post) — you need to steer things to what your product, or a variant of it, WILL look like. Make a real polished demo. Put real work into it. Your “existing” product or team or tech might be used against you.

This is why “imagination” is so key — your product currently does X, but there are probably 5 giant companies where a few tweaks/changes to it – X’ – could accomplish a major objective for them…how you pitch each might be a little different.

I can’t overstate the fact that relationships matter. You can’t start this process with 3 months of cash. You should be thinking about this even if you plan to conquer the world — get to know key decision makers/GMs at every potential acquirer because…you never know.

And again, my approach wasn’t “I want them to buy me.” It genuinely was “I want this *commercial* deal with this company, because it will be transformative for MY business.” Which was 100% true.

There’s also the reality that sometimes your current “business” scale makes your “product” less appetizing (what does the acquirer do with all the people/processes if they want to repurpose?). This is the hardest part: do you change your business to make it more palatable?

GENERALLY, the answer is NO. Most M&A fails. Again, when you want to sell usually does not align with when they want to buy. But if you really NEED to sell, it’s useful to think through the “anchors” holding you back:
https://x.com/arampell/status/1562557849128931328

“Running a process” to sell a company rarely works if selling team or product, especially when product needs to be repurposed…but if you are already being hotly pursued, then and only then (IMHO) does it make sense to “shop” — “Boy who cried wolf” syndrome is real.

Because again, “when they want to buy” is a real thing — maybe they just bought a giant company and don’t have the budget/fortitude to buy another one. Maybe they whiffed their last quarter’s earnings. Don’t push a string. Hurts your chances when they’re ready to buy.

Sometimes you can help expedite, though: once you already have the relationships, and ideally some product integration in place, you can, say, start a fundraise and ask if they’d like to invest (might make acquisition more expensive down the road, maybe they should buy now!)

In the absence of competition, though, it’s very hard to speed up an in-flight M&A conversation/process. And it WILL suck up most of your time and energy…and distract every member of the team working on it. Limit the circle of knowledge on this — it’s crucial.

“Raise money when you don’t need it” is the normal advice for fundraising. For M&A, I would strongly encourage everyone: “Build relationships and think about this…when you don’t need to sell.” Because one day…you might want to or need to.

And again, this doesn’t mean CEOs should spend most of their time on this. I think ideally it’s 5-10% just focused on capital raising/relationships (inclusive of prospective M&A) as a background process.

Lastly, if you want a good price — much less likely when your growth has stalled. The best (luckiest?) deals I’ve seen done are when the CEO (recognizing an upcoming speedbump) basically “expedites” interest…and when the “wants to sell” and “wants to buy” variables meet 🙂

Customer Acquisition, Sales, Startups, Strategy, Tweetstorms

The Goldilocks Zone of Cost Irrelevance

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Originally posted as a Twitter thread on December 08, 2022

“The Goldilocks Zone of Cost Irrelevance”

Some of the most valuable companies provide a crucial service, but don’t charge enough to have customers care enough to switch/think about switching

Janitorial services, payroll services, etc. Hard to be displaced / hard to get in.

At TrialPay I called this the “Janitorial Services Problem” — imagine writing a BigCo CEO: “I will make your toilets 19% cleaner for 7% less cost!”
CEO likely won’t care or even care enough to *find the person who DOES care*
It’s actually possible nobody does!

There really is a Goldilocks Zone here. If you represent a giant cost, it’s worth optimizing/RFPing. If you’re too cheap you likely can’t afford a sales team to sell in. But if you’re “just right” — irrelevant to COGS, but you have high margins and a large n of customers…wow

For many of our clients we were a small % of their revenue. Nice, but not crucial. Unlike janitorial services (which every office needs), we were doing something new — so category creation in a zone of irrelevance (eventually it became a category, though)

Moreover, put yourself in the shoes of the CEO…who likely only cares about 1-3 BIG things/KPIs that will move revenue, profits, stock price, save their job, secure their bonus, etc

So if you have a “janitorial services” type product — hard to get in, hard to displace, not incredibly relevant — how do you start? Some things we tried to do…

If leading with your product — do not just try to “go high” — selling to the CEO, board, whatever. They likely will not care! They will not care to find the person who cares! This is a rookie mistake I see many entrepreneurs make.

HOWEVER, if you do get a high level connection, try to lead with something they care about, and link it to your service. I would always try to figure the key priorities of the company and try to lead with that, versus “we’ll make/save you some small incremental dollars”

As an example, they might have (strategically) cared about showing they were ramping up Facebook customer acquisition (in 2011). Or mobile. Optics — if linked to a “braggable” KPI — almost always trump small dollars.

One other clever thing we did was use a bundled hook, as I called it. BigCo CEO didn’t care about our product, but did care about supporting Charity XYZ — so it was a much better reach out to say “we are working on something to support XYZ…”

We did a promotion called “The BigBundle” where 100% of proceeds benefited the American Cancer Society. We kept nothing, not even payment fees. The bundle consisted of…products from our merchant customers that we would sell to consumers.

It turned out to be a pretty clever hook — doing well by doing good — to get more companies to use us. In order to include their product, they needed to sign a contract with us, integrate some code (so we could deliver/authorize), etc.

I often described a customer journey as 10 stages.
Stage 1: Who the hell are you? Go away
…
Stage 6: Contract signed
Stage 7: Code integration complete
Stage 8: Small test done
…
Stage 10: Fully live and turned on, key integrations done

The “BigBundle” got us to Stage 7 with several dozen NEW customers — which then made it really easy to solve the Janitorial Services Problem in the future

After finishing the charitable promo, we had signed contracts and live integrations — so now the sales pitch was so much easier. “Just reply ‘yes’ and the toilets will automatically get 19% cleaner at 7% less cost — we’re already integrated and past procurement”

And once we were the new Janitorial Services Company, we could defend our position quite nicely — knowing how hard it was to get in 🙂

Inspired by a morning conversation with @davidu and @martin_casado — thanks guys!

Finance, Fundraising, M&A, Startups, Strategy, Tweetstorms, VC

Private-to-Private M&A

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Originally posted as a Twitter thread on October 17, 2022

How we almost merged our company TrialPay, many times, while navigating the “can’t raise cash without growth, can’t grow without raising cash” problem. The embedded thread shows the surviving path, but let me walk you through several that *didn’t* work https://x.com/arampell/status/1562557849128931328

It’s not uncommon during bull markets to have too many competitors on the field for a given space. A “roll-up” can theoretically create more pricing power while eliminating redundant teams, tech platforms, etc…increasing revenue while lowering OpEx! “Synergies” galore 🏦💵

And even without an “over-competed” space, you might have one company with LOTS of cash, and another with lots of product-market fit but unable to raise…so one way to “raise money” is effectively to just merge with a cash-rich competitor. If cash is king, merge with cash!

Let’s go back to May 28, 2013. Here I am in the *last* row of the now defunct AirBerlin, flying from LAX to Berlin to meet with SponsorPay regarding a merger. I needed to make a presentation and proposal, which I attempted to do from my seat…despite the reclining guy in front

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The problem with private-private mergers is obvious. How do you ascribe relative value to each company? For public companies, there’s a constant voting machine. For private companies, you have an old valuation, cash in bank, burn/revenue, and rosy projections around the future

We had just come off another merger that was almost magical. We bought a company called Lift Media with an identical product, moved all their customers to our platform, only needed one person from their team (not to sound heartless)…so we got all their revenue w/ $0 cost

With SponsorPay, we had more cash and more revenue. We were (internally) bearish on our future growth, since we were late to mobile. They were more bullish on their future growth. We both were probably showing a bit more bravado during the negotiations – my opening slide here

After looking at their financials and our relative cash positions, here’s what we offered (I figure the statute of limitations is up on sharing this stuff since neither company exists anymore! SponsorPay became Fyber became Digital Turbine, so you know how the story ends)

But it was a hard sell. Their investors wanted cash, or at the very least not common stock in our company. We were busy with our spinoff of Yub (see thread in 1). They had hired a banker to try to “shop” our deal. We basically got nowhere, but we didn’t have a sense of urgency

We were also very torn on further diluting our ownership to “double down” on our core strategy by doing a competitive merger. Did it really make sense to give up 20%+ to get more revenue scale but still have 10 other competitors? Like whack-a-mole…with the smallest mole.

I was honest with them that we were busy on our spinoff and likely to see some short term financial pain, and didn’t want to enter the negotiation on “defense” as a result of this. But honestly, my biggest concern was the adage that two turkeys don’t make an eagle

As the year went on, we missed our numbers. They were doing better. We still had more cash. But while we kept opportunistically trying to make this happen, we became further and further apart on price and *strategy*…and after about a year they pulled out, rightfully so.

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We were pursuing other deals as well. Accel had a challenged company called GetJar which we looked at buying, but we couldn’t get there. I spent a ton of time with PE firms looking at doing a take-private + merger with a public company, Digital River, that needed new tech

This one (DRIV) was arguably the most insane. Merge our unprofitable company plus tech-forward and differentiated team into a profitable but slow-growing public company, steered by a slash-and-burn PE firm. But valuation was even more challenging in this model.

We prostrated ourself in front of every company adjacent to us but our cash position, once our strong point, was weakening. We even had conversations with “that stock might be valuable!” tech companies (future eagles, with us almost acting as VCs) but we had too much rev/opex

In the end, the path we took was the one I wrote about here: https://x.com/arampell/status/1562557849128931328

But several learnings from this experience of private-to-private M&A, including when I’ve seen it work well.
A. 🦃+🦃 ≠ 🦅. Make sure there’s a *real strategy* you can get behind
B. Don’t waste time. If you are cash rich in a bad market, that’s your value. Move fast.
C. “Optics” converge on irrelevance quickly. “Optics” are a reason not to cut burn, not to eliminate products, etc. You’re merging with a private company, not a BigCo
D. Roll-ups are good if they get you to market leadership, but not if they leave you with high fragmentation
E. To quote The Godfather II (and Sun-Tzu): “Keep your friends close, but your enemies closer.” Being on good, text-message-banter terms with the CEOs of all your competitors is *always* a good idea…particular in an environment like this.

Hope this was helpful. I think we’ll see a lot more private-to-private deals, particularly amongst late stage companies, in this market cycle. Fin.

Fundraising, M&A, Startups, Strategy, Tweetstorms

Exiting the Catch-22 of a Stalled Startup

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Originally posted as a Twitter thread on August 24, 2022

How a company I co-founded (TrialPay) once exited the Catch 22 of “can’t raise cash without growth; can’t grow without raising cash” which is potentially the most “unsolvable” (Kobayashi Maru) situation a VC-backed company can face

First, a refresher. There are basically three outcomes for a VC-backed company:
-go public/get bought
-go out of business
-become a zombie

Let me explain the third one…because you might be thinking “wait, you mean become marginally profitable forever? That’s good!”

Most businesses generate profits + are valued at the present value of those future profits. VC businesses: more valued as call options — “if this thing works, it could be huge!” — which is why a day 0 company with just a PowerPoint presentation is “worth” $50M sometimes

Once things go south, a doom loop can happen:
-best employees don’t believe in the equity and leave
-you need to pay people more to stay, amplifying burn
-customers get nervous
-AND company with immature product can’t (always) cut to profitability…so still burning money

And again, cutting to profitability with almost zero cash cushion might mean never being able to restart growth (esp having lost the best talent in the co), and then the opportunity costs of the founders kick in…why stay? Particularly with albatross of a “stale” cap table

Now to my story re TrialPay. As a payment company servicing digital goods, it was pretty bad when all of the major platforms (eg Facebook, Apple etc) decided to “own” payments. We went from $25M revs (2010)->$70M (‘11)->$77M (‘12)…to $55M (‘13). Not good, esp when market⬆️

Many of our most talented people started leaving. We had gone through M&A conversations with every major strategic buyer and twice been left at the altar — very hard to come back once you have that Scarlet letter. We executed a big RIF, downsized office space, etc…the usual.

But we did three unorthodox things that uniquely turned things around and yielded a 9-figure exit:
A. Promoted aggressively from within
B. Spun-out a company (dividended it out to shareholders) which later had its own exit
C. Sold some of our IP

Promoted from within: companies compensate people with cash, equity, and title/responsibility. We were low on cash, nobody believed in our equity, so we started taking junior people and making them VPs+ — a huge amount of responsibility they wouldn’t and couldn’t get elsewhere

Generally speaking, people want career/title progression, and don’t like leaving a company to take a “lower” job elsewhere…which is a nice realization if you are bleeding talent. Responsibility can really motivate fresh people.

next: Spinning out a company. We did an IRS Section 355 tax free spin out — which basically means we took one product, wrapped it into a new company, mirrored the cap table but flattened preference stack and removed most liq pref, added a new big option pool, and spun it out

This was almost alchemy. On one hand we had people who wanted to stay at the mothership if they had more title/responsibility; on the other were engineers and product people who wanted a true high growth startup again, not a colossal shrinking turnaround

At TrialPay we had this $6M/year project/team to build an “offline affiliate network” using credit card rails which TrialPay could then use for offers (eg “get Zynga coins for free if you shop at Starbucks”). It was a great idea but only yielding cost, no revenue

So this is what we spun out.
But with lower cost because we gave people big equity packages at an exciting new startup with a very low valuation and no preference overhang.

So it was better than zero sum: we reduced burn at TrialPay (costs spun out), implemented more startup-like packages at our spin-out (less cash, more equity — with an easier path to exit for that equity) — so the burn of NewCo was lower than the same team had been at TrialPay

Sure enough, within ~6 months a company (Coupons Inc) bought our spin-out for $30M, and there was lots of interest since it was a lean engineering-centric organization. It wasn’t a home run but everyone (including TrialPay employees, since we mirrored cap table) made money

Many of the would-be acquirers had passed on buying TrialPay since we were losing too much money and were too big with too many things (they wanted us for X, not X + Y + Z). But spinning off a key strategic asset changed that.

Finally, at TrialPay we sold a license to our core software to Visa, an existing investor in the biz. This provided a meaningful amount of cash to TrialPay (we turned a profit that year), further shoring up our balance sheet, and a small team went to Visa to help implement

This gave birth to the Visa Commerce Network, but since it was still reliant on many parts of TrialPay, Visa decided to buy the whole company of TrialPay later that year, ending a daunting 2 year battle of “can’t grow without capital; can’t raise capital without growth”

It was a very trying experience, and I distinctly remember @bhorowitz taking the time (as a non-investor who barely knew me in 2013!) to give my co-founders and me guidance and counsel as we navigated between rocks and hard places. Hope this helps others in the same boat. FIN

Commerce, Customer Acquisition, Payments, Startups, Strategy, Tweetstorms

BNPL and “Incumbent Does X”

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Originally posted as a Twitter thread on June 07, 2022

“BigCo X offers installment payments on existing payment rails” is not really competition to a wide set of use cases that Buy Now, Pay Later enables, because without allowing the merchant or manufacturer to lower the interest rate or extend the term, it doesn’t change behavior

For example, Amex has offered *for a long time* a product called “Plan It” which works great and allows any purchase to be turned into a set of installments.

Here’s my Amex bill

I click on “Plan It” next to my Flea Street payment (great restaurant btw) and can either Split It (with friends, using Venmo or PayPal), Plan It (turn into installments), or even Use Points

I’m going to use Plan It, which offers me several installment plans — 3, 6 or 12 months. No interest but a monthly “plan fee”

This works great, but to the point at the beginning — it misses the fact BNPL is a *promotional tool used by manufacturers and merchants to sell more stuff* — eg, Toyota often offers and *advertises* 0% financing to induce you to buy (promotion!)…not “post payment planning”

More on this from a thread I wrote in September 2021: https://x.com/arampell/status/1435692945387048964

ApplePay is awesome, and integrating installments to ApplePay makes sense, just like it made sense for Amex, above. But the “consumer + merchant + manufacturer” magic of BNPL happens when merchants/manufacturers can lower rates and extend terms to consumers…

…and can actually integrate those lower rates and extended terms into promotional materials in order to bring customers TO the checkout. It’s “too late” to first show this in the literal checkout line…which is why car manufacturers have run financing promotions for decades.

BNPL “done right” brings this same set of tools to any merchant and even any manufacturer (see long BNPL thread above on manufacturer-sponsored offers), helping unlock sales that otherwise would not happen

Customer Acquisition, Economics, Fintech, Startups, Strategy, Tweetstorms

Stochastic Gross Margins of Financial Services

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Originally posted as a Twitter thread on November 03, 2021

Many areas of financial services have “stochastic margins” per widget, but hopefully (obviously!) positive margins for the whole batch of widgets sold – unlike most manufacturers, with fixed/declining COGS at scale. This means many things when you build a “financial” business

You might make or lose money on the marginal loan, marginal insurance policy, marginal payment processed, marginal market-making trade. Apple makes the same margin on every iPhone 13 Pro it sells.

In no particular order, here are some things to think about:

Understanding adverse selection v positive selection is crucial. And the “default” (when you are providing pure MONEY) is being *overwhelmed* with adverse selection before the positive selection customers even show up. Bad loans, risky insurance, tainted properties, etc.

ONE FORM of adverse v positive selection is pull v push. In most businesses organic consumer adoption is a godsend. In risk, it is not! Compare people searching for “I need a loan” to people who get “pushed” a loan offer based on their highly desirable, prescreened credit

This is one of many reasons why postal mail works so well (surprisingly!) for lenders. It’s not just the saturation of the channel – it’s push v pull, picking your customers vs trying to pick through the sea of (possibly) adverse selection applicants

So tracking the **channel** against the cohort performance is *crucial* to understand which channels tend to have more of this adverse dynamic, even holding things like credit score or underwriting risk constant. Cohort customers by time AND channel (and other behaviors)

Be highly, highly tuned to “anomalously high” conversion rates. It might mean that you found a great channel, or it might mean you found a motherlode of desperate/bad/fake customers

A life insurance executive once told me that they found that post-midnight advertising on the History Channel was their most cost effective channel, but turned out to be netting very bad, depressed customers — which didn’t show up in medical underwriting but tracked to channel

Another form of adverse selection happens when you are buying/underwriting a subset of financial products without seeing the full set. Think lenders who sell SOME of their loans. The offered products are ipso facto riskier or worse than the retained ones.

The tail REALLY matters – cohorts need to season. If you are selling life insurance, you don’t know if you’re good or bad at underwriting until (sadly) people die. If you’re buying homes…until the VERY last homes sell.

A mistake I see many companies make is they record their early realized gains, and either assume that will continue or (equally bad) hold everything else in the tail at cost. The last trades are almost always the worst — that’s why it took so long to unload them

Promotions are their own form of adverse selection in “deal seekers.” PayPal once ran a giant promo (trying to launch their offline biz) with HomeDepot, and saw massive customer adoption – but all from SlickDeals deal seekers who saw opportunity for profit

so:
-let cohorts season before assuming anything
-understand channels
-always watch for adverse selection
-be vigilant watching for anomalously HIGH conversion rates
-push can outperform pull
-beware underwriting “subsets” of a customer’s business
-beware deal-seeking

Economics, Finance, Fintech, Real Estate, Strategy, Tweetstorms

iBuying and Marketplaces

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Originally posted as a Twitter thread on November 02, 2021

few thoughts on iBuying in light of ZG news:
Amazon started off stocking every book it sold, but the vast majority of revenue is now 3P marketplace/FBA (Fulfilled by Amazon). Once AMZN aggregated consumer demand, it started aggregating other sellers and charging commissions

So iBuying is not simply “let’s take lots of principal risk by playing market maker.” Opendoor is aggregating a lot of inventory, which in turn aggregates consumer demand (direct to OD), which then would allow OD to aggregate 3P supply since supply follows consumer demand

the only way to do this is to buy the homes since, as a principal, Opendoor can choose to withhold from MLS and simply list direct. An agent representing a homeowner could try this but…there’s no strategic value to owner in risking lower price for “strategic value to company”

next: cohort math. The real embarrassment to ZG is that their misfire on this business impugns the accuracy of their apparently not very accurate “Zestimate.” But the reason for the misfire, IMHO, is about how cohorts work and age.

let’s say I buy 1000 homes this month for $300M. Avg price $300K. Between commissions, fixes, cost of capital, etc I might be shooting for 50bps profit at the end. But the last 10 homes to sell will make or break me. Why?

by virtue of the fact that they are my LAST 10 to sell, something must be wrong with them. Termites, ghosts, etc. I might need to discount them by 50% to sell them. But that 50% principal impairment wipes out my WHOLE cohort profit/is not realized until the END of cohort!

so basically:
-there is a lot of strategic value to aggregating supply -> aggregating demand to build a marketplace in the biggest asset class in the world. It’s not dumb to try.
-it is very, very hard to get it working, particularly since it will look good until the very end

Fintech, Payments, Strategy, Tweetstorms

Payment Network Effects and Incentives

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Originally posted as a Twitter thread on September 27, 2021

There have been many attempts to topple payment network effects by paying users to switch. This almost never works, because (a) more people are motivated by convenience than small amounts of money, and (b) those motivated by money will suck up all the promotional budget ASAP

Good case study today is here, with Venmo, straight to my inbox. $10 of $20 at CVS! CVS doesn’t have 50% gross margins, so Venmo is almost certainly paying. But will “normal” people use this? Will it change behavior in a lasting way?

Whenever a promotion like this happens, the “deal hunters” of the internet rejoice! You can even buy a $20 CVS gift card for $10 + sell it on eBay for $15! See here, on Slickdeals…the promotion is capped (100M people can’t use it, that would be $1B!) and gets quickly depleted

PayPal did this with HomeDepot in 2012, in an attempt to jumpstart their offline business. https://www.wsj.com/articles/SB10001424052970203513604577145140658342670

Promotions aplenty (50% off etc), but it didn’t work…at least not in changing behavior. People (the deal seeking people!) pillaged the promotions and moved on.

A good rule of thumb: a new technology will take off “automatically” if it’s 10x better and 1/10th the cost. Payments offline just work, hard to make them 10x better (vs online, where many opportunities since people don’t memorize their credentials…lots of abandoned carts)

So then there’s cost, where you generate merchant excitement with anything that’s 1/10th the cost, but then fail to persuade consumers to adopt it since they lose their rewards. I often describe interchange as a problem of concentrated benefit (banks/V/MA) and diffuse costs…

Saving 2% on your $5 purchase is simply not compelling enough to sign up for a new payment instrument, or switch payment instruments, even though repeated enough times it’s real money. And the merchant might simply try to keep the savings, versus pass on to consumers.

Look at Target. ~$25B in sales, if this were all credit @ ~2% (it’s not) that would be $500M in fees, or a 20% bump to operating income if they eliminated it. Target has something called their RedCard, which now accounts for >20% of sales by…providing 5% (!!) discounts

So Target *did* switch 20% of people over, which is impressive — but would those people stick if the 5% rebate went away? Maybe…but probably not? (NB: Target made $172M last quarter in a profit sharing agreement with TD for the Target Credit Card)

It *is* valuable to become (and pay for) the default payment in a new wallet with repeat usage that’s “set it and forget it.” Uber, Starbucks, United, Amazon…all have “wallets” with stored value, and credentials, that could theoretically be used elsewhere (e.g., AmazonPay).

The reason I find BNPL interesting is, as I stated here, the ability to produce a parallel network that yields more sales and customer utilization “organically”:

https://x.com/arampell/status/1435692945387048964?s=21 https://x.com/arampell/status/1435692945387048964

Changing behavior is tough, and providing discounts and offers generally doesn’t generate the lasting behavior change companies want. Google learned this lesson with Google Checkout, Visa with Visa Checkout, MasterCard with MasterPass, etc.

13/ So the opportunities and questions are: can you *in a lasting way* appeal to convenience vs cost? If so, a one-time incentive *might* be just fine. Otherwise — it’s probably wasted ammunition against the impenetrable fortress of interchange.

Commerce, Fintech, Payments, Strategy, Tweetstorms

Why BNPL is an Early Threat to all of Payments

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Originally posted as a Twitter thread on September 08, 2021

Why is “Buy Now, Pay Later” (BNPL) an early threat to trillions of dollars of market cap – Visa (almost $500B), MasterCard ($350B), card issuing banks, acquiring banks/services (Fiserv, FIS, Global Payments, etc)?

2/ Behind every card transaction there are FIVE parties: consumer -> issuing bank -> network (V/MA) -> acquiring bank -> merchant. The middle three get zero data on what items (“SKUs”) are being bought. Short video I made here:

BNPL makes no sense for, say, a $5 transaction at Walgreens. But do you want to get a 2 meter long paper receipt which you need to return that $5 item? Because of the architecture, there’s no way for the issuer to receive that AND the merchant doesn’t want to give it to them

Because the issuer, network, and merchant acquirer do not see SKU-level detail, financing is just “cash advance” and “everything else”
What if a merchant wants to lower the rate for SOME items? (Sell more!) What if a *manufacturer* wants to lower it across merchants? No can do

This what makes BNPL so interesting. It’s a **parallel** network, with SKU level information, that bypasses the issuing bank, card network, and merchant acquirer. It’s just the consumer, the merchant, AND (this is exciting!) a new participant: the product manufacturer!

Let’s say Samsung wants to create an installment payment plan for their new $1000 phone (b/c lower pricing sells more stuff!). How do they do this at, say, Walmart and Target and Amazon? When everyone has a different kind of credit card and those issuers don’t see SKUs? BNPL!

Right now this parallel network is being used for installments / customized financing – the clear product-market need and the hole the “one size fits all because of no SKU-data and five parties” created. But adding SKU-level info and manufacturers is a HUGE unlock for more

There have been many attempts to build a competing payment network (eg MCX: https://en.wikipedia.org/wiki/Merchant_Customer_Exchange) but they failed to address a consumer need. BNPL has both consumer demand and merchant demand, albeit for a subset of transactions

Over time, there’s no reason why any transaction – even the $5 Walgreens one – cannot be run over the BNPL rails, which are signing up merchants and consumers at an aggressive clip. Rather than a financing carrot, it might be a discount carrot, a warranty carrot, etc

Walmart et al created MCX because they hate (understandably so!) paying ~2% interchange fees. But those fees are protected by a very very powerful network effect. Walmart tried playing chicken in Canada — cutting off Visa cards in 2016 — and lost:

https://www.cnbc.com/2016/06/13/walmart-canada-to-stop-accepting-visa-says-fees-too-high.html

So you really need a *ubiquitous parallel network* with *consumer benefit* in order to go cold turkey against the current oligopoly and not lose sales. BNPL is just that. Merchants already use it, consumers already use it, and SKU data passes freely.

As the mobile phone increasingly becomes the consumer wallet, and as merchant payment terminals become smarter, you can also imagine a world where payments (and loans) automatically shift to the lowest cost/highest benefit provider…more here:

Open-loop payments (the V/MA system) are one of the greatest network effects of all time, and have created and *captured* tons of value. The moat is immense. But BNPL and mobile wallets are creating the first market-based (not regulation-based) cracks in the fortress.
FIN