Disruption Day in Banking

When it comes to using money, most people around the world need just two things: a place to store it, and a means to spend it. Deferred consumption and investing is a third vector, of course, but limited to the portion of the global population that can afford to do so. Short of a barter system, however, everybody on the planet needs money storage and transfer, whether the currency in question is the dollar, euro, or yuan.

That is the unifying thought that binds a raft of announcements and news today, all related to how technology and money intersect. We haven’t seen this much activity in the space in months, which tells us things are heating up at the intersection of traditional financial services and fintech.

#1. PayPal filed a patent application to accelerate crypto currency transactions and explicitly mentions bitcoin in the paperwork for the US Patent and Trademark Office. Bitcoin’s blockchain cycles every 10 minutes, so it can take that long to officially confirm a transaction. PayPal’s idea is to essentially operate a parallel system on top of bitcoin/other cryptos that can authenticate transactions in real time.

What’s in it for PayPal? Crypto currencies are theoretically cheaper than existing payment systems. They haven’t all lived up to that promise, however, due to system congestion (too many transactions, not enough bandwidth). Build a proprietary network on top of a crypto, however, and you could have cheaper transfers than the existing banking system and proprietary security to boot. In short, the best of both worlds.

The full patent application is here (very nerdy in spots…): http://appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=1&p=1&f=G&l=50&d=PG01&S1=20180060860.PGNR.&OS=dn/20180060860&RS=DN/20180060860

#2. Coinbase, a dominant player in the US crypto wallet space, hired the former head of Corporate and Business Development at LinkedIn. Emilie Choi did 40 deals in 8 years at her former employer, and said in a Bloomberg interview that she sees a similar level of activity coming at Coinbase. She was also there when the company sold itself to Microsoft, of course, so she knows how to sell as well as buy assets.

A Recode article cited Choi as saying her initial targets would be “acqhires” (buying companies to access senior talent). Past that, anything seems up for grabs. Coinbase did $1 billion in revenues last year, and given their fee-based business model one must assume they are profitable at that level.

Even if you don’t own bitcoin this is big news. Coinbase is a real company in the crypto space (10 mm customers at last count), and very closely watched. Their new Biz Dev head is clearly plugged in. Any public company mentioned as working on a deal with them will see a pop in their stock price. And, unlike so many of the micro-cap scams of the last few months, the move higher will have actual fundamentals behind it.

The Recode article: https://www.recode.net/2018/3/5/17077414/emilie-choi-coinbase-linkedin-mergers-and-acquisitions

#3. Amazon doesn’t want to be a bank, but… The Wall Street Journal reported today that Amazon has asked JP Morgan to build a “Checking account like” product for its customers as well as younger digitally savvy consumers and less affluent households that are currently under-banked. If that sounds like a tall order, it is. But is does check all the boxes: social awareness, a focus on millennials, and expanding share of wallet.

But what’s Amazon’s real goal here? Ideally, it would like consumers to store their money with them in anticipation of spending it later. That avoids the need to pay credit card fees and helps profitability. Amazon’s North American ecommerce sales last year were $106 billion; every 10 basis points of transaction cost savings represents $106 million to the bottom line.

There are some analogs out there right now for “money storage” – PayPal/Venmo and Starbucks prepaid balances are examples – but these do not offer FDIC balance insurance. That limits their appeal as a viable option for many consumers. By teaming up with a bank, Amazon is clearly thinking bigger than just a few dollars in a transactional account. Will Amazon one day take your entire paycheck in a direct deposit? Never say never.

Not to curse this effort, or Amazon itself, but recall that the Discover Card started life as an offshoot of Sears back in 1985. Its hook was that it charged no merchant or customer membership fees. Still, other merchants were reluctant to accept the card for fear of funding a competitor.

The more things change… as the saying goes.

More details: https://www.cnbc.com/2018/03/05/amazons-talks-with-jp-morgan-may-build-on-services-to-the-unbanked.html