Bits of Value

More equitable network participation

One of the most exciting things decentralization enables is the transfer bits of value alongside bits of information. For two decades we’ve been using forums, contributing to Wikipedia, crawling the Web, and exchanging files. When you stop and think about it, it’s shocking that our ability to transfer bits of information hasn’t created an equally open and permissionless way to transfer bits of value.

In the shadow of NFT-mania, there is an incredible amount of innovation happening around protocol governance, community building, and DAOs. 

Some of this experimentation is related to and in support of art-focused NFTs; some takes more recognizable forms akin to investment clubs or cooperatives. In all cases the goal is to create a more equitable relationship between the employees, investors, and users of a network.

Here are a few of the ways we’re transferring bits of value through decentralization. Some of the examples below include governance rights alongside a transfer/share of value. I’ll cover governance in a future post.

Community Access Tokens

Artblocks is one of the pioneers of generative art on the blockchain. It’s first project was Chromie Squiggle which includes just under 10,000 unique works represented as NFTs on the Ethereum blockchain.  As of mid-April, Squiggle owners, verified by the address that holds the NFT, can join the non-affiliated (but likely blessed) SquiggleDAO. The DAO aims to become the largest collector of generative blockchain art in the world and two weeks after launch is reported to have over $1M in its treasury. Those treasury contributions have come in the form of multi-Squiggle owners donating a Squiggle, which presumably gets resold on OpenSea. The newfound utility of Squiggles, plus the recycling of Squiggle’s to fund the treasury correlates to a near doubling of the floor price of a Squiggle from ~0.25E to ~0.5E. 

$SQUIG is not asset backed, meaning holders have no claim to the treasury and there is no plan to distribute financial rewards to $SQUIG holders. Presumably the value of $SQUIG will rise in correlation to SquiggleDAO’s assets and influence, however, the primary incentive to own $SQUIG is its access rights. Access to what? We’re not quite sure and that’s part of the fun.

Usage Tokens

Usage tokens are distributed to participants in protocols like Uniswap and Compound. Usage tokens are meant to explicitly recognize the role users and other participants play in the success of a protocol. They incentivize behaviour that benefits all users and in doing so act as a sort of bootstrap and backstop for the desired network effects of the protocol. Incentives are Web3’s carrot, while lock-in is Web2’s stick.

Usage tokens require careful implementation so that speculators and other bad actors don’t assume control of the narrative and community. If you thought Bitcoin and Telsa were a religion wait until you see some of the communities pumping the value of tokens that have no obvious utility or traction beyond speculation. There is a reason terms like apeing, bag, and degen are common lexicon within crypto. 

Investment Return Tokens

These are tokens that represent a principal investment and the expectation of positive returns. These tokens are an on-chain version of an index fund, investment club, venture fund, or other return-seeking structure from traditional finance. Because these structures are represented on a blockchain they can be open to anyone, funded anonymously, and governed transparently. 

For example, the Set Protocol allows anyone to create an index fund of tokens. The most popular of such funds in the DeFi Pulse Index which is made up of tokens with high community engagement as measured by the total value locked in their protocol. For example, the usage tokens I mentioned above, $UNI and $COMP, are represented in the DeFi Pulse Index. Anyone can buy the DeFi Pulse Index and there is no cap on the number of participants or contribution amount.

Neptune DAO is registered as a Delaware LLC and exists to generate yield for members. Yield is primarily generated through lending, staking, and providing liquidity. As a Delaware LLC the Neptune DAO is limited to 99 accredited investors and therefore doesn’t share the access and openness of some of the other structures discussed above. Neptune DAO, leverages a framework developed by Open Law. The Open Law framework seeks to use existing legal and organizational frameworks to advance digital community governance and the tokenization of assets. It’s sort of like the difference between the Coinbase approach (ask to be regulated) and the Uniswap approach (autonomous software with no regulatory precedent). Open Law and other DAO frameworks are a topic I’ll explore here in the next few weeks.


It’s important to understand that what is enabling the transfers of value above is of course imperfect. Governance models, crypto-wealth, high transaction fees, speculation, and a variety of other forces are shaping our experiments and impacting our ability to transfer bits of value in more accessible and equitable ways. What we are learning today will not only inform our experiments in the future but will be a composable layer upon which we can build those future experiments. It’s still early.

US Payment Methods in the 2020s

There hasn’t been a major consumer payments innovation in the US in two decades.

Paypal was invented in 1999 because existing payment methods didn’t work well for peer-to-peer transactions on the Web. 

Ebay had successfully connected individuals and small merchants with customer demand but did not help to facilitate the transaction itself. At the time, most eBay sellers were unable to or had no desire to, set up merchant accounts and accept card payments. And since It was the seller’s responsibility to protect against fraud, this meant waiting for a check in the mail before shipping the goods. Paypal recognized the opportunity to help eBay sellers streamline the entire transaction between buyer and seller. The result was an entirely new type of transaction and kickstarted peer-to-peer (P2P) payments on the web. 

Paypal had invented a new payment method. And since then, payments innovation has focused on optimizing the payment methods we’ve already got.

Accepting payments today is easy

Accepting payments got a lot easier in the mid-2000’s. The payments facilitation model allowed companies like Square to profitably offer payments services to small merchants as part of a broader solution. 

In the 2010’s, Stripe and Adyen took embedded payments farther by helping platforms like Lyft and Shopify process payments, mitigate counterparty risk, and generally streamline the entire transaction between buyer and seller.

The payment innovations above have enabled new business models and allowed upstarts to compete with incumbents, but they are optimizations of existing payment methods.

US Payment Methods

New payment methods are rare.

In the early 1920’s, charge accounts served some of the same purpose as embedded payments in the 2010’s. Compared to handling cash, charge accounts simplified payment acceptance, streamlined back-office operations, and encouraged customer loyalty. 

By the mid-19th century, checks had replaced charge accounts. Like cash, checks were widely available, widely accepted, and low-risk. Like charge accounts, they were also convenient. 

Checks still represent 10% of all consumer payments, even though general-purpose charge and credit cards were introduced in the 1950’s.

Like checks, card payments were convenient, secure, and efficient. But cards allowed the holder to borrow money instantly and that innovation changed the psychology of money and the way we transact.

Finally, in the mid-1990’s Blockbuster Video introduced the first large-scale gift card program. Gift cards enabled a new type of transaction at-scale. In 2018 there were over $160B worth of gift cards sold in the US.

Which brings us back to Paypal, and points us towards mobile. 

The Seeds of New Payment Methods

Mobile devices have reshaped most of our world, so why haven’t they reshaped the way we pay? 

New payment methods have a chicken-and-egg problem. In the Paypal example, demand for a new payment medium emerged from the seller. Looking back even further to checks and charge accounts you find that new payment mediums almost always emerge to address the needs of a person or entity receiving the funds.

This might explain why the shift to mobile hasn’t produced a corresponding shift in payment methods. The way we transact on the web has so far been sufficient on mobile. Card payments are widely accepted and peer-to-peer platforms are ubiquitous. 

In other words, sellers (and other recipients) are happy.

To illustrate the point, let’s look at Tilt, which was one of the most hyped consumer payments startups of the 2010’s. The company hypothesized about a social payments platform; a sort of collision between payments and Facebook. However, what Tilt taught us that when it came to paying a friend, existing P2P payment methods would do. 

Like Tilt, Venmo has improved P2P payments on mobile, but mostly for the sender, and not enough to establish a new method of transacting that is ubiquitous enough to challenge the status quo.  

Square

In contrast, Square focused almost solely on the seller side of their market, at least initially. As a buyer, Square always created delight, with features like signing with your finger and sending digital receipts. However, by and large, their focus has been on solving a problem for the seller. With the release of Cash App in 2013, Square is hinting at how they might leverage its merchant scale to create a new type of payment method.  

There are over 15 million Cash App users in the US. Over 3.5 million of those Cash App users are also using the optional debit card that links to the account. In 2017, Square reported having over 2 million merchants using its point-of-sale tools. That’s a critical mass of small merchants in the US with a deep desire for simplified payment processing and better tools to engage customers. It’s easy to imagine how Square might bring the two sides of their market together to create tremendous value beyond the movement of money. This ability to create new types of transactions is what defines a new payment method.

Shopify

Shopify is also well-positioned to enable a new type of transaction centered around mobile payments for physical goods. In 2013, Shopify partnered with Stripe to begin offering a first-party payment processing service. While Shopify maintains integrations with over 100 payments processors, the first-party service addresses a merchant’s needs well beyond the movement of money. Shopify doesn’t explicitly break out payments revenue but estimates put it at 40-50% of total revenue. 

Page 9 of Shopify’s 2018 annual report illustrates how the company’s focus on merchants is leading them to create a payment medium of their own:

“For merchants using Shopify Payments, buyers are already getting a superior experience, and with our investments in additional customer touchpoints such as retail and shipping, brands that sell on Shopify can offer buyers an end-to-end, managed shopping experience that previously was only available to much larger businesses.”

On the surface, Shopify is simply competing in a category that is adjacent to its SaaS shopping cart solution. However, a deeper analysis reveals a company that understands how payments fit into the overall value stream for merchants and how that value stream is changing alongside consumer behaviour. 

In order to better service merchants, Shopify will need to find ways to make the transaction experience better for consumers as well.

Earlier this year, Shopify Pay became Shop Pay. It appears to be a focused effort to bring value to the buyer, independent of the merchant side of the transaction. By creating new value for the buyer, Shopify will presumably be helping the merchant.

Shopify will continue to deemphasize the payment itself, instead, focusing on the entire value stream from re-marketing (one-click payments via social ads) through to unboxing (Arrive app). Using only my phone number, I can complete an order through a Shopify powered store. Imagine all of the ways Shopify or others could develop my phone number into a payment medium. By my earlier definition, Shopify may have already invented a new payment medium.

Stripe

Stripe has shifted the payment landscape significantly since it launched in 2009. At launch, Stripe famously allowed developers to accept card payments with just seven lines of code. No merchant account, no PCI certification, and no legal entity or business bank account required. By 2013, Stripe was fueling growth in marketplace businesses by enabling those businesses to reduce friction across their networks. Like Square and Shopify, Stripe is focused on helping entities receive payments. The company has wrapped its core capability in a startling number of value-add services, and like the examples above, Stripe’s value stream also extends out to touch the buyer. For example, the company introduced Stripe Subscriptions to help businesses reduce missed and late customer payments. This includes tools that prompt a customer for updated card information and predict the right date to retry a failed payment. Stripe even worked with the major payment networks (Visa, MasterCard, American Express, Discover) to update end customer records when new card numbers were generated. By focusing on the merchant, Stripe has created distinct value for the person or entity on the other side of the transaction. Even still, Stripe never reveals itself to the buyer in a transaction. 

At my last startup, Eighty percent of our software spend was processed by Stripe.

In the future, enabling a new type of transaction like metered billing could require that Stripe build a more direct relationship with buyers. If the overlap between buyers and sellers is big enough, Stripe could act as a buyer’s payment method too. From this position, they might combine the source of funds with a tool for managing the subscriptions being paid for. Stripe has already introduced a credit card targeted at its base of existing seller-customers. With a dense network already in place, it’s only a matter of time before Stripe uncovers a use that case that only a new medium will solve.

Apple Pay

Apple might be the only company in the world with the scale and engagement to build a new payment medium by starting with buyers/senders. Today, Apple Pay is an enabler of the existing credit card payment medium/method, but it does not enable a new type of transaction. Even Apple Card is a marginal extension of the existing card payment medium. Apple Pay transactions are processed using whichever network is prioritized by the two parties at each end of the network, in this case, the merchant’s payments provider and the card-issuing financial institution. 

There is one notable exception. Apple Cash transactions are processed exclusively on the Discover network. Apple Cash is not a card payment and therefore does not need to comply with the regulation stating that all credit, debit, and prepaid cards must be available for processing on multiple networks at the discretion of the merchant. 

Apple has effectively set up a direct link between the merchant terminal and the stored-value balance in Apple Wallet, with Discover acting as a service provider. 

Discover represents less than 4% of all credit card processing volume in the US. With one-hundred million users, a ubiquitous network, and increasingly powerful mobile devices, Apple might be able to turn a first purchase into a  relationship, or a loyal customer into a referrer.

Conclusion

New payment methods enable completely new types of transactions. Usually, this means bringing both sides of a network closer together by reducing cost, removing friction, and aligning incentives. The result is something that feels more like an experience than a means of transferring value from one person or organization to another. This new transaction experience starts by creating value for the receiver and then layering on value for the buyer/sender. 

Payment methods can be built as open or closed systems. The medium can be tightly or loosely coupled to the sources of funds that underly it. 

The most popular payment methods in the US are cards, cash, and check/ACH debit. And the only new payment method to emerge since the 1950’s is peer-to-peer digital payments, which Paypal popularized in the late 1990’s.

The way we transact is broken. Fees are high because legacy payment networks are hard to maintain. Customer experiences haven’t evolved because the primary stakeholders in our current networks are the rent-seekers (banks, network managers, merchant acquirers).

Companies like Square, Shopify, Stripe, and to some degree Apple, are aggregating merchants at scale and starting to deliver new types of value to both merchant and buyer. It’s possible that these merchant networks, mobile devices, and open financial rails (blockchains, etc.), are the combination that unlocks the next payment method. As rare as new payment methods are, I’m convinced that at least one will emerge this decade.

Google Banking Follows the Travel Playbook

Google says they will never sell customer’s financial data, and I believe them. However, the only way Google’s checking account makes sense is if they use that customer data to sell you something or remove friction from a buying experience with one of their advertisers.

Here’s how they’ll do it.

Google’s strategy is to collect data on your income, debt servicing, and which card products you use.

Checking accounts store and move money. Customers don’t want to pay for them and banks can’t make money from them.

So why is Google offering checking accounts when Apple is offering credit cards? Scale. Google doesn’t want to offer checking accounts per se. Google wants to create a wedge and aggregate demand for all financial services.

Jeff Bezos is famous for betting on things that won’t change. Google is betting that providing a checking account is still the best way to sell additional financial products.

Act 1 – Lower the Cost of Customer Acquisition for Bank Partners

Google’s checking account doesn’t require a credit check and is available to anyone with a US tax ID. Google already has your name and address. It’s likely they have your date of birth. They may even have your tax ID.

With Google, banks get access to a huge number of prospective customers that can open an account in less than two minutes. In exchange, Google gets to aggregate an increasing amount of the demand for financial products.

Banks pay an average of $150 to acquire a new checking account customer.

Google will help banks acquire new customers for less, while those banks service the customer just like any other.

Banks are losing the fight for the user experience layer; Plaid has made our bank data portable. Dwolla has enabled money movement from third-party apps; Neo-banks like Chime, Current, and Wave are acquiring customers with differentiated value propositions and more efficient distribution.

In many ways, partnering with Google leaves banks with more control (for now) than the alternative. Either way, the trend is the same; users want to access financial services from a variety of channels with no friction.

Here’s how the Google checking account will work: “Bank, take this information and open an account for this individual”. “Bank, show me the transactions on this account”. “Bank pay $2,000 to American Express.”…. and so on.

The infrastructure required for the bank to perform these operations is already built and paid for. The marginal cost of servicing the next customer is tiny compared to the cost of acquiring them. This is especially important because we’re talking about a product that no-one wants to pay for.

With this model, the bank serves the Google Checking Account customer no different than any other. The bank is still responsible for all compliance, card mailing, and customer service. Google accepts zero brand risk related to fees, security, user experience, or any of the other things that have made banks one of the most mistrusted industry groups in the World.

The banks now compete in a game that Google has designed.

Act 2 – Aggregate Demand

Booking.com spends $3.5B per year on Google’s advertising products. In 2018, Google booked $18B in ad revenue from the travel industry. Booking.com had revenues of $14.5B.

So what does this have to do with banking?

Financial services represent a small fraction of Google’s ad revenue. It makes sense; financial services are sold as new or expanding relationships. Travel is transactional.

The user controls all of the data required to perform a travel search and make a purchase. Not true for discovering and buying financial services.

But as banks lose control over the user experience, and customer’s financial data becomes more portable, financial services become financial products, and thus more transactional.

Earlier this year Skift explained why the Google Travel launch is the final piece of Google’s strategy to become the one-stop shop for travel.

Google’s bid to become the one-top shop for financial services may follow a similar path.

Act 3 – Google Pay

With a few exceptions, Google doesn’t process transactions as part of Travel. They mostly aggregate demand and pass the customer along to Booking.com, Expedia, and other online travel agencies.

If Act 3 for Google Travel is to process the transaction itself, let’s explore what Act 3 might look like for Google “Financial”.

In the future, there may be little functional difference between your Google Pay balance and your checking account balance or remaining credit. You don’t care where the money is stored so long as the source(s) of funds is applied to whatever purchase/transfer you’re making, in whatever priority makes the most sense.

When Google monitors your transactions and can access your sources of funds (checking account, credit cards, loans), Google Pay becomes the gateway to your finances.

Even truer if Google “sees” the transaction before anyone else. There are three parties that could “see” your transactions first:

  1. A digital wallet like Google Pay
  2. A card network like Mastercard
  3. The bank (ie. automatic debit for your car or mortgage payment)

Digital wallet transactions will continue to grow. Google and others will continue to build information asymmetry vs. banks. Financial services will become more transactional. Google will become a one-stop-shop for financial products for millions of consumers.