Outlines of platform finance
Tea leaves of financial innovation
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I've been in the weeds for some weeks now, thinking about the changing financial system, both the global-dollar core and the crypto periphery. The confluence of two news stories in recent days, however, suggests that it is a good moment to look at the broader context.
On the one hand, Twitter announces the establishment of an in-house blockchain team; on the other hand, Amazon says it will stop accepting UK-issued Visa credit cards. Both of these developments lie at the intersection of platform technology and finance. To my mind this is the context for the current wave of financial innovation, which, when all is said and done, may look very different than it does at present.
Amazon announced that it will stop accepting UK-issued Visa credit cards, after the payments company raised processing fees by nearly a percentage point. Such fees have been a bone of contention between payments companies and retailers for some time: they are generally thought to be high, and the field is generally thought to be an area open to innovation, competition and even upheaval. Amazon is big enough to push Visa around. By refusing to accept Visa-issued credit cards in the UK, and threatening to stop issuing co-branded cards in the US, Amazon has succeeded in putting Visa on the defensive.
Amazon had already signalled, in July of this year, that it is thinking about payment innovations. "We believe the future will be built on new technologies that enable modern, fast, and inexpensive payments," the company said in a job posting. At the time, this was breathlessly read as suggesting that the company was preparing to accept retail payments denominated in crypto.
But Amazon's willingness to cut Visa off suggests a less flashy, but more consequential interpretation. The company knows exactly how much it spends on card transaction fees, and is looking to reduce them. For now it will fight with Visa; in the longer run, the company would prefre to find a way to use its computing resources to build an alternative. It's not about transacting in Bitcoin, it's about building payments deep into the platform.
Twitter, meanwhile, has brought on Tess Rinearson, an accomplished software engineer, to build something at the intersection of blockchain technology, social media and programmable finance. Certainly, one could see this move as a symptom of CEO Jack Dorsey's enthusiasm for crypto, already a source of conflict with shareholders. One could equally point to the hurdles encountered by Meta (Facebook) in building Novi/Libra/Diem, its many-times-reimagined wallet/cryptocurrency experiment. It is surely possible that Twitter will indulge a fascination with DeFi and come up empty-handed.
Regular readers know, and seem to appreciate, my skeptical view of DeFi. There are many reasons to think that existing projects will not survive a real liquidity test, and surely there is at the moment more than a little speculative excess in crypto markets. Still, at least some of DeFi's ideas are here to stay. Facebook and Twitter are drawn those monetary experiments because they are creating a connection between technology, which social media platforms are good at, and payments innovation, the need for which is widely felt.
These two snapshots are of limited significance on their own. But I think they say a lot about what will be the terms of financial development in the coming months and years.
Twitter and Amazon exemplify the platform business model: they exploit technology and network effects to intermediate (retail goods, social content). The platform model was ascendant even before the pandemic, and is only more so now. Meanwhile blockchain has ventured ahead, and perhaps by now overreached, by imagining a platform-based payment system. Not unlike the early internet, that has to date been largely an open-source affair, a proof of concept for a future commercialized system.
Confronted with the real costs of an aging legacy payment system, which increasingly seems overpriced, platform businesses see an opportunity. Current efforts may or may not succeed, but it looks more and more like someone eventually will.