I spent the day yesterday at the Consumer Financial Protection Bureau in DC, at an event discussing mobile payments and related innovations and regulatory issues.
Naturally, this is a big issue, with the huge rush to mobile everything, the continued expansion of software-powered web businesses, and the emergence of new payment technologies (from far-out tech like bitcoin to new practical applications of existing tech like paying for a cab with your phone).
The session that most grabbed my attention was one on “Opportunities for the Underserved Community” — how payments tech and mobile payments might or might not help those will less financial and societal resources.
Dan Schulman from American Express evoked James Baldwin’s famous line:
“anyone who has ever struggled with poverty knows how extremely expensive it is to be poor”.
The gist being that the closer your balances are to zero, the more difficult and more expensive everything gets. As per normal, Louis CK explains it best:
“you ever get so broke that the banks start charging you money… for not having enough money?”
“So they charged me; they charged me $15. That’s how much it costs to only have $20.”
And it’s not just “the poor” as you might imagine it: a recent FINRA study suggests that 41% of americans spend all of or more than their monthly income.
That means that 41% of Americans are managing their cash flow in a hard core way, and are living at, close to, or beyond zero on a regular basis. This is shitty (and I know from personal experience).
So what does that mean for mobile payments, banking and the internet? Well, it helps to look at the business model of traditional deposit banking, which looks something like this:
This is an oversimplification, but essentially consumer banks make money on deposit accounts in two ways: by investing the money of wealthy customers, and by charging fees to folks hovering around zero.
You’ll notice the big dip in the middle — the low-balance accounts that neither earn fees nor have investable balances. Schulman noted that these accounts are unprofitable for banks, and make up nearly 40% of all deposit accounts.
What this says to me is that the banking business model is misaligned with lower and middle income consumers. If the banks’ cost structure means that 40% of consumers are unprofitable, and we make up the difference by levying fees on the poorest customers, we have a problem.
What’s interesting is that not only is this bad for society, but it’s also a big business opportunity.
Part of the reason banks can’t serve these customers profitably, and have to resort to fees on low-end customers, is that their overhead and transaction costs are so high. That made sense in a brick-and mortar era, with layers upon layers of analog financial middlemen, but it doesn’t make sense in the age of software and the internet.
Just consider what USV portfolio company Dwolla’s mission is: “Allow anyone [or anything] connected to the internet to move money quickly, safely & at the lowest cost possible.” Or, put another way: to enable the system to actually work the way most people assume it does (i “transfer” money to you and — poof! — you have it).
The internet and software-based businesses bring distribution and transaction costs down, practically to zero. They also tend to put a high premium on design and user experience.
If you put those two things together, you have the ingredients for building a better banking and payments system — one that helps people when they need it (e.g., when making financial choices and transactions), has a business model that’s aligned with users and not opposed to them, and that scales to the size of the population at extremely low cost.
So, when I think about what the opportunity is for new regulators like CFPB (not to mention startups in the space), it’s to imagine a future where radically new opportunities are opened up for all consumers, building on the potential of ultra low transaction costs, great user experience, and high transparency (and to think about how to allow for the experimentation and barrier-to-entry breaking it’s going to take to help us get there).
These are the fundamental principles behind every web and mobile application, and I think they have the potential to solve some of the thorniest and most deeply embedded problems facing our society.