Weekly reading – 29th April 2023

What I wrote last week

a16z pushed a weak narrative for ACH. I disagree


($) Pepsi’s New Healthy Diet: More Potato Chips and Soda. Under the previous CEO, Pepsi was pushing towards healthier products and drinks. Under the current CEO, that’s no longer the case. Pepsi is back to being a brand of soda and chips. Ramon Laguarta understands that consumers are more conscious of potential impact that his company’s products can have on health. But he also has a mandate to increase shareholder values. Therefore, Pepsi is trying to thread the needle: still sell the processed food and soda, but make them as less salty or sweet as possible. So far, it has been positive because Pepsi has had a revenue spike. But for how long? There is only so much you can do to limit salt and sugar before soda and chips don’t taste good any more. And the consumer trend towards healthy snacks may accelerate again. Perhaps, the previous CEO didn’t succeed, not because her direction was wrong, but because her timing was.

Bud Light’s attempt to market to new customers alienated old ones. A very interesting article on how direct-to-consumers brands struggle to strike the right balance in a politically volatile market like the US. Success stories like Apple with their inclusive marketing campaigns are as common as drama like Anheuser-Busch. Brands will need to take a leap of faith, test & learn and adjust accordingly.

Some brands pull back on Pinterest ad spend because of weak performance metrics. Pinterest is still a good top-of-the-funnel channel to drive brand awareness. But if you are looking for a channel to improve performance, Pinterest may not be the best option.

Apple’s Device Ecosystem Multiplies its Brand Strength and Stickiness. Incredible stickiness of Apple products and ecosystem.

How Bed Bath & Beyond lost its suppliers’ trust, and doomed itself. Realizing that they had serious problems, Bed Bath & Beyond brought in a Target executive to save the day. The CEO wanted to push the company into omnichannel and private labels. While the new strategy might make sense, it was writing a check that the company’s infrastructure could not cash. Plus, I find it ridiculous that the Board authorized the buy-back program that unsettled critical supply partners and started the downward spiral into bankruptcy. A massive management failure of an iconic retail brand

($) The Boss Wants to Make You More Efficient. It’s important to identify areas where technology can make a difference and be more efficient. It’s equally important to determine whether what you are trying to make efficient is the right thing to do. That’s called effectiveness.

Other stuff I find interesting

($) Still Going Fast, Inflation Changes Drivers. A great article discussing the drivers of inflation. First, it was about the supply chain crisis. Then, the war in Ukraine happened. These days, services drive inflation

The EU has approved the world’s first carbon tax on imports. Everything is going to get pricier in Europe. “The carbon tax is part of a wider overhaul of the bloc’s carbon market that will require European industries to comply with strict emissions standards, making their products more expensive to produce. The tax is intended to ensure that the costlier, lower-carbon EU goods will not be undercut in price by those from countries with more lax rules on emissions. Any companies importing such products into the EU will be required to buy certificates to cover their carbon emissions, based on the volume of goods they bring in and the emissions footprint of those goods. The tax will also prevent manufacturers, hoping to evade the EU emissions standards, from moving operations to another country, and then sending their goods into the EU, a process known as “carbon leakage”. The carbon tax, to be phased in from 2026, will cover some of the most polluting industries: steel, aluminum, cement, fertilizer and electricity, as well as hydrogen. In the future, it could be expanded to include organic chemicals and polymers, including plastics.

Africa fell in love with crypto. Now, it’s complicated. I think this sums it up nicely. “Mohamed Taysir, co-founder and CEO of Egypt’s Singularity Finance, believes the trend of crypto startups closing down is driving attention away from the promise of quick money to more “beneficial use cases of blockchain.” Adepoju Adebowale, a 27-year-old crypto enthusiast from Nigeria, told Rest of World he once believed Africa and crypto were the perfect couple. However, the events of the last few months have forced him to change his mind. He said his crypto investments grew from 70,000 naira ($152) to 3 million naira ($6,514.23) within six months in 2021. Now, Adebowale has lost almost all of that money

The Italian farmers saving an ancient fruit with solar power. I hope the Italian government can support farmers in this endeavor. This is where some governmental subsidies can make a lot of difference, given how expensive it is to install solar panels on farms.


PetSmart has 60 million customers in its loyalty program

U.S. Bureau of Labor Statistics found that car dealer markups contributed between 0.3 and 0.7 percentage point of the nearly 16% rise in the consumer-price index between the end of 2019 and the end of 2022

iOS App Store has 101 million monthly active users in Europe

Nearly Half Of New Subs Find Netflix’s Ad Load ‘Heavy’. Source: MediaPost

a16z pushed a weak narrative for ACH. I disagreed

a16z pushed a weak narrative for ACH. I disagreed

The renowned venture capital firm, a16z, recently published an article named “The Future of Payments is… Red?“, whose content I find at best unconvincing. The gist of the article is that the author believed fintech startups could challenge the two dominant networks (Visa & Mastercard) by pushing for ACH transactions to replace credit cards. The example used to substantiate the thesis is Target Red Card. Per the article, and sorry for the lengthy excerpt:

Look at Target’s full-year revenue for 2022: they made $107.6 billion in sales and $3.4 billion in pre-tax income. Now imagine if every transaction at a Target store or at target.com were made with a credit card—which is currently not the case—at an average fee of 2%. This would result in $2.2 billion in incremental income if all payments shifted to ACH, which would be 65% 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%, the company is… giving up 5%, albeit to the user in the form of direct savings at Target, which is the primary benefit of the RedCard.

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

That said, while I think Target has been smart to roll this out, paying 5% to save 2% (and justifying it by showing increased engagement, which likely reverses cause and effect and shows sampling bias!) is not smart. A better alternative, in my opinion, would be to provide customers with a one-time benefit to make the switch. As an example, imagine if Netflix started offering such a benefit and started offering customers, upon log-in, a $2 one-time discount if they clicked and switched their payment method to direct debit. This would provide Netflix with long-term savings of more than $100 million a year in North America alone, based on their rough interchange costs.

Luckily, inertia, one of the twin moats that protects so much of banking, is now decreasing thanks to improved technology, and consumers are more willing to switch up their payments methods. (Rewards, the process by which merchant fees fund customer benefits, with banks in the middle, remains a stubborn reason why “RedCard as a Service” hasn’t previously taken off.)

There are several points with which I disagree with the author and I’ll go over them one by one.

The claim that Target gives 5% discount on Target transactions to save 2% in interchange is not true. A loyalty program is more than just payments. First of all, loyalty programs existed way before credit cards came around. Brands understood that a loyalty program helped build customer relationship and retain customers. Second, a branded debit or credit card is a tool with which retailers collect valuable first-party information. Who a customer is, how often a customer visits a certain store, what they buy, what combination of goods they buy, what promotions they are most responsive to, whether they want to pick up goods at drive-through, in store or have them delivered. The kind of information not only assists a retailer in personalizing offers and making operational adjustments accordingly, but also powers a high-margin advertising platform. Look at the big retailers on the market. The Walmarts, the Amazons and the Targets of the world all have ambition to build an advertising machine popular with advertisers. How else do they provide targeting to those advertisers without data about their own customers?

There are a bunch of 2% cash back credit cards on the market. Some even offer a higher rewards rate on Target purchases. Consumers are pretty savvy. They will use whatever saves them the most money. Remember that Target would have no information on a customer if they used a non-Target card. Without offering a competitive earn rate, how could Target compete and gain valuable customer information?

The Target credit card is underwritten by TD Bank USA. Co-branded credit cards usually serve as a revenue stream for brands and Target credit card is no exception. According to the latest 10K, Target recorded $734 million in profit sharing from TD Bank as revenue. $734 million! Of course, that’s not entirely pure profit as I believe Target shoulders some of the rewards expenses, but it’s still one hell of a figure. Because Target debit card is issued by Target itself, in collaboration with a bank, they earn much less, if anything at all, from the debit card. So why do they have it in the first place? Why does Target have a reloadable account with the same 5% cash back?

One word: accessibility. Not everyone has a Social Security Number or an ITIN to open a checking account and get a debit card. Then, not everyone with an SSN can get a credit card. TD Bank must have some say in whom they want to give credit to. A FICO of 600 should disqualify a lot of folks from having a credit card. Hence, a lineup of different options helps Target widen their target audience. And if Target already offers a debit card or a reloadable account, they may as well give a reason to customers why they should use those options.

The author of this article argues that retailers should incentivize consumers to use ACH and abandon credit cards. His example is that utility providers already do so. There are two errors with that argument. First, consumers love credit card rewards. Why would they turn away from concrete savings and benefits? Second, using utility providers as an example doesn’t make sense. Consumers pay for utility once a month. Twice or three times at most. These providers charge 4%, which is substantially higher than most credit cards’ earn rate. The extra fee deters consumers from using credit cards as payment method. The gain is smaller than the expense. It doesn’t hurt because most of the time, it’s just one transaction every month. For retailers like Target, it’s different! They want consumers to shop as often as possible. Retailers rarely impose a transaction fee like utility companies do (they negotiate a favorable interchange rate with the networks) and consumers want their rewards. Hence, it’s exceedingly difficult here to change consumer behavior.

In addition, I don’t understand why the Target Debit Card is an example of how Visa and Mastercard can be disrupted. Visa and Mastercard are two of the most known and trusted brands in the world. Walk to a restaurant in a remote country and if you see the Visa logo, you know that your Visa card will work there and you are protected from fraud. How popular is Plaid globally? Is it as trusted as Visa and Mastercard? The networks built an incredible business model in that they are accepted by millions of merchants and millions of consumers trust them. Plaid has been around for a while and if they haven’t gained much traction, what are the odds that Plaid will build a similar business model like the networks?

Plus, how could we replicate that model with ACH? Mom-and-pop merchants want customers and frictionless payments that are proven and tested. Yes, saving 2% is great, but it’s still a lot better than losing business to a competitor nearby because that competitor enables card payments.

I understand that a16z wants to push a narrative that is favorable to their fintech investments, but this is not a good one as the reasons mentioned above.

Weekly reading – 25th December 2021

This is the last post of the Weekly reading series in 2021. Hope you have enjoyed it!

What I wrote last week

I wrote about VRIO, a business strategy framework that can help analyze a company’s competitive advantages

Get to know Affirm


Spider-Man: No Way Home’ Swoops In With a Pandemic-Record Opening. The global gross of $257 million during opening weekend is the 3rd highest of all time. Remember that this is the 27th movie in the Marvel Universe Cinematic and it’s achieved during a global pandemic. Disney’s ability to draw viewers and make great content consistently is just extraordinary. However, it creates a conundrum for the company. Putting content in theaters will haul in a truckload of money and boost the top and bottom line. That also means Disney+, the flagship streamer, will have to wait for at least a certain amount of time to feature the hottest movies, diminishing its power to attract subscribers. Unfortunately for the iconic company, Wall Streets cares a lot about Disney+ subscriber count. Hence, the management team will have their hands full in the next year or two finding the right balance in terms of content distribution

Amazon’s grocery battle isn’t what you think. As an Amazon shareholder, I’d prefer the company owning the software powering stores to operating physical grocery shops. The reason is simple. Grocery is a low-margin business and the competition is fierce. Even if Amazon manages to operate cashier-less stores, chances are that they won’t reach the scale of Costco or Walmart to compete in unit economics. Owning the software powering other stores; however, is profitable. A few retailers already tested out Amazon Go technology. Now, Amazon just needs to prove their worth and scale it to make this another great and profitable business

Bob Iger Makes His Disney Exit as a Titan of Transformation. Bob Iger will go down in history as one of the best CEOs ever. His work transformed Disney and put it in the position that it is now. I like his book The Ride of a Lifetime too.

How Shopify Outfoxed Amazon to Become the Everywhere Store. “In late 2015, in one of Bezos’ periodic purges of underachieving businesses, he agreed to close Webstore. Then, in a rare strategic mistake that’s likely to go down in the annals of corporate blunders, Amazon sent its customers to Shopify and proclaimed publicly that the Canadian company was its preferred partner for the Webstore diaspora. In exchange, Shopify agreed to offer Amazon Pay to its merchants and let them easily list their products on Amazon’s marketplace. Shopify also paid Amazon $1 million—a financial arrangement that’s never been previously reported. Bezos and his colleagues believed that supporting small retailers and their online shops was never going to be a large, profitable business. They were wrong—small online retailers generated about $153 billion in sales in 2020, according to AMI Partners. “Shopify made us look like fools,” says the former Amazon executive.”

6th Annual Grocery Tech Trends Study. “74% of grocers report that the tight labor market is a major obstacle that will drive their retail technology investment over the next 18 months. More than half (54%) of grocers are increasing their year-over-year tech spend, with a focus on advancing digital and mobile capabilities, analytics-driven decision-making, personalized marketing, and click-and-collect.”

A great profile of the CEO of Automattic, the company that runs WordPress.com. “After we hung up our first Zoom call, Mullenweg sent me an email with the subject line “Freedom is central.” The body was a quote from Albert Camus, which worked as an explanation for just about everything Mullenweg believes in, fights for and plans to spend the rest of his life working on: “The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion.”

The global semiconductor value chain. Today, I started my research into the world of semi-conductor and this is an excellent resource.

Stuff that I found interesting

Himalayan Glaciers Are Melting at Furious Rate, New Study Shows. “Glaciers across the Himalayas are melting at an extraordinary rate, with new research showing that the vast ice sheets there shrank 10 times faster in the past 40 years than during the previous seven centuries.”

Hospital Prices Are Unpredictable. One Type of Health Coverage Often Gets the Worst Rates. I said it before and I’ll say it again, the way that we have to live in fear of getting healthcare in this country is a disgrace

TikTok is the most visited domain in 2021, even more than Google.com. That’s impressive


YouTube TV is alleged to have more than 4 million subscribers

0.01% of bitcoin holders controls 27% of the currency in circulation

ACH made up 20% of non-cash payments in the U.S in 2020

Source: Michael Batnick

Real-time Payments

I did a little bit of research on real-time payments and want to share here. It’s a big topic so I’ll likely add more in the next few weeks. In this post, I just cover why we need real-time payments, what it means and what it does. Let’s go!


Before we talk about real-time payments (RTP), we must first talk about ACH. Automated Clearing House (ACH) is a method that moves money digitally from one bank account to another in the U.S. Before ACH was born in the 1970s, consumers and businesses sent and received money using checks that required a lot of human input. As the number of checks increased, along with the payment volume, and payment preferences evolved, the banks realized that they needed a more efficient way to automate and speed up the sending and receiving of money. That’s how ACH came about.

What does ACH do exactly? It acts as a financial postal office that handles transactions between financial institutions. Every day, there are thousands of transactions initiated in the U.S. ACH operators sort these transactions, bundle by recipient and deliver them accordingly in several batches every day. Each of the batches includes instructions telling the recipient financial institution whether it is to make a debit or credit to accounts under its purview. At no point do any two banks exchange real money to settle transactions. Settlement is processed through the Federal Reserve.

There are two ACH operators: EPN and FedACH. The Electronic Payment Network (EPC) handles the fund transfer for the private sector while FedACH serves the same function for the federal government. The National Automated Clearing House Association (NACHA), a non-profit, serves as a trustee and a rule-making body of ACH. Collaborating with the government agencies, NACHA sets up rules that dictate how EPN and FedACH deliver messages.

Even if this is the first time you have ever heard of ACH, you must have already used it. ACH is how employers deposit salary to employees’ accounts, a customer pays a service provider every month, a customer pays a credit card, a business makes a payment to a supplier or IRS deposits tax refund to a taxpayer’s account. Compared to credit cards or wire transfers, ACH has its strengths. Credit cards aren’t available to many consumers, especially those with a bad credit history. Meanwhile, it’s far easier to open a checking or saving account which one can use to initiate an ACH transaction. For businesses, credit cards can mean a few percentage points in revenue losses due to interchange fees. ACH, on the other hand, is significantly cheaper. Wire transfers can enable a big transaction safely and quickly; however, they are usually pricey at $15 per transaction. Because of its accessibility and cost-effectiveness, ACH is very popular with 27 billion payments worth about $62 trillion in the U.S in 2020.

But ACH isn’t perfect. Because it is batch-based, ACH can take several hours, if not days, to confirm and settle funds. The delay can have ramifications. For instance, small businesses can run into cash-flow problems with delay in fund availability. The pending transactions and, as a result, the uncertainty regarding balance can put some consumers at risk of overdrafts. Consumers that pay bills on the last day of the grace period may incur late fess or even face stoppage of services because their payments won’t be cleared fast enough.

Real-time Payments

According to the Payments Innovation Alliance, a real-time payment (RTP) is “an immediate, irrevocable, interbank account-to- account transfer that utilizes a real-time messaging system connected to every end-user through a financial institution, third party, or another real-time system. Funds are available for use by the receiver and real-time confirmation is provided to both the sender and receiver in seconds. While the requirement of immediate confirmation and fund availability is undebatable, there are conflicting opinions on whether settlement of RTP should be immediate. NACHA said that RTP settlement doesn’t need to take place real time. The majority of RTP systems today use a deferred net settlement method which offers a lower liquidity risk than a gross settlement method (settle transactions individually). On the contrary, The Clearing House claims that RTP network payments “clear and settle individually in real time with immediate finality”.

Essential characteristics of RTP include:

  • 24/7/365 availability
  • Authorization or rejection of payment is within seconds 
  • Fund posting and availability are within seconds
  • “Push” payments only
  • Use of ISO 20022 message standard. This will enable the transfer of richer data
  • Irrevocability. Funds are only transferred after sufficient funds are confirmed and when payments are sent, they are irrevocable
  • Availability of a proxy database that allows end users to send and receive payments without knowledge of the receiver’s bank account information 

RTP benefits consumers and businesses in several ways. The constant availability and the immediacy of funds increase consumers’ convenience and help them manage budgets better. Thanks to RTP, some consumers may no longer have to live in anxiety with last-minute bill payments not clearing fast enough. With a proxy database, RTP can allow consumers to receive and send money without offering bank account details, a practice that makes me nervous every single time. All they need is a phone number or an email.

For businesses, there are multiple benefits that RTP can bring. They can refund customers and pay off suppliers right away, rather than a few-day delay. Who doesn’t want to get their hard-earned cash faster? Hence, customers and suppliers will field fewer anxious calls and be ultimately happier. Happy customers and happy suppliers mean happy life, I guess. In some urgent circumstances, the value of RTP will be even more highlighted. For instance, sometimes businesses are required to make unexpected same-day payments to authorities. They can use ACH and hold their breath that their payment makes it to one of the earlier batches. Or RTP can solve that problem instantly and hence, reduce regulatory and compliance risks. As receivers, the finality and irrevocability of payments will be a boon to businesses. Once they receive payments through RTP, they don’t have to worry about whether the senders have enough funds or will recall transactions. Plus, payments are cleared and settled right away. These two factors will help improve their cash flow management tremendously.

Another benefit of RTP is the use of ISO 20022 payment messages. The new standard is an improve over the old ones in the amount of data it can transmit and its structure. With the old standards, businesses can’t extract insights from the messages. In some cases, that can send false positive compliance issues leading to delays and higher expenses. According to SWIFT, poor data results in 1 out of 10 international payments being held up. The ISO 20022 payment messaging standard enables parties involved to attach a richer and more structured data to a payment. Data can include details of the remittance, the purpose of the payment, the original source and other relevant information. With this new data that can be processed more easily, businesses can reduce fewer errors, avoid delays, decrease unwanted reconciliation expenses, and gain valuable insights. 

A practical example of ISO 20022
Source: SWIFT

What are the RTP or faster payment services in the U.S?

First, let’s talk about the RTP network. It is the first core infrastructure in the U.S in more than 40 years. It was built and launched in November 2017 by The Clearing House, whose owner banks include arguably the biggest in the country. The RTP network is available to all federally insured U.S depository institutions and already reaches 61% of U.S demand deposit accounts (DDA). 

Next is FedNow. It is owned by the Federal Reserve and is expected to launch in 2023. Once live, it will be available to all depository institutions in the U.S. The Federal Reserve said that FedNow will process messages and settle payments within 20 seconds. In the beginning, FedNow’s initial transaction limit will be $25,000, lower than the current limit imposed on the RTP network by The Clearing House. 

Clearing House's owner banks
Source: The Clearing House

Mastercard Send is Mastercard’s native method that enables instant payments between governments, businesses, and consumers. Mastercard Send supports disbursements – non P2P payments to consumers, domestic P2P payments and cross-border P2P transfers originating from the U.S. As of this writing, Mastercard Send is available in the U.S only and all domestic debit cards, including non-Mastercard cards. Interested issuers can tap into the Mastercard Send API to enable this capability. 

Visa Direct is Visa’s equivalent of Mastercard Send with two major differences. The first difference is that while Mastercard Send is currently available in the U.S only, Visa Direct can be used in more than 100 countries. Secondly, its requirement for fund availability varies from one financial institution to another. In the U.S, Visa Direct mandates that all participating issuers make funds available within 30 minutes, a more relaxed approach than Mastercard Send, which claims that funds are available and settled within seconds

Zelle is a mobile payment application developed by Early Warning Services, which is owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S Bank and Wells Fargo. The application enables users to transfer funds from one to another without the need for account details. All it requires to initiate a transfer is an email address or phone number. Formerly confirming transactions within minutes, Early Warning Services announced in February 2021 that Zelle transactions can now be cleared and settled in real time, officially making it an RTP network. Zelle users need to note that several banks place restrictions in terms of the number of transactions and transfer volume that a user can initiate in a month. 

In December 2017, NACHA announced the launch of Same Day ACH, which enables the ACH payments to be processed faster and potentially settle in the same day, if a payment is submitted early enough. Despite this improvement, Same Day ACH isn’t an RTP method because transactions are still processed in batches and revocable. 

Wire Transfers offer instant payment confirmation and settlement. However, unlike RTP, Wire Transfers are more suited for low-volume high-ticket transactions, limiting its value and accessibility to consumers and businesses. Compared to a few cents per RTP transaction that The Clearing House charges, a wire transfer usually costs at least $15. 

Mobile payment apps such as CashApp, Venmo or PayPal allow instant transfers between users. Users can use their Venmo balance for purchases. What makes me unclear about whether these apps are RTP are 1/ they require users to use another payment rail to retrieve money. Customers who want instant transfers from these apps to their checking accounts will have to pay a small fee. 2/ will refunds go to bank accounts or Venmo accounts? If they go to bank accounts, how long will it take? 3/ Since not every merchant supports checkout with these apps, will it still be RTP?