Weekly reading 25th June 2022

What I wrote last week

Books on Payments

Supreme Court overturned Roe v Wade and took away abortion rights


Inside the Reinvention of Albertsons Cos. The over-arching theme of Albertsons’ plan moving forward is to use technology and data to make decisions so that efficiency can improve and so does customer engagement. Grocery is a hard business. Margin is low and competition is fierce. Albertsons said their goal was to have shoppers complete grocery shopping at their stores without visiting rivals’ footprint while offering local assortments. It means that the selection has to be broad, but the stores at the same time cannot expand in size forever. They also need to keep a close eye on costs and margin as well. That would require a lot of data analytics, coordination in the case of omni-channel shopping and great execution.

($) Retailers’ Inventories Pile Up as Lead Times Grow. On top of the ever-changing consumer behavior and sky-high inflation, retailers now have to deal with long lead times in production which make it even more difficult to match demand with supply while keeping costs in check. Hold a lot of the wrong inventory to avoid supply chain and production issues, and you will be punished like Walmart or Target. Be nimble with inventory and you don’t have well-stocked shelves to woo customers. Hard times ahead.

Consumer watchdog eyes crackdown on credit card late fees as inflation threatens to increase them. If CFPB introduces regulations on late fees, it will affect how issuers generate revenue from credit cards. Late fee is a significant source of revenue by itself, but it also encourages consumers to pay off balance to avoid further penalty. If late fees are further capped or even outright banned, such an incentive will go away and consumers may carry more balance. It will increase risks and reduce revenue for issuers. It’ll be interesting to see how this develops.

($) Canada to Compel YouTube, TikTok and Streamers to Boost Domestic Content. I am generally supportive of having the right kind of regulations in place to help businesses. Hence, I would be in favor of the Canadian government giving these streamers incentives to promote Canadian creators’ work. I am not; however, ok with a government mandating a preference of local content.

($) GM and Ford, Driving to Beat Tesla, Turn on Each Other. An interesting read on how two iconic American car manufacturers are going at each other for market shares in the EV area.

($) How Singapore Got Its Manufacturing Mojo Back. “In courting factories like this, Singapore has become a rare wealthy country to reverse its manufacturing downturn. The city-state had faced industrial decline, with World Bank figures showing manufacturing falling to 18% of gross domestic product in 2013, from 27% in 2005. Then manufacturing made a comeback in Singapore, rising to 21% of GDP in 2020, according to the World Bank’s latest figures. Singapore has aggressively wooed highly automated factories with tax breaks, research partnerships, subsidized worker training and grants to local manufacturers to upgrade operations to better support multinational companies, among other enticements. There’s a caveat: Singapore’s success has come by automating away many jobs. It has more factory robots per employee than any country other than South Korea. Business executives say Singapore has succeeded because it has a welcoming, low-tax government and a strong base of English-speaking science, engineering and mathematics graduates and manufacturing managers. Relatively loose immigration laws make it easy to hire foreign engineers.  Executives also say they trust intellectual-property protection laws in Singapore, unlike in places like China where they sometimes worry their partners will copy their products.”

Source: Twitter

Other stuff I find interesting

Japan to subsidize TSMC’s Kumamoto plant by up to $3.5bn. Semiconductor companies get handsome subsidies from governments from all over the world. Japan will give TSMC $3.5 billion while Europe hands Intel billions of euros to build a plant there. That goes to show how countries value the strategic importance of semiconductor going forward

Why America Will Lose Semiconductors. A good run-down of problems that America faces in semiconductor. It’s a nice complementary read to the previous link

Friendly fungi help forests fight climate change. “A 2016 study led by researchers from Imperial College London revealed that one particular type – ectomycorrhizal fungi – enables certain trees to absorb CO2 faster (and therefore grow faster) than others. This is known as the “CO2 fertilisation effect”. These fungi live in the root system of a host tree. In a symbiotic relationship, fungi help the tree to absorb more water, carbon and other nutrients. In exchange, the tree provides food for the fungi by photosynthesising. Ectomycorrhizal fungi have also been found to slow down the process of rotting; decomposition breaks down all that locked-away carbon and releases it into the atmosphere. So the fungi, in effect, have two methods of fighting global warming.”

The most dangerous place on Earth. “Nestled on Lithuania’s southeastern border, Druskininkai opens onto a narrow notch of strategic territory known as the Suwałki Gap. Stretching about 100 kilometers along the Lithuanian-Polish frontier, between Belarus in the east and the Russian exclave of Kaliningrad to the west, Western military planners warn the area would likely be one of the Russian president’s first targets were he ever to choose to escalate the war in Ukraine into a kinetic confrontation with NATO.”

($) Erdogan Is Hung Up on the Power One Kurdish Woman Has in Sweden. “Amineh Kakabaveh’s journey from Peshmerga fighter to Kurdish refugee and then Swedish lawmaker has thrust her into her adopted homeland’s standoff with Turkey. Turkish President Recep Tayyip Erdogan is holding up Sweden’s application to join the NATO alliance, saying it harbors “terrorists” — his catch-all label for those with links to Kurdish militancy — and he’s hinted at Kakabaveh’s influence as a particular problem.”. Just an amazing story by Amineh


Edmunds reported that the average price of an EV exceeded $60,000

Since November 2021, more than $2 trillion in cryptocurrency value has evaporated

Covid vaccines saved 20 million lives in the first year

TikTok had $4 billion in revenue in 2021. Its US-based users spent on average 29 hours on the platform, compared to 16 hours on Facebook and 8 on Instagram

Source: IMF

Books on Payments

The payments industry is one of the most complex and interesting out there to me. A lot happen behind the scenes whenever we send out a rent payment through a checking account or buy a coffee with a swipe of our credit card. As consumers, we don’t know much about such complexities. Plenty of innovation over the years has gone into providing optionality as well as a smooth experience to consumers while helping out merchants and financial institutions achieve their business goals. It can be daunting and difficult to start learning about an industry as complex as payments, especially when there are numerous abstract concepts and jargon. But if you are really interested, I’d recommend these three books. They touch upon the general concepts, operational details of each payment method and more importantly, these books are written for laypeople like you and myself

The Anatomy of The Swipe

This book is focused more on credit and debit cards. You’ll learn about key concepts such as interchange, settlement, authorization, chargebacks, Know-Your-Customers (KYC), the parties involved in a card transaction and so on. You’ll learn about how money moves in a card transaction and how a merchant gets paid ultimately. The author did a great job explaining abstract concepts in an easy-to-understand manner. In fact, I gave this book to our intern who had had zero knowledge on payments as a crash course to our industry. He loved it. Hence, I think you too can learn a lot about card payments from this book. Check out my review here.

The Field Guide To The Global Payments

Launched earlier this month, The Field Guide to Global Payments covers more payment methods than just cards and it touches up on other countries than just the US. Because of the number of topics that it tries to cover, in my opinion, I don’t think it has the same depth as the other two books. Nonetheless, there are very interesting facts, stats and concepts covered that will trigger more research and investigation.

One of the earliest noted uses of the term “credit card” dates all the way back to 1887. In his utopian novel Looking Backward, Edward Bellamy described the concept of using a card for purchases; he used the term “credit card” eleven times in the novel. In 1946 the first bank card, Charg-It, was introduced by Brooklyn- based banker John Biggins. A user’s bill was forwarded to Flatbush National Bank, and the bank settled the amount with the merchant directly and collected the funds from the user’s bank account. Only a small number of merchants were supported by the program – those in a specific two-square-block radius – and the card could only be used by those who banked with FNB.

On the checkout page, the shopper fills in their payment details. Typically these are the PAN (payment account number, the sixteen digits on their card), the expiry of their card, the CVV (the three or four-digit security code), and their billing address. Pro tip: if you don’t send the AVS data (billing address information) in the authorization, you may get an interchange downgrade, which means, in short, that the transaction will cost you more as a merchant.

Taking on PCI compliance is a large decision – there are more than 1,800 pages of documentation and more than three hundred security controls, alongside yearly audits. There are four levels of PCI, which each have their own requirements that apply to different use cases. Partnering with a gateway, PSP, or standalone vendor to outsource PCI scope is the decision many merchants make because of this.

Merchants do, however, have a lot of agency in improving decline rates. Overall, in-store (POS) transactions tend to have very low decline rates, while ecommerce transactions can have 5 to 10 percent decline rates. Note that the prevalence of declines goes up for recurring transactions, like a subscription payment, or for cross-border transactions. High-risk merchants, like gambling or escort services (what many dating apps are considered by the card networks!), have even lower benchmark auth rates.

Visa’s excessive chargeback program is called the VDMP – Visa Dispute Monitoring Program. They divide the previous month’s chargebacks by that month’s total Visa transactions. If a merchant has 100 chargebacks and a chargeback ratio of at least 0.9 percent they are added to the program to be monitored. Mastercard has the ECP – Excessive Chargeback Program. The ECP divides the number of chargebacks in a single month by the total number of transactions in the previous month over Mastercard. Their threshold for entering the program is one hundred chargebacks and a ratio above 1.5 percent. In the event that a merchant hits these thresholds, they are notified by their acquirer who may also help them to get fraud levels below the threshold.

Signature debit cards get their name from the fact that a customer must sign the receipt during an in-store payment, and a merchant must subsequently authenticate that the signature on the receipt matches the signature on the back of the card. Signature debit transactions clear funds from the cardholder’s checking account same-day and are usually processed over Visa or MasterCard’s networks. PIN debit cards, however, are authenticated when the cardholder enters their PIN number on a point-of-sale device. Though the funds are also pulled from the cardholder’s checking account, they don’t always clear the same day. These transactions are also eligible for cashback. When you buy groceries and ask for $20 cash back, that transaction will be processed as a PIN debit transaction. There are many more PIN debit networks than the signature networks.

Payments Systems in The US

This book provides an overview of payments systems in the US with great details. First, it talks about payments and payments systems in the US in general. Then, it discusses each core system in details, ranging from the history of the system to what happens behind the curtain and what it is like today. The systems discussed in this book include checking, cards, ACH, wire transfer and cash. Then, it also provides the perspective of consumers as well as the banks before closing out with thoughts on payments innovation. It’s quite a long book, but if you are nerdy about payments, I’d recommend it.

In a net settlement system, the net obligations of participating intermediaries are calculated by the payment system on a periodic basis—most typically daily. At the end of the day, a participating intermediary is given a net settlement total and instructed either (a) to fund a settlement account with that amount, should it be in a net debit position, or (b) that there are funds available to draw on in its settlement account, should it be in a net credit position. Checking, card payments systems, and the ACH are all net settlement systems in the United States.

In a gross settlement system, each transaction settles as it is processed. With the Fedwire system, for example, a transaction is effected when the sending bank’s account at a Federal Reserve Bank is debited and the receiving bank’s account at a Federal Reserve Bank system is credited. No end-of-day settlement process is necessary in a gross settlement system.

Signature debit card interchange is lower than credit card interchange, and PIN debit interchange is even lower for unregulated debit card issuers. Larger debit card issuers (with over $10 billion in assets) receive regulated interchange rates that do not distinguish between signature or PIN debit usage.

Debit card authorization is more challenging than credit card authorization, as the bank must check against an ever-changing account balance. In the early days of debit, banks would authorize transactions (or have a processor authorize them) against a “shadow file” that could be hours or even days out of date. Now, however, most large banks handle authorizations dynamically against the “real” balance in the checking account.

Some payments networks are heavily resourced (i.e. have lots of money), enabling network-level investment in product definition, brand, risk management, and exception processing requirements. Visa, Mastercard, American Express and PayPal are all examples of what we call “thick model” networks. Other networks are thinly resourced, and manage only minimal interoperability issues, leaving functions such as product definition and brand to intermediaries. Check clearing houses, the ACH, and PIN debit networks are all examples of this “thin model.”

Closed loop networks, such as American Express, have card issuance policies similar to some provisions of the open-loop card network rules, so as to ensure interoperability for merchants and other users of the payments system. Merchant agreements, for similar reasons, are much like those of open-loop card networks. But a closed loop network is free to change such policies and agreements without the involved processes used by open-loop networks.

Closed loop systems have the advantage of simplicity. As one entity sets all of the rules and has a direct relationship with the end parties, it can act more quickly and more flexibly than the distributed open loop systems, which must propagate change throughout the system’s intermediary layers. The disadvantage of closed loop systems is that they are more difficult to grow than open loop systems; the payments system must sign up each end party individually.