
Marc Andreessen on big data, Bitcoin and upending the world of finance - aet
http://www.washingtonpost.com/business/in-his-words-marc-andreessen-on-big-data-bitcoin-and-upending-the-world-of-finance/2014/10/15/8fb050d2-5304-11e4-892e-602188e70e9c_story.html
======
aseem
“But think about the scenario of a loan officer talking to a prospective
client. To software people, that looks like voodoo. The idea that you can sit
across the table from somebody and get a read on their character is just
nonsense."

This coming a Venture Capitalist...

~~~
justincormack
Either way, loan officers do not talk to clients much any more, it has all
been automated. "Computer says no" etc.

~~~
waterlesscloud
Thanks in part to software I wrote! I feel like I've made such a useful
contribution to society!

------
abalone
_> Most consumer transactions are weighted with a 3 percent fee._

This is the single most fundamental misunderstanding in the bitcoin camp.

First of all it is only in some countries like the U.S. where fees are in the
2-3% range. Others have regulated that fee away already. In fact, the U.S.
just recently regulated debit card interchange down to 0.05% + 21 cents.[1]

Second -- and this is really important -- most of that fee goes back to the
consumer in the form of reward programs. That's primarily what they are
funding: 1-2% cash back programs, free travel, etc. Not the "100,000 people
and 1970s mainframe computers" that Marc describes.

So, the opportunity to lower fees (1) doesn't exist in many places, and (2)
where it exists it consists of _taking value away from consumers_.

So no rational consumer will voluntarily transition over to a lower-benefit
instrument. If U.S. merchants really wanted to experiment with the future of
"lower fees", just try accepting debit cards only (not credit cards). See how
consumer like it. Great for merchants, not so much for customers who want
their cashback programs.

Even where lower fees have been forced through regulations (Australia), it did
not result in a general 2-3% reduction in consumer prices. Guess what,
merchants kept that margin.[2] This is why big merchants like Walmart are
resisting Apple Pay in a futile effort to push their own CurrentC, a new
instrument that bypasses card networks and deducts directly from your checking
account. But guess what: it _takes value away from consumers_. Exactly the
same problem with bitcoin for consumer payments.

This is why it will have an extremely tough time replacing credit cards -- and
that's before we even get to the matter of consumer protections. You need a
trusted intermediary to be able to enforce chargebacks, which protect
consumers against ripoffs. You can't do it with insurance alone; you have to
be able to reverse transactions. So by the time you add intermediaries back
in, Bitcoin is just another centralized card network with an exotic protocol
for moving money. It's the next Discover card, sans card.

There may be more specific niches where bitcoin is useful. But this notion
that bitcoin will save us all 3% on purchases is just plain uninformed. And
unfortunately it's at the foundation of so much of the investment in this
area.

[1] [http://www.heartlandpaymentsystems.com/Durbin/What-is-the-
du...](http://www.heartlandpaymentsystems.com/Durbin/What-is-the-durbin-
amendment)

[2] [https://www.competitionpolicyinternational.com/assets/Hot-
Tu...](https://www.competitionpolicyinternational.com/assets/Hot-
Tubs/Interchange-Fees-web.pdf)

 _" Another predictable result is the absence of evidence that consumer prices
have fallen as a result of lower merchant discounts. This is not surprising
because the cost savings are too small to be measurable with any degree of
confidence. However, based on the economics literature on pass- through
effects, we believe that it is highly unlikely that consumers have received
any significant benefit over the period of time considered given the likely
sticky prices and high concentration in the Australian retail sector."_

~~~
beaner
> most of that fee goes back to the consumer in the form of reward programs.

I don't really buy this. Why not just not have the fees and let prices be
lower so that consumers have more cash? Cash is always better.

I assume most people never take advantage of most of their points, essentially
sacrificing that 1-2% to the credit card processor. The processor knows this,
which is why they do it.

~~~
namecast
Agreed. And the rewards aren't paid for with the fees charged to the customer;
they're paid for with sweetheart deals between the payment processor and
reward provider. There's nothing wrong with this even - it's biz dev 101.

As an example: Mastercard (let's say) offers American Airlines cobranding,
marketing (in the form of newsletters and emails pushing me to use miles
whenever i pay my bill) and service perks (read: lower transaction processing
fees) in exchange for frequent flyer points (note - not even dollars, a point
is some fraction of a dollar in terms of flight purchasing power) for tickets
on flights that would otherwise probably have a seat empty. Nice seats on full
flights cost more points, of course. I get these points if I use my card often
enough.

I'm fine with this arrangement - both parties are gaining here, and maybe I as
a customer get a nice perk occasionally when I finally have enough incidental
points saved up to go on a flight - but none of us is under the impression
that there's some one to one relationship between fees charged and amount of
money paid for redeemable rewards, and I expect that in volume both parties
are actually making money off of this arrangement, not sacrificing revenues.

There's also a feedback loop at work here - Mastercard pushes points for
American Airlines, more people use American Airlines, more of them end up
using the same airline regardless of points due to familiarity and customer
stickiness, so Mastercard gets more AA transactions and more fees overall -
even though they've dropped the per-transaction fee rate, the increased volume
makes up for it...

~~~
rgbrenner
> And the rewards aren't paid for with the fees charged to the customer;

the interchange fees for Visa and Mastercard have a surcharge for rewards
cards.

It is definitely not the case that the rewards for your card are free (to the
merchant/consumer).

~~~
namecast
You: >the interchange fees for Visa and Mastercard have a surcharge for
rewards cards. >It is definitely not the case that the rewards for your card
are free (to the merchant/consumer).

Me:

> And the rewards aren't paid for with the fees charged to the customer;

I don't see a conflict with these statements, do you?

------
jeffreyrogers
Over the last few weeks I've noticed an increasing amount of interest in
Bitcoin and related technologies (P2P, blockchain, distributed computing,
etc.) with the overwhelming majority of voices saying that this is something
revolutionary.

But doesn't it make more sense to try to solve your problem in the simplest
way possible? I'd argue that there is rarely a case in which a bitcoin-like
solution is the simplest way to solve whatever problem you're faced with
(baring the problem bitcoin was intended to solve of course).

------
uptown
Is it possible to believe in the blockchain, but be on-the-fence about
bitcoin? I realize they're presently pretty tightly linked, but I see the
blockchain technology as the new concept holding tremendous promise.

~~~
awt
Not if you understand Bitcoin. What is stored in the blockchain? If something
else were stored in the blockchain, what would be the motivation to do the
work necessary to add new blocks?

~~~
uptown
I could think of all other sorts of exchange of value, within a network, that
wouldn't be tied to bitcoin.

~~~
awt
Such as?

------
7Figures2Commas
> “There is a growing idea in Silicon Valley that there are sources of data on
> consumer behavior we can use to predict creditworthiness. These will be
> completely different than the traditional approach to credit ratings, which
> are tremendously imprecise and ‘laggy.’ PayPal can do a real-time credit
> score in milliseconds, based on your eBay purchase history — and it turns
> out that’s a better source of information than the stuff used to generate
> your FICO score.

Traditional credit ratings are "tremendously imprecise"? That's an insane
statement. FICO is a proven model and has weathered multiple business cycles.
Virtually all of the alternative models being experimented with today haven't.
A lot of these models are going to fall apart when the current environment,
which has seen record low credit default rates, changes.

I'd love to see a $50,000 auto loan or $400,000 mortgage approved on the basis
of eBay purchase history alone.

> “The hypothesis is that there are many other similar sources of consumer
> data: credit card bills, social-network behavior, potentially even search
> history. Lots of people, both in the big Internet companies and at start-
> ups, are trying to get at these large pools of data and figure out new ways
> to do scoring. What they all have in common is that they are all being done
> outside of banks.

Notwithstanding the fact that credit payment history ("credit card bills")
_is_ factored in to a FICO score, a couple of things should be pointed out:

1\. Many of the companies trying different models are doing so in an attempt
to serve thin file borrowers. Not surprisingly, established players like Fair
Isaac aren't sitting around twiddling their thumbs. They have their own
solutions for these borrowers, like the FICO Expansion Score. Just because
startups don't want to pay for somebody else's solution doesn't mean they're
the only ones innovating.

2\. Credit scoring has never been a core bank function so Andreessen's comment
about this taking place outside of banks makes no sense and raises the
question: does he even know what he's talking about?

> “The minute any of these new credit vehicles can show any level of
> repeatability and reliability, the hedge funds come in and provide the
> funding. Hedge funds are very comfortable with analytic models. If you have
> sufficient stability, you can get leverage.”

The hedge funds are looking for yield. Putting aside the fact that a lot of
this money is going to dry up when the interest rate environment changes, the
hedge funds are less interested in analytic models and more interested in
demand. In other words, it's about customer acquisition. An underwriting model
alone won't cut it; you need to be able to find the borrowers.

Also, Andreessen seems to be viewing hedge fund participation as some sort of
meaningful validation. Looking at hedge fund performance it should be obvious
that most hedge funds are not "smart money" by any stretch of the imagination.
When the current market turns, a lot of them will lose their shirts just as
they did in 2008 betting big on junk like subprime mortgage-backed CDOs.

> “Bitcoin is like technology that’s arrived from Mars, and so regulators
> don’t know what to do with it. That’s a good thing. What a lot of financial
> technology entrepreneurs will tell you is that if you’re going to innovate
> in financial services, you want to do something so new and so different that
> the existing regulatory system doesn’t know how to react to you. That is
> your window of opportunity.

This is silly and untrue. In early 2013, FinCEN issued guidance for virtual
currencies, and the IRS weighed in earlier this year. Not surprisingly, just
because Bitcoin is "new" and "different" doesn't mean that the standard rules
and regulations don't apply, as some have learned the hard way[1].

[1]
[http://www.usatoday.com/story/news/nation/2014/09/04/bitcoin...](http://www.usatoday.com/story/news/nation/2014/09/04/bitcoin-
exchanger-charlie-shrem-pleads-guilty-to-silk-road-related-charges/15095129/)

~~~
ThomPete
FICO score forces you to take on debt to show you are good with money. The US
is debt ridden to the extreme.

Make of that what you want.

~~~
ohazi
"Debt" in name only, perhaps. You don't need to pay a cent in interest to
build up a very good FICO score. A credit card used correctly (paid in full at
every statement) is plenty.

~~~
misaelm
I would add that if the "FICO score forced you to take on debt" it would give
a better score to someone with a 95% debt to credit line ratio than to an
otherwise equal individual with only a 5% debt to credit line ratio. In
reality, the opposite is true.

Having said that, for you to have a valid FICO score, you do need to have at
least six months of credit history (credit card, loan, mortgage or otherwise).

------
pptr1
Marc is extreme smart and talented individual. But when your on Twitter 24/7
and keep on making predictions your gonna be wrong at times. Sometimes you can
be wrong in a really big way.

~~~
idlewords
I haven't seen any evidence that he's particularly smart. The guy had an early
success that convinced him he can see head and shoulders above others. This
turned him into a write-only visionary. Like many such people, he's
entertaining to read because of the strength of his convictions, but it's
probably a bad idea to take him too seriously.

~~~
applecore
That's taking a dim view of the man's prolificacy, or maybe I'm not
understanding what "write-only visionary" means.

~~~
idlewords
I don't follow what you mean by "prolificacy". Prolixity? Or that he's
prolific?

By 'write-only visionary', I mean someone who no longer has a working feedback
loop telling them they're sometimes wrong.

~~~
craigyk
> By 'write-only visionary', I mean someone who no longer has a working
> feedback loop telling them they're sometimes wrong.

well put. kudos. i hope you don't mind as I'm sure I'll repeat this in the
future.

------
graycat
> "Bank regulation tends to backfire"

Warning: <rant>

Hmm ..., let's see: As I recall, in the 1920s some "unregulated banks" were a
major part of the mechanism that caused the US economic boom of the 1920s, the
stock market crash of 1929, the banking crisis soon afterward, i.e., _runs_ on
the banks, catastrophic shrinking of the money supply, massive price deceases,
massive unemployment, bankruptcies, the Great Depression in the US, the US
slowing buying from Europe, the Great Depression spreading to Europe, the
great economic stress in Germany, the rise of Hitler for a _command economy_ ,
which actually did get the German economy going again, WWII, the deaths of
maybe, what, 50 million people, maybe 100 million, ah, why sweat over few tens
of millions of people more or less (right, Marc?), and, then, some really
severe laws for the _regulation_ of banks.

We said, "never again will the banks do that to us". Indeed, from now on the
banks will be creatures of the US Federal Reserve.

But, in 2008, with not enough regulation, the banks did it to us again. Hurt a
lot of people, and we got some more banking regulations. BTW, we are still
cleaning up the mess the banks left behind, once again, in 2008.

Paulson, Bernanke, etc. remembered with full clarity and had no doubts: "Your
banking regulator is sitting right here, and if you don't take this money you
will be declared capital deficient on Monday morning. ... You will not leave
here before you sign the paper in front of you." Paulson, Bernanke were just
determined, as immediately was Congress, that the US banks would _not_ fail;
there _would_ be liquidity; the banks _would_ be well capitalized with plenty
of reserves with no doubts; there would not be _runs_ on the banks; AIG could
be $85 billion in the hole and cause no problems, etc.

Bernanke was just _determined_ not to be the Fed Chair who presided over the
second Great Depression, e.g., from banking regulation failures.

Marc, in the US, we _regulate_ the banks. The US Federal Reserve, etc. has the
banks by the short hair, holds on with a tight grip, and just will _not_ let
go. Marc, are we learning, now? Are we getting some clarity about banking
"regulation"?

In many ways, in _social and psychological capital_ , the US is still
recovering from the severe damage and losses of the Great Depression and WWII:
People that lived through those years, and many didn't, often suffered
horribly and, thus, did some relatively poor parenting, passing on a lot of
really strong anxieties and not nearly enough in security, insight, social,
psychological, emotional, artistic, and intellectual _capital_. The anxieties
led to stresses led to depression, incapacitation, more stresses, more
depression, clinical depression, a huge range of social problems, including
some suicides. I know far too much about what I am describing. We're talking
big deficits in social and psychological _capital_ passed from parents to
children. We have not recovered yet. It appears that full recovery will take a
few more generations. E.g., I can believe that a tribe in Brazil that never
saw _civilized_ people is generally much happier than people in the
_civilized_ countries that went through the Great Depression and WWII. Those
tribes have no banks, bubbles, and Great Depressions.

The Great Recession? Still a _lot_ of people are not yet back to work, and
that situation is well known to lead to more in abused wives, abused children,
alcoholism, drug abuse, crime, infant mortality, divorce, and suicides,
_little_ results like those. Marc, you can understand wrecked families, right?

It seems that banking regulation is just crucial unless, of course, we want to
kill tens of millions of people a few times each century. Ah, let's don't just
mince words, kill a few hundreds of millions of people a few times each
century? More? Sure, maybe more! Right, Marc?

Sure, I know; I know; we can agree that the dangers of unregulated banks won't
last very long. I mean, that is, don't you see, another WW will mean we no
longer need any more banking regulations, or coal, natural gas, oil, cars,
houses, plastics, trash pickup, clothes, schools, hospitals, restaurants,
smart phones, libraries, the Internet, venture capital firms, venture
partners, or people -- there won't be anymore people, puppy dogs, kitty cats,
birds, etc.

Gee, "Look, Ma, no more banking regulations! Ma? Ma? Are you there, Ma? Ma,
where are you? Ma!!!!"

Thank you Marc. Your _knowledge_ of finance, banking, and economics is showing
through with great clarity!!!!!!

Gee, I thought that we were all supposed to understand financial bubbles, the
Great Depression, etc. by, what, somewhere in middle school? Marc, did you
skip middle school? Maybe you'd want to go back, sit in the front row, and pay
attention? And put away your mobile devices.

Unregulated banking? I'd rather give chunks of plutonium to naughty 8 year old
boys just to see what they could do with it.

Marc, unregulated banking is the fast way to the end of at least human life on
earth. Wouldn't be very good for your deal flow or venture returns either!

Sorry to be so negative: 50 million, maybe 100 million, dead, the suffering of
my ancestors and my wife's ancestors who went through the Great Depression and
WWII and the Cold War tend to make me a little, just a _little_ , shall we say
_sensitive_ on this subject. But, I'd rather be sensitive and negative than
silent and dead. Right, it's just my opinion, and YMMV. </rant>

~~~
maxerickson
The Federal Reserve system was established in 1913, in response to some
earlier crises.

The primary banking related response to the depression was the Glass–Steagall
Act:

[http://en.wikipedia.org/wiki/1933_Banking_Act](http://en.wikipedia.org/wiki/1933_Banking_Act)

It established the FDIC and curtailed speculative investment at commercial
banks. There were some provisions giving the Fed some more powers and
encouraging banks to become members, but those were at least as much about
establishing lending facilities as they were about regulation.

~~~
graycat
Agreed. But in practice the larger banks have no choice but to become Member
banks so that in effect they are creatures of the Fed.

1913? A story went we didn't want to have to depend on J. P. Morgan again!

To concentrate on the crucial _bigger picture_ , I omitted mention of Glass-
Steagall or its revisions that helped bring on 2008.

So, banks are regulated on their reserve ratios, etc.

My post boils down to a dirt simple but still basically correct: For banking
regulated good, unregulated bad, very bad. For something this important,
something dirt simple but still correct has some advantages.

~~~
praxeologist
>My post boils down to a dirt simple but still basically correct: For banking
regulated good, unregulated bad, very bad. For something this important,
something dirt simple but still correct has some advantages.

I don't think your analysis is correct much at all. Perhaps you are genuinely
not aware that these crises were the result of government intervention. I
suggest you to read Rothbard's _What Has Government Done to Our Money_ here:
[http://mises.org/money.asp](http://mises.org/money.asp)

~~~
graycat
Thanls for the link. I just followed it, and I believe I get the gist of what
he is saying. I've heard of the Austrian economist before and heard some of
the arguments.

Of course, there are many examples from history that support those points.

Right, on the banks, we can have (1) no regulation, (2) bad regulation, or (3)
good regulation. I have to conclude that (1) no regulation is not a good
solution because, with the history of banking crises, e.g., the crises that
led to the 1913 regulations, when there was no regulation, since banking has
such a crucial role in the economy and also has motivations for profit, we can
too easily get serious _systemic_ problems.

E.g., banks need to be told to have sufficient _reserves_.

For (2) bad regulation: Sure we don't want that.

For (3) good regulation, maybe we can't really get that. And maybe attempts at
(3) historically have caused lots of problems, e.g., dumb, nasty governments
printing money by the trillions of trillions.

Still, we don't want (1) or (2). So, we do the best we can trying to get (3).
Here in the US, at least since 1933, I believe that the regulation worked
fairly well (as intended, not so _well_ more broadly, e.g., didn't get us out
of the Great Depression; we didn't get people back to work until people
started shooting at us and we started war production, in which case supposedly
within 90 days everyone had at least one job offer and many people had 1+
jobs) until the crash of 2008. Well? No, only _fairly_ well. My guess is that
that regulation did work better than we would have had with (1) no regulation.

My first cut take on your concerns is that you are more concerned about the
Fed and it's role in the money supply than just banking regulation. So, right,
for a recent mess up, Greenspan actually feared, in simple terms, that all the
computers would stop on January 1, 2000 and, from this fear, opened up the
money supply to keep the economy going nevertheless and, net, _printed_ too
much money.

So, we get a suspicion: To drive the best in a straight line or fly an
airplane at a constant altitude in a straight line, just tie the controls down
with strong rope and keep human hands far away. Well, if only due to lots of
_random exogenous_ influences, that simplistic _constant control_ doesn't work
very well for cars, airplanes, or a money supply or an economy. Instead, we
need a _pilot_ , right, a _good pilot_ , and maybe Greenspan was not so good
near year 2000.

Or, maybe instead of a Fed, just go on a gold standard. Maybe.

But, I was talking about banking _regulation_ and not so much what nasty
governments can do to mess up the money supply with _printed_ money.

We regulate lots of things, medicines (safety and efficacy), food safety, auto
safety, building safety (e.g., building codes, e.g., to protect against
another shirtwaist factory or whatever it was fire), caps on aspirin bottles,
age for drinking beer, and much more.

Do I like some mandate of anti-lock brakes on cars? Nope: I don't want the
extra cost at purchase or maintenance.

Regulation on car tailpipe emissions? Out in the country, say, 90% of the US
land area, I see little need for the regulations, but I concede that in the
cities the regulations are from helpful and justified up to just crucial. Yes,
those regulations recently cost me $300 for a catalytic converter, with,
maybe, platinum, when out in the country where I live a simple piece of pipe,
for maybe $2, would have been fine. But, no joke, the regulations did a lot to
clean up the air in the cities, with no doubt good health effects.

Even I'm not enough of a libertarian to conclude that we should have no
regulations.

------
rdlecler1
Does anyone know what the rest of the article covers?

