Elon Musk has talked about implementing payments in Twitter, implementing his full vision for X.com, the company that with narrower focus became Paypal. It’s an excellent idea. But the implementation path has major obstacles he’ll have to overcome.

I have personally seen multiple efforts by tech teams inside and outside the fintech industry get hopelessly stuck in the swamps trying to implement “simple” things like prepaid debit cards, or even “just” rewriting their software using tools less than forty years old. I have also watched with amusement as the obsession with crypto technology continues to inspire major projects doomed to fail at the Fed, exchanges and a variety of prestigious banks, not to mention countless startups. I trust Mr. Musk will continue his results-driven practice by ignoring all this and drive towards a successful implementation of Twitter payments and banking.

The Huge Benefit of Starting with Twitter

Most companies you might start are classic one-to-many companies, i.e., there’s one of you selling to (you hope) many customers. There’s another kind of company, many-to-many. The company is in the middle, attempting to match many people who want something with many people who have something. E-Bay is a classic example of this kind of business, which is sometimes called a “network effect” business. These are really hard to start, because buyers want to go to a place where there’s lots for sale, and sellers only want to go to places where there are lots of buyers. How do you get such a thing started from scratch? It’s hard!

Here's the good news: Twitter is somewhat like a one-to-many business like publishing today. But because it doesn’t itself make what it sells like a classic newspaper does, it’s really a many-to-many business like Facebook, with readers using it because they like the writers they can find and follow on it, and writers using it because there is a large potential audience of readers a.k.a.followers. It has well over 300 million active monthly users!

This is good news because the main barrier of a P2P financial business – getting a large base of users with your app – has already been met and overcome.

The Danger of Typical Technology Methods

I’ve been privileged to spend a couple decades meeting and interacting with smart, accomplished software people who are doing new things. I’ve learned a great deal, both models that work and tendencies to avoid. I’ve written the observations in multiple books.

Banking built on Twitter should be a pretty simple application. But experienced people want to apply their often-inappropriate experience to building the software, and smart people too often want to prove how smart they are by following the latest tech fashions. In either case, the application suddenly becomes really hard to build.

In addition to my tech investing experience, I know the difficulties from personal experience in the world of credit card software. The world of existing issuing and acquiring systems is incredibly complex, and most attempts to build new ones fail. The experts can’t imagine anything different, and the newbies blast ahead with their wonderful modern ideas building great-sounding systems that don’t work. It’s a solvable problem, but the rare combination of in-depth knowledge of the existing systems and the ability to use methods that are modern, powerful and unfashionable is required.

Here are some of the main issues.

Modern people will want to assure that the system is “scalable” by using ridiculous things like microservices.

Modern people will want to leverage the powerful new blockchain technology – something that is amazing for Bitcoin but thousands of times worse than anything else for corporate-controlled systems.

Traditional people will want everything centered on exclusively on DBMS, avoiding powerful tools like document-centered and memory storage to enhance the solution.

Smart people tend to be highly language-focused, instead of meta-data and abstraction oriented.

Nearly everyone will want a great set of requirements and a plan for how to meet them. The trouble is you can never know all the real-world requirements of a system you have yet to build! So an approach based on post-hoc design works best.

Recognize that "building" is the wrong metaphor for creating software; the reality is that software is mostly changed. A whole set of powerful methods for building high-quality software quickly with maximum speed emerges from this.

I hope Mr. Musk builds his new banking system. The efficiency and low cost of such a system would be great. I hope he takes the path of using simple, non-fashion-driven tools and a grow-the-baby, post-hoc-design method to build his solution from birth through adolescence into full functioning adulthood. I look forward to it!

Cashless payments have been around for quite a while in the form of checks and credit cards. But even while physical cards are being re-issued with chips, there is huge innovation going on to bypass checks and cards, and go all-electronic. There is Apple Pay, remote sensing, QR codes and more. Lots of people are excited about a new wave of consumer convenience, most of it based on credit card technology. It's all good!

Is it really ALL good? You never seem to hear about the downside of all this new technology. But there's actually lots of downside. Payments are a huge field. So I'm going to just point out a couple issues with credit cards, the basis of most cashless payments by consumers.

The Volumes

Let's start by getting a sense of how much money we're talking about. Look at this:

That's more than $5 TRILLION dollars in 2016 just in the US. How much is that? Well, for starters, it's more than the entire US Federal budget!! In fact, it's over a quarter of the US GDP.

Merchant Discount rates

This is an incredibly important subject — of which most consumers are blissfully unaware. The concept is simple. Suppose you buy something from a merchant for $100. When you pay cash, the merchant ends up with … $100! what a shocking concept! Well, it is shocking when you realize that when you pay with a credit card, the merchant will end up with less than $98, and often less than $97.

That may not sound like a big deal. But what if you're running on thin margins, like many merchants, and are under intense competitive pressure to cut prices, have sale prices, etc. You can be doing well to end up with an overall margin of 10% on your business. This means that collecting $97 instead of the full $100 amounts to a margin reduction of … 30 percent!

Merchants grit their teeth and take it. They have no choice. The giants don't care. But next time you go to a small shop or farmer's market and see a sign that says "cash only, please," you'll understand.

This is a complicated subject, since the discount rate includes more than a dozen charges for various things, the largest of which is called "interchange." But it easy to boil it down. Consumers put about $5 trillion on their cards, which they have to pay — undiscounted. The discount is about 2-3%, which is between $100 and $150 BILLION dollars. A year.

Some combination of issuing banks, acquiring banks and networks (like VISA) are splitting that money.

Credit card debt

Leading thinkers in payments love to talk about how consumer-centric they are, and how they're investing heavily to make using cards even more convenient for consumers. Aren't they just wonderful people?

The magic of credit cards is that when you want to buy something, and you use a card to buy it, you can get what you want even if you can't afford it. Great concept, huh?

Consumers in the US alone are burdened with about $1 TRILLION dollars of credit card debt. And it's not rich people who have the debt. It is overwhelmingly people with little to no net worth.

What's worse is what they pay. Today's average of interest rates is around 19%. It hasn't been less than 15% in quite a while. So that means that consumers have to pay well over $150 BILLION dollars a year just to keep the debt current, not counting paying it off. Almost all that money goes to the banks that issue the cards, though various lawyers and collection agencies get their cut. 

What cards are worth

None of the institutions involved with cards care a whit about whether the card is physical or electronic. What they care about is protecting and preserving their more than $250 BILLION dollars a year in revenue. How much is that? Here is an excerpt of a list of the world's governments' revenue:

As you can see, the revenue up for grabs with today's credit cards in the US is about the same as the revenues of the government of Sweden, 15th out of more than 190 countries. Card revenues are worth, well, quite a bit…

What this means

What all this means is simple: the companies involved are living high on this revenue, and will go to great lengths to protect it. They will spend big on fancy consumer features — so long as those features are based on the card infrastructure.

Why this matters is that there are incredibly inexpensive and fast methods of transferring money that are not based on the card infrastructure. Some of these are in widespread use outside the US. In the US, the least expensive such infrastructure in wide use is ACH, which is a government-run electronic form of checks.

There is no technical barrier to upgrading this network to be near-instantaneous. Technically, it could have been near-instant 20 years ago! But no one involved felt like doing it somehow, and even today, it's getting faster at an incredibly slow pace.

There are a couple modern peer-to-peer payment systems that are based on this technology. While they're growing, they are tiny compared to card volumes, and the card insiders are working madly to control and contain this threat to their massive revenues.

Conclusion

I'm strongly in favor of consumer convenience. My goal here is simply to point out that the convenience comes at an astounding cost that is hidden from consumers who don't carry a balance on their cards, and is a constant temptation and on-going burden to those who can't afford debt, particularly the expensive kind you get with revolving credit cards.

Cards, cards, cards – they all have the same shape and size, they all have a mag stripe on back, similar numbers and date and your name on the front. How different can they be?

I admit, they all have this in common: you can use them to get stuff. Instead of cash. That’s a lot to have in common! But the next level deeper, they can be so different, it’s amazing.

One of the biggest differences is when you pay for the stuff you get with the card. All cards fall into one of three buckets in terms of the “when do I pay” question. The buckets are:

• Pay before. Put money onto the card. Then you can spend it. No money on card, no stuff.
• Pay now. Use the card. Is there money in your account? You get your stuff. The money will be pulled within a day.
• Pay later. Use the card, if you haven’t used it “too much” recently. You’ll eventually have to pay, with interest if you take your time.

Pay before

In the industry, this is usually called a prepaid debit card. There are two categories of these.

The first kind is usually called a gift card. You can see these hanging on racks near the check-out counters of stores.

As you can see, each is worth a certain amount of money at a given retail store.

Some retailers have gotten pretty creative about their card designs, like this one that is supposed to be for millennials:

What if you just want to give money? Now you can do that. For example:

The second kind of pay-before card is usually called a prepaid debit card, but the key thing about it is that it’s rechargeable, which means you can put more money onto any time and use it for any purpose.

Prepaid debit cards normally have substantial fees associated with using them, because it’s the only way the companies doing the processing can make money. They’re not associated with a bank account, so they’re perfect for people who don’t have one.

Of course, technology being what it is, companies have evolved these categories — some gift cards are now rechargeable.

The key thing to understand is that pre-paid debit cards are “debit cards” for technical purposes – but they’re NOT associated with a bank account. That’s what makes them easy to buy. Whether they have a bank account or not, people can use pre-paid debit cards anyplace cards are accepted.

Pay now

The industry calls this a debit card. It’s tied to a bank account. When you use the card, you debit the account, which is normally a checking account.

Depending on how you use the card, the actions and underlying technology can be quite different. If you just tell the system it’s a card, it will usually be treated as an off-line debit card, and the charge will be made to your account overnight. If you admit it’s a debit card, you’ll be asked to enter the PIN, just as though you were at an ATM. This is usually called PIN debit. The money is immediately removed from your account.

Pay later

Finally we get to the credit card. It’s a credit card because when you use it, someone is giving you credit for the amount you charge, and will expect you to pay the money back. You are welcome (sometimes encouraged) not to pay on time, because then you have to pay interest on the loan you’ve taken out. Unlike a home mortgage, which is “fixed” credit, the credit card is “revolving” credit, because the money going in and out is like going through a revolving door.

When you swipe a debit card, your bank account is checked to see if there’s enough money to cover the charge or the cash. When you swipe a credit card, your revolving credit line is checked to see if there’s enough credit to loan you enough money to cover the proposed purchase.

Summary

Using a card always involves money. But whether the money is already out of your pocket, comes out when you use the card, or whether it’s a bill you’ll eventually have to pay makes a large difference to you, which is reflected in a large difference in what happens behind the scenes.

Cards. Love them or hate them, they are a key part of our lives in general, and of the fintech part of our lives in particular. If you're going to understand fintech, it's important to understand at least the basics of what goes on behind the scenes with cards. Not to mention knowing the proper terminology to use.

You spot a bank. You know you're getting low on cash. You stop and walk up to the machine. You pull out your wallet, and here comes your first choice: which card should I use? You probably don't think much about it, since there's probably a card you're used to using. But what makes your "cash card" special is that you know the four digit PIN code that stands between you and your cash.

But they're not all the same. The most basic and original kind of card is an ATM card. Here's an example:

Notice that the card doesn't say VISA or Mastercard on it. It's an ATM card, which is different! You put the card into the machine:

Then you enter your PIN code on the keypad. The ATM machine is actually connected, perhaps through a series of networks (more on them later) to your bank's computers. The first few of the card numbers identify your bank. Your bank gets the request and checks your balance. If you have enough money in your account, the bank immediately debits your balance, and sends an approval of the withdrawal request to the ATM machine. The machine then counts out your money and you take it:

You take your card and the transaction is complete, just as though you had been with a human teller.

The original ATM machines were connected to the same computers in roughly the same way as human tellers. Each bank had its own ATM machines, just as each one had its own branches.

Shortly after ATM's were deployed, the first interbank network was rolled out. One of the first was NYCE.

NYCE was developed and owned by a set of New York banks to enable a customer of any bank in the network to use any ATM that was also in the network. There are now over 300,000 ATM's in the NYCE network, and a whole lot more in the other networks that sprang up to compete with them.

If you pull out that bank card and try to pay for a meal in a restaurant with it, things aren't going to end well. But banks want you to use their cards! So after some time, the debit card was introduced. It looks nearly the same as an ATM card, but not quite. Here's mine, for example:

It has the same general appearance and numbering scheme as the ATM card pictured above, and the same "good thru" date. But it says VISA, and it says "DEBIT," which makes it different!

One way to think of it is a card with two hats on.

Hat number 1, the DEBIT hat: it's an ATM card. You put it in an ATM machine, enter your PIN, get your cash and away you go.

Hat number 2: the VISA hat: it's a "credit card." You hand it to the cashier at the store, it's swiped, and you walk away with your stuff. Except that, instead of being a separate account, the card is associated with your normal bank account, and the money comes directly out of your checking account. No talk of "minimum payments," it just comes out. Hope you've got enough there! Because it's not a "credit" card — it's, sneakily, a kind of cash card!

That's enough about cards for one sitting. But I hope you can see a theme emerging: there are a number of systems designed and built for different purposes that can be accessed by cards that look and act much the same … except the underlying technology is completely different.

Like most specialist areas, fintech has its own vocabulary, highly meaningful to insiders but opaque to outsiders. The important issue of “whose rails are you running on” is one of those phrases.

Insider vocabulary

Some people learn to play a bit of baseball when they're young:

They learn basic vocabulary like bat, ball, base, hit, grounder, fly ball, catch, throw and out. That's already lots of words! But the pros and other people who are seriously into what the rest of us lightly call the "game" share a greatly extended set of concepts, words and phrases among themselves.

To take a couple simple examples, there is the “squeeze play” and the “infield fly rule.” Those are just a couple I happen to know. I'm sure there are whole piles of words and phrases that are way beyond me. It’s the use of that specialized vocabulary that distinguishes people who “know baseball” from those who merely watch or attend games.

Fintech is no different. There is some shared vocabulary among all the sectors of fintech. In addition, each specific fintech domain has its own set of vocabulary and concepts, arranged in layers according to how deep you are into the business or technology of the specific fintech sector.

Rails in fintech

When someone talks about "rails" in the payments sector of fintech, they're talking about the mechanics of how money gets from a sender to a receiver. It's about transportation.

It turns out that the image of "rails" is appropriate. Rails are what trains run on. They're big, elaborate, fairly expensive things that were developed a long time ago, and have been somewhat modernized. They constitute a system that is completely separate from and incompatible with the larger and more recent system of roads used for trucks and cars.

Even though railroads started decades before the modern road system, they are a valuable part of today's transportation system. They handle certain kinds of transportation far more efficiently than road-based trucks could.

Same thing with financial-system "rails." They are robust, reliable and cost-effective for the kinds of "cargo" they transport (financial transactions), and not about to be replaced any time soon.

Layers of competing technology

Fintech's technology of "rails" is not only separate from the "normal" way data moves around today, it's remarkably complicated. You may think it's pretty simple, just like I did. It's just adding and subtracting, and every once in a while you multiply to calculate interest; how bad can it be? Reality educated me; I was wrong, big time! And what's worse, there is more than one system of rails!

Let's take one rail system as an example: the ATM network, a.k.a. cash machines.

These are older than you might think. Here's what an early cash machine looked like in 1967:

It was just a railroad car; no network yet, and therefore no "rails." But a true networked version soon followed. It's not easy to find out the historic details, but it appears to have happened early in the 1970's:

The ATM network is just one set of rails. The credit card network has a rather different set, which is completely incompatible. Which is why, among other reasons, the choice of rails is important!

Conclusion

The "rails" used by financial transactions in fintech are deep, robust, incredibly complicated and separate down to the roots from most modern technology. The chance that a bunch of bright kids in a garage is going to come up with a bright idea and replace it next year is zero. And there's more than one rail system to use!

That's why one of the most important questions for payments in fintech is "whose rails are you using?" Even if you have no clue how those rails are built, and few people do, the answer is nonetheless important.

Fintech. It’s new. It’s big. Everyone wants a piece of it. Better jump into Fintech before it’s too late!

But what is Fintech? Fin? Like the thing that fish have? That Chinese people put in soup for special occasions?

No, it’s not the technology behind Shark’s Fin soup.

It’s “Financial” Technology.

Oh, that’s simple. Fintech is about money! I know what that is!

But since when is money new? And everyone has always wanted a piece of it. So “Fintech” can’t just be money, if it’s both “hot” and “new.”

And it’s not. “Fintech” is the name for a diverse collection of companies and products, each of which applies modern technology to some aspect of financial transactions.

Phew! That’s quite a mouthful! And kind of vague. So let’s dig in and see what’s really going on.

Fintech and real people

First of all, let’s be clear that the vast majority of people, normal people, not only don’t know what “fintech” is, they don’t need to know and don’t really want to know. Who feels the urgent need to replace their old “fin” with a fancy new “fintech,” after all?

Just think about phones. Maybe you didn’t envy the people who walked around with giant phones with antennae sticking out of them yakking away on the street.

But the second you saw someone pulling a ringing flip phone out of their pocket and answering the call, you probably felt the urge. And then when the iPhone came out? There were lines snaking out of Apple stores. Everyone knew what phones were and how they worked, and all you had to do was see one of the fancy new ones to want one.

“Fintech” is something investors, market analysts and corporate types in financial companies think and talk about. Regular people? Nope. It’s more like "energy sector” or “entertainment;” it’s a group term that covers lots of stuff that’s only vaguely related. For example, here’s a graphic that shows one group’s view of fintech:

And then when you dive into just one sector of Fintech, Bitcoin/Blockchain, here’s something that shows the intense interest of big corporate players in it:

Over 70 strategic investors have put real, old-fashioned money into these startups!

Conferences

Let's talk about conferences. Big ones. That, as a normal, everyday kind of person, you've probably never heard of.

Like Money20/20, an amazing conference that started just four years ago, whose subject is "disruptive ways in which consumers and businesses manage, spend and borrow money."

Another conference is smaller, but is all about people who invest in the kinds of small companies at Money20/20:

And who among us "normal" people might have even gotten close to the right answer to the question, "How much money was invested in Fintech companies last year?"

Perhaps now you're starting to get a sense of why Fintech is new … and why it's hot, hot, HOT!!