Who owns Dwolla's replacement? Dwolla.
Banks are smarter than that. Adoption of this will be zero.
Instant transfers mean that someone can bankrupt an entire bank - instantly. If someone hacks this brand-new untested system and issues 100% withdrawal orders for every customer account, B of A and Citibank and Wells Fargo and HSBC can all be bankrupted between 10:32:24 and 10:32:25. Ooops!
ACH is slow and revocable on purpose.
Most importantly, anyone who talks about financial transactions at the level of shuffling bits around and doesn't address the issues of fraud, money laundering, regulations, and legal compliance is just not serious about it. If you want to invent a new currency or a new banking infrastructure, go right ahead. But unless you are prepared to get into bed with the existing processors as well as world governments and law enforcement agencies then you are probably relegating your system to obscurity or worse.
A billion times over. I'm very passionate about changing banking, but the reality is that every single 'new' model breaks down when you take into consideration the overhead created by compliance and fraud prevention.
If you believe that recent regulation (Dodd-Frank, et al.) ensures better outcomes for consumers than past-regulation, you'd think it'd be easier for new entities to comply because they're not hindered by institutional baggage and said entities will share the sentiment and spirit of their regulators. If that's the case, it's a win for consumers.
The banks get to learn about their tech and keep abreast of whatever "new groundbreaking innovations" they have, whilst pretending to play along.
Commodity and future exchanges existed, one way or the other, for 5000 years. The modern commodity exchange traces its history at least to 15th century Europe, if not earlier.
If you need to change currency, you go to the bank. You would expect a currency exchange, where buyers and sellers meet to exchange currency, would have existed given that it's much simpler than a stock exchange / commodity exchange to run.
Well, bank stifled the money supply to any such attempt, until they couldn't in the early '2000s -- but they invested and bought the emerging players, to make sure that their lucrative money changing business is not harmed.
Look up who owns currenex, hotspot, EBS, and the other currency exchanges. Also, look up the rules - they favor the banks above other players.
The retail money changing business is not so great if you're dealing in change (<$10k), but as someone who negotiated the rate at which he changed his Swiss francs into US Dollars at a JP Morgan Chase branch in New York, it isn't a regulatorily locked market. Having a private banking relationship will lower the threshold for negotiated rates, too.
> As someone who traded large volumes of commodities, currencies, and their derivatives, this is false. Most trading of these assets happens OTC, between private parties, and never touches an exchange.
I was not claiming that it does happen in an exchange. I was claiming that the banks were (successfully, for years) doing everything in their power to stop such an exchange from forming - do you think that is not true?
I was claiming that the big banks own the existing exchanges, currenex, hotspot, EBS, is that not true? (I've been out of the game in the last 3 years, the player names might have changed -- but I'd be surprised)
I have first hand experience of big banks exerting their influence on those (supposedly anonymous) exchanges to kick participants out when their trading style was not compatible with the banks' interest.
> This is far more de-centralized and efficient than having it happen on exchanges.
De-centralized, yes. Efficient? Only for the other party (which is a bank, the vast majority of the time).
If you want to change swiss francs to USD, and I want to change USD to swiss francs, if we had a two sided market ("an exchange") to meet in, we'd find each other, agree on a public, easily discoverable price, and that's it; The one of of us who was smarter (or could wait longer) would earn the spread, the other one would pay it; alternatively we would meet at the mid price, splitting the spread. This happens all the time in exchange traded shares, commodities and futures.
However, the way it works today OTC is that instead you and I both find a big enough player (e.g. JP Morgan, or Goldman, or whoever), who makes a market in the currency - buys at the lower price, sells at the higher price, earning the entire spread, always. Unlike either of us, that player -- by virtue of its size and position -- knows the "buy" and "sell" orders of a lot of the smaller players, and can react accordingly.
> s someone who negotiated the rate at which he changed his Swiss francs into US Dollars at a JP Morgan Chase branch in New York, it isn't a regulatorily locked market. Having a private banking relationship will lower the threshold for negotiated rates, too
That's exactly my point: You would expect an exchange that would make this into a symmetric, competitive, information efficient market because there are hardly any regulatory issues (compared e.g. to running a stock or commodity exchange). The fact that this hasn't happened in 500 years of modern exchanges is a testament to the stronghold that banks have on currency trading.
Note that such exchanges have appeared for everything, from bandwidth to energy to pork bellies - but only in a very limited way for currencies (controlled by the same old boys network), where it is easiest to start such an exchange, and such a market benefits everyone except same old boys.
Every trade is a two-sided market. An exchange differs from OTC only in that it is more centralised. The NASDAQ is no more an exchange than the currency markets (both are de-centralised, quote-driven markets).
>by virtue of its size and position
Market makers on traditional exchanges have information from volume that smaller players don't. In fact, the centralisation means the cumulative frequency distribution of market power trails off faster on traditional exchanges versus OTC markets (this is why mom and pop can stick guns to the banks in pink sheets but less so on the NYSE).
>stronghold that banks have on currency trading
You don't have to go through a bank. You can list your currency trade on a currency bulletin board. But they will still have market makers who amass advantage by volume. Most currency hedgers, except the very largest, go through a bank because they get good spreads. FX market making is very competitive (a border between you and your competitor doesn't help) and can always be dis-intermediated. Stock exchanges get a lot of volume from regulatory fiat. If you really want a centralised FX exchange note that currency brokerages internally crosses their orders - you can draw a box around those brokerages and call them exchanges if you'd like.
FX market making fails to make indecent profits save for the effects of insider information, usually from central banks. If there is a "stronghold" we were all playing our cards rather stupidly.
>exchanges have appeared for everything, from bandwidth to energy to pork bellies
Requiring everything be on a quote-driven exchange doesn't make sense - it is stupid to subject to an illiquid market (esoteric derivatives) and stupid to subject to a market that's already nearly perfectly liquid (currencies).
As an aside, I would guide anyone looking at Wall Street to note that the centre of gravity of influence has long since shifted away from the banks and towards proprietary market makers, e.g. GETCO, Knight, and hedge funds, e.g. Bridgewater, SAC. For the time being the new citadels of power are sufficiently de-centralised to be highly competitive with each other and, as a cohort, the banks.
You are arguing against centralized FX trading (the logic, and viability of). But I'm not arguing for it. When I'm referring to an FX exchange, I'm talking about a symmetric, non-centralized, almost unregulated, two sided open market. An airbnb/uber for currency. What hotspotfx claimed to be, but isn't.
A place where I can come in and say "I have $100, I want to buy 80 euros", and you say "I have 100 euros, I want $130", and we'd find each other. TTBOMK, HotSpotFx and Currenex supposedly offer that, but with great limitations and favoring the bigger players (who own them). And there are no such venues independent from the large banks.
Such a system would eliminate paying (half) the spread, which is where currency market makers make their money -- by letting you trade directly with me, rather than force us to let the bank net with itself and pocket the spread. It works for stocks, it works for futures, it works for commodities. Why can't it work for currencies?
And I know, from working with them, that the big banks actively work against the formation of such a market; and they have the clout to sabotage that.
> If there is a "stronghold" we were all playing our cards rather stupidly.
Again, I'm not saying that the banks know something you don't. They make money on spreads (little on EUR/USD, more on JPY/SEK). The stronghold is on the ability of anyone else to build, say, a "currency ebay".
> Requiring everything be on a quote-driven exchange doesn't make sense - it is stupid to subject to an illiquid market (esoteric derivatives) and stupid to subject to a market that's already nearly perfectly liquid (currencies).
Nothing is required. But doesn't it seem strange to you that currencies, which are at least as liquid as other things which are traded in {symmetric, anonymous, information-equal} venues, aren't -- when the regulation around them makes operating such a venue much easier than, say, a futures exchange?
> For the time being the new citadels of power are sufficiently de-centralised to be highly competitive with each other and versus the banks.
I agree completely, except in FX, which is dominated by the banks. (Disclaimer: Up to date as of 2010. hedge funds were already at the center of gravity).
Sort of like what you do with an FX trading account? You wouldn't have to pay the spread. Of course the price could slip against you while you wait, which is why most hedgers just pay a market maker (MM) to take that risk.
Or, if you think the spread is so sinister, you can go and make a market on the spread as well. There are upstarts doing this all the time, once again laying waste to the claim of banks having a stranglehold on the FX market.
>...rather than force us to let the bank...pocket the spread. It works for stocks, it works for futures, it works for commodities.
You pay the spread to an MM on all of these. Plus a commission to your broker which includes a commission to the exchange. If you trade a stock on the NYSE you always trade with specialists; on NASDAQ you only mostly trade with MMs.
The reason there isn't a currencies exchange is because there are a number of de-centralised, inter-linked currency trading venues in place. It would be more expensive to trade FX on a stock-exchange model.
>FX, which is dominated by the banks
You seem to have a faith-based conviction on this, so I'm not going to argue it any further. The currency markets are one of the most efficient, i.e. fair, markets on the planet. As a former trader at a multi-trillion dollar Swiss bank I can say with supreme confidence that you're far off the mark in that charge.
P.S. The currency markets work like Craigslist, except where there are tons and tons of Craigslists that are constantly talking to each other and that everyone is always connected to.
Note: there are banks that have a strangle on the FX market. Central banks. And the market still runs away from even them. Trust in the fact that if there was any pinch point in the FX markets the central banks would have found it.
> Sort of like what you do with an FX trading account?
Can you name an FX trading account that matches two users (rather than user and market maker?) I'd like to move my money there. Doubleplusgood if it's anonymous like the CME.
> Or, if you think the spread is so sinister, you can go and make a market on the spread as well.
Have you tried that? I have. And got thrown out of multiple FX venues because I was profiting at the owner's expense; all of these venues profit by making markets and netting locally. In a symmetric market, there's no other player who can throw you out when you're smarter than they are. The best they can do is not trade with you (and if the market is anonymous, they can't even do that without stopping trade entirely).
And depending on your strategy, the spread might be very sinister. I can (could, anyway) make money on the super competitive EUR/USD if I'm allowed to make markets. I can break even on the buy side if the spread is <1 bp. I can make more on currencies with larger spread if I'm allowed to make markets. But I'm not.
> You pay the spread to an MM on all of these.
Dude, have you ever traded CME, Eurex, Liffe or almost any exchange other than NYSE and NASDAQ? (or, traded NYSE/NASDAQ these through the old INET or ARCA?) If you paid to an MM when you did, your broker was cheating you. There were no privileged market makers on these exchanges.
> As a former trader at a multi-trillion dollar Swiss bank
Funny. As a former quant whose software traded trillions in notional (not that it says much, given that 3 eur roundtrip could get you >120,000eur notional) I can assure you I know what I'm talking about. And no, it wasn't in the NYSE or NASDAQ. And no, I wasn't paying any MM. And yes, if I had to pay the spread, I wouldn't be able to make any money.
> there are a number of de-centralised, inter-linked currency trading venues in place.
Can you name one that has symmetric anonymous trading, like CME or Eurex or LIFFE does? Because the biggest names that claimed to (Currenex, HotspotFX) didn't - and I know that because I witnessed that first hand.
If you can, I'd be happy to start trading there. Please let me know of one.
Another thing is Wells Fargo has several businesses HQ'ed there--mostly in their consumer "division". (I'm flying blind with regard to their corporate org chart names.) I'm betting besides the credit union guys, WF is lurking quietly in the background, guiding, protecting, waiting to acquire when the time is right.
However, why have you assumed Dwolla isn't cooperating and establishing relationships with existing market participants and regulators? They appear knowledgeable and are treated fairly within the present industry (e.g. they've consistently received favorable and auspicious attention from industry press).
Granted, the United States won't look fondly on a protocol they can't have total control and insight into, so a launder-friendly protocol ala bitcoin isn't going to get the endorsement of Wells Fargo.
To my mind, as someone who works in the financial sector, Dwolla claiming they're going to take on ACH is a huge flashing red light saying that they're either dangerously naive or they really don't understand why banking works as it does - or a combination of the both. Either way, there's no way I'd let my money go near them.
I'll take the "combo".
To wit, from their support center:
http://help.dwolla.com/customer/portal/articles/86685-securi...
1- "Dwolla.com is tested and certified daily to pass the McAfee® SECURE Security Scan. McAfee® SECURE is the world‘s leading provider of website security services and probes Dwolla.com daily for known vulnerabilities. To help address concerns about possible hacker access to your confidential data, and the safety of visiting this site, the "live" McAfee® SECURE mark appears only when this site passes the daily McAfee® SECURE tests."
2 - "Dwolla's data processing technologies are professionally hosted by a company that specializes in hosting solutions. All information provided to Dwolla is encrypted and securely stored to ensure the confidentiality and integrity of our customer’s transactions and Dwolla’s intellectual property.
The hosting provider also enables Dwolla’s solution to be highly available. We have worked with the hosting provider to build in redundancy in our primary data center, and a secondary data center as needed for disasters"
There you have it. 100% hosting uptime and absolute security. Because the security provider is best of breed and "Dwolla's data processing technologies are professionally hosted by a company that specializes in hosting solutions", as opposed to, say, Walmart.
If Dwolla wants to provide an alternative to big-bank ACH with smaller vigs for the holding banks, what's your beef?
I'll say though that retail banking is not my area - I work with derivatives and risk.
For what it's worth, I've got no beef at all with someone trying to do ACH better. I just think that for Dwolla to claim that they'll be able to do so is either massive hubris or massive naivety, neither of which I want in my payment processor. They're a tiny company backed by a small company, and that does not bode well for their ability to deal with operational risk when they're talking about these sort of ventures.
Or to put it a different way - if you want to disrupt big money, you better have deep pockets.
For comparison with the 'Big Four' US retail banks (and baring in mind that these are international banks as well, so not all assets are US based)
Citi - $1.8T JP Morgan Chase - $2.265T BoA Merrill - $2.129T Wells Fargo - $1.313T
The worlds largest retail banks are somewhere in the $2.5-$3.5T range, with the same caveat about that being spread around the world.
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I'm not familiar with Barclays, however, in my experience, many banks will process a transfer less than $5,000 USD in three to five business days, but take far longer to process a transfer greater than $5,000 USD. While it's understandable, I wish banks made this trade-off explicit.
But they don't own Visa or Mastercard. Visa and Mastercard do. And yet the banks play the Visa/Mastercard game.
However, taking out 100.000 in cash might require advance notice, as it's a rather rare case and many smaller branches (say, 2-teller branch in a mall) by default wouldn't actually have that much cash in place, so they need to request extra cash to be shipped to them.
Also, any such cash transaction will be instantly reported to the government/police, as required by 'money laundering' laws; and identity verification when opening an account is a bit stricter than in USA - generally, account holders tend to be real even in fraud cases; identity theft/document forgery is very hard and rare.
There are fraud/money laundering cases where the recipient/account holder is a homeless guy that had earlier been washed&dressed in a suit&instructed by mafia to open an account. Internal security do get notice of such attempts immediately and verify the transactions. I have seen cases where "transfers €100k to your account, withdraw it as cash 5 minutes later" ends up in arresting the guy right there in the branch while asking to make the withdrawal.
In any case, ACH/wire transfers that take a day or less and cost no more a few cents are easily possible; but the banks aren't motivated to do this. In EU, the government forced us by law to offer better conditions for customers; otherwise the fees&float were good income (free rent) as long as everybody else is using the same ACH. A central ACH that has a lot of technical delays and high fees essentially allows a price-fixing cartel without technically/legally being a price-fixing cartel.
Velocity controls (bank-wide and per customer) should mitigate the prospect of someone issuing "100% withdrawal orders for every customer account."
I tried going to the FiSync site to see what'd happen if I claimed to be a financial institution. Apparently their security is so tight that it won't let me log in because it claims I don't have a phone number on my account, which I do.
Not sure about Dwolla, but if banks can acquire (or develop, though that seems unlikely) a payment method that is easier to use that the ones we currently have, and thereby it increases consumer spending, I would take that seriously.
Why would banks promote banking via smartphones and iPads as they do? Seems like that would be opening customers up to considerable insecurity and a host of potential technological glitches.
Maybe it's because those devices are so easy to use they stimulate customers to use bank services more liberally and frequently.
Not to mention reducing the costs of providing face to face customer service.