Marc Andreessen on big data, Bitcoin and upending the world of finance

This coming a Venture Capitalist...

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...

[2] https://www.competitionpolicyinternational.com/assets/Hot-Tu...

"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."

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).

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...

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>