AI transcript
0:00:05 Hi everyone, welcome to the A6NZ podcast. I’m Sonal and this is our seventh episode of 16 Minutes,
0:00:10 our news show, which in addition to our regular podcast show in this feed, is where we cover
0:00:15 recent headlines of the week, the A6NZ way, why they’re in the news, why they matter from our
0:00:19 vantage point in tech, and share our experts’ views on the trends involved. You can catch up
0:00:26 on past episodes at a6nz.com/16minutes or subscribe to the 16-minute show directly wherever you get
0:00:30 your audio. And to be clear, none of the following should be taken as investment advice. Please be
0:00:37 sure to see a6nz.com/disclosures for more important information. This week, we cover two topics.
0:00:41 We briefly discussed the latest news from the front lines of cyber fraud, where the FBI made a huge
0:00:47 number of arrests for BEC scams in what was described as one of the largest cases of its kind in U.S.
0:00:53 history. But first, we go deep on the new Apple credit card, what it means beyond the headlines.
0:00:58 Okay, so the first news item we’re covering this week is that Apple released a credit card,
0:01:03 and it was actually announced a while ago, but only became available this week to U.S. iPhone
0:01:07 users. And let me quickly summarize the news, and then I’ll introduce our A6NZ expert. They’re
0:01:11 partnering at Goldman Sachs as the issuing bank and mastercard for the Global Payments Network.
0:01:16 The card, which is of course coded white, is made of titanium, but that’s still heavier than other
0:01:20 plastic cards in the market. And by the way, a funny little anecdote here is that Verge reported
0:01:25 via MAC rumors that Apple is advising against keeping the card in a leather wallet or in direct
0:01:30 contact with Denim as such fabrics, and I quote, “might cause permanent discoloration that will
0:01:36 not wash off.” That part’s pretty LOL. That said, it is news that Apple, a tech company, is moving
0:01:40 into financial services. And this matters in the bigger picture of credit, which drives personal
0:01:45 finance and our economy overall in so many ways for better or worse. So let me quickly also summarize
0:01:48 some of the salient details here. There are no typical credit card fees, such as sign-up fees,
0:01:53 late fees, international fees, annual fees, overdraft fees, et cetera. And there are other
0:01:58 features such as greater transparency into interest paid and so on. So that’s a quick context. And
0:02:03 now let me welcome our A6NZ expert to put that news in context. Our newest general partner for
0:02:07 Fintech, Anisha Charya, who is most recently VP of product at Credit Karma. Welcome, Anish.
0:02:10 Thank you. Excited to be here. Excited to have you on here.
0:02:14 Long time listener, first time guest. I’m excited. So the real question here,
0:02:20 why does this news matter and why the hell should we care? I’m not supposed to cuss anymore.
0:02:28 You can with me. So the least interesting way to think about this is Apple released a new credit
0:02:32 card because, you know, a credit card is a credit card. There are more interesting credit cards with
0:02:37 better rewards or credit cards that have fancier designs. And a lot of the discussion has been
0:02:41 about that and it’s just sort of a distraction in my view. So what do you think the real significance
0:02:45 here is? Well, I think there’s two things to talk about. First of all, you know, whenever Apple enters
0:02:49 a category, it’s worth looking carefully at what they’re doing because they’ve reinvented
0:02:55 existing categories over and over again. If you take a look at the actual features of the card,
0:03:00 they’ve taken a bunch of things that credit card companies do sort of behind the scenes to the
0:03:06 detriment of consumers like charge fees for being late, charge fees for overdrafts, charge fees whenever
0:03:11 you swipe the card internationally as well as giving you a terrible FX rate. So these are
0:03:16 all lines of business that credit card companies have historically monetized and
0:03:20 it’s mostly been invisible to consumers and really has done them a bit of harm.
0:03:25 So Apple has actually changed all of that. The second thing they’re doing is showing you how
0:03:29 much interest you’re actually paying. So if you actually just pay the minimum amount that your
0:03:32 card company asks you to pay every month, it is going to take you years and years and potentially
0:03:37 even decades to pay that card off. And that trade off has never been clear to consumers.
0:03:41 Consumer credit card debt is over a trillion dollars right now. We’re starting to approach
0:03:46 historical highs. There’s never been a better time for us to be thinking and talking about
0:03:51 credit card debt. And the first step is a product that’s really transparent. So that’s sort of level
0:03:56 one of what’s interesting. I have a quick question. The transparency feature, that seems like something
0:04:01 that’s very easy for other credit card companies to do. Yes. So A, why haven’t they done that yet?
0:04:05 And B, can’t they just quickly copy this now? Yeah. So it’s really interesting. There’s this sort of
0:04:11 innovators dilemma and it looks a lot like SMS did 10 years ago. That’s right. If you look at what
0:04:16 happened with carriers, they knew that SMS was going away, but there was some powerful executive
0:04:21 whose name was attached to the SMS revenue line and they would not let it go away. And as a result,
0:04:25 carriers missed messaging. Right. So basically the innovators dilemma in the classic context of
0:04:29 disruption theory where an entrenched business does not want to disrupt its core business when
0:04:33 there is a new business on the horizon because even if they know it’s coming, they are actually
0:04:36 making money off their core business. You’re essentially cannibalizing yourself in order to
0:04:40 go into the new area. Exactly. Powerful internal stakeholders don’t want to see it happen. So
0:04:44 it doesn’t. And by the time they realize that Apple’s got a significant edge by offering this
0:04:48 transparency, it may be too late. Okay. So now let’s go back to the next level. Yeah. So least
0:04:53 interesting is that it’s a new credit card. But I think the most interesting thing here is that
0:04:57 Apple is actually unbundling the credit card. Tell me what that means because I feel like
0:05:00 people in tech talk a lot about cycles of bundling and unbundling, whether it comes to things like
0:05:04 cable and TV or media, software packages. I mean, the phrase comes up in lots of different
0:05:09 contexts. What does bundling and unbundling specifically mean in this context? So there’s
0:05:13 a few aspects of the credit card. There’s a physical piece of plastic that I have in my wallet.
0:05:19 There is a payment network that processes the payment when I swipe that piece of plastic.
0:05:25 And then there is a debt provider beneath it that typically provides me with this unsecured debt
0:05:30 that I’ve made a commitment to pay back. So what this means in terms of unbundling is that Apple
0:05:36 actually owns the customer relationship. They’ve partnered with Mastercard to handle the payments
0:05:40 and then they’ve partnered with Goldman to handle all of the debt. If tomorrow they decide, “Hey,
0:05:44 Goldman, we’re going to replace you with Capital One,” or more importantly,
0:05:48 Goldman and Capital One, we’re going to allow you to compete to see who can give the customer
0:05:52 the lowest price debt. All of a sudden, those companies have very little leverage to say no.
0:05:56 It’s like they’re almost white labeled, essentially. Exactly. We did a wonderful podcast
0:06:00 a couple of years ago on B2B2C business models where we actually go in a lot of depth around
0:06:06 the challenge of that kind of thing. So on that note, why then are Goldman and Mastercard
0:06:10 incented to work with Apple on this? And has Goldman actually ever had a consumer-facing
0:06:15 line of business like this ever? Well, I think there’s a short-term, long-term trade-off happening
0:06:20 here. The street has really wanted to see Goldman grow their business. Goldman typically has not
0:06:24 been a big consumer lender. They dip their toe in it with the launch of personal loans via Marcus
0:06:30 over the last two years. So great brand Apple, huge footprint. It’s a great way to drive growth
0:06:35 in the short term, but it may be a peric victory. Okay. Let’s talk about the connection between
0:06:40 Apple’s new credit card and Apple Wallet. So there’s been a lot of hype, quite frankly,
0:06:44 over the years around digital wallets, and there’s been many forms. Can you help orient
0:06:49 where this fits in that sort of arc of where we are in the wallet space, digital wallet space?
0:06:55 Yeah. My partner, Alex, has done a ton of thinking and published some important work on
0:06:59 the wallet. So it’s worth referencing that. One of the things that’s happening here is Apple is
0:07:06 offering 3% cashback for purchases from Apple and 2% when you use Apple Pay. 1% if you use a
0:07:12 physical card. So you effectively double from 1% to 2% if you’re using their payment mechanism.
0:07:17 And the word is that the fee that Apple charges merchants is on the high side, the interchange
0:07:22 fee. If they can then start to take a portion of those fees at scale for whenever people are
0:07:27 spending money, it becomes a very large business. If Apple becomes your default payment instrument,
0:07:34 if Apple effectively white labels the way that you get debt, if Apple owns all aspects of the
0:07:39 consumer product experience around financial services, they’ve talked about pivoting to being a
0:07:44 services company, there’s no bigger segment of the industry that’s more backwards and has more
0:07:48 opportunity for product innovation than money. So what do you make of the fact that they have no
0:07:53 points? And how does a role of kind of loyalty programs play into all this? The thing is the
0:07:57 cashback is actually the simplest form of points. It’s largely the same thing. Some of the most
0:08:01 popular cards out there are cashback cards because you don’t have to navigate some crazy
0:08:07 matrix of blackout dates and conversion rates. So it’s very Apple of them to actually go after
0:08:12 the thing that’s most clearly understood by consumers, which is cashback. If you take a look
0:08:17 at what’s happening with credit card companies, they effectively have to acquire customers by
0:08:21 using messages that they can put on billboards. So what are things that you can put on billboards?
0:08:27 You can put eye popping rewards rates, cashback rates, some of them do it using a big brand
0:08:33 presence like American Express. So this has really been a way to drive customer acquisition
0:08:39 for credit card companies. But the question is, are customers actually receiving value from it?
0:08:43 How many are using their rewards and how many are overpaying for the rewards because they’ve got
0:08:48 a really expensive line of credit card debt that they actually revolve on month after month
0:08:53 after month. So I think the reorientation opportunity here is to things that are actually
0:08:56 in consumers financial benefit versus things that look good on a billboard.
0:09:00 Then let’s go into the tech because the elephant in the room or maybe the opportunity in the room
0:09:05 that we haven’t really talked about here is that this is really one of the first, maybe not the
0:09:10 first times a significant tech company is really moving into financial services. So let’s talk
0:09:13 about what that means on the technology side. And just to quickly summarize some of those tech
0:09:18 aspects. First of all, Apple Card uses machine learning and they also have geo location with
0:09:22 Apple Maps to clearly label where and when people made a purchase. You also already mentioned
0:09:28 transparency and interest paid. And while apparently 74 of the top 100 US merchants already accept
0:09:34 Apple Pay, including Target, Taco Bell, and Hi-V supermarkets in the Midwest, the budgeting
0:09:38 feature is actually not integrated with other credit cards in an Apple Pay account,
0:09:41 which is something that David Pierce pointed out in the Wall Street Journal. But the point is that
0:09:46 Apple is giving users weekly and monthly spending reports that help turn wallet into a budgeting
0:09:51 app that can help them keep track of purchases. So I think one of the most interesting opportunities
0:09:55 on the tech side is today a lot of product features are built in a functional way.
0:10:00 And if you take a look at our relationship with money, it’s actually much more emotionally
0:10:04 oriented than functionally oriented. That’s such a good point. Yeah. And ironically,
0:10:08 all of the financial services products that have existed in the past. Now the technology
0:10:11 companies are sort of making the same mistake are highly functional. Here’s your budget,
0:10:15 here’s what you spent money on, here’s what the end of the month looks like.
0:10:20 So I think actually the real product inflection point here is to start to lean into that emotion,
0:10:25 to acknowledge that emotion, and start to help people make financial decisions they feel good
0:10:31 about versus makes sense in some abstract, classically rational sense. And when it comes
0:10:35 to the product features, guess what? Most people don’t like to budget because most people don’t
0:10:40 like to diet. It’s the same concept. Nobody actually wants to be reminded every week that,
0:10:43 “Hey, you went out for Mexican last night and you blew your calorie limit out of the water.”
0:10:48 Totally. So the magic product feature here is not a budget. The magic product feature here is
0:10:54 actually helping to automate all of the small financial decisions to help you achieve a better
0:10:59 outcome. Angela has spoken about this, Alex has spoken about this. A lot of great founders
0:11:03 have talked about the concept of self-driving money. Tell me more, that’s fascinating.
0:11:09 Self-driving money means not having to actually make all of the decisions to optimize your financial
0:11:14 life. So if you look at how much we’re overpaying on our mortgages, our credit cards, our personal
0:11:18 loans, there are better products that we could get today that we just don’t have because we either
0:11:24 don’t know about them or it’s too high friction to apply for them. So I think that the orthodox
0:11:28 see is that we need to tell people to stop drinking Starbucks every day to save money.
0:11:34 That’s actually not true. If we can just use technology to efficiently price all the financial
0:11:37 products they have, we put a lot more money back in Americans’ pockets.
0:11:41 So speaking of putting money back into America’s pockets, what do you make of the headlines from
0:11:46 analysts at Nomura that Goldman could lose money here if losses come? Because basically the analyst
0:11:52 is assuming that Goldman has to spend about $350 to acquire each new user, which means it would
0:11:56 only break even after four years. But what happens if a recession comes before that,
0:11:59 then they would lose revenue, especially because the margin is already tight to begin with.
0:12:03 So how do I tie that back into the Apple news? Because Goldman Sachs is approving the subprime
0:12:08 borrowers. Yeah, I think the story here is that traditionally credit cards have a whole approval
0:12:14 process that is very onerous. Not everyone gets approved. Apple has clearly been pushing their
0:12:20 partner to approve a larger set of people. In the future, there will be no credit card application
0:12:25 as retrograde that we even need that. And everyone should have access to some form of payment and
0:12:30 unsecured debt, even if it’s a low credit limit. There’s many orthodoxies which are not true when
0:12:35 it comes to money. One of the orthodoxies that’s not true is we have this belief that there are
0:12:39 people who are credit worthy, who have great credit scores, who are good people. And there are people
0:12:44 who never pay their bills and have bad credit scores. And when there is a recession, things are
0:12:50 going to go haywire, it’s overblown. The truth is for people who have a lot of fluctuation in
0:12:55 their means or limited means, they’re always living in a recession. So the variability that you see
0:13:00 while it exists, it’s not as high as the perception is. And often people who have these great credit
0:13:06 scores are on the edge of being wealthy, end up being ones who get in trouble. So I think that
0:13:13 there’s a broader discussion about “subprime credit card” sort of customers and how do you
0:13:18 think about them? And I think that we take an overly negative view. We should actually be thinking
0:13:23 about them in a more holistic sense. All right. So Anish, bottom line it for me. How should we
0:13:28 think about this news and its broader significance in the financial services ecosystem? Bottom line,
0:13:32 it’s not just another piece of plastic in your wallet. It has the opportunity to fundamentally
0:13:36 change the way that we think about our money. This product has the opportunity to change
0:13:40 Americans’ relationship with their credit cards, with their debt, and potentially with their money
0:13:44 more holistically. Fantastic. Well, thank you for joining the 16 Minutes. You’re welcome.
0:13:49 Okay. So for the next segment of 16 Minutes, we are going to be talking about the news this week
0:13:56 about a type of fraud, BEC scams, where the FBI recently made a huge number of arrests. And 14
0:14:02 arrests were made in a 252 count federal grand jury indictment that was unsealed just this past
0:14:08 Thursday. And it named 80 defendants charged with defrauding victims of up to $10 million in what
0:14:14 was described as one of the largest cases of its kind in U.S. history. The type of fraud is BEC,
0:14:18 which stands for business email compromise. And just to quickly summarize a bit more of the stats
0:14:25 and context of why this matters here, just in the period from 2013 to 2018 and five year period,
0:14:31 $12 billion of losses were due to this kind of fraud. And this kind of fraud is growing at a rate
0:14:37 of 123% year over year, which is basically more than doubling every year. And it costs about
0:14:43 $300 million per month. So it’s very costly and dangerous in that context and a big effing deal.
0:14:48 So I’m now going to introduce Joel de la Garza, who’s actually becoming a bit of a regular unfortunately
0:14:53 on 16 Minutes to talk about all the security news and whatnot. Joel, let’s talk about this
0:14:58 news and what it is and why it matters. Yeah, absolutely. So this is actually one of the
0:15:03 simplest and just kind of most ridiculously easy forms of fraud. Business email compromise
0:15:10 is basically a form of fraud where I create an email address that seems somewhat similar
0:15:15 to someone you may know and be working with in your company. So I could create a fake email
0:15:22 address for your CEO or your CEO, make it sound like their name. And I send email messages into
0:15:27 your company asking people sort of lower down the stack to send me money. Is this like spearfishing?
0:15:33 It is even more simplistic than spearfishing. The way it typically works is people in the
0:15:37 workplace are generally conditioned to respond very quickly to anyone above them who sends them
0:15:42 an email. So in the way that emails are typically displayed in an email client is that you just
0:15:47 see the name of the sender. And so when your CEO sends you an email saying, I need money,
0:15:50 I can’t get into my work account, can you please route the money to this address,
0:15:55 people tend to do it. And they do it to the extent of losing $300 million a month.
0:15:59 I feel shocking that they would do that. So it goes back to sort of the everything that’s old
0:16:03 is new again, right? This is the oldest form of fraud, right? It’s the walking around asking
0:16:07 people to give you money and seeing who’ll give you a dollar out of their pocket.
0:16:09 Can you tell me a little bit more about why this matters in the context of all the other
0:16:12 frauds and cyber crimes that we’ve talked about on this podcast? Oh, yeah. Well,
0:16:17 I think broad strokes, if you sit back and you take a look at the way that fraud is evolving,
0:16:22 in the very beginning of online fraud, attacks were super sophisticated. They use custom malware.
0:16:27 You had all these different intermediaries. A whole industry popped up to support them.
0:16:31 Whole businesses were dedicated to actually solving and finding the malware that created
0:16:35 this fraud. As we’ve actually gotten better at technical security, we patch our systems,
0:16:39 web application vulnerabilities are harder to find. Fraud is now just asking individuals
0:16:42 to send you money, right? Like you said, everything old is new again. It’s basically
0:16:46 back to basics. We’re back to social engineering. And that’s the most effective form of fraud that
0:16:50 exists. Okay. So bottom line it for me, Joel. How should we think about this news? So the
0:16:54 interesting thing about this fraud is that it’s able to grow at such a rapid rate and it sort of
0:16:59 creates this new fraud at scale category that we’ve never seen before. And I think that fraud
0:17:03 in its current form is going to continue to grow and scale in ways like this,
0:17:06 in very simple, trivial ways that can hit multiple people and steal lots of money.
0:17:11 It’s just an incredibly low effort to do. You create an email that looks like someone that’s
0:17:15 already out there in the public domain and you start sending messages to people that work inside
0:17:18 their country to send you money. And is technology going to be able to fix this if it’s a social
0:17:22 engineering problem? So obviously there are things that technology providers can do. They can
0:17:26 flag email messages to say they’re coming from outside of your company. They can actually give
0:17:30 you warnings to say be careful. We’ve seen other scams that look like that. And we’re seeing a
0:17:34 lot of providers start to do that. I think ultimately this is the kind of problem that gets
0:17:38 solved with knowledge, that gets solved with information. It’s one of those things where
0:17:42 the user is ultimately kind of the last line of defense and a lot of attacks like this. And if
0:17:46 someone asks you to send the money and you send the money, there’s not a whole lot that technology
0:17:50 can do there. Making people aware of these frauds tends to be the most effective way to prevent
0:17:54 them and it’s the path that I advocate. So education basically? Absolutely. Knowledge is power.
0:17:55 Thank you. Thank you.
0:00:10 our news show, which in addition to our regular podcast show in this feed, is where we cover
0:00:15 recent headlines of the week, the A6NZ way, why they’re in the news, why they matter from our
0:00:19 vantage point in tech, and share our experts’ views on the trends involved. You can catch up
0:00:26 on past episodes at a6nz.com/16minutes or subscribe to the 16-minute show directly wherever you get
0:00:30 your audio. And to be clear, none of the following should be taken as investment advice. Please be
0:00:37 sure to see a6nz.com/disclosures for more important information. This week, we cover two topics.
0:00:41 We briefly discussed the latest news from the front lines of cyber fraud, where the FBI made a huge
0:00:47 number of arrests for BEC scams in what was described as one of the largest cases of its kind in U.S.
0:00:53 history. But first, we go deep on the new Apple credit card, what it means beyond the headlines.
0:00:58 Okay, so the first news item we’re covering this week is that Apple released a credit card,
0:01:03 and it was actually announced a while ago, but only became available this week to U.S. iPhone
0:01:07 users. And let me quickly summarize the news, and then I’ll introduce our A6NZ expert. They’re
0:01:11 partnering at Goldman Sachs as the issuing bank and mastercard for the Global Payments Network.
0:01:16 The card, which is of course coded white, is made of titanium, but that’s still heavier than other
0:01:20 plastic cards in the market. And by the way, a funny little anecdote here is that Verge reported
0:01:25 via MAC rumors that Apple is advising against keeping the card in a leather wallet or in direct
0:01:30 contact with Denim as such fabrics, and I quote, “might cause permanent discoloration that will
0:01:36 not wash off.” That part’s pretty LOL. That said, it is news that Apple, a tech company, is moving
0:01:40 into financial services. And this matters in the bigger picture of credit, which drives personal
0:01:45 finance and our economy overall in so many ways for better or worse. So let me quickly also summarize
0:01:48 some of the salient details here. There are no typical credit card fees, such as sign-up fees,
0:01:53 late fees, international fees, annual fees, overdraft fees, et cetera. And there are other
0:01:58 features such as greater transparency into interest paid and so on. So that’s a quick context. And
0:02:03 now let me welcome our A6NZ expert to put that news in context. Our newest general partner for
0:02:07 Fintech, Anisha Charya, who is most recently VP of product at Credit Karma. Welcome, Anish.
0:02:10 Thank you. Excited to be here. Excited to have you on here.
0:02:14 Long time listener, first time guest. I’m excited. So the real question here,
0:02:20 why does this news matter and why the hell should we care? I’m not supposed to cuss anymore.
0:02:28 You can with me. So the least interesting way to think about this is Apple released a new credit
0:02:32 card because, you know, a credit card is a credit card. There are more interesting credit cards with
0:02:37 better rewards or credit cards that have fancier designs. And a lot of the discussion has been
0:02:41 about that and it’s just sort of a distraction in my view. So what do you think the real significance
0:02:45 here is? Well, I think there’s two things to talk about. First of all, you know, whenever Apple enters
0:02:49 a category, it’s worth looking carefully at what they’re doing because they’ve reinvented
0:02:55 existing categories over and over again. If you take a look at the actual features of the card,
0:03:00 they’ve taken a bunch of things that credit card companies do sort of behind the scenes to the
0:03:06 detriment of consumers like charge fees for being late, charge fees for overdrafts, charge fees whenever
0:03:11 you swipe the card internationally as well as giving you a terrible FX rate. So these are
0:03:16 all lines of business that credit card companies have historically monetized and
0:03:20 it’s mostly been invisible to consumers and really has done them a bit of harm.
0:03:25 So Apple has actually changed all of that. The second thing they’re doing is showing you how
0:03:29 much interest you’re actually paying. So if you actually just pay the minimum amount that your
0:03:32 card company asks you to pay every month, it is going to take you years and years and potentially
0:03:37 even decades to pay that card off. And that trade off has never been clear to consumers.
0:03:41 Consumer credit card debt is over a trillion dollars right now. We’re starting to approach
0:03:46 historical highs. There’s never been a better time for us to be thinking and talking about
0:03:51 credit card debt. And the first step is a product that’s really transparent. So that’s sort of level
0:03:56 one of what’s interesting. I have a quick question. The transparency feature, that seems like something
0:04:01 that’s very easy for other credit card companies to do. Yes. So A, why haven’t they done that yet?
0:04:05 And B, can’t they just quickly copy this now? Yeah. So it’s really interesting. There’s this sort of
0:04:11 innovators dilemma and it looks a lot like SMS did 10 years ago. That’s right. If you look at what
0:04:16 happened with carriers, they knew that SMS was going away, but there was some powerful executive
0:04:21 whose name was attached to the SMS revenue line and they would not let it go away. And as a result,
0:04:25 carriers missed messaging. Right. So basically the innovators dilemma in the classic context of
0:04:29 disruption theory where an entrenched business does not want to disrupt its core business when
0:04:33 there is a new business on the horizon because even if they know it’s coming, they are actually
0:04:36 making money off their core business. You’re essentially cannibalizing yourself in order to
0:04:40 go into the new area. Exactly. Powerful internal stakeholders don’t want to see it happen. So
0:04:44 it doesn’t. And by the time they realize that Apple’s got a significant edge by offering this
0:04:48 transparency, it may be too late. Okay. So now let’s go back to the next level. Yeah. So least
0:04:53 interesting is that it’s a new credit card. But I think the most interesting thing here is that
0:04:57 Apple is actually unbundling the credit card. Tell me what that means because I feel like
0:05:00 people in tech talk a lot about cycles of bundling and unbundling, whether it comes to things like
0:05:04 cable and TV or media, software packages. I mean, the phrase comes up in lots of different
0:05:09 contexts. What does bundling and unbundling specifically mean in this context? So there’s
0:05:13 a few aspects of the credit card. There’s a physical piece of plastic that I have in my wallet.
0:05:19 There is a payment network that processes the payment when I swipe that piece of plastic.
0:05:25 And then there is a debt provider beneath it that typically provides me with this unsecured debt
0:05:30 that I’ve made a commitment to pay back. So what this means in terms of unbundling is that Apple
0:05:36 actually owns the customer relationship. They’ve partnered with Mastercard to handle the payments
0:05:40 and then they’ve partnered with Goldman to handle all of the debt. If tomorrow they decide, “Hey,
0:05:44 Goldman, we’re going to replace you with Capital One,” or more importantly,
0:05:48 Goldman and Capital One, we’re going to allow you to compete to see who can give the customer
0:05:52 the lowest price debt. All of a sudden, those companies have very little leverage to say no.
0:05:56 It’s like they’re almost white labeled, essentially. Exactly. We did a wonderful podcast
0:06:00 a couple of years ago on B2B2C business models where we actually go in a lot of depth around
0:06:06 the challenge of that kind of thing. So on that note, why then are Goldman and Mastercard
0:06:10 incented to work with Apple on this? And has Goldman actually ever had a consumer-facing
0:06:15 line of business like this ever? Well, I think there’s a short-term, long-term trade-off happening
0:06:20 here. The street has really wanted to see Goldman grow their business. Goldman typically has not
0:06:24 been a big consumer lender. They dip their toe in it with the launch of personal loans via Marcus
0:06:30 over the last two years. So great brand Apple, huge footprint. It’s a great way to drive growth
0:06:35 in the short term, but it may be a peric victory. Okay. Let’s talk about the connection between
0:06:40 Apple’s new credit card and Apple Wallet. So there’s been a lot of hype, quite frankly,
0:06:44 over the years around digital wallets, and there’s been many forms. Can you help orient
0:06:49 where this fits in that sort of arc of where we are in the wallet space, digital wallet space?
0:06:55 Yeah. My partner, Alex, has done a ton of thinking and published some important work on
0:06:59 the wallet. So it’s worth referencing that. One of the things that’s happening here is Apple is
0:07:06 offering 3% cashback for purchases from Apple and 2% when you use Apple Pay. 1% if you use a
0:07:12 physical card. So you effectively double from 1% to 2% if you’re using their payment mechanism.
0:07:17 And the word is that the fee that Apple charges merchants is on the high side, the interchange
0:07:22 fee. If they can then start to take a portion of those fees at scale for whenever people are
0:07:27 spending money, it becomes a very large business. If Apple becomes your default payment instrument,
0:07:34 if Apple effectively white labels the way that you get debt, if Apple owns all aspects of the
0:07:39 consumer product experience around financial services, they’ve talked about pivoting to being a
0:07:44 services company, there’s no bigger segment of the industry that’s more backwards and has more
0:07:48 opportunity for product innovation than money. So what do you make of the fact that they have no
0:07:53 points? And how does a role of kind of loyalty programs play into all this? The thing is the
0:07:57 cashback is actually the simplest form of points. It’s largely the same thing. Some of the most
0:08:01 popular cards out there are cashback cards because you don’t have to navigate some crazy
0:08:07 matrix of blackout dates and conversion rates. So it’s very Apple of them to actually go after
0:08:12 the thing that’s most clearly understood by consumers, which is cashback. If you take a look
0:08:17 at what’s happening with credit card companies, they effectively have to acquire customers by
0:08:21 using messages that they can put on billboards. So what are things that you can put on billboards?
0:08:27 You can put eye popping rewards rates, cashback rates, some of them do it using a big brand
0:08:33 presence like American Express. So this has really been a way to drive customer acquisition
0:08:39 for credit card companies. But the question is, are customers actually receiving value from it?
0:08:43 How many are using their rewards and how many are overpaying for the rewards because they’ve got
0:08:48 a really expensive line of credit card debt that they actually revolve on month after month
0:08:53 after month. So I think the reorientation opportunity here is to things that are actually
0:08:56 in consumers financial benefit versus things that look good on a billboard.
0:09:00 Then let’s go into the tech because the elephant in the room or maybe the opportunity in the room
0:09:05 that we haven’t really talked about here is that this is really one of the first, maybe not the
0:09:10 first times a significant tech company is really moving into financial services. So let’s talk
0:09:13 about what that means on the technology side. And just to quickly summarize some of those tech
0:09:18 aspects. First of all, Apple Card uses machine learning and they also have geo location with
0:09:22 Apple Maps to clearly label where and when people made a purchase. You also already mentioned
0:09:28 transparency and interest paid. And while apparently 74 of the top 100 US merchants already accept
0:09:34 Apple Pay, including Target, Taco Bell, and Hi-V supermarkets in the Midwest, the budgeting
0:09:38 feature is actually not integrated with other credit cards in an Apple Pay account,
0:09:41 which is something that David Pierce pointed out in the Wall Street Journal. But the point is that
0:09:46 Apple is giving users weekly and monthly spending reports that help turn wallet into a budgeting
0:09:51 app that can help them keep track of purchases. So I think one of the most interesting opportunities
0:09:55 on the tech side is today a lot of product features are built in a functional way.
0:10:00 And if you take a look at our relationship with money, it’s actually much more emotionally
0:10:04 oriented than functionally oriented. That’s such a good point. Yeah. And ironically,
0:10:08 all of the financial services products that have existed in the past. Now the technology
0:10:11 companies are sort of making the same mistake are highly functional. Here’s your budget,
0:10:15 here’s what you spent money on, here’s what the end of the month looks like.
0:10:20 So I think actually the real product inflection point here is to start to lean into that emotion,
0:10:25 to acknowledge that emotion, and start to help people make financial decisions they feel good
0:10:31 about versus makes sense in some abstract, classically rational sense. And when it comes
0:10:35 to the product features, guess what? Most people don’t like to budget because most people don’t
0:10:40 like to diet. It’s the same concept. Nobody actually wants to be reminded every week that,
0:10:43 “Hey, you went out for Mexican last night and you blew your calorie limit out of the water.”
0:10:48 Totally. So the magic product feature here is not a budget. The magic product feature here is
0:10:54 actually helping to automate all of the small financial decisions to help you achieve a better
0:10:59 outcome. Angela has spoken about this, Alex has spoken about this. A lot of great founders
0:11:03 have talked about the concept of self-driving money. Tell me more, that’s fascinating.
0:11:09 Self-driving money means not having to actually make all of the decisions to optimize your financial
0:11:14 life. So if you look at how much we’re overpaying on our mortgages, our credit cards, our personal
0:11:18 loans, there are better products that we could get today that we just don’t have because we either
0:11:24 don’t know about them or it’s too high friction to apply for them. So I think that the orthodox
0:11:28 see is that we need to tell people to stop drinking Starbucks every day to save money.
0:11:34 That’s actually not true. If we can just use technology to efficiently price all the financial
0:11:37 products they have, we put a lot more money back in Americans’ pockets.
0:11:41 So speaking of putting money back into America’s pockets, what do you make of the headlines from
0:11:46 analysts at Nomura that Goldman could lose money here if losses come? Because basically the analyst
0:11:52 is assuming that Goldman has to spend about $350 to acquire each new user, which means it would
0:11:56 only break even after four years. But what happens if a recession comes before that,
0:11:59 then they would lose revenue, especially because the margin is already tight to begin with.
0:12:03 So how do I tie that back into the Apple news? Because Goldman Sachs is approving the subprime
0:12:08 borrowers. Yeah, I think the story here is that traditionally credit cards have a whole approval
0:12:14 process that is very onerous. Not everyone gets approved. Apple has clearly been pushing their
0:12:20 partner to approve a larger set of people. In the future, there will be no credit card application
0:12:25 as retrograde that we even need that. And everyone should have access to some form of payment and
0:12:30 unsecured debt, even if it’s a low credit limit. There’s many orthodoxies which are not true when
0:12:35 it comes to money. One of the orthodoxies that’s not true is we have this belief that there are
0:12:39 people who are credit worthy, who have great credit scores, who are good people. And there are people
0:12:44 who never pay their bills and have bad credit scores. And when there is a recession, things are
0:12:50 going to go haywire, it’s overblown. The truth is for people who have a lot of fluctuation in
0:12:55 their means or limited means, they’re always living in a recession. So the variability that you see
0:13:00 while it exists, it’s not as high as the perception is. And often people who have these great credit
0:13:06 scores are on the edge of being wealthy, end up being ones who get in trouble. So I think that
0:13:13 there’s a broader discussion about “subprime credit card” sort of customers and how do you
0:13:18 think about them? And I think that we take an overly negative view. We should actually be thinking
0:13:23 about them in a more holistic sense. All right. So Anish, bottom line it for me. How should we
0:13:28 think about this news and its broader significance in the financial services ecosystem? Bottom line,
0:13:32 it’s not just another piece of plastic in your wallet. It has the opportunity to fundamentally
0:13:36 change the way that we think about our money. This product has the opportunity to change
0:13:40 Americans’ relationship with their credit cards, with their debt, and potentially with their money
0:13:44 more holistically. Fantastic. Well, thank you for joining the 16 Minutes. You’re welcome.
0:13:49 Okay. So for the next segment of 16 Minutes, we are going to be talking about the news this week
0:13:56 about a type of fraud, BEC scams, where the FBI recently made a huge number of arrests. And 14
0:14:02 arrests were made in a 252 count federal grand jury indictment that was unsealed just this past
0:14:08 Thursday. And it named 80 defendants charged with defrauding victims of up to $10 million in what
0:14:14 was described as one of the largest cases of its kind in U.S. history. The type of fraud is BEC,
0:14:18 which stands for business email compromise. And just to quickly summarize a bit more of the stats
0:14:25 and context of why this matters here, just in the period from 2013 to 2018 and five year period,
0:14:31 $12 billion of losses were due to this kind of fraud. And this kind of fraud is growing at a rate
0:14:37 of 123% year over year, which is basically more than doubling every year. And it costs about
0:14:43 $300 million per month. So it’s very costly and dangerous in that context and a big effing deal.
0:14:48 So I’m now going to introduce Joel de la Garza, who’s actually becoming a bit of a regular unfortunately
0:14:53 on 16 Minutes to talk about all the security news and whatnot. Joel, let’s talk about this
0:14:58 news and what it is and why it matters. Yeah, absolutely. So this is actually one of the
0:15:03 simplest and just kind of most ridiculously easy forms of fraud. Business email compromise
0:15:10 is basically a form of fraud where I create an email address that seems somewhat similar
0:15:15 to someone you may know and be working with in your company. So I could create a fake email
0:15:22 address for your CEO or your CEO, make it sound like their name. And I send email messages into
0:15:27 your company asking people sort of lower down the stack to send me money. Is this like spearfishing?
0:15:33 It is even more simplistic than spearfishing. The way it typically works is people in the
0:15:37 workplace are generally conditioned to respond very quickly to anyone above them who sends them
0:15:42 an email. So in the way that emails are typically displayed in an email client is that you just
0:15:47 see the name of the sender. And so when your CEO sends you an email saying, I need money,
0:15:50 I can’t get into my work account, can you please route the money to this address,
0:15:55 people tend to do it. And they do it to the extent of losing $300 million a month.
0:15:59 I feel shocking that they would do that. So it goes back to sort of the everything that’s old
0:16:03 is new again, right? This is the oldest form of fraud, right? It’s the walking around asking
0:16:07 people to give you money and seeing who’ll give you a dollar out of their pocket.
0:16:09 Can you tell me a little bit more about why this matters in the context of all the other
0:16:12 frauds and cyber crimes that we’ve talked about on this podcast? Oh, yeah. Well,
0:16:17 I think broad strokes, if you sit back and you take a look at the way that fraud is evolving,
0:16:22 in the very beginning of online fraud, attacks were super sophisticated. They use custom malware.
0:16:27 You had all these different intermediaries. A whole industry popped up to support them.
0:16:31 Whole businesses were dedicated to actually solving and finding the malware that created
0:16:35 this fraud. As we’ve actually gotten better at technical security, we patch our systems,
0:16:39 web application vulnerabilities are harder to find. Fraud is now just asking individuals
0:16:42 to send you money, right? Like you said, everything old is new again. It’s basically
0:16:46 back to basics. We’re back to social engineering. And that’s the most effective form of fraud that
0:16:50 exists. Okay. So bottom line it for me, Joel. How should we think about this news? So the
0:16:54 interesting thing about this fraud is that it’s able to grow at such a rapid rate and it sort of
0:16:59 creates this new fraud at scale category that we’ve never seen before. And I think that fraud
0:17:03 in its current form is going to continue to grow and scale in ways like this,
0:17:06 in very simple, trivial ways that can hit multiple people and steal lots of money.
0:17:11 It’s just an incredibly low effort to do. You create an email that looks like someone that’s
0:17:15 already out there in the public domain and you start sending messages to people that work inside
0:17:18 their country to send you money. And is technology going to be able to fix this if it’s a social
0:17:22 engineering problem? So obviously there are things that technology providers can do. They can
0:17:26 flag email messages to say they’re coming from outside of your company. They can actually give
0:17:30 you warnings to say be careful. We’ve seen other scams that look like that. And we’re seeing a
0:17:34 lot of providers start to do that. I think ultimately this is the kind of problem that gets
0:17:38 solved with knowledge, that gets solved with information. It’s one of those things where
0:17:42 the user is ultimately kind of the last line of defense and a lot of attacks like this. And if
0:17:46 someone asks you to send the money and you send the money, there’s not a whole lot that technology
0:17:50 can do there. Making people aware of these frauds tends to be the most effective way to prevent
0:17:54 them and it’s the path that I advocate. So education basically? Absolutely. Knowledge is power.
0:17:55 Thank you. Thank you.
with @illscience and @smc90
This is episode #7 of our news show, 16 Minutes, where we quickly cover recent headlines of the week, the a16z way — why they’re in the news; why they matter from our vantage point in tech — and share our experts’ views on these trends.
This week we cover, with the following a16z experts:
- Apple releasing a credit card, and what it means beyond the card features itself, what it means for consumer credit (and recession risks), and the financial ecosystem overall — with new a16z fintech general partner Anish Acharya;
- BEC frauds and scams indictment and the FBI bringing a massive federal grand jury indictment, one of the biggest of its kind, and what it means and how to prevent this type of cyber fraud — with a16z operating partner for security Joel de la Garza;
…hosted by Sonal Chokshi.
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