Visa Follow-Up and Today’s Payments Ecosystem (with Gaurav Ahuja)
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Gaurav Ahuja, welcome to ACQ2. Thanks for having me, guys. It's been a long time in the works. You've been a friend of the show for a long time. And thank you for being a research source for our Visa episode. Of course, I was excited to give it a listen. And you guys do such a good job just going through the history in the most meticulous way possible. I love the episode. Thank you. Well, we wanted to say, listeners, if you don't know Gaurav, Gaurav is an investor at Thrive. And

And some of you may know that name, but not know the history. So Thrive launched its first institutional fund in 2011. That was a $40 million fund. They led Warby Parker's Series A, invested in Instagram, and they incubated several businesses, one of which is Oscar Health, and another of which we will talk about later this episode with Gaurav that is in the fintech credit card payment space.

And since then, the firm has grown to a much larger entity, managing $15 billion with a team of nine investors. They invest at all stages, and their track record includes leading rounds in companies like Stripe, OpenAI, Twitch, and many more.

Gaurav, we want to open with you and say you're both an investor at Thrive and also the founder of a Thrive-backed startup. And in particular, you invest in vertical SaaS and fintech. But you started this credit card company. So how does that work? How do you pull off this dual role? Yeah, look, the very fact that Thrive is open-minded on how exactly we think about our day-to-day and our roles is really what drew me to the firm seven years ago.

I love investing and working with founders directly, but I knew if one day I have an idea that

And it was this idea I couldn't stop thinking about. And I just had to start it that Thrive would be a unique way to capitalize that company in a pretty special manner. And so in 2020, I got really excited about the idea of co-branded credit cards. And I hit it off with this guy named Dara Murphy. And I remember it was early COVID and we were breaking New York City curfew just to hang out with one another and just kept talking about the idea in New York City, going in parks, unsure how much distance we needed to keep. We had masks on, but...

I was pretty much just focused on imprint for that first year and helping it get launched. And, you know, I still get the same emotional ups and downs that a founder would get, which is one week I'm like, man, imprint is the best company in the world. And the next week I'm pretty sure that we're about to go bankrupt. And that oscillation keeps me going back and forth and back and forth. And even today I'm still joining leadership meetings every single week. I am, you know, about to go to a company offsite and,

I'll hop on a plane for any important sales meeting, and I'm even a pitcher or a storyteller of the product to other venture capital firms as well. Does being the founder of one of your portfolio companies make you behave differently with companies that you're not the founder of? Definitely. I like to think that each of the roles makes me better at the other. Every day at Thrive, I'm a seller of the venture capital product. At Imprint, I'm actually a buyer of the venture capital product and telling the story to other firms. And we've raised over $100 million at this point.

The reality is I think we've seen so many types of venture capital experiences. We know what good founder experience looks like versus bad founder experience. And man, do I take that back to the firm? I think it's really influenced the way that I want Thrive and myself to just really thoughtfully interact with founders and always make sure we're creating that good experience.

Yeah, it's pretty crazy that like as an active GP at a, you know, premier venture firm, you are also going and pitching GPs at other venture firms. You're getting real time competitor experience data. Every firm has its own style and every individual will have their own style. That's what's going to make them unique and win opportunities. But one thing that always stuck with me is during the A that we raised,

you know, we talked to a few firms and one of those firms, we met a few of the partners we presented. Nobody asked questions afterwards, kind of felt like a dead room. We walked away feeling like, do they really like the business at all? And it turns out they did. And then we walked to another firm and had the same thing. We pitched the company, but man, all the questions we got were totally different. Each individual who was part of that meeting sent us their own thoughtful solo email on all

the things they loved about our product, which stores they wanted to see it at. One of them even like gave us a consumer survey that they did with their own 20 friends and showed us the insights from that. That was like real love. And it showed us that every single person on that team was bought into the product, not just the point person that we were working with at that firm. So that's one thing that I've always tried to take back to thrive as a really tactical example of how it's influenced me as an investor and how I think about that founder experience today.

Love that. All right. Well, Gaurav, let's dive right into it. So you invest in fintech and you do a lot of stuff in the credit card space. A lot of these cards rely on interchange. And a big topic on the Visa episode was

Is this trending to go away? Like, should Visa be worried? Should these companies that rely on Interchange be worried? Give us your view of what's going on in that space. Diners Club took 7%. Now it's down to 2% to 3%. What's going on? Look, it's a great question. And I'll start with my bias, which is I don't want it to go away. At the same time, I actually think Interchange is kind of misunderstood.

To assess a lot of industries, I like to think about natural market forces and unnatural market forces. And here, when I look at just the natural market forces that might influence Visa's interchange or merchant discount rate, I don't think it's likely to be just capped at the knees and go away.

maybe unnatural market forces, say a new president who has an agenda. It's just hard to predict that. So let's set aside unnatural market forces for a second and just talk about what we can see and kind of feel on the natural market forces side. And so the first thing I'd argue is,

Look, I think the common narrative is that interchange is falling. And David, as you point out now and in the episode, yes, it was six or 7% once upon a time. It's now two to 3%. But that's only true if you look across a very, very long time horizon. The reality is if you look across a different timeline,

You actually see a kind of flatlining of interchange rates, and it suggests to me that we found this market equilibrium. So you can go on the Federal Reserve's website and I'll send you guys the link to this. It shows you the last 13 years of merchant discount rates.

And what you'll see is that it's been pretty steady. So one, I dispelled the narrative and look, the way merchant discounts rates get set is there's this tug of war from banks on the one side because the banks want higher MDRs because that's more interchange in their pocket. And on the other side, merchants who want lower MDRs, so they're not paying as high of fees. And it suggests that the tug of war has actually steadily stabilized over the last 13 years when you look at these charts. And

And just to make sure we define some terminology, the 2% or the 3% that we throw out on the visa episode, that is actually the merchant discount rate. And the amount that the issuing bank keeps is known as the interchange. Is that right? That's right. So it's the MDR is the sum or the total, and then a fraction of that pie is the interchange fee. And most of it is going to interchange. So say, just to use hypothetical numbers,

Say Visa sets the merchant discount rate for a card scheme at 200 basis points. So 2% of a transaction is going as MDR and

Only 10 bps. So 10 basis points out of that 200 might be going to Visa and then say another 10 bps might be going to the payment processor. And then the bulk of it, 170, 180 bps is going towards the bank. And so most of that is bank interchange. That's why this tug of war exists that yes, the entire 2% is eaten by the merchant, but the bank is seeing a lot of that.

And so visas, yes, they're here, they're setting the rates, but their job is to set rates that work for the entire market and help Visa or just cash to digital as a secular trend to grow. Yeah. There's also an element here, too, that's similar to like Amazon type dynamics of in you could look at this and say, like, man, payment networks were a way better business back in the 50s and 60s when they could take six or seven percent out of the transaction. Yeah.

But that would be like completely wrong because the volume was so much smaller then. And now like, yeah, OK, the total VIG that payment networks take out of the system is two to three percent. But the volumes are like an unbelievable amount. I don't know what like a million times higher, maybe like the actual dollars that are coming out are so much higher.

Yeah, David, we're on this multi-decade, perhaps multi-century freight train of cash to digital that just will not stop. And so in some ways, we're losing the forest from the trees when we're always debating 10 bits here and there.

Well, there's this interesting thing that we didn't explore too in the Visa episode that you just brought up. So if 160 bps or 170 bps is going to the bank, we talked about what this amazing business Visa is. Do you have a sense of the cost of goods sold on the card issuer, the bank side of things on great, they get 160 bps in the door, but how much does that cost them in fraud and everything that they need to do to be able to facilitate that revenue?

Rewards points. Yeah, you kind of hit the nail on the head at the end there. So, yes, there's customer service, there's fraud costs, but the big one is the rewards. And the banks think about this not just as interchange. They're thinking about it as a collection of interchange and interest revenue on their credit cards.

So for every transaction, there's probably at least two points or for higher end cards, maybe three points, 3% of interchange revenue. But then on average for every dollar spent, there are some users who you suggested on the episode or you're a transactor. So you're on auto pay every single month. You're never revolving. But on average, there are quite a lot of revolvers.

And the average dollar is probably generating 6% to 8% of interest revenue as well. So between the interchange and the interest revenue, we're talking on the order of magnitude of 8% to 9% to 10% of total revenue per dollar spent on a credit card. And so they're thinking about both of those hand in hand. And for the highest end customers, they'll even charge annual fees like the Amex Platinum, which is $400, $500 a year.

So for a good rewards card that lots of people use, you could imagine it's something like a $500 annual fee, four or five hundred bucks, and people are getting three, four percent back on the sort of all-in blended rewards if they're using it appropriately. And if they don't revolve, do banks look at credit cards as a loss leader, as a hope to get people into other products if you're not actually making any interest payments ever?

For the basket of users, there are always some interest payments. And so for the basket of users, they can make the justification that, sure, I'm going to get some transactors only who I make less margin on. But the revolvers out there, especially when we can do it in a healthy way and not be abusive on our credit side, we're actually on a basket basis doing pretty decently on this card program.

All that said, for the transactors only, they still don't want to steer you away for those high-end cards like Amex Platinum or Chase Sapphire. The reason being, you as a transactor still might not be making money for them on that particular card, but you now being in the Amex or the Chase ecosystem...

you're way more likely to go buy a mortgage from Chase. You're way more likely to go do that savings account with Chase. You're way more likely to get the car loan with Chase because they're always front and center with you. And guess what? Credit cards of all of your financial products are the most engaged with product. And so if you're trying to get people in shots on goal to show them new products, credit cards are the best way because you're checking your transactions. You're making sure that your payments are paid full on time. That is the golden ticket to all the other products that that bank has.

Well, this is so great. And this is one of the big reasons why we wanted to do this episode with you. On our Visa episode, we didn't really focus on one, the incentives writ large of the banks today versus the Bank of America days. And two, this whole rewards ecosystem. And this is the world that you live in at Imprint. So let's dive into both of those. We'll take the banks first. Like, how are they thinking about this? I mean, I'm imagining based on what you just said, like,

duh, every time I take out, you know, my Chase card and I pay somewhere, that's obviously a Chase logo right in my face, you know, multiple times a day. Just simply the value of the brand logo on the card is huge for a banker for whoever's logo is on that card.

Absolutely. At its core, Chase has a skew of products for every income segment out there. So we're, of course, in the last part of this conversation focused on the higher end card, which is the Chase Sapphire, but they've also got the Chase Freedom, which is their free general purpose card. And that's for kind of mid-tier FICO scores. And then as you get lower, you've got secured cards. And as you get into customers who have not been approved for credit at all,

You have Chase debit cards, obviously, and you want each of those to be the terminology for Chase's top of wallet card. You want each of those to be the number one thing you are spending on because for all the reasons we just talked about, it gets you to go to the Chase app multiple times a week checking your transactions. And when you're ready for that mortgage or when your income starts to go up and they start to realize that your spend on each card is going up, they're going to trigger you with the right offers at the right time and make sure they can monetize you as a whole for the next several decades.

Rewind to the 90s. This was kind of the emergence of Capital One. Their credit card captured the hearts of the Gen X population, and they are still riding that wealth wave of the Gen X population till today in 2023 and will continue to be doing so.

And then zoom forward, what will the next version of that be? This is some of the investors thesis on cash app, which is cash app had captured the hearts and minds of millennials. And will cash app roll out credit cards and mortgages and a bunch of the profitable products that traditional banks have to then go capture that wealth generation for the next several decades?

It's fascinating. So really, the card relationship could be viewed as a customer acquisition strategy, a way to build brand, and it'll be profitable for the card issuing bank. But the goal is really the bigger pie of having you participate in a suite of products across everything they offer.

That's right. And I don't want to give the impression that credit cards as a category for each of these banks is unprofitable. In fact, they still do rank in one of the more profitable categories. My only point is that they are willing to take transactors on because they can still cross sell all of these other products for decades to come. This is super helpful because I sort of always wondered, you know, my behavior is like Ben's. I'm just a transactor. I don't think I've ever carried credit card debt.

for a single month in my entire life, I'd always wonder, like, I get these great rewards. I'm just taking all this money effectively from these banks. But understanding this now, like, oh, yeah, of course, like they're happy to play the long game here and, you know, push me into other products. I've always wondered, David, if I'm personally unit economic negative for the underwriting bank of my most common credit card.

A few times I've tried to do the math and come to the answer of like, I'm probably break even, which I'm sure is how they've done the math too. It's like even our most corner case customers who get the best deal are roughly break even for us. But I don't know. It's always been hard for me to try to back into that calculation.

So we were in the middle of talking about the credit card interchange and about the merchant discount rate. And Gaurav, you did a nice job illustrating sort of what part of the MDR flows to which entities. So if there were downward pressure from, say, a regulatory regime on MDR,

MDR and on interchange, how would that actually play out and how would that impact Visa? Yeah, I think the first thing I'd do is think about where exactly interchange would get cut. When I see a lot of the Wall Street analyst reports on Visa, it feels like they just talk about interchange getting cut at the knees indiscriminately and all interchange is the same to them. When I think in reality,

consumer credit interchange versus business debit interchange versus charge cards are all totally different risk pools for Visa. And the one that seems most likely to get cut, I'm not making a statement of yes, likely or no likely, but ranks highest on my list is probably Durban exempt interchange. And so to back up, this is really relevant for the fintech narrative. This is a rule that allows some debit cards to make 2% interchange on Visa.

all debit card spend instead of what is the capped regulated rate of just 10 to 20 basis points. So 10x higher revenue. And the reason the exemption exists is to say there are a lot of small banks out there, oftentimes regional or local community banks, that really debit interchange was their main source of revenue or can be a main source of revenue. We want you to keep banking that your populations very well. So we don't want to take this business away from you. So we'll protect you all. You all are Durban exempt.

Now what's been happening though is- And this is for banks under a threshold of assets, right? That's right. It's under 10 billion of assets. You are considered a Durbin exempt bank. The list of all the banks who qualify for this is public. And just so listeners know, there was a thing called the Durbin Act that passed that for the large banks capped the debit card interchange rates. So that's that 10 to 20 basis point score that you're talking about.

Exactly right. How this has been getting used in fintech world is a lot of fintech companies partner with these banks and say, you're a small bank, you get 2% of interchange, let us be an extension or a wrapper of you, build the consumer experience, and we will make the 2% interchange ourselves, or the bulk of it and share a little bit of it back with you bank.

Now, I'd actually argue that's a great thing. Obviously, I'm biased here. I'm an investor in these companies. I think it's led to a ton of innovation that would not have otherwise existed. But just to state the argument, I think people out there look at some of those success stories, Cash App in particular, and they say, Cash App, you're a behemoth now. You have 50 million actives. You are making something like $40 of gross profit dollars per active user per

There's a lot of money here. And so why are you guys working with a small Durban exempt bank still getting access to this 2% interchange? I think that's an argument that people are going to wrestle with and has been brought up about Square and Cash App in particular.

On the other end, I think several regulators are still fine with how this has played out because they're looking at Cash App or they're looking at Chime and they're saying, hey, for my constituents, they're happy with this. This enabled innovation. Yeah, this enabled innovation. This is the first great consumer experience for lower income populations that our traditional banks weren't serving well. So maybe this was all a great thing and we should continue to ride the Durban exempt wave. Which is so in some ways,

strange that it accrues to these tiny community banks. In another way, it is actually the upside of the way that this amendment was written, where if the goal was to help the people that these small community banks were working with, keeping those banks afloat and bringing them a new revenue stream is very important. I mean, community banks are among some of the like

most endangered species of businesses in the United States right now. A thing that I hadn't totally understood before is, well, if the small community bank, the Durbin exempt bank, is the one that's powering an enormous card program, even if that debit card program is huge in scale, it doesn't actually accrue to their AUM, so it won't push them over the limit. So that can sort of scale indefinitely. That's exactly right. That's exactly right. Thinking this through a little bit, if

The dynamics hadn't been this way. We'd probably be living in a world where there are like three or four banks in America right now. And that's probably not the world that we want to live in. Yeah, we want competition. We want innovation. This is what we all live for.

Say I'm wrong on this and it's not, you know, this overly analytical view of which parts of interchange are most at risk. And it is something wholesale. Like we just set an MDR cap on all types of credit card fees. So nothing can be higher than, say, 1% or whatever number they choose.

Well, I still think Visa might have an out because I think people might be conflating interchange with MDR to our earlier conversation in that. And so the cap that would be set is not on interchange necessarily, but it's on MDR. So the merchant discount rate can never be higher than 1% in this hypothetical.

Well, the split of that 1% is still something for Visa to go negotiate. And so today, if the split is 10 to 20 basis points for Visa, 10 to 20 basis points for the processor, 170 to 180 basis points for the bank, well, in a world where 1% is the cap, the total pie gets drunk, Visa still might be able to come out winning with 10 basis points and five basis points for the processor and only 70 basis points for the bank. The outsized share of the hit might be the bank. Now,

Now, I still feel good about that scenario because, look, Visa shared the pie with all the other constituents. Banks really want this. So they're lobbying hard for MDR to stay high. And then, by the way, it's not just banks. The users are getting smart. They understand that interchange means rewards for them. I don't know if you guys have seen this, but do either of you use the points guy? Yes. Have you read the points guy? I have referenced the points guy many times.

for your listeners who haven't seen it, like a wicked good website to go explore all of your credit card and rewards optimizations. If you're traveling, like you go check out the points guy. They started this whole petition this year that got users to sign and basically fight against the credit card competition

Competition Act, which is one of the current active threats to MDR and interchange out there, to go send messages to their local congressmen and women to actually tell them, no, we want interchange to stay high. So they're just recruiting. Visa hasn't done any of this. It's just collateral damage of sharing a piece of the pie with all the constituents around the table.

It is funny. I mean, it's the old mongerism. You show me the incentives, I'll show you the outcome. And after decades of really enjoying these rewards, we do not need Visa as consumers to advocate on our behalf. We are perfectly happy if someone puts something in front of us to, say, sign this petition so you get to keep your hundreds or if not thousands of dollars of rewards per year that you're getting for free to say, sure, I would love to do that. A little sidebar, but I just imagine that

the points guy is like one of these incredible you know small business on the internet stories like that must just be like an incredible business running the points guy it just took a guy to start the points guy and like obviously the organization is scaled and there's a lot more to it now but on the internet you can build a something amazing with just the same with nerd wallet it's almost the identical story of it i think they went through yc at some point but before that it was like just a couple co-founders yeah i was a nerd people love their points guys i

I know we were going to do this later in the episode, but let's do it now. Tell me your history as a points nerd. So I started out my career as a consultant. And as you know, you travel a lot in consulting. I actually didn't have a home. I was one of those people. I didn't have a home or a home address, I should say, for two years. And I took advantage of it. I, for two years, was young and trying to see a bunch of cities around the country. I think I got 10 cities and 10 different projects over two years. And I stayed in hotels as

as much as I could. I tried to go explore those cities on Sundays before the week started. Because there's this thing, right, where like at the end of the week, the consulting firms will fly you to wherever you want. Like it's not like you have to fly back to your home, right? That's effectively what it was. Or if you wanted to come on Sunday instead of Monday morning, like

come do it and come hang out in the city. Or if you wanted to fly your significant other out to you, come do it. You don't just have to go home to them. So it was this kind of, I mean, within some bounds, you know, really unlimited travel policy. And I ended up in a place where I was, um,

choosing my airlines. I was making debates about who had the best screens or seats with other consultants, just the nerdiest stuff that, you know, 10 years, 20 years later, I know I'll never think about again. But in that moment felt huge. And that sprawled into other types of rewards programs. And I ended up in a place where I have something like dozens of credit cards that

that I use and have been approved for at this point. And I will make sure each of those cards is maximally used. You guys are feeling bad about maybe being unit economic negative for your banks. Like, I promise you I am unit economic negative for my banks.

And that didn't deter you from getting into the industry. That's exactly right. It's a behavior we can lean into. What's your craziest points story where you traded a paperclip for a house? So I grew up in Michigan and the Detroit airport is a Delta hub. And so quickly through consulting, I got Delta status and

Now, occasionally each of these airlines will do status matches. However, most of the time they don't have these live and active. Apparently, if you email the right people at each of these airlines, you can actually get custom status matches with very little burden of proof. And so every year I was kind of emailing from a new address or making a new SkyMiles equivalent at other airlines such that I could get to the diamond status or whatever the equivalent was at each of the airlines.

Now, what I could never find out a way to crack was all of these airlines have something above their highest listed status. So for United, it's called Global Services. For Delta, it's called Delta 360 Airlines.

That was one that I could never figure out how to kind of play the game for and get behind the scenes into. Wait, so when you say status match, it means you literally email a person. You're like, I'm super statusy on this airline. Can you make me that on your airline? And I'll start flying that and they'll just give you all those qualifying miles effectively for free. Yep, that's exactly right. Wow.

Right now you can do this on JetBlue. JetBlue is seeing an opportunity at this very moment to steal Delta customers away because Delta changed their rewards program this year. And they went from miles flown as a qualifier to simply dollars spent. And believe it or not, turns out the only people spending massive amount of dollars are business travelers on Delta. And they're

The regular consumer is really frustrated with this who's been playing the Delta rewards games for decades. And JetBlue is seeing this as a frustration moment to go steal a bunch of those hearts over to JetBlue. And they're offering status matches that are pretty friendly for all the Delta users. Amazing.

All right. Well, this is actually, I think, the perfect time to transition to the rewards ecosystem piece of this. And we may come back to banks and interchange and MDR and all that. But the rewards piece, we talked about for just the general bank credit cards, why even transactors like Ben and me are still worth it to have in their ecosystem because of the cross sell to other products. But

Obviously, there are a lot more credit card programs out there today than just from banks. And many, many merchants have their own programs and so are participating on the other side of the aisle here. This really gets to your expertise and the company that you founded, Imprint. Talk to us about this whole merchant rewards world. Yeah, absolutely. So all the rewards we've talked about till now are one-to-one. They're between a bank like Chainlink.

Chase and Chase Sapphire or Amex and Amex Platinum and their users. When you add a new variable into the mix, which is the merchant, I think things get really interesting because there's a new rewards pool. It's not just interchange and interest revenue that's monetized. It's a merchant also giving rewards saying, I think you're going to spend more at my store now. So there's a third value pool you get to tap into, which is more sales and more margin for the store.

That's the why here as the backdrop. Now let me get into imprint. So if you guys have, as we've talked about, an Amazon credit card or a Delta credit card or a Costco credit card, these are all versions of

what we call as a category, co-branded credit cards. And what we do at Imprint is pretty simple. We power these co-branded credit cards for the best and largest merchants. So today we've raised something like $100 million plus from Thrive and Kleiner and Stripe and Ribbit. This year we've 10x'd our transaction volume in the last six or seven months.

And we power cards for some very large merchants. If you have any Southern listeners tapping into this episode, we work with HEB, which is a top five grocery store in the country that does about $40 billion of revenue.

Yeah. ATB is actually like a really amazingly well-run company based in Texas, based in San Antonio. Huge that you guys work with them. Totally. We've absolutely loved them. Fun fact for everybody listening, they're famous for their tortillas that are made fresh in the store and they have a butter tortilla candle. So definitely go get that out. Yeah.

So how does it work when you say imprint powers them? What is it that imprint does where HEB couldn't sort of directly create their own co-branded card program? It's maybe helpful to tie this all back to the personal story why I'm a credit card junkie again from before. I told you I have dozens of credit cards, but like let's understand the user behavior behind those. Most of them just sit in my closet at home.

And they don't have a physical presence in my life. I'm explaining all this because the why is really important to understand behind this category. Most of them don't have a physical presence in my life. And despite living in my closet, they're doing their job directly.

directing my spend in the right places. So if I'm making an airline purchase, I will irrationally tell myself I shouldn't go price check United and American and Spirit. I'm just going to Delta and I'm booking there because that value from booking with my card and the extra points I'm getting and the potential free seat upgrade I'm getting, the emotional value I feel there is so much greater than the actual dollar value. Or similarly, if I'm making an expensive

purchase, say a Dyson fan, I'm going to make sure I'm doing it on Amazon to get my 5% cash back with the Amazon credit card versus Dyson.com. Similarly, Uber Lyft, so easy to price compare by opening up both apps. I'm not doing that. I'm going straight to Uber because I know I'm getting my 5% cash back on the Uber credit card. And so these are marketing tools at their heart. They are not financial products. And that's the extra variable I was talking about by adding in a merchant.

And relative to the way I think you guys talked it on the episode, this is the investor in me coming out, why I'm so economically attracted to this market. It's not about marketing for Visa. I think that's how you guys might have laid it out in the show. And it used to be that way. So it used to be in the 90s, there were these affinity cards that went viral everywhere. So every university had a card. Every nonprofit had a card. Every sports team had a card. And the logic was kind of gimmicky in my mind. It was my users love me.

my users will love a card that has my image or logo on it and they'll use my card. That was it. However, with co-branded cards, specifically with merchants, we're talking about a value pool shift. We're talking about a business model innovation. And so imagine your Walmart,

Every time you see one of your customers swiping a card at checkout at Walmart, say it's a Citi double cash card or a Chase Freedom card, you're watching a bank get 2% of interchange, Citi or Chase getting 2% of interchange. And as we talked about, another maybe 8% or 6% at least of interest revenue on average per dollar spent. So this bank that did nothing to help consummate the transaction between me and the user is getting 8% of every dollar going through my store every

Why don't I instead, as Walmart, partner with the bank and take some of that 8% by working with that bank through a revenue share back, and I'm going to give that portion back to my users. So now it's this free value pool. I already have a Walmart loyalty program. It's positive ROI for me. People want to spend more when they're using my loyalty program. I can boost that at no extra cost and maybe double the value in it.

by working with a co-branded card. And so it's this thing that you can use for your highest value users that account for most of your spend. And why is the bank willing to do this and split their revenue pool with a merchant? It depends on which bank. And this is structurally why I think we're able to enter. If you zoom out, already it's clear that this is a pretty big industry.

30% of all credit card volume is actually going on merchant or store branded cards. So that's a trillion dollars of transaction volume just on co-branded credit cards. But I think as you properly point out, Chase and Amex, the bar is really high for them to care about doing a rev share with a merchant. And so it's got to be Amazon for Chase to worry about doing a Chase Amazon card, or it's got to be Delta for Amex to worry about doing a Delta Amex card.

But most of the time, it's like, hey, I'm Chase. I'm Amex. I'm already winning. One in every five cards is a Chase credit card. One in every five credit cards is an Amex credit card. So they're already doing a good job capturing that full 8%, the full value themselves. They have zero or very little incentive to partner with a standard merchant out there.

So that's why when you look down the list of hundreds of co-brand programs, most of them are not Chase and Amex. That's just a handful. It's most of these banks that you should never be working with, which are Synchrony Bank, Comenity Bread, or U.S. Bank. And the reason you never want to work with these banks is that on the one hand, they're not technology companies. But then secondly, I don't believe that they realize they're marketing products. They still think they're financial products. On the technology front, these banks, they don't build out their own banking core.

They each sit on top of Fiserver, T-SYS. Breadcomenity, as an example, went down earlier this year. You couldn't issue a card. You couldn't log in. Their merchants were extremely annoyed. Even Goldman Sachs, who powered the magical Apple Card experience, on the one hand, they didn't build out the front end. Apple built all of that out. And on the other hand, they didn't build out their own core. They used something called CoreCard. And so it's like, what did they do?

And I look at this and it leaves a lot of obvious gaps. It's like merchants take 12 to 18 months just to get launched with one of these banks. Every time a merchant wants to make a tweak to a loyalty program, it's extremely difficult because you have to go back to the negotiating table and basically rebuild out the entire rev share agreement.

The bank doesn't know how to share transaction details with the merchants. So imagine going to your Delta account and not knowing how much you've spent on your card to see how close you are to accruing the value status that you were hoping to get. Synchrony, by the way, has two different logins. So for web and mobile, you'd have two different logins. Or if you had two merchant cards, both powered by Synchrony, they'd also have different logins.

This is the thing that frustrates me the most. That was the technology piece. They don't realize, on the other hand, that they're marketing programs. And so here are your best customers as a merchant. And you have this panel of your most loyal users spending the most at your store. You have all their transactions. You have all their SKU level detail. Well, you have no ability through your bank partner to interact with these customers, send them promotions, and

engage with them, send them the right messages at the right time, or even just the basics on gleaning insights about what are they spending. Let me tell me more about my best users. It's just such a shame. One thing, just to be clear, these banks, the synchronies and the like of the world that you say, you know, you should essentially never be working with. These are dedicated banks for like merchant card programs. These aren't like we were talking about earlier in the episode, the small community banks that are powering fintechs. These are not like mom and pop shops.

That's such a great point, David. Most credit card companies are competing on one dimension when they're going after users, which is rewards and maybe user experience and their app for that consumer. The dimensions we're trying to compete on are much more multifaceted.

there's this entire layer of product surface area that we're trying to build for the merchants. So of course, we've got to have great user product, but we've also got to build an entire B2B effectively marketing tool for marketing offices at each of the merchants that we work with. So everything from sales,

sending specific promotions to your best users or understanding the insights and how they're spending throughout the year, or being able to say, I have another merchant in Texas who wants to be a part of our loyalty program for the month of December this year. How do I add them in seamlessly as a partner to my card network? Those are the sorts of things that that software should be able to let you do that somebody else can't. And so if I'm understanding right, what you're essentially saying is,

Because it is provable that you actually can increase loyalty, you know that there is an additional revenue pool to play with in creating even better rewards for frequent shoppers if they use this card. Exactly right. Interesting. The logic for a Walmart or any other merchant out there is that right now they've all got loyalty programs that they've found are

the perfect investment into. So they're saying as Walmart devoting 2% of my annual sales to a loyalty program is yielding positive ROI with the good customers in my basket. Now with this co-branded card, I can make that 3% or 4% at no extra cost to me and all of a sudden juice a lot more value from my highest spend users and get them to stop spending at my competitors and only at my store.

And there's also, I didn't understand this before, for merchant card programs, depending on the terms of the rev share agreement, the merchants also get to participate to some extent in the interest revenue that the banks are making from those cards.

Is that correct too? Yeah, it might not be exactly framed that way, depending on how the deal is structured. But the simplest way to think about it is for every dollar spent, there's some percentage that is going to the merchant. The merchant is using that percentage, some or all of it, to devote into their loyalty program. Gotcha. So back to the HEB example, they certainly could have created and perhaps they likely did have their own credit and debit cards before. But

But they had nowhere near the fine level of control and insight into their customers and their customer spends and their customer loyalty on these platforms. I would say it's even more basic than that. I think as a brand, if you care at all about your user experience, the bank partner that you choose is an extension of you as a brand.

And it is very hard to put Synchrony or any of these other legacy banks in front of your customers and expect them to still be high NPS on your brand. Trying to explain the credit card ecosystem today versus trying to explain it in 1995 is...

is completely different. Like where the value pools are, how it's cut, what the percentages are. It was a pretty clean story in the 90s of how this whole system works. And the answer today to basically any question about who makes money in what scenario is, well, it depends. And it is wild how everyone has sort of figured out

without massively changing the overall system. The merchant discount rate is still, to your point, Grove, approximately what it was 30 years ago. But everyone has figured out, well, for this particular situation, I'm providing more value. And therefore, I'd like to negotiate some custom deal for this segment in this scenario where I'm able to get more of the economics on it. I think that's a really good insight. The ecosystem has gotten increasingly complex and

And this is just one example where merchants are now a new variable added in and a new value pool that you can tap into because of sales uplift. But there's tons of examples of this. I think corporate card and corporate spend is another version of this where there's new variables popping in. Certainly, it gets even more complex as you start to think about corporate also with travel. So now you're getting OTAs and the OTA margin involved in this. And companies like Ramp are trying to get into this space and take advantage of it.

I think every new variable you add into this, there's new value pools you can tap into, which creates both more room for complexity, but also more room to just align incentives for the right people in a transaction versus what in the past has always been really one-to-one.

And the right framing for this is probably as a business, you can no longer think about, well, you know, I have 3% or whatever it is that I owe in card processing. And then I'll think about the other 97% as my business that I have to run that 3%.

is sort of blended in now with, yeah, it's card processing, but I could use it to my advantage. I could be clever with it. I could say for some customers, it's this percent. For some customers, it's that percent. It sort of gets rid of the clear, bright line between the business I'm operating where I acquire customers and sell goods and retain those customers. And oh, yeah, I owe some money for payments as this cost over here. So

Certainly. I think if you're thinking about it the right way, there are always going to be those merchants who look at that 3% and have a limited number of things they can do with it. And so we'll continue to look at it as the 3% cost. Thus, all the pressure that we've been talking about earlier in this episode on Visa and MasterCard. I think where that will particularly hold true is you guys mentioned low margin businesses. What's it?

even lower margin than say a retail goods business might be for example a really low take rate marketplace and so you might only be getting a five to ten percent net revenue take rate on all the gmv going through your marketplace but boy you still gotta pay three percent not on your net revenue but three percent fees on the entire gmv so as a portion of your net revenue it is a really high cost to bear

Yep.

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like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. Wow, I've never actually thought about this, but like my mind immediately goes to Airbnb. Like, how do they deal with this? Well, Airbnb is a high take rate marketplace. Yeah.

Well, I mean, yes and no. It's not a high take rate on the GMV. After you factor in fees, it is. Maybe that's how they deal with it. So I don't know exactly anyone at Airbnb or how they've thought about this. But outside in, you can see they launched with a new product called Stripe Link not too long ago. And for anybody who doesn't know yet, Stripe Link is kind of like...

Think about shop pay, but for anything on the web, not just e-commerce. It remembers you based on your phone number and or email and your identity and your saved payment methods at any checkout.

However, the way Airbnb has chosen to implement this is not as a credit card remembering tool and remembering your identity for increased conversion that way, but as a bank linked payment method tool. And so that would indicate to me that they have hopes of, yes, also lowering the processing fees, just like other marketplaces might as well. By shifting the money movement from the credit and debit rails to the ACH rails. You got it.

It does make super low take rate marketplace businesses basically non-viable. You could imagine if you only take a 5% take rate on your marketplace, the payment processing is 40%-ish of your total revenue. It's pretty hard to have below the line costs and stay profitable as a going concern. I think that's very well said. And it's why in a lot of brokerage industries that are low take rate,

they tend to be more B2B and they tend to be as a result, almost always ACH and or cash, right? Real estate is filled with examples like this, where you'd never use a card to go make that payment because the fees would be unbearable and they've stayed on ACH and or check as a result of that very large barrier. Well, I imagine for...

imprint kind of the idea to part of this. We've been talking about the Amazon merchant card programs, the Deltas, even the HEBs, like the really large customers that you all have. Part of this also must have been about just kind of democratizing access for merchants at lower scale into having their own card programs and thinking strategically about the 3%, right? In the old world, would a

mid-sized regional merchant be able to get the time of day from one of these banks to customize their programs? I'm imagining probably not. I think that's such a good point. I think Visa can sometimes get a bad rap for being a non-innovative company, or at least that's what investors might say. They'd say it's classic big company profits. They have no incentive to innovate. They haven't done anything new in years. At least I've heard that narrative before.

And I got to tell you, David, to your point, our experience at Imprint has been pretty different with Visa. So I'll hit on a couple of examples. One is a BD example. The other is a technology example. The BD example is for your listeners looking to learn more about Visa to give you insight on how they think about the co-branded credit card market. If a new merchant is looking to launch a card or re-up a deal for a card with a new bank,

Sure, it might seem like this deal between the merchant and the bank, but Visa and MasterCard are kind of watching and they both smell blood. They both look at this and say, I got to get the banks that I work with. So for Visa, that might be Chase, for example.

And get Chase to go win that deal. Because if Chase wins that deal, it means I win the deal. And that volume is coming to me. In what is a pretty steady state market share business between Visa and MasterCard, these can be pretty big chunks. If you, as Visa, just swung over the Costco card to you, away from, say, Amex, as a hypothetical, that's 1% of all card spend that just moved over to you as Visa. Oh my god. Yes.

The Costco card alone is roughly on the order of magnitude of 1% of all card spend. These are one of their few opportunities and strategic ways to try to go win business. And what's been awesome to see is they aren't just staying with what they would have considered to be safe old banks for new merchant programs. And I know this was effective for us at HEB and it's effective for us in new deals that we've won but not yet launched with.

Visa is out there saying, you got to work with imprint. This is the best bank for you. And it's really amazing to see them leaning into startups in a process like this because the story of them not being innovators totally wouldn't lead you to believe that. So that's the BD kind of side of this. The technology side of this is Visa has tried to make themselves a lot more approachable. And in the past, it used to be that you couldn't as a startup looking to play in this 3% interchange world.

Get directly connected to Visa. You had to go through some intermediary that was big and had a relationship with Visa as a conduit. So you would have worked with a core processor. You would have worked with some card issuing company like Stripe Issuing or Marketo or Lithic, and they would have had a deal with Visa that you'd ride the back of.

However, now Visa has launched something called Cloud Connect, and it's what we use at Imprint. And it actually is this instance that we can plug into directly, and it gives us direct access into VisaNet. So we are directly plugged into the ledger through Visa, not working with some big conglomerate that they had to go partner with before. And it's not just technology. They've got teams of people who can talk to fintechs. They know how to speak our language. It's been a really cool site to see.

All of this speaks to just the general power of technology getting better. Everything from our previous discussion on, well, it depends on the type of transaction, on who the customer is, on which card they're using. You can't do this sort of clever individual segmentation on a per transaction basis without more advanced technology. Or in this more recent example, this API, you can't facilitate

thousands of small partners working directly and plugging into VisaNet without modern technology. And so it does definitely support the story of as technology gets better, as Visa adopts modern technology, you can

can have a much more cleverly routed ecosystem for these transactions and for all these different parties involved in each transaction. I think that's totally right. And look, I'm saying all these positive things with my founder hat on and from personal experiences. Then if I totally remove myself from the situation and put my investor hat on for a second, I look at these things and I say, hey, they're great. MasterCard's leaned into a few of these things as well. They

They have a product called Finicity, which is kind of a plaid competitor. They have a product called Session M, which is a merchant loyalty software. But then I look at them and I think, boy, like, I hope I'm not offending anybody, but who the heck cares about these? Well, they moved the needle on a half a trillion dollars of enterprise value. We've got this massive secular shift going on from cash to digital that will last for decades.

And these other things are on the margins for these businesses. It kind of reminds me of Google, of what has been a 30-year tailwind of just movement to search online and digital advertising online. And every other consumer product that Google launched just kind of doesn't move the needle for their P&L. And it doesn't matter. What's interesting, this seems like a case where Visa and MasterCard are

want this increased volume on their networks. That is core to their whole business. But building these types of technology and marketing technology programs for merchants to enable that more volume happening on their networks and as competitive vectors between the networks is

That feels like less of Visa's core competency. So it makes sense, right, that they would open their APIs to allow startups like Imprint to do this. I think that's absolutely right. All of these things are... And tell me if you think I'm seeing this wrong. Ways that Visa is using technology to play defense, like, oh, we have to keep that merchant on our network, or, oh, we got to go get that merchant to be on our network instead of MasterCard's network. On the episode, we talked...

sort of more about ways they're using technology for offense, which is, can we expand beyond our core market of consumer to business payments, like with Visa Direct or with B2B payments? Do you think that that story is credible of a huge driver of Visa's future is something other than the consumer to business tailwind of digital payments? I definitely think there are other categories for them to tap into.

Whether it's under-penetrated categories of consumer payments or, to your point, B2B payments, those are definitely growing parts of the pie that I know their BD team is leaning into with fintechs. Take rental payments as an example on the consumer side as an under-penetrated area of spend for credit cards.

They've done a couple of things here. They've partnered with some fintechs who are launching rental payments rewards cards that actually give back a lot of the fees to users when they do manage to pay rent with a credit card. But then secondly, within the last few years, they've actually lowered interchange fees or lowered MDR for rental payments. And so Visa is not

a one size fits all type of MDR. Every category has a different type of MDR and they've purposefully lowered it in some categories like grocery or gas that are kind of necessary for the everyday consumer. While it's higher in other categories, they've added rental payments to one of the lower categories on their list as well.

Those are some of the levers they can push on the margins on the consumer side. On the B2B side, I think they're doing a great job leaning into all of the rapidly growing corporate credit card startups out there. And one thing that's constantly surprising to me is you guys talked about on the episode, this McDonald's advertisement that felt kind of like a shock in the 90s of this is a big deal. They accept credit cards.

I wonder sometimes if we're in the same place in that journey on the B2B side of businesses just starting to realize that I've got to accept credit card payments in 2023 to be able to stay competitive and win business and make my process of accepting customers as easy as possible relative to my competitor. So I think a lot of the services industries are starting to adopt credit card payments as a result, and Visa is right there making sure they're ready to capture it.

It's never even crossed my mind of should acquired accept credit card payments for our sponsors. But like, maybe, I don't know, maybe that's a world that we're heading towards. If the fees were low enough. I mean, it's one of these interesting things where if there is real competition for a consumer between merchants, then Visa should massively lower the MDR so that they can shift their

ACH payments to card payments. But when there's not competition, like let's say I move into a apartment building, I'm not making the decision on which apartment building to move into based on who's going to let me use a credit card versus who's going to require me to enter my bank information. If I'm that apartment building owner,

There's almost nothing that you can do to compel me to take credit cards. Push back on that growth, but that feels like a hard category to ever actually move the needle on. I agree with your higher excitement on the B2B side and lower excitement on cracking some categories within consumer that have seemed uncrackable, like rental payments. The way it's starting to happen in rental payments is less...

Of what you just said though, in the, so the emerging properties we're starting to see are not individual landlord saying, Hey, I'm going to accept cards. That individual landlord is still going to take Venmo or check or cash, whatever it might be that they're doing informally today. It's happening more on the property management side. So these companies operating at scale that are trying to formalize their business, it's much easier to think about digitizing all of your payments versus just accepting cash or informal payment methods.

And it's not to say that they're accepting all the credit card fees themselves. They actually do pass on a lot of the fees in most of these instances to the user. So they have the user at checkout. Again, it kind of feels like an e-commerce experience. Equity Residential is a good example of a property management software company doing this. They at checkout will offer the consumer the option to pay for fees. And you'd be surprised at the uptake rate of users buying into this. And one of the trends I was referring to is

people like these in MasterCard working with startups, there's one called Built out there that are saying, sure, user, you're paying a fee, but let us give you rewards back in the version of that fee. And maybe in some cases, we can even partner with the property manager to get another value pool of what is now increased conversion from users feeling like it's easier to pay and live at this building. So that's, again, small portion of the industry, but I'm trying to explain narratives as to where they could crack into new markets that they've just had a tough time cracking into so far.

So, you know, as we're talking here about B2B payments and about rental payments and niche consumer use cases and ACH and banking versus credit card networks, this, of course, takes my mind to the really big question out there, at least for startups and VCs of like, is there

there any potential that a competitive, you know, very large global network effects payment network could emerge out there like a true competitor to the Visa MasterCard duopoly? And lots of people have talked about this for a long time. We spent a lot of time on this on our Visa episode. Is there any path that this could actually happen? Yeah, it seems like a tall task.

As we've kind of keep circling around, it just feels like Visa and MasterCard are so entrenched and do such a good job protecting their positions and

But all that said, I think it's fun to go through the theoretical exercise of who could start to take away share. So maybe not cut them off at the knees, to use my old language, but find pockets of opportunity. And broadly, I think about two areas. The first area you guys touched on, so who are the processors out there already that have

one foot in the door on this business. What does it take to displace Visa as a processor? It's either really large scale on the payment acceptance side, or it's really large scale on the consumer side. And there's a few names, PayPal,

Shopify, you guys didn't mention, I don't think on the episode, Stripe launch, Stripe link square, you definitely mentioned. So maybe to take through each of those four, like PayPal is the first legitimate threat here. And they showed that, yes, we can take some share of our payment processing and direct it to a user's bank account or their PayPal wallet instead of a card.

It's not clear that that is ever going to increase share from here, but it certainly means they can keep the entire payment processing spread on a select number of transactions that don't go through Visa. So they at least proved it was possible.

I think Shopify is probably the most similar informed factor to PayPal, but a way better experience in my mind. My guess is that ShopPay is a way higher percentage of total Shopify GMV than PayPal wallet is of entire, you know, brain tree processing online. And you could see a world where ShopPay, now that they have rewards, this rewards cash concept,

They make one of your five default payment methods, your bank account, and default to that each time and offer you some percentage of rewards to go pay with bank account. That would be another example that comes to mind, similar to PayPal. On the Square side of things, they're way stronger on the consumer end. They've got 50 million MAUs, which is an incredible number of MAUs to have in today's market.

On the processing side, the payment acceptance side, though, I do think while they have a couple hundred billion of processing volume every year on Square terminals, those are still really small businesses. And it's hard to change user behavior that way. So yes, when I go to my coffee shop, I can scan the Cash App QR code. And it's an amazingly fast experience that does bypass Visa and MasterCard. But until I think you get some big, big merchants, it's hard to just see that story play out. The

The positive narrative there would be they bought Afterpay and Jack is spending a lot of time, he says, on Afterpay itself, that they find a really good way to integrate that into the network such that that same coffee shop scan the Cash App QR code experience I just mentioned starts to show up anywhere Afterpay is accepted to. That would be certainly a boon in their direction.

Would the natural play for someone like Square, who has the consumer side of the marketplace but not the terminal side of the marketplace, at scale at least, they've got only these sort of small merchants, should they just go buy Verifone or someone like that and then enable the pay with cash app on these huge merchants also? Yeah, that's an interesting thought. So any terminal with the screen effectively...

they can start to put the cash up QR code is kind of where you're going with that. Right. And of course, the merchants would have to opt in. And of course, it would have to make economic sense for them. But you could imagine the merchants would be really excited about this. Wow. Just as fast payment rails that 50 million consumers have access to. And I don't have to pay the full merchant discount on this sounds amazing. Totally. And I think it's worth calling out. This is probably the most direct thing that Apple, the biggest competitor on your list, could

could probably do. So I think the two of you ended your episode with the understanding that Apple had a tall task of needing to either be a bank or overcome some compliance regime to be able to close the loop on the transaction. I actually am not sure the bar is that high. So again, they've got all the users out there and they're, by the way, the highest value users, right? Just think about every app that launches on both Google Play Store and iOS. Most of the value comes from the

No.

No. That's because the three of us are not cool. We're not young high schoolers at this moment in time. But if you go survey high school users at this moment in time, Apple Cash has surpassed Cash App as the number one peer-to-peer app for this population.

And so as I think about opportunities of where people are going to naturally start closing the loop without thinking that they're closing the loop, that feels like one opportunity to me. And that's just the online side. For the offline side, the reason I brought this up is because that's kind of the Verifone example in my mind. Could an Apple, if anybody has the scale to play hard at the negotiating table, could an Apple go work with each of the payment processors that work out there and say, yes, add me as a network operator?

with your core processors, that feels like an outcome that is worth thinking about without them needing to be a bank or some kind of compliance regime. And so high schoolers are using Apple Cash as their peer-to-peer wallet. Therefore, they constantly have balances stored in there. It's almost like an extension of a bank account. And so it would be a natural next step for them, unlike us, the three of us who never have balances in there. When they click Apple Pay at checkout,

they see their cash balance right there and they start selecting that as a de facto way to go pay. So in some ways, it's already a version of closing the loop. Okay, so we're talking about this interesting Apple scenario. What could they do here? So Gaurav, what you were proposing a minute ago is different, I think, than what

Apple Pay does now. So what they do now is they throw, what is it, 10 basis points or 15 basis points on top of every transaction and say, I don't really care how this transaction routes, we get a little spiff on top. So it's a little bit more expensive a transaction when you use Apple Pay. And what you were sort of proposing there is, what if they bootstrap another parallel network to Visa and they say, well,

rather than running it over the Visa network, we're going to run it over our own network. How does Visa think about sort of carrots and sticks that it has with merchants to keep transactions running over their network versus alternative payment methods? I think the source here would likely have to be the processing terminals or the processors that

each of the networks are working with, because that is who Apple would have to go to to get approval in this process. And there are not a lot of them. This is a pretty consolidated market at this point. Exactly right. Exactly right. So when there's a few, and you can imagine most of their business today is Visa, and

Visa is threatening, hey, if you work with Apple, I would not work with you. That would be the obvious stick that they can go apply to the market. That the DOJ would likely have a lot to say about. Yeah, exactly. Visa tells Verifone they can't accept alternative payments. Exactly. And look, we're getting into two or three layers of hypotheticals if Apple entered and then if Visa responded. So this is all fun storytelling at this moment. But the carrot then is,

Okay, Apple's come into the market and they're going to charge 1% fee. Do we, for the first time, lower MDR to match that? We're still going to keep our Visa share of MDR, but banks like, sorry, you got to deal with it because otherwise you're going to get zero from Apple. Yeah. Yeah. It's fascinating to think about. And it almost does feel like an inevitability that something in this area will happen because as you and I have talked about in previous conversations, the

The wallet and the notion of what card is at the top of your wallet is so much less relevant now, now that your phone, in many cases, is the payment method. Like, I don't care often, like, what card gets used or what rails it goes over. All I care about is I'm going to hold my phone up to your little thing, and I know in a post-COVID world that the transaction's going to complete. And so, like...

who is providing value in the whole chain of the transaction here. Like a lot of who is providing value is now the terminal and the phone company. That's so well said. It's an abstracted user experience. There's another way of saying that, right? There's an abstraction layer above all of your cards when you're paying with your phone.

I think that's also, by the way, what would make it easier for a rewards nerd like me to constantly optimize, right? And always be choosing the best card for the best transaction. In fact, there are some startups out there that specifically lean into that value prop. They say, always pay with our card and we're going to reroute the transaction to your best card that you send to us. Wow. So you...

You can do like proxy cards like that. Yeah. And the business model there is for anything where you don't have a better rewards proposition than our card, we get to keep those transactions for ourselves. Fascinating.

This is the perfect transition. We've been talking in this potential competitors to Visa MasterCard section. We've been talking about all these big companies, Apple, Stripe, Square, Shopify, etc. That's all well and good, but we're all private company investors here. Let's talk about startups. Is there a vector, do you think, I mean, you do so much work in this space, but

Is there a vector that there really is like the ultimate prize here that a new company, that a new network could win? Gosh, I go back to the beginning of the story. Remember how this entire journey started with payment networks? It all dates back to the Diners Club. And the Diners Club, as you so well highlighted in your episode, doesn't really scale horizontally.

And as a result, that's what paved the way for Bank of America to be this horizontal network that could work anywhere, not just at restaurants. But I love the kernel from the Diners Club narrative that there was this network effect that emerged in just the restaurant industry in New York. And I think that's such a powerful insight. So Diners Club, in its very first instance, was launched at one restaurant. That one restaurant had 200 users that were, think, the madmen of their days.

going out in New York City, having great meals. And they probably didn't just shop at one restaurant, they probably went to multiple. And what that means is the other high-end restaurants in New York City also wanted access to those users. Those users already had a Diners Club card. So those next restaurants are more likely to want to join the Diners Club network. So after a year, they had 27 restaurants, not just the one. Those 27 restaurants were

now attracted 47,000 cardholders, and so on and so forth. You kind of saw this virtuous cycle emerge. After a decade, the Diners Club card had a million users on the network. And so for so many reasons, the business didn't really work. And that's why Visa and Bank of America took over. But that kernel is interesting because every industry has this power user dynamic.

And it's certainly one that I've invested behind. I love studying different corners of the world and understanding how the highest spenders, the most loyal users of that industry really operate and what their specific needs are. You can look everywhere and you see it. So in mobile gaming, the top 6% of users are 88% of all mobile gaming spend in healthcare. I think it's something crazy. Like 10% of patients are 78% of all patient expenses. Yeah.

And the list goes on in other industries, trucking users, cannabis purchasers.

luxury apparel shoppers. There are power users in every one of these industries that have specific needs. And just to make those specific needs really tangible, take healthcare as an example. If you have a large transaction you got to make, it's probably not as simple as just paying with your Visa card. It's probably more complex. You've got to use your HSA or your FSA account. There's obviously insurance billing involved in that. And then you've even got

For high AOV transactions, you've got to have buy now, pay later. You've got to have some sort of installment loan option at checkout or the equivalent of checkout.

And sure, you can maybe say healthcare is too complex an industry. Of course, it's different there. But even look at cannabis. There's regulatory needs in cannabis. And every time you make a purchase at a dispensary, you need to show your driver's license in most states and prove that you're not an illegal buyer of this cannabis product. Mobile gaming, no regulatory requirements. But that mobile game company wants to reward you or sell you items and sell you those coins or gems as packages at different rates depending on how...

good of a player you are, how many minutes you spend in the game, what level you achieved. And so the vertical specific nature of checkout introduces opportunities for these vertical companies who process payments to emerge. And as I think about startup opportunities, you

Each of them probably have pockets of areas they can start to do what PayPal showed as possible, which is for certain pockets of power users, which might be a very small N of users. If I can give them an incentive to link their bank account, I can actually keep the entire 3% spread for myself. That's the name of the game. And while I don't think that's the strategy to go take down Visa, it is this really great opportunity that I know I'm excited about and see a lot of our founders going after as well.

It's funny. The bare case on Visa is not that someone is going to come in and take all of Visa's lunch. It's that a lot of these vertical and niche opportunities that they could have taken if the world had stayed a simpler place and technology had not progressed this far get eaten away by a fragmented set of little specialized players. Exactly, right? The Diners Club was this vertical use case to start because nothing existed before.

for then. And then the standardized protocol of Visa and a standardized accounting method took over for everything everywhere. But technology has actually made it easier to verticalize again and make checkout more specific to each use case. That's a great point, particularly like the healthcare example. And as you say, there's all sorts of regulatory stuff there. So like maybe it's possible, maybe it's not. But, you know, I can think of

Three or four examples just in Jenny and my own history over the past few years where you have enormous transactions, multiple diverse payment sources, all sorts of not because we wanted it that way, but it just had to be that way. Particularly when you go through fertility. I mean, that was a 30, $40,000, you know, transaction with so many parties involved. And like, yeah, that's a huge opportunity. Yeah.

Absolutely. And I don't think it's just value extraction from these vertical companies. I actually think it's good for the user. If you are a power user in a particular category, if you're checking out in gaming all the time, or you're checking out a cannabis dispensaries all the time, you being remembered in a shop pay like way every single time with your stored payment methods is just a better experience for you. So it should be a win for both sides. It's not this only value extractive play.

Popping up a level, you've listened to our Visa episode. What else do you have comments on or what else did we miss in our episode? So one timely thing that I don't think came up in the episode was this ongoing conversation about the Credit Card Competition Act.

Is that something you guys are familiar with? Not terribly. It's probably the most active version of a proposed act or bill that could threaten credit card merchant discount rate today. And essentially what it says is that any bank issued card, even if it has the Visa logo on top of it, has to have at least one other network that it works with as well.

And so that would be saying a merchant, if you're accepting a card and somebody swipes a Chase Visa, you're not forced to just use Visa. There's a backup network on that card that they have to have legally now.

that can set their own merchant discount rate. And hey, it's probably cheaper than Visa. You can choose to use that one instead. That's kind of the logic behind this act. And the theory is that by introducing competition or at least two networks on each card, you'll start to see fees come down naturally. And whatever market equilibrium I discussed before, having settled for the last 13 years, starts to move back down in favor of merchants.

This isn't a totally new idea. So it's not like this act came out of nowhere. It's very similar to how our debit cards actually work today. So every debit card, even if it says Visa on it, does have a secondary network that it is forced to also work with.

And we never talk about it because one, nobody's heard of these secondary networks. No regular user has ever heard of these secondary networks. And two, most merchants don't care to ever use them because the approval rates are lower. And guess what? On debit, fees are already capped. They're very low in the first place unless it's Durban exempt. So Visa and MasterCard remain dominant.

But in some higher risk industries like the adult entertainment industry or the cannabis industry or the gaming industry, these industries do tap on these secondary networks at times because they can't work with Visa or MasterCard in some cases. And so as I look at that example, I think that would be one version of the world that we can try to glean and peek around to the corner of if this act were to get passed for credit cards, how impactful might it actually be? That's maybe one thing that wasn't covered in the episode, but

And then I step back and zoom out and I think about Visa. They've got to be pretty actively thinking about this, or at least I would assume they're actively thinking about all these risks.

I think there are some things they're probably doing actively to manage it. And then there are other things that they might be doing not so actively, or they might not be doing so intentionally to manage it as well. The most obvious thing that they do is they share the value pool. We've talked about this a few times now, but the fact that so much of the value goes to banks and so much of that value goes to consumers means you've got all these constituents lobbying and fighting for MDR to stay where it is to oppose the counterfeits. The points guy lobby. The points guy lobby. Exactly.

That's the intentional thing. And I think that will that will continue to remain. So you've got other people fighting the good fight. The unintentional things are this is all conjecture at this point is I feel like they do a good job leaning into the press narrative that Visa is kind of helpless against merchants.

You guys had this fascinating story that stuck with me from the episode, which is Bank of America played dumb effectively and pretended their credit card business was so unprofitable. And as a result, it invited no competition for a better part of a decade. Sometimes I feel like Visa does this too. Honestly, if I were the CEO, I'd probably be very actively leaning into it and telling my PR team to say,

Always plant stories about how everyone's attacking us, about how there's regulatory pressure all over us and we're being forced to lower our fees and Amazon doesn't like us and this country doesn't like our fees. And in reality, we've seen that fees have held steady for 13 years. And so just take a look at this headline. This article had a moment on Twitter earlier this year. Here's how the headline goes.

Visa and MasterCard agree to lower average credit card interchange fee below 1%. I remember seeing this. You remember this, right? Yeah. Like this sounds horrible, but it's totally not true. And the headline makes it sound like they're getting punished globally. But then you read it and you're like, okay, so this is only for Canada. And you read the fine print. It's not only for Canada. It's not only for Canada.

It's also only for the smallest of small businesses that they have to work in some particular industries and have sales under $300,000. So effectively zero. Effectively, this didn't affect Visa at all. But the narrative is getting out there to the broader public, or at least the Twitter sphere of like, oh, wow, Visa and MasterCard really have been lowering their fees. Exactly, exactly. And it kind of feels like there's like every six months, there's some viral moment like this that happens again. And then you look into it and it's kind of a total nothing.

So here on the one hand, they're pointing out or letting these sob stories be pointed out, again, intentionally or unintentionally. While on the other hand, they do a pretty good job

kind of making it hard to see where fees are being increased at the same time. Value-added services. Yeah, you guys talked a lot about value-added services. And so to dive deeper into how MDR is set, it's not the simple 2% or 3% that we've been talking about this whole time. There is, as you guys pointed out, there's credit card schemes. So there's Visa Traditional, Visa Signature, Visa Infinite. All three of those have a different fee.

Every type of swipe has a different fee, whether it's card not present or present. Every type of customer has a different fee scheme. So whether it's consumer credit, consumer debit, charge card, credit card, small business charge card, corporate credit card, all different. And then even every category, as we've talked about, has different fees.

So gaming versus gas versus grocery, all different fees. So you've got this four-dimensional spreadsheet that they can kind of like pull and tug on different strings to increase certain parts while decreasing other parts. But really, the most valuable parts are probably getting increased. Whereas the least valuable parts seem to be getting the headlines. Exactly right. I pointed out how they decreased interchange fees in the rental category before, which is true.

On the other hand, the gaming category is increased, which I'm sure is much larger for Visa right now. One other thing I wanted your take on after doing the episode was these systems like PIX and UPI. These are India and Brazil's real-time payment networks. These are working very well in those countries and have inspired FedNow in the U.S. Do you think that's a credible threat to Visa?

I think PICs and UPI were developed in a really different market environment in India and Brazil relative to the Fed now in the US. And just to say more on that, credit card penetration was just a lot lower in India and Brazil, and payment terminals weren't ubiquitous everywhere in those countries. In fact, I remember looking at

U.P.I. based startups in India at the time. And when U.P.I. was launched, India basically had 50 million active credit card users out of a population of a billion. So it was really that specific 50 million high income users that were, say, shopping at malls or some e-commerce transactions. But

on the whole, there was this massive gap in the market that was still cash-based. And so the secular tailwind of moving from cash to digital wasn't actually totally being served, not as a result of anything Visa did, but just payment processing wasn't a thing in as broad of a sense. So UPI could come in with a government mandate and actually take over from day one. And I think

The reason that's probably different in the U.S. is that Visa and MasterCard are already so entrenched and the problem is kind of solved. Yes, it comes with fees, as we've talked about already, but they've done such a good job spreading the value that I think people are kind of happy with this equilibrium or happy in a sense that it's resulting in equilibrium. And then moreover, I look at how FedNow is being rolled out.

And this is a huge if, but if it is being run the way it's kind of currently being run, I feel like it's got no shot anytime soon at really taking share. The reason I say that is the rollout is already kind of a slow and tedious rollout. They're trying to take it one step at a time. But the whole point of trying to launch a payment network is that it is a network. You need scale. You need users. You need the banks to be a participant in it.

And unfortunately, at start, there were only 35 banks that opted in. But some of the massive names like Bank of America or Citi just weren't a part of it at all. And so if you're somebody trying to build a product experience around instant payments on FedNow, you're going to have a really hard time because a substantial percent of your transactions won't be real time. So your choice as a product company is to not launch the product or launch a bad product. And you're going to choose not launch the product.

Yeah. Funny thing about these network effect businesses, you know, they often require near 100% penetration in order for them to be viable. You can't really guarantee an experience and then have it only work with 70% of the participants in the network. Exactly. If you're a fintech company and you're deciding go or no go, 70% is not going to cut it to determine launching a new product on FedNow. Fascinating. Well, Gaurav, on a lot of this stuff,

I felt like I knew a lot coming in from doing the Visa episode. And I've realized that in typical sort of acquired fashion, we did our best in a four-hour episode to round off all the rough quarters and say like, you know, on an 80-20 basis, you now understand the 80% case. And yeah, there are a lot of details here and there, but you sort of understand this

in the majority of cases. And what I'm realizing from this conversation is, man, that 20% is sort of growing in complexity. It's growing to be a larger percent of transactions, and it matters a lot. And I think that's the complicated story of payments today is you can get the general gist, but to really be successful in this ecosystem, understanding all the corner cases and all the dynamism in the industry right now is actually extremely important.

I really love that as a summary. I guess there's a reason you guys do what you do, which is you can take a bunch of complex detail and abstract it away, which is exactly right here. And that 20% is both where the challenges are going to exist. It's also where the opportunities are for a bunch of startups out there.

Yeah. So speaking of startups, you do a lot of investing in fintech companies. We briefly touched on Thrive at the beginning, but can you give me a little bit more of a sense of like, what does this quite secretive firm invest in? And as you guys have grown so large, I mean, 15 billion AUM reasonably quickly is kind of a

crazy out of nowhere story with nine investors, small team. Josh did that great interview with Patrick on invest like the best. And everyone should go listen to that if you haven't already, but there's not a ton out there about you guys. What does thrive look like today? I'll hit on the small team part. It's one of the things that drew me to the firm. When I joined, we were six people on the investment team or nine people on the investment team today. The firm as a whole has grown a ton.

But the reason I think it's so special is that each of our sub teams is really small still. And what that allows is this deep level of shared consciousness. I've worked with

my partners for many, many years now, such that I can probably predict how they might react to an opportunity or what questions they might be asking if they were in a room when they're not even there. And we don't have these formal investment committees where some small portion of the team is joining. We are all the investment committee every single meeting.

critically debating each other's thoughts. And so even if we're going a little long or debating an extra minute thought one meeting, it's kind of compounding for the next one and the next one after that. And InVenture, which is a power law business, as you guys know, being 1% better every single quarter

really, really starts to add up. And if you can be 93% good in your thinking versus 90% good, I really think it shifts the odds of you trying to get a shot at working with one of those category defining companies. So that's the team part and why we've stayed so small. And I think we always will have that same mentality. On the what do we invest inside? The answer is pretty simple.

The answer is that we want to find category creating or category defining companies, and we want to partner with them as early as possible. And we've invested everywhere from seed stages to public rounds and everywhere in between. When we work with companies, we try to lean in in a massive way.

And then the thing that makes us perhaps a little unique is that we'll go earlier than early. We will not just invest at the seed stage, but we work in a lot of ways with founders who are starting to think about that next idea, but don't know exactly what they're thinking about. And we've got this wonderful insights team that will actually sprint at ideas with founders along their journey to help them crystallize their idea. You know, venture at the seed stage is kind of funny sometimes, which is, hey, I'm a founder. I've got an idea.

It's not built yet. I'm going to come pitch the VC firm, VC firm, go back in a black box, make a debate, ask a bunch of tough questions and come back to me and spit out yes or no. That's kind of the process today. And I think what we've tried to create here is let's kind of co-diligence this or let's co-explore this together. And over several weeks or months together, we'll ask those same tough questions and do the calls together. We're going to do the market report research together. We're going to go tap our network to introduce you to the right people together and

By the way, at the end of this, hopefully you're coming out with either the conclusion of this is not worth the next decade of my life spending time on or a lot more conviction in the idea. And if we can have that conviction together from the seed level, that's so unique in this market that I think it builds the foundation for a really long lasting relationship.

I love that. So either way, it's sort of a successful outcome for the founder where, you know, either it's yes, let's do this together or no, and you probably also shouldn't do it. But of course, you let them come to their own conclusion on that. I'm curious what the pitch is to founders about doing this process. And I assume it's part of it is what you just said. And yes, that sounds like a great experience.

But this also isn't happening in a vacuum. There is a market for seed financing out there. A response I might think of to that is like, that sounds great, but I can also go pitch 20 other firms and a whole bunch of them will just give me money right now. Why should I spend all this time with you? If a founder has...

already determined everything they need to know about the idea, which is certainly the case sometimes. It's a founder who's worked in the industry, or maybe it was an open source project they're running on the side and they're ready to go at it full time. Those are instances where you don't really need to co-explore the idea. And I totally buy that. And we're still going to make sure we're there for that process as a more traditional looking seed round. But for a lot of processes out there, I actually think there's this moment in time where you have a few

categories or kind of nuggets of ideas you're really excited about but you really either want to a refine them or be kind of have the the pressure tested thinking from somebody who will be doing that eventually in a pitch anyway and doing that in the out in the open together versus again in this like closed door black box as a vc investment committee i think is a much healthier experience for both sides and then it just leads to better partnership i think any i

founder who's looking to work with the firm, if you pitch somebody and get an answer in a week, that could be one great way to work with somebody. But it'd be much better to have a foundation that was built over several months or better yet, several years is actually often the way this happens with us.

where now we both have the foundation of working styles with one another, but also the foundation on the idea and that we've kind of pressure tested every corner. So as the idea evolves or things aren't going well, we're not sitting here freaking out because we didn't understand what we invested in. We're actually sitting here trying to be constructive, helping with the problems. And I guess also married to what Thrive has become now to a multi, multi, multi-billion dollar asset under management firm is

I would imagine part of the pitch, too, is not just like, oh, we do this and then like there's a great seat around and it's like, oh, yeah. And we can be like a major capital provider to you for a very, very long time. So it's worth it to invest in this deep relationship with us. Listen, it's capital. It's a...

communications team, it's a data science team, it's a talent team. There's not just one person you will ever interact with at the firm. It's certainly all nine investors who are now bought in fully into your idea and are going to storytell on your behalf. And then every type of function or service that you will either need today or at some point in the future of the company, there are thought partners that you can work with.

at the right moments in time and you can pull on those strings with again a group of an entire firm not just that one individual

We would be remiss if we didn't give a shout out to great friends of Acquired, the NAVA team, where this is like literally a case study in exactly what you're talking about. Incubated at Thrive, co-founded by a Thrive partner, company's doing super well. And Thrive has been a major player in every single round that they've done. It's one thing for someone to come on a podcast and say like, here's the strategy and lay it out in broad strokes. But like,

This is literally an angel investment of mine where I've watched it happen firsthand. And it's very cool. Thanks. I appreciate you saying that. And the Navva team is truly amazing. We're not always the best at talking about ourselves, as you guys alluded to. So it's way better. And we think it speaks much louder volumes when its founders being able to tell stories about working with Thrive. And anytime there's a founder considering working with us, our answers are

You should definitely talk to the founders. We've worked with them in the past. That's a way better story than the one we're going to be able to tell you ourselves. Love it. Well, Gaurav, this has been a blast. Thank you so much. Totally. I am so glad we were able to do this. And if you'll let me, I just have to thank you guys for everything you do on Acquired. You know, to date this back to why I'm probably working in business at all today, I'm

Going back to undergrad where I thought I was going to be going into medicine or become a doctor, there was this one class that I took pass fail my senior year. It's one of those kind of throwaway classes taking out of curiosity called American Business History.

And man, did I work the hardest I've ever worked at a class for that pass fail class. I just loved it. I loved the material. I loved the random stories we learned about, you know, TV and TV advertising emerging for the first time in the 1900s and how that led to consolidation of CPG brands. I loved reading about milk co-ops and how they came together in each market. And these were stories that like really stuck with me and I was applying them or thinking about how they related to businesses in the real world today and

And what you guys do is a total extension of that class in my mind. You are educating the world, all of us as listeners on the most iconic companies. And what I like even more is that so much of my corner of the world, which is venture and startups,

really admires other venture-backed companies and other startups. But oftentimes those are stories that are maybe five years old or in the best case scenario, 20 to 30 years old, like a Facebook or Google. And the reality is, sure, I'm sure there are learnings there, but how do we actually learn from

the most iconic companies that are 100 years old out there. That's a crazy thought to me. A company can last for 100 plus years. And that's what you all do. Those are the types of companies you all study. So I get the benefit of that education. So thank you as a founder trying to make it, as an investor trying to always have an edge. I so appreciate and love what you guys are doing and just really grateful for the friendship. That means so much. Thank you. That's been a huge discovery for

been in me over the last year, 18 months of like, you know, we used to just be in our little tech and venture ecosystem and there's nothing wrong with that. That's great. And they're great stories there too. But like, actually it's these really, really old ones, the LVMHs, the Costcos, the Nikes, you know, that are,

undertold in our industry, surprisingly. Yeah, David, it just occurred to me we should make a plot starting in 2015 to today where the x-axis is date and the y-axis is age of company covered and sort of watch it shift back in time because I think

Our personal taste has definitely shifted from the shiny to the enduring over these last eight years. It means a lot coming from you to hear you say that, that what we've believed is that by studying those companies, it brings new dimension to the arena that we operate in, which is the new company arena. 100% agree with that.

Guys, all I can say is that I hope in 100 years, whatever the young kids are doing instead of podcasts, they are going back and looking on Acquired and telling the story of Acquired themselves. Gaurav, let's all hope for that. Thank you so much. Thank you. And listeners, we'll see you next time. We'll see you next time.