A Long View of Banking Industry Disruption (#36)

There’s a lot of overlap between what a very, very good equity analyst does and what an investigative reporter does.

[00:01:26.21] Ben Robinson: So, Marc, thank you so much for agreeing to come on the Structural Shifts podcast. We’re a really, really big fan of Net Interest and so, we feel very, very privileged to have you on the show. If you don’t mind, can we start by you just briefly introducing yourself and giving us a short summary of your career so far, just because I think that will be relevant. I think we can use parts of your career to frame some of this discussion.

Marc Rubinstein: Sure. Well, no, thanks, Ben. It’s great to be on. I’ve been in the realm of financial services for 25 years. I started as an equity research analyst, analyzing banks — I spent 12 years doing that — I spent 10 years investing in banks as a partner of a hedge fund exclusively focused on financial services, stocks globally, publicly-traded, long and short. And then since 2016, I’ve looked at financial services out of sheer interest. It’s something that it’s difficult to shake off. And so that’s basically it in a nutshell.

[00:02:22.07] Ben: Good. Okay, so we’re gonna pick up on different aspects of that. But I wanted to start with the equity research part because one of the newsletters I’ve most enjoyed — I mean, they’re all brilliant, but one of the ones I’ve most enjoyed just because it had personal resonance for me because I was once an equity researcher — was the one where you talked about the history of equity research. If you don’t mind, maybe you can just talk a bit about how sell-side equity research works, because it’s kind of a strange model where, you know, fund managers have access a lot of times to internal research, but yet they source it from a third party; that third party doesn’t charge directly for that research. So it’s kind of a strange model. So if you don’t mind just talking about sell-side equity research, and also how it’s changed, right? Because I think, you know, if I were to put it crudely, it’s gone from a really well-paid, really highly-solicited job to something which is not that anymore, right?

Marc: So, I started out as an equity research analyst in the mid-’90s. And I was not particularly familiar with it as a professional opportunity. It wasn’t something that I, at college, realized that it’s something that I wanted to do. I wanted to go into finance and I participated in a graduate training scheme at a bank — Barclays Bank — it was an investment banking subsidiary of Barclays at the time; and went through various placements across the bank, not dissimilar to the way graduate training programs work today. I do need to say though, any listeners that have watched the series industry, it was nothing like that. But I ended up in equity research and spent, as I said earlier, 12 years there. Now, the way equity research was conducted then was very, very different from the way it was conducted prior to that, and the way it’s conducted today. Equity research emerged in the 1960s, 1970s as an add-on to the core brokerage business that brokers offered their clients. At the time, commissions were very, very heavily regulated and the only way to compete was through ancillary services. And so, brokers offered equity research as one of those ancillary services. They gave it away for free. It was a marketing device in order to attract brokerage business. And that was the case when I entered as well. At around the time — so, we’re going into the ’90s, into the late ’90s and early 2000s — another side of the investment banking business was booming, and that was M&A — an equity underwriting. It’s very topical now to go back 20 years and look at the tech boom of ’99–2000s, given the conditions we’re currently seeing today. But the way it worked back then is that companies would want to IPO and they would choose their investment banks, not dissimilar today. And one of the features that they would look for in selecting their investment bank was the quality of the research that that investment bank produced. And so, rather than exclusively being an ancillary business to the trading business — which was the case, historically — increasingly research became an ancillary business to banking, as well. And as a result of that, equity research attracted a new revenue stream and was, therefore, able to grow. And in the late 1990s, this business of equity research grew, costs increased, a superstar culture emerged.

The markets are not efficient, and Signal and Zoom are great recent examples of that. And to the extent that they’re not efficient, research does have value and those inefficiencies typically emerge the lower down the market cap curve one goes.

Marc: The piece that you referenced, I talked in there about a telco analyst who worked at Smith Barney in New York, called Grubman, and he wrote on telco stocks like AT&T, and he was coerced by his boss, Sandy Weill, who was the Chief Executive at Citigroup, to rethink his view — it’s kind of a euphemism for upgraded to a buy — on one of the stocks under his coverage. The 2000s came along, Eliot Spitzer, who was the Attorney General in New York, took a view that actually there was a massive conflict of interest at play here and he tried to dismantle that construct within equity research. The problem is that the cost base was still there and the cost base didn’t have now a revenue stream to attach to. And so, you had like an orphan kind of wandering around looking for kind of a foster family; this cost base was looking for a new revenue stream. For a short period, it stumbled upon proprietary trading. So, the period between 2001 probably, 2006, 2007, investment banks built very large prop trading businesses, internally, and equity research was a feeder mechanism for some of the ideas that they would put on. And then, the financial crisis happened and that business disappeared as well. Ultimately, that was also dismantled by regulators through Volcker amendment to the Dodd-Frank Act of 2010.

Marc: So, throughout this entire history, you’ve had this kind of valuable resource — inherently, experts looking at companies and issuing investment recommendations through the process of research on those companies. Yet, in and of itself, it was a business that found it very difficult to reflect a model that was able to pay it sufficiently. Which brings us to today and you’ve had another bout of regulation — this was in Europe about three years ago — in 2017, you had MiFID II, which required an unbundling going all the way back to the ’60s, where this process started, where research was ancillary to trading, regulators in Europe came along and said, “Actually, there’s a conflict inherent in this as well.” Certainly in the degree to which it paid for by institutions, and yet again, the business has gone through a kind of an identity crisis. And that’s really where we are today.

[00:08:35.08] Ben: If you like, it’s been sort of hammered by three waves of regulation, right? So, first, Eliot Spitzer, then Volcker, now MiFID II. One of the things that’s changed is you said, I think in your newsletter, you talked about how much Grubman made, right? I think he made like $50 million or something in the space of a few years, which would be unheard of now. So, you know, payback has gone down. But the other thing that’s notable is the amount or the volume of equity research, which has dramatically changed. I mean, you talked about go-to Credit Suisse, an investor meeting, they were like, you know, hundreds of analysts there. I remember, you know, going to SAP investor meetings, there would be 100 plus analysts in the room. And so, clearly, we went from a situation where there was oversupply — do you think we’ve tipped to the opposite situation where there’s a lot of undersupply, particularly of smaller cap stocks?

Marc: For sure there is an idea that there’s an undersupply research out there, that a lot of it is being certainly a shakeout within the industry. Now, it was arguably overpaid, to begin with — and certainly Grubman, did he merit the millions of dollars that he accrued? Probably not, almost certainly not. Possibly not from a compensation perspective, but from a resource allocation perspective to the industry, we may have under shored on the other side. And it’s not dissimilar. Maybe the analogy here is the media, is the press and actually there’s a lot of overlap — and I draw this out in that piece — between what a very, very good equity analyst does and what an investigative reporter does. And there’s a public service here, there’s a public good here. You know, certainly what the research analysts were doing — so Wirecard, very well-known fraud. Interestingly, the credit, rightly so, for uncovering that fraud has gone to a journalist, Dan McCrum from the Financial Times. But there are other cases, and certainly, there were a couple of analysts. Some of them didn’t cover themselves in glory, but there were a couple of analysts who also got that right. And there’s kind of a public service to looking independently, without being influenced by the companies themselves and the management of those companies, nor by other constituencies, for putting out independent research on companies, for doing their job.

[00:10:49.16] Ben: It’s interesting that you call that public good, because it suffers from the same shortcomings of a public good, in the sense that it’s difficult to exclude access to that research once it’s in the public domain. And it doesn’t stop you from consuming. In many ways, it does have the properties of a public good, which means it suffers from the free-rider problem and in general, sort of under-provision.

Marc: Absolutely right. And in addition, it’s difficult before the fact to know if it’s any good or not. Clearly, the analyst report that said that Wirecard was a fraud, after the fact we know was very, very valuable research. The report, which would have arrived on the same day, on the client’s desk which said, you know, Wildcard is a great company and it’s got huge upside — again, after the fact we realized it’s got negative value. But at the time, the decision rests on the recipient to discern between those two. And that’s not easy. And it’s not easy as well, to know ultimately, where the value is, in this. There’s a lot of noise out there.

[00:11:53.12] Ben: I want to come back to Wirecard in the context of, you know, bank regulation, and whether it’s a level playing field. But just on this idea of, you know, perhaps under-provision of research. Do you think that creates arbitrage opportunities? So, for example, do you think it’s now easier to create alpha investing in small-cap stocks? Because there’s a high return on doing that research yourself, whereas before, that was not the case.

Marc: I think, yes. So actually, just recently, there’s two companies called Signal — Elon Musk tweeted quite recently that one should be buying Signal, he was a big proponent of Signal; readers picked up the wrong Signal. Actually, early on in the pandemic, the same thing happened with Zoom, there were two Zoom companies. The point here is, you know, the markets are not efficient, and Signal and Zoom are great recent examples of that. And to the extent that they’re not efficient, research does have value and those inefficiencies typically emerge the lower down the market cap curve one goes.

It’s incredibly difficult for any investor to change their mind.

[00:12:57.18] Ben: There’s a quite high proportion, certainly relative to, in the past, small caps that no longer have any sell-side equity coverage, right?

Marc: Yeah, that is right. And it’s not great, either. Now, the flip side is that some of it has shifted over to the buy-side themselves. That was a trend that was already in place from the institutional perspective. But what we’re now seeing because of the ability to share ideas more freely, through the internet and platforms like Twitter, and also dedicated platforms, like Sub-Zero, and the ability for individual investors or smaller, emerging institutional investors to get access to infrastructure — maybe they can’t afford Bloomberg at $24,000 a year, but they can afford other apps and other facilities — more research has been generated. And you know, actually, this brings us back to the model, it is quite interesting. So, the old research model was ‘we’ll give it away to everyone for free and we’ll attract some revenue dollars through trading commissions’. More recently, post-MiFID II, that translated into, ‘we will just service, say, the top 100 customers who are prepared to pay for it’. There’s a trade-off now between generating thousands of dollars from 100 customers or via the internet, particularly where the market might be individual investors who… And whether this is cyclical or secular or not, at this stage, I don’t know. But certainly, retail engagement in the market is increasing. They’re not going to pay thousands of dollars for institutional research but the quality of what’s available on the internet is very, very high, and maybe they’ll pay $20, $30 a month, and tens or hundreds of thousands of those… You know, there’s a good newsletter writer called — there’s a number of good newsletter writers out there, but a number of them, they offer, in my view, institutional-grade research, particularly in the technology space, and they charge $10, $20 a month for it. But they have hundreds of thousands. And I actually would be interested to see their p&l against a traditional equity sell-side research business, given lower costs and broader reach.

[00:15:21.13] Ben: I was actually gonna highlight this as a second arbitrage opportunity, which is one might be there’s more potential to make money from small caps than there was in the past, but the other one is, I think — you know, I don’t want to suggest that this is the model for Net Interest, but a bit where you can almost crowdsource almost as good or maybe even better, in some cases, research from the internet, which is, you know, the sort of the bottom up, you know, kind of organic production of research to fill the gap. Because, I agree, and you see the same thing also in investigative journalism and other content areas, which is, you know, your choices are either to pay a subscription for the FT or to subscribe to newsletters, right? Because these things are sort of mushrooming. And, you know, I mean, that’s another phenomenon in the way that you’re embodying, which is you publish your newsletter on Substack, and in some ways, you’re kind of contributing to this gap that’s been left as equity research has become or is provided to a lesser extent than it was in the past.

Marc: Yeah, I think that’s right. And, you know, it comes from just this, I don’t like the word ‘democratization’ that people use, but it certainly plays into our theme. You know, clearly, the advantage that… And I remember when I was an equity research analyst, it was at BZW, which you mentioned, which was a subsidiary of Barclays. And I was looking at Swedish banks in 1996. They kind of emerged from a crisis, they’ve been re-privatized, they’ve been re-IPOed, and there was kind of a recovery theme in a way. And I stumbled upon — it was kind of the early days of the internet, we had access to the internet, but what was on there was difficult to find. There was no search, it’s kind of the days before Google. And I kind of stumbled across a document written from the Central Bank of Sweden, the Rik Bank, which provided very interesting data on kind of banking volumes. It was faxed to me by somebody in Sweden. I literally, I was working at home, it was a Saturday, I was working at home. I couldn’t read it because it was Swedish. Google translate didn’t exist. I ran around to my local bookstore, bought a Swedish-English dictionary, translated this thing, put out a piece of research on this finding that actually loan growth in Sweden, based on this data was greater than anybody anticipated. And it was it. I stumbled across something purely informational. And clearly, the friction to getting that information now is just non-existent. Everybody has all of the information all of the time hence, there’s no arms race in place to get new sources of information. Kind of alternative, dangerous nets. But you know, that’s all done. What’s happening now is the same thing is happening to analysis. Now, people, again, through the ability to meet in the market square via whether it’s Twitter or any other kind of platform, there might be a great analyst who’s based in… I mean, I know there’s a great equity research analyst, who I read called Scuttleblurb, he is based in Portland, Oregon, far from Wall Street, and there are people just all over the world in India, in small towns in England, all over the world, all analyze it. So, they’ve got the base level of information and the degree of analysis they’re doing now is institutional grade, and it’s accessible.

[00:18:50.08] Ben: It was just before the financial crisis that you switched from being a sell-side analyst to working for a hedge fund, if I’m right. Presumably, that was a great time to have the ability to go short on banks. And I just wondered, you know, when you were living through it, how evident was it in advance of the crisis that it was coming. Could you presage that, you know, we were gonna have this big crash, or was it really as sort of sudden and unexpected to you as it was for the people that weren’t as closely following that?

Marc: It’s a really interesting question. It would be easy for me to say yes. I would say the way I would finesse it is yes, we saw elements of it. But it’s important to remember, somebody once said, ‘causes run in packs’. There’s never a single cause. I think it’s lazy analysis. And I see it and often politically motivated for people to say the financial crisis was caused by x — and x typically correlates with one’s political inclination. X could be, you know, greedy bankers, or x could be people borrowing too much or x could be sloppy regulation or x could be too much leverage at the banks or whatever it might be. There’s a whole range of reasons. And ultimately, it was the confluence of lots of those things that happened to create the crisis. Although we — me and my colleagues — identified some strands of it to have predicted the degree to which it all coalesced, you know, in kind of, you know, let’s say, October 2008, I think that was difficult to predict. But that’s never… There’s complex reflexivity to it. It happened, I remember watching, I vividly remember watching the debate in Washington around passing the torpid. It was controversial. And I remember specifically it went down. But because it went down, the market went down, and so, reflexivity because the market went down, then when it came back for another reading because the market had gone down, incentives have shifted. Predicting kind of reflexivity in advance is difficult. Having said that, the worst things we saw. So back in, you know, we were short. I mean, back in 2006, we were short some subprime companies. I went back through my — I’m not a Facebook user anymore but when I canceled Facebook, I downloaded all of my posts, and there was one post in July of 2007, where I cautioned about an impending financial crisis. We were short, Fannie and Freddie, and all the rest of it. Just an observation about investing broadly, and, going into more detail on the crisis, but investing broadly, it’s incredibly difficult for any investor to change their mind. And I think there were a number who were negative; a lot stayed negative beyond March 2009. But the fascinating thing to me is those that there were kind of negative, and then they switch positive. And just taking a step back away from financial services, but generally, investors’ ability — the very, very best investors, their ability to adapt to changing conditions like that, continually, it’s very, very difficult. And I think, you know, history is littered with investors who have got two or three calls right, but to be able to retain an element of persistence, through those changing dynamics, it’s very, very difficult.

[00:22:38.06] Ben: Yeah, I think it could be a rabbit hole but I would argue almost that potentially the greatest of all investors, Warren Buffett, has not been able to adapt this strategy to some extent to the digital age, because he’s still buying sort of, you know, asset-heavy companies with a lot of supply-side, economies of scale, and so on. So I think it even happens to the best when there’s a paradigm shift.

Some of the consternation of bankers right now is that tech companies are getting away with stuff that they just wouldn’t be able to get away with.

Marc: True. And to our conversation earlier about small cap, large cap, I mean, certainly, his performance hasn’t been as good in the recent past, compared to prior periods in his history. And he’s got longevity, very difficult to compare him to any other investor, because I’m not sure there’s any track record out there that’s as long as his. But he made the point recently — he actually made it ’99 — he made the point, there’s a great quote in ’99, where he was talking about if he had a million dollars to invest, you know, he’d crush the market because of his ability to access small cap, but it could be a reflection on your point as well.

[00:23:36.10] Ben: It might be both because you actually wrote another great newsletter about the curse of managing too much money — it becomes harder and harder to achieve a return on much bigger sums.

Marc: Yeah, exactly. That’s another curse — I call it the Zuckerman’s curse. Gregory Zuckerman, who’s a great writer, has written a number of books about — he’s written two, in particular — hedge fund managers. And they’ve been published. Clearly, he’s been attracted to them because of their profile, and their profile is a function of their performance. And therefore, there’s a direct line between them showing good performance and him writing a book. Actually, there’s more nuance to that. It’s not them having good performance, is them having good performance and being big enough for him to notice. One of my favorite investors out there is Hayden Capital. A guy called Fred Liu, based in New York, was up 222% last year, but he’s small, nobody knows of him. And the curse is that over a certain size it’s difficult to sustain that performance on an ongoing basis. Actually, it’s worse than that because typically, after a good year, the money then comes in. And investing isn’t mean reverting but certainly, there’s an element of… It’s only as difficult to sustain very, very good performance across multiple time periods.

[00:25:05.17] Ben: Do you know what Zuckerman’s next book is about? Just so we know in advance.

Marc: That’s a good one. I feel bad because I’ve read them all. I mean, they’re great books. It’s the writing on the wall.

[00:25:20.11] Ben: I’m gonna ask you, a bit like the financial crisis question I’m gonna ask another question, which is gonna be, I think, impossible for you to answer in retrospect, without any sort of cognitive biases, and so on. But you wrote another newsletter, which I really, really liked, which was called “The End of Banking”. How obvious was it now, in retrospect, that post-financial crisis, financial services was just not going to be the same again, right? Because their profitability is not the same. It doesn’t represent anywhere near the same size of, you know, as the composition of the index in which it sits. And so, it just seems like the financial crisis in a way was like, you know, the peak. And you know, maybe as you said, this may be cyclical, it may be that in the future, it becomes as big as it was and as profitable as it was. But certainly, it seems much more structural, for the reasons I think we can talk about now. But when did it become evident to you that the sector becomes structurally less sexy in a way?

Marc: I’ll be honest with you, it took me a long time. My mental model — I mentioned Swedish banks earlier — my mental model was that banks — and this has been true historically, and in my working memory through the Swedish banks, they went through a period of crisis, they’d be recapitalized, they’d come back to the market. Typically, they’d be a lot more conservative and so, underwriting would be tighter. They would then generate huge amounts of capital and then recover. There was a singularity inherent in the industry. They would crash, they’d be recapitalized and then recover. And that was my mental model. I remember at the time being told — we talked about the tech boom from 20 years ago, ’99–2000. We’ve talked about that already. I remember in 2010, 2011, a strategist who’d experienced the tech boom — I mean, I experienced a tech boom as well but I wasn’t directly involved in it — I remember a strategist at a bank saying to me, “The market has to cycle through a generation of investors to forget what happened, to forget the scars of the previous crisis for any kind of return to normality.” And I didn’t believe it. I said, No. You know, so I was sanguine about the extent to which the market recovered. I underestimated a number of things. I underestimated one, how low-interest rates would stay for how long. Two just the… You know, and I often think, actually, for the investment banks, worse than 2000 for them, and their long-term from a strategic perspective, worse than the experience they suffered in 2007–2008m how well they performed in 2009, hurt them longer term from a strategic perspective more, because the backlash was then huge. It was kind of the political disgust, they made so much money in 2009, and that increased the scope of regulation, which muted them for many, many years after that. So, I underestimated regulation, and then we can talk about disruption. It’s difficult. I’m not sure I underestimated that but that was clearly another factor.

[00:28:45.28] Ben: Maybe let’s unpack those things because I think interest rates, I think, you know, we won’t know for a long time if this is a structural or a cyclical factor. But it seems like the re-regulation of the banking is a much more structural thing. As is this one other thing which I don’t know if it’s permanent or not, but you talk about it as governments inserting themselves into the cap table of banks. This idea that they become almost like an arm of government in some ways, right? Because, you know, particularly during the COVID crisis, you know, that we used the direct funding and also, you know, they just don’t have the same control they used to have over capital allocation. So, again, I don’t know if that’s a structural or a temporary phenomenon, but certainly, one of the things that’s been so weighing on bank valuations. But the re-regulation part, I think is probably much more structural. And the question I wanted to ask you about that is, you know, I think we could probably talk about regulation in different buckets. So part was about making banks safer, part was about some introducing more transparency, but the part that I think is now looking a bit kind of controversial in a way is all the regulation is aimed at introducing more competition to banks. You know, so, a PSET, for example, almost seems like that was mistimed because I think what the regulators perhaps hadn’t appreciated because the lag, was that there’s just been so much new competition from non-banking players, right? So I wonder almost in hindsight whether regulators would still introduce some of the regulation they’ve done to introduce more competition into banking because it seems like almost now, not necessary. And potentially unfair. You know in your last newsletter, you talked about that letter from Ana Botín to the FT. And, you know, some of that I thought was quite justified, some of that criticism of recent regulation and the absence of a level playing field. So, it’s a long question, but do you think almost like some of the regulation are tilted or was too far against the banks?

Marc: Yeah, I think it is. I think it’s a truism that regulators typically fight the last battle. And not just regulators. I think it’s a response to, you know, I mentioned earlier, you know, my mental model for the period after the financial crisis was dictated by the last battle, which was the Swedish banking crisis of mid-1990s. So for regulators is the same. They are very, very focused on fighting that battle. And equally, I think it was a truism that whatever the cause of the next financial crisis, it was never going to be the same ingredients to the one in 2007, 2008 to 2009. By the same token, we’re not talking about a financial crisis, here. We’re talking about as you put it out, a playing field. But certainly, the combination of low-interest rates, and a playing field that’s not level was very, very negative for the banks. And there was a degree to which maybe regulators understood that, maybe they didn’t. If they understood it, certainly there was no political motivation to circumvent it, because there was this culture about wanting to punish the banks. But you’re right, you know, this point about they insert themselves, the role of any chief executive of any company, pretty much exclusively is capital allocation. And from an investor’s perspective looking at banks, if they don’t have the capability to manage their own capital allocation because regulators can come in… I listened to a debate recently, between some sell-side analysts, and market participants, and representatives from the Bank of England. And the view of the Bank of England — and I don’t think they’re unique here. I think it’s a view of many regulators that prevented their banks from paying out capital, in March of 2020 was only temporary. But you’ve spoken about scars and the degree to which scars can be left, and from now on, any investor that is investing in a bank understands that at any point, particularly given the capital framework that was put in place to protect banks from unknown. I mean, clearly, a pandemic was an unknown, but that’s what capital is there for. It is there to protect against the unknown. It is not there to protect unknowns, except for a pandemic, or unknowns except… All unknowns, whatever they might be. And so, even with that in place, for them to come in and say, “Actually, we’re going to take charge here of capital allocation” that sends out a very negative signal.

One could have made an argument 10 years ago that banks have got more data, more valuable data. I guess Amazon has got shopping data, Google has got search data, Facebook has got social data, and some overlap between them. Banks have got financial data, and what data is more valuable than financial data? And yet, they’ve been restricted, rightly, from their ability to monetize that.

[00:33:26.20] Ben: Plus, they’d already introduced regulations to ensure that there were more buffers, that you had to protect against losses earlier in the cycle. And so, to some extent, it was almost like a double hit on their ability to allocate capital, right?

Marc: Exactly. Exactly. So we’ll see the extent to which… There’s a view out there that we haven’t seen the worst, that maybe over 2021, when things begin to recover, small businesses will see unemployment. And there’s a view out there. The other thing is, again, a competitive point of reflexivity. Back in March, the regulators didn’t anticipate — to be somewhat fair to them — the degree to which monetary policy would come in, and fiscal policy would come in, but once they had come in, there was a degree of caution that was maybe unwarranted. And again, they might argue, who cares. We’re hurting some bank investors here, but who cares? But ultimately, from the perspective of a bank investor, there’s some long-term issues here. And actually the ultimate bank stop, and it worked in 2009 is that investors, the private sector bails out the banks, the private sector puts more money in because it knows that actually, at this point in time, we can draw a line and that future returns for that bank look positive. It would have been difficult actually, for that to have taken place in 2020, given what had gone on before it and given the things we’ve discussed about regulatory intervention. I think it would be very difficult. The banks have raised capital in the private markets, and that would have been very negative.

[00:35:19.18] Ben: Do you think maybe things might change from here? This is where I wanted to bring in Wirecard because the banks are so heavily regulated now and so closely scrutinized that a lot of the scandals and fraud and impropriety is happening outside of the banking sector in tech companies or shadow banking or areas of shadow banking. Do you think at some point that the regulator is now going to change the direction of, or at least move its focus to all of those companies that are doing banking, but aren’t banks?

Marc: Whether it’s going to happen or not, I don’t know. And actually shadow banking, I mean, I said earlier, I’m going to contradict myself now talking about fighting the last battle. But some of the ingredients of that last battle were in the non-banking sector, were in the shadow bank. Subprime companies weren’t regulated and in the US, different regulatory requirements for thrifts, such as Washington Mutual, who played a game of regulatory arbitrage, choosing to be regulated by one regulator rather than a broad financial services regulator. The investment banks weren’t regulated as banks. Lehman Brothers was regulated separately from… And as a result of the crisis, Goldman and Morgan Stanley became bank holding companies and became regulated as a bank. So shadow banks, this kind of regulatory arbitrage was going on anyway. But you’re right, is going on now. And these payments companies, to all intents and purposes, what a payments company does is not dissimilar to what a bank does. And we saw that with Wildcard, actually. And hence, you know, you mentioned Ana Botín’s FT piece. Some of the consternation of bankers right now is that tech companies are getting away with stuff that they just wouldn’t be able to get away with.

Nobody wants a mortgage, they want a home.

[00:37:23.05] Ben: in every sense, right? In the sense of the same scrutiny, but also, you know, they don’t even have the same level of capital, for example, to do the same business. It’s not just more scrutiny, it’s not just the supervisory level blame for this; it’s actually an operating level blame for this as well.

Marc: Yeah, that’s right. That’s right. That’s right. And the issue here is not about financial stability, per se. It’s about the specific issue that Santander has, and Unicredit has mentioned it, and Jamie Dimon at JP Morgan has hinted at it as well, which is about data. And one could have made an argument 10 years ago that banks have got more data, more valuable data. I guess Amazon has got shopping data, Google has got search data, Facebook has got social data, and some overlap between them. Banks have got financial data, and what data is more valuable than financial data? And yet, they’ve been restricted, rightly, from their ability to monetize that. And I think the issue now is we’re seeing this convergence of data and this degree of consternation about the degree to which the playing field is not leveled.

[00:38:43.00] Ben: And the PSDs bit as well. It’s not just that they have to share data if the customer says that’s okay, is that they’re sharing data with companies that already have, in some ways, an advantage because they’re already more embedded in our lives, right? So, you’ve made the point many times in your newsletters, if you control distribution in the digital age, you know, you’re in a much better position to create network effects and to reduce the cost of customer acquisition and so on, than if you’re a balance sheet provider. And so it’s almost like, it’s a double whammy of sort of thinking you need to introduce more competition and forcing banks to share a really valuable asset with those people that are already better positioned to capitalize on data and distribution anyway.

that combination of Goldman Sachs’ back office, banking as a service infrastructure, with Apple’s consumer-facing distribution and brand value, could be a bigger competitor to JP Morgan than Chime or any kind of startup, FinTech, challenger bank.

Marc: Yeah, that’s right. And banks, certainly some of the starter bank, some of the challenger banks are trying to exploit that idea about distribution. But they don’t have the distribution right now, and that’s obviously an issue for them.

[00:39:41.03] Ben: I’m really pleased you mentioned challenger banks because one of the things I wanted to ask you is, you know how people are talking about this COVID economy is k shaped, right? And the idea that everything digital is booming and everything analog is suffering or faring really badly. And to some extent, you’ve seen that in the world of financial services and FinTech. You know, you talked about Square — which we’ll come back to in a second — as a company that’s really shot up and really found more customers and been able to benefit from the crisis. But challenger banks notably haven’t. What do you put that down to?

Marc: Well, some of them have, actually. So you’re right. I did write. Some of them have. Chime in the US has done very well through this period. But others haven’t. I think the biggest challenge, singularly, that these challenger banks face is their ability to acquire customers cheaply — and the right customers. There’s some question mark as to the quality of those customers, let’s say. And actually, to be fair to the company, the company has provided disclosure in the past as to what the unit economics are, on a customer that pays its salary account into its Monzo account, as distinct from a regular customer that maybe saw their friend has got Monzo, downloaded the app, and maybe actually isn’t even an active user. I guess a problem — maybe is why it’s different from other digital industries — is that there’s a life cycle perspective, whereby the customer becomes more profitable when he’s a little bit older. And yet, digital adoption tends to take place when they’re younger. So the challenge for the challenger banks is twofold. One is, as I’ve mentioned, it’s the ability to acquire customers cheaply. But the second, linked to the ability to capture revenue from them, is can they turn a millennial into — can they extract profitability, which is equivalent to what a typical bank customer profitability might be? Or do they have to wait until that customer gets a bit older, and kind of hits that profitability level, which would be typical in a lifecycle process.

[00:42:11.04] Ben: Let’s talk about customer acquisition cost, because I agree with you, the unit economics are really hard to manage, if you’ve paid loads and loads of money to acquire the customer. It costs a lot to acquire the customer. And then, the lifetime value is somewhat held up — in my view, at least — which is, you know, the ability to sort of upsell and cross-sell customers is hard in banking because we don’t actually spend very much time on the banking apps. And so, we still have this thesis that it’s gonna become much easier to embed banking and other channels than it is to build a really, really profitable banking business going forward. Because, you know, if you consider social channels, for example, or e-commerce channels, we spend a lot of time on those channels. And if you can introduce banking at the point of sale, or if you can introduce banking in a social way, then, you know, first of all, we have a low or even negative cost of customer acquisition, but then you also have the ability to generate very high lifetime value, because you have the customer spending a lot of time on the app, and therefore, you have a lot of surface area in which you drop-sell and cross-sell. Where do you stand on that whole embedded banking discussion?

Marc: Yeah, I think that’s right. I think that is right. I think one of the reasons why payment has been the most successfully penetrated area within financial services by startups and digital propositions is exactly this point that the frequency of payments is infinitely higher than the frequency of mortgage application. So that is right. And I’ve thought about this in the context of insurance, as well as banking, but in both cases, nobody wants a mortgage — there’s no tangible benefit, there’s no tangible value in the mortgage itself. Nobody wants a mortgage, they want a home. And secondary to that is the financing of it. And equally, nobody wants a checking account. Ultimately it is a payments mechanism and they want some facility to serve multiple jobs. One is to preserve their payments. One is as a store of liquidity. One is maybe as a conduit into savings — longer-term savings. But the tangible value of the thing itself is low. And, as you say, therefore, the appeal of embedded finance is very, very high. Now there are issues around regulation, and from a business perspective, the ability to scale, but from a consumer perspective, it makes perfect sense.

[00:44:51.15] Ben: And do you think this is, therefore, the biggest threat to banks over the long term which is, you know, it becomes easier to embed finance in channels that have engagement, than trying to create engagement in banking channels, and therefore, as you’ve talked about this sort of split between what we might call distribution financial services and the, I guess we could call it the manufacturing financial services becomes even more pronounced, and therefore, you know, profits go one way and the other becomes more and more of a utility over time.

Marc: It depends. So, one of the features of banking is that each market is distinct. There’s a path dependence because we’re going back hundreds of hundreds of years, banking has evolved very, very differently across different markets. You know, a mortgage in Switzerland is very, very different from a mortgage in the UK, for example. So Russia is an interesting case study. Sberbank, the biggest bank in Russia, has brand value that banks across countries in Europe and in the US would envy. They have phenomenal brand value. Sberbank itself has launched a marketplace where… Everything we were discussing earlier, it knows it’s got the data and it’s got the brand value. So it’s got the data and the brand value. So, it’s offering a marketplace to its customers via its app. So that’s one approach. Everything we’re nervous about big tech companies in the US and countries in Western Europe, everything we’re nervous about them achieving, Sberbank itself might be achieving that and is in competition to the tech companies in Russia because it’s forging its own path there. So that’s one market. It’s a bit different. But you’d be right elsewhere. You know, I often think about that. I’ve written this in one of the newsletters that Goldman Sachs plus Apple is probably the biggest competitor — that combination of Goldman Sachs’ back office, banking as a service infrastructure, with Apple’s consumer-facing distribution and brand value, that combination of both of those could be a bigger competitor to JPMorgan than Chime or any kind of startup, FinTech, challenger bank.

[00:47:18.01] Ben: Listening to you, it seems there’s a tendency to conflate retail banking with banking in general, because, you know, trust is so important. And as you say, once we move into wealth management, then you just don’t see the same level of tech or FinTech disruption. Once you move into wholesale banking, you know, you don’t see the same level of tech and FinTech disruption. So I wonder, you know, are we guilty sometimes for talking about retail banking, as if it’s whole banking? And then the second point would be because you’re such a student of financial services, I wonder, do we also fall into the trap of thinking that these things which look so disruptive, have actually played out many times before in different guises? Because I was reading your newsletter about Visa before and it’s almost in a way that, was Visa not embedded banking in a way? So I wonder, are we also guilty of thinking these are bigger trends than they really are and they happen quite regularly over the course of history, in cycles?

Marc: Yeah, it’s such a good point. I think 100% I agree with that. And there’s nothing new under the sun. A lot of what we’re seeing now we’ve seen before in various guises. So you’re right, I did a deep dive on Visa, recently. It’s a fascinating story. The founder of Visa, Dee Hock was so far ahead of his time in thinking about payments and the way in which payments simply reflect — just to give some context, we’re talking about the 1960s, where, you know, computers were the size of buildings, and he was thinking about payments. And most of the payments at the time were done on paper that was shuttled between banks. And he foresaw this system whereby payments were — he didn’t use the phrase ones and zeros, but he talked about alphanumeric data — simply alphanumeric data. He has written about all of this. So, Dee Hock, the founder of Visa, is 92 years old today. He founded Visa in the late ’60s, let’s call it 1970. He was CEO until 1984. And he wrote a book in ’99 that was re-issued in 2005. And he questions the need for banks. He says, “If it’s just alphanumeric data, why do we need banks, and the payments?” And he, at the time, knew nothing about crypto, knew nothing about digital currencies. But presently, he talks about a global currency, he talks about payments just taking place directly between consumer and merchant, much of the functionality that Bitcoin potentially offers — or crypto more broadly potentially offers today. And he was talking about this in the ’60s and ‘70s.

Marc: Just to come back to your question, similarly, equally, he allowed JCPenney, which went bankrupt last year, it kind of came out, it went through a bankruptcy process in 2020, has come through with that now. But back in 1979, it was one of the three biggest retail merchants in the United States. It was so big, he said, “Well, let’s introduce embedded finance, let’s bring it straight into the Visa ecosystem”. But even before that, interestingly, it was companies like JCPenney, that actually invented the credit card in the way now that… So now we think about kind of Shopify, and everything that Shopify is doing with Stripe to embed finance at the point of sale in merchants. This was a big merchant’s… I guess, what’s changed is that you don’t have to be big anymore, that because of these providers, because the cost of everything has gone down — the cost of storage, the cost of underwriting, the cost of everything has gone down — it’s become more accessible for smaller companies to offer these things that the big companies have been offering since the 1950s and 1960s. So yes, there’s nothing new under the sun. The same with challenger banks. AG was a challenger bank that merged in the UK with a not dissimilar model to the model of many challenger banks today, 20 plus years ago, 25 years ago. A lot of these models have appeared before and one of the things that I try and do in that interest is look back through history — as you said — as a student of financial services, to learn from them and apply them to the situations we find ourselves in today.

[00:51:54.04] Ben: Having said that, there is nothing new under the sun, I just want to get you on digital currencies, because actually, it does seem like something which is more transformational. If you don’t mind, can you briefly just describe what digital currency is because, you know, one of the things that, you know, when we talk about digital currencies, people get, I suppose, a bit confused about is, you know, if I were to pay you some money now, and I would just transfer it to you, that’s in a way digital money. So what’s the difference between just an electronic transfer of Sterling versus digital Sterling?

Marc: There’s three types of digital money broadly. One is crypto. So, basically, it’s got its own infrastructure and its own coin. So, like Bitcoin. Two is we can talk about stable coins, which have their own infrastructure. So Facebook looks like it will launch any week now, actually, its own stable coin. It’s got its own infrastructure, but it’s stable in the sense that it’s not its own coin, it’s a US dollar or some other currency. And then the third type is a Central Bank Digital Currency, which is, the central bank maintains the infrastructure. It is also an existing currency — call it the US dollar. So these are the three types. And the difference is… So, if we’re talking about your question referred to Central Bank Digital Currency, the difference is, you know, if I give you a 20£ note, it will have a serial number on it. So, when I’m talking about a digital currency when I’m paying you online, it won’t have that serial number on it. So basically, I’m digitizing that 20£ note. I’m digitizing that 20£ note such that if I was to pay you 20£, it would have a serial number attached to it, such that the regulators, the central banks could then audit the trail of that currency the way they do with cash right now through a digital system.

[00:53:56.06] Ben: But isn’t that the most important point for Central Bank Digital Currencies, which is about that ledger? And therefore, it really goes into the question the extent to which you need banks to intermediate. Because if you can have your wallet directly with the central bank, if the central bank can disperse money to you directly, does it to some extent take away that role of banks as creating money supply? Because I suppose, to the earlier question about, you know, if we are going to see an increased split between the distribution of manufacturing financial services, and the central banks kind of rising up to take a bigger share of the manufacturing — or I don’t want to call it manufacturing, but if the balance sheet aspect of financial service because more will just sit directly on their ledger. Does that again squeeze the traditional banking sector?

Dee Hock, the founder of Visa wrote a book in ’99 where he questions the need for banks. He says, “If it’s just alphanumeric data, why do we need banks, and the payments?” And he, at the time, knew nothing about crypto, knew nothing about digital currencies. But presently, he talks about a global currency, he talks about payments just taking place directly between consumer and merchant, much of the functionality that Bitcoin potentially offers — or crypto more broadly potentially offers today. And he was talking about this in the ’60s and ‘70s.

Marc: Yeah, absolutely. And one of the reasons why the central banks are being so cautious in rolling out Central Bank Digital Currencies — everybody’s looking at China — China is trialing Central Bank Digital Currencies right now. They’ve suggested that those trials will continue up until Beijing Winter Olympics in 2022. So, we’re not going to see anything launched until at least then. And that’s in China. And similarly, Europe and various other central banks have said that they’re still studying it. And one of the things they’re studying is exactly that, is that what would differentiate between retail central bank digital currency, and wholesale. And one extreme would be retail, which is the picture you paint, which is that you and I have an account with a central bank, the same way that UBS has an account with the central bank, or Barclays has an account with a central bank. We have an account with a central bank and are therefore able to conduct ourselves without the need for banks.

[00:55:48.18] Ben: Because I can just send you money through my wallet to your wallet, right?

Marc: Exactly. And it’s insured. The way bank deposits are currently insured. All they do at wholesale, and actually, they maintain the role of banks. And again, it goes back to this idea of path dependence. It is quite interesting. Dee Hock, when he thinks about Visa, he’s got this framework for looking at the world. He says, you know, “To understand anything, you have to think about the way it was, you have to think about the way it is, you have to think about the way it might be. And you have to think about the way it ought to be.” And when he was thinking about Visa back in the early ’70s, and say today, actually, he’s made this very clear in his book, that Visa had been created through his kind of organizational principles. It’s not a panacea, and he lists in his book, and I quote him in my recent piece, some of the issues, some of the drawbacks some of the flaws in the Visa model. And to come back to what we were talking about, the point applies here as well, is that there’s a path dependency that, you know, maybe on a blank sheet of paper, we can devise this phenomenal new financial system. And they did that in China. You know, China didn’t have credit cards, they went straight from cash. So they didn’t need credit cards. They went straight from cash to a digital wallet, and you cut out the middleman. That’s very, very difficult when you’ve got vested interests that are cultural, political, data, that when people are used to a certain way of doing things as they are in Europe, in the US, you might be right, from a blank sheet of paper, if we could devise a financial system, we do it like this. But that’s not, to use Dee Hock’s framing, that may be the way it ought to be but we can’t neglect the way it has been and the way it is. And therefore, it probably won’t pan out like that.

[00:57:49.16] Ben: I was going to ask you this question at the end, but I feel I need to sort of preempt it now. Which is, you talked about Libra. And I just wonder, you know, if you look ahead at 2021, what’s the most potentially game-changing thing that’s going to happen in financial services that people aren’t talking enough about? It feels like that might be Libra, because, in a way, they’re going to roughshod over all those vested interests and introduce something that’s going to potentially have the adoption of every Facebook user, which is I don’t know how many billion people and it’s kind of outside a single country jurisdiction and it just seems massive. I’m wondering, you know, are you going to write a newsletter on Libra? Because it just seems such a big phenomenon?

Marc: Yes, I agree. I think it will be a big story for 2021. Riding roughshod. Interestingly, they already watered it down. So initially, they put together a consortium, which included financial service companies, there was a backlash from regulators. And so, they watered it down and the result today is something a little bit different. But I agree with you 100%. I think it’s gonna be a big story of 2021.

[00:58:54.13] Ben: But it’s still a currency that might be used to intermediate peer to peer and other transactions. You know, and even all the vendors that sell through Facebook, right? Within the Facebook network, you might have a currency that sits independently of any fair company, or is that not?

Marc: So again, I mean, anything I would say, the regulators do still have the capability to insert themselves. And we saw that too in Brazil, WhatsApp, which is part of Facebook launched a payments mechanism. And they spent a lot of time preparing it, launched it, presumably at launch they’d had the approval of the central bank because they’d spent a lot of time preparing it, but nevertheless, the central bank once it saw it, changed their minds and shut it down. So, regulators still do have this power, which is, I guess, classic disruption. Bitcoin has been operating at the margin and interestingly it never really became a payment coin. So, Coinbase, which is going to IPO this year, started out as a payments system for Bitcoin. And there’s a book that was released in December, called Kings of Crypto, about the story of Coinbase. And in it, they talk about hiring somebody in order to acquire merchants that will accept Bitcoin. And they did a great job, he got all these merchants, he got multiple billion-dollar revenue companies, lots of merchants, all lined up to accept Bitcoin. But consumers didn’t want to spend their Bitcoin. And so, they pivoted to a broker and Bitcoin became less of a payment mechanism, and more of an asset class, more of a commodity. But clearly, that can change. But as I said, it’s tangential, classic disruption. So they operate margin, and it can become mainstream.

[01:00:58.23] Ben: Yeah, if I understand what you’re saying, Libra, first of all, you know, whatever way in which it’s envisaged that it will be used might change because the use case is different from the one that was a bit like Bitcoin. I want to move on to a different topic now, which is private versus public investing. Because, you know, to get to the latter part of your career, I think one of the things that you’re doing now is you’re doing some angel and private investing. I just wonder if you have any interesting observations about the difference between investing in public markets versus investing in private companies? And I suppose we’ll come back to it as well. But you know, I think it’s relevant because companies seem to be staying private for so much longer than in the past. And it’s almost like being an expert in private investing is a more important skill set than it was historically, we could potentially argue. So I wonder if you’ve got observations around that.

Marc: Yeah. So, interestingly, three months ago, I might have agreed with your point about companies staying private for longer. I think what we’ve seen recently through the rise and the emergence of SPACs…

Ben: You’ve preempted that because I was gonna ask if the SPAC is the vehicle to get companies from private into public markets faster?

Marc: Yeah. I think yes, they are.

Ben: Let’s break this down into three sections, if you don’t mind. So, first of all, maybe everything we’ve got on the data shows it’s changed yet, but why weren’t companies staying private for longer? Because it must have been because it was difficult to realize the value in public markets. And how do SPACs do that? Why would a SPAC or a company taken to market through a SPAC, have a higher valuation than a company that would have gone through an IPO process?

Marc: Yeah. In the short term, maybe that’s an inefficiency in the market. Long term, it’s not clear that the mechanism through which one comes to market has a bearing on one’s long-term valuation. But having said that, there are some structural differences in the process. The key one here being that when, through the IPO process, management is not allowed through SEC guidelines to provide any projections on the future. And coming back to what we were talking about earlier, in terms of equity research, one of the roles, one of the jobs that equity research analysts used to fulfill was to provide equity research at the time of the IPO. Now, it wasn’t always independent, which is one of the issues why it was shut down. But there was a service provided nevertheless. Now, that’s not allowed. So now, what will happen is the company will provide its own filing and the institutional investor will have to peruse that filing, do their own due diligence, do their own work in order to take a view, but they’re given no steer as to what the projections are.

[01:04:08.23] Ben: Do you mind, just because I’m not sure everybody knows what a SPAC is. I mean, I love the phrase that you put in your newsletter, you said, “The SPAC is a bit like the wardrobe, is the portal to Narnia, complete with unicorns on the other side.” So what did you mean by that? If you don’t mind just spending a minute on what it is because it’s such a new phenomenon. Maybe many people don’t know what it is.

Marc: Sure, that’s fine. So a SPAC is a Special Purpose Acquisition Company. And what it is, it’s a pool of money that is raised by a sponsor. Typically, a well-known sponsor will raise several hundred million dollars in cash. And the purpose of the cash and the role of the company that the cash sits in is to do an acquisition with a private company, to find a private company — hence the analogy of Narnia. So public investors clearly are restricted to investing only in public companies. But if they were to buy a share in a SPAC, it’s just a pool of cash. If they were to kind of hand some cash to the sponsor, the sponsor will then go through the wardrobe, into the land of the private companies and find a private company to merge with, bring it back out. And then, all of a sudden, you now, through the merger process, have got a share in a private company.

[01:05:31.21] Ben: That is a great analogy, by the way. That’s superb to describe what a SPAC is.

Marc: And just to finish off what I was talking about earlier, the difference is — and it’s slightly arcane, it’s kind of regulatory — but the merger process enables the company to provide projections. So the guy on our side of the wardrobe, when the sponsor comes back out with his private company, can say, “Well actually, in 2022, ’23, ’24, these are our projections. What do you think?” And at that stage, he can either kind of roll with it, or he can sell because maybe it wasn’t what he wanted as a public market investor, so he can sell but he’s kind of got that right.

[01:06:14.17] Ben: So you think this sort of recent last 20-year phenomenon, with more companies staying private, is maybe addressing this fact? Because it does two things, essentially, if I understand rightly. Firstly, it reduces a lot of the friction and the cost of going public because I can’t remember how much an IPO costs, but it’s a lot, right? You pay your fees, I think it’s like four or 5% that you pay to the investment bank?

Marc: It could be even higher, actually. Yeah.

[01:06:35.04] Ben: So yeah. So there isn’t that big cost, there isn’t the sort of, you know, I don’t know how many months it takes to IPO. But it reduces the friction, the cost, the time to go public plus also through being able to share projections with the market. Arguably, and I think this is the bit you’re talking about, there isn’t the data, but arguably, it enables you to achieve a higher valuation. Because I guess there are two reasons why people stay public for longer, right? One, they didn’t feel they could achieve the valuation that they deemed appropriate in the public market, or they were just put off by the time and the cost and the friction.

Marc: Yeah, that’s right. And also the third reason is the private market was rich with capital. So, why would they…

Ben: But that bit hasn’t changed, has it?

Marc: That hasn’t changed. But you’re seeing even in the public… You know, interestingly, recently… So Lemonade is a FinTech, it’s an insurance company that was founded on a kind of a digital platform. And it was SoftBank. So the SoftBank vision fund is one of the biggest venture capital backers out there, it was an investor in Lemonade. It went public in July of 2020. Actually, recently, already in 2021, it’s raised fresh capital in the public markets, at a valuation much, much higher than when it went public in the summer. Typically, normally — and that’s an unusual occurrence — in the public markets, normally, that would take place in the private markets to be a funding round, even six months after the last one. It’s more unusual in the public market. There was kind of a convergence between… I mean, maybe it’s cyclical just because of where valuations are. But it feels as it was kind of convergence between some of the behaviors that were typically the case in private markets and in public markets.

[01:08:23.10] Ben: I suppose you could argue companies like Tesla wouldn’t achieve a richer evaluation on the private market than they could in the public market. But do you think also, there’s some of the stuff that couldn’t IPO because it didn’t come under the same level of scrutiny would do so through a SPAC?

Marc: Yeah, I think that’s right. I mean, some pushback about SPAC is people have talked about as being a SPAC bubble. And, you know, inevitably, there’ll be a lot of poor companies that are coming through that wardrobe, sneaking through that when the, you know, as Buffett says, when the tide goes out. Yeah, we’ll say who’s swimming naked.

[01:08:59.29] Ben: I think probably we’ve run out of time to talk about Robinhood, and that whole phenomenon of the gamification of the stock market investing. But I just wonder if you had any other observations just from your practice as a public and a private investor. You know, the kinds of things you look for in companies that you didn’t historically, or whether it’s very similar.

Marc: It’s really very different. It’s very, very different investing in private companies, from investing in public companies. For one, probably four key differences. One is the level of transparency, which is much higher on the private side than on the public side. Two is — and this is an interesting point — two is volatility. So, a lot of people inherently don’t like volatility. And I think one of the attractions of private market investing is that they only get revalued when there’s a funding round. And so, kind of right now it’s not an issue, because, in the markets, we’re only seeing upward volatility with everything getting up. But I think there was a kind of a degree of, think back to March, April of 2020, when there was a lot of not such good volatility in the markets. I think there was a degree of comfort around private holdings, which, you know, whether it is Robinhood app, or whatever broker one is using, one’s not seeing kind of the daily volatility of valuations in private holdings than they are in public. That’s a big behavioral difference. The third difference is the structure. It’s very, very important as a private investor to be comfortable with the structure of the holding. You know, when you buy a share in Apple, it’s a share in Apple. It’s pari-passu with all the other shares in Apple. That’s not necessarily the case with private companies. Well, they are different classes of shares so it’s something that as an ex-public investor gone private, I suddenly have to learn about. And the final point is just that you’re in the room. I mean, I can write a newsletter about Jamie Dimon at JP Morgan, he may or may not read it, he may or may not do anything about it…

Ben: I think he subscribes to that, doesn’t he?

Marc: Probably he won’t do either. But it’s just a great experience being involved in a private company.

[01:11:31.05] Ben: Yeah, I think is that last point, which is, you know, you have the ability to make your own weather in a way, right? Because I always thought, for me, that’s the key advantage of angel investing, which is, you don’t just sort of invest the money and hope for the best. You can actually get involved and materially affect the return on that investment that you make.

Marc: Yeah, exactly. Exactly. Exactly.

[01:11:51.10] Ben: One question I wanted to ask you, which is the big downside, obviously, of private investing, is liquidity. And it just amazes me that we haven’t seen more people enter the space for the secondary market for private investing. Why do you think that is?

Marc: There are some crowdfunding platforms in the UK — it was one crowdfunding platform in particular in the UK — was Seedrs, which offers secondary trading of its companies that is crowd equity, crowdfunded for. But probably is difficult, actually, because of the fact that, coming back to the point about structure, different classes of shares. You know, I did another newsletter on fixed income markets — electronic trading and fixed income markets — which is much less developed than electronic trading in equity markets. The reason being is there are multiple fixed income instruments out there. Whereas there’s only one equity for most companies, there’s only one equity. And it’s the same here with private, there’s two different classes of shares with too many different terms. But there’s no standardization.

[01:12:53.08] Ben: So, I have two quick follow-on questions for you. One is, what’s getting you really excited beyond Libra looking into 2021?

Marc: I think what’s happening in embedded finance is fascinating. I think what’s happening broadly, just the acceleration we saw in 2020 around digital, I think what’s happening broadly, through payments mechanisms, and beyond payments, not payment as the hub. It used to be that the checking account was the anchor product for most banks, or potentially, the mortgage actually, increasingly is becoming payments. And that I think has all sorts of implications, whether it’s around crypto or Libra, or embedded finance. It’s basically the common theme across all of those things.

[01:13:40.06] Ben: And then the last question I wanted to ask you, which I think is gonna be difficult, you may have to come back to us, which is, what’s the best book that’s ever been written about the financial services sector?

Marc: Liar’s Poker.

Ben: Yeah, that would have been my pick. Yeah. Okay, good. So if anybody hasn’t read Liar’s Poker, you really, really should. Great. Marc, thank you so much for coming on the podcast. It was a great discussion, and I really appreciate you taking the time and keep up the good work with Net Interest which is awesome. And if you didn’t subscribe to Net Interest, you really should. One fantastic deep dive into an aspect of financial services every Friday. So subscribe. Marc, if people want to subscribe, where do they find it?

Marc: Yeah. So netinterest.email is the page.

Ben: Thanks so much again.

Marc: Thanks, Ben. Great to be on. Thank you.