Re: Bypassing the Digicash Patents

>> When one combines the transactional economic advantages of DBC: no customer
>> accounts, statement generation, little or no need for dispute resolution
>> and the economies of using the Net for settlement, with the still
>> considerable marketing costs, the likely differential between DBC and
>> CC/ACH is closer to one order of magnitude at best.
>
>Again, I still hold out for three or four.
>
>> This is still
>> considerable, however, and if properly branded and marketed could
>> significantly displace current competition, for lower value transactions.
>> The overhead of CC discounts is keenly watched by merchants.  If a trusted
>> DBC issuer/agent offered 1.0% fees (especially to on-line merchants) it
>> would get noticed quickly.
>
>Agreed. However, when it happens, it'll probably be more significant than
>that. I think removing 3 or 4 extra zeroes from the status quo is probably
>what people should try to do when developing this stuff. I think that the
>technology offers us at least that much slack, and probably more.
>
>Remember, it *is* supposed to change the world. :-).

If I grant that you're right that DBCs will be 3-4 orders of magnitude
cheaper than the book-entry approaches, and I'm ready yet, there is still
the issue of whether such savings can be quickly passed on to the merchant
and consumer, and thus spark this revoltion.

Consider this, if a DBC-based system were to garner 3% (about what it might
take to get noticed by the consumer, retail and business markets) of the
GDP's $4 trillion in transactions, or about $120 billion, and the
transaction fees were $0.0025, this would generate about $300 million in
fees.  This is about what Western Union International generates in fees, a
very respectable sized business.  But how much marketing and branding
expenditures would it take to get there?  All financial products which
attempted to reach a broad market and have a significant impact have
required, in the past, significant up-front marketing expenses (VISA
succeeded because BankAmericard spent in the $10s million per year range).
Unless the Net will enable a 3-4 orders of magnitude reduction in such
expenses, amounting to an historic bootstrap, it is difficult to see how
this will occur without a white knight.

A similar situation is occuring in cellular.  Prices are plummeting because
many new companies are building out competitive PCS networks and forward
pricing their services to gain market share and economies of scale.  These
new players have deep pockets (or are backed by those with deep pockets).
To wrench away the bank and credit card francshise from the established
players may require similar sized investments.

--Steve


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At 10:00 pm -0400 on 5/5/97, Steve Schear wrote:


> If I grant that you're right that DBCs will be 3-4 orders of magnitude
> cheaper than the book-entry approaches, and I'm ready yet, there is still
> the issue of whether such savings can be quickly passed on to the merchant
> and consumer, and thus spark this revoltion.

I actually don't care about the merchant and consumer. The hole you pour
the cost savings into belongs to the people clearing the trades, the
trustee and the underwriter. They'll take care of the consumer and the
merchant. Again, the reason we have ATMs is because they put tellers out of
work. If we can move that decimal point three or four places to the left
with strong financial cryptography, then we won't have a spark, we'll have
a Chixalub event. :-).

> Consider this, if a DBC-based system were to garner 3% (about what it might
> take to get noticed by the consumer, retail and business markets) of the
> GDP's $4 trillion in transactions, or about $120 billion, and the
> transaction fees were $0.0025, this would generate about $300 million in
> fees.  This is about what Western Union International generates in fees, a
> very respectable sized business.  But how much marketing and branding
> expenditures would it take to get there?  All financial products which
> attempted to reach a broad market and have a significant impact have
> required, in the past, significant up-front marketing expenses (VISA
> succeeded because BankAmericard spent in the $10s million per year range).
> Unless the Net will enable a 3-4 orders of magnitude reduction in such
> expenses, amounting to an historic bootstrap, it is difficult to see how
> this will occur without a white knight.

"Branding" is not the issue here. What we're talking about is the creation
of exactly the opposite, what economists call "perfect" competition, like
in commodities markets, where one soybean is as good as another. Fungible,
in other words. In the bond market, once you have two bonds which are
equivalent in credit rating, call structure, etc., effectively equivalent
in total return, in other words, you don't care who issues it.

The way we get to this is to exponentially increase the number of
underwriters, which is what Moore's Law gives us in the form of those
underwriting microbots I blather on so much about. If the costs of
generating that $300 million you're talking about is less than that revenue
by any small but appreciable fraction, you have a market. By the way, we
should avoid conflating cost with revenue. I'm talking about reducing the
cost of delivery by 3 or 4 orders of magnitude. Whatever you charge is what
the market will bear. :-). It's the profit margin, not the market size
which counts, and I claim that someday you'll have very small entities
making very small markets indeed. Remember, the original Mark Twain Bank
"mint" ran on a 486. If, as Dr. Myrhvold likes to point out, computers 20
years from now are going to be a million times more powerful, then that
creates a scale of financial entity to which $300 million is huge. Way too
big to think about.

In the meantime, if, due to the entertaining pricing distortions of
creating a new market you were able to sell that $300 million worth of
total cost for $3 billion, that would be cool, right? At least until you
had some competition, and, given Moore's law, that competition could happen
pretty quick...

Cheers,
Bob Hettinga



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