Programmatic Money
Our view on what changes with the Web 3.0 finance stack.
The personal financial management (PFM) landscape is similar to how the early days of personal computing were; difficult, syntax heavy, and requiring significant background knowledge.
Making a simple directory copy on an Altair 8800 or Commodore 128 required understanding of command-line code and an ability to enter complicated commands without the types of tools that we have today (e.g. Stack Overflow, Reddit, and other crowd-sourced knowledge mediums).
Similarly, when it comes to personal financial management, we expect individuals to know:
- What IRA to sign up for — Roth or Traditional?
- How much they should contribute to their 401(k) — Company match, or more? Do I max out to the IRS limit?
- What types of savings accounts they should have — High yield? A CD? Money market funds? What’s the difference between SPIC and FDIC insurance?
- How to tax diversify — What is tax-loss harvesting? How should I file, and with who, and why?
We’re in an era where we are effectively handing people a rudimentary Commodore 128; one that controls their lives, their wellbeing, and their future, and expecting them to write the correct command-line level code to navigate them to the outcomes that they want.
Without the right level of abstraction, how people engage with their finances tend to expose them to systemic defects and bad-faith acts that impact their livelihood in ways that they don’t even understand.
Many — but not all — financial service providers take advantage of the information asymmetry between users and financial institutions to provide second-rate service, high/hidden fees, and minimal value-add. The reason that these providers can offer such poor services that lead to bad outcomes is that they are fundamentally selling trust, not outcomes.
Users engage with these services because they trust them to solve the most important problem in personal finance for them; not the quantitative answer as to what portfolio allocations they should use (that’s for institutional clients), but a simplification of the complicated world of countless financial solutions out there.
And in a world of complexity and abundance, the leverage point in the value chain shifts from those who manufacture products and tools, to those who provide indexing; a way to effectively search through all of the accounts, product types, and solutions to find the right ones that help users reach their desired outcomes.
This arc of increased abstraction is the same in finance as it was in personal computing.
Returning to the early PC example, the world of command-line interactions that required knowledge and expertise meant that only a limited number of hobbyists could partake in the personal computing revolution. This capped both the total addressable market and limited the number of resources invested. This exclusionary consequence kept the market, and its growth, small.
It wasn’t until the graphical user interface (GUI) came along that the true potential of PCs was unleashed. Now, copying a directory didn’t require multiple lines of commands but instead was a simple right-click on a folder; copy, drag, and drop. Computers were now accessible to a wider audience than ever before, and the rest is history.
And yet, the question — and more importantly — the opportunity remains; where is the graphical user interface for personal finance? One that provides the right level of abstraction of financial outcomes, removes undue complexity from users, and offers trust at scale?
Early solutions that provided an aggregated view of your accounts, Mint being the canonical example, were a strong first step in the right direction. Different services have come and gone, but most of the successful “fintech” companies of the past several years have focused on building out the underlying infrastructure needed to allow different financial accounts to interact with each other at the API level. Indeed, we remain bullish on that opportunity, but it seems we haven’t gone much further than Mint when it comes to making finances a simpler experience for users.
We are just now beginning to see the emergence of a new generation of financial solutions that are building on top of infrastructure APIs like Plaid and Alpaca in hopes of providing a better experience for users. Companies such as Tally, Northstar Money, Astra and others in our network are beginning to solve the problem of user abstraction in a way that harkens back to what the GUI did for personal computers. We are incubating similar concepts and are always interested in chatting with operators and investors in this space (info@mutablematter.com).
While the aforementioned solutions are bringing much-needed intelligence to personal finance, they are still being built on top of the existing infrastructure of the traditional financial services “stack”. A new stack though is emerging, one that is predicated on the new data type that is enabled by blockchains, and one in which money truly becomes programmatic.
When money can be manipulated at the software (and data type) level on a 21st-century, Web 3.0 stack, everything changes. The GUI for personal finance becomes possible, and digital wallets, protocols, and regulation are our three core areas of focus as we accelerate towards that frontier.
Digital Wallets
When money can be manipulated as easily as code, digital wallets become the central point of development for compelling user experiences. Digital wallets are crucial because they are terminals that solve both the identity problem in finance, “who is allowed to access this account and make changes?” and the custody problem “where is value/assets stored?”. In the traditional financial stack, the challenges of custody and identity were server-side, i.e. J.P. Morgan, Goldman Sachs, Wells Fargo, and Visa took on the burden of authenticating users, mapping those authentication keys to accounts, and storing the right amount of assets on a users’ behalf.
But now, identity and custody are *native* when blockchains serve as the foundation of your financial infrastructure. Now the assets themselves can self-authenticate and custody themselves intelligently. Now, the power shifts to the client-side in how the wallet — which serves as the user’s gateway to their assets — is designed.
In many respects, the wallet is a new type of personal cloud computer, one that allows us to surface only the most important aspects of our financial lives to the user and remove the rest of the complexity away. Wallets are where we believe the promise of simple, easy to use, and sufficiently abstracted personal finance will be solved. We’d go so far to say that Wallets are likely the most important personal computing paradigm of the 2020s.
Wallets will be the central hub for running new protocols and applications and as they gain prominence, the need to surface trust and privacy while balancing the amount of control a user has is a critical fault point that will make or break many solutions. Those that do well to articulate what’s happening to one’s money with care will outperform. Wallets will be one of the first killer apps for blockchain solutions, and we’re looking forward to seeing this space evolve.
Protocols
Many of the core functions of our financial landscape will be generalized as protocols. Sending money abroad, moving money between accounts, and opening new accounts are but a few types of functionalities that will be powered by protocols rather than privileges afforded by application-level service providers.
We are already seeing this today in the traditional finance stack. Many of the emergent fintech providers (Point, N26, etc.) are offering debit cards, high-yield savings accounts, and low-commission trading because a generation of infrastructure companies — Plaid, Dwolla, and others — has arisen that allows new entrants to offer these functions with a simple API call.
As a result, many of the personal financial management startups that are consumer-focused are starting to look similar. The point-solution products are not compelling enough on their own to sustainably acquire customers, so there has been a rush to offer a wider berth of offerings. This has manifested in high customer acquisition costs with long payback periods.
The truth is that the point of competition for users is now about the type of service being offered on top of accounts, cards, and favorable lending terms. It won’t be enough to offer a debit card and a checking account; can you also optimize my spending behavior to pay off my loans? My credit card? How about a house? This dynamic will be all the more pronounced in a dynamic world where protocols can be monetized via tokens, and many of the sophisticated consumer-facing fintech solutions (e.g. Tally) are refactored for a Web 3.0 world and surfaced to users via Digital Wallets.
Regulation
Perhaps the most relevant dimension of change in the Web 3.0 world will be what tone regulation will take. Financial services are one of the most highly regulated industries in the world. This is in part because of the identity and custody problems (AML/KYC/Reporting), but also in part because it clashes heavily with statecraft. As a result, building relationships with policymakers and communities will be critical, and we believe that RegTech opportunities are emerging that will allow regulators to opine on governance — at the software level — from day one. This is an area of active exploration, but efforts such as Flux Financial’s community banking are a glimpse at a future of what a public/private partnership that’s enabled by thoughtful regulation can look like.
In the 1970s, Xerox PARC unveiled the world’s first commercial GUI operating system. Shortly after, a scrappy youth named Steve Jobs toured the facility and became enamored with the windows, icons, and simplicity of it all.
The way in which the GUI made personal computers accessible was the foundation for the success of companies like Apple and Microsoft who defined the world we live in today. Personal finance is at a similar moment in history, and at the intersection of wallets, protocols, and regulation lies a revolution that will be even bigger than that of the PC.
As always, if you’re working on any of these spaces — or want to partner to refine our thinking, subscribe below and reach out at info@mutablematter.com
