The Money Hackers

How a Group of Misfits Took on Wall Street and Changed Finance Forever

Daniel P. Simon

• Publisher: HarperCollins Leadership
• Year: 2020
• eBook ISBN: 9781400216611
• Topic: Business
• Subtopic: Finance
• Index: Business

Businesses, investors, and consumers are grappling with the seismic daily changes technology has brought to the banking and finance industry. The Money Hackers is the story of fintech’s major players and explores how these disruptions are transforming even money itself.

Whether you’ve heard of fintech or not, it’s already changing your life. Have you ever “Venmoed” someone? Do you think of investing in Bitcoin--even though you can’t quite explain what it is? If you’ve deposited a check using your iPhone, that’s fintech. If you’ve gone to a bank branch and found it’s been closed for good, odds are that’s because of fintech too.

This book focuses on some of fintech’s most powerful disruptors--a ragtag collection of financial outsiders and savants--and uses their incredible stories to explain not just how the technology works, but how the Silicon Valley thinking behind the technology, ideas like friction, hedonic adaptation, democratization, and disintermediation, is having a drastic effect on the entire banking and finance industry.

Upon reading The Money Hackers, you will:

• Feel empowered with the knowledge needed to spot the opportunities the next wave of fintech disruptions will bring.
• Understand the critical pain points that fintech is resolving, through a profile of the major finsurgents behind the disruption. Topic areas include Friction (featuring founders of Venmo), Aggregate and Automate (featuring Adam Dell, founder of Open Table and brother of Michael Dell), and Rise of the Machines (featuring Jon Stein, founder of robo-advisor Betterment).
• Learn about some of the larger-than-life characters behind the fintech movement.

The Money Hackers tells the fascinating story of fintech--how it began, and where it is likely taking us.

1

MAKING MONEY MOVE

HOW VENMO BECAME A VERB

When Iqram Magdon-Ismail and Andrew Kortina decided to disrupt the world of finance, it was because Iqram forgot his wallet.

This was 2009, and Iqram was spending a lot of time going back and forth to New York City from where he lived in Philadelphia. The trip was becoming somewhat routine for him: he would spend his weeks working at his day job and then spend his weekends in New York working with his friend Andrew on their new idea.

Iqram had met Andrew when they were freshmen at the University of Pennsylvania. They were randomly assigned together as roommates, and, unlike many of those random pairings, this one was a good match. The two of them shared the same interests and aspirations, and even some of the same computer science classes, so they got used to working side by side. By the time they were seniors, they were collaborating on a small business idea, a college classifieds site they called My Campus Post. They spent their afternoons doing grassroots marketing and their nights writing code. It was an exhausting, exhilarating first taste of the life they both wanted: creating an internet startup.

My Campus Post never took off, but it was a great learning opportunity. Most of all, it taught Iqram and Andrew that they wanted to keep working together. After graduating, they moved to New York and started working as programmers, hopping from startup to startup and collecting experience along the way. Then a company back in Philadelphia offered Iqram a position as vice president of engineering. He took the job, but he didn’t want to stop working with Andrew. They’d recently turned their attention to something big, something with real potential—something they were calling “Venmo.”

Venmo was a music app.

They got the idea while they were at a jazz show. The music was so good, but they would never be able to hear it again. Wouldn’t it be cool, they thought, if you could send a text message to the band and have a recording of the live show emailed to you?

The idea had promise, but figuring out how to implement it was taking a lot of time—and that meant, more weekends than not, one of them was on a train traveling to meet up with the other for a couple days of brainstorming and coding.

And one particular weekend, Iqram forgot his wallet.

Andrew told him not to worry about it. It wasn’t the first time this sort of thing had happened to them, after all. They had been roommates for years, and over those years, they’d lent each other money for drinks, groceries, rent—and they’d always eventually gotten out a calculator, figured out who owed money to whom, and cleared their debt by writing each other checks.

How many times had they done this? Dozens? Hundreds?

But this time, the thought of their old system made Iqram laugh. A check? He wasn’t even sure he knew where his checkbook was. He paid all of his bills online.

It was like a relic from a bygone era. If he could find that checkbook, he would scribble the amount onto that bank-issued piece of paper in barely legible handwriting and then have to mail the check to Andrew—which would mean buying a stamp and an envelope and finding a mailbox. Then, when Andrew received the check, he would have to find a bank branch, go there during its business hours, fill out one of those antiquated little deposit slips, and hand it to a bank teller along with some identification. Eventually—after a three- or five- or seven-day hold period—the money would be added to Andrew’s account.

“Why are we still doing this?”

In 2009, people were doing everything from their mobile phones—except moving money. Somehow, this most fundamental, basic thing was a capability that hadn’t been invented yet.

Why not?

Iqram and Andrew had come across a spot of what technologists and marketeers like to call “friction,” the chafe that happens when someone tries to do something that should be easy but isn’t. Imagine a visit to the DMV. That shudder that runs down your spine is because of friction.

Friction has been a driving force behind many of life’s discoveries and inventions, and Venmo was no exception.

“Let’s just try to solve this problem,” they decided.

REMOVING FRICTION

“Let’s just try to solve this problem.”

Iqram and Andrew began work converting their mobile music app, Venmo, into a tool that people could use to exchange money.

Why is it so hard to move money across the internet?

In 2009, moving money on the internet wasn’t new. Amazon and eBay had been up and running for nearly fifteen years. Every major retailer had some version of an online shopping cart on its website, and, according to the US Census Bureau, e-commerce was generating more than $130 billion a year in sales.¹

And e-commerce wasn’t just for people with credit cards, either. Banks were issuing debit cards that worked just as well for online purchases.

Why was it straightforward to move money to Amazon and eBay but not to individual people?

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PAYMENT GATEWAYS

ONLINE SHOPPING HAS become so commonplace that people don’t think about how complicated it is. You hit the BUY Now button and it works.

Magic.

But there are a remarkable number of complicated steps that go into making that magic, and the steps are collectively known as a “payment gateway.”

First, anyone who wants to receive credit card information on the internet has to follow guidelines spelled out by Visa, Mastercard, and the other members of the Payment Card Industry; their technology has to be what is called “PCI compliant.”

PCI compliance requires the use of bank-level data security: established cryptographic protocols for encoding sensitive information; safeguards for protecting that information where it is stored; and maintenance and testing to make sure those systems are, and stay, secure.

Bank-level security isn’t easy and it isn’t cheap. The expense is a justifiable investment for big online retailers, but for small businesses—or for individuals who want to pass money between each other—it is completely out of reach.

And PCI compliance is only one part of the process. Once the credit card data is sent securely across the network, the receiving end has to translate those sixteen numbers into an actual payment. Is this string of data attached to a Visa, a Mastercard, a Discover, an American Express? Before the merchant can check to see if the credit card number is real, verify that it belongs to the person who submitted the order, and confirm there is money available in the account, the merchant must first figure out which credit card company to ask. The software that does this, a “payment switch,” interprets the data and handles the connection with the issuing bank.

Then that credit card company—the issuing bank—goes through its own verification process. Debit card transactions get routed through the account holders’ banks. Security checks run to protect against fraud.

The average credit card transaction goes through roughly a dozen individual steps before it can be approved—and these steps all happen in the two or three seconds between pushing the BUY Now button and seeing the confirmation screen.

Like magic.

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All Iqram and Andrew wanted to do was create an app that could transfer money from a personal bank account to someone else’s. Their banks had websites that showed them how much money they had—so they knew this data was already in a digital format. Why was it so hard to access?

And more to the point, why hadn’t the banks created this functionality themselves?

One answer is the banks just didn’t care. Banks had a long history of developing new technologies, but their idea of innovation was always aimed at making their own processes better and more efficient. Innovating the customer experience wasn’t something that would have occurred to them, and even if it had, it wouldn’t have been a high priority, least of all during the lean years that followed the market crash.

But for a software developer, creating a good user experience is paramount.

Even if banks had wanted to build a tool for transferring money, it wasn’t as straightforward a problem as it might seem. In 2009, according to the FDIC, the United States had just shy of seven thousand banks.² Getting the banks to talk to one another was hard enough, but getting their databases to talk to one another—when each one had been built to its own custom specifications—was somewhere between infeasible and impossible. It would have taken a lot of work, and banks had no incentive to do it.

But Iqram and Andrew did—so they got to work.

Building the prototype, it turned out, wasn’t especially hard. They were soon passing money back and forth to each other, leaving a long trail of SMS receipts of their transactions: “Iqram 20” quickly evolved into “Kortina paid you $20 for Thai lunch at Nooch.”

It was working.

What wasn’t working, though, was getting funding.

They took one meeting after another, but couldn’t get anyone to take them seriously: they had no track record, no user base, and a prototype cobbled together on top of Google Voice—not enough to reassure a venture capitalist. One investor interrupted Iqram and Andrew’s presentation to tell them he was only interested in “billion-dollar, home-run opportunities.”

“This will be a trillion-dollar company,” Iqram shot back.³

The investor wasn’t convinced. Most investors hadn’t heard of this thing called “fintech,” a field that wasn’t quite finance and wasn’t quite technology. There was no reason to believe that, as a sector, it would be profitable. What was their plan to monetize? How was this little tool for trading small amounts of cash between friends ever going to make a substantial profit?

Iqram and Andrew didn’t have clear answers. But that didn’t change their commitment to the app. They continued to find ways to make the user experience more seamless, improving it one iteration after another, sending countless text messages back and forth across the system.

Then they noticed something.

Their collection of text receipts was starting to paint a vivid, if accidental, picture of their lives. The list of transactions showed where they liked to eat and drink, what bands they liked to see, who they were spending their time with. Every time someone passed money to someone else, it was because there was something interesting going on—and, collected together, all of this information about a person’s transactions started to tell a unique story.

What they had created, by pure accident, was a social news feed.

Venmo wasn’t just a way of moving money. It could also be a social network, broadcasting real-time data information about its users.

This could be huge.

If only they could get some money.

BILL READY KNEW a thing or two about money.

He was an unlikely dot-com entrepreneur: he had never even used a computer until he arrived at college. But he was a quick study. He dove into software engineering, and before he turned thirty, he was president of an online bill payment company called iPay. When iPay sold for $300 million, Bill moved on to take over one of the most important internet companies...

Table of contents

• Contents
• Foreword by Peter Grauer
• Fintech Timeline
• Prologue: There’s No App for That
• Author’s Note
• Chapter 1: Making Money Move
• Chapter 2: Giving Money to Strangers
• Chapter 3: Aggregate and Automate
• Chapter 4: Rise of the Machines
• Chapter 5: Banking the Unbanked
• Chapter 6: Border Crossings
• Chapter 7: Mystery Money
• Chapter 8: Distributing & Decentralizing
• Chapter 9: The Empire Strikes Back
• Epilogue: The Future
• Acknowledgments
• About the Author
• Notes
• Index