The News: Twitter and Strike partner to disrupt the global payments and remittances market. For more details on the announcement check out this CNBC Power Lunch interview with Strike CEO Jack Maller.
Strike and Twitter Partner Up to Change Finance — Legacy Players Better Buckle Up
Analyst Take: Last week two Jacks, Dorsey and Mallers, announced a collaboration that I believe will shake the very foundations in the boardrooms of the likes of Visa, Mastercard, PayPal and perhaps most damagingly of all, Western Union. Let’s be very clear from the get go, the announcement by Twitter and Strike is not just about sending someone a couple of cents for a tweet you like. While a lot of the mainstream media has picked up on the name Twitter Tips and gravitated toward this being a variant of Patreon for Twitter this demonstrates a fundamental lack of understanding of the scope of what is occurring here.
In the CNBC interview, Strike CEO and Founder Jack Mallers breaks down the significance of the joint announcement. With this move, Twitter is looking to go head-to-head with companies like VISA, Mastercard, PayPal, Western Union, and basically anyone who owns or operates a network that gets money from point A to point B, be that a micro-payment, a remittance, a wire transfer, or whatever legacy financial mechanism is used to get money from one bank account to another bank account.
In the CNBC interview, Mallers refers repeatedly to the partnership between Strike and Twitter as delivering “instant global cash finality at relatively no cost” and I want to take a moment to address each part of his statement. For starters, this isn’t actually instantaneous. However, when we compare this subsecond delivery process to the traditional legacy ACH, wire transfer, and remittance experience, which can take multiple days and, in some cases, a week plus for money to travel across the globe, so subsecond is truly revolutionary.
Mallers also refers to the global nature of this partnership. It’s important to note that this is not particularly revolutionary. The Bitcoin network is truly borderless and global in nature, and no single country, industry federation or jurisdiction has legal or regulatory insight over Bitcoin. While China repeatedly tries to ban Bitcoin and move it to the fringes, only last week announcing the latest in a series of posturing statements, Bitcoin continues to go from strength to strength and pull more participants into the network. My take here, China has banned Google, Wikipedia, and Facebook to name just a few, and all of these organizations and networks seem to be doing just fine. Whether or not China can enforce its ban, the Bitcoin network will still operate in China as the network is tamperproof and resilient. The only option the CCP has is to police the on/off ramps and make the conversion to fiat currency illegal.
The next major term Mallers used is ‘cash finality.’ As an example of cash finality, when I give Starbucks $20 for a cup of coffee, there is no way for me to cancel the transaction after the fact. Starbucks has the money, I have the coffee and the transfer of funds is complete. In the world of electronic payments and remittances, however, this is not the case. Oftentimes the transaction is not deemed complete for 90-days after the initial transaction. The central processing authority that moves the money from point A to point B or for that matter any number of intermediaries can cancel the transaction, or worse recall it for many days or weeks after the initial transaction. While we as consumers don’t see these back end delays you can be certain that merchants and suppliers very definitely do. These delays have a direct impact on cash flow, and in some cases mean the money doesn’t ever make it to the other party. This is not always a bad thing. If someone goes on a spending spree with your credit card without your permission ‘cash finality’ is not what you want. You want to be able to call Visa or Mastercard and have them cancel the transaction and for you not have to pay for the goods or services you never actually purchased. We need to tread carefully here and not subscribe to all of the hype, but there are cases where ‘cash finality’ has merit.
The final phrase Mallers used in his interview that I’d like to address is ‘at relatively no cost.’ As any small merchant will tell you, the fees for a Visa or MasterCard transaction can be prohibitive. As consumers, we have all experienced instances where merchants won’t take accept anything but cash for transactions under a certain dollar amount. That’s because retailers are paying a mix of variable and fixed rates. The average Visa rates right now are about 1.29% + $0.05 to 2.54% + $0.10. For a merchant, the ability to sell you a can of Coke for $2 is simply not worth it.
Somewhere, Strike has got to get paid for their services of providing the network and transport layer. Today, Strike users can buy bitcoin on Strike with no added fees, only taking on the market-spread execution cost charged to us by our execution partners. As of the writing of this article, Strikes outlines the company’s execution costs as below 0.3%, and they expect that to drop below 0.1% over the coming months as volumes grow. Suffice to say these fees are a lot smaller for money transportation than in traditional payment and remittances rails.
Bitcoin the Asset and Bitcoin the Network
So how is Strike planning to replace the established legacy money transportation layer? The short answer is bitcoin the network. When people think about bitcoin, they think of the highly volatile asset that they buy via Coinbase, Gemini, Binance, or Kraken — they are not thinking about bitcoin the global decentralised global network. Even if they are thinking about the network, even fewer are thinking about the Layer 2 lightning network that is rapidly addressing the shortcomings of the original bitcoin layer 1 network.
The original bitcoin network worked on the principle that every transaction resulted in a block being created with the details of the transaction embedded within it. This was fine when not many transactions were flowing over the underlying blockchain network underneath the bitcoin system. However, as transaction volumes grew and block mining rewards grew the network was struggling under its own success. Rather than forking the network or changing the block size, the approach was taken to handle scalability and volume though a layer 2 approach. Put simply, the lightning network enables the ability to aggregate an infinite number of transactions into one single block on the underlying blockchain network.
How Strike Works
Jack Mallers and the Strike team are describing the legacy systems as proprietary siloed closed systems with limited interoperability. For instance, for today’s users, being able to send money between Venmo’s network and that of Paypal is impossible. While Strike has a vested interest in users using their wallet and services, Strike’s underlying network is open and people can connect their app and service of choice to the layer 2 Lightning network. Strike is trying to leverage the Bitcoin network to deliver one global singular interoperable monetary protocol to deliver bearer finality at no cost. In short, Strike is trying to do what the internet did for communication with http and TCIP by leveraging the Lightning network as a singular global protocol for money.
Strike is using the recent developments in the Lightning network to provide a robust, global, low-cost transport system for money transfer. Essentially what happens is fiat currency is converted to bitcoin at point of origin then transported as bitcoin to the other country or location and then converted to the corresponding fiat country at the completion of the transfer.
In order to offer the much-needed KYC and AML required in such a service offering, Strike is partnering to deliver the complete service. According to the Strike Terms of Service they work with Prime Trust, LLC, a Nevada state-chartered trust company to accept and custody payments and to effect transfers to and from users’ accounts. What this means is that Prime Trust custodies while in transit. What that also means it that Strike won’t process payments for businesses that Prime Trust doesn’t like, which will most assuredly include businesses in the porn and weed industries for starters, because Prime Trust is in control here.
According to Nasdaq’s recent article: Jack Mallers’ Strike Rolls Out Bitcoin Buys, Going Head-to-Head with Coinbase, “They do not touch the money at all, ever,” Prime Trust CEO Scott Purcell told CoinDesk. “We open the accounts, we touch the money, we do all the AML/KYC” – shorthand for compliance with anti-money-laundering and know-your-customer laws. In this setup, Strike is “simply a technology layer and we are actually the ones that effect the transactions,” Purcell said. “Thus, there’s no need for them to have any type of licensing.” He also shared that many other Prime Trust customers use this model.
The benefit to Strike here is that they are not exposed to ForEx risk while the transaction is looking to be finalized. Because the transaction is near instantaneous and is only being converted at each end of the transaction, the ForEx exposure is negligible, if it exists at all.
The Deets on Twitter Tips
While the Twitter and Strike announcements are certainly significant for the legacy financial systems and some huge established players in that market, we must also not forget the headline grabbing Twitter Tips jar functionality that was also announced. Content creators are increasingly looking for innovative options that allow them to monetize their work by way of their fan base. Whether it’s a gamer looking to interact with their fans using Twitch or an artist looking to bootstrap their art through Patreon, new models and options are developing to crowdsource micropayments from fans. Twitter entered this market this week with Twitter Tips. This new approach is designed to enable fans of a particular Twitter handle to literally tip the creator of the content.
Esther Crawford, Twitter’s Head of Product, made the announcement by way of an article published on the Twitter blog last Thursday, with the rollout going first to iOS and then to Android within a few weeks. Crawford explained, “People in the eligible markets will have to sign up for a Strike account and add their Strike username to receive Bitcoin tips over the Lightning Network.”
Twitter has been exploring creator monetization options in beta format for a few months now, but this is the clearest indication yet of the company’s strategic intent to evolve the microblogging site. This functionality is still too nascent to confidently predict how it will transform usage of the social platform, suffice to say that we are seeing a strategic pivot in how Twitter plans to work with its content creators that largely drive usage and adoption of the platform by the masses.
Strike and Twitter: What Does This Mean for the Legacy Players?
Strike and Twitter working together makes sense. But the question on everyone’s minds is what this means for the legacy players. Visa and Mastercard, and even relatively new vendors such as Venmo and CashApp, are in the crosshairs of Strike. The 2.9% that Visa charges merchants is the ball game here, the credit risk, the counterparty risk, balance sheet float and fixed cost in the intermediaries in between — all of these things mean cost for the legacy players. By comparison, the lightning network is free. This means that the cost basis for transactions just collapsed to zero. Providers on this network can offer services at single digit basis point levels and still make profits. Conversely, the providers of the legacy systems simply can’t operate at these levels with their existing proprietary closed networks.
In my opinion, it is very early days for the lightning network and the likes of Strike and we will certainly need to closely watch the adoption of this approach, however this revolutionary technology is pretty exciting.
To characterize where this technology is in its development cycle, the analogy I would use would be this is Linux Vs Windows 25-years ago. Mallers and Strike are betting on the network effects of open-source development, and history has shown us over time this is a solid bet.
Looking Ahead to the Fireworks
It is still too early to fully assess the impact of the collaboration between Strike and Twitter on the established money transfer market. However, it is clear that the legacy players in this market have not seen the likes of Jack Dorsey and Jack Mallers before. To say both don’t fit the mold of suited and booted Wall Street types is an understatement, and Mallers’ pink Crocs that he shows in the CNBC interview clearly show that he’s cut from a different cloth.
The underlying approach and technology approach is sound in what Strike and Twitter are offering, what is less clear is how the regulators in various geographies will react. Facebook tried to undertake something similar on the surface with Libra and hit a wall with the regulators.
While the approach that Strike and Twitter are taking is cleaner and less damaging to sovereign currencies, it will still need to be tested in the heat of Washington and other jurisdictions around the world. The fact that Strike and Twitter were able to launch the offering in 48 U.S. states frankly shocked me, and I expect the antibodies in various global governments to kick in in the months ahead. The established order simply has too much to lose to allow the Jacks to disrupt this market. Expect fireworks in the weeks ahead as the lobbyists, mainstream media, and regulators weigh in with ill-informed opinions that can be summarized as simply as a desire to keep the status quo exactly where it is and the money flowing through their revenue generating networks.
If you’ve got the time and want a glimpse at Mallers’ personality and what he sees on the road ahead, I highly recommend you watch the CNBC clip I highlighted at the beginning of this article.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.