| Who do you think would be better at designing a simple and delightful user experience for a credit card: Apple Inc., or the average bank? If you had asked me this a week ago I would have confidently said "Apple." Banks are stereotypically confusing and legalistic; Apple is stereotypically friendly and easy to use. Apple's whole thing is "it just works": Instead of making you fill out pages of confusing forms, I would naively have thought, Apple would just let you choose a couple of clear options and automatically do what it was supposed to do. But yesterday the US Consumer Financial Protection Bureau fined Apple $25 million, and Goldman Sachs Group Inc. another $65 million, for basically designing bad user experiences for the Apple credit card that Goldman issued. And yet most banks manage to run credit card programs without getting in this sort of trouble? There are two main problems. One is that Apple and Goldman did not do a good job of letting customers dispute fraudulent charges, because when they clicked "dispute" they had to fill out another form and sometimes they didn't ("Respondent" here means Apple): On Apple devices, Apple Card users can select Apple Card transactions and click "Report an Issue." After completing an initial form by selecting issue types and then selecting "Done," the Messages application on consumers' devices opens and generates a prefilled message based on the issue selected. After consumers press send, Respondent designed the Report an Issue functionality to connect them to Goldman. … On June 25, 2020, Respondent added a new "forms feature" to the Report an Issue functionality, which Respondent had proposed and designed. For consumers who selected certain issue types and then sent the initial message, the "forms feature" sends consumers a link to an additional form in Messages. From when Respondent introduced this functionality through at least July 31, 2021, the message above this link read: "Ok. We'll need a little more information about this transaction." Through at least July 31, 2021, when consumers did not complete and submit the additional form, Respondent failed to send tens of thousands of Billing Error Notices to Goldman for resolution. In this circumstance, neither Respondent nor Goldman attempted to further contact the consumer about the Billing Error Notice or conducted any investigation of the Billing Error Notice.
And, as we discussed yesterday, the reports that did get forwarded to Goldman overwhelmed its customer service department: "For the disputes that Apple did send to Goldman Sachs," says the CFPB, "the bank failed to consistently send acknowledgment notices within 30 days, conduct reasonable investigations, or send resolution letters explaining the determinations of its investigations within 90 days." The other problem is that customers could use their Apple Card to buy Apple products with interest-free installment payments, but they had to click a box to opt into interest-free installment payments, and if they didn't click that box they would instead put the purchase on their credit card (and incur interest): Respondent designed the advertisements for Apple Card Monthly Installments, or ACMI, and the checkout process for enrolling purchases of Apple devices on Respondent's website in ACMI. … Through at least July 2020, the checkout process on Respondent's website presented consumers purchasing iPhones with an option to "Pay in full" or "Pay monthly." The checkout process did not explain that "Pay monthly" referred to ACMI, or provide further details about ACMI, until after consumers selected this option.
Honestly … this stuff does not strike me as that bad? Like "you have to fill out two forms to get a credit-card refund, and not close your session before you're done"? "You have to click a box to pay in interest-free installments"? As consumer financial services go this does not seem all that onerous. I sort of expect consumer financial services to involve multiple confusing forms. We talked a few weeks ago about how the US Treasury has its own website for individual investors who buy Treasury bonds, and to move those bonds to another account you have to use "the Treasury Department's antiquated system, which can require verified signatures and paper forms sent through the mail" and can take up to 12 months to complete. Oooh, Apple makes you check a box! It feels a little like the problem here is that Apple was too ambitious about making the experience easy: It wanted things like disputing charges and paying in installments to "just work," it tried to cut down on complexity and paperwork, and it advertised to its customers that everything would be intuitive and easy. And then things were slightly less intuitive and easy than the customers had come to expect from Apple, which the customers — and the CFPB — experienced as misleading. The circle of life is: - Banks make some new sort of loan. Maybe it's widget factory financing loans.
- Banks realize it would be more efficient to sell these loans to someone else: Instead of making a loan with their own money and keeping it on their balance sheet, they can make the loan, package it up, sell it to investors, and free up capital to go make other loans. Widget-factory-backed securities, the package is called. Perhaps it's sliced into tranches: Some investors get the senior claim which is very safe; others get the most junior claim, which is riskier but has a higher yield.
- This is efficient for the banks, but sometimes a bit impersonal for the borrowers. Whereas in Step 1 borrowers would go to the bank and say "I need a new loan against my widget factory" and the bank would say "great let's talk about what sort of financing makes sense for your factory," in Step 2, the bank instead says "okay sure so standard terms in the widget-factory-backed securities market are a five-year term with 70% loan-to-value ratio, and we'll need three weeks to market the loan to investors," and that is perhaps less convenient for the borrower.
- Someone else — now we call it a "private credit fund" — comes along and says, "well, we have a lot of money, we could lend it to widget manufacturers. We can give them faster, more certain financing with more flexible structures and more personalized service, and probably charge them more for it. And we can hold the loans on our balance sheet, because we are stuffed with money from long-term investors looking for yield."
- Private credit gets into the widget-factory-financing business and starts to compete with, or displace, the banks.
- The private credit firm thinks "you know, this is nice, but what would be even better is adding some leverage. Instead of lending $100 of our investors' money to finance widget factories, let's borrow $100 from a bank and lend $200 to the widget factories."
- So the private credit firm goes to a bank and asks to borrow money, secured by its portfolio of widget-factory loans.
- The bank is like "sure whatever that's a good credit." Because it is: Lending $100 against a $200 portfolio of widget-factory loans is safer than lending $100 against a $150 widget factory. You get a senior claim on a senior claim. The bank happily makes the loan.
- The bank remembers Step 2: The bank has capital and funding constraints, and is often happy to get loans off of its books.
- So it packages the loans from Step 8 into stuff it can sell to investors. Widget-factory-loan-backed-loan-backed securities, WFLBS-squared, I don't know.
There are no theoretical limitations to this. The investors in Step 10 can borrow money from banks to finance their purchases of WFLBS-squared, and the banks can securitize those loans, etc. There are many variations and I am being a bit loose, but not that loose. Here's the Wall Street Journal: Goldman Sachs this month sold $475 million of public asset-backed securitization, or ABS, bonds backed by loans the bank makes to fund managers that tide them over until cash from investors comes in. The first-of-its-kind deal is a lucrative byproduct of the New York bank's push into loans to investment firms, such as these so-called capital-call lines. Goldman's new deal reflects two trends transforming financial markets. Increasingly large managers of private-debt and private-equity funds are moving up in the Wall Street pecking order, but they often need money fast. Banks, once again, are reinventing themselves to adapt. ... Capital-call loans function like credit cards for private-fund managers. The funds borrow money to invest quickly in private debt, private equity, real estate and infrastructure. They then "call up" cash commitments from clients in the funds, mostly institutions such as pensions and insurers, and repay the loans when the clients deliver. … The bank still owns most of its capital-call loans, but repackaging even a small amount into investment-grade bonds sets the stage for future sales to large debt investors, such as insurers and pension funds. The move gives the bank a new way to compete against, and sometimes cooperate with, the private-debt funds that increasingly dominate the market for asset-based finance.
Capital-call loans are not exactly the sort of private-credit leverage I described above: These are not permanent leverage on the private credit fund, but rather a short-term tool for cash management and/or boosting reported rates of return, and they are not limited to private credit funds but also include private equity, etc. Still, circle of life. Also part of this natural cycle is people complaining about it: Bankers say the capital-call ABS and similar innovations help them safely serve clients while bringing in rich fees. But such efforts have preceded market excess in the past, to put it mildly. Skeptics see parallels between CDOs (the collateralized debt obligations that helped fuel the financial crisis in 2008) and the growing use of SRTs (synthetic risk transfers), NAV loans (based on net asset values) and more.
Yes right I mean the two potential "market excess" problems in banking are: - Banks can make risky loans, hold them on their balance sheets, and blow up.
- Banks can make risky loans, sell them to investors, get sloppy about what they're doing because they're not eating their own cooking, and blow the investors up.
The second one is bad for the banks because they're probably financing the investors too. I am not really an alarmist about private credit. There is a huge boom right now in the categories of lending broadly referred to as "private credit," and people worry that this boom will lead to sloppiness and risk and eventually defaults and losses. And, you know, that's probably true; financial markets move in cycles and "as long as the music is playing, you've got to get up and dance." My general assumption is that private credit is less systemically risky than many other forms of credit, because it is funded mostly by locked-up long-term investors so there is less risk of fire sales, contagion and bank failures. But not no risk, and we talked above about how private credit is interconnected with banks. I will say though that as someone who writes about finance through the cycle, I expect to enjoy eventually writing about sloppiness and losses at private credit firms, because sloppiness is interesting. A huge boom in private credit is a difficult thing for a private credit manager to manage: There's so much money coming in, so many competitors getting into the space, that it's hard to stick to tough underwriting criteria and do only the good deals. You have to do so many deals to keep up, and they can't all be good. This seems like a genuinely hard problem, though to be fair there is a straightforward solution. Here is a Financial Times article about HPS Investment Partners, a big private credit firm that is choosing among "three paths": The first, the sale of a stake in HPS to [a Middle Eastern sovereign wealth fund] of $1bn or more; the second, an initial public offering. But it is the third track that could be the most lucrative for HPS's founders and the one [founder and CEO Scott] Kapnick is keen to clinch: an outright sale, possibly to the biggest asset manager of them all, BlackRock. … HPS and its rivals are seen as an answer to the problem many asset managers are struggling with: how to secure a toehold in private credit. It is a nearly $2tn asset class that credit rating agency Moody's estimates could swell to nearly $3tn by 2028. "If you're caught in a tidal wave, your boat will go faster," one HPS adviser said. "If you were small and important before you are bigger and important today and all you had to do was show up to work."
If everyone is desperate to get into private credit, that makes it a bit hard to run a private credit firm: You have more competition each day, and more pressure to do bad deals. But it makes it an incredibly good time to sell a private credit firm. I wrote yesterday about the theory "that day trading meme-stock options is a gateway drug for sensible retirement investing." There are a lot of ways to put your money into the stock market; some of them feel mostly like "fun gambling," while others feel like "boring sensible investment of retirement savings in the long-term growth of the economy." A lot of retail brokerage accounts will let you do both. If you are young, carefree and confident, and don't have very much money, you might gravitate toward the gambling stuff. And then later, as you get more money and responsibility and grow up a bit, you will get more curious about buy-and-hold investing in low-cost index funds. And you can do both of those things — and transition between them — in the same brokerage account. This is good! Arguably it is socially useful for brokerage apps be competitive with, say, sports gambling apps, to be as fun and easy-to-use and exciting and risky as sports gambling. Because investing is competing with sports gambling for young, risk-seeking people's attention. But the brokerage app is better positioned to transition those people into boring responsible investing. There is no analogous transition in sports gambling. Here is a recent paper finding that sports betting "does not displace other gambling or consumption but significantly reduces savings, as risky bets crowd out positive expected value investments." Zero-day options are, arguably, a bit better than that. Again you cannot get too carried away with this theory. Is it socially beneficial to introduce riskier and zanier financial products to retail brokerages? Well, if the zanier products lure customers away from sports betting, and start them on a road to mature sensible investing, then yes. If the zanier products lure customers away from index funds, and start them on a road away from sensible investing, then no. I'm not sure there's an a priori answer. Also it is not exactly true that you can easily do zany gambling and sensible investing in the same brokerage account. There seems to be some specialization; some brokerages optimize for fun and others for responsibility. Sometimes the fun brokerages also grow up to be responsible ones, though. We talked about this yesterday in the context of X-Trade Brokers Dom Maklerski SA., a Polish brokerage that started out with leveraged contracts-for-differences gambling and moved into things like actual stocks and pension savings accounts. And in the US there is Robinhood Markets Inc., which is perhaps most famous as a place for young people to day trade meme stocks and options on their phones. Here's a Barron's story about how Robinhood is growing up, too: Robinhood has big opportunities ahead, especially if it can get clients who opened accounts to invest significant assets on the platform. Piper Sandler analyst Patrick Moley estimates that 10% of U.S. adults currently have a funded account at Robinhood, but the company has less than 0.3% of the $65 trillion worth of retail assets in the U.S. … Robinhood's main task now is to increase wallet share. At the same time, it has to attract a broader group of investors as well as ones who want more help on their financial journey. It's working on a financial advice offering. "For any customer anywhere in the world, we can be the place where they keep their assets and execute all their financial transactions," [Chief Executive Officer Vlad] Tenev tells Barron's. … The company intends to launch a wealth management offering next year. "If we want to be a one-stop shop, we have to have it," says Chief Brokerage Officer Steve Quirk. Quirk declined to go into details. But given Robinhood's tech-heavy approach, it is probably safe to say it will be low-cost and won't involve human financial advisors operating out of bricks-and-mortar locations. In July, Robinhood bought Pluto, an investment research company that uses artificial intelligence to develop customized investment strategies. Adding a financial-advice option could complement Robinhood's mission to serve active traders, says Quirk, a former TD Ameritrade executive. He notes that it's common for investors to take a do-it-yourself approach for part of their portfolio, while leaving the bulk in an advisory solution. "Until we expand into wealth management, we aren't getting that portion of their business," Quirk says. "And frankly, it is often the biggest part of their overall wealth."
If Robinhood has 10% of the accounts but 0.3% of the assets, that suggests either that (1) it has mostly the smallest investors or (2) it has mostly people's fun money, and their responsible investment money is somewhere else. Displaying confetti when you do an options trade is a good way to attract people's fun-money accounts; having a low-cost automated financial advisory offering is a good way to attract their retirement savings. It is helpful, for Robinhood and perhaps for its customers, to have both. Here's a good Financial Times story about Tether: President Vladimir Putin has touted a new international payments framework to world leaders gathered in Russia this week, eager to show how he is shrugging off western sanctions and challenging the US-dominated global financial order. Putin accused western powers of "using the dollar as a weapon", arguing in a speech at a Brics summit in Kazan that sanctions against Russia since its full-scale invasion of Ukraine "undermine the trust in this currency and diminish its powers". The main agenda item of the summit, attended by the leaders of China, India, Iran and others, was a Russian proposal to circumvent the US dollar by setting up a new payments messaging system known as "Brics Bridge". … Despite the bonhomie, however, there have been few practical steps towards the proposed payments system. … The main problem with the proposal is that the US has made it clear to third countries that working with Russia's war machine will cost them access to the dollar, hampering the Kremlin's efforts to build a sanctions-proof payments network. ... The chilling effect spurred banks in countries such as Turkey and China to sharply cut back on dealings with Russian counterparties well beyond the executive order's scope.
No I'm kidding it's not about Tether, it's about Brics Bridge, a Russian proposal to do international trade without going through the US dollar system. The problem with the US dollar system, for Russia, is that the US government has a lot of control over it, and uses that control to pursue its own purposes. Those purposes include sanctioning Russia for invading Ukraine, with the result that a lot of Russian politicians and companies can't really use the dollar system. This is a problem because the US dollar system is widely used for international trade — including trade that does not otherwise involve the US, like Russia buying stuff from China. So Russia would like to use some alternative system for trade with other countries. The other countries that Russia wants to trade with mostly do not care about the US government's geopolitical purposes and would, in the abstract, be happy to trade with Russia. But those countries also want access to the dollar system, because they would like to be able to trade with — not just the US, but all the other countries in the world, which again mostly use the dollar system. So Russia's counterparties do not want to be cut off from the dollar system like Russia has been. So if Russia came to them and was like "hey we built a new trading system, you want in," they will say no, because joining the new Russian trading system seems like an obvious way to annoy the US. Whereas if some new trading system just came into being, set up by neutral third parties, with the properties that (1) it is not in any obvious way tied to Russia but (2) it is open to everyone and resistant to meddling by the US government, then that might appeal more to Russia's trading partners. We talked last week about how Tether is reportedly pitching its stablecoin to global commodity traders who, you know, sometimes want Russian or Venezuelan oil. I wrote: People sometimes complain or worry about [the US "using the dollar as a weapon"], and the complaints and worries often take the form "if the US government keeps weaponizing the dollar, then eventually it is going to be overthrown as the currency of global trade and replaced by the yuan or whatever." But another possible bet is "if the US government keeps weaponizing the dollar, someone will invent a better dollar, something that is fully interchangeable with the dollar but that is not subject to US government policy." What if it's Tether?
The people against whom the dollar is weaponized — Putin, etc. — are the ones with the most incentive to build a new global payments framework, but they're the ones least able to do it. The people who might do it are unaffiliated third parties just looking to make money. Polymarket Cracks Down on US-Based Users as Whale Bets on Trump. The French Connection to Online Bets on Trump. More Companies Ditch Junk Carbon Offsets but New Buyers Loom. Funds Frozen in Synapse to Be Returned by Year End, Trustee Says. Klarna Shareholders Vote to Oust Director Amid Tension on Board. This Little-Known Private-Equity Firm Booked a 79-Fold Return. Google's Anthropic AI Investment Gets Formal UK Merger Probe. Keurig to Buy Ghost Energy Drinks for More Than $1 Billion. Intel-Backed Blockchain Startup R3 Weighs Options Including a Sale. US finalises $20bn loan to Ukraine. Saudi Prince's Beach Party Looks to Show Neom Dream Is Real. "Richard White, the billionaire co-founder of Australia's largest listed technology company WiseTech Global, has stepped down as chief executive after … a legal dispute with an ex-girlfriend over an unpaid furniture bill." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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