Long Take: Growing financial engagement with messaging in Coinbase Wallet, Venmo, and the super apps
Is it messaging with finance, or finance with messaging?
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: The intersection of finance and technology has led to innovative ways of mixing attention, commerce, and finance, epitomized by entities like Shopify and Venmo. The success of these platforms hinges on understanding how to mix engagement and financial product within their business model. Crucially, financial services are moving beyond being just transactional machines, by increasing user engagement and developing strategies to improve customer retention. The next frontier, as highlighted by Coinbase's integration of the XMTP protocol for messaging, is developing a persistent digital identity for users, emphasizing the growing significance of interoperability and privacy in the evolving world of Web3.
Topics: Shopify, Venmo, Ant Financial, Apple, Coinbase, XMTP, super apps, big tech, engagement, payments
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Long Take
Commerce and Engagement
We often come back to the core ways to make money in finance, if you are touching the underlying financial flows:
Money in motion
Money at rest
Money at risk
In the first case, think about the financial movement flow generated by payments or capital markets trading. This is like a current, going from one node to another, pulled by an underlying physics. The utility function of one person has a difference to the utility function of another person, and through a transaction that set of utility functions is satisfied in a mutually beneficial exchange.
The other two cases are about what a person does with the capital once it stops moving. Is it deposited at a bank to accrue yield? Is it invested into an asset allocation for long-term holding? Or is the value put at profound risk to underwrite a loan or an insurance policy, creating intertemporal financial smoothing (i.e., utility function time travel) or pooling risks at an aggregate level.
Understanding and caring about this makes you different from other tech builders and investors. While the generalist thinks of money as a medium in which the substance of the economy is measured — i.e., just some abstract points that intermediate commerce — you understand it to be a product as well.
But that is also a trap, to be in love with understanding the money product, to only think of allocation and investment management. And that is because the magic money points come out from the differentials of consumer utility functions, of the preference differences between the people that engage in commerce, and those utility functions largely deal with substantive products built in the operating economy. In other words, real world stuff.
This integration has been historically pretty hard for finance, and perhaps for good reason. The maker of the truck wheels does not care about what the truck delivers, it only cares to sell the wheels into the truck manufacturing value chain. But occasionally, you get interesting experiments, like wheels that are super stable so that the egg-truck doesn’t break the eggs it is carrying from too much bumping. Or something like that. You get finance apps that play with commerce in deeper ways than just being the system of arbitrary money points.
One example would be Shopify, and its set of integrations. Is it a private label store for third party creators, or is it a destination application that also hosts financial products like payments and underwriting?
You might be able to see how the financial product grows out of the economic activity. First, stores offers goods and services to customers. Shopify creates the infrastructure for those stores to offer goods online, and then to process payments through an embedded finance integration. Then, as stores accrue on the Shopify platform, there’s a tendency to centralize and aggregate distribution by pooling the customers of those stores on a Shop app, and then to centralize and aggregate the financial management, processing, and assets of the stores within attached financial functionality.
Now think about engagement — the magic tech word. What is engagement? It is the frequency with which users check an application, or the amount of time somebody spends on your website, or browsing your store. If your business is a simple transactional machine selling a product at a time, then engagement increases the surface area of your economic potential. You want people to convert from prospect to a sale.
If 1 million people show up per year to your application and 5% convert whenever they show up, you have 50,000 paying customers. But if those million people show up 10 times a year, maybe each time there is a 1% conversion rate for a total of 10% and now you have 100,000 paying customers. This is a toy example, but you can see the logic. Multiply the number at the top of the funnel by the time they spend on your distribution footprint, and you get two variable to toggle. The first is the raw number of new people. And the second is some version of engagement, or perhaps retention. You are maximizing attention gathering of those who are already interested in your services.
So with Shopify, which makes money with the volume of commerce that occurs on its affiliated merchants, you want to increase engagement across all customers in the systems. Therefore, you would cross pollinate them between stores, given them a honeypot app where they scroll around, and increase conversions in all merchant locations. That leads to more purchases, and then more money at rest, as merchants have better economics and build out treasuries to manage in their pretend bank accounts.
Another example if Venmo, famous for creating a financial feed that shared the private details of how money was being sent around within its network. It was decried for misunderstanding user behavior. But rather, Venmo understood that it could not generate more engagement through its core monetization engine, i.e., payments, and instead had to drive engagement through some other trick, i.e., social networking.
The value of this engagement is normalizing peer-to-peer payments. Look, everyone’s doing it! It’s not weird! And it also has a strong branding halo effect from the social proof. Note how this engagement hangs off commerce, not finance. It is the underlying substance of the transaction that matters — sharing a pizza, paying back a friend — and not the features of the financial network. The updates don’t brag about how long it took to transfer the money, or whether it is using ACH, Visa, or Bitcoin.
The Money Message
The other, more obvious, place where we’ve been watching this intersection is within the messaging apps. Messaging apps have millions and millions of users, far more than any neobank or payments footprint. About 4-5 years ago, there was a push to integrate small value money transfers into payments, essentially making Venmo / CashApp a native feature within messaging. Everyone from Whatsapp to Apple has