Examining how Paypal makes money on cross-currency payments

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Making cross-currency payments can be expensive. The mark-up (or, more accurately, the spread to inter-bank FX rates) applied to transactions that involve a currency conversion can be as high as 4%. In the past, it could be argued that the cost of processing international payments and the FX risk that banks assumed when providing the cross-currency component justified such high mark-ups. However, advances in technology now mean that the processing of such transactions can be almost entirely automated, which drastically reduces the cost per transaction, and the FX exposure can be tracked and managed in real-time, which reduces the risk. Furthermore, growth in transaction volumes means that economies of scale can be harnessed to further reduce the costs and risk.

However, mark-ups have remained stubbornly high. An example is the  “Non-Sterling Transaction Fee” that most UK credit card issuers apply when a card is used to make a payment in a foreign currency (card issuers in other countries apply similar fees). This fee is typically in the 2.75-2.99% range and is supposed to cover the costs associated with the currency conversion. However, the fee charged to card issuers by Mastercard and Visa for processing such transactions is just 1%. I’ve never been able to find out the justification for that extra 1.75-1.99%. If anyone can enlighten me, let me know!

Those juicy fees present an opportunity for companies that process credit card payments to persuade customers to pay those fees to the credit card processor instead of their card issuers. Last August, I grabbed some screenshots to demonstrate how Paypal does this.

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Written by jackgavigan

March 12, 2013 at 11:42 pm


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The three most over-used, yet misunderstood, words in the business vocabulary are: innovation, disruption and leadership. It’s incredible how many people throw these terms around without being clear on what they actually mean.

Leadership, in particular, can play a massively important role in determining an enterprise’s success or failure, so it’s critical to understand it properly.

The most experienced and consistent practitioners of the art of leadership are the military, who operate in situations where lives (and victory) depend on the willingness of men to follow orders. As a result, business has much to learn from the armed forces, not least an accurate and concise definition of leadership.

Discussion of leadership is so often overloaded with vague but emotive ideas that one is hard put to it to nail the concept down. To cut through the panoply of such quasi-moral and unexceptionable associations as “patriotism”, “play up and play the game”, the ever-asking-your-men-do-something-you-wouldn’t-do-yourself” formula, “not giving in (or up)”, the “square-jaw-frank-eyes-steadfast-gaze” formula, and the “if… you’ll be a man” recipe, one comes to the simple truth that leadership is no more than exercising such an influence upon others that they tend to act in concert towards achieving a goal which they might not have achieved so readily had they been left to their own devices.

– Norman Dixon, On the Psychology of Military Incompetence (1975)

Or, to express it more simply:

Leadership is the phenomenon that occurs when the influence of A (the leader) causes B (the group) to perform C (goal-directed behavior) when B would not have performed C had it not been for the influence of A.

– William Darryl Henderson, Cohesion: The Human Element in Combat (1985)

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Written by jackgavigan

March 2, 2013 at 6:29 pm

Andrew Mason’s legacy

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SuckersYesterday, Groupon announced lacklustre earnings, which caused the stock price to tumble by nearly 25%. This evening, the company announced that Andrew Mason is being replaced as CEO. Within minutes, Mason posted a memo admitting that he was fired, which people have described as  honest, charming, humble and “a good standard in how to leave“.

People have short memories. Throughout 2010 and 2011, Groupon raised $1,098.2m from investors. More than 86% of that money ($946.8m) was distributed to the founders or earlier investors in the form of share buybacks. Andrew Mason personally received nearly $28m. (For full details, see my post from September 2011.)

It later emerged that, at the time the founders and early investors were taking money out of the company, Groupon’s liabilities exceeded its current assets (i.e. it owed more money to merchants than it had in the bank). If Groupon’s growth had slowed during 2011, it could well have gone bust. Mason and Lefkosky’s judgement in opting to enrich themselves instead of bolstering the company’s financial position was questionable, to say the least.

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Written by jackgavigan

February 28, 2013 at 11:13 pm

Posted in Bubble 2.0, Ethics

Let’s Make Sure That 2013 Is Better Than 2012

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Greed is GoodI originally wrote this blog post nearly two months ago. For many years now, I’ve used the Christmas break (which I normally spend away from London and with less ‘Net connectivity than usual) to reflect on the past year and lay plans for the next.

This Christmas, my reflections led me to write a blog post titled 2012: The Year Greed Reared Its Ugly Head, which I never published, but which largely forms the first half of this post.

For me, 2012 began with the memory of the Zynga stock options kerfuffle still fresh in everyone’s mind and, by May, we had seen Groupon and Zynga’s stock plunge below their IPO prices (although both sets of founders did all right). Then came the debacle of the Facebook IPO, with what Roger McNamee characterised as “self-dealing” by insiders at the board level who had “better information” than retail investors.

We also had the debate over whether acquihires were fair to investors and, in London, there were two separate instances of smooth-talking “entrepreneurs” employing staff for their startups, who then weren’t paid. To top it all, news of the LIBOR manipulation scandal broke.

Gordon Gecko famously said that “Greed is, for want of a better word, good” and, to a certain extent he’s right – the desire to earn money and accumulate wealth is a great motivator (and I doubt many founders and early startup employees would put in the hours and effort if there was no prospect of a pay-off) – but it shouldn’t be our primary motivator.

Masahiko Yamada, the President of Fujitsu’s Technical Computing Solutions Unit, once said that “the best innovators’ primary motivation isn’t money. They just want to change the world.”

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Written by jackgavigan

February 18, 2013 at 11:56 pm

Posted in Entrepreneurship

Don’t Blame the Bankers

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A recent press release from Startup Bootcamp bears the attention-grabbing headline “Bankers Holding Back Europe’s Tech Entrepreneurs“. It echoes sentiments expressed at the Digital Sizzle 4 town hall event back in May, where members of the audience complained that banks weren’t lending money to startups.

The problem is, it’s not true. Banks don’t make investments in startups, venture capitalists do.

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Written by jackgavigan

October 10, 2012 at 11:20 am

Posted in Entrepreneurship

Computers don’t cause problems. People do.

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What trading systems look like

The past six months have seen a rash of headlines about computer glitches and failures affecting financial firms. First, BATS had to pull its IPO due to problems with its own trading platform. Then the start of trading in Facebook shares was delayed due to a NASDAQ systems failure. In June, a failed system upgrade affected hundreds of thousands of RBS customers in the UK. Finally, on August 1st, Knight Capital lost $440m in just 45 minutes due to problems with its market-making software.

Now the Chicago Fed has released a letter (PDF) containing the results of a survey, which reveals that “two-thirds of proprietary trading firms, and every exchange interviewed had experienced one or more errant algorithms”. I’m not surprised. I’ve done it myself, creating a ad-hoc market-making tool which malfunctioned when there were no other quotes in the market.

Admiral Hyman G. Rickover of the United States Navy is regarded as the “father of the nuclear navy”, having served as director of Naval Reactors for over three decades. He wrote:

Responsibility is a unique concept: it can only reside and inhere in a single individual. You may share it with others, but your portion is not diminished. You may delegate it, but it is still with you. You may disclaim it, but you cannot divest yourself of it. Even if you do not recognize it or admit its presence, you cannot escape it. If responsibility is rightfully yours, no evasion, or ignorance, or passing the blame can shift the burden to someone else. Unless you can point your finger at the person who is responsible when something goes wrong, then you have never had anyone really responsible.

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Written by jackgavigan

September 21, 2012 at 12:52 pm

London to Silicon Valley

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Since my first purposeful trip to Silicon Valley last summer, I’ve visited the area twice more, spending more than six weeks there in total. My experiences have been overwhelmingly positive. The people I’ve met out there have been welcoming and helpful. They’ve spared the time to meet with me and leveraged their network to make introductions to people and companies that I would never have been able to access otherwise. The overwhelming impression is one of openness, optimism, a desire to help others succeed and a collaborative, “pay it forward” culture. There’s no sense of “What’s in it for me?”.

I hate to say this but, regrettably, I don’t think we can say the same about the tech startup sector here in London. I think we’re making progress with the growing success of open, inclusive networking events like Silicon Drinkabout, but I think we have a long way to go. To quote James Clark’s MBA dissertation (in which he looked at the question “Why is there no British ‘Google’ and what can be done about it?“), “rather than being open and free flowing, business networks in Britain are stratified, resulting in poor transference of information”. We simply don’t have the same open, collaborative, helpful culture that exists in Silicon Valley.

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Written by jackgavigan

September 20, 2012 at 4:11 pm

Posted in Entrepreneurship

What Steve Jobs really thought about stealing other people’s ideas

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The BBC’s Newsnight dug up a great piece of footage from an interview with Steve Jobs from back in the ’90s, for a segment on tonight’s show about the impact of the Apple v Samsung judgment:

“I mean, Picasso had a saying. He said ‘Good artists copy. Great artists steal.’ And we have, y’know, always been shameless about stealing great ideas.”

Original footage, in context, below.


Written by jackgavigan

August 28, 2012 at 10:16 pm


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Saturday marked the three-month anniversary of Facebook’s IPO. Its stock price is down nearly 50%, while the S&P500 has risen by over 9% over the same period and the NASDAQ-100 index (which Facebook hopes to join later in the year) is up over 12%. This past week alone saw Facebook shares decline more than 12%, hitting an intra-day low of $19.00 on Friday (suggesting that limit orders are kicking in at that level). Commentators have suggested that the drop can be at least partly attributed to the expiry of the first lock-up period on Thursday but one would expect that the market would have anticipated and priced in the impact of insiders and early investors liquidating a portion of their holdings. The fact that the price still dropped suggests that the post-expiry sell-off may have been greater than expected and doesn’t bode well for the lock-up expiries that are due over the coming months. Facebook could end up rivalling Zynga and Groupon for the title of “largest decline in stock price since IPO” (Facebook, of course, has already won the gold medal for “Largest decline in market capitalisation”).

How can a company that was valued at over $100bn just a few months ago now be worth barely half that?

Well, the scary fact is, it could get worse. Jan-Frederik Kobus came up some valuations for Facebook stock based on the methodologies commonly used on Wall Street. The results aren’t pretty, ranging from $6 to $10.

The only way Facebook is worth $19 a share, let alone $38, is if investors believe that it can generate far greater revenues than it does at the moment. So, let’s take a look at some of the risk factors that could affect its revenue growth.

User Growth

Facebook’s growth has been phenomenal. It rapidly eclipsed the previous generation of social networks and looks set to reach a billion users in the next couple of months. However, if Facebook adoption mirrors the standard technology adoption S-curve, subscriber growth will begin to slow at some point. Every Wall Street analyst covering Facebook will be adding newly-announced subscriber numbers to their graph and looking for any hint that the slope is flattening out, at which point we’re likely to see a rash of headlines and more downward pressure on the stock price.


The biggest threat to Facebook’s dominance of social networking is that a new entrant will disrupt Facebook in the same way that Facebook disrupted Myspace. Most people believe that the network effects that allowed Facebook grow so large, so quickly, present a massive obstacle to any challengers, but the fact is that, in an era of accelerating technological development, network effects are a double-edged sword.

Bear with me while I draw an tenuous analogy from the financial sector.

In the mid ’90s, the majority of trading in German government bond futures happened on the London International Financial Futures and Options Exchange (LIFFE, pronounced “life”), an open outcry exchange, where all trading occurred between traders shouting and gesticulating furiously at one another on a physical trading floor in London. Its closest competitor, the Deutsche Terminbörse (DTB), had managed to capture the local German banks’ dealflow but it wasn’t until it introduced screen-based trading (which allowed traders outside the trading pit direct access to the market, instead of having to place their orders through brokers who had seats in the pit) that it managed to challenge LIFFE’s dominance. Once DTB captured 50% of trading volume, a tipping point was reached and, within months, the vast majority of trading shifted from LIFFE to Eurex (DTB’s successor), where it remains to this day.

The worst-case scenario for Facebook is that a new entrant builds enough momentum to become the hot new way to keep in touch with one’s friends. Mobile presents the most obvious opportunity in the short- to medium-term but the obvious candidates to exploit it – Google and Path – have failed to make any inroads thus far.

In the longer term (which, to be fair, is probably a time horizon too distant to affect Facebook’s stock price today), the threat is likely to come from a generational shift, in which the children of today eschew the social networks their parents use, in favour of newer, trendier, more fashionable alternatives.

Business Model 

The lion’s share of Facebook’s revenue comes from advertising, which is a zero sum game – on the whole, companies don’t start spending more on advertising when presented with new advertising channels; they simply re-allocate their budget to the most effective channels. That means that Facebook must compete against other channels for every dollar of advertising revenue it earns, and the competition for advertising dollars is only set to intensify. The next big development in this area is likely to be targeted promotions, personalised by users’ location, demographic, personal preferences and their friends’ preferences and recommendations. However, this is a space which Google, Groupon and Foursquare are as well-positioned as Facebook to exploit.

The other key revenue stream for Facebook is what it refers to as “Payments and other fees”, the majority of which comes from Zynga, which hasn’t exactly been impressing the markets recently. While Zynga was content to leverage Facebook’s network to grow rapidly, there’s no guarantee that the next generation of social gaming companies (which, chances are, will be founded by disgruntled ex-Zynga employees) will be as keen to fork over 30% of their revenues to Facebook.

Zynga, like Groupon, surfed a wave of hype and explosive growth to rush to IPO, allowing the founders and early backers’ to cash out before it dawned on investors that the business model’s half-life was on the verge of expiring. Google, on the other hand, having triumphed over AltaVista, Northern Lights and Inktomi, found a viable business model and then proceeded to diversify beyond its core search-driven advertising business into apps, maps, videos and mobile phones, and continues to expand into driverless cars, glasses and fiber.

Facebook’s first attempt to expand its business beyond the confined of its own website was an unmitigated disaster and there has been little indication since that the company has either a strategy or the capability to diversify beyond its existing revenue models. Even if it starts tomorrow, it will be doing so while grappling with the challenge of maintaining its existing revenue stream while its subscribers shift to mobile.

Structural Shifts

In a sector as fast-moving as the Internet, the most dangerous threats are the ones that aren’t obvious or even visible – Rumsfeld’s “unknown unknowns”. Yahoo! never imagined that a PageRank’d search engine could replace its Internet directory. Sun Microsystems never imagined that a free, open source operating system running on Intel hardware would triumph over Solaris on UltraSPARC in the enterprise. Microsoft never imagined that Apple would rise from obscurity to rule mobile operating systems and Nokia never imagined that a company with 0% market share would come to dominate the mobile phone market. Back when I started using the Internet in 1993, I never imagined that, 19 years later, I’d be accessing the ‘Net from a handheld, wireless device, with bandwidth exceeding a T1.

Nobody knows that may appear out of leftfield over the coming years but one thing worth remembering is that the most successful communications and media technologies – from the original telephone, thru GSM mobile phones to 3G, from fax to email, from cassette tapes thru CDs to MP3, from VHS to H.264, from Ethernet to the Internet itself – have all been based on open standards and platforms. It seems unlikely that, in ten years’ time, we’ll still be logging into http://www.facebook.com in order to send friend requests, organise parties and share photos.

Facebook’s ability to foresee an recognise such changes, to pivot and adapt to them, will determine whether it follows in the footsteps of Google or Yahoo!


The single, overriding factor affecting Facebook’s long-term success, is the company’s leadership. Ultimately, the buck stops with the CEO.

Back in 2001, when it became apparent that Google had discovered a viable business model in the form of AdWords, its investors (led by John Doerr of Kleiner Perkins and Mike Moritz of Sequioa) insisted that Page and Brin hire a professional CEO. They chose Eric Schmidt, who presided over a successful IPO followed by steady growth. By the time he handed the CEO’s baton over to Larry Page in early 2011, Google was generating annual revenue of $29bn.

By contrast, Mark Zuckerberg has held onto the Chairman/CEO role at Facebook. In theory, Sheryl Sandberg brings the managerial expertise that Zuckerberg lacks but, through Facebook’s dual-stock structure, he controls the majority (57%) of shareholder votes, despite owning just 28% of the shares, which makes his position and authority unassailable (as evidenced by his unilateral decision to acquire Instagram). It also gives him the ability to stack the Facebook board with yes-men, if he chooses to do so.

In effect, buying Facebook stock means that you’re betting that Zuckerberg has the ability to lead the company through the challenges detailed above.

The scandal over Facebook’s “selective disclosure” of reduced revenue forecasts to a select group of Wall Street analysts just before the IPO  will have dealt a blow to the market’s confidence in Zuckerberg’s. It will also have served to remind them of the controversies over how Facebook was founded and how Zuckerberg tried to screw his first investor. Investors don’t want to invest in a company ruled by a CEO who does whatever he wants – they want to invest in a company led by a CEO who delivers unto them a return.

Zuck successfully built the world’s biggest social network but it remains to be seen whether he can steer it through the challenges it faces, to retain that position.

Update – 20th August 2012, 14:53

Less than 24 hours after I wrote this, news emerged that Peter Thiel has sold the majority of his shareholding in Facebook, which can only add to the downward pressure on the stock price.

Written by jackgavigan

August 19, 2012 at 6:54 pm

Posted in Bubble 2.0

Buying fake Twitter followers

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Elliot Loh thought it’d be funny to buy someone 1,000 fake Twitter followers:

So I did.

BuyRealMarketing.com will sell you 1,000 Twitter followers for $15, so I paid my money, specified @loh’s Twitter account, sat back and waited.

Six days later, they hadn’t turned up, so I prodded a BuyRealMarketing representative on Twitter and two days later, Elliott suddenly had 1,487 new followers (I guess they threw in a few hundred extra to make up for being slow to deliver):

Interestingly, these new followers don’t seem to be recognised as fakes by StatusPeople‘s Fake Follower Check tool (although it could simply be that the tool hasn’t refreshed its data since Elliott himself checked, just before his new followers arrived):

At a time when Mitt Romney is under fire for having fake Twitter followers, I found it interesting that it was so easy to buy fake followers for someone else’s account.

Thanks to Elliott for being such a sporting guinea pig.

Written by jackgavigan

August 18, 2012 at 12:35 am

Posted in Silliness