Could Reward Programs Appreciate in Value Over Time
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Typically, loyalty reward programs are opaque and nonfungible, particularly those from traditional airlines and credit cards. In contrast, Starbucks has one of the most successful programs because its 17.6 million active users can receive tangible benefits in real time. Users deposit money onto the app and can order ahead of time, enjoy free coffee refills, skip lines, and earn stars which can be redeemed for beverages. Thanks to its loyalty program, Starbucks not only gains important insights into customer behavior patterns but also can avoid paying fees on credit and debit card transactions.
On Monday, Bakkt’s Chief Product Officer, Mike Blandina, updated analysts on its digital asset product development and elaborated on its relationship with Starbucks. Bakkt is a subsidiary of the Intercontinental Exchange (ICE) focused on bitcoin and other digital assets. In September it launched the first bitcoin futures platform with settlements in “physical” bitcoin. Now Bakkt is focused on a consumer app and merchant portal, with plans to launch with its first partner, Starbucks, in 2020.
ARK believes that Bakkt will provide companies like Starbucks with a way to introduce customers to and reward them with digital assets. Instead of awarding stars, Starbucks could offer customers a percentage of transactions back in digital currencies like bitcoin that can be traded elsewhere. Loyalty programs that offer fungible rewards provide members with more utility. Based on the success of Starbucks’ app, customer engagement increases in tandem with utility.
Wouldn’t you be more inclined to get your coffee from Starbucks based on the potential appreciation of its rewards – i.e. bitcoin - over time?
AlphaStar Beats 99.8% of Human Players in StarCraft II
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A year after AlphaStar beat one professional StarCraft II player, Alphabet’s DeepMind published new results showing that its artificial intelligence (AI) beat 99.8% of players active in the game today. The original AlphaStar had a number of advantages over humans like viewing the entire map at once and making thousands of moves per minute. DeepMind subjected the new AlphaStar to human limits and gave it the ability to compete in all three StarCraft races on four different maps, putting to rest the criticism that AI cannot compete against humans in complex, real-time games.
Although a significant achievement, AlphaStar’s Starcraft victories do not suggest that AI is approaching artificial general intelligence (AGI). Instead, it demonstrates that, when turbo-charged with large quantities of data and computing power, old AI techniques can solve problems that used to require human intelligence.
Perhaps the company best positioned to exploit a unique and large pool of training data is Tesla (TSLA). Its rapidly growing auto fleet sends over-the-air an ever-growing database of driving examples to train its AI model. While other self-driving teams are counting on hand crafted code and/or advanced sensors, Tesla could leapfrog them with general algorithms trained on unprecedented amounts of data, which are the sources of most AI breakthroughs today.
The Challenger Banks Face Many Challenges
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At Money2020 this week, we spoke to a number of investors evaluating European- and US-based challenger banks as investment opportunities. Their conclusions corroborated our previous thinking: challenger banks face many challenges.
According to these investors, only 20-40% of challenger bank “users” are actual active users. As a result, venture capitalists probably are paying up to $3,000 per challenger bank user, more than double the $1300 we previously estimated. For reference, public markets value each deposit account at regulated banks at roughly $3400, thanks in part to an array of products and services including lending. In contrast, subject to less regulation, most challenger banks derive most of their revenues from one source: splitting the interchange fees on debit card transactions with FDIC-insured partner banks.
Unfortunately for challenger banks, debit card interchange revenue could face pressure during the next few years. Today, the Durban amendment caps the interchange fee on debit cards for banks with $10 billion or more in assets but not on those with assets below $10 billion. While some policy experts believe that all banks ultimately will be subject to the cap on interchange fees, others submit that the Durban amendment is key to the survival of small banks. In our view, given FDIC’s role in protecting consumers and small banks, high debit interchange fees are unlikely to disappear.
At the conference, we were surprised at the lack of focus on Cash App, Square’s Digital Wallet, which offers many more products and services and ten times more active users than the majority of challenger banks. If the public market were to value one Cash App user as highly as private market investors are willing to pay for one challenger bank user, Square’s market cap would nearly triple from $26 billion today to $71 billion.
