The underwriter provides value by being _one_ convenient transaction to sell my company's shares. Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. The investment bank then wires me the money and I get to concentrate my efforts elsewhere (like the product) instead of fundraising. (Damnit Jim I'm a tech CEO and not a hedge fund portfolio salesman!) The investment bank is now on the hook for selling the shares to those 1000 investors. Also, the investment bank has the prestige and the rolodex of potential buyers. For me (say a young 20-something) to replicate that would require many golf games and champagne dinners that take my time away from improving the product. Saving me time is worth something, right? (Maybe not a 3% underwriting fee but it's definitely worth something.)
Cutting out the underwriter also means I leave "money on the table" because many investors would rather buy initial shares from a reputable intermediary like Goldman Sachs rather than a startup like me.
If you as a company, prefer to _do_ the same investor relationship work that underwriters do, by all means, skip the underwriter fees.
> Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch.
Well in an ideal world, companies shouldn't have to haggle at all -- a public auction should determine the IPO price. Or better yet, companies should be able to just submit sell orders as they see fit, without being required to make any volume or price commitments beforehand.
An IPO is (usually) for a small amount of a company (5-10%) - hence the term "initial". Once the stock is traded, the market is continuously setting prices (essentially a continuous auction) and companies are able to sell more stock if they so wish. The reason IPOs are not also auctions (or market priced) is because that model has been tried and it doesn't work.
Google's IPO auction famously just scraped the low-end of its estimate (after the range was revised down). It "popped" 18% on its first day of trading which - at very best - shows that dutch auction is no better than underwriting.
According to https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ "the mean average of all 21 [auction IPO] opening-day gain[s] was 1.25 percent". So it seems like Google was an anomaly, but Dutch IPOs in general are not leaving much money on the table compared to traditional IPOs.
> (Maybe not a 3% underwriting fee but it's definitely worth something.)
That's a good point, and applies to all of the previous poster's examples. Does your underwriter work 10x as hard to underwrite a 1B IPO than a 100M IPO? Is it 10x harder for a realtor to sell a $1M house than a $100K house? Does Visa work 10x harder on processing a $100 payment than it does on a $10 payment? It's crazy that these "services" charge a percentage of the transaction price. Why don't these guys get paid by the hour like most professional services? I'd love to get paid a fixed percentage of the price of the products that I work on, but that's ridiculous!
That seems rather like someone is going to eat "the loss" than "providing value for both guys". The stock market is the mechanism that provides value for the buyer and seller.
If you are selling before any price discovery is on, you are either getting screwed; or your investors are. If the investment bank could figure out the right price for the shares, why have the stock exchange in the first place.
>The stock market is the mechanism that provides value
If this was true in every circumstance, please consider why "market makers"[1] exist within the NYSE and London stock exchanges. If the stock market itself provides the value, buyers and sellers should find "market makers" redundant with zero value-added -- but that doesn't happen.
Therefore, I propose that one doesn't compare investment bank IPO underwriters to a naked stock exchange. Instead, compare the underwriter to a "market maker". The underwriter can be seen as the first market maker for the initial offering. That's worth something to many owners of companies looking to get liquidity.
They are completely orthogonal. A market maker provides immediacy. Not all parties in a market want to trade at the same time. The market maker provides the service of immediacy, which they charge for. You are free not to use their service. You can place your own resting order, you can use an intraday cross, or a an opening or closing cross to access liquidity. You could also execute a block trade through a bank. You could use a dark pool. Or you could use some combination of all of them.
The underwriter is like a market maker only in the fact that it is taking principal risk when it purchases the shares. It typically already has buyers lined up for all the shares and it does not face risk from the price changing between when the IPO is priced and trading starts. That is not to say that the bank is not without risk. It has obligations like price support for the IPO.
They're useful if you don't want to deal with individual tenants, ever, and just want to treat any issues that arise as an expense. Otherwise, you have to be prepared to treat a rental as a part-time job.
(That said, they can also be terrible.)
> Title/Escrow company in a home sale
Escrow seems like a critically valuable service. It shouldn't be as intertwined as it is with a pile of other services, but I wouldn't want to do without it.
I don't think I've ever seen a longer list of arbitrary fees than when I signed all the paperwork when buying a house. It felt like death by a thousand cuts with dozens of little $50-500 line items that seemed so arbitrary. When I would ask about them, I basically got told, "do you want the home or not..."
title checking can also be very important, because you don't want to fork over hundreds of thousands of dollars and then have the sale be invalidated because of title issues years down the road. Depending on what state you're in, this can be a non-trivial process to figure out.
Because most home purchase happen on the order of decades. A large percentage of property being purchased has titles that go back 50 years or more. Understanding who bought what when with what covenants using what surveys etc... isn't a straightforward task.
o_O what, your country/state/whatever jurisdiction doesn't have a title office?? Both Hungary and Canada (I am a citizen and real estate owner in both) has a title office where I can request the title online and it has a complete, official history.
Edit: Thanks for the downvote(s), care to explain where I am wrong?
Title transfer is more complicated than simply trusting what's listed on a document. Property, covenants, business/family arrangements and other factors change over time. All of this needs to be checked as part of the sale (or at least should be).
Respectfully: what the...? The title in the title office (or whatever else they call it) is the official truth. If someone, say, has a right to use the property until their death, that's a note on the title, not a piece of paper on the drawer. If it's not on the title, no one cares about your business or family agreement. If you contest the title based on such an agreement in a court of law you will always lose, in the most literal sense of the word, the title is all there is. I do not understand a word of what you are saying. What's going on in the USA?
When you take into account titles can have multiple leins, land can change, covenants can change, legal entities can come and go (divorce, death, business closure), banks come and go and debt is sold and a whole host of things up to and including outright fraud, simply relying on the title is often enough, but sometimes not.
Case in point, I just bought some land that I intend to build on. There was an easement on the original lot before it was subdivided. That easement was never updated to reflect the new subdivided properties. It didn't need to be, because it only applied to structures on the land, of which there were none. Due the way the covenants work for the county, where this easement was placed (my lot of the neighbors) would determine whether I can build a house on the lot. This was discovered during the title search and we had to get the county to make a decision, which required zoning consulting with a judge, before we could purchase the property.
Had I purchased this lot without a title search, I could have went ahead with financing construction and perhaps even broken ground, before this was discovered. Even planning and zoning missed it originally. Additionally, given that this was technically a dispute, if I had not done this due diligence, it's entirely possible the neighbor could have made a case for the easement and I would have been stuck with a court case which is always a gamble.
Trust me, I do a lot of real estate on the side and the few hundred dollars you pay for title insurance is well worth it when these types of issues come up. The last thing you want to deal with is going to court with your soon to be neighbors over property line, easement, covenant etc... disputes after you've already purchased the property and are forced to live with the consequences (best case your neighbors hate you, worse you're stuck with a dud property). It's a small price to pay for what is likely the largest purchase you'll make.
When I paid-off my mortgage in the UK I was disappointed not to receive the title deeds on paper.
In the past few years the land registry agency here has been encouraging lenders to scan-in old documents and destroy the paper originals, so the only active indication of ownership is a record in a database. They call this 'dematerialisation'.
I can only hope they have an excellent versioning and backup strategy.
Escrow is a valuable instrument, but there fees charged for it today is unwarranted.
In the future, escrows will be handled by smart contacts for a lot cheaper, not people.
As for property manager, with the surfeit of online tools for everything from listing, screening tenants to rent payment, their value is significantly diminished
> Escrow is a valuable instrument, but there fees charged for it today is unwarranted.
Agreed.
> In the future, escrows will be handled by smart contacts for a lot cheaper, not people.
Seems exceptionally unlikely. That doesn't work unless all the infrastructure they interface with all uses the same underlying resolution system; otherwise, someone has to provide a bridge, and that makes the "smart" contract effectively toothless. Half the job of escrow is to deal with a giant pile of legacy systems.
> As for property manager, with the surfeit of online tools for everything from listing, screening tenants to rent payment, their value is significantly diminished
"property manager as a service" seems like a fine concept, but there will still be many people who do not want to do that work themselves. By all means, be a "virtual" organization, but someone still needs to have a rolodex of repair services to call when someone needs their air conditioning fixed in the middle of the summer.
Visa provides protection from a lot of risk on both the buyer and seller's side.
As a seller I know that if a Visa payment clears I'll be getting that money, even if the customer doesn't have it. I don't need to arrange financing or risk taking a check that may bounce long after the customer has disappeared.
As a consumer, I get some measure of protection from fraud and have the option of doing a chargeback and letting Visa sort things out with the vendor if something is not as described.
Just to be clear: as a seller you are not indemnified by Visa if you accept a fraudulent payment. In that case, the money is taken out of the seller's account and returned to the buyer.
You really have no idea how the payment card industry works. Visa provides 0 protection to the buyer or the seller.
The card issuer/bank provides protection to the buyer.
NO ONE provides protection to the seller. The seller's are 100% expose and lose most disputes. With EMV, some of the risks will move but not much. All online transactions are keyed, so not subject to any protection.
Visa doesn't sort out anything, they provide a network and take a cut. Disputes happens between issuer, processor in the middle and merchant. If the processor fails to recover the money from the merchant then the processor is on the hook.
And if the person you ordered from fails to send you the item? Or sends you a defective item? Or if someone steals my info and spends my cash?
Credit cards act as an escrow service to protect against all of those things. Cash (and its online equivalent) has a place in the world, but so do credit cards.
I don't really want, and definitely don't need, that sort of thing. I'd much rather pay for online purchases using something that protects me in the event of fraud.
Hence the existence of credit cards. It would be nice to have these protections without the line of credit attached but you can just ignore it if you want.
Their value really is that they exist and are more or less a monopoly, so you have to pay the fees to use them (as a merchant) or turn away the overwhelming majority of customers.
I think they clearly have value, but the problem is that it's hard for the market to settle on the true value because of the games they play with credit card points. They've tricked consumers into thinking that credit cards incur no costs, but in fact give them cash back and points.
If points were banned, and consumers instead paid the credit card fee as a line item on their receipt next to taxes, you might find more downward pricing pressure or consumers willing to pay cash.
Well duh, of course people would prefer cash if their credit card started costing them money. Credit cards are basically free to the consumer. You could argue that the ever-present fees causes the prices of goods to go up to compensate but it's just really not the case. You can look at merchants that accept and don't accept credit cards and you won't see really any tangible difference between the prices of their services.
There are a decent number of places that have a minimum price for using a card, and I've even seen gas stations that charge extra per gallon if you pay with credit instead of cash. I definitely agree that in the overwhelming majority of cases there isn't a difference to the consumer, and even when there is it's fairly slight.
Prior to their existence what mechanism provided the same avenue for transaction? Especially as the world moved online I would argue they became more relevant for transactions. I don't disagree with the monopoly part but that doesn't discredit their value in my opinion.
Not only do they exist, but they provide some kind of infrastructure to transfer payments. How do you do this without a middleman? Even mailing a check relies on banks and a postal system.
If you're paying 3% you're getting ripped off. There is no reason you should be paying more than 1%. In the EU interchange is 0.3% for credit and the scheme fee is less than that.
Maybe if you're doing an unauthorised, interdomain transaction with an imprinter in a brothel then 3% is reasonable.
Authentication would only solve one type of fraud (using someone elses credit card). What about when you buy something online and the seller doesn't send you the item? Or sends you a broken item? What is a service breaks their contract with you?
There are lots of kinds of fraud that aren't identity based.
It really depends on a lot of things (do you have a chip terminal? If not, are you a gas merchant and based in the US, and the total transaction is under $50? Are you enrolled in 3D Secure? Are you on the Full Fraud Recourse list?...etc.)
How you answer those questions determine chargeback eligibility. Even if networks do issue a chargeback, you can provide a 2nd presentment with evidence supporting your claim that it wasn't your fault. Finally, if all else fails, you can go the Good Faith Credit route.
Which leads me to say that the burden of fraud really falls on the network, not the merchant, since they have to abide by definitive chargeback policies set forth, and be willing to accept 2nd presentments for the sake of maintaining merchant relationships.
Your conclusion still holds true- swipe fees should be less than 3%- probably closer to 1%... let's just say I work in the industry, and see how the proverbial sausage is made.
Only online transactions(CNP) where you ship the product to address other than card's billing address. If the merchant uses 3D secure for online transactions, issuer is fully liable for fraud. For card present transactions, issuer is fully liable for chip based transactions. Merchants only bear risk if its a stripe or a manually keyed in transaction.
High cost of for credit card transactions is because merchant pays for the 60 day interest free loan on the money that the bank is giving the consumer to make the purchase. Debit network transactions are a lot lower, 0.5% for durbin amendment cards(90% of cards out there).
I am in Australia where the rules are different, but does 3D secure protect you against the CC owner claiming the item is not as described or was not received?
visa fees? way less. total fees to the merchant per swipe is way under 3% for any sizable businesses. something like 1.2% + $0.10 was average when I worked for a payment processor.
> Institutions that add little to no value in transactions
I think the key qualifier you're missing from this broad assertion is "transactions which, by and large, go according to plan." Each of these institutions offers little value in cases where the parties involved are both fully informed and fully above-board, but each of these institutions offers critical protections in cases where one of the parties fails to uphold their end of an agreement properly.
Visa is not a payment processor, Visa is a payment scheme. Payment schemes offer a variety of value
- settle and clear globally in almost any currency, almost any country, if you accept Visa and somebody with a Visa walks in your store we'll be able to pay
- protection of the merchant against insolvency of the card holder (yeah the issuer comes up with the money but Visa makes him pay)
- protection of the card holder against fraud
- protection of the card holder against misconduct by the merchant (ie. but not limited to the merchant not shipping the goods). this is really easy to do for the card holder without having to the merchant, which may the on the other side of the world, to court.
- a rule book for international conflict resolution
- rules for software development and operation processes among participating companies, see Mt. Gox
- rules for terminal security
- a lot more
If however you mean that Visa is a worse version of MasterCard that doesn't have its shit together, then I agree.
Less middlemen is also why so many people are getting scammed out of $ in ICOs.
There was a thread on HN a while back where HNers proposed regulation for BTC trade.. comment by comment rebuilding the (legitimate) reasons for regulation.
I'm not saying the SEC is a force of good, just saying that good and bad can come with less regulation.
I'm really on the same page with you expect for 4. The property manager does give important value which is close to "managing human resources". He might get, disproportionally, higher pay than what he should but that might have to do with your target population.
(ie: if you are renting a cheap house, you'll need for of "managing human resources" than for an expensive one. Even though you are getting less for the deal).
The actual payment networks like visa and mastercard charge very small amounts in most cases, something around %0.15 + $0.02. Most of the credit card fee is going to the issuing banks.
1> IPO underwriter 2> Title/Escrow company in a home sale 3> Payment processors like Visa 4> Property manager for a rental home 5> Realtors
These middlemen need to be bypassed to keep more value in these high value transactions and reduce costs!
I'm glad Spotify is doing this, hopefully other big names will follow