Many-to-One-to-Many

Intro

What do Broadridge and Visa have in common? Despite one being lesser known than the other, they are both in the business of unifying fragmented, many-to-many markets.

As Bill Gurley wrote in 2012, unifying a fragmented market is a great way to build a venture-scale business. In a world where software is increasingly commoditized by AI, Gurley’s principle holds even more true today — more problems, more money.

One of the things I look for as an investor is how new financial products and technologies create the conditions for new many-to-many problems. Similar to how the popularity of investors buying stocks through broker intermediaries gave rise to Broadridge and the innovation of the credit card gave rise to Visa.

Broadridge

Broadridge is a financial market infrastructure company whose core business is investor communication solutions. When an investor buys a share of a stock, ETF, or mutual fund through their broker (Schwab, Fidelity, etc.), the broker is responsible for sending proxies and disclosures in the shares and the funds that their clients are invested in.

Up until the 1990s, brokers were responsible for the operations of forwarding proxy materials and corporate action from issuers (e.g. Apple, Coca Cola, Nvidia, etc.) to investors. Proxy processing was a massive operational burden for brokers and issuers alike. Brokers had to communicate with every issuer their investors held and issuers had to coordinate with and settle invoices from every broker through which an end investor purchased its stock¹.

In the 1990s, that changed. Richard Daly, a street-smart Queens native who had forged working papers at nine years old, saw an opportunity to turn an operational burden into a business. By building a network connecting many issuers to many brokers, Daly turned a many-to-many communication problem into a many-to-one-to-many solution that simplified and reduced the cost of issuer to investor communication.

Visa

The origins of Visa trace back to 1958 Fresno, California in what is now known as “The Drop.” In 1958, Bank of America mailed 60,000 unsolicited credit cards to residents in Fresno, California, marking the first time a bank had entered the credit card market at meaningful scale. 

Because Bank of America was the largest consumer bank in California and interstate banking was illegal at the time, Fresno was a contained market with deep Bank of America penetration. These unique conditions let the bank run a closed-loop credit card system, acting as both issuer and merchant acquirer on every transaction.

Shortly thereafter, other banks caught wind of Bank America’s growing credit card business and wanted part of the action. In 1966, Bank of America stood up the Bank Americard service organization with the purpose of licensing the Bank Americard program and network to other banks.

Unlike the original closed-loop BankAmericard system, in which both the issuer and acquirer were Bank of America, the BankAmericard service organization transformed the network into an open-loop system in which the issuing and acquiring banks could be separate institutions. Bank Americard’s program, however, was built under the assumption that Bank of America would be on both sides of the transaction and didn’t solve for the operational complexities of coordinating across many issuing and acquiring banks.

In 1970, in an effort led by Dee Hock, who would then go on to become Visa’s founder, Bank of America gave up direct control of Bank Americard to an association of banks to build an open-loop network that could better scale and more efficiently clear credit card transactions across many issuing and acquiring banks. That organization became Visa.

Looking Forward

As cash and securities become tokenized, new intermediaries, user behaviors, and resulting market structures will inevitably give rise to new many-to-many problems. Tokenized securities will be purchased through new types of intermediaries (smart contracts), purchasers of securities themselves may be agents instead of humans, and stablecoins will live across multiple blockchains and be issued against multiple collateral assets (various tokenized money market fund and tokenized deposit issuers already exist today). 

Some startups are already taking matters into their own hands:

1. Ubyx: connects many stablecoins to many financial accounts, helping fintechs, banks, and other financial institutions accept and redeem stablecoins at par.
2. Better Money Company: connects many stablecoins to many stablecoins, enabling a user to go from one stablecoin to another at par without relying on secondary market liquidity.
3. Mesh: connects many wallets to many wallets, powering deposit flows that allow a user to easily fund wallet A from another wallet, wallet B, without leaving wallet A’s user interface.

If you’re building next-generation financial market infrastructure solving many-to-many problems, reach out!