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.
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.
" The offer price of $85 was well below initial expectations" (https://www.vcexperts.com/buzz_articles/252)
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!
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.
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.
[1] https://en.wikipedia.org/wiki/Market_maker#In_stock_exchange
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.
Edit: Thanks for the downvote(s), care to explain where I am wrong?
Look https://ltsa.ca/property-information/what-information-title here, all Statutory rights of way, Easements, Covenants, Judgments, Leases, Claims of Builders Liens are on the title.
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.
Title insurance is dumb but in some form its pretty nice. Likely overpriced by an order of magnitude or so.
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.
"Umm, we lost all records of deeds for a city. Please resubmit your land claims to our office..."
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
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.
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.
But it's the issuer, not the network, that bears that credit risk. When a cardholder defaults, the issuer takes the loss.
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.
No cash back. No fees... Just simple transactions, like walking upto the cash register and paying with 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.
Suuuuure
Filling cash registers, sending money to the bank and counting money is free, and there's no loss from theft or mistakes
Oh they aren't? Then money is not free of fees
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.
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.
[1] http://europa.eu/rapid/press-release_MEMO-16-2162_en.htm
There are lots of kinds of fraud that aren't identity based.
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.
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 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.
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.
(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).
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