October 13 was the one-year anniversary of the first FIN post and, coincidentally, the day that FIN (in conjunction with CDX/Techonomy) held our first-ever in-person conference. The three and a half hours of programming yielded some fantastic sessions. One highlight was FIN’s exclusive interview with Square cofounder Jim McKelvey. An edited transcript is below; you can watch an unabridged video of the interview here.

FIN: It’s my great privilege and pleasure to introduce Jim McKelvey. Jim is the co-founder of Square, a payments firm you might’ve heard of. He is also more recently the founder of Invisibly, which we’ll talk about a little bit. He sits on the Federal Reserve board in his hometown of St. Louis. Jim, welcome. Let me start by asking you to reflect a little bit. You launched Square in 2009. 12 years have gone by, what do you think about the payment space, the fintech space? How has it changed during that period? How do you think about it today compared to those days?

Jim McKelvey: I still think it’s kind of early days, but when we started Square, there was no fintech space. It was this idea that we had to solve a specific problem, and we focused a lot of effort on solving that problem. And in the process created this thing that people have now called fintech so Square and maybe a handful of other firms were very, very early. PayPal was there a decade earlier, but they hadn’t done anything new in a decade. Interesting thing about PayPal was: why doesn’t PayPal do this? We couldn’t answer the question. We thought, well, PayPal is going to copy us. And then they didn’t. It took PayPal a good eight years to wake up and start copying Square, which they now do routinely.


FIN: You say early days, and I know what you mean, but a lot of capital has been created. A lot of companies have been created. You talk in your book about the unfairness of the payments industry. Has that changed?

JM: It’s gotten somewhat better? It used to be terrible for small merchants. Square’s made it a lot better for small merchants. It’s still pretty good. I was a small merchant. I was a glassblower. Still am actually. In trying to sell one of my pieces one day, I lost a sale because I couldn’t take an American Express card. That bothered me enough to call my friend Jack [Dorsey] and Jack and I had already agreed to start a company, but we didn’t know what we were going to do. So I was like, “Hey, instead of that thing that we sort of planned on doing, let’s fix it so I can get paid.” So that was the origin of Square.

Square’s done a lot on the merchant side, but I think there’s still a lot more to do on the individual side–the unbanked or underbanked, people who are living sort of out of the realm of the traditional financial system.

FIN: Maybe the critical moment in the book is when Amazon decides to get involved in your little business.

JM: That experience was what led me to write the book. The worst thing that can happen if you have a startup company is Amazon decides they want your business. They copy your product, they undercut your price by 30%, they add the Amazon brand name and you die. And that happened 100% of the time before Square. We kept running the company and amazingly after about a year, Amazon quit. I couldn’t answer the question: What happened? Like did we just get lucky? ‘Cause Amazon just doesn’t give up. And the answer led me down this path of research, which led to the book. I said, Square can’t be the only example of this phenomenon happening in human history. So I started researching and it took me almost two and a half years to find a peer group of other companies that had had the same phenomenon: little startups who you would expect to just get crushed by the incumbents or by the government or by some other very, very powerful institution. These not only were these hard to kill, but they ended up then becoming the dominant companies in their field.

FIN: Some of the companies include Southwest Airlines, Ikea, but those were companies that entered into already existing businesses. It seems to me was there was really nothing like Square.

JM: Depends what you mean by “existing businesses.” The furniture business has been around for millennia, but affordable furniture that normal people could have was not around until Ikea started. Air travel has been around since Pan-Am started flying those boat things, but air travel until Southwest arrived was limited to rich people and people on expense accounts. If you didn’t have one of those, then you took the bus. There was credit card processing before Square, but there was not credit card processing for the guy down at the taco stand.  

FIN: You call the book The Innovation Stack, explain what that term means.

JM: Each of these companies had this messy thing that differentiated them from all their competitors and all the other companies in the market. It was not the way I had been taught innovation; popular myth has it that innovation is some spark of genius and then people work on it. It turns out to be this messy iterative process, at least in the companies that I studied—and it needed a name. So I coined this term “innovation stack,” which is this interlocking set of things you have to do. And I say have to, because the other interesting thing that I discovered when doing the research in the book is that none of the founders intentionally set off to be innovative. Their intention was survival, and they were forced into a situation where they couldn’t copy.

FIN: You’re pro-copying.


JM: I am completely for: copy everything you possibly can. If you think innovation is the first move, it almost never is. It’s the last resort. The best thing you can do is find somebody who’s had a similar problem and solved it and copy what they did. By the way, that’s why we’re all here. That’s how our DNA works. But there are weird times when you can’t copy. Usually that’s when you were doing something that nobody has ever done before. That’s the classic example, but there are other times when for regulatory or other reasons you are prevented from doing what everyone else does.

FIN: Do you think that the next big fintech steps come from innovation and technology, or is it innovation in marketing? Where do you think the next innovations are gonna come from?

JM: Probably from outside the industry, probably for somebody that doesn’t think of themselves as a fintech, because if you define yourself in any industry, you immediately inherit all the restrictions and adhesions of that industry. So the fact that Square entered the fintech world before there was a fintech world allowed Jack and me to do a bunch of things that were kind of crazy. In hindsight, we broke, I think I counted like 17 laws and rules and regulations. I think I actually stopped counting at 17, but it was this pile of soon to be legal actions where we were just breaking rules. You wouldn’t do that today: you’d go to a VC who’s funded other 12 other similar fintechs.

FIN: Let me shift gears a little bit, because you for the last couple of years have sat on the Federal Reserve board of St. Louis. There’s been a lot of fed, I don’t want to say alarms, but let’s say alerts, regarding stablecoins. For those who aren’t paying close attention to this, a stablecoin is a cryptocurrency that is denominated to an existing government currency, a fiat currency. Of the ones that are pegged to the US dollar, Tether is the largest. These have grown tremendously in value and are essentially unregulated because the producers of stable coins are not registered as banks. They are, are probably taking up a space previously occupied by money market funds. This worries people on the fed. I’m just curious, like what that looks, what that conversation looks like, where you sit.

JM: About three years ago, I was walking through Manhattan and Gemini had an ad on a bus. They were advertising that they were “the regulated crypto exchange,” in other words, they were bragging about the fact that they among all other crypto exchanges actually had somebody regulating them. The implication there is “Trust Gemini, because we at least have one adult who is auditing us.” And look, there are a lot of adults at the federal reserve and our mission is to keep the economy running well. Regulation is an essential part of that. And if you don’t have trust in the financial system, or if you don’t trust how your money is moving, then commerce freezes up. So yeah, it’s a very serious issue. We take it very seriously and we have some brilliant people working on it. Can’t tell you exactly what’s going to happen. , but, um, so what’s going to happen.

FIN: So let’s go into it a little bit. There are different approaches, right? So it has been floated to have a rule that if you issue stablecoin, you have to register as a bank. Which is kind of a big deal and quite different from the way things operate now, is that the best approach? Should we treat stable coins as a security and regulated through the SEC?

JM: Two viable avenues there. Either one will work. I’m not going to get into the details of regulation, but regulation generally is good at the beginning of these value exchanges. And if you think that governments are going to allow unregulated currencies to exist, take a look at China.

FIN: I interviewed you in December of last year and I went back and looked at the questions and I was like, “Can you believe Bitcoin’s at $20,000? This is out of control.” And today the last I looked it was $56,000. Where do you see crypto going? I’m not looking for a number, but are we at the early stages of the crypto revolution? Is it going to crash and burn? How do you think about it? Are you invested in crypto?

JM: Indirectly, mostly, and then directly to a tiny amount. I am not as big a crypto fan as my partner, but here’s the thing that I’m questioning, which is what is the government response? That was your previous question. I conveniently didn’t answer it. Not that I could have, right? If I knew, then I’d be way better dressed. Governments tend to take a dim view of not controlling the land and not controlling the money. And if you think you own the land under your house, try not paying your taxes, just give it a shot. See who owns it. Governments right now are confronted with this thing. Bitcoin is decentralized. So they can’t just subpoena or bomb, some sort of central entity, right?

FIN: Nigeria tried this, they banned Bitcoin. And as far as anybody can tell Bitcoin transactions in Nigeria have like tripled.

JM: Yeah. It’s very difficult to squash this, but governments are not out of moves. So the question is what are those moves and how are they likely to come in? And I think you’re going to see some responses from a lot of governments. And I don’t know what those responses are going to look like. The history of government coming into regulate something is that they tend to overregulate it. I would bet on sort of over-regulation of these things by people who basically don’t understand how they work.

FIN: One of the possible paths it seems to me is that the United States government issue some kind of central bank digital currency. This is a hot topic in other countries. I think three quarters of all the central banks in the world are studying the problem. We’re supposed to have a report out from the government, I thought last month, but we haven’t seen it yet. Do you think that’s a possibility and what impact do you think that would have on Bitcoin and other cryptocurrencies?

JM: So Bitcoin again, is sort of an outlier because there’s no central entity. But anything that can be regulated probably will be regulated and a central bank digital currency, I think is on the roadmap for most major countries. Oh, we’re looking at it.

FIN: I would like to know more about your new company, um, called Invisibly, which is…I don’t know that I would call it a fintech, but it is in the payments space.

JM: No, it’s not. It’s in a space that has never worked. So, Invisibly is—God, it’s almost five years old now. I was recruited by a bunch of media companies to help them save their businesses. There’s a big problem. So quality used to be brought to us by the fact that the channels were expensive. If the printed page costs you money or the broadcast signal costs you money, then there’s competition to have that space filled or have that program broadcast. And therefore the program or the article has to be of a certain quality, otherwise it doesn’t make the paper or it doesn’t make the broadcast. So because that space is limited, then advertising is at a premium because advertising basically has to display good content. So the advertising has to be expensive and therefore expensive ads gives money too. So we can hire great journalists.

And the whole thing works—or I should say worked because it stopped working. When we took the constraints off and said, “Hey, on the internet, you can publish anything for free and you can make your own videos” the cost effectively went to zero and the supply went to infinity. What happened was then a destruction of a model that brought us quality. So there are only three ways to make money in media: subscriptions, ads, or pay per view—and pay per view has never worked. And the advertising model has a couple of basic problems. The whole efficiency of the programmatic ecosystem is just a disaster. 90% of the revenue is lost. And the other problem is that it works against the interests of all of us as individuals. So you sell your attention by watching something.

The solution unfortunately has never worked and it’s micropayments. It’s the ability to make tiny, tiny little payments. You say, well, I want all my media to be free. And I say, okay, let’s make it free. As long as you’ll trade me your attention for free, I’ll give you your media for free. And that’s the trade you’re making now, but let’s make it efficient. And the way we make it efficient is I give you an agent. So I have an agent, he books, my speaking things. He makes sure you guys all have to buy these books like, and my agent negotiates for me. And when I want to sell my services, if I want to sell myself as a speaker at a conference, my agent negotiates that deal.

So you should have a little agent to negotiate when you want to watch an ad, that agent should say, well, um, not during the middle of this thing that he wants to do, but how about tonight? When he’s waiting at an airport, you can have five minutes of my client’s time. Your agent should go out there and negotiate on your behalf with your consent. And conversely, that agent should buy for you. So if you want to read news, your agent should be negotiating those purchases as well. Why are you paywalled off from an article you want to read? I know people that want to read articles, can’t read them and it’s not because it’s the five bucks. It’s the complete pain to sign up for another service.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.