History Shows American Express Should Be Deadly Frightened of Blockchain (AXP)

FILE - This Jan. 21, 2015 file photo ,shows the American Express logo displayed in the window of a New York business. American Express reports quarterly financial results on Wednesday, July 22, 2015. (AP Photo/Mark Lennihan, File)

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The case, Ohio v. American Express that is currently in front of the US Supreme Court actually offers a lot more than meets the eye…and hints at a coming disruption. In the case itself AmEx (AXP) is suing their merchants who have “steered” customers away from AmEx cards in favor of cheaper cards.

AmEx cards are more expensive for the merchant than Visa and Mastercard alternatives, so a seller has a natural incentive to suggest or tell a customer to use a different card. This, in part, is why in 2015, news that the company had lost its significant client relationship with Costco Wholesale Corp (COST) contributed to an annual share price decline of over 40%.

AmEx, understandably doesn’t like this and claims that the merchant has violated the terms of their agreement, which I am sure is true. Here’s the thing, the outcome of this case doesn’t really matter. All it shows is that American Express, as a financial services intermediary, is even more in the cross hairs of blockchain-driven disruption than we experts previously imagined.

As Matan Field, co-founder of DAOstack, a company I advise shared with me, “Blockchain supports the creation of infrastructures that allow better distribution of assets, power and opportunities. That alone opens wider economic spaces that can be much more efficient than our current models”

Evolution: We’ve Seen This Before

It shouldn’t be shocking, because we’ve seen this historical adaptation before. According to venture capitalist Bill Tai, “Just as the telcos embraced TCP/IP and actually had a huge hand in defining and bringing it to market, ALL major banks today are experimenting with Blockchain based technology.”

It’s very true, and here’s why.

As I summed up during a recent briefing to senior Department of Defense officials at the Pentagon, what we learned in Iraq and Afghanistan is that networks beat hierarchies. Now, with blockchains, we have a way to coordinate large scale, decentralized networks with the efficiency of hierarchies, if not even better.

In Team of Teams, Stanley McChrystal’s biography about his time as a general in both conflicts, he talks about the rude awakening he encountered seeing just how big his disadvantage was between his centralized command and the decentralized networks of Al-Qaeda in Iraq and Afghanistan.

McChrystal quickly recognized how he needed to reimagine how teams were built and empowered. The general “made sure the features commonly present within a small team such as shared awareness, trust, decentralized authority, and team-wide purpose [were] also defining characteristics of the umbrella team.” Here’s a US General, the guy who sits at the top of one of the most powerful hierarchies of all time, saying, “Uh, networks are a better way to go.”

That, apparently, is a common lesson of history, and here’s how it relates to American Express.

Incentives and Rewards

AmEx has built a hugely successful business model by being a centralized, hierarchical platform that enables trust to be brokered between buyers and sellers. However, as the company has grown, its incentives have grown apart from the incentives of the merchants.

The financial services giant has been losing the war on rewards points to larger competitors since 2016, according to Barron’s. “Banks are driving the rewards spree because they want to lure new customers and profit off their debt balances.”

How do we know? Well, if incentives were perfectly aligned, would Amex really have to sue its community members?

In a decentralized network like Bitcoin, Zcash, Litecoin or a DAO platform like DAOStack or Aragon, the network doesn’t work if the incentives of the community and the incentives of the individual are not aligned.

As crypto startups enter the space, one of the very first things they think about is making sure incentives (including honest and consistent behavior) is literally “hard-coded” into the blockchain. There are also clear “governance” rules ensuring that if the “terms and conditions” need to change, these rules are done with the consensus of the majority of the network. If the majority doesn’t agree, the rule doesn’t change.

The Power of Choice

That protection from the tyranny of a centralized power is one of the factors that encourages more people to become network participants by obtaining tokens. This, in turn, increases the value of the tokens, making the network even more valuable, encouraging more people to join, and the cycle continues.

If you don’t like the network, you just sell your tokens and leave.

There is no one entity that compels you to behave in a certain way. Whatever the network rules are, you know it’s because it’s the one where the majority of the participants are getting value in proportion to their investment.

One of the most powerful features of blockchains is that their open architecture forces companies to provide value not by locking users in, but by setting users free. As Galia Benartzi, Co-founder of Bancor concludes in her TedX Talk on the subject, “Blockchain has the power to shift society from a pyramid, with limited room at the top, to a web, with more access to opportunity and value.”

The Bancor Protocol allows anyone to easily create a cryptocurrency and for all tokens to be automatically convertible to each other on an open-source, non-profit global value transfer network where switching costs are extremely low for customers when everyone owns their own data, wallets and universally exchangeable tokens.

This is where Amex is vulnerable, because it’s difficult to quantify the value that the consumers are getting from the relationship.

When a decentralized network comes along that offers its participants the same type of trust and payment options that Amex currently offers, but also has the mechanism baked-in to preserve the investment-value equilibrium, people will start to move towards it.

Networks beat hierarchies, and Amex is a hierarchy. With legacy financial systems lagging in keeping pace with today’s demanding customer, your next best investment may very well be a network-based one.

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