Track 4 · The House · lesson 1

You are the other side of the table

10 min

Every time you accept a default, leave a balance sitting, tap a card, let a renewal go through or pick the middle option, somebody books it. Not metaphorically. It appears on a line in a document, gets attributed to a team, and someone is measured on whether it went up.

That is not a conspiracy. It is what a transaction is. There are two sides, and you are one of them.

A counterparty is the other side of a trade. Not an enemy — the word is deliberately neutral, and the relationship is usually mutually useful.

But the counterparty's interests are not yours, and it is doing the arithmetic in advance and full-time, while you are doing it occasionally and in a hurry. That asymmetry is the entire subject of this track.

Knowing how the other side earns does not make you cynical. It makes you a better customer, and it tends to make you calmer, because most of what looks like manipulation turns out to be an incentive that nobody hid.

The engine teardown, pointed at institutions

You already have the nine questions. This track runs them on the institutions you deal with weekly — banks, insurers, subscription businesses — and the answer to question one is always the same. You pay. What varies is how, and whether you can see it.

Three things make these businesses different from the gym in the last lesson.

They are paid before they deliver, or they hold your money in between, which turns out to be worth more than the service. Their revenue often arrives in a form that does not feel like a price — a spread, a default, a renewal. And they operate at a scale where a fraction of a percent of customer behaviour is a material line in the accounts, which means small nudges are worth engineering carefully.

Predict

A current account is free: no monthly fee, free transfers, a free card. Where does most of the money come from?

Fees on the customers who go overdrawn or pay lateThe balance sitting in the account, lent out at a higher rate than it is paidSelling customer data to advertisersA small charge the merchant pays when the card is used

The three questions

Every lesson in this track ends the same way, with the same three questions. They are deliberately blunt, because the whole difficulty with these businesses is that the answers are separated from each other by design.

Who pays? Which person's money moves, and in what form.

Who benefits? Who receives value, which is often not the same person, and sometimes not even the same category of person.

Who carries the risk? If the thing goes wrong, whose balance falls.

The interesting institutions are the ones where those three have three different answers.

Something people say

“If you are not paying for it, you are the product.”

Why it spreads: It is compact, it is true of advertising-funded media, and it gives a satisfying feeling of having seen through something.
The part that is true: For an ad-funded service it is close to exactly right: the attention of the user is packaged and sold, and the advertiser is the customer in the sense that matters.

Applied to a bank it goes wrong in an interesting way. You are not the product; your deposit is the raw material, and you are also a creditor. The bank owes you the balance and is using it in the meantime. That is a different relationship from being sold, and it comes with a different risk: not that your data is traded, but that the bank cannot return the money on the morning everybody asks at once.

The general form is better and less quotable: when a service is free, find the input you are supplying. Sometimes it is attention. Sometimes it is money. Sometimes it is the option to be sold something later.

Check

A price comparison site is free to use and shows you insurance quotes. Who is its customer?

You — it is providing you with a serviceThe insurers, who pay a commission for each policy soldAdvertisers, through the banners on the pageNobody — it is a public service run by a regulator

Who pays, who benefits, who carries the risk

For the comparison site: you pay, indirectly, because the commission is inside the premium you are quoted. The insurer benefits, buying a customer more cheaply than its own advertising would manage, and you benefit too, from a genuine reduction in search effort. You carry the risk — that the ranking is not the ranking you assumed, and that the cheapest insurer is not on the list at all.

None of that makes the comparison site a bad thing to use. It makes it a thing worth using with the mechanism in mind, which is the only defence this track offers and the only one that keeps working.

Worth remembering

A counterparty is the other side of a transaction: not an enemy, but an entity whose interests are not yours and who is doing the arithmetic full-time.
Institutions differ from ordinary businesses in that they are often paid before they deliver and hold the money in between.
A free current account is usually funded by lending the balance out at more than it pays, not by fees.
The three questions to end on are: who pays, who benefits, and who carries the risk.
The interesting institutions are the ones where those three questions have three different answers.