PayPal reportedly in talks to buy Pinterest

A couple of days ago, media outlets reported that PayPal was in talks to buy Pinterest for what could be a $40 billion deal. Per WSJ, “the talks are at an early stage and may not lead to a deal, some of the people cautioned.” If that went through, this acquisition would be PayPal’s biggest ever. But what does it mean for the iconic PayPal? Below are my thoughts.

Overview of PayPal & Pinterest

Before we go further, let’s recap quickly what PayPal and Pinterest do, how they make money and how their businesses are at the moment.

Formerly known as a check-out and Person-to-Person (P2P) function, PayPal has grown leaps and bounds in the last few years with grandiose ambition to be THE Super App for payments, consumer financial services and eCommerce. PayPal’s services now include almost all the things that consumers need such as debit card, credit card, BNPL, online & offline payment, P2P or remittance, just to name a few. On the merchant side, PayPal has added a plethora of Merchant Services and Marketing Tools in addition to its well-known payment processing. As a two-sided platform, PayPal needs to deliver value to consumers in as many ways as possible, including enhanced and seamless shopping at merchants, while appealing to merchants with tools to grow their business from both marketing and operations standpoints. Last month, the company took a big step towards their grand vision with the new PayPal mobile app.

There are several revenue streams for PayPal. First, a bulk of its revenue is from transaction processing. For each transaction that goes through PayPal, the company takes a cut. Hence, the bigger the volume, the bigger PayPal’s top and bottom lines. Second, PayPal also charges merchants on value-added services such as loans, inventory management or point of sale. Then, it also generates fees from other services such as remittance or credit card-related fees.

The transformation of the business is also evident in the numbers. PayPal’s number of active accounts grew from 244 to 403 million from 2018 to 2021, including 76 million Venmo accounts, while the merchant base expanded from 19 to 32 million. Its quarterly Transaction Volume exploded from $139 to $311 billion, more than $1.2 trillion in annualized volume. In Investor Day 2021, PayPal disclosed their target of $2.8 trillion in annual volume, 750 million active accounts and $50 billion in annual revenue at the end of FY2025. Quite an ambitious target.

PayPal's consumer and merchant services
Figure 1 – PayPal’s consumer and merchant services. Source: PayPal

The other side of the rumored deal, Pinterest, is a visual-centric social platform whose mission is to bring inspiration to people’s lives. “A photo is worth a thousand words” is essentially their value proposition. Every day, thousands of users & brands, called Pinners, post their ideas in the form of images or videos, called Pins, to the platform. Pins can be grouped together in personalized Boards that are accessible to others. Similar to other social media platforms, Pinterest deploys machine learning algorithm to personalize suggestions of new ideas to users, based on their previous activities. Meanwhile, advertisers can take advantage of the visual-centric experience, the global audience as well as data on consumer preferences calledTaste Graph on Pinterest to optimize advertising dollars and grow their business. Over the last couple of years, Pinterest has invested in features and partnerships to enable commerce on its properties. For instance, it launched Shop from Boards, Shop from Search and Shop from Pins in April 2020. The month after, it announced a partnership with Shopify that allows Shopify merchants to upload their catalogue to Pinterest seamlessly. Earlier this month, the company introduced a few new features to help merchants and creators showcase their hard work and generate more revenue/income.

Pinners saved nearly 300 billion Pins across more than six billion boards. We call this body of data the Pinterest taste graph. Machine learning and computer vision help us find patterns in the data. We then understand each individual Pin’s relationship not just to the Pinner who saved it, but also to the ideas and aesthetics reflected by the names and content of the boards where it’s been pinned. We believe we can better predict what content will be helpful and relevant because Pinners tell us how they organize ideas. The Pinterest taste graph is the first-party data asset we use to power our visual recommendations.

Source: Pinterest

According to the latest filings, there are 454 million Monthly Active Users on the platform, 2/3 of which are female and 80% of which are outside the U.S. Even though it makes up only 20% of the MAU base, the U.S generates 78-80% of Pinterest’s revenue which came in at $485 million and $613 million in Q1 and Q2 2021 respectively. Pinterest was operationally unprofitable in the last three years, but has turned in some profit in the first 6 months of 2021. As a result, their free cash flow (FCF) has improved markedly. The company had negative FCF in 2018 and 2019 before turning in an FCF margin (FCF over revenue) of 0.73% in 2020. Their FCF margin for Q1 and Q2 2021 was 55% and 17% respectively. To put it in perspective, PayPal’s FCF margin in the last two quarters was 25% and 17% respectively.

Pinterest quarterly revenue
Figure 2 – Pinterest’s quarterly revenue. Source: Pinterest

Would the acquisition be about increasing active accounts for PayPal?

I doubt it is the primary reason why PayPal entertained this move. At the moment, these two are completely separate apps. Having Pinterest under PayPal would provide absolutely no incentive for Pinterest users to become PayPal users. Merchants that are already on Pinterest have no extra incentive to work with PayPal just because of this alleged acquisition. If PayPal decided to force the issue and fold the red app into the blue app, it would be catastrophic for both and a value killer for shareholders.

Would the acquisition be about improving free cash flow for PayPal and padding the sheets?

While Pinterest indeed posted higher FCF margin in the last two quarters than PayPal, I don’t think improving FCF margin is the driver of this move either. Competitively, PayPal is in a far stronger position than Pinterest. The former is one of the most iconic brands globally with millions of users and merchants in its network and in the leading position in its field whereas the latter is no match in terms of advertising capabilities with the likes of Facebook, Instagram or Google. The remarkable turnaround in FCF margin only happened in the last two quarters; hence there is no telling what the future would be, given the lack of strong competitive advantages. Plus, the price tag is more than $40 billion. It’s unfathomable to think that PayPal’s board would authorize such a gigantic splash for this reason alone.

Would the acquisition be about the upper marketing funnel and closing the loop for PayPal?

At the bottom of the customer experience, aka the checkout page, is where PayPal excels with its breadth of both consumer and merchant services. What it doesn’t excel at, yet, is at the upper funnel where the interest seed is planted and where reach is generated. In other words, PayPal doesn’t have the capability or expertise yet to help merchants expand the customer pool. Last year, the company paid $4 billion for Honey, a browser extension that finds online deals and presents them to shoppers. To some extent, Honey helps PayPal address the issue of lead generation, but as a browser extension, there is only so much that Honey can do, especially on a global scale. At the time of the acquisition, Honey had 17 million active users. Not everyone who uses PayPal installs Honey on their browsers. Yours truly is one of those people.

With more than 450 million users across the globe, theoretically Pinterest could be the solution to this problem. However, the question is what the customer experience of PayPal + Pinterest would look like. The ramifications may have significant impact.

At the time of this writing, users can browse for ideas on Pinterest and be directed to merchant websites for further actions without even having to leave the red app if they choose to click on the hyperlinks that come with the Pins. The problem for PayPal is that this whole journey has nothing to do with them. Merchants choose which payment processor offers the best value, not which one owns Pinterest. If PayPal forced merchants to use their own product to use the social platform, it would backfire. In this scenario, there is no strategic value add for PayPal.

One possibility floated on the Net is that Pinterest could be PayPal’s eBay. Ironically, eBay owned PayPal from the early 2000s till their divorce in 2015 and since then PayPal has gradually reduced their reliance on eBay for transaction volume. I am not sure that PayPal wants to pay a mountain of money for something that they want nothing to do with any more. Even if PayPal wanted Pinterest to become their own eBay, running a two-sided global marketplace is a resource-consuming endeavor. After pouring $40+ billion in acquiring Pinterest, PayPal would have to spare valuable resources to help the acquired firm. Given the intense competition that PayPal faces and the head start in terms of marketplace that Facebook and Instagram have, this possibility, while not too wild, doesn’t sound appealing.

What I suspect is the crown jewel that might interest PayPal is the Taste Graph mentioned above. While the new PayPal app is definitely an improvement over its predecessor, the Shop tab is underwhelming. There are a bunch of offers on the tab, but there is little personalization. Hence, I don’t think at the current state, it helps merchants drive a lot of sale. In theory, PayPal could do a lot more personalization given the data on shopping behavior that it possesses. By mining transaction data, PayPal could know which merchants are one’s favorite, how often one shops at those merchants, which product categories (using Merchant Category Codes) are popular and even what items (SKU data) are shopped the most. By working with bureau agencies like Experian, PayPal could learn about financial status of its users such as how many trades are open, the total balance of all trades, the delinquency history and all that.

The Shop tab on PayPal's app
Figure 3 – The Shop tab on PayPal’s app

What PayPal doesn’t have is the interest data outside of the transactions processed on its platform. Let me give you an example. I am a huge fan of Manchester United and Scuderia Ferrari F1 team. But you wouldn’t know it if you merely looked at the transactions on all my credit cards, let alone only my PayPal account. PayPal could work with another company to acquire this data; however, this presents two challenges. If the data is not 1st-party data, it’s usually very unreliable. The Taste Graph is Pinterest’s intellectual property and 1st data. The reliability is certain. The other problem is that who has the global footprint that Pinterest has and available for an acquisition. Facebook, Google, LinkedIn, Twitter or even Snapchat isn’t available. I am sure PayPal could find another company with 1st party interest graph for the U.S market, but it’s not easy to find it for the global audience. If PayPal is serious about meeting their 4-year target, the U.S market alone wouldn’t cut it.

For good measure, PayPal likely doesn’t have the top of wallet share for its users. In other words, if an average person spends $1,000 a month, I don’t think that user will spend everything through PayPal. If I have to guess, PayPal only sees less than 30% of the wallet share. The implication is that they have no idea about the spending pattern and interest that lies in the other 70-80% of the wallet. So if they wanted to operate a serious deal-recommending engine on the PayPal app, they would want as much data as possible. As PayPal already strives to get users to spend as much as possible through their platform, increasing the wallet share organically takes time.

PayPal offers consumers all possible checkout options: BNPL, its mobile wallet, debit card, credit card and line of credit. It definitely wants the app to be the ultimate shopping app for consumers. Right now, a PayPal user like me doesn’t open the app unless I need to send somebody money. I figure that PayPal wants users to actually open the app and spend time there every day. To do that, they need to incentivize shoppers to visit and the best way is personalized deals. To grow its merchant base, the best way is to generate sales and leads for merchants. In my mind, the alleged acquisition of Pinterest could help with these two objectives. With that being said, $40+ billion is a huge price tag and acquisitions are generally challenging to pull off, especially expensive ones. I am also concerned about how much overlap there is between the two user bases. There is also a question of engagement of international users. Despite making up 80% of Pinterest MAUs, users outside the U.S bring only 20% of revenue. Is it because Pinterest isn’t popular among international advertisers? (I know there are Pinterest users in Vietnam, but I doubt there are brands and advertisers that actually use the platform) Or is it because user engagement isn’t high? While I can try to see the logic, I am not too comfortable with this major move.

Appendix

Shopping intent on Pinterest stats
Figure 4 – Shopping intent on Pinterest stats. Source: Jareau Wade
Consumer register preferences at the start of the shopping journey
Figure 5 – Consumer register preferences at the start of the shopping journey. Source: Thomas Paulson

Book review: Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life

This book is up there among the best that I have ever read. You won’t find the technical advice or methods to determine whether a stock is a good buy/sell or when. Instead, it’s full of nuggets of wisdom drawn from some of the best investors or thinkers in the world such as Howard Marks, Nick Sleep or Charlie Munger. Whether you are a successful investor has more to do with your patience, your temperament, your thinking and your process than with your IQ, your maths prowess or your ability to build sophisticated financial models. Don’t get me wrong. Those factors definitely help, but if they were the role determinators of success in the investing world, then why would professional traders fail to beat S&P500 all the time and why wouldn’t we have more millionaires?

Because how you approach investing, your patience, your ability to detach emotions from decisions, your character and your thinking affect significantly impact the outcome of your portfolio, they also shape how happy and wise you are in life. On the other hand, learning to be a better investor also helps you understand about yourself better and become wiser & happier. This book is all about that.

Even though the investors interviewed in this book are highly successful and legendary, all the lessons and advice aren’t applicable universally. Everybody’s make-up is different. The audience will have to decide for themselves which lesson works and which doesn’t. Case in point, there are a few investors that are more tolerant of risks and have high concentration of their portfolios in a few stocks, while others consider more diversification acceptable. Some investors feel more comfortable through the volatilities of the markets while others prefer a smooth ride.

I really learned a lot from this book and expect to read it again soon. Really recommend to anyone who is interested in self-improvement or investing. Below are a few of my favorite excerpts. It’s not really easy to pick out these because I literally took note all over the book.

Learn from other people

I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart. —Charlie Munger

“Yet Pabrai’s success both as an investor and a philanthropist is built entirely on smart ideas that he has borrowed from others. “I’m a shameless copycat,” he says. “Everything in my life is cloned.… I have no original ideas.” ”

Luck & humility

One way that Marks keeps his own ego in check is by reminding himself of the starring role that luck has played in his life. After reading Malcolm Gladwell’s book Outliers, which explores various causes of success, Marks compiled a list of lucky breaks that have helped to propel him to where he is today. His streak began with the “demographic luck” of being born to white, middle-class parents in the United States at the start of a golden era of postwar growth.III Nobody in his family had a college degree, but he was fortunate that his parents valued learning, bought an encyclopedia, and encouraged him to go to college. His high school grades were nothing special, so he thinks he was also lucky that Wharton accepted him. And it was Wharton that exposed him to finance, leading him to jettison his earlier ambition of a career in accounting.”

“I once gave an interview in which I mentioned that Marks has a high IQ, which has no doubt contributed significantly to his success. In response, he sent me a charmingly modest email, remarking, “People who don’t fully acknowledge their luck miss the fact that being intelligent is nothing but luck. No one does anything to ‘deserve’ a high IQ.”

There’s one other great benefit to acknowledging his luck: it makes him happy. “I walk around with this incredible feeling that I’m a lucky guy,” Marks confides. “If you’re a negative person, you might say, ‘Well, I’ve been lucky in my life and that really sucks because it means that my success is undeserved and may not continue.’ But I say, ‘Gee, what a great thing to be lucky. And, you know, I really owe it to somebody, whether it’s God or chance or whatever.’ ”

Patience

“Instead, says Pabrai, they “place many bets, small bets, and frequent bets.” The trouble is, there aren’t enough compelling opportunities to justify all of this activity. So Pabrai, like his two idols, prefers to wait for the most succulent salmon. During a conversation in his office in Irvine, he says, “The number one skill in investing is patience—extreme patience.” When the market crashed in 2008, he made ten investments in two months. In more typical times, he bought just two stocks in 2011, three in 2012, and none in 2013.”

Fourth, said Templeton, successful investing requires patience. When he bought US stocks at the outbreak of World War II, he knew how cheap they were, but he couldn’t predict how long it would take for the market to agree with him. His edge lay not just in his superior insight, but in his willingness to wait year after painful year for the situation to play out as he’d predicted.”

Margin of safety

How, then, can individuals reduce their vulnerability and bolster their resilience? Following Buffett’s lead, we should always keep enough cash in reserve so we’ll never be forced to sell stocks (or any other beleaguered asset) in a downturn. We should never borrow to excess because, as Eveillard warns, debt erodes our “staying power.” Like him, we should avoid the temptation to speculate on hot stocks with supposedly glorious growth prospects but no margin of safety. And we should bypass businesses with weak balance sheets or a looming need for external funding, which is liable to disappear in times of distress. None of this is brain surgery. But it requires us to take seriously that oft-forgotten commandment Thou shalt not depend on the kindness of strangers.”

“Kahn became Graham’s teaching assistant at Columbia in the 1920s, and they remained friends for decades. I wanted to know what he’d learned from Graham that had helped him to prosper during his eighty-six years in the financial markets. Kahn’s answer: “Investing is about preserving more than anything. That must be your first thought, not looking for large gains. If you achieve only reasonable returns and suffer minimal losses, you will become a wealthy man and will surpass any gambler friends you may have. This is also a good way to cure your sleeping problems.”

As Kahn put it, the secret of investing could be expressed in one word: “safety.” And the key to making intelligent investment decisions was always to begin by asking, “How much can I lose?” He explained, “Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made for gains. The problem is that people nowadays think they’re pretty smart because they can do something quite rapidly. You can make the horse gallop. But are you on the right path? Can you see where you’re going?”

“Second, to achieve resilience, it’s imperative to reduce or eliminate debt, avoid leverage, and beware of excessive expenses, all of which can make us dependent on the kindness of strangers. There are two critical questions to ask: “Where am I fragile? And how can I reduce my fragility?” If, say, all of your money is in one bank, one brokerage, one country, one currency, one asset class, or one fund, you may be playing with a loaded gun. With luck, you can get away with anything in the short term. With time, the odds rise that your vulnerability will be exposed by unforeseen events.

Third, instead of fixating on short-term gains or beating benchmarks, we should place greater emphasis on becoming shock resistant, avoiding ruin, and staying in the game. ”

Hard work

“Second, said Vinik, “There’s another constant through the twelve years, and that’s very, very hard work. The more companies you can analyze, the more cash-flow statements you can go through—and go through every line of—the more good ideas you’re going to find and the better the performance is going to be. There’s no substitute for hard work.”

“The best predictor of success is often nothing more mysterious than the unflagging fervency of a person’s desire”

Incremental yet sustainable improvement

What’s distinctive is the indomitable consistency of his discipline. Most people get fired up for a few days, then flame out. I own a kettlebell and a skipping rope, neither of which I’ve used more than three times. The primary purpose of their existence is to make me feel guilty. Yet Gayner keeps plugging away, never perfect, but always directionally correct. The key, he says, is that he is “radically moderate” about everything he does. “If I make extreme changes, they’re not sustainable. But moderate, incremental changes—they’re sustainable.”

Resounding victories tend to be the result of small, incremental advances and improvements sustained over long stretches of time. “If you want the secret to great success, it’s just to make each day a little bit better than the day before,” says Gayner. “There are different ways you can go about doing that, but that’s the story.… Just making progress over and over again is the critical part.”

“In short, there’s nothing flashy or grandiose about Gayner. Yet it would be hard to find a better role model in the investment world. After all, his “satisfying, slow, and steady” method of building wealth relies heavily on common sense and well-chosen habits, not esoteric skills or daredevil risks. When I ask him what regular investors should do to get rich, he offers the least exotic advice imaginable: “Live on less than you make. Invest the difference at a positive rate of return. You cannot fail if you accomplish those two tasks.” He adds, “If you’re living on less than your means, you’re rich right now.”

It’s more important to avoid idiocy than to try to be smart

“I don’t have any wonderful insights that other people don’t have. I just have slightly more consistently than others avoided idiocy. Other people are trying to be smart. All I’m trying to be is non-idiotic. I find that all you have to do to get ahead in life is to be non-idiotic and live a long time. It’s harder to be non-idiotic than most people think.”

“None of this would have happened if Buffett and Munger weren’t so committed to challenging their beliefs. Munger has always disdained “heavy ideology” in everything from investing to politics, denouncing it as “one of the most extreme distorters of human cognition.”

“While other billionaires collect art, vintage cars, and racehorses, Munger describes himself as a collector of “absurdities,” “asininities,” and “inanities.” His daughter Molly recalls listening in her youth to his many cautionary tales “about people doing stupid things,” which often included “a tinge of ingratitude and poor moral judgment.” A typical story would feature the cosseted heir to a fortune who turned with bitter resentment against his father. Molly Munger remarks, “It’s stupid at every level: ungrateful, self-sabotaging, unrealistic, egotistical.”

This habit of actively collecting examples of other people’s foolish behavior is an invaluable antidote to idiocy. In fact, it’s the second great anti-stupidity technique we should learn from Munger. It’s a perverse hobby that provides him with endless entertainment and insight, enabling him to catalog in his head all of the “boneheaded” moves to excise from his playbook. Anyone can benefit from this practice, he tells me, “but I don’t think you get it unless you have a certain temperament. A lot of what I do is not IQ. It’s something else. Temperament. Attitude.”

Cardless – The fintech startup behind Celtics, Cleveland Cavaliers and Manchester United credit cards

If you support Celtics, Cleveland Cavaliers, Manchester United or Miami Marlins, you can show your love to the teams with the branded credit cards powered by Cardless. Even if these teams aren’t usually on your TV or device every week but you still want to take advantage of great benefits, check out their cards.

Take the Manchester United card for example (Figure 1). The card offers 10% off Manchester United merchandise on select channels, 5x points on dining every time the club has an official match, 5x on ride sharing and streaming services and 1x on everything else. During the first year, the points are doubled to a mouth-watering rate of 10x on dining, ride sharing & streaming services and 2x on everything else. Said another way, if you use Netflix, Spotify, if you eat out a lot and if you shop at Walmart, this card will give you almost unbeatable rewards during the first year. Reward points can be redeemed for statement credits or Manchester United gift cards at a slightly higher rate.

Manchester United credit card powered by Cardless
Figure 1 – Manchester United Credit Card. Source: Cardless

The card also reimburses users up to $5/month for a Peacock subscription provided that users have at least $500 in spend the month before. To sweeten the deal, Cardless waives all the fees, including annual fee, late fee, foreign transaction fee and overlimit fee. However, the APR is quite high at 29.99%. So, you do not want to revolve your balance with this card.

As mentioned above, these cards offer great benefits that are popular to consumers in all walks of life. If you are looking for a new credit card, you may as well give it a try. From a perspective of somebody who works in the card industry, here are my thoughts.

Cardless is a San-Francisco-based fintech startup that helps brands launch a credit card in “a matter of weeks, instead of months or a year”. Costco credit card is issued by Citi Bank. Cardless offers the same function essentially as Citi in this card-issuing process. Started in 2019, the startup has raised $50 million so far to date.

The partnership with sports teams is a great idea to increase the stickiness. It’s likely that a lot of these clubs’ loyal fans will want to sign up for card to use on match days or whenever they go to a stadium. Some will get a card for the sake of supporting their club or as a memento. Plus, these brands can help Cardless push the marketing side of the equation. One press release or one email may lead to many sign-ups. Hence, Cardless likely won’t need to spend much on acquisition. Traditional issuers spend a lot of money on direct mails. An issuer like Capital One easily sends out 60 million mail pieces a month to prospects. If a mail piece costs only $0.5, we are still talking about $30 million/month in direct mail expense that Cardless doesn’t have to worry about. That’s a significant advantage.

It’s intriguing to me how Cardless will make money. To attract prospects, they decide not to charge fees, leaving their revenue and profit dependent on interests on revolving balance and interchange. The problem is that any reward scheme that is higher than 3x is almost a loss-maker as interchange rates for consumer credit cards are less than 3%. In Cardless’ case, losing out on interchange is almost a given. Therefore, Cardless’ hope of profitability for a card program hinges on customers paying interests. If their portfolio consists of only transactors – the term we use in the industry to describe folks that pay balance dutifully – Cardless will keep subsidizing users with their own money.

For good measure, in addition to operational expenses, Cardless has others to worry about. Partnering with prestigious sport brands means that the startup has to pay these brands a finder’s fee whenever a new card is issued. Plus, the company has to pay their technology partners as well, including the card networks (Visa, Mastercard), their issuer – First Electronic Bank and their card management system provider CoreCard. That’s quite a lot to handle for a company that relies almost entirely on one source of revenue.

Cardless was started in 2019, only two years ago. The challenge for a young credit-card issuing startup like Cardless is that it doesn’t have the historical data to strengthen underwriting and minimize losses. Even the firm admitted it itself: “The incumbent issuers have a major advantage in this area: they can use their mountains of data and gigantic teams of analysts, engineers and scientists to make very educated and precise credit decisions”. Cardless has to find the perfect group of customers who use the card regularly (in order for them to acquire new partners), don’t charge off but don’t pay full balance so that Cardless can have interest income which, as I articulated above, is likely their only revenue source. Unfortunately, those who usually revolve have a low credit score and are more likely to charge off, making this a delicate & difficult challenge to solve. The startup can be better at underwriting by signing up more partners quickly and using the incremental data to feed their algorithms. But if their early model doesn’t predict losses well, they will lose a lot of money in the beginning. I, for one, really love to know how they are handling this issue.

My best guess is that Cardless keeps the lights on with VC money. That’s totally fine. Nonetheless, I don’t think they can keep introducing card programs with rich benefits that are limited in their capability to make money forever. Venture capitalists will push the company to improve profitability or won’t invest further if this model persists long in the future. It’s possible that Cardless may have a plan to pivot to other adjacent products or services in the future.

Boston Celtics credit card powered by Cardless
Figure 2 – Boston Celtics Credit Card. Source: Cardless

How our brains receive messages & implications

Do you have trouble communicating your ideas or land your sales pitch? Do you understand why human attention is fleeting & difficult to maintain? Read on because this entry may give you an answer.

Before I move on, I want to give a shout out to the book “Pitch Anything” by Oren Klaff. Everything I am saying below is based on this really interesting book that can have a tremendous impact on readers’ professional and personal lives.

Humans brains drive communication as that’s where messages are developed, presented, received and processed. Anatomists will say that a human brain is highly complex, but for sake of simplicity, consider it having three main parts: Neocortex, Midbrain and The Old Brain or Crocodile Brain.

The human brain consists of Neocortex, Mid-brain and the Crocodile Brain
Figure 1 – The three parts of a human brain. Source: Pitch Anything by Oren Klaff

The Old Brain/Crocodile Brain is responsible for the initial basic filtering of all incoming messages. As a physically weak and small species compared to others in the wild, our ancestors, for their survival, relied on ability to detect threats early. This Crocodile Brain is the part that does that detection job and tells the rest of the body whether something is a threat or not. Over the ensuing thousands of years, while our human body evolved a lot with the time and communication became more sophisticated and nuanced than just “yeah it’s dangerous/no it’s actually friendly” responses, this Old Brain hasn’t, staying largely as primitive as it was.

Above this Crocodile Brain are Mid Brain, which “determines the meaning of things and social situations”, and the Neocortex, which evolved with our society over time and allows us to reason and think in complexity. Neocortex is where we develop ideas, reasons to back those ideas up and language to present . In other words, everything that we can’t do with Crocodile Brain.

You can already see the root-cause reason why communication fails sometimes. In any exchange, a message that is developed by the most advanced or smartest part of the brain is initially perceived by the 5-million-years-old most primitive part. If the amygdala part of the Crocodile Brain considers a message as threatening to our survival, it will essentially shut down the brain and ignore the message in question. If the message is too novel and complex, the Crocodile Brain, which is high-maintenance, dumb compared to the Neocortex and lazy as it doesn’t like to work a lot, will get bored and refuse to let it go to the upper parts of our brain.

That’s why professional writers say that the beginning of an article or paragraph is super important in persuading us to keep reading. We tend to lose focus and attention quickly if something is not simple, easy to understand nor concrete. Our Crocodile Brain will shut down if it is forced to process jargon, remotely unknown words or abstract concepts.

That’s why you hear some professional presenters want us to open every presentation with a bang, something make us laugh, something that we can relate to or something that is positively shocking yet concrete (like a statistics). If a presentation’s first few slides don’t have a shock-and-awe element, the Crocodile Brain will get bored and attention will wane.

That’s why when a chart or a table contains loads of data and information, it’s better to highlight the part where audience should focus on. Remember, the Crocodile Brain is lazy. If you ask it to scan a lot of information quickly, it will get bored.

That’s why a relatable and known brand in business is a highly valuable asset. The Crocodile Brain will be more at ease when it recognizes a familiar logo or a familiar brand name.

That’s why in some cases even well-intentioned & well-reasoned messages aren’t received. They never get to Neocortex (Your bosses are NOT that dumb to not understand you. They just don’t receive the communication the way we want them to).

In short, what makes pitches difficult is that our highly developed Neocortex has to persuade a lazy, primitive and dumb Crocodile Brain, which only likes clear, simple, straightforward and friendly ideas. All the communication tips or recommendations are aimed to do one thing and one thing only: to get through the Crocodile Brain and to the Neocortex without triggering fear. There are tons and tons of tips and tricks out there on improving communication. I won’t be able to get to them all in this post. I hope that I gave you the root-cause problem so that you can come up with solutions accordingly.

Is BNPL replacing Credit Cards?

BNPL is a red-hot phenomenon now both in the financial and retail worlds. Because most BNPL transactions are funded using debit cards or checking accounts rather than credit cards, one of the main debates is whether it is replacing or will replace credit cards.

When asked about BNPL and its impact on credit card balance, the CFO of Discover, John Greene, had this to say:

What we’ve seen to date is consumer appeal has been on the lower credit quality folks. I think there will be a natural evolution that, that will come up the credit spectrum. We’ve also seen in terms of the firm, some higher credit quality customers actually electing to do a buy now pay later transaction, whether it’s paid in for or something else.

We haven’t seen any discernible impact whatsoever. So where I would likely see that is through new customer acquisition, and that’s — that activity has been very, very robust. The balance sheet on existing customers here, so loans, that’s been impacted by stimulus and kind of how they’ve allocated their dollars within their household. Nothing from the details we’ve looked at that would indicate that buy now pay later’s impacting the portfolio.

Discover Financial Services – Barclays Virtual Global Financial Services Conference

Echoing that sentiment, Brian Wenzel, CFO of Synchrony Bank, said there was no visible impact from BNPL on their credit card portfolio:

Yes. So first, we have studied buy now, pay later impact over the last couple of years as it really has grown, and we partnered with an outside firm to kind of do a deep analysis really on the — at the customer account level to kind of understand the behavior patterns it has. So when we see it and the data we’ve seen, I think, 75% of the buy now, pay later accounts are funded out of a debit account, right? So the view is that they are — you’re using cash and taking what would be a debit transaction through the buy now, pay later. We then looked — and really the impact of our business, and we looked at it and talked a little bit about it in Q&A last week about the impact on our business.

Are we seeing anything that says buy now, pay later is impacting credit? And so when you look at it versus a cohort population of our Mastercard as well as our Dual Cards, we see a low penetration, and we have not seen any changes certainly with how they use credit with us. In fact, they are more engaged with us than our average customer. They generate more revenue for us, but we have not seen any change. So as we look at it — when we look at applications come through, go over some of these products are offering, we have not seen any change, discernable changes.

So when you think about the impact to us in credit, we don’t really see it yet. We think that there is a shift that’s happening probably from cash as a tender type. And I think this is where the merchants and our partners are taking a step back. They are saying, “Yes, we understand your offer, consumers like it. But is this driving incrementality for us, true conversion?

Synchrony Financial – Barclays Virtual Global Financial Services Conference

One may argue that the main business of Discover and Synchrony is credit card so they had to put on a brave face. They might have. But since they are publicly traded companies; which often require them to be truthful to investors, I’ll give them the benefit of the doubt. More importantly, what they say seems to be in line with what Marqeta sees in their 2021 State of Credit report.

Recently, Marqeta released a 2021 State of Credit Report with some interesting insights into how consumers in the U.S, the U.K and Australia use BNPL and credit cards. The report is based on a survey of 3,500 people across three countries. Here are my take-aways regarding consumer preferences in the U.S:

  • 78% of respondents in the U.S use credit cards while 25% actively use BNPL
  • 50% of U.S consumers use credit cards because of rewards, something that is still a weakness of BNPL providers but they are working on it
  • “60% of U.S. 18-25-year-olds said they made more than five purchases on their credit card online each week, compared with 19% of 50-65-year-olds”
  • “79% of consumers surveyed who use BNPL reported having three or less BNPL plans open at a given time, with 45% of people reporting their average BNPL purchase at less than $100.”
  • “Older consumers however, were decidedly against, with survey respondents 51-65 years old voting overwhelmingly (63%) in favor of the credit card-first status quo.”
  • “Americans were again slightly worse off, with 30% responding that they’d struggled to meet payments”

3 out of 4 U.S consumers use credit cards. 60% of the younger segment use their cards regularly every week while the older and wealthier crowd want to keep the status quo. That, to me, is the sign that the credit card business is still healthy and well, at least for now. By no means do I insist that BNPL doesn’t have a chance to overtake credit cards. More and more issuers such as Citi, Amex or Chase introduced the ability to put qualified transactions on installment plans (BNPL). All the major retailers in the country allow shoppers to have a payment plan. Even Apple is reportedly working on their own version of BNPL. Who knows what the future holds? But for now, all signs point to a healthy credit card industry holding their ground.

Some thoughts on new benefits for Visa U.S Credit Cardholders

Per Visa:

Visa Inc. (NYSE: V) today announced the addition of Shipt, Skillshare and Sofar Sounds – as exclusive benefits – for Visa’s U.S. Consumer Credit cardholders. Eligible cardholders can now get a free Shipt membership to receive free same-day delivery on groceries and household essentials on orders over $35; boost their creativity through Skillshare’s online learning community; and get access to presale tickets plus be eligible for a free concert ticket while discovering Sofar Sounds’ global community of music lovers.

Specifically, the benefits vary from one product to another. Signature/Infinite credit cardholders will be able to enjoy more benefits from Visa than other cardholders:

ShiptSkillshareSofar Sounds
InfiniteUp to three years of free Shipt membership (normally $99
 per year)
Free membership for three months plus 30% off annual renewalsSeven-day Visa Exclusive Presale to Sofar-presented events, plus a free ticket with each purchase of one or more tickets to a show during the presale window
SignatureThree months of free Shipt membership, then nine months of membership at 50% offFree membership for three months plus 20% off annual renewalsSame as Infinite
OthersOne month of free Shipt membership, then three months of membership at 50% offSame as Infinite but limit two free tickets per year

You may wonder now if you are qualified for Infinite or Signature benefits. Infinite cards are typically high-end premium cards with a significant annual fee such as Chase Sapphire Reserve or U.S. Bank Altitude Reserve Visa Infinite Card. Hence, if you are already paying in the hundreds of dollars a year for a credit card, chances are that you have an Infinite card.

It’s a bit easier to get a Signature card. Every year, issuers have campaigns to increase credit limit for qualified customers. There are two reasons for it: 1/ a higher credit limit can stimulate more spend from customers and 2/ a Signature card earns an issuer more interchange revenue than a Classic card. One of the key criteria for an upgrade is that customers must have less than $5,000 in credit limit, which is the threshold for a card to be considered by Visa to be Signature. After an upgrade, a Signature card will have more than $5,000 in credit limit.

Therefore, if you have a good credit history and standing, ask your issuer to increase your credit limit to above $5,000. Do check with them if it means you are getting a Signature card. Each issuer will have a different set of criteria to look at, in addition to credit score, to see if they will upgrade your account. There may be a hard/soft credit pull involved and as a result, your credit score may take a hit. However, if your monthly balance doesn’t change, a bigger credit limit means that your utilization would be lower and hence, your credit score would bounce back soon.

I don’t know the exact agreement between Visa and these companies, but if I have to guess, it won’t be Visa that subsidizes these benefits. Visa only earns a tiny piece from every transaction (like 0.2% give or take). The maths don’t add up for them to subsidize these benefits. On the other hand, the likes of Shipt, Skillshare and Solar Sounds have a perfect partner in Visa to market their services and acquire new users. Visa is the biggest card network in the world and in the U.S. It will be highly challenging to find an issuer that doesn’t have a Visa product. After this announcement, issuers will include the new benefits in their marketing: social media, direct mails, emails or websites. Credit card is a highly competitive and fragmented business. Every player pours millions of dollars into marketing and user acquisition every year. Hence, the names of Shipt or Skillshare will be more popular. I also think they will get more new users to the door. The difficult part is to make them stay. But hey, if you want to keep someone close, they have to be familiar with you first. This is about it.

For Visa, this is a good move to deepen their moat. Not only does the network have the biggest pool of merchants AND consumers in the U.S, but they also have the same advantage globally. While powerful, this moat doesn’t guarantee future successes. Visa has competitors circling. Apart from the traditional competitors such as Discover, Mastercard or American Express, there are new challengers on the horizon such as this startup Banked from the UK as well as alternative payment methods such as BNPL via ACH. This new slate of benefits is a plus for consumers as well as card issuers, at no additional cost. It is aimed to acquire new cardholders and keep them on the network as long as possible.

Weekly reading – 18th September 2021

What I wrote last week

The importance of reading footnotes

Interesting articles on Business

Facebook Says Its Rules Apply to All. Company Documents Reveal a Secret Elite That’s Exempt. The sentence “we’re not going what we say publicly we are” can be applied to any company to some extent. The problem for Facebook is that the trust-eroding incidents happen way too often for a company with grandiose ambitions. Facebook wants us to trust them and use some of the new services for Facebook Pay, but how can trust be formed when stuff like this happens? I am sure this won’t be the last time that Facebook got a PR black eye.

Intuit Agrees to Buy Mailchimp for About $12 Billion. “Mailchimp, established in 2001, is based in Atlanta and is still owned by founders Ben Chestnut and Dan Kurzius, according to its website. The company, which hasn’t taken any outside funding, began as a web-design agency and ran an email-marketing service on the side that later became its focus. Today it also offers other digital-ad services and customer-relationship- management tools. Already popular among small businesses, Mailchimp became something of a household name in 2014, when it advertised on the first season of the hit podcast “Serial.” The company now serves 2.4 million monthly active users, including 800,000 paying customers. Half of its customers are outside the U.S. It had about $800 million in annual revenue last year, a 20% rise from the year earlier.”

Square Offers Sellers and Consumers a New Checkout Experience with Cash App Pay. It’s a natural progression in my opinion. Square is competing with PayPal to be the Super App for consumer financial needs as well as the go-to partner for commerce. PayPal has enabled payments by QR Code and mobile wallet for a while. Now, Square and Cash App have it too.

Facebook Knows Instagram Is Toxic for Teen Girls, Company Documents Show. “For the past three years, Facebook has been conducting studies into how its photo-sharing app affects its millions of young users. Repeatedly, the company’s researchers found that Instagram is harmful for a sizable percentage of them, most notably teenage girls. Expanding its base of young users is vital to the company’s more than $100 billion in annual revenue, and it doesn’t want to jeopardize their engagement with the platform. The features that Instagram identifies as most harmful to teens appear to be at the platform’s core. The research has been reviewed by top Facebook executives, and was cited in a 2020 presentation given to Mr. Zuckerberg, according to the documents.” Guess what Facebook chose to do? Nothing. Absolutely nothing.

Adobe jumps into e-commerce payments business in challenge to Shopify. The race to be the force that powers eCommerce features some of the biggest firms in the world: Amazon, Walmart, Shopify, PayPal, Adobe and Square. If you notice, the first three have fulfillment capabilities. PayPal bought Happy Returns. So it’s only a matter of time the latter three build out their own fulfillment muscle.

Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’ “Shoppers spend more at Macy’s when they use installment plans offered through Klarna Bank AB, Macy’s CEO Jeff Gennette said on a recent earnings call. Klarna also is helping the retailer attract younger customers, he said. A desire to boost loan approvals was among the reasons Walmart in 2018 decided to end its decadeslong credit-card partnership with Synchrony Financial. Citigroup Inc. saw a sevenfold increase in the dollar amount of credit-card purchases converted to installment loans in July, compared with the same month a year prior, said Gonzalo Luchetti, head of Citigroup’s U.S. consumer bank.”

Other stuff I find interesting

One Woman’s Mission to Rewrite Nazi History on Wikipedia. I hope down the line, years from now, there will be folks who come across what Ksenia Coffman did and be thankful that she did. Same way as I do today.

What Makes Work Meaningful — Or Meaningless

Stats

“Close to half of all new U.S. gun buyers since the beginning of 2019 have been women”

55% of shoppers start their 2021 holiday season shopping before Thanksgiving

Source: JungleScout

When reading reports, read the footnotes!

It’s not natural for most people to pay close attention to the small fine print in the footnotes. When I was at school, nobody told me about it. But in some cases, what the footnotes contain is very valuable and can change the information that goes before it. In this post, I’ll give you an example of how a $27 billion publicly traded company (Synchrony Bank) manipulates numbers to their advantage and how paying attention to the footnotes can help you jump through that manipulation.

Per Synchrony’s Investor Day Presentation

Synchrony shows their acquisition cost and customer lifetime value of their co-branded credit card portfolio

The point of the upper slide is that Synchrony Bank is more efficient than its peers in acquiring new and more valuable accounts. Well, there are some caveats. First, it may well be true that it costs Synchrony less to acquire new co-branded accounts. They partner with some of the most popular brands such as Amazon or PayPal. They don’t need to send out a lot of direct mails or run plenty of digital ads. However, I strongly suspect that they will have to pay these brands a high finders fee as in every time an account is opened, the brands receive a fee. In these cases, I won’t be surprised if the fee is north $100. Technically speaking, the finder fee isn’t classified as an acquisition expense, but to ordinary audience who doesn’t work in banking, the net financial impact isn’t clear from this presentation.

Second, the comparison data is from Argus. Argus collects data from different issuers in the country and shares back to each participant its benchmark’s data. It can be a very useful tool as management teams. The main drawbacks of Argus are 1/ as the identity of the participating issuers is kept anonymous, one doesn’t really know exactly who they are compared against; 2/ Argus data is on a quarterly basis and usually lags behind by 90 days. In other words, since we are not wrapping up Q3 2021 yet, the most up-to-date data in Argus should be for Q1 2021, but I know from personal experience that as of this writing, benchmark data is only up to Q4 2020. My point is that it’s unclear from the presentation that Synchrony is comparing data from the same period.

Last but not least, the way they calculate Customer Lifetime Value is a bit flattering. The footnote, if I interpret it correctly, states that they look at the CLTV of accounts that are on the books for 10 years. In the credit card world, if a customer stays with you for a long time, usually it means that customer is more valuable than shorter-tenured ones. Hence, it seems Synchrony looks at the CLTV of only some of their best customers, instead of the general population of their co-branded cards.

I’ll give you another example of the importance of footnotes. From the same presentation by Synchrony:

Synchrony tries to show how they manage risk

The point that Synchrony is trying to make here is that they grow their portfolio responsibly by curtailing the riskier customer group (subprime, which include the Low and Medium). The confusion comes from how Subprime is defined. In their explanation, Synchrony considers anybody with VantageScore less than 650 to be Subprime. According to The Balance, Vantage Score 3.0 and 4.0 use the same tiers as FICO score and Subprime refers to people with less than 600 in Vantage Score. To the Consumer Financial Protection Bureau, Subprime includes anyone with less than 620 in credit score. To Experian, the threshold is 670. The lack of a universal definition of Subprime means that Synchrony is likely not trying to manipulate the audience in this particular case. Rather, if somebody wants to use this information, they should really need to look at how Synchrony defines Subprime. Otherwise, any comparison would be flawed.

These are just two small examples of how critical information is sometimes buried in the footnotes. There are plenty of other examples. Everyone that publishes something has an agenda and employs tactics to highlight such an agenda and tuck away what can seed doubt. We should strive to be vigilant and mindful while reading others’ reports.

Truths about that 6% of People with iPhones in the US Use Apple Pay In-Store

A new article from PYMNTS claimed that only 6% of iPhone users use Apple Pay in stores.

As someone who works in the credit card industry and a follower of Apple, I have a few points to make with regard to this article. Per PYMNTS.com

Seven years post-launch, new PYMNTS data shows that 93.9% of consumers with Apple Pay activated on their iPhones do not use it in-store to pay for purchases. That means only 6.1% do. After seven years, Apple Pay’s adoption and usage isn’t much larger than it was 2015 (5.1%), a year after its launch, and is the same as it was in 2019, the last full year before the pandemic.

That finding is based on PYMNTS’ national study of 3,671 U.S. consumers conducted between Aug. 3-10, 2021.

First, I am naturally skeptical of surveys. To properly design and execute a representative survey whose results you can use to project trends both an art and a science. In other words, it’s difficult and tricky. Without knowing the specifics of the surveys that PYMNTS used over the years, I can’t really say for sure that their data is 100% accurate or representative. For instance, did these survey represent the U.S population demographically? We all know that older folks tend to be more reluctant towards technology than the younger crowds are. What if some of these surveys were more skewed towards Baby Boomer or late Generation X?

With that being said, let’s assume that these surveys were properly designed and conducted as there is no reason to believe that they weren’t either. Still, there are some important context points that I’d love to discuss. The U.S is traditionally slow in adopting tap-to-pay payments, compared to other developed countries in Europe. Here is what Visa had to say at the RBC Capital Markets Financial Technology Conference back in June 2021:

Canada is almost 80% of all tap to pay of all face-to-face transactions, almost 80% are tap to pay. In Europe, it’s over 80%. Australia, it’s almost 100%. Across Asia, it’s over 50%. And in the United States, it’s now over 10% from basically a dead stop a couple of years ago. So right now in the U.S., we’re a bit over 1 in 10 transactions with tap to pay, 1 in 10 of all face-to-face transactions of tap to pay. About 350 million cards, last time I looked, 268 of the top 300 merchants, 23 of the top 25 issuers are issuing contactless.

What Visa essentially said there is that mobile wallet transactions in stores basically didn’t exist two years ago. The low adoption isn’t confined to Apple alone. It’s applied to all mobile wallets on the market. Hence, it’s not a surprise that only a small number of consumers used Apple Pay in stores. Since then, the tap-to-pay transaction share has increased a lot, but from contactless cards, not from mobile wallets.

The issuer where I work only introduced contactless cards in August 2019. The roll-out was gradual as we enabled the feature only on new cards and renewal replacements. Before August 2019, we saw contactless transactions make up only a low single digit percentage of all transactions. After the change, there was an increase in contactless transaction share, but it mostly came from contactless cards (as in you tap a plastic card against a card reader). It makes sense for several reasons: 1/ Using a plastic card, whether it’s debit or credit, is a habit. It’s unreasonable to expect consumers to change their habit overnight; 2/ To some consumers, it’s just not convenient to take out a phone to pay. During the pandemic, we all had to wear a mask. That contributed to the inconvenience as most Apple Pay transactions have to be approved by using Face ID (few iPhones in circulation are too old for Face ID); 3/ Sometimes, the card readers just don’t accept mobile wallet transactions. I personally experienced it myself several times when a technical glitch forced me to pull out my wallet and use my plastic. Even when card readers are to become more reliable & friendlier with mobile wallets and the pandemic closes out soon, the current habit of flashing a plastic card in stores won’t go away any time soon. It’s a painstaking process that will take quite a while and it’s not even a guarantee that it will change significantly at all.

The low adoption of mobile wallets in general leads me to my next point: how is Apple Pay compared to other wallets? The article by PYMNTS did bring up some comparison between Apple Pay and its peers:

Today, Apple Pay remains the biggest in-store mobile wallet player, with 45.5% share of mobile wallet users. Over the last seven years, the total amount of Apple Pay transactions at U.S. retail stores has increased from an estimated $5 billion in 2015 to $90 billion in 2021.

Although that growth is commendable, it is largely the result of more people with iPhones upgrading to newer models and more merchants taking contactless payments, both leading to a general increase in retail sales – 12.9% greater in 2021 than 2019. But to be successful, innovation must solve a problem, fix a source of friction or improve an experience that is so painful that consumers or businesses are motivated to switch.

The article is so focused on Apple Pay that it missed two important points. One is that Apple Pay isn’t Apple’s main business. It may well be in the future, but it surely hasn’t been since 2014. Why is it Apple’s fault that the adoption of tap-to-pay payments in the whole U.S is low? It’s not really reasonable to expect Apple to go all out and force a new habit on consumers when there is little financial reward. The other miss is that if only 6 out of 100 people used Apple Pay, which captured 92% of all mobile wallet payments using debit card in the U.S in 2020, what does it say for others? 1% or lower? Yes, 6% adoption is low for the most valuable company in the world, but in the grand scheme of things and in comparison with its peers, that figure suddenly looks significantly different, does it?

The last point I want to make is that it is NOT comprehensive and helpful to look at the mobile wallet share of in-store transactions. What about consumers who use Apple Pay or other wallets for online transactions? How many transactions do Apple users make using Apple Pay on their phones or through the App Store? How many transactions on web pages are through Apple Pay? Said another way, is Apple Pay more suited for online transactions than for in-store payments? And PYMNTS is judging Apple Pay on something that it’s not meant to address in the first place?

In short, I believe that this article from PYMNTS is useful to some extent as we have a reference with regard to in-store mobile wallet payments. However, the entire write-up lacks important context that can lead readers to misguided conclusions. My hope is that the whole conversion is more balanced now with what I mentioned above.

Disclaimer: I own a position on Square, Apple and PayPal.

PayPal made strides towards being a Super App

PayPal amplified its efforts to become THE Super App for consumers’ financial needs with several big announcements in the past few days.

  • Giant Eagle enables PayPal and Venmo at all of its 474 stores. This is the first grocery chain in the country that accepts PayPal and Venmo at checkout. To complete an in-store order, users can simply open their PayPal or Venmo app and have the QR code shown in the app scanned by the store cashier. As an incentive to promote the adoption of this feature, PayPal will send $10 in cash back to anyone after they make the first purchase of at least $40 at Giant Eagle
  • ACI Worldwide partners with PayPal to bring mobile wallet options to ACI’s bill clients. ACI Worldwide is a leading company in real-time digital payments with numerous clients in various industries such as consumer finance, government, education, healthcare, insurance, telephone and cable, and utilities. By virtue of the new collaboration, bill payers can now make payments on ACI’s client platforms through their PayPal or Venmo wallet
  • Yesterday, Fiserv announced a new feature that enables business-to-consumer payments deposited to PayPal or Venmo accounts. PayPal or Venmo users will be able receive payments from gig economy companies, insurance firms or tax refunds from the federal governments to their PayPal or Venmo account
  • Last but definitely not least, starting October 1, 2021, the company is going to drop late fees for BNPL customers globally.

PayPal is one of a few companies that are known globally. Anyone that regularly shops online must be familiar with their iconic blue button on online merchants’ checkout page. Strong in processing online payments, PayPal; however, hasn’t been as popular with in-store checkout. Personally, I rarely see a store that accepts PayPal as a payment option. The company is well aware of that weakness and planning to address it. In the very last earnings call, the CEO mentioned that they were going to aggressively go into stores. The partnership with Giant Eagle is proof of that. Even though there are only 474 stores in the chain, this is a great first step. I imagine that PayPal will try to use data acquired from this partnership to demonstrate to prospect partners the benefits of allowing PayPal products at checkout. Plus, grocery is a staple category to consumers. If they are accustomed to checking out with PayPal/Venmo, they will be more likely to use it for other purchases as well.

PayPal has been growing its bill payment service for a while. In the previous earning call, the company cited growing bill payment volume as one of the reasons for its decreasing take-rate. The partnership with ACI Worldwide will likely grow the processing volume yet suppress that take-rate further for the foreseeable future. ACI Worldwide supports around 4,000 customers in the US and according to one study, Americans spends $2.75 trillion a year on recurring bills. Even if this move helps PayPal gain 1% of that volume, that’s another $27.5 billion a year added to the company’s U.S bill payment volume. Given that it processes $350+ billion in a quarter WORLDWIDE for ALL services, I suspect that’s the lift the management will be pleased with. I really like this partnership with ACI. Instead of going out there and going through hoops to work with numerous companies, PayPal can now be available on 4,000 checkout pages in a short amount of time. Bill payments are such a critical function in most adults’ life. Convincing consumers to use PayPal/Venmo to pay bills will create a usage habit that is difficult to break.

Here is PayPal from its 2020 annual report:

Transaction expense is primarily composed of the costs we incur to accept a customer’s funding source of payment. These costs include fees paid to payment processors and other financial institutions to draw funds from a customer’s credit or debit card, bank account, or other funding source they have stored in their digital wallet. Transaction expense also includes fees paid to disbursement partners to enable a transaction. We refer to the allocation of funding sources used by our consumers as our “funding mix.” The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal or Venmo account balance or PayPal Credit.

Hence, the more transactions are funded through bank accounts or PayPal balance, the better it is financially for PayPal. Asking consumers to transfer funds from a checking account to a PayPal/Venmo before making a purchase using that balance is futile. It’s inconvenient and cumbersome. The collaboration with Fiserv helps PayPal go around that challenge. Additionally, having a balance motivates users to be more active. If a friend of mine sends $50 to my PayPal account, I will be more willing to use it for my next purchase than I would without that $50 balance. A few months ago, Square bought the tax business of Credit Karma and integrated it into Cash App. I wrote in my thought on the acquisition

In essence, it benefits Square when customers have balance in their Cash App. The more balance there is, the more useful Cash App is to customers and the more revenue & profit Square can potentially earn. I imagine that once Credit Karma’s tax tool is integrated into Cash App, there will be a function that directs tax returns to customers’ Cash App. When the tax returns are deposited into Cash App, customers can either spend them; which either increases the ecosystem’s value (P2P), or deposit the fund back to their bank accounts. But if customers already direct the tax returns to Cash App in the first place, it’s unlikely the money will be redirected again back to a checking account. As Cash App users become more engaged and active, Square will look more attractive to prospect sellers whose business yield Square a much much higher gross margin than the company’s famous Cash App.

The integration of Credit Karma Tax into Cash App did happen. The same logic can be applied here. In addition to lowering its transaction cost, PayPal benefits in different ways from having more balance in its wallet. Instead of acquiring a tax filing business like Square did with Credit Karma, PayPal collaborates with Fiserv to enable not only tax refunds, but also paycheck deposit or insurance payments. Less capital, more applications. What’s not to like?

The BNPL market is hotter than ever. Recently, Square paid an enormous sum of $29 billion for Afterpay. Merchants are racing to enable the feature due to the fear of missing out. Banks like Citi, Chase or Amex scramble to offer their own BNPL version. Even Apple is rumored to develop its own service for Apple Pay transactions. PayPal launched its PayPal in 4 in August 2020. Since then, the service has processed more than $3.5 billion in transaction volume, $1.5 billion of which took place in the last three months alone. Yesterday, with its policy to drop late fees for consumers, PayPal took a bold step towards gaining more market share in this red hot market.

Let’s talk quickly about how BNPL providers make money. There are some providers like Afterpay or Klarna that allow consumers to break down a purchase into several interest-free payments. To generate revenue, these providers charge consumers a fee for every late payment and merchants a fee that is much higher than the usual interchange rate in exchange for new business. On the other end of the spectrum, there are other companies like Affirm that charge consumers no fees, but levy interest on the purchase. For PayPal, it originally belonged to the first group of BNPL firms that offer interest-free payment plans. As a late comer, PayPal lets merchants use this service at no additional charge, apart from the usual commission rate. Today, to attract the end consumers, PayPal decides to drop late fees, a move that will force other competitors to copy to avoid losing grounds. I expect them to follow suit soon. Late fees only make up 9% of Afterpay’s revenue. The problems for these pure BNPL players are that 1/ they don’t have multiple touchpoints to consumers like PayPal and 2/ they are already not making money. Dropping late fees will make the road to profitability even tougher. For the likes of Affirm, I mean, what can they offer consumers and merchants that PayPal can’t?

All of these developments have one common goal: to make PayPal the go-app application for all things financial for us consumers. Just take a look at the breadth of services that PayPal can offer below. There are few companies that can do the same, let alone having 32 million merchants on the network and a brand name that is widely recognized across the globe.

PayPal's Consumer Services
PayPal’s Consumer Services

I expect in the next few quarters, PayPal will have:

  • A higher TPV
  • A lower take-rate due to more bill payments, P2P, especially from Venmo, the drop of BNPL late fees and less reliance on eBay
  • Higher loss rates
  • Higher cost of transactions simply because PayPal has to compensate the likes of ACI, Fiserv and Giant Eagle
  • Higher marketing expense as % of revenue

However, as a shareholder, I can’t help but feel optimistic about the company’s outlook with these moves. I look forward to hearing the management team discuss the ramifications in the future earnings calls.