Uber may deliver marijuana in the future. Update on Credit Karma and Square

Uber’s business reportedly hit a stride in March. CEO hinted at the prospect of delivering marijuana

In a filing today, Uber revealed that it had an astonishing month in March 2021, when its Gross Bookings hit the highest level in the company’s history. Uber said that its annualized bookings for Mobility and Delivery hit $30 and $52 billion, respectively, last month. I have mixed feelings about this. At the first glance, the filing seems like a trove of good news for Uber as the figures imply that its two main business segments are firing on all cylinders. Uber’s total bookings in 2018 and 2019 were $50 and $65 billion, respectively. If the annualized numbers above are realized in 10 months’ time, that will be an impressive achievement for a company of this size, given that our societies spent more than one year in a historic pandemic.

But IF is the important word here. To be honest, I don’t really know how the annualization is calculated. Did they multiply the bookings in March by 12? Or did they multiply the bookings in the best week in March by 52? I may be ignorant not to understand the nuances in these languages, but if you invest your hard-earned cash into a company, it’s healthy to be a bit paranoid.

Another news that came from Uber is that its CEO hinted at the prospect of delivering marijuana.

“When federal laws come into play, we’re absolutely going to take a look at it,” 

Source: The Verge

Two months ago, I wrote about Uber’s acquisition of Drizly, the market leader in liquor delivery in the US. Chief among the benefits of acquiring Drizly for Uber are the proprietary technology that can verify IDs and the team that knows how to navigate the complex legal systems at the state and county levels. These capabilities will be tremendously helpful to Uber if they decide to delivery marijuana. Even in the states that allow the cannabis delivery, consumers still have to show that they are old enough; which is the perfect use case scenario for what Uber gets from Drizly. Right now, marijuana for recreational purposes is only legalized in a handful of states and is still illegal at the federal level. Some Democrats are pushing to change that and I think that it’s just a matter of time before the change takes place. Even if marijuana for fun is legal on the federal level, there will still be a lot of work to be done on the local level as each state will have a different mandate. In that case, having a team that knows how to deal with regulations from county to county on liquor delivery like Drizly will come in handy. The recreational legal cannabis market in the US is estimated to reach $27 billion by 2024. Estimates like this are usually optimistic, but even if half of that estimate checks out, it will increase Uber’s Total Addressable Market significantly.

Update on Credit Karma and Square

Last month, I wrote about Square’s acquisition of Credit Karma’s tax unit and potential benefits that the former can take from the latter

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. 

Today, a user on Twitter noticed the new integration between Credit Karma and Square that would enable users to direct tax refunds straight to their Cash App account. Even though this is a logical move, how it will actually benefit Cash App remains to be seen as there hasn’t been any reporting on the overlap between Cash App and Credit Karma’s tax unit in terms of active users. Nonetheless, I look forward to seeing what Square brings to the market that stems from this acquisition.

Hydrogen fuel cell vs Battery Electric

As the calls to combat climate change become increasingly louder, the interest in an alternative to carbon-based energy heightens. Because our combustible engines used in daily commute emit a lot of carbon dioxide, finding a greener and more environmentally friendly option is believed by many to help us reduce the greenhouse gas. There are two main approaches to replacing gas in our vehicles: hydrogen fuel cell and lithium-ion batteries. I spent a few days reading up on this topic because I believe that it will be an important aspect of our lives moving forward and I was looking for a new investment opportunity. If you aren’t familiar with the topic, the clip below is a very great summary

Hydrogen fuel cells contain higher energy density and release energy on demand, instead of packing it all in a container like Lithium-ion batteries. Because of its higher energy density, hydrogen powers vehicles over a much longer distance than the current batteries can. If battery electric vehicles want to cover a longer distance, they have to be equipped with bigger and heavier batteries which, in turn, require more energy to be transported. A classic Catch-22 problem. Moreover, because hydrogen fuel cells use hydrogen stored in a separate tank and oxygen from the air to produce energy on demand, it’s much faster to charge than batteries. While battery electric vehicles (BEV) take like an hour to charge, fuel cell electric vehicles (FCEV) take as long as an ordinary trip to the gas station. Hence, if we’re just talking about energy density and time taken to charge a vehicle, FCEVs are clear winners.

However, the story isn’t that simple. The problems with FCEVs start upstream, before the fuel goes into the vehicles. Even though hydrogen is one of the most abundant elements, it doesn’t exist as a standalone. It takes energy to produce pure hydrogen, store it and transport it to where the end users are. Because there is a lot of inefficiency and work to be done to deliver hydrogen as fuel, the costs in hydrogen production are currently much higher than the costs required to produce Lithium-ion batteries. As a consequence, FCEVs are significantly more expensive than BEVs, rendering it a much smaller and less consumer-friendly market than BEVs. From a manufacturer point of view, that serves a roadblock to the economies of scale. But if they can’t achieve economies of scale, it’s not easier to lower the price of FCEVs. Another Catch-22.

Hydrogen fuel and Battery efficiency rate
Source: Greencarreports

Due to their potential contribution in our fight against climate change and superior efficiency over burning gasoline in a propulsion, battery and hydrogen fuel technologies have received increasing support from governments around the world in terms of subsidies, research grants and friendly regulations. This kind of support will help fine-tune the technologies, accelerate the adoption and make them more economically viable. I believe that they both have a place in our society in the near future. BEVs already have a leg up in scale over FCEVs. Proponents of BEVs such as Tesla or Volkswagen already achieve the scale they need to make their vehicles economically appealing to consumers. As demand grows, so will the scale; which will drive down the total cost of ownership of BEVs even more. Supporters of FCEVs such as Honda, Hyundai and Toyota still believe in the potential of hydrogen fuel in passenger cars, but they have to solve the problem of producing and transporting hydrogen. On the other hand, batteries’ low energy density, barring any technological advances in the future, make them virtually disqualified for large transportation means such as trucks or planes. Due to its high energy density, hydrogen fuel is more apt to use in trucks, cargos, ships, planes or other commercial cases. Microsoft already uses hydrogen fuel to power their data centers. Walmart and Amazon are two prominent clients of Plug Power, a major producer of hydrogen fuel turnkey solutions.

Even though batteries and hydrogen fuel can provide greener energy, their net contribution to our planet remains a question mark. As mentioned above, it takes a lot of energy to produce pure hydrogen and as of now, there is inefficiency from when hydrogen is produced to when it goes into a car’s tank. If a hydrogen producer burns natural gas such as methane to get pure hydrogen, the cost will be cheaper than other methods, but the process will be harmful to our environment. If hydrogen is produced by using electricity, especially electricity from renewable sources (sun, wind), to break down water into constituents (this method is called electrolysis), the environmental harm will be lower, but this method is more expensive. Plus, the most efficient method of electrolysis right now uses Platinum, which is not a cheap material and whose mining can be detrimental to our nature.

On the other hand, the downside of Lithium-ion battery, in addition to those mentioned above, is the extract of Lithium. The mining practice is controversial in some countries such as Bolivia and can leave a lasting impact since requires a lot of water to extract Lithium, as you can see below.

This field is developing fast and sophisticated that the more I read up on it, the more interested I am. By no means do I think that by just spending a few days on research, I became an expert. Not even close. I will continue to educate myself on this important avenue and hope that this is helpful to you and triggers your interest.

Cost of ownership of a 300-ton dump truck when using Diesel or Fuel Cells
Source: Hydrogen Council
cost of ownership of a heavy-duty truck when using Diesel or Fuel Cells
Source: Hydrogen Council
US operational cost for a bus breakdown (FCEV vs BEV)
Source: Deloitte
Current policy support for hydrogen deployment
Source: IEA.org

My experience with Amazon Shopper Panel

I wrote about Amazon Shopper Panel before. The program is on an invite-only basis. Essentially, participants upload 10 non-Amazon receipts (Whole Foods transactions aren’t counted either) every month to earn $10 in Amazon balance and have an opportunity to earn more by completing surveys. In my post, I wrote about the immense applications that can come from this initiative. This time, I want to update you with more details on the program. I myself received an invitation back in February 2021. If you are selected, you will receive an email like this

Amazon Shopper Panel Invitation
Figure 1 – Amazon Shopper Panel Invitation

The app is fairly simple. The first tab gives the user an overview of how much in rewards he or she has earned so far every month. The second tab is where receipts can be uploaded while the third tab houses all the surveys that Amazon wants you to complete. There are other routine sections such as FAQ, Contact Us, Legal Information and Sign Out that are tucked in a window that will open once you touch the three-dot symbol.

How Amazon Shopper Panel App Looks
Figure 2 – How Amazon Shopper Panel App Looks

Receipts can be uploaded via a phone camera. Based on my experience so far, the app is fairly receptive towards even wrinkled receipts and those that have small tears. Email receipts are qualified, as long as they are sent to receipts@panel.amazon.com from the same email that a participant uses to register an account. I got a car wash voucher from a dealership a while back and used it at a random fuel station in Omaha. The receipt from the car wash was still accepted, much to my surprise, because it didn’t have any card information. Since February 2021, I completed two surveys and received 25 cents for each. The surveys featured only one question each time and it was pretty basic such as, I paraphrase here, “where did you get information for your online purchases?”.

 Email receipts are accepted
Figure 3 – Email receipts are accepted
Even a car wash receipt without payment is accepted
Figure 4 – Even a car wash receipt without payment is accepted

Since starting to use the app, I have paid attention to how receipts differ from one another in terms of structure and layout. The computational process used to digest these receipt images will have to be pretty sophisticated to handle the intricacies and variety in how receipts are printed and captured. If Amazon can gain this ability to read images, it can be applied to other parts of their retail business.

Even if receipts are input by humans, the intelligence that Amazon may gain from this initiative will open up a lot of opportunities:

  • Design new private label products
  • Court other retail partners with unprecedented and reliable data
  • Support their ads business
  • Upsell current customers by understanding them better

My expectation is that Amazon will select enough folks from different backgrounds to join this effort. The participants have to be representative of consumers in America in terms of age, race, income and gender. Plus, the pool has to be big enough and the time period should be long enough so that the data can be statistically significant. As a result, at $10/participant/month, this initiative can reach 6 figures pretty fast. If the time and resources dedicated to the analysis task are factored, the expense will rise even higher. To other smaller retailers, the technical and financial barriers are not easy to overcome. To other retail giants like Walmart, I am surprised not to see a similar effort from them. This is the type of initiative where if your rival gains the first mover advantage, it will be a tall order to claw it back.

In life, there are skillsets which are very difficult to gain, but once mastered, can offer long-term leverage in various aspects of our life. Think: sales, writing, coding, human languages, cooking, fitness. In my opinion, this initiative belongs to the same category. If it proves to be successful, Amazon Shopper Panel can arm Amazon with intelligence and capabilities that are going to lift the company to even greater heights.

Disclosure: I have a position on Amazon and Walmart in my personal portfolio.

Having a lot of data is powerful. Handling is NOT easy

Brands’ blunders in their emails

Over the past few weeks, I had a couple of incidents in which brands sent me pretty awkward emails. The first incident was with the online pet store 1800PetMeds. A few weeks ago, I found out that my cat had ringworms. I went to 1800PetMeds to buy an oral solution that his vet prescribed. The transaction took place on 21st February 2021 and went smoothly; which I was thankful for. The bottle’s capacity is 52ml. My cat is supposed to take 1ml per day for 7 consecutive days on alternate weeks, meaning that we can’t use up that bottle in 30 days. Even if he takes it every day, it will have to take around 50 days to finish the bottle. Nonetheless, 1800PetMeds waited only for 30 days before they sent me an email encouraging me to buy another bottle. Their email headline read: Kimi’s next Intrafungol order is read. While I appreciate their initiative, I prefer my cat being healed completely to having to buy another bottle.

Another incident was with Hulu. It sent me an email at 10AM in the morning with a one-month free trial as a gift for my birthday. While the note was late by some margin, I still appreciated it. Less than 12 hours later, it sent me another email at 7PM, asking me to become a subscriber. If that’s not awkward enough, here is the kicker: I already received the same trial offer a few days ago and took it! I doubt that there is a system in place at Hulu that manages the delivery of marketing emails.

Handling a lot of data isn’t easy

1800PetMeds and Hulu aren’t some mom-and-pop shops that don’t have the resources to acquire and analyze data. On the contrary, they are Internet companies that should be experts in data analytics. Yet, they still have blunders like my examples above. To be clear, there is not a human-being sitting at a desk and sending out emails like above from Outlook. They are all automated from email tools such as Mailchimp. Hence, this is a product of my information being stored in their database and their operationalizing it.

This post isn’t to ridicule them. Since I have first-hand experience in dealing with data and knowing how difficult it is, I feel for them. At work, I deal with credit card data. There are many partners in our portfolio, some of which can have hundreds of thousands of accounts. Many accounts have hundreds of thousands of transactions every year. The sheer amount of transactions, coupled with their randomness in frequency, makes it a monumentally challenging task to figure out the purchase pattern for each person so that we can offer personalized marketing. For good measure, depending on how good your payment processor and internal data system are, the problem can be compounded by the irregularities in merchant descriptions. Below is what I have to do at work to categorize purchases into merchants. Think about what it is to do it for so many merchants out there

This is just one of the many aspects of what my job entails. We also have to look at how some attributes such as FICO, Balance, Credit Limit changed over time, how an account is engaged digitally (whether it enrolls online, mobile, e-statement, billpay, auto-pay or whether it is connected to a digital wallet), how profitable an account is and where that profitability comes from, and how we can be more efficient in acquiring account (whether direct mail, Internet, our retail branches, our Financial Institution partners or our Cobrand partners’ stores are the most efficient channels).

When I first joined my current team, my boss told me that it would take me a year or at least 6 months to be comfortable, not yet proficient, with what we do on a daily basis. He wasn’t wrong. Our learning curve is very steep. Plus, when dealing with a large amount of data, you have to take into account the infrastructure elements. Here are just a few on a high level

  • Is your current data infrastructure set up to assist fast data retrieval?
  • Does your data warehouse have high availability? Or does it crash a lot?
  • Is it easy to get the data you need or does it take hours to run complicated SQL queries?
  • Is there a set of universal definitions of metrics and fields?
  • Do you have a data visualization that can aid in presenting complex data? Is it connected straight to the data warehouse? Is it in a coding language that requires your team to learn?
  • Do you have a machine learning capability in-house to create proprietary models?
  • Is there a tool that can help eliminate biases to create apple-to-apple comparisons? If yes, how is data transferred from internal data warehouses to that tool?

I don’t believe my company is elite in data analytics. Not even close. I don’t know for sure, but companies like Netflix or Google should be an exciting place to work at because you’d be able to see how they handle an ocean of data at their fingertips. For many companies such as my employer, even though data driven operations are worthy visions, they are highly difficult to realize. Well, so is making money, I guess.

Weekly reading – 20th march 2021

What I wrote last week

The economics of a credit card

Business

Hy-vee CEO shared how Covid shaped the company’s operations moving forward

Why Amazon Fresh stores will likely rock a few boats. As its competitors do more shipping from their own stores, Amazon can get on level terms in that sense with having more stores of their own in strategic locations. Plus, if they can get these cashierless stores to run properly, they will be able to cut back a significant line item on the Income Statement, paid employees!

How Trader Joe’s $2 wine became a best-seller

Telegram App Is Booming but Needs Advertisers—and $700 Million Soon 

The new Google Pay repeats all the same mistakes of Google Allo

Apple brand loyalty hits all-time high as Samsung loyalty dives

Austin Rief: How Morning Brew went from college newsletter to $75 million in 5 years

She Came to the US to Study With Only $300 in Her Pocket — Now She’s a NASA Director For the Mars Rover

What I found interesting

Does Atlantic Canada have a blueprint for rural revival in the post-pandemic era?

Facebook’s GDPR bypass reaches Austrian Supreme Court

Stats you may find interesting

BNPL grew by 215% year over year in Jan and Feb 2021. Total eCommerce spending reached $121 billion so far

As of February 2021, 45% of Square sellers accept online payments, up from 30% a year ago

56% of the people surveyed by AirBnb preferred domestic travel post-pandemic

How do credit card issuers make money? What are the main types of credit cards? A quick look into the credit card world

Launching a credit card product is similar to putting together a jigsaw. There are many pieces: how to appeal to customers, which customers are an issuer’s likely target, what a good experience looks like, how an issuer can make money and how a card can compete with existing products on a market. In this post, I’ll go over my thoughts on the economics of a credit card, the main credit card types that I see on the market (excluding those debit cards that have credit card functions), the appeal of Apple Card and how different cards compare to one another.

Economics of a card

An issuer essentially generates revenue from three main sources with a credit card: interest payment when customers don’t pay off their balance, fees (late fee, annual fee, cash advance fee, balance transfer fee, foreign transaction fee and others) and interchange. Interchange is a small percentage of a transaction that a merchant pays to a card issuer whenever a customer uses a credit card to pay. The more spend is accrued, the more interchange issuers generate. Interchange rates are determined by networks such as Visa, Mastercard, Discover and American Express. The exact rates depend on a lot of factors: the industry or category that a merchant is in, what type of card (high end or normal) is being used, regulations (Europe imposes a limit on interchange rates, unlike the US) and how a customer uses the card to pay (swipe, chip, mobile wallet, online, phone..).

On average, some categories such as Airlines, Restaurants, Quick Restaurant Services, Hotels or Transportation have an interchange rate somewhere between 2% – 3%. Other categories such as Gas and Grocery, especially at Walmart, Target or Costco usually yield a very low interchange rate around 1% – 1.4%. Any credit card that offers higher than 3% in cash back in a category likely loses money on that category as the interchange cannot make up for the reward liabilities. Issuers are willing to offer 3-5% cash back, knowing that they lose money on that front, because they are banking on the assumption that the money that they make up from other sources will offset that loss. Specifically, they are likely to make money on categories with 1%. For instance, if you buy clothes or pay for a subscription online or buy something from a Shopify store, your card issuer is likely to make at least 1% in interchange, after they give you 1% in cash back. Additionally, issuers that offer a rich reward scheme usually impose an annual fee to offset the reward liabilities and the signing bonus that they use to acquire customers.

Hence, cards with no annual fee offer a cash back between 1.5 – 2%. They can’t afford to go higher than that because the maths would unlikely add up. Cards that have an annual fee often come with high rewards and a big bonus. While a big bonus can be an attractive tool to acquire customers, it incentivizes short-term purchase bursts and unintentionally attracts gamers, customers who receive the bonus, cash it out and either become a ghost, if they don’t have to pay an annual fee, or close out the card for good. There are a lot of gamers and gamers aren’t profitable to issuers. However, issuers still dole out a big bonus and attractive rewards because they think that there are customers that stay for a long term and can provide the interest income and fees that issuers need.

Three essential types of credit cards

I call the first type of cards the “Everyday Card”. Examples of this category include Blispay and Citi Double Cash Back. These cards offer a standard rewards rate on every purchase category (1.5% to 2%) with no annual fee. There is usually a 3% foreign transaction fee and there is no signing bonus. What makes Everyday Card appealing is that customers do not need to remember the complex rewards structure. They can just “set it and forget about it”. It earns them respectable rewards on every purchase, even at Walmart.

The second type of cards is the “No Annual Fee With Bonus”. Examples of this category are Discover It Cash Back, Freedom Unlimited or Freedom Flex. These cards’ highest reward rate is usually 5% on a certain pre-determined category that tends to yield a high interchange rate. In some cases, this 5% rate can rotate every quarter, keeping it interesting for customers and making them locked in if they want to activate a preferred category. There is a signing bonus for new customers. Some cards reward customers with a few hundred dollars in a statement credit if they spend a certain amount in the first 90 days. This mechanism is designed to make customers locked in early. The issuers bank on the assumption that once customers earn their signing bonus, they will stick around to keep those rewards points alive. However, it’s not uncommon for customers to cash out their rewards and become inactive afterwards. 

Discover’s signing bonus is designed to keep customers active during the first calendar year. They promise to match the cash back rewards at the end of the first year, but the bonus is a one-time occurrence and doesn’t repeat. This mechanism may keep customers active longer than what an outright statement credit does, but customers can always leave after the first year.

The last type of cards usually comes with an annual fee. Examples are Chase Sapphire Preferred or Bank of America Premium Rewards. Cards in this category come with a signing bonus after qualifying conditions are met and with a rich rewards structure. To offset expenses, issuers impose an annual fee. Customer acquisition may not be an issue with cards in this category, but will customers stay around after the signing bonus? Or are customers happy enough to pay a high annual fee every year? Also, these cards’ reward rate is high only in categories with higher interchange rate such as travel or dining. The rate is pretty light (1%) in other categories. While this approach appeals to a specific segment of customers, for customers that want “to set it and forget it”, does it still carry that same appeal though?

If you find credit cards complex and confusing, that’s normal because they are usually designed that way

Most credit cards can be pretty complex and confusing to customers. Let’s start with rewards. A tiered reward structure forces customers to mentally remember all the combinations of categories and rates. If customers have multiple cards in their wallet as they often do, it’s not an easy ask. Of course, there are folks that make a living in maximizing rewards, but that doesn’t work for the rest of us. In addition, it’s not always clear to customers how to categorize merchants. Merchants are categorized by Merchant Category Codes. These codes help issuers set up rewards and help networks determine interchange rates. MCCs are known in the banking industry, but to an ordinary customer, they don’t usually mean much. In some cases, issuers provide a list of qualifying merchants, but they can’t list all the available merchants and the practice is not ubiquitous.

Moreover, reward redemption can be a time-consuming process. Points or cash back earned in this cycle have to wait at least till the cycle ends before they are available for redemption. It can take longer in some cases, especially when it comes to signing bonuses. Here is a list of how long it takes for points to post at different issuers, compiled by Creditcards.com

 How long it takes to redeem the signing bonus?How long it takes to redeem spending rewards
Amex8-12 weeks after a customer hits the spending requirementWhen the current cycle ends
BofAAt the close of the billing cycle when the minimum spend is metWhen the current cycle ends
Capital OneWithin 2 cycles of when the spending requirement is metUp to 2 cycles
ChaseUp to 6-8 weeks after a customer hits the spending requirementWhen the current cycle ends
Citi8-10 weeks after a customer hits the spending requirementWhen the current cycle ends. With Citi Double Cash Back Card, it can take a bit longer if customers don’t pay in full
DiscoverWithin 2 cycles after a customer hits the spending requirementWhen the current cycle ends
US BankUp to 2 billing cycles after a customer hits the spending requirementWhen the current cycle ends
Wells FargoUp to 2 billing cycles after the qualifying period When the current cycle ends
Figure 1 – How long it takes issuers to let customers redeem rewards

The final point in rewards is that issuers tend to deceptively inflate the rewards by posting numbers in points, instead of dollars. Understandably, 100 points sounds much better than $1, even though they have the same value. Nonetheless, it creates an unnecessary level of complexity for customers to mentally convert points into cash, especially when the reward value is big.

Rewards aren’t the only source of frustration for credit card customers. Credit cards are essentially loans on which you may or may not have to pay interest. However, issuers hope that customers will incur interest and fees (as long as they don’t charge off). How often are fees prominently and clearly marketed as rewards? How often do you see in advance the potential interest payment if you don’t pay off your balance? Here is a study by Experian on the concerns that consumers have about credit cards

Consumer concerns about having a credit card
Figure 2 – Consumer concerns about a credit card

Apple Card is designed to do something different

Apple launched Apple Card in August 2019 in collaboration with Goldman Sachs. Customers can apply for an Apple Card right from the Wallet app, which is pre-loaded on an Apple device. The preloading is a significant advantage as customers don’t need to either load another bank app or search for a website and apply for a card. As soon as an application is approved, customers can use their Apple Card immediately either by holding your device near an NFC-enabled reader or paying online. With Apple Card, cardholders earn 3% cash back on purchases at Apple and strategic partners such as Exxon, T-Mobile, Walgreens, or Nike, 2% cash back on others purchases using Apple Pay and 1% cash back using the titanium physical card. The 2% cash back on other purchases can be appealing, but not every offline or online merchant allows Apple Pay.

The biggest selling points of Apple Card are transparency and simplicity. Take their no-fee structure as an example. There is no fee involved with Apple Card. No annual fee, no foreign transaction fee, no over-the-limit fee and no late fee. While Apple remains coy on cash advance fees, their special clientele may not use the mainly virtual Apple Card for this specific reason much. 

The simplicity also goes into their daily cash back. Typically, cash back earned through a credit card can take weeks to be registered and redeemed. Points or cash back earned this cycle must wait at least till the cycle ends before they are available for redemption. With Apple Card, cash back is earned daily in Apple Cash. As long as transactions are posted, customers can see the earned amount reflected in their Apple Cash. In real money term not in points. This takes away an unnecessary step for customers to mentally convert points into cash. Furthermore, Apple Cash can be used at any time, either in a person-to-person transaction, in a deposit back to a checking account or to pay back the outstanding balance in Apple Card. 

In terms of transparency, Apple Card tells customers how much interest they are paying when making a payment. And their APR is on par with other issuers’. In the Wallet app, customers can determine how much of the outstanding balance they want to pay. Depending on the amount, Apple will let customers know in advance their interest so that they can make an informed decision. It is in contrast to what almost all other issuers do. 

Apple Card's flexible interest rate
Figure 3 – A simulation to show interests on Apple Card varies based on how much a cardholder can pay.
Source: Apple

Apple Card only works with iOS devices and Apple Pay can be a challenge for elderly or less tech-savvy customers. Nonetheless, no card is perfect for everybody and the transparency and simplicity can teach us a lesson on how to craft a good customer experience. Despite being available only in the US and all restrictions above, Apple Card’s portfolio balance grew from $2 billion in March 2020 to $3 billion in September 2020 and roughly $4 billion at the end of 2020. Not bad for a portfolio with one card that is restricted to iOS devices. 

Annual fee or no annual fee? Appealing and complex or straightforward and simple?

A good practice in positioning is to use a 2×2 matrix. In this case, I’ll look at Apple Card and the three main credit cards mentioned above through whether they are easy to use and whether they have an annual fee.

Credit card positioning
Figure 4 – A 2×2 positioning matrix for credit cards

Let’s look at the positioning chart above. On the top right corner, we have an ultra-luxury card such as The Platinum Card from Amex. This card’s annual fee runs up to $550 and while rewards rate can range from 1x to 10x, it is not easy to remember all the details or to redeem rewards. On its left side, we have cards such as Capital One Venture and Chase Sapphire Preferred. These cards’ annual fee is $95, lower than the Platinum Card’s. Similarly, the complexity of cards such as Chase Sapphire Preferred is still high. Capital One Venture has 2x rewards rate on every purchase, making it less complex to use for some users, but it’s still time-consuming to redeem cash back. 

Moving further left, there is Capital One Quicksilver. This card’s annual fee stands at $39 and it offers 1.5x on every purchase. It’s in the middle of the spectrums. On the “no annual fee” side, we have two groups. The first group features cards such as Freedom Flex and Discover It Cash Back. These cards offer a 5x reward rate, but it rotates every quarter and to some customers, that can add some complexity. The other group features cards such as Citi Double Cash Back and FNBO Evergreen. These cards have no annual fee and offer 2x on every purchase. Nonetheless, they still have a complex fee structure and a reward redemption process that can be improved.

The point here is that it’s very competitive on the top half of the chart. All these cards have their own unique selling points that appeal to different customer segments. What they do have in common is that their fees and reward redemption are pretty complex.

On the other side of the x-axis, there are Apple Card and Upgrade Card. Even though it’s straightforward to use Apple Card as there is no fee and cash back is earned daily, the use of Apple Card depends much on whether customers have an iPhone and whether merchants enable Apple Pay. 40% of mobile users in the US don’t own an iPhone and as discussed above, older and less tech-savvy customers may not find Apple Pay comfortable. Without Apple Pay, the titanium card itself earns customers a paltry 1% cash back. 

Upgrade Card is a credit card issued by Sutton Bank, a medium sized bank in Ohio with $500 million in assets, and marketed by Upgrade. There is no fee with Upgrade Card. Here is what the company claims on its website

Not all traditional credit cards charge fees. However, creditcards.com’s 2020 Credit Card Fee Survey found that the average number of fees per card is 4.5. For example, the 2019 U.S. News Consumer Credit Card Fee Study found that the average annual fee (including cards with no annual fee) is $35.23, the average late fee is $36.34 and the average returned payment fee is $34. 01. The Upgrade Card charges none of these fees. Over 90 percent of cards charge balance transfer fees and cash advance fees. The Upgrade Card enables you to transfer cash from your Personal Credit Line to your bank account with no fees.

Source: Upgrade

With Upgrade Card, customers earn 1.5% cash back on all purchases as soon as customers pay off balance. The 1.5% cash back rate is lower than what Apple Card customers earn using Apple Pay, but on the other hand, Upgrade Card is device-agnostic and doesn’t rely on any mobile wallets. Hence, it is more accessible. However, Apple Pay allows customers to earn and use rewards daily while Upgrade Card only allows customers to redeem rewards after they make full payments.

According to the book The Anatomy of The Swipe, medium sized banks are essentially unregulated and can charge a higher interchange rate than big regulated banks. Hence, it’s very likely that Upgrade Card’s interchange rates are higher than those of cards issued by the likes of Chase or Capital One. The higher interchange rates can help offset rewards liabilities and generate revenue.

In fact, I am surprise to find no product like Upgrade Card from big banks. I suspect it would take a huge investment in infrastructure by legacy banks to offer the Daily Cash feature that Apple Card has. But legacy banks can essentially waive all fees like Upgrade Card does. While the likes of Chase, Discover or Capital One have more expenses than a smaller platform like Upgrade, they also have more popular brand names than Upgrade; something that would help tremendously in customer acquisition.

In summary, the credit card world is highly competitive. If an issuer follows the conventional way of launching a credit card, it will surely have a lot of competition and little to differentiate itself from competitors. In the upper half of Figure 4 above, I do think all the concepts and variations of rewards and economics have been tried. To be different, an issuer has to think differently and appeal to customers more with a superior customer experience (easy and simple to use) and less with complex features.

Thinking about Square’s acquisition of Credit Karma’s tax unit

Back in November 2020, Square announced its agreement to buy the tax unit of Credit Karma for $50 million in cash. Unlike Turbo Tax, which is infamous for slyly inducing tax filers to pay for its services, Credit Karma doesn’t charge users fees. Here is from the press release

Consistent with Square’s purpose of economic empowerment, Cash App plans to offer the free tax filing service to millions of Americans. The acquisition provides an opportunity to further digitize and simplify the tax filing process in the United States, expanding access to the one in three households which are unbanked or underbanked. The tax product will expand Cash App’s diverse ecosystem of financial tools — which currently includes peer-to-peer payments, Cash Card, direct deposit, as well as fractional investing in traditional stocks and bitcoin — giving customers another way to manage their finances from their pocket.

“We created Cash App to provide more access to the masses of people left out of the financial system and are constantly looking for ways to redefine our customers’ relationship with money by making it more relatable, instantly available, and universally accessible,” said Brian Grassadonia, Cash App Lead. “That’s why we’re thrilled to bring this easy-to-use tax product to customers as we continue to build out the suite of tools Cash App offers. With this acquisition, we believe Cash App will be able to ease customers’ burden of preparing taxes every year

Source: Square

There are several reasons why I think Square made a big splash on Credit Karma’s tax business.

Customer acquisition

In the same press release, Square claimed that 80 million people in America file taxes online every year, yet Credit Karma’s customer base is only 2 million. As of Q4 2020, Square’s Cash App monthly active user count stood at 36 million. Even if all Credit Karma’s current users are on Cash App and all active Cash App users file taxes online, by offering a decent free tax-filing service, Square can appeal to 44 more million tax payers in America at the top of the sales funnel. In the latest earnings call, Square disclosed that its Cash App user acquisition cost is less than $5 per user. At that rate, Square only needs from the acquisition of Credit Karma’s tax tool 10 million new users to break even on the $50 million in cash paid, let alone other benefits discussed later in this entry. Obviously, the conversion rate from being a tax filer to a Cash App user won’t be 100%, but a relationship to some extent with customers is still much better than no relationship at all. As of now, Paypal is Square’s arguably biggest rival with very similar offerings. However, Paypal doesn’t have an offering equal to what Credit Karma can offer to Square, yet. Perhaps, it can be a useful differentiator.

Customer retention

Engaged customers are often the more profitable customers. Filing taxes is, in most cases, a once-a-year activity for individuals. Given that Credit Karma is a free service and that Square essentially declares its intention to keep the service free, it won’t be a revenue center. Nonetheless, it doesn’t mean the new acquisition can’t help Square grow the top line. Here is how Square currently makes money with Cash App:

  • Whenever customers use Cash Card with Cash App to pay businesses for purchases, Square makes a small interchange fee
  • If customers want to expedite deposits to their bank accounts, there is a fee. If they can wait 2-3 business days, the deposits will be free
  • Customers are charged a fee when they make a P2P transaction using a credit card
  • Square imposes a small mark-up on Bitcoin’s price before selling it to customers through Cash App

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.

Additionally, there is nothing that stops Square from giving customers immediate access to tax returns in exchange for a small fee. Tax returns, after being approved, only hit bank accounts after a few days. Square can entice customers to pay a small fee to access the money immediately in Cash App which they can use to invest or make payments. It’s a win-win for everybody.

Figure 1 – The more engaged customers are, the more valuable they are to Square. Source: Square
Figure 2 – Seller offers a much higher gross margin to Square than Cash App. Source: Square

A great source of data

With Credit Karma’s tax tool, Square can have access to a reliable source of demographic data such as age, location, status, income, education, reasons for tax credits and investing behavior. Individual tax filers don’t often try to deceive Uncle Sam in their tax forms. Hence, any information derived from tax filings through Credit Karma is accurate and can be very useful to Square in designing and offering new products. Last year, Square got approval from FDIC to open a bank in Utah and a few days ago, it announced that its industrial bank named Square Financial Services already began its operations. According to the press release, the bank will first focus on underwriting and original loans to existing Square Capital customers and potentially all sellers in the future.

Nonetheless, it won’t surprise me at all if Square’s bank ventures into consumer banking products such as mortgage, credit cards, savings or checking accounts in the future. If they do, information derived from tax forms will be very valuable. I am working for a bank now. We are often frustrated by the lack of demographic information on customers. When they apply for a credit card, sometimes they disclose their annual income, along with other basic information like age or street address, but that’s about it. After they enter our system, it’s almost impossible to receive updated information in their income, their status or other information that a tax form can reveal such as security trading, cryptocurrency trading or donations. What could possibly give a financial institution that kind of information accurately, reliably and regularly on an annual basis than a tax form?

In summary, I do think this is a good strategic acquisition by Square. Personally, I can see some useful applications that Credit Karma can offer and really look forward to how it actually pans out in the near future.

Disclosure: I have a position on Paypal

A Look At “Buy Now Pay Later”

“Buy Now Pay Later” (BNPL) lets consumers break down purchases into smaller installments, either for free or with a charge. Sounds familiar? BNPL isn’t a new concept. Your credit card is essentially the OG of BNPL. When you put a big purchase (like a mattress or a new smart TV) on your credit card, you can spread out the outstanding balance into smaller chunks over a few months. If you make prompt payments every cycle, there will be no finance charge or late fees. Otherwise, you’ll incur penalties which can be fairly expensive as credit cards’ APR is usually in the high teens or the 20s.

What is the difference between BNPL and credit cards then? While credit cards can be convenient, securing approval isn’t always easy, especially for low FICO customers. Even though possession of a credit card can boost one’s FICO in the long term, upon an application for a new card, consumers will likely receive a hard FICO pull which hurts their standing in the short term; the price that some customers are reluctant to pay. Furthermore, it can take a couple of weeks for consumers to receive their plastics. With BNPL, consumers can receive a decision from BNPL online in a few minutes and there is only a soft FICO pull that doesn’t hurt their credit standing in the short term. As Covid-19 forced businesses to move from brick-and-mortar to online and it placed significant financial constraints on consumers, it created a perfect environment for BNPL to thrive.

Who are the main players and what do they offer?

  • Afterpay is among the biggest BNPL lenders in the US. Hailing from Australia, the company only entered the US market in 2018. Remarkably, the US has quickly become the biggest contribution to the company’s revenue in only 3 years. Afterpay doesn’t charge interest. Consumers make the down payment at the time of the purchase and have to pay off balance in 6 weeks (a payment every 2 weeks) to avoid late fees.
  • Klarna is a Swedish startup that offers payment and financial services, including BNPL. It entered the US market in 2015. Klarna allows consumers to make interest-free installments within 30 days or 6 weeks. It also offers high-interest financing options that spread out payments in a longer term.
  • US consumers should be very familiar with Paypal. The company launched its BNPL offering last August. Paypal’s BNPL is similar to Afterpay’s, allowing consumers to break down purchases into 4 interest-free installments.
  • Affirm was founded by ex Paypal, Max Levchin in 2012. Its model is slightly different from other BNPL lenders’ in a sense that Affirm doesn’t charge consumers usage or late fees. Payment options include monthly interest-free installments in 3 months or installments with interest over a longer period.

These startups have played an important role in popularizing BNPL. Now, banks joined the party. Amex launched its BNPL a couple of years ago, but on a fairly limited basis. Since then, it has opened it up to more customers. Chase also introduced its own version called “My Chase Plan”. These banks let consumers make interest-free installments with a monthly fee equal to a percentage of the purchase’s amount. This gives borrowers incentive to pay off their balance as soon as possible, because the longer the plan is, the more fee they will have to pay. Amex even lets its customers combine multiple purchases into one BNPL plan. Unlike startup BNPL providers, these banks impose a minimum requirement of $100 per purchase, along with other criteria, to ensure that customers aren’t overextended.

 InterestInstallment FrequencyFee to use BNPLLate fees
After Pay0%Every 2 weeksNoneYes
Affirm0% – 30%Monthly, up to 12 monthsNoneNone
Amex0%Every month% of each eligible plan’s total amount. Yes
Chase0%Every month between 3-18 months% of each eligible plan’s total amount.Yes
Klarna0% – 19.99%Every 2 weeks or in 30 days for 0%Every month up to 36 months with APRNoneYes
Paypal0%Every 2 weeksNoneYes
Quadpay0%Every 2 weeksNoneYes
 AmexChase
How many plans can an account have?10 active plans at a time10 active or pending plans at a time
Minimum purchase requirement$100$100
Penalties for paying off plans earlyNoNo
Rewards on BNPL purchasesYesYes
Are refunds/returns automatically applied to an account’s balance?No, customers must call the issuerNo, customers must call the issuer
Can authorized users set up plans?Only card owners or Authorized Account Managers with Full Access can set up a planOnly card owners can set up a plan

What do merchants and consumers get from BNPL?

For shoppers, BNPL lets them spread out a big purchase into smaller interest-free installments quickly and without a credit card. As mentioned above, the convenience and speed that BNPL brings are even more attractive during Covid-19, especially to younger shoppers who may not build their credit yet or may not have a credit card. Klarna and Afterpay claimed that 90% of their transactions were with debit cards, and 72% of those customers had enough balance on their checking account to cover 2-5x the purchase amount. To lock in customers, BNPL providers such as Klarna and Afterpay launched loyalty programs respectively with additional benefits for their most engaged customers. Klarna’s rewards program Vibe was launched first in the US in June 2020. The no-fee program allows customers to earn 1 point for every dollar spent. The points can be later redeemed for gift cards. Klarna reported that the program exceeded more than 1 million members. On the other hand, Afterpay’s loyalty program Pulse offers a different set of benefits. Registered members in the program can opt to pay nothing up front, choose to reschedule up to 6 payment dates and buy Afterpay gift cards. With Amex and Chase, shoppers accrue points to their bank rewards accounts and can be redeemed later.

However, there are risks for consumers when using BNPL services. A study found that many shoppers incurred late fees, not because they couldn’t make payments financially, but because they lost track of their payment schedule. While this prospect is real, BNPL providers are taking steps to make it easier for shoppers to pay on time. Klarna lets customers set up automatic payments and send out notifications. In the long term, it will be better for BNPL providers to rely too much on late fees. The second risk lies in the consumer protection or lack thereof and the difficulty when it comes to refunds/returns. Credit card issuers have to stop payments when they are disputed. With other BNPL providers, consumers first have to contact sellers, get credit and then proceed to the next steps with the lenders and the outcome is less guaranteed.

From a merchant’s perspective, BNPL brings more customers as the service providers spend a lot of money on marketing and user acquisition. Regardless of whether borrowers make payments on time, merchants get paid in full up front and they don’t have to bear the risk of chargebacks or fraud. In return, though, merchants have to relinquish a fee for each transaction to BNPL providers that can be multiple times higher than what they usually pay in interchange. Plus, merchants risk losing their relationship with customers. I wrote about the importance of owning your relation with your customers. If shoppers feel more attached to BNPL providers than merchants, in the same way shoppers feel more attached to Amazon than the sellers on Amazon’s website, merchants run a risk of losing bargaining power.

BNPL adoption

Because it brings flexibility in payments, BNPL became a hit with shoppers in 2020. Klarna reported that at the end of 2020, it had 14 million registered consumers, 3.5 million monthly active users and 60,000 downloads in December 2020 alone. As of Feb 2021, Affirm had about 4.5 million users that had at least one transaction in the last 12 months, up from 3 million users from one year prior, an increase of 50% YoY. Likewise, Afterpay had 8 million active users as of Feb 2021, up from 5.6 million in June 2020, and the US is now its biggest market. Paypal introduced its “Pay in 4” product in the US market in August 2020 and said that it was the company’s most successful launch ever. 

The rise of BNPL also benefits merchants. In December 2020 alone, Klarna drove 22 million lead referrals to more than 6,000 US retailers. Reportedly, Sephora’s in-store and online orders through Klarna in the US saw an increase in average order value by 65% and 35% respectively. Additionally, Afterpay delivered 45 million lead referrals to its partners globally in December 2020. As the US is Afterpay’s biggest segment and the world’s biggest retail market, it likely made up more than half of those referrals. Over the last 12 months, Afterpay reported a 141% increase in the number of active merchants in the US, from 7,400 in Dec 2019 to almost 18,000 in Dec 2020. Furthermore, Affirmgrew its merchant network by 39% during the last 6 months of 2020, to almost 8,000. 

According to the latest Global Payment Reports by FIS, BNPL will make up 4.5% of North America’s eCommerce in 2024, up from 1.6% in 2020. 

How do BNPL providers make money?

For providers that have an option to charge interest up front like Affirm, interest income can be a significant source of revenue. In fact, it’s Affirm’s second biggest revenue stream. Late fees can be another stream, though, as I already mentioned, they should constitute a small percentage of a provider’s income. Afterpay’s late fee only makes up 7% of the company’s revenue. Most of these providers make money from a fee that merchants have to pay them on every transaction. This fee helps BNPL providers offset the cost of fund placed on the balance allocated to shoppers, the interchange fee that these providers later have to pay to card issuers when shoppers make payments and operating expenses. As BNPL lenders become more popular, I suspect they will eventually launch advertising services whose revenue is high margin, compared to their current margin structure. For banks such as Amex and Chase, a minimum purchase requirement of $100+ means a higher interchange revenue. Plus, they charge customers a monthly fee to use their BNPL service. On the other hand, banks have to incur more expenses as they are much more regulated.

In short, BNPL is a trend born out of unaddressed needs of consumers and accelerated by a special market environment (Covid-19). It’s similar to something that once you saw, you can’t unsee. Once consumers experience it and come to like it, as evidenced by the rapid growth of BNPL providers, I don’t see how it will go away in the future. It will be interesting to see 1/ how these providers work to be more efficient, grow their machine learning capabilities so that they can minimize their losses, and acquire users and 2/ how lawmakers catch up to what’s going on in the market and what ramifications potentially new laws would bring.

Take-aways From Berkshire Hathaway 2020 Shareholder Letters

Shareholder letters, when written well, are a great source of knowledge, wisdom and interesting things. Berkshire Hathaway’s is one of those letters. Today, the company, which is based in Omaha where I currently reside, published its 2020 letter. I read it with a hot cup of coffee and pleasure, and now I want to share my take-aways in this post. You can read the letter in full here

You don’t always win every year, but being patient and having a long-term horizon matters

On the second page of the letter, readers can see the annual and compounded return of Berkshire Hathaway for the last 55 years. The firm didn’t always have a positive return every year. Far from it. It fluctuated greatly from one year to the next, from 28% return this year to -32% the following year. If these professional capital allocators who have more years of investing than my years of living don’t have a positive return every year, I think I shouldn’t set that bar for myself or neither should you. The main thing is that Berkshire had a compounded annual return of 20% in the last 55 years, meaning that the overall gain is some 2.8 million percent, a ridiculous return. Everyone prefers getting rich fast, but in the long term, it is likely better to be patient and have a long term horizon. The results will come, if you do it right.

Having an investing philosophy

Once in a while, I ran across some FinTwit folks who questioned the wisdom of holding large cap stocks such as Apple or Amazon. You know, the familiar big names across industries. These people claimed that to earn an outsized return, investors should look somewhere else where the fish isn’t fished as often. That may be true, but in the age of information, it’s really hard to get information that others can’t. What is harder to possess is patience and willingness to adopt a long term horizon. Back to Berkshire Hathaway, the company said that its Apple position was likely its 2nd most important asset. I mean, if these people upon whom thousands of investors entrust their savings choose Apple and earn excellent returns, why shouldn’t anyone, provided that they did their homework?

Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.

Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.

Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.

To Charlie and Warren, I think they don’t care about being a contrarian like so many aspire to be. What they want to be is to be right with their allocation of capital, as it is their fiduciary duty to shareholders. If we can get excellent returns, will it matter if those returns come from a tech giant or a company few heard of? Nah. So if you are only comfortable with the companies you know, don’t listen to the “advisors” who seem to be more eager to be “contrarian” (whatever that means) than to be right.

On page 4 of the letter, Warren and Charlie laid out their investment philosophy. They prefer owning a piece of a great business to 100% of that business. Their reasoning is that great businesses are rarely available for the taking, and even if they are, they will be greatly expensive. Owning a piece of a great business is cheaper, more profitable and cheaper. Berkshire Hathaway’s favorite companies are good to great businesses with a competent leadership that retain most of their annual earnings. As the investees grow their businesses over time, Berkshire’s ownership becomes more valuable. Over a long period of time, the growth in value will be aided by the 8th wonder of the world, compound interest. It may sound easy, but it isn’t. Identifying great businesses to buy is a challenge in and of itself. Sitting on those investments patient for a long period of time is not an easy task either.

What’s out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). As we pointed out in these pages last year, retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.

Admittedly, I learned a lot from Charlie and Warren in terms of investing. I try to read up as much as possible about a business and if I like what I read, I buy the stock and try not to sell it. The decision not to sell isn’t driven by my financial determination that a stock has more upside to go. That piece, I still have to learn, even though I don’t find it easy. Instead, my choice to keep stocks over time is mainly driven by my laziness. I don’t want to get up every day and day trade. Plus, I believe that once I own a piece, a very small piece of a great business, it will be more beneficial to keep the ownership as long as possible. A lesson from the two wise old men.

Work ethic

Charlie is now 97 years old and Warren is 90 years old. They are still actively managing their firm, making investment decisions and interacting with shareholders, either through letters like this or a meeting. In the letter, they talked about the story of Nebraska Furniture Mart and its founder, Mrs B, which is one of my favorite business stories:

The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattle in 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936 had saved $2,500 with which to start a furniture store. Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at yearend 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and on deposit, totaled $50 (that’s not a typo).

One invaluable asset, however, went unrecorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Day invasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November 1945. Once Mrs. B and Louie were reunited, there was no stopping NFM. Driven by their dream, mother and son worked days, nights and weekends. The result was a retailing miracle.

By 1983, the pair had created a business worth $60 million. That year, on my birthday, Berkshire purchased 80% of NFM, again without an audit. I counted on Blumkin family members to run the business; the third and fourth generation do so today. Mrs. B, it should be noted, worked daily until she was 103 – a ridiculously premature retirement age as judged by Charlie and me.

Mrs B worked daily till she was 103. Charlie and Warren are in their 90s and still working. I mean, I find it inspiring. Sometimes, I feel old whenever I think about the time when I was 16, even though I am just approaching 31. But these great examples remind me that I still have a few decades to work and enjoy life. Such a reminder can be hugely valuable.

Book Review: Working Backwards: Insights, Stories and Secrets From Inside Amazon

I always cherish a read that reports honestly on the culture of a company, pulling the curtain and providing details on what works, what processes the company used to forge the culture or the “tribe” that they have. Working Backwards is such a book. It was written by two insider Amazon veterans who lived the experience. From a small startup in Seattle that sold books online in the 1990s, Amazon has grown over time to become a household name in the world, a brand trusted by many and a competitor feared by rivals. It’s marching nicely towards generating $400+ billion in annual sales and currently employing over 1 million people. When a company consists of a small team of folks, management and the instillation of culture are straightforward. However, it’s another issue to manage more than 1 million people and still maintain the culture. How did Amazon do so?

“Our culture is four things: customer obsession instead of competitor obsession; willingness to think long term, with a longer investment horizon than most of our peers; eagerness to invent, which of course goes hand in hand with failure; and then, finally, taking professional pride in operational excellence.”

Excerpt From: Colin Bryar. “Working Backwards.”

When it comes to culture and corporate values, you may feel that a lot of companies just put together a list of sensible and sound-good sentences. That’s true. What makes one company different from another is how much the day-to-day operation is guided by its culture and how much the leaders exemplify it. From the very beginning, Jeff Bezos already showed the importance of customer obsession, setting the tone for the #1 value at Amazon for years to come. When employees see the CEO walk the walk, instead of just talking the talk, they believe in what he or she says and follows accordingly.

“From the tone of customer emails to the condition of the books and their packaging, Jeff had one simple rule: “It has to be perfect.” He’d remind his team that one bad customer experience would undo the goodwill of hundreds of perfect ones. When a coffee-table book arrived from the distributor with a scratch across the dust jacket, Jeff had customer service write to the customer to apologize and explain that, since coffee-table books are meant for display, a replacement copy was already on order, but shipment would be delayed—unless time was of the essence and they preferred the scratched copy right away. The customer loved the response, and decided to wait for the perfect copy while expressing their delight at receiving this surprise consideration.”

“Another of Jeff’s frequent exhortations to his small staff was that Amazon should always underpromise and overdeliver, to ensure that customer expectations were exceeded. One example of this principle was that the website clearly described standard shipping as U.S. Postal Service First-Class Mail. In actuality, all these shipments were sent by Priority Mail—a far more expensive option that guaranteed delivery within two to three business days anywhere in the United States. This was called out as a complimentary upgrade in the shipment-confirmation email. Thank-you emails for the upgrade included one that read, “You guys R going to make a billion dollars.” When Jeff saw it he roared with laughter, then printed a copy to take back to his office.”

Excerpt From: Colin Bryar. “Working Backwards.”

One of Amazon’s core values is Hire and Develop The Best. In the very beginning, staff was handpicked by Jeff Bezos, who has a notoriously high standard. As the hiring need grew substantially, Jeff couldn’t get involved in every hire any more. At one point, they ” had new people hiring new people hiring new people.” It became much more challenging to ensure the quality of every hire. Hence, The Bar Raiser program was created. The program’s purpose is to create a formal, scalable and repeatable process that can help with hiring the right people. Essentially, in addition to the normal practices such as having detailed Job Descriptions, phone screening and multi-team interviews, Amazon trains a team of interviewers whose goal is to identify in every new hire something that he or she can do better than a member of the existing team. The Bar Raiser cannot be the hiring manager or recruiter, but has the veto power to ultimately reject an applicant; though such a power is reportedly rarely exercised. It’s similar to having a new set of eyes that can review your work, whether it’s an essay or a code, and help remove the gut feelings out of the process as much as possible.

As Amazon’s business became increasingly multi-faceted and complex, how did the firm organize teams internally to be nimble, effective and innovative? The answers are: single-threaded leadership and two-pizza teams. The concept of single-threaded leadership is fairly simple: appoint someone to own a major initiative and remove all other responsibilities. Unburdened by other responsibilities, these single threaded leaders can devote all the time and energy to make their initiatives work and grow. More importantly, when a company wants to come up with new ideas, there is no way to gauge the results of the ideas without bringing them to real life and there is no point of doing so when there is nobody focused completely on that task alone. Andy Sassy, who will become the next CEO of Amazon in Q3 2021, used to be Jeff Bezos’ shadow and the single threaded leader for AWS. Other major successes at Amazon such as Prime, Kindle and Amazon Digital all resulted from having dedicated teams and leaders build them up from the ground.

“Amazon’s SVP of Devices, Dave Limp, summed up nicely what might happen next: “The best way to fail at inventing something is by making it somebody’s part-time job.”

And there is the two-pizza team. It’s normal in a working environment to depend on somebody else for your job. However, if there are too many dependencies, they will slow down the innovation process and reduce the efficiency of the whole company. To address that issue, Amazon came up with the two-pizza team concept. The idea is to have a small enough team that they can be fed with two pizzas. Each team is tasked with removing its dependencies and building out infrastructure and innovating. The sooner a team becomes unshackled by dependency on others, the sooner it can dedicate its resources to actual work and innovation. Each team functions like a small startup or a self-sustaining API that can work together if necessary, but doesn’t rely on others to be effective.

The next element of the Amazon Magic is my favorite: the importance of writing. At Amazon, Power Point is replaced by 6-page memos. The point is that writing a memo helps crystalize and sharpen ideas, as well as removes the limitations of a Power Point. Of course, Amazon still delivers presentations to partners, but internally, they rely on memos to ensure that the presenters think through the ideas/problems and don’t waste anybody’s time with half-baked thoughts. Another practice is to write a PR/FAQ for every new product/service idea. The idea is to envision the end result or customer experience that could come from a new idea, put it down to a one-page press release and work backwards to the details in an FAQ section.

I cannot tell you how many times I came up with an idea and after putting it to words on this blog, I realized how little I thought about it. Every time I write about something on this blog, it still may not be accurate, but the end product is much better than my original thought. At work, I also see it first hand. People have a lot of ideas in their head and shoot out ideas to everyone else. I am pretty confident that they didn’t take the time to work through the nuts and bolts, the logic, the challenges and ramifications of their ideas.

“The reason writing a good 4 page memo is harder than “writing” a 20 page powerpoint is because the narrative structure of a good memo forces better thought and better understanding of what’s more important than what, and how things are related. Powerpoint-style presentations somehow give permission to gloss over ideas, flatten out any sense of relative importance, and ignore the interconnectedness of ideas”

“Pressed against this functional ceiling, yet needing to convey the depth and breadth of their team’s underlying work, a presenter—having spent considerable time pruning away content until it fits the PP format—fills it back in, verbally. As a result, the public speaking skills of the presenter, and the graphics arts expertise behind their slide deck, have an undue—and highly variable—effect on how well their ideas are understood. No matter how much work a team invests in developing a proposal or business analysis, its ultimate success can therefore hinge upon factors irrelevant to the issue at hand.

We’ve all seen presenters interrupted and questioned mid-presentation, then struggle to regain their balance by saying things like, “We’ll address that in a few slides.” The flow becomes turbulent, the audience frustrated, the presenter flustered. We all want to deep dive on important points but have to wait through the whole presentation before being satisfied that our questions won’t be answered somewhere later on. In virtually every PP presentation, we have to take handwritten notes throughout in order to record the verbal give-and-take that actually supplies the bulk of the information we need.

“Pressed against this functional ceiling, yet needing to convey the depth and breadth of their team’s underlying work, a presenter—having spent considerable time pruning away content until it fits the PP format—fills it back in, verbally. As a result, the public speaking skills of the presenter, and the graphics arts expertise behind their slide deck, have an undue—and highly variable—effect on how well their ideas are understood. No matter how much work a team invests in developing a proposal or business analysis, its ultimate success can therefore hinge upon factors irrelevant to the issue at hand.

We’ve all seen presenters interrupted and questioned mid-presentation, then struggle to regain their balance by saying things like, “We’ll address that in a few slides.” The flow becomes turbulent, the audience frustrated, the presenter flustered. We all want to deep dive on important points but have to wait through the whole presentation before being satisfied that our questions won’t be answered somewhere later on. In virtually every PP presentation, we have to take handwritten notes throughout in order to record the verbal give-and-take that actually supplies the bulk of the information we need. “The slide deck alone is usually insufficient to convey or serve as a record of the complete argument at hand.”

There are more great points, examples and details about Amazon’s culture from the book, apart from some of my favorite above. The book also touches on the value of thinking long term, being patient, removing defections at every level or controlling the input variables. With what I think are sensible decisions and policies, there is little wonder why Amazon is a success that it is today. In my opinion, there is no greater competitive advantage than having a robust culture that can foster a company’s mission and vision. You can replicate parts of operations or strategy, but it’s much harder to replicate a culture. Amazon managed to put together a strong culture, evidenced by their financial success and brand name, and it’s something that rivals will find highly challenging, if not impossible, to mirror.

This is a great read for business students or any curious mind that wants to know more about one of the greatest companies on Earth. If you are looking for such a read, I highly recommend it.

Disclosure: I own a position on Amazon.