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.

Weekly reading – 13th March 2021

What I wrote last week

My thoughts on Square’s acquisition of Credit Karma’s tax unit

My review of the book Think Again: The Power Of Knowing What You Don’t Know

Business

An interview with Elliot Turner on Twitter. Lots of good stuff in here.

Octahedron Capital publishes a super interesting presentation every quarter, compiling quotes from executives

A very interesting piece on how Jeff Bezos approached design. I love the anecdote on how Amazon’s logo came into beings.

How Salesforce became Silicon Valley’s best late-stage tech investor. Salesforce is a prime example that you should care more about Operating Income than Net Income if you want to evaluate a company’s operations

A great post on the importance of reinvesting in a business. As the saying goes, it’s one thing to get to the top of the mountain, it’s another to stay there.

A great conversation between The Verge and Twitter’s Head of Consumer Product. The company announced some very interesting product developments in the pipeline. As a fan of the platform, I can’t wait to see what unfolds next

Postmates added $70 million in revenue and saved $3 million in network fees with Stripe

Neil Cybart published a new article on the importance of Apple’s retail stores

A very telling piece on how Facebook’s internal effort to curb misinformation using AI was punted by Zuckerberg’s desire for growth

What I found interesting

Apple Gave Us an Exclusive Look Inside Its Next-Generation Fitness+ Studio

Tesla told California DMV that its future autonomous vehicles wouldn’t be fully autonomous. What else is new?

WSJ’s profile on Manchester United star forward, Marcus Rashford. If you are not familiar with football (yeah, the real football where the ball touches feet more than hands), Manchester United is one of the richest and biggest clubs in the world. It has a reputation of playing home-grown talent and actually has been fielding at least one academy player every game for the last few decades. Marcus Rashford is the latest biggest home-grown star that came out of the famed academy. Inspired by his difficult childhood, Rashford took on the British government last year, in a campaign aimed at providing school meals to children during Covid-19. The government listened and hundreds of kids were fed because Marcus Rashford had the will to do what his reputation enabled him to.

Corporate logos are changing with the time

A look into the cyber-surveillance world of Israel

Stats that you may find interesting

Costco edged by Amazon and Apple to lead all brands in customer satisfaction

India leads the world in IPv6 adoption rate at 63%

Disney+ has more than 100 million subscribers. Though the count is impressive, comparing it with Netflix’s subscriber base, either now or when it first started, may require a lot of unpacking. The consumer attitude towards streaming is different now than it was when Netflix began to stream its content online. The mix of subscriber base is also different. Disney+ has 30% of its subscribers. Nothing inherent bad about it, but to have an apple-to-apple comparison, one must figure out whether Netflix has the same composition. Plus, the streaming competition 10 years ago for Netflix might be much less fierce than the current landscape.

If you need more evidence as to how different a GOP government and a Democratic government are, here it is. One proposed a law that benefits low-income folks (Democrats) while the other passed a law that put more money in the pocket of the richest.

Source: TPC

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

Beware while filing taxes with Turbo Tax

Tax season is here. Millions of folks in the US have filed taxes or are going to and I suspect that thousands will use Turbo Tax’s services like myself. If you qualify for free file programs, check this website out from Turbo tax or this list of other services from the IRS. The reason why I called out this version of Turbo Tax is that I couldn’t find it from their main website.

If you have any income, be it interest, capital gain or dividends from your stock portfolio, chances are that you’ll pay at least $80 ($40 for Federal tax and $40 for State tax) to use an upgrade service from Turbo Tax. The “free” version on Turbo Tax doesn’t cover it at all. In fact, they design their website in a way that tricks users into paying more buy labeling the “free” version (I don’t believe you can access the free version on Turbo Tax main site) “Not Now” as you can see below

Source: Propublica

It’s bad enough that the company uses color effect to trick users. They also label it manipulatively so that users are discouraged to pick an option that screams “Not now”. Worst, that is not the only trick Turbo Tax has to get more from your wallet. Upon finishing your tax filing, you will be prompted to pay for the service fees by either using a credit card or paying with tax refund. After minutes or probably hours of preparing all the documents and information, a taxpayer is likely tired and likes to finish up so quickly that he or she won’t notice that using tax refund to pay Turbo Tax will result in a $40 fee

turbotax pay refund fee
Source: Mighty Taxes

PLEASE DO YOURSELF A FAVOR AND PAY WITH A CREDIT CARD

I came across an alternative that I personally will try next year: Credit Karma. The service claims that its free version covers dividends and capital gains, supports federal & state taxes and can import tax returns, even when you filed taxes with a different preparer.