Weekly reading – 16th April 2022

Business

Pricey Jet Fuel Punishes Airlines and Passengers. “Jet fuel, a kerosene-based product akin to diesel fuel, has roughly doubled in price since last April across the U.S., according to S&P Global Commodity Insights, while gasoline has risen about 45%. A fall in exports of Russian diesel in recent weeks has driven Western refiners to shift resources from jet to diesel production, leaving jet fuel undersupplied, S&P Global Commodity Insights analysts said.”

Apple’s privacy focus means fewer app features, slower development, say company’s own engineers. The skeptics or critics that say Apple’s focus on privacy is self-serving should read this article. Of course, when you run a business, I believe your MO should be to maximize revenue and profit. However, what differentiates one company from all the others is its ability to align such a goal with actions that also benefit other stakeholders. In this case, Apple has repeatedly proven that they align their business with user privacy. There are things that the company could have done to further its business interests, but those things were put on shelf because they went against their promise to users on privacy. If that’s not proof of Apple’s intention, I don’t know what is.

Wedgewood Partners First Quarter 2022 Client Letter. Some great commentaries on a few companies such as Meta, PayPal or First Republic Bank.

Amazon sellers face 5% fuel and inflation surcharge to offset rising costs. What sellers get from platforms such as Amazon is traffic, eyeballs and business. However, such dependence also means that in the times of inflation, it becomes more expensive for sellers to generate revenue and profit. You can only pass on the costs to consumers so much before business is lost.

The Chips That Rebooted the Mac. A nice piece by WSJ on Apple’s decision to develop its own chips. Business students should really be encouraged to study Apple for business lessons and insights. The company is a great case study in terms of customer orientation, platform development, business strategy, execution, supply chain, pricing and marketing. The move to rid itself of dependence on Intel and decide their own future is a masterpiece

Intangibles and Earnings. Improving the Usefulness of Financial Statements. Accounting is the language of business. Some companies use sophisticated accounting practices to often hide the true state of their businesses. This article walks readers through how to sort of earnings, investments and the implications on valuations.

Other stuff I found interesting

Why Germany Won’t Keep Its Nuclear Plants Open. It is baffling to me that Germany decides to favor other sources of energy and electricity over nuclear. If there is EVER any silver lining, in addition to laying bare what we should know about Putin already, it’s that Germany starts to move away from Russia and the dependence on its gas and oil

America’s highest earners and their taxes revealed. It’s an informative read, but by no means do I mean that billionaires are legally guilty for successfully exploiting the loopholes to reduce taxes. It’s the lawmakers’ job to make sure high earners pay their fair share AND keep the attractiveness of the US as a business environment. On the other hand, rich folks want to keep as much money as possible. The fact that they can do so without being in jail shows who successfully did their jobs

An example of how China uses technology, surveillance and facial recognition to inflict human rights abuses on its own citizens

Stats

Digital ad revenue in the U.S. jumped 35% to $189 billion last year

Fintech app installs grew by 35% YoY in 2021

In March, total U.S. online grocery sales pulled back 6% to $8.7 billion versus March 2021’s record high of $9.3 billion

QR Codes’ popularity in Vietnam

The perks of living in the States as a Vietnam is that I get to see the differences between the two countries in several aspects. One of them is payments. If contactless and tap-to-pay is more common and popular in the US, QR Codes are much more ubiquitous in Vietnam, at least in the big cities. What you see below is in Ho Chi Minh City, the biggest economic hub in Vietnam. When you venture out to smaller and poorer provinces, things may change significantly.

This is how we paid at a convenience store. The cashier scanned the QR code on a phone to process payments.

In the below clip, we were at a local bakery named Tous Les Jours. You can see different QR Codes for different mobile wallets. Consumers can just scan one and make payments. The nature of the transaction requires immediate confirmation since nobody is going to wait 5′ for a payment to go through.

Even mom-and-pop stores like a sugar cane shop and a photocopy shop below allow payments via QR Codes

A sugar cane shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes
A local photocopy shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes

Mobile wallets like Momo strive to acquire and retain users. When we paid for our drinks at the sugar cane shop, we got 50% discount out of nowhere even though the transaction amount was only $1.2.

Momo gives users 50% discount on transactions out of nowhere

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PayPal made strides towards being a Super App

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

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

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

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

Here is PayPal from its 2020 annual report:

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

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

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

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

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

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

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

PayPal's Consumer Services
PayPal’s Consumer Services

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

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

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

Why Square paid the big bucks for Afterpay

Last Sunday, Square announced that it was going to acquire Afterpay, the Buy Now Pay Later provider from Australia, in a $29 billion all-stock deal. A lot has been said about this merger and the one bear case that I have seen quite often is that people questioned whether Square could actually build its own BNPL in-house and is wasting $29 billion on this deal. Below is how I think about it.

Before we go further, let’s take a minute to talk about these two companies in general. Afterpay was founded in Australia in 2014 by Nick Mornar and Anthony Eisen. The company allows shoppers to break purchases into four interest-free installments paid every two weeks. Afterpay charges merchants 3-4 times interchange rate in exchange for customer leads and the underwriting of the loans. Merchant revenue constitutes the majority of Afterpay revenue while late fees make up around 9% of the top line. Currently available in Australia, New Zealand, the U.S, the UK and Canada, Afterpay is launching services in a few European countries such as France, Italy and Spain.

Originally started as a payment company with a little credit card reader, Square has grown leaps and bounds over the years to become a publicly traded financial company with over 30 different services, a banking license and over $126 billion in market cap as of this writing. Square’s revenue comes from different sources. Bitcoin makes up more than 50% of Square’s revenue, even though the gross margin is only around 2%. The company sells POS hardware at a cost to merchants and charges them for used services. If merchants and customers want to receive funds instantly, they must pay Square a small fee. Square also offers merchants loans from which it earns interests. Last but not least, there is interchange revenue from millions of transactions processed through Cash App.

Square used to have a BNPL option which was discontinued due to the effects of Covid-19. Then why the sudden change of heart and why wouldn’t Square reactivate Square Installments instead of paying an enormous sum for Afterpay? First of all, it’s about international expansion. While Square is available in some overseas markets, 85% of its GMV is from the domestic front. Meanwhile, more than 50% of Afterpay’s GMV originates from non-US markets. Acquiring Afterpay gives Square quick access to those international markets and reduces reliance on its home market. Plus, it’s not really easy to build up a BNPL service from scratch. In addition to having to acquire merchants and users, to be a BNPL provider, one has to deal with a lot of regulation hurdles. These are the things that currently Afterpay does better than Square in non-US markets. Hence, this purchase will help Square bypass all the trouble and acquire these skills quickly.

Second, customer acquisition. Afterpay’s main clientele includes Enterprise merchants wanting to leverage its popularity with consumers. On the other hand, while Square’s fastest growing segment is merchants whose GMV is higher than $500,000 a year, I doubt they are big enough that we can call them Enterprise. Hence, this acquisition enables the acquirer to move up the ladder and into a new market. The U.S is responsible for 62% and 43% of Afterpay’s active customers and GMV respectively. However, I’d say that in terms of reach to U.S consumers, Square is the far better company in this equation and has multiple touchpoints that it can use to acquire new users (Credit Karma tax, Cash App P2P, Bitcoin trading). Therefore, Square can definitely assist Afterpay in user acquisition. On the other hand, Afterpay gives Square access to the former’s high income customer base in coastal cities where Square isn’t as competitive as in the South.

Third, merchant acquisition and retention. Merchants pay BNPL providers because of not only consumer preferences, but also the new business that these providers bring due to their marketing reach. For instance, Klarna reported 22 million customer lead referrals in the U.S December 2020 alone. This extra revenue is what merchants, especially smaller ones, crave and are willing to pay for. With the Discovery tool from Afterpay, Square can strengthen the relationship with merchants and keep them in the ecosystem. The more merchants they have, the more their Cash App can appeal to consumers and the healthier the whole ecosystem will be. As a result, the addition of the Discovery tool is strategically beneficial to Square.

Last but not least, this merger is about the competition. Square ‘s main challenger in the race to become the Super Financial App is PayPal. Formerly a P2P platform and a primary checkout option on eBay, PayPal has transformed itself into a financial service and a formidable eCommerce player. It provides both merchants and consumers with multiple different services to facilitate in-store and online transactions. With PayPal, shoppers can pay in stores and online with QR Code, tap-to-pay, mobile wallet, debit cards, credit cards and PayPal Credit. In the past few months, the company has ramped up significantly efforts in cryptocurrency trading, one of the selling points of Cash App. Additionally, PayPal recently launched Zettle, its card reader, in the US, a direct threat to Square’s bread and butter. PayPal’s own BNPL, PayPal in 4, has facilitated $3.5 billion in GMV in a few markets since its launch in August 2020, $1.5 of which came in the last 90 days alone. As mentioned above, Square no longer has an installment service.

Outside of the U.S, PayPal and Klarna, the global leader in BNPL, share a lot of market overlap with Square and Afterpay. This acquisition of Afterpay gives Square an instant counterweight to these competitors. Could Square build its own BNPL muscles? Absolutely, I have no doubt about it. But it will take a lot of time and resources for Square to play catch-up. By the time the company could form a respectable presence in the markets, PayPal and Klarna would already sign more merchants, gain more market share and establish a purchase habit as well as brand name with consumers. It would be incredibly tough to overcome these advantages. With Afterpay, Square won’t have to start from scratch and can compete right away with their rivals.

In summary, from my perspective, there are legitimate reasons why Square made such a big splash. Afterpay brings to the table what Square needs for its growth plan and more importantly, it does so instantly. Of course, M&A deals fail all the time. Synergies are often overstated. Cultural clashes tend to be overlooked. Execution doesn’t materialize as expected. Management teams butt heads. All kinds of trouble can happen to derail a partnership. This one isn’t immune to such risks. But I hope that one day we can look back at this deal as an important milestone and lever that propels Square to incredible heights.

Figure 1 – An example of regulatory hurdles that a BNPL provider has to deal with. Source: Afterpay
Figure 2 – Afterpay can help Square move up market. Source: Square + Afterpay
Figure 3 – Afterpay can expand to coastal cities in the U.S and acquire higher income clientele. Source: Square + Afterpay
Figure 3 – Integration of Afterpay into Cash App. Source: Square + Afterpay
Fincog Overview of BNPL Providers, Ranked by Size
Figure 5 – GMV of Global BNPL Providers. Source: Fintechnews
Figure 6 – Klarna’s footprint. Source: Klarna

Weekly readings – 24th August 2019

Spotify’s pitch to podcasters: valuable listener data

Netherlands’ Building Ages. How cool is this? It must have taken quite some time and effort to build this map.

OuiWork? The quick case for WeWork as an actually disruptive business

Apple Targets Apple TV+ Launch in November, Weighs $9.99 Price After Free Trial

Where Top US Banks Are Betting On Fintech

Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible

Apple’s New TV Strategy Might Just Work

MoviePass database exposes 161 million records. Much as I am grateful to MoviePass, perhaps it’s time for the company to be shut down

Starbucks, monetary superpower. Let me give you a notable quote to get an idea of what this article is about

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities. 

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt. 

Now bigger than eBay, Shopify sets its sights on Amazon

Inside India’s Messy Electric Vehicle Revolution