($) The Subtle Strategy Behind Elon Musk’s Price Cuts at Tesla. The EV war is so fascinating. Manufacturers like Ford and GM are raising prices to maintain profitability and appease investors. Musk, on the other hand, chooses a different path. He is lowering prices to put more Teslas on the streets and hoping that consumers will pay for a subscription to download latest software. To support the bet, he sanctioned an expansion of Tesla factories. The committed capital can make or break his company’s fortune. If it works, other car manufacturers will lose market share to Musk and will have to lower prices. Otherwise, let’s just say GM got into so much trouble that they required a government bailout because of the same tactic.
The underbelly of electric vehicles. Electric vehicles have their strengths, but it’s inaccurate to say that they are entirely harmless to our nature and environment. It’s because an EV requires a lot of minerals whose extraction and processing can take a toll on Mother Nature. This article offers a good rundown on aspect.
.James Corden Bows Out. It’s not surprising to read that The Late Late Show is wildly unprofitable, but it’s bizarre to hear that the show runners still wanted to keep James Corden around for 2-3 more years. Regardless, it’s a good read on the late night television space and how it has evolved in the past few decades.
What went wrong with Shopify’s quest to build a logistics business. “In a fulfillment relationship, you only have — let’s call it — $2 to spend on the fulfillment fees. Those $2 go a lot further with one partner than they do when you’re splitting them between a middle management layer, i.e. Shopify, and the fulfillment partner itself. It’s harder to find the right third-party logistics provider for smaller merchants, because most good 3PLs are looking for volume customers. And as Shopify started its business, most of its customers were smaller customers. So there is a legitimate problem that they saw. But it’s more they made a big mistake with how they wanted to solve the problem. What I found in my own experience, is that the approach of an asset light network makes it very difficult to make consistent quality of logistics delivery across an effort, because of having different partners with different processes and things like that.“
What the U.S.-China chip war means for India. “The investment in design, through the design-linked incentives, is from the perspective of building on our strengths. Government wants to support 100 local firms working on integrated circuit and chipset designs. The other focus is on the outsourced semiconductor assembly and test, where India has a comparative advantage given that we have low-cost labor. Design and testing are two places where we actually have advantages. I don’t think we need to invest in display fabs, because if Chinese companies don’t provide them, we can buy them from Japan or South Korea. It’s a huge cost we are putting up for this display fab. We have a lot of scope and talent. In some estimates, we have 20% of the total design workforce in the world. The India Electronics and Semiconductor Association claims that around nine out of 10 chips that go into the market will have some Indian design center work behind them. So there is capability, but now that needs to be translated into intellectual property and new products that are made from India.“
For the last couple of months, a score of technology companies have announced support for Tap to Pay on phone. Here is a quick rundown:
Clover, a Point-of-Sale and business management platform by Fiserv, now enables small & medium sized businesses to accept Tap-to-Phone payments on iPhones:
As a point-of-sale platform for merchants, Clover processes over $234 billion in payments each year. Small- and medium-size businesses (SMBs) in the U.S. can now accept in-person contactless payments on their own iPhones thanks to an integration with the Clover Go iOS app and Tap to Pay on iPhone. For Clover merchants on the move, including fitness trainers, home service providers, market vendors and food truck operators, the addition of Tap to Pay on iPhone enables contactless payment acceptance without the need for additional hardware. Businesses can also use Tap to Pay on iPhone as a complementary solution to accept payments for needs like line busting or accepting payments at the table.
Fiserv, one of the leading payment technology providers in the world, launched digital issuance for debit cards:
Financial institutions can eliminate the wait that often goes along with receiving physical debit cards with the launch of new capabilities from Fiserv, a leading global provider of payments and financial services technology solutions. Cardholders now can access a new or replacement debit card electronically, allowing them to make in-store and online purchases immediately and eliminating the need to wait for a physical card to be mailed out, received and activated.
Houzz will allow contractors and professionals on its platform to get paid with Tap to Pay on iPhone
Houzz Inc, the leading platform for home remodeling and design, today introduced Tap to Pay on iPhone within Houzz Pro, the all-in-one business management and marketing software for residential contractors and design professionals. With Tap to Pay on iPhone, industry professionals can turn their phones into point-of-sale devices to quickly collect electronic payments in person. Pros simply open any invoice in Houzz Pro, choose a scheduled payment and select “Collect Payment”. Then they tap their iPhone to their client’s contactless credit card, debit card, or smartphone to accept the charge from a digital wallet.
ACI Worldwide and MagicCube Partner to Deliver Tap to Pay Acceptance for Mid- to Large Retailers
ACI Worldwide, a global leader in mission-critical, real-time payments, has teamed up with MagicCube, the creator of i-Accept™, to deliver secure and seamless contactless payments on commercial off-the-shelf (COTS) smartphones and tablets using Tap to Pay—with or without PIN. The solution will provide mid-size and large retailers operating in complex environments with device-agnostic control and visibility of transaction data. This comes on the heels of MagicCube’s announcement extending its platform to big-box retailers.
i-Accept empowers financial services institutions to enable large merchants and retailers to accept contactless transactions through payment cards and mobile wallets such as Apple Pay, Google Pay, and Samsung Pay. Uniquely, i-Accept adapts to local card schemes and crypto wallets and supports Buy Now, Pay Later programs. It also allows for secure PIN capture on a COTS device screen without the need to scramble or shuffle the PIN entry device keys, making the transaction experience intuitive and efficient for the customer.
Stripe, a financial infrastructure platform for businesses, today announced support for Tap to Pay on Android, enabling businesses in six countries to accept contactless in-person payments using a compatible phone or tablet.
Square software turns Android devices into powerful payment technology
Square today launched Tap to Pay on Android for sellers across the U.S., Australia, Ireland, France, Spain, and the United Kingdom. The new technology empowers sellers to securely accept contactless payments with a compatible Android device, and at no additional cost.
Visa offers fascinating commentary on Tap to Pay (TSP). In the US, T2P penetration is now at 34%, up 700% compared to three years ago.
And tap-to-pay continues to be a powerful driver of engagement. Globally, 74% of all face-to-face transactions outside the U.S. are now taps. In the U.S., we’re at 34%, up 7x from three years ago and up more than 10 percentage points from last year.
A couple of highlights in the second quarter include U.S. quick service restaurants, where penetration surpassed 40% and in key metro areas across the United States, we continue to see great traction beyond the success in New York and San Francisco, L.A., Detroit, Seattle, San Diego and Ocean to Miami are all now over 40%.
Mass transit continues to be one of the best ways to get people used to tapping and we’ve set records. In the first half of 2023, we processed more than 745 million Visa Tap to Ride transactions globally, up 35% over the first half of last year. We’ve enabled 55 new transit systems, bringing our footprint to over 650.
The rising popularity of payments on the phone carries significant ramifications for different industries. Payment facilitators will face a major strategic risk if they don’t introduce the technology in time. T2P on phone will soon be table stakes and like in a poker game, a company needs to buy their way in before they can think about winning. The same logic applies to debit and credit card issuers. Enabling the addition of a card to a digital wallet is no longer enough. Instant provisioning to digital wallets will be a required standard. I believe that while card plastics still play a role in the payment world, but more and more transactions will take place on smartphones. Hence, any card that wishes to gain top of wallet must find a way to consumer phones.
Furthermore, the increasing adoption of T2P on phone represents a huge tailwind for device manufacturers. It’s very simple. The more popular T2P on phone is, the more phones these manufacturers will ship. Apple, in particular, will be among the biggest beneficiary. Even if consumers take time to upgrade hardware, Apple can still extract revenue from subscriptions and the App Store. That’s in addition to the 0.15% cut that Apple earns on every Apple Pay transaction.
Retailers that don’t allow T2P on phone will have no choice, but to follow the trend. The biggest name in this bucket is Walmart. They stubbornly refuse to accept contactless payments, except their own Walmart Pay. But when even the Costcos and the Aldis of the world accept T2P on phone and the trend is irreversible, I expect Walmart to concede and change their mind in 2-3 years.
What about PayPal? I believe this trend will make it more important for PayPal to push their branded credit/debit cards. Think about it this way. Even if PayPal announced support for T2P on phone with PayPal app tomorrow, consumers would still need to install the app on their phones. It takes only 2-3 finger taps to complete the task, but it’s by no means easy. On the other hand, Apple Pay and the Wallet app are ready to use from the get-go. No further installation required. That’s a significant disadvantage from PayPal’s perspective. To overcome that, they need to be involved in in-store transactions.
Because rewards are accumulated through a PayPal account, any point earned through the use of PayPal/Venmo cards in stores can spur activity on their apps. PayPal will have time to act as consumer behavior is often difficult to change. But they should make sure their cards are provisioned in digital wallets and their branded cards are in as many hands as possible.
The renowned venture capital firm, a16z, recently published an article named “The Future of Payments is… Red?“, whose content I find at best unconvincing. The gist of the article is that the author believed fintech startups could challenge the two dominant networks (Visa & Mastercard) by pushing for ACH transactions to replace credit cards. The example used to substantiate the thesis is Target Red Card. Per the article, and sorry for the lengthy excerpt:
Look at Target’s full-year revenue for 2022: they made $107.6 billion in sales and $3.4 billion in pre-tax income. Now imagine if every transaction at a Target store or at target.com were made with a credit card—which is currently not the case—at an average fee of 2%. This would result in $2.2 billion in incremental income if all payments shifted to ACH, which would be 65% more profit!
Target has impressively shifted 20% of their entire sales to their own cards. The only “illogical” part of this is that to save ~2%, the company is… giving up 5%, albeit to the user in the form of direct savings at Target, which is the primary benefit of the RedCard.
Target isn’t an outlier here. Most “frequent interaction” or high-frequency billing companies do the same. Verizon and AT&T, as additional examples, give you substantial monthly savings for moving your bill-pay off of credit cards and to ACH (or sometimes debit cards, given the lower average fee).
That said, while I think Target has been smart to roll this out, paying 5% to save 2% (and justifying it by showing increased engagement, which likely reverses cause and effect and shows sampling bias!) is not smart. A better alternative, in my opinion, would be to provide customers with a one-time benefit to make the switch. As an example, imagine if Netflix started offering such a benefit and started offering customers, upon log-in, a $2 one-time discount if they clicked and switched their payment method to direct debit. This would provide Netflix with long-term savings of more than $100 million a year in North America alone, based on their rough interchange costs.
Luckily, inertia, one of the twin moats that protects so much of banking, is now decreasing thanks to improved technology, and consumers are more willing to switch up their payments methods. (Rewards, the process by which merchant fees fund customer benefits, with banks in the middle, remains a stubborn reason why “RedCard as a Service” hasn’t previously taken off.)
There are several points with which I disagree with the author and I’ll go over them one by one.
The claim that Target gives 5% discount on Target transactions to save 2% in interchange is not true. A loyalty program is more than just payments. First of all, loyalty programs existed way before credit cards came around. Brands understood that a loyalty program helped build customer relationship and retain customers. Second, a branded debit or credit card is a tool with which retailers collect valuable first-party information. Who a customer is, how often a customer visits a certain store, what they buy, what combination of goods they buy, what promotions they are most responsive to, whether they want to pick up goods at drive-through, in store or have them delivered. The kind of information not only assists a retailer in personalizing offers and making operational adjustments accordingly, but also powers a high-margin advertising platform. Look at the big retailers on the market. The Walmarts, the Amazons and the Targets of the world all have ambition to build an advertising machine popular with advertisers. How else do they provide targeting to those advertisers without data about their own customers?
There are a bunch of 2% cash back credit cards on the market. Some even offer a higher rewards rate on Target purchases. Consumers are pretty savvy. They will use whatever saves them the most money. Remember that Target would have no information on a customer if they used a non-Target card. Without offering a competitive earn rate, how could Target compete and gain valuable customer information?
The Target credit card is underwritten by TD Bank USA. Co-branded credit cards usually serve as a revenue stream for brands and Target credit card is no exception. According to the latest 10K, Target recorded $734 million in profit sharing from TD Bank as revenue. $734 million! Of course, that’s not entirely pure profit as I believe Target shoulders some of the rewards expenses, but it’s still one hell of a figure. Because Target debit card is issued by Target itself, in collaboration with a bank, they earn much less, if anything at all, from the debit card. So why do they have it in the first place? Why does Target have a reloadable account with the same 5% cash back?
One word: accessibility. Not everyone has a Social Security Number or an ITIN to open a checking account and get a debit card. Then, not everyone with an SSN can get a credit card. TD Bank must have some say in whom they want to give credit to. A FICO of 600 should disqualify a lot of folks from having a credit card. Hence, a lineup of different options helps Target widen their target audience. And if Target already offers a debit card or a reloadable account, they may as well give a reason to customers why they should use those options.
The author of this article argues that retailers should incentivize consumers to use ACH and abandon credit cards. His example is that utility providers already do so. There are two errors with that argument. First, consumers love credit card rewards. Why would they turn away from concrete savings and benefits? Second, using utility providers as an example doesn’t make sense. Consumers pay for utility once a month. Twice or three times at most. These providers charge 4%, which is substantially higher than most credit cards’ earn rate. The extra fee deters consumers from using credit cards as payment method. The gain is smaller than the expense. It doesn’t hurt because most of the time, it’s just one transaction every month. For retailers like Target, it’s different! They want consumers to shop as often as possible. Retailers rarely impose a transaction fee like utility companies do (they negotiate a favorable interchange rate with the networks) and consumers want their rewards. Hence, it’s exceedingly difficult here to change consumer behavior.
In addition, I don’t understand why the Target Debit Card is an example of how Visa and Mastercard can be disrupted. Visa and Mastercard are two of the most known and trusted brands in the world. Walk to a restaurant in a remote country and if you see the Visa logo, you know that your Visa card will work there and you are protected from fraud. How popular is Plaid globally? Is it as trusted as Visa and Mastercard? The networks built an incredible business model in that they are accepted by millions of merchants and millions of consumers trust them. Plaid has been around for a while and if they haven’t gained much traction, what are the odds that Plaid will build a similar business model like the networks?
Plus, how could we replicate that model with ACH? Mom-and-pop merchants want customers and frictionless payments that are proven and tested. Yes, saving 2% is great, but it’s still a lot better than losing business to a competitor nearby because that competitor enables card payments.
I understand that a16z wants to push a narrative that is favorable to their fintech investments, but this is not a good one as the reasons mentioned above.
What Booking.com does is very easy to understand: to facilitate online travel reservations between travel service providers and travelers. The company was founded in the Netherlands in 1996 under the original name Bookings.nl. In 2000, Bookings.nl merged with Bookings Online to form Booking.com; which was subsequently acquired by Priceline Group five years later. The acquisition was so successful that the parent company Priceline Group changed its name to Booking Holdings in 2018.
Booking Holdings includes many well-known brands to travelers such as Booking.com, Priceline, Agoda, Rentalcars.com, Kayak and OpenTable. These different platforms enable online reservations for accommodation, flight tickets, rental cars, activities and restaurants. As of the end of 2022, Booking Holdings’ services are available in multiple languages to millions of travelers around the world, making the parent company one of the most powerful players in the travel industry.
Revenue streams and expenses
Let’s talk one thing that everybody understands: money. Booking Holdings (Booking) has three revenue streams: Agency, Merchant and Other revenues.
Agency revenues come from travel bookings in which the company connects travel service providers with travelers. Think of it as matchmaking. Travel service providers are responsible for processing payments as well as all the related costs. For the services provided, Booking earns a commission per every transaction for which it invoices the service provider after travel is completed.
Merchant revenues, on the other hand, are derived from transactions in which Booking does the matchmaking AND facilitates payments from travelers. In this model, because Booking offers more value than in the Agency model, it earns not only reservation commissions, but also other related fees.
Last but not least, Other revenues consist of 1/ revenue earned by OpenTable; 2/ advertising on all of its platforms and 3/ compensation for sending referrals to other online travel agencies.
On the other side of the equation, Booking has the following main, including but not limited to, expenses:
Marketing: In 2022, Booking spent almost $6 billion on its brands, search engine keyword purchases, affiliate programs and other performance advertising. This expense line item usually makes up around 1/3 of Booking’s revenue. Investors pay attention to Booking’s marketing expense because the more efficiently the company can generate traffic and business, the better the earnings will be.
Sales: Booking incurs different expenses for processing payments and making sure these payments go through smoothly. There are also costs related to call center, content translation among others. Sales makes up about 8% to 10% of Booking’s revenue.
Personel: salaries, payroll taxes, bonuses, other benefits and compensations make up around 15-20% of the total revenue
Administrative: recruiting, training, office expenses and other administrative costs amount to 5-6% of Booking’s revenue
Technology: back office software and keeping sites running reliably cost Booking about 3-4% of its annual turnover
Agency vs Merchant Model
Let’s talk about the two primary business models in the travel industry.
In the Agency model, as mentioned before, Booking acts as a matchmaking middleman between travelers and service providers without being involved in the payment. Revenue comes in the form of commission on a transaction basis. Booking only gets paid after generating actual business for its partners, ie. after guests booked, used and paid for services. To travel service partners, there are several advantages. First, they get to decide on their prices and inventory, maximizing revenue and profits. Second, there is no longer a risk of the agency (Booking) going bankrupt. Third, service providers have positive cash flow since they are paid by travelers first before having to pay Booking.
Nonetheless, there are a few downsides of this model to service providers. Being free to control inventory means that they are at risk of having unsold perishable inventory. Additionally, these providers have to absorb the costs of processing payments, including interchange, fraud protection, chargebacks and compliance. Travel merchants, especially those in the US, have higher interchange rates (2%+) than merchants from other high-frequency categories such as groceries or gas. In other words, US-based travel merchants lost at least 2% of its revenue per transaction when they process payments. It’s a real cost that any business owner will take into consideration.
In the Merchant model, the likes of Expedia and Booking Holdings buy inventory in bulk from supply partners, at a significant discount obviously, and sell it either a la carte or in a bundle with add-on services. To supply providers, the Merchant model solves the volume question and takes care of all the expenses related to payments. However, they don’t have control over inventory or prices and they have to suffer on the margin as Online Travel Agencies (OTAs) demand a meaningful discount for the value offered.
The model in which a travel service provider should engage with Booking, in my view, depends on the size of the provider and where it operates. If a provider is a small boutique hotel with 20 rooms, because the provider doesn’t have leverage over Booking, they would have to absorb a high commission rate in the Merchant model. Hence, the Agency model looks more attractive from the margin perspective. However, the provider will have to manage and sell inventory, as well as deal with all the payment-related issues.
If a provider is a well-known hotel chain with multiple properties and hundreds of rooms, the dynamic is different. In this case, the provider is more likely to engage the Merchant model: use its significant bargaining power to negotiate a lower commission while ensuring that every month, some inventory is already sold.
I want to touch on payments a little bit before we move forward. This issue may not be top-of-mind, but can have meaningful consequences to a business. First, if a merchant processes payments by itself, it has to invest in infrastructure so that popular payment methods are available and it is compliant with all regulations. This task is not always easy or cheap. Here is Booking on the topic:
We are processing more of our transactions on a merchant basis where we facilitate payments from travelers through the use of payment cards and other payment methods (such as PayPal, Alipay, Paytm, and WeChat Pay). While processing transactions on a merchant basis allows us to process transactions for properties that do not otherwise accept payment cards and to increase our ability to offer a variety of payment methods and flexible transaction terms to consumers, we incur additional payment processing costs (which are typically higher for foreign currency transactions) and other costs related to these transactions, such as costs related to fraudulent payments and transactions and fraud detection. As we expand our payments services to consumers and business partners, in addition to the revenues from these transactions, we may experience a significant increase in these costs, and our results of operations and profit margins could be materially adversely affected, in particular if we experience a significant increase in non-variable costs related to fraudulent payments and transactions.
…In addition, as our payment processing activities continue to develop, we expect to be subject to additional regulations, including financial services regulations, which we expect to result in increased compliance costs and complexities, including those associated with the implementation of new or advanced internal controls, including, by way of example, those arising from the E.U.’s Payment Services Directive 2 and similar legislation. The implementation of these processes may result in increased compliance costs and administrative burdens.
A property owner is unlikely to be as good at Booking in setting up a great payment system. Hence, it may help to reduce operational workload to just outsource this particular task to Booking. Second, interchange rates for US-based merchants are often north of 2% and have serious impact on the bottom line. A single boutique property owner can’t negotiate a more favorable term with the networks. In this case, the likes of Booking Holdings can offer value. Booking pays partners in the Merchant model in two ways: either through a virtual credit card or by bank transfer. With its market power, I think Booking Holdings can negotiate a better deal with the networks and help merchant partners lower the interchange costs. If merchants want to take payments through a bank transfer, Booking charges 1.1 – 1.9%, which is often lower than credit card interchange rates in the US. In Europe, where interchange rates are regulated and much lower than those in the US, this factor is not as relevant.
The difference in interchange rates, depending on where a property is located, is the perfect transition to the second factor determining which model a travel service provider should adopt. Here is what Booking wrote in one SEC filing:
For example, in the European Union and the United Kingdom, the Package Travel Directive and other local laws governing the sale of travel services (the “Package Directive”) sets out broad requirements such as local registration, certain mandatory financial guarantees, disclosure requirements, and other rules regulating the provision of single travel sales, travel packages, and linked travel arrangements. The Package Directive also creates additional liability for a provider of travel packages, which could be the OTC, for performance of the travel services within a packaged trip under certain circumstances. Some parts of our business are already subject to the broad scope of the Package Directive, and as our offerings continue to diversify and expand, we may become subject to additional requirements of the Package Directive. Compliance with this directive could be costly and complex or, as a result of these requirements, we could choose to limit offerings that would otherwise be beneficial for the business, any of which could adversely affect our business, results of operations, or ability to grow and compete. Any changes to the Package Directive, including any changes to the scope of the travel services covered, increased levels of consumer protections, or changes to the requirements of financial guarantees could be costly or complex to comply with and may also adversely affect our business, results of operations, or ability to grow and compete in the future.
Because of the regulatory overheads, Booking Holdings and its peers are not motivated to engage in the Merchant model as they may be elsewhere. Hence, merchants in the UK or Europe may not have this option available even if they want it.
How They Are Staying Competitive
Booking Holdings thrives when their flywheel works properly: having more travelers attracts more service providers while having more service providers is a real value-add to travelers. As long as Booking proves that it can help partners grow sustainably (ie. bring more business and value at a competitive commission), partners will come. The question becomes: how can Booking keep travelers making reservations on their platforms when there are so many alternatives out there?
The first step is mind share. Booking has to be the first name in travelers’ mind when they start the process of booking a trip. Showing up at the top of search result pages helps. Ads such as Super Bowl commercials also helps drive awareness. Both of these things require technical skills and investments. Because I think Booking Holdings is very good at SEO, judging from my experience searching for lodging, and can spend millions of dollars every year on marketing, it’s a real competitive advantage.
But the work doesn’t stop when travelers go to Booking’s sites. Travelers tend to look at other sources and see if they can get more value elsewhere. First-party providers are motivated to lower the price for the same booking on their website a bit just to avoid commission to OTAs. Therefore, Booking must first ensure parity in everything: photos, features, map location, pricing, booking protection and cancellation policies. In this area, I think Booking is brilliant in creating the Genius program. Genius is a marketing program in which participating partners get more visibility and business in exchange for, at least, an automatic 10% discount on their “least expensive and most popular room type or unit”. The more a traveler books with Booking, the more Genius benefits they have. It incentivizes travelers to do business with Booking while offering to providers access to these coveted frequent travelers. Consumers save money, partners generate more business and Booking is a happy middleman. Win-win-win.
Furthermore, it’s important that Booking becomes a one-stop shop for all things travel. A trip includes other components than just accommodation, including, you know, flights, car rentals and activities on a trip. Looking up several providers for each of the components takes time. Hence, it’s really valuable to travelers when Booking can let them reserve everything on one platform. To the best of my knowledge, AirBnb does not offer flight reservations. First-party websites like Marriott.com do offer vacation packages, but they only have the inventory that they own and reviews on those properties. With Booking, consumers have access to a wider selection and more extensive reviews.
On the connected trip, on our long-term vision is to make booking and experiencing travel easier, more personal and more enjoyable, while delivering better value to our traveler customers and supplier partners. We have expanded our offering into travel verticals other than accommodations with a focus on flights.
And in the future, we will work to link relevant travel components together to provide a more seamless and flexible booking and travel experience. We believe that as a result of this initiative and the improved consumer experience we will drive increases in customer engagement and loyalty to our platform over time. We have continued to make progress on further developing our flight offering on Booking.com, which is now available in over 50 countries.
This flight offering gives us the ability to help our consumers book another important component of their travel in one place on our platform and allows us to engage with potential customers who choose their flight options early in their travel discovery process. We continue to see that over 20% of all of our flight bookers globally are new to Booking.com. We will continue this important work to provide our customers the best possible trip experience we can offer.
Source: Booking CEO on Q4 FY2022 Earnings Call
Booking used to rely on the Agency model. They started to transition more to the Merchant model in 2017 and gained great strides. As of 2022, it made up 44% and 42% of Booking’s total gross volume and revenue respectively, up fro the mid-teens five years ago. Then they followed up with initiatives such as additional offerings (flights for instance) and payments. I think the management team has done the right things to grow their business and be competitive. The numbers don’t lie. Booking Holdings long trailed its rival Expedia in gross bookings (GB) before the pandemic, but since then, has recovered faster and better than Expedia. That translated into a bigger gap in revenue. While Expedia’s revenue hasn’t come back to pre-pandemic level, Booking’s already surpassed it in 2022. The current status, by no means, is a guarantee of future outcome. Booking must not be complacent, especially when a challenger like AirBnb is growing fast and furious, albeit at from a smaller base.
BNPL is a red-hot phenomenon now both in the financial and retail worlds. Because most BNPL transactions are funded using debit cards or checking accounts rather than credit cards, one of the main debates is whether it is replacing or will replace credit cards.
When asked about BNPL and its impact on credit card balance, the CFO of Discover, John Greene, had this to say:
What we’ve seen to date is consumer appeal has been on the lower credit quality folks. I think there will be a natural evolution that, that will come up the credit spectrum. We’ve also seen in terms of the firm, some higher credit quality customers actually electing to do a buy now pay later transaction, whether it’s paid in for or something else.
We haven’t seen any discernible impact whatsoever. So where I would likely see that is through new customer acquisition, and that’s — that activity has been very, very robust. The balance sheet on existing customers here, so loans, that’s been impacted by stimulus and kind of how they’ve allocated their dollars within their household. Nothing from the details we’ve looked at that would indicate that buy now pay later’s impacting the portfolio.
Discover Financial Services – Barclays Virtual Global Financial Services Conference
Echoing that sentiment, Brian Wenzel, CFO of Synchrony Bank, said there was no visible impact from BNPL on their credit card portfolio:
Yes. So first, we have studied buy now, pay later impact over the last couple of years as it really has grown, and we partnered with an outside firm to kind of do a deep analysis really on the — at the customer account level to kind of understand the behavior patterns it has. So when we see it and the data we’ve seen, I think, 75% of the buy now, pay later accounts are funded out of a debit account, right? So the view is that they are — you’re using cash and taking what would be a debit transaction through the buy now, pay later. We then looked — and really the impact of our business, and we looked at it and talked a little bit about it in Q&A last week about the impact on our business.
Are we seeing anything that says buy now, pay later is impacting credit? And so when you look at it versus a cohort population of our Mastercard as well as our Dual Cards, we see a low penetration, and we have not seen any changes certainly with how they use credit with us. In fact, they are more engaged with us than our average customer. They generate more revenue for us, but we have not seen any change. So as we look at it — when we look at applications come through, go over some of these products are offering, we have not seen any change, discernable changes.
So when you think about the impact to us in credit, we don’t really see it yet. We think that there is a shift that’s happening probably from cash as a tender type. And I think this is where the merchants and our partners are taking a step back. They are saying, “Yes, we understand your offer, consumers like it. But is this driving incrementality for us, true conversion?
Synchrony Financial – Barclays Virtual Global Financial Services Conference
One may argue that the main business of Discover and Synchrony is credit card so they had to put on a brave face. They might have. But since they are publicly traded companies; which often require them to be truthful to investors, I’ll give them the benefit of the doubt. More importantly, what they say seems to be in line with what Marqeta sees in their 2021 State of Credit report.
Recently, Marqeta released a 2021 State of Credit Report with some interesting insights into how consumers in the U.S, the U.K and Australia use BNPL and credit cards. The report is based on a survey of 3,500 people across three countries. Here are my take-aways regarding consumer preferences in the U.S:
78% of respondents in the U.S use credit cards while 25% actively use BNPL
50% of U.S consumers use credit cards because of rewards, something that is still a weakness of BNPL providers but they are working on it
“60% of U.S. 18-25-year-olds said they made more than five purchases on their credit card online each week, compared with 19% of 50-65-year-olds”
“79% of consumers surveyed who use BNPL reported having three or less BNPL plans open at a given time, with 45% of people reporting their average BNPL purchase at less than $100.”
“Older consumers however, were decidedly against, with survey respondents 51-65 years old voting overwhelmingly (63%) in favor of the credit card-first status quo.”
“Americans were again slightly worse off, with 30% responding that they’d struggled to meet payments”
3 out of 4 U.S consumers use credit cards. 60% of the younger segment use their cards regularly every week while the older and wealthier crowd want to keep the status quo. That, to me, is the sign that the credit card business is still healthy and well, at least for now. By no means do I insist that BNPL doesn’t have a chance to overtake credit cards. More and more issuers such as Citi, Amex or Chase introduced the ability to put qualified transactions on installment plans (BNPL). All the major retailers in the country allow shoppers to have a payment plan. Even Apple is reportedly working on their own version of BNPL. Who knows what the future holds? But for now, all signs point to a healthy credit card industry holding their ground.
The economics of dollar stores. An excellent post by The Hustle on how dollar stores work. The most interesting things to me are 1/ unit prices on some items at these stores can be higher than those at bigger chains such as Target or Walmart. The absolute prices are lower, but they are also on a much smaller volume. 2/ These stores seem to be more concentrated in poorer neighborhoods. I read somewhere that richer customers don’t mind the stigma of buying stuff at dollar stores. I wonder if that’s still true and how much the trend is a boost to these stores’ business.
How a Beer Giant Manages Through Waves of Covid Around the World. A great story of how a global business uses data analytics to make decisions in the tumultuous pandemic. Even when the AB Inbev’s data team accurately predicted the second surge in India, it did get the previous predictions wrong. Nobody has a crystal ball to see the future. All we can do is to increase the odds with a wealth of data and machine computing.
Mac sales in India tripled after online Apple Store opened. One aspect of Apple’s business that I think should be discussed more is its retail stores and website. The report here credited the presence of Apple’s website for the significant increase in sales. I also learned from the article that to launch own-brand eCommerce sites in India, companies need to source locally 30% of their production. I guess there is a side benefit of expanding supply chain in India, apart from lowering the risk of over-reliance on China.
An interesting article on the next CEO of Amazon, Andy Sassy. The level of detail orientation described in the article is admirable. I love the concept of the Wheel of Death. People naturally tend to get complacent. Having them on their toes and preserving the unpredictability is a great way to ensure that they perform to the level required.