Weekly reading – 25th September 2021

What I wrote last week

Is BNPL replacing credit cards?

My thoughts on Visa’s new benefits for U.S Signature/Infinite cardholders

Articles on Business

When to Buy Now, Pay Later, and When to Just Pay Now. “Affirm doesn’t report payments on its four biweekly payment zero-interest loans, it said, or when consumers are offered a three-month payment option with no interest. Afterpay doesn’t work with credit bureaus at all. Sezzle Up explicitly informs users that it will report on-time payments to Equifax and TransUnion. Affirm doesn’t charge late fees, but late or partial payments can hurt your credit score, and may prevent you from using the service in the future. Sezzle Up also reports delinquencies. Klarna and Afterpay revoke access to their platform until payment is made. Both companies also charge late fees, tacked onto your next payment. Afterpay charges $8, or 25%, of the purchase, whichever is less, while Klarna charges a maximum $7, or no more than 25%, of the past due amount. Klarna said it will contact users to collect payment before charging a late fee.

This delivery app went above and beyond for its workers. Then Uber took over. Cornershop’s original operating model was more beneficial and friendly towards workers. After the acquisition, life became more challenging for drivers. It remains to be seen whether the regulation in Chile will allow workers to unionize and force Uber to recognize drivers as full-time employees. This is a classic case of conflicting interests between gig companies and drivers as well as of the important role that governments play in this conversation.

Why the University of Florida gets a ~$20m cut of Gatorade profits every year. A fascinating story on a wildly popular drink.

The Most Important iPhone Ever. “What makes the iPhone and perhaps Apple special is that it seems to deliver things that nobody asks for but then everybody wants while eschewing overshooting a performance dimension that a few demand but most won’t use. The tragedy of overservice and disruption is that if you don’t shift the definition of performance eventually you run out of demand at the top of the performance curve. That opens you up to “good enough” competition from below. Instead you need to re-define the notion of performance: compete on a new basis, reset expectations. That the iPhone can find new dimensions of performance and hence demand is effectively a solution to the innovator’s dilemma.”

PayPal Introduces Customers to the Next Digital Payments Era with the New PayPal App. “The new PayPal app will introduce new features including PayPal Savings, a new high yield savings account provided by Synchrony Bank, alongside new in-app shopping tools that will enable customers to earn rewards redeemable for cash back or PayPal shopping credit and uncover deals with hundreds of merchants. Additionally, the new app offers PayPal customers a single place to manage their bill payments, get paid up to two days earlier with the new Direct Deposit feature provided through one of our bank partners, earn rewards and manage gift cards, send and receive money to friends, family and businesses, pay with QR codes for purchases and redeem rewards in-store, access and manage credit, Buy Now, Pay Later services, buy, hold and sell crypto, as well as support causes and charities they care about.”

Other stuff

The tangled history of mRNA vaccines

Stats that may interest you

“One in five consumers made a purchase using a “buy now, pay later” service within the last 12 months.

One in six consumers who made a buy now, pay later service purchase regret doing so, commonly citing high interest rates, a lack of options to build credit, or making unnecessary or unaffordable purchases.”

There have been 47 startup venture deals in Africa in 2021 so far with the average deal size of $21 million

CPC on Amazon ads is $1.27 in August 2021, up from 86 cents from a year ago, according to a survey

31% of online grocery shoppers use PayPal, according to a new study by ACI Worldwide and PYMNTS

Fuel Wasted Due to U.S. Traffic Congestion in 2020 Cut in Half from 2019 to 2020

14% of U.S consumers said they switched to an iPhone from another operating system in the last two years, a report said

Weekly reading – 11th September 2021

What I wrote last week

I did a quick review to show which remittance services you may want to use to transfer money to Vietnam or India

My reservation on PYMNT’s study on Apple Pay’s usage in stores

Interesting articles on Business

Why the global chip shortage is making it so hard to buy a PS5. In the silicon manufacturing process, for the most advanced tool inside a fab, typically you’ll have hundreds of different tools. Actually in a large fab, like one you might see at TSMC (Taiwan Semiconductor Manufacturing Company), you’ll have thousands of these tools. And these tools are big machines that process these wafers and do various things. And most tools cost, starting with a couple of million dollars, to the most expensive tools are in excess of 150 million euros. In Asia, they’ll build these things in a year. They’ll move in equipment in the second year, get it qualified, running, by the end of the year. In the US, or in the West, it takes a lot longer, because we don’t have the same mentality they have in Asia. We’re going to do all the permitting, all the hearings, and all that stuff. So it wouldn’t surprise me if it took 50 percent longer to twice as long. Now, let me tell you why that’s a problem. Because to your second question, a modern fab these days, one of the closer-to-leading-edge ones will cost you $10 billion-plus for the smallest efficient scale, and a really efficient scale will probably cost you closer to $20 billion. Think about how much depreciation that can generate. In Asia, the mentality is every day, every hour this thing isn’t running costs me tens of thousands, hundreds of thousands, sometimes millions of dollars. I’ve been in Asia on Christmas Day, and there are people out there with jackhammers and pouring concrete because it was like, “Man, every minute this thing gets done sooner, we can start generating cash.” We do not have that mentality in the West.”

Companies Need More Workers. Why Do They Reject Millions of Résumés? A gap on a resume should not be used to disqualify a candidate immediately. Many need to take a break, whether it was because a family member was sick or it was for their mental health. A less-than-stellar historical record shouldn’t disqualify a candidate either. We all make mistakes and we all deserve chances. Plus, if someone has the necessary skills, does it matter where they got those skills? Does it matter if they don’t have a degree? We use software to evaluate hundreds, if not thousands, of applications a year. It’s understandable. But I do believe that we can write better software to accommodate hiring needs and give people chances.

The surprisingly big business of Library E-books

PayPal To Acquire Paidy. PayPal agreed to acquire Paidy, a BNPL provider in Japan, for $2.7 billion in cash. Paidy reportedly has 700,000 merchants and more than 6 million users. As PayPal itself already has more than 400 million users, this acquisition isn’t likely about inflating the user base. The second reason is likely capabilities. Paidy, which shoppers can use without creating an account first or using a credit card, has a proprietary machine learning models to evaluate credit worthiness of consumers. In other Asian countries, it’s not uncommon for shoppers to pay cash on deliveries for online orders. Perhaps this is something that PayPal wants to replicate in other Asian markets.

Australia’s Top Court Finds Media Companies Liable for Other People’s Facebook Comments. The Court’s argument is that media companies post articles to stimulate conversations and engagement through comments. Hence, they should be liable for such comments. I don’t think that line of reasoning totally lacks solid grounds. I mean, a company’s Facebook page is essentially its property where it has the ability to curate (with Facebook’s help, of course) and it should have some responsibility for defamatory comments taking place there.

Source: CNBC

Stuff that I found interesting

This wildly reinvented wind turbine generates five times more energy than its competitors. This proposal, if materialized, can generate power for up to 100,000 households with one station while reducing the waste that is usually seen with the traditional turbines.

A great series on the study of obesity

Stats that may interest you

Mobile transactions in Vietnam are expected to increase by 300% between 2021 and 2025

Apple has around 52% to 57% of the mobile game transactions market (page 138)

Even though Apple doesn’t have a separate P&L for its line businesses, the Court found that the App Store’s operating margin is approximately 75% (page 145)

What remittance providers you should NOT use

For many immigrants such as myself, remittance is part of the life living overseas. We work hard here and send a bit of help back home whenever we can. In normal times, such assistance is a nice touch. In times like this when many parts of the world such as Vietnam are in strict lockdown because of Covid, it becomes even more critical and appreciated. In times like this, it matters more which remittance providers we entrust with our money to family and loved ones. In this post, I’ll tell you which ones I’d use myself, what I’d not and why.

When it comes to choosing a provider through which I can send money back home, these are the main selection criteria:

  • Are they reliable? This is money we’re talking about. Of course, we want it to be safe and secure. Luckily, the most popular services on the market have a good reliable track record. If not, they wouldn’t service in this business.
  • How long will it take for money to be deposited? Nowadays, it takes much less time for recipients to see money show up in their bank accounts than it did just a few years ago. A transfer can arrive at the receiving account in a few hours or within a day. My experience is that the top providers can transfer funds at pretty much the same speed.
  • How much does it cost in total? This is THE deciding factor. Influencing the net amount that recipients receive are the fees and the exchange rate. The best way to evaluate different services is to look at the final amount that will be credited to the destination account.

I conducted two experiments in which I looked at what would happen if I transferred $1,000 to Vietnam and India using the most inexpensive method through 6 select providers: Xoom/PayPal, Money Gram, World Remite, Ulink Remit, Western Union and Wise. Here are the results:

$1,000 from the U.S to Vietnam$1,000 from the U.S to India
Wise22,544,180 VND72,450 INR
Money Gram22,537,350 VND72,663 INR
Ulink Remit22,226,000 VND72,565 INR
World Remit22,140,076 VND71,930 INR
Xoom/PayPal22,348,000 VND72,034 INR
Western Union22,468,068 VND72,606 INR
Figure 1 – Net amount received when $1,000 is sent to Vietnam & India using different remittance services

In both cases, Wise, Western Union and Money Gram are very competitive. Ulink Remit should be considered if the destination is India. Both World Remit and PayPal should not be considered. I don’t know about the value of a few Rupees in India, but if I have to lose a couple of thousand Vietnam Dongs on every $1,000 sent back home, I’ll be put off. Personally for me, Western Union, Wise and Money Gram will be the go-to services to send money to Vietnam. What is yours?

Net amount received when $1,000 is sent to Vietnam through different providers
Figure 2 – Net amount received when $1,000 is sent to Vietnam through different providers
Net amount received when $1,000 is sent to India through different providers
Figure 3 – Net amount received when $1,000 is sent to India through different providers

Figure 4 – It’s weird to see WorldRemit is the recommended provider here

Weekly reading – 4th September 2021

What I wrote last week

Important investing lessons that I learned

Business

Google Pay team reportedly in major upheaval after botched app revamp. 92% of mobile wallet transactions in the U.S in 2020 were on Apple Pay. If I were an Executive at Google, I’d question why a firm with limitless resources, world-class engineering and ownership of Android couldn’t get Google Pay to be an equal competitor to Apple Pay. One can argue that Apple should have some credit with popularizing Apple Pay. If the driving force were the Cupertino-based company’s dominance and monopoly, why wouldn’t Google replicate that success with its own digital wallet?

How one woman helped build the #AppleToo movement at tech’s most secretive company. I never want to read about anybody being mistreated at their workplace. This #AppleToo movement is no exception. I am very disheartened to read about a group of folks being mistreated and disrespected, especially at a company that I long admire for other reasons.

PayPal is exploring a stock-trading platform for U.S. customers. It came as no surprise to me that PayPal is planning to launch a stock-trading feature. The ambition to be the Super App for consumers’ financial needs has been in full swing for a while. The company is putting the pieces of the puzzle together and this is one of them.

Affirm Holdings’ Moat: Why World’s Largest Retailers Want Affirm. I don’t necessarily agree with everything said in this piece, but that doesn’t mean it doesn’t have some good points.

Why Marta Ortega Pérez Is the Secret to Zara’s Success. This is one of the more interesting points in the article: Every morning after dropping off her son at school, Ortega Pérez gathers with the company’s CFO, Miguel Díaz, and other top staff around an industrial table out on the open floor to review global rankings for such bestselling pieces as a minimalist black spaghetti-strap summer dress, or a rococo printed pajama-style blouse with matching shorts. Orders heading to stores are constantly adjusted, an anomaly in an industry that typically plans merchandise drops well in advance. (Zara’s operations are supported by an in-house technology product team that uses  Netflix as a measuring stick for both consumer-facing and back-of-house innovations, including a mock fulfillment center floor set up to study the movements of a box-moving robot.)

To appease Japan Fair Trade Commission, Apple agreed to relax its anti-steering rules for Reader apps globally. What it means is that the likes of Spotify and Netflix should be able to sell digital goods to consumers without paying commission to Apple by adding a link to an outside webpage. Historically, Apple was vehemently against this, but the regulatory pressure has been piling up around the world so I guess this is Apple’s pre-emptive action to hopefully get some relief. I have seen some developers skeptical of how this change in policy will actually pan out. I mean, they have reasons to, but given the resources and clout at Apple’s disposal, this is a great step for developers. For consumers, this remains to be seen. One of the selling points of the App Store is that consumers feel safe whenever they make a purchase. Since Reader apps can now direct consumers to outside the App Store, it will depend on who will make the determination as to which app can qualify for the new policy. There remains a possibility that some developers with a harmful agenda can camouflage their app as a Reader App and commit fraud.

Apple Plans Blood-Pressure Measure, Wrist Thermometer in Apple Watch. Apple’s positioning of the Apple Watch is very smart. It’s not trying to compete with normal watches whose main function is to tell time or luxury watches whose main value is the bragging rights. By focusing on the watch wearers’ health, Apple sticks to its core value of providing hardware that is personal to consumers and its strengths, mainly the combination of hardware & software as well as its ecosystem.

How Disney and Scarlett Johansson Reached the Point of No Return. The legal debacle with Scarlett Johansson is unfortunate and worrying as it foreshadows what could be in store for Disney in the future if they didn’t learn from this lesson. According to the article, it could have been avoided, yet here we are. Plus, the pandemic, the interconnectedness of Marvel storylines, the pressure on the bottom line and the priority status imposed on Disney+ make release distribution a delicate matter. While Black Widow brought in $60 million in extra revenue and profit from the Premier Access, Kevin Feige, the Marvel boss, wasn’t happy about it. Putting “Black Widow” on Disney+ conflicted with Mr. Feige’s tiered approach—creating TV shows that complement movies on the big screen. He resisted plans for the movie’s simultaneous release, in part because he didn’t like the idea of having one of Marvel’s few female-driven movies demoted to the at-home streaming service, said people familiar with his thinking.

Other stuff I found interesting

Indonesia, More Majestic Than Ever by Boat. I have never been to Indonesia, but I’d love to. And of course, by boat, if possible.

These charts show which states will get the most money from Biden’s infrastructure bill. Regardless of the criticisms of this bill, I am pleased to see more investments in the embarrassing and decaying infrastructure in this country.

Can ‘smart thinking’ books really give you the edge? Makes you really think about it

Stats that may interest you

Vietnam saw $16 billion in remittance in 2020

52% of young adults in America lived with parents in 2020. The figure jumped to 71% for people aged 18 – 24

Cash accounted for 78% of transactions at Point of Sale in the EU in 2020

YouTube Music hit 50 million subscribers, up from 30 million reported in October 2020

Weekly reading – 21st August 2021

What I wrote last week

I came across a couple of posts from Afghanistan veterans on their experience there

My notes from the 2021 Debit Issuer Study

My thoughts on recent developments from PayPal

Business

Inside HBO Max’s Scramble to Fix Its Glitchy App. In the streaming world, the user experience is critical in keeping customers engaged and the churn down. HBO Max fumbled the ball terribly with their confusing brands, products and messaging in the beginning. I don’t think I am a dumbass, but I didn’t even know the difference between HBO, HBO Max or HBO Now. Then, they out together an app that was littered with bugs as summarized in the article. The reason, as reported, is that they merged the two legacy apps that were built for different purposes. One was built to offer ad-free content while the other featured commercials. It is not a surprise that bugs happened. What is a surprise is that an institution like HBO or Warner Media let it happen in the first place.

Amazon Plans to Open Large Retail Locations Akin to Department Stores. This move may be Amazon’s attempt to copy what other retailers like Target do. They fulfill online orders from their network of stores. It takes a lot of stores to cover the country and logistics management to figure out the inventory and the actual shipping. We’ll see.

Walmart’s e-commerce business is set to hit $75B in sales this year

Paying With a Credit Card? That’s Going to Cost You. If this trend is legit and merchants continue with the surcharge (which is not an uncommon practice in Vietnam), it and the growing popularity of BNPL will have adverse effect on credit card spend. Remember: BNPL is mostly funded through debit cards

How the Apple lobbying machine took on Georgia, and won. Apple is my largest position. However, I found the whole lobbying issue troubling. It’s nothing different from companies writing bills and lawmakers enacting such bills.

What I found interesting

‘Likes’ and ‘shares’ teach people to express more outrage online

China Passes One of the World’s Strictest Data-Privacy Laws

Another excellent post by Morgan Housel. In light of what happened in Afghanistan today, I can’t help but think about what small events in the past could have prevented this war in the beginning and what would happen to the people of Afghanistan in the future after the U.S pulled out

One is to base your predictions on how people behave vs. specific events. Predicting what the world will look like in, say, 2050, is just impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations and social persuasion in the same way is a bet I’d take.

Another – made so starkly in the last year and a half – is that no matter what the world looks like today, and what seems obvious today, everything can change tomorrow because of some tiny accident no one’s thinking about. Events, like money, compound. And the central feature of compounding is that it’s never intuitive how big something can grow from a small beginning.

Source: Collaborative Fund

Stats that may interest you

50% of surveyed Americans have no problem with false information online

Target’s Circle Rewards Program reaches 100 million subscribers

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

Consumers’ Digital Wallets – Where Card Issuers Need To Be

In this post, I will touch upon digital wallets & checkouts as well as some market movements that make me believe that it will be strategically important for issuers to occupy consumers’ digital wallets.

Fast checkouts and payments are on the rise

Consumers love convenience. Instead of spending time to fill out addresses and credit card credentials, shoppers can finish the job with just a couple clicks. The same goes for in-store check-outs. It’s a far more convenient experience for consumers to hover the phone or a smart watch over a card reader than to drop whatever they are doing with their phone, reach for a wallet and pick out a card. Granted, even though they may not appeal to less tech-savvy shoppers, these fast checkouts, when absent, may be a deal breaker to the more technologically shrewd crowd. I mean, there has to be a reason why many stores accept the likes of Apple Pay or PayPal, despite losing a bit more revenue. Businesses know that by not enabling convenient payments and checkouts, they risk losing a whole lot more.

The more these payment applications are accepted at stores, the more they become useful to consumers and the more consumers they can acquire. The more consumers these wallets acquire, the more they can appeal to stores. The virtuous cycle keeps going. As they become popular, the mobile wallets become something like downtown Manhattan to card issuers. While it doesn’t guarantee success, being present in consumers’ phone and wallets suddenly becomes more critical. Furthermore, there are developments on the market that highlight the importance of this point, starting with Visa.

A new rule from Visa

Per JP Morgan:

In April 2022, Visa will introduce updates to existing domestic interchange programs with categories and rates for card not present Visa EMV token transactions. This includes both network tokenized transactions and digital wallets. With this update, a roughly 10 basis point reduction will apply for many card not present transactions that are Visa EMV tokenized in most segments.

In some cases, interchange rates for non-token transactions will go up, so while the net benefit may not reach 10 basis points, merchants that do not take advantage of the digital wallet incentive will undoubtedly be leaving money on the table. As ecommerce continues to grow, shifts like these to the overall cost of payments will have significant cost implications and influence a merchant’s product development roadmap.

The gist of this news is that Visa will allow merchants to keep more money from mobile wallet transactions but make them pay more whenever customers have to type in their information and card credentials. A few basis points may not sound much, but if your online sales is $1 million/year, the savings can be up to $10,000. Visa is the biggest network out there, accepted in virtually every store around the world. When the new rule comes into effect in 2022, its impact will be wide-ranging. I expect Mastercard to follow suit soon. The question for issuers now becomes: can they sit idly and let their rivals occupy the valuable real estate on our phones?

Apple Pay

Apple Pay is a proprietary mobile wallet by Apple that enables convenient payments by just a phone tap in stores or one click online. The feature is compatible on iPhone 6, all the models that came after and all Apple Watch. That should cover pretty much every iPhone user in the U.S, which makes up 60% of the mobile market domestically. Since its debut in 2014, Apple Pay has grown increasingly popular over the years. As of January 2021, Apple Pay is available in 90% of stores in the U.S and hundreds of websites, including those of major brands. According to the 2020 Debit Issuer report by Pulse, mobile wallet debit payments in the U.S in 2019 by Apple Pay, Samsung Pay and Google Pay totaled $1.3 billion, of which $1.1 billion came from Apple Pay. As of this writing, major cities such as Chicago, Los Angeles, New York City, Portland, San Francisco & Washington D.C already allow passengers to ride transit with Apple Pay. This kind of integration will only boost its popularity more in the future.

Figure 1 – Apply Pay facilitated most of the mobile payment transactions funded by debit in the U.S in 2019. Source: Pulse

Almost all issuers in the US enable integration of their cards into Apple Pay. American Express lets users who are instantly approved add their cards to Apple Pay immediately. In July 2021, it’s reported that Apple is working on a BNPL service for Apple Pay transactions. Historically, Apple offers a payment plan for its select products & services via Apple Card. Apple Pay Later will allow approved customers to make four interest-free payments due every two weeks or monthly payments at an undisclosed yet interest. Customers can connect their Apple Pay with any card that they want and it’s not required to own an Apple Card. This service will make this mobile wallet even more attractive to customers, though right now whether or when it goes to market remains to be seen.

PayPal

Many people know PayPal as the known P2P platform or that payment option that used to be on eBay. Over the years, PayPal has transformed itself into something much bigger. It now provides a lot of services for both consumers and merchants. No longer restricted to online purchases, consumers can now use PayPal online and in stores with services such as QR Code, mobile wallets, contactless, debit card, credit cards, PayPal Credit and PayPal in 4.

Figure 2 – Discover’s communication to ask customers to link accounts to PayPal

The brand and the scale of PayPal are not to be underestimated. In Q2 FY2021, PayPal processed $311 billion in transactions, almost twice as much as $170 billion in the same quarter two years ago. The company’s YoY growth in transaction volume topped 40% in the last two quarters despite operating at an incredible scale. If you take out eBay, the growth rate was never lower than 45% in 2021. Additionally, there were 403 million active accounts, including 76 million Venmo and 32 million merchant accounts. Venmo’s transaction volume doubled in the last 18 months from $29 billion in Q4 FY2019 to $58 billion in Q2 FY2021. The scale of PayPal is also reflected on how fast they roll out new features. PayPal in 4 was launched in August 2020. Since launch, the service generated $3.5 billion in transaction volume, of which $1.5 billion alone took place in the last three months. Meanwhile, the number of merchants that enabled payments by QR codes leaped from 500,000 in Q3 FY2020 to 1.3 million in the most recent quarter.

On the earning call, the CEO of PayPal highlighted its imminent push into the in-store space.

Clearly, on the branded side, we think we add a tremendous amount of value, things that John talked about, buyer and seller protection, Buy Now, Pay Later at no incremental cost, fraud protection, highest checkout conversion, etc. But we took down rates for basic full-stack processing. That also was reduced somewhat substantially from the 2.9%, plus $0.30 to 2.59%, plus $0.49. And that is going to enable us to aggressively compete for all of the payment processing of the merchants that do business with us.

And you’ve heard us say time and time again, David, that we were going to move into the in-store space. We’re going to move so aggressively in there. We rolled out Zettle in the U.S., is a really beautiful full package. It doesn’t just include card reader but inventory management, sales reads out and allows a merchant to seamlessly load inventory in both their online and in-store locations and then, across multiple channels as well.

And so we’re, obviously, gonna be very aggressive on moving into in-store, and it’s always been part of our strategy. And by the way, if a small merchant does all of their business with us, they can actually see their overall costs come down. And we wanna encourage them to do all of their business with us because we are a trusted platform. They do turn to us, and we price, we think, the right way.

Source: Fool.com

If PayPal successfully becomes one of the de facto checkout methods in stores, given it’s already a popular checkout option online, how would smart issuers ignore the need to get into consumers’ PayPal wallet?

Shop Pay

Shop Pay is the native checkout feature by Shopify. Shopify is an eCommerce platform from Canada. It provides businesses with the tools necessary to build a customized online presence. When merchants list their products on Amazon or Walmart, they just rent a space and have little flexibility for their own branding. Plus, these merchants have to pay numerous fees to the likes of Amazon and Walmart. With Shopify, they pay a monthly subscription and a usage-based fee for some paid services. But stores can keep their own branding and gain more control over their destiny.

Shop Pay works similarly to Apple Pay, PayPal or Visa SRC. Once a credential is stored, customers can use Shop Pay across all stores powered by Shopify. In February 2021, Shopify expanded their checkout feature for the first time to all Shopify-powered stores on Facebook and Instagram. The collaboration was successful that a few months later, they decided to roll out Shop Pay to all merchants on Facebook and Google. This move can bear significant ramifications. Facebook owns the most popular social networks in the world like Facebook, Instagram, WhatsApp and Messenger. Their access to billions of consumers is what retailers want. Google has the dominant market share in search and as a result, a unique access to consumers globally. As these tech giants make a push into eCommerce, Shop Pay will benefit from this partnership and grow even more.

Figure 3 – Shopify’s GMV in Q2 2021 was higher than that of the entire year of 2018. Source: Shopify

Between its launch in 2017 and the end of 2020, Shop Pay facilitated $20 billion in transactions. The cumulative figure increased to $24 billion as of Q1 FY2021 and $30 billion as of Q2 FY2021. As you can see, Shop Pay is growing increasingly fast. The growth of Shop Pay coincides with the growth of Shopify. In the last quarter, Shopify processed more volume than it did in the entire year of 2018. As this company continues to expand and by extension, so does Shop Pay, how long can issuers be absent from this checkout option?

In summary

Engaged customers will add their favorite card to their mobile wallets. The challenge is for issuers that don’t occupy the top-of-wallet position yet. Customers can still rotate cards and choose a certain one at the time of purchase. Hence, being in a customer’s wallet doesn’t mean a card will be used often. Card issuers still need to offer values and work hard to increase engagement. But as the saying goes, you have to be in it to win it.

Weekly reading – 19th June 2021

What I wrote last week

A study that revealed people preferred an electric shock to being left alone with their own thoughts

Some interesting comments from Walt Disney CEO on the business

Business

How Ondo’s Customers Using Shop Pay Installments Are Spending 2x More Than Regular Customers. The concept of BNPL isn’t new. What is interesting is that it is now adopted for stuff like socks.

Apple admits why its own Files app was ranked first when users searched for competitor Dropbox. Not a good look for Apple. It does seem that the top brass at the company didn’t know about this issue at all and once the issue was revealed, it was opposed. However, the thing about being the top brass is that you have to take responsible for what your direct reports do.

An interesting presentation on Mistakes of Omission. If you are into investing, this presentation can be very thought-provoking. One of the things that I keep thinking about is whether I am paying too much for a business and whether I unnecessarily increase my average price. I haven’t invested for a long time, but so far, most of my biggest winners happen when I decided to increase my average

A look inside Google’s first store. I hope that Google will use these stores as a showroom to demonstrate to the end users the awesome features it releases every year. Yes, the company isn’t known for making great hardware like Apple is, but the stores’ functionality doesn’t need to be restricted to hardware only. They can be a place to bolster customer relationships and educate end users on a variety of Google services. How many Google features do you not know? How many do you actually know about but haven’t used because they all seem abstract and complex at first glance?

PayPal lowers their rates for U.S merchants on Visa/Mastercard transactions and raised rates for their own products. This is quite a bold move to compete with Stripe, Square and Authorize.net as well as to clearly showcase their position. PayPal is confident enough in the appeal of their own offerings that they think a rate hike is justified. Recently, PayPal has been very aggressive on multiple fronts: engaging merchants and acquiring new users. I got multiple offers from PayPal and Venmo recently from $5 to download the app, $10 to reactivate my Venmo account or $10 to refer a friend.

A couple of interesting posts by CNBC on Roku here and here. I am not working at Roku, so I don’t know what the culture is like. Even if I knew what it was like, it would still be difficult to make a generalization as a culture works for many but doesn’t for others. Still an interesting case study

What I found interesting

I saw millions compromise their Facebook accounts to fuel fake engagement

This is a story about a Japanese diplomat who courageously defied his own government to save hundreds of Jews decades ago. I had never heard of Chiune Sugihara. I am glad that I did this week

I am not a fan of the New York Times nor am I a subscriber. But this investigative piece on the train crash in Mexico City is excellent

Senate passed a bill that would make it easier for folks to unsubscribe online. What can I say? Long overdue. One of the things that rarely come out of the Senate. All those subscription services, especially newspapers outlets, should feel ashamed of themselves for making it overly difficult for consumers to unsubscribe. I hope they will make this kind of shenanigan illegal.

When you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have.

When someone is viewed as more extraordinary than they are, you’re more likely to overvalue their opinion on things they have no special talent in.

Everyone’s dealing with problems they don’t advertise, at least until you get to know them well. Keep that in mind and you become more forgiving – to yourself and others.

Source: Harder Than It Looks, Not As Fun as It Seems

Stats that may interest you

The price of lumber in the US shot up by 377% last year

40% of elementary students in Vietnam are obese, according to the latest survey by the Ministry of Health

Weekly reading – 22nd May 2021

What I wrote last week

I gave examples of how prices on Amazon can be much higher than what you can find at retailers

A couple of great clips about soy sauce and its history

A review of Disney’s Q2 FY2021 results

My thoughts on Paypal

Business

A Moneyball Experiment in English Soccer’s Second Tier. Although people are quick to point out that Billy didn’t win a title with his Money Ball method, his team did improve within his limited resources. Barnsley will unlikely win any title, especially the Premier League. However, as long as the team makes it to the top tier and earns more money by just showing up, it should be an astounding success itself.

Why former Google ads boss Sridhar Ramaswamy is building an ad-free search engine. A pretty interesting interview. I wonder what would make such a search engine attractive enough that people would pay to use it. I mean, DuckDuckGo is pretty great and it is privacy-focused. And it’s free.

Panera Bread’s new design transforms it into a neighborhood bakery in a bid to build loyalty. Retailers have to focus on delivering experience. The physical goods are a must, but it’s just part of the puzzle.

What I find interesting

Khmer Temple-Hopping Motorbike Loop | Tra Vinh. Vietnam has a lot to offer in terms of tourism. I’d say that instead of frustrating yourself in touristy places, you should head to destinations like Tra Vinh, which have their own charm, beauty and history. Personally, I prefer Tra Vinh to cities like Nha Trang or Mui Ne.

Hyundai Nexo breaks world record for longest distance travelled in a FCEV. Even though a long distance was achieved with one tank of hydrogen fuel, eventually these cars still need to refuel. Hence, the challenge of propping up fuel stations in popular areas still remains. Unless that is accomplished, there is still a long way to go for fuel-cell-electric vehicles. Though the way got a tiny bit shorter.

Censorship, Surveillance and Profits: A Hard Bargain for Apple in China. Not only is China a $50 billion market for Apple, but it also houses its main irreplaceable yet supply chain. Even a local billionaire hero like Jack Ma disappeared over night and lost his influence after angering the government and President Xi. What chance does Apple have to be anything different? If Apple still wants to do business in China, it has no choice but to do everything it can to balance between appeasing Xi and protecting its customers as well as principles. Some may say that Apple could have pulled out of the country like Google. Well, that’s Google principle. Tim Cook’s principle is to show up because “nothing changes from being on the sideline”. You can disagree with his or Apple’s principle, but you can’t just change it. Additionally, as a Vietnamese, I don’t think it would be much better to relocate all the supply chain to my country. The story would be more of the same. Well, in many countries, it would still be more of the same.

Google Workspace got a huge upgrade. At first glance, the upgrade looks so interesting.

The 1,400-year-old invention Peru is reviving. In the age of technology when our societies are more technologically advanced than ever, ancient techniques tested over the years continue to be effective.

Apple previews powerful software updates designed for people with disabilities

You may soon be able to buy pre-IPO stocks

Stats that may interest you

Ethereum will use at least ~99.95% less energy post merge

There are 3 billion active Android devices

The average age of bridges in America is 44 years