Weekly reading – 14th May 2022

What I wrote last week

Uber Q1 FY2022 Results

Book Review – After Steve: How Apple Became A Trillion-Dollar Company And Lost Its Soul

Business

Newest trend in delivery apps: move from cars to e-bikes. Micromobility is great for short-distance deliveries in a busy city like San Francisco. This is how Grab Food, Shopee Food and others manage deliveries in Ho Chi Minh City. Consumers order food within 3-4 kms most of the time. Traffic jam is a feature of the city. If couriers used cars for deliveries, there wouldn’t be any food delivery business! eBikes are also environmentally friendly. I hope to see more innovation and governmental subsidies in this space

John Gruber on the European Commission’s calling Apple Pay an illegal monopoly. I like John’s takes on Apple-related things. He is experienced and more importantly nuanced and fair. “This passage, as well as much of the rest of the E.C.’s “statement of objections”, seeks to dismiss the hard work Apple has done to make Apple Pay successful. Yes, NFC is an industry standard, and Apple Pay is, in part, built on top of that. But before Apple Pay, NFC was hardly used, even though Android had supported it since 2011. When Apple Pay launched in late 2014, its support for the existing NFC infrastructure was so good, it worked with many credit card terminals that had no explicit support for “Apple Pay” specifically. Apple Pay was so easy to use people were using it at retailers who weren’t even Apple Pay partners. That’s not a credit to NFC, which had been in place for years. That’s a credit to Apple. I honestly don’t understand where the E.C. sees anticompetitive behavior with Apple Pay. What I see is market share dominance stemming from the hard work of designing better integration into iOS and iPhones and educating users about the feature. How else could the iPhone’s share of NFC payments so far exceed the iPhone’s share of mobile phone sales? I’m not saying Samsung and Google suck at this, per se, but Jennifer Bailey’s team at Apple is really good, and perhaps just as importantly, really diligent about this sort of thing.”

Congress is ‘moving too slowly’ on semiconductor supply crunch, Commerce Secretary says. The dysfunction and ineffectiveness of Congress, especially in this matter, will cost America a lot both in the short and long term.

Buy Now, Pain Later? An interesting read on BNPL and specifically Affirm

Don’t forget Microsoft. Business schools around the world should teach students about Microsoft and its revival by Satya Nadella.

Business Travel Rebounds as Execs Choose (Real) Face Time Over Zoom. I, for one, am curious about whether business travel will come back to the pre-pandemic levels and how it will come back. During the pandemic, articles were written on how business travel would never be the same. Anecdotally, my colleagues at work traveled to Omaha, Nebraska for monthly meetings and quarterly department reviews as if nothing had happened in the past two years. China remains a question mark. Because they remain persistent on the zero-Covid strategy, they are not a viable destination at the moment. And I hope that the prolonged fight with Covid does not give other variants a chance to spring up. I think we have enough of a pandemic for, let’s say, the next few decades.

Inside the Collapse of CNN+, the News Channel’s ‘Apollo Mission’. The launch of CNN+ seems rushed and more like a political move by some executives than a savvy business initiative

How Gillette Embraced the Beard to Win Over Scruffy Millennials. Gillette went from demonizing beards to embracing them. After years of fruitless resistance and declining sales, they finally realized that their bread and butter product is no longer what men want. More than half of the men in the world don beard, including two-thirds of millennial men. Sensing that the tide they were going against was too strong, Gillette launched new beard-friendly products rolled into a line named King C. Gillette. A deviation from what the company is always known for, but a good strategic shift, I think.

Other stuff I found interesting

Could solar power solve Puerto Rico’s energy nightmare? I can’t imagine living in this day and age without electricity. Especially when that happens in a U.S territory.

Moon soil used to grow plants for first time in breakthrough test. This discovery inspires a lot of questions, possibilities and dreams

Cat Litter Could Be Antidote for Climate Change. I don’t know about you, but I don’t have “cat litter could absorb methane before it goes up in the air” in my 2022 bingo card. But it’s a nice surprise and discovery.

Stats

NYC subway ridership as of March 2022 is 60% of the pre-pandemic levels

Germany has 9% of all bitcoin nodes

“In 2021, U.S. podcast advertising revenues rose to $1.4 billion”

Only 50% of the time when a PayPayer user goes to a site that has PayPal does that user use PayPal

Thoughts on Buy With Prime

A few days ago, Amazon made a big announcement on Buy With Prime (BWP). Prime benefits loved by thousands of shoppers, including free & fast delivery, easy return and quick checkout, have been restricted to Amazon.com. That’s how Amazon persuades millions of shoppers to pay $10/month for the privileges. Now, imagine you can enjoy all of those benefits on other websites, not just Amazon. That’s what the new service is all about.

For Prime shoppers, there is virtually nothing that needs to be done beforehand. Once you come across eligible products from merchants that participate in BWP, you just need to repeat the usual checkout process on Amazon.com. There is no additional sign-up. At first glance, everything about BWP looks good, except that here are two things that concern me. The first is return. The language from Amazon reads that only some BWP orders, not all, are eligible for return. To me, the name Buy With Prime insinuates that all products enlisted in the program can be returned hassle-free. As a result, what does it mean that only some are qualified? What about the rest? How do I know which products are returnable and which aren’t? The other thing that gives me pause is that if there is an issue with my BWP orders, I have to contact the sellers. My experience with Amazon Prime so far has been great. I don’t have much to complain about. On one or two occasions when I needed to inquire about my orders, the Customer Service from Amazon was helpful and great. However, I wonder if the same level of excellence can be expected from BWP merchants. In case there are unresolved issues, will Amazon help me? What kind of purchase protection can I expect?

Buy With Prime. Source: Amazon

For Amazon, this is a hit-multiple-birds-with-one-stone move. First, expanding Prime to other online stores brings more selection to shoppers, enhancing the value of Prime. The more valuable shoppers find Prime, the stickier the membership will be and the more grip Amazon has on these coveted shoppers. Such influence will translate into bargaining power in negotiations with merchants and suppliers. Second, this service will help Amazon get the most out of their fulfillment capability. Any merchant wishing to participate in BWP does not need to sell on Amazon.com but must have their orders fulfilled by Amazon. The giant retailer has spent a fortune on building out their fulfillment capacity. In the 2021 shareholder letter, the CEO Andy Jassy wrote:

We spent Amazon’s first 25 years building a very large fulfillment network, and then had to double it in the last 24 months to meet customer demand. We’d been innovating in our fulfillment network for 20 years, constantly trying to shorten the time to get items to customers. In the early 2000s, it took us an average of 18 hours to get an item through our fulfillment centers and on the right truck for shipment. Now, it takes us two. 

Given the level of investments, it’s understandable that Amazon wants to maximize the utility of these fulfillment centers. The more orders the centers process, the higher their utilization and the higher the ROI. If you were Amazon, would you want the same thing? Third, off-Amazon purchase data! Amazon knows the behavior of Prime customers, based on their purchase history on Amazon.com. Nonetheless, they don’t know what these customers buy outside of its online store. The company tried to remedy this issue through initiatives such as Amazon Shopper Panel. With BWP, they can capture purchase data on other online stores and use it for their benefits such as private label launches, targeted ads or fine-tuning product recommendation.

For merchants, there are pros and cons from using BWP. Obviously, the Amazon Pay checkout option can help reduce cart abandonment. That’s the sales pitch that we often see the likes of PayPal or Apple Pay sing. Having Amazon take care of fulfillment is attractive to merchants that do not have the means to set up their own logistics. It’s also great for merchants to own the relationship with shoppers, instead of relinquishing it to Amazon entirely like before. While such benefits carry a great deal of appeal, merchants need to be aware of the risks related to BWP. Firstly, the fees paid to Amazon will cut deep into the margin of these merchants. Secondly, they may open the gate to the henhouse for the fox by letting Amazon know what Prime shoppers order on their website. It’s widely reported that some sellers thrived at first on Amazon.com, only to falter and disappear later when Amazon introduced similar products. Who is to say that it’s not a possibility in this case? In addition, BWP merchants have to be responsible for marketing. The greatest perk of being on Amazon.com is that sellers are almost guaranteed traffic. BWP just takes care of checkout and fulfillment. It doesn’t bring valuable traffic. With the reduced margin, due to Fulfillment by Amazon fees, can merchants afford the marketing expenses too?

The introduction of BWP can be a threat for the likes of PayPal, Shop Pay or Apple Pay. Apple Pay and Shop Pay don’t have a fulfillment solution attached to the checkout button. PayPal does with Happy Returns, even though its scale can’t be compared to Amazon’s. Merchants, especially small ones, will consider BWP because they don’t want to be distracted by all the shipping headaches. The adoption of BWP will certainly decrease the amount of transaction volume processed by PayPal, whose revenue is transaction-based. As a consequence, BWP is not welcoming news for PayPal. To remain competitive, PayPal needs to continue offering more values to merchants and simplify the checkout process as much as possible. In this game, having one more click than your rivals is like being slower by one second in F1. Moreover, they should be wise to point out the threats that Amazon can pose with BWP and hope that they can scare merchants into avoiding BWP. After all, few things are as persuasive as fear.

Weekly readings – 12th February 2022

What I wrote last week

Thoughts on PayPal’s latest earnings

Apple’s next growth opportunity. Disney’s streamers showed resilience. ESPN+ achieved its FY2024 target

Business

Stream big: how Netflix changed the TV landscape in 10 years. I don’t deny that Netflix revolutionized the streaming industry or that it has the scale advantages. What I disagree with Netflix bulls or fans on is the alleged invincibility. The latest earnings call was a disappointment, sending the stock down by 20%. For the first time, the management team vaguely admitted competition which includes rivals with deep pockets and additional services that can help “subsidize” these rivals’ streamers. So far, Netflix has been successful, but it’s not a lock that they will continue to be the market leader in the near future.

‘Spider-Man: No Way Home’ could have hit $2 billion at the global box office if it were released in China. Movies without a release date in the most populous country in the world leave a lot of dollars on the table. It will be interesting to see producers strike a balance between freedom to cast whoever they want or craft whatever story they want to tell and the need to appease China. A big payday from a release in the country is something worth thinking about.

New Airline Bets You’ll Stop in Alaska for a Cheaper Flight to Asia. Personally, I look forward to the launch of Northern Pacific and flights to Asia through Alaska. I have never been there and tickets can be cheaper. So why not?

Deep Dive: Xiaomi. More than just cheap phones

How Alexandre Arnault Is Shaking Things Up at Tiffany & Co. An interesting profile of one of the Arnault children. He seems to have more than just the right last name

A $6 Billion Wipeout Was an Omen for Food Delivery Stocks. At this point, I feel like it’s irresponsible to invest in food delivery startups or publicly traded firms that do not have the scale. While it’s already tough for the established incumbents to run their business in the black, it’s an order of magnitude harder for those without scale. And if you haven’t noticed, the market isn’t looking kindly on unprofitable companies in a cut-throat market like food delivery.

Stuff I found interesting

Where Is There More Lithium to Power Cars and Phones? Beneath a California Lake. “In the U.S. hunt for lithium, an essential component of the batteries that power electric vehicles and cellphones, one big untapped source might be bubbling under a giant lake in Southern California. The U.S. currently imports almost all of its lithium, but research shows large reserves in underground geothermal brines—a scalding hot soup of minerals, metals and saltwater. The catch: Extracting lithium from such a source at commercial scale is untested.”

House Passes $350 Billion Competitiveness Bill, but Senate Fight Looms. Read this article and you’ll see how broken Washington is. The country really needs leadership, assistance and regulation to compete on strategic fronts. Yet, these lawmakers are prioritizing tribal politics instead of putting the country first.

EV Charging Network Will Target Interstate Highways. “Dotting the interstate-highway corridors with charging stations is considered a priority because it will give EV motorists confidence that they can take long-distance trips without trouble recharging. Stations will have to be installed every 50 miles, no more than one mile off the interstate, according to a guidance memo by the Federal Highway Administration. And stations will have to have at least 600 kilowatts of total capacity, with ports for at least four cars that can simultaneously deliver at least 150 kilowatts each. The stations also have to be accessible to the general public, or to fleet operators from more than one company. The locations can include privately owned parking lots if they are open to the general public.”

Germany’s Covid Boomtown Stumbles Over Its Newfound Riches. Progressive politicians want companies to pay more taxes; which companies do not want to do. Folks just want stable jobs and to be taken care of by the tax money they pay. Marburg is another example of how hard it is to strike a balance and keep everyone happy

Stats

International students earned nearly half of the master’s and PhD STEM degrees in the US in 2019

90% of Uber’s earners work fewer than 40 hours per week and 60% work fewer than 20 hours per week (Investor Day 2022)

46% of Uber’s gross bookings in Q4 2021 came from customers engaged both with Mobility and Delivery. These customers made up only 17% of Uber’s customers base (Investor Day 2022)

10% of all first time riders to Uber in 2021 came to a 2-wheeler or a 3-wheeler trip (Investor Day 2022)

Thoughts on PayPal’s latest earnings

What happened?

Last week, PayPal reported its Q4 FY2021 results, causing the stock to reach by almost 25% and reach its 52-week low. Once a $360+ billion company at its peak valuation, PayPal is now worth $148 billion. There are a few contributing factors to this implosion.

The first is the disappointing guidance. A few months ago, the company set the revenue growth for 2022 at 18% which is now replaced by the 15-17% range. The guided Earnings Per Share is $4.67, well below the consensus of $5.21. For Q1 2022, revenue is expected to grow by 6%, significantly lower than the two-digit growth rate usually seen in every quarter since 2019. High inflation, the supply chain issues that have been felt across markets, increased tax rates and tough comparisons to last year’s results are to blame.

Net new active accounts are also a let-down. Total net adds in 2021 stood at 49 million, far lower than the 55 million target reaffirmed in November 2021. This year, PayPal expects to add 15-20 million new accounts. This conservative goal is lower than what PayPal managed in 2018 or 2019 before Covid-19 boosted their business and pulled forward a lot of net new accounts. The management gave two reasons for this muted outlook. First, 4.5 million accounts are found to be illegitimate. Even though the number is immaterial to the overall account base of more than 400 million, it affects the company’s estimate and thinking in terms of net new adds. The second and bigger reason is a new pivot in customer acquisition. Used to plow a lot of money in incentive-led marketing tactics, PayPal is going to abandon low-ROI efforts on low-value customers and instead prioritize high-ROI engagement campaigns which they say have better yields.

Because of the new pivot in customer acquisition, PayPal determined that the target of 750 million active accounts by 2025, which was only set last year on Investor Day, is no longer appropriate. The rumored acquisition of Pinterest a few months ago already called into question the growth outlook. This unexpectedly disappointing development aggravated investor doubt that the management team bit more than they could chew last year and sold investors on unrealistic targets. For me, it is the biggest shock from the earnings call. After Q3 FY2021, I was already concerned about PayPal’s ability to hit its long-term goal, but I, in no way, could expect that they gave up one year into the 5-year plan! Talk about disappointment!

Are the business’ fundamentals still healthy?

Investors are right to be downbeat on PayPal. The announcements on the earnings call gave nothing, but cause for doubt on the health of the business. Nonetheless, I don’t really think that all is lost. The outlook from here isn’t as rosy as we were told before, but one of the most iconic brands in the world can’t just crumble over night. Here are a few reasons why.

The divorce from eBay is strategically essential as it liberates PayPal from the exclusive partnership. EBay is now responsible for only 3% of PayPal’s total payment volume (TPV) and revenue, down from 8% of total TPV and 14% of revenue in the same quarter two years ago. Ex-eBay TPV growth has outpaced total TPV’s every quarter since Q1 2019. This, coupled with the fact that average transactions per active account continues to rise, signals that PayPal’s non-eBay services grew on merit and appeal to consumers.

PayPal's TPV and ex-eBay TPV growth
PayPal’s TPV and ex-eBay TPV growth

Venmo continues to impress with $60.5 billion in TPV and $250 million in revenue in Q4 FY2021. There are 83 million active users in the U.S alone, meaning that almost 1 out of 4 people in the country uses Venmo. The TPV and the popularity are likely to rise with new major partnerships such as the one with Amazon or DoorDash. However, since these partners may command a low take-rate, whether they will help with the monetization remains to be seen. That’s the overall concern with Venmo. Despite the apparent popularity and making up 17% of PayPal’s active account base, Venmo is only responsible for 3.6% of the company’s revenue. The likelihood of merging the two apps any time soon is low. The risk of damaging the Venmo “cult” and taking away its appeal by folding it into the parent app is too big, but at the same time, how would the company entice Venmo users to try out other services? Currently, Venmo is available only in the U.S. What about an international expansion? Investors definitely can use some more disclosures on both issues from the management team.

BNPL is another bright spot. Launched only in August 2020, Pay in 4 already reached $8 billion in total TPV, 12.2 million unique customers and 1.2 million participating merchants. Considering that the parent company has 383 million consumer accounts, 33 million active merchants and 200 markets, there is a lot of growth ahead. As customers who used BNPL delivered 2x average revenue per account, this service will be an important acquisition and engagement tool. Would that translate into money for PayPal? The jury is still out on this question. As there is no fee charged to consumers and no additional service fee to merchants, PayPal is hoping to generate revenue through additional services. This is one of the areas on which I wish to gain additional insights in the near future.

Ironically, I find the new pivot in customer acquisition positive to some extent. While I was disappointed by the abandonment of the 5-year target, I think or at least hope that this is the right move for the business. Let me explain why. I used to receive a lot of incentive-led marketing campaigns from PayPal such as a reward for downloading an app, a discount at a partner store or a chance to win a money pot. As a consumer, I liked these efforts. The investor in me, though, thought that these outreach efforts seemed like a desperate attempt to inflate active account numbers and keep the Street happy with the progress towards the magic 750 million number. But as the active consumer account base grows, you can’t buy cheap engagement forever. Soon, the cost of low ROI campaigns would catch up and it did for PayPal. Therefore, now that the target doesn’t float over their heads any more, the company can be smart about allocating valuable marketing dollars. The next few quarters and the new disclosures on ARPU will be critical in regaining investor trust.

PayPal's marketing tactics
PayPal’s marketing tactics

Competition

Adding fuel to investor doubt is the fact that PayPal has fierce competition in the payment market. The silent killer Apple Pay provides a seamless checkout experience on millions of Apple devices and thousands of online stores. Block/Square is investing and pushing aggressively (such as the acquisition of Afterpay) to gain an upper hand over PayPal to become THE Super App for financial needs. Affirm is evolving from being a pure BNPL player, and adding new capabilities such as eCommerce button, savings and rewards. Additionally, there are Shop Pay and Facebook Pay, native checkout experiences on hugely popular platforms with thousands of merchants and consumers. Last but not least, the rise of real-time payments around the world and in the U.S will also be a threat. Given this elevated level of competition and the sudden change in long-term targets, it’s obvious that PayPal underestimates competitors and overplays their hands. From now on, it’s back to the basics which include constant innovation, addition of value-added services and a firm grip on its engaged and loyal customers.

In summary

The latest quarter is undoubtedly a disaster. There is no other way to describe it. Management overestimated their competitive advantages and consequently set unrealistic goals which led to misguided actions (the rumored acquisition of Pinterest). When such mistakes came into light, the punishment followed, in the form of billions of dollars in market capitalization. But the iconic and trusted brand is still there. PayPal still has incredible assets and millions of active accounts on its platform. The ingredients for redemption are ready. Now it’s up to management to bring about results and restore investor trust.

Venmo’s TPV
Transactions Per Active Account

Super Apps

In this post, I’ll touch upon briefly the definition of a Super App, give a few examples and talk about the business implications of these apps.

The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others. Merchants need to have access to a lot of consumers to join a network while consumers only find the network useful when there is a lot of utility, namely plenty of merchants. The chicken and egg problem of a two-sided network is hard. Therefore, the singular focus on a vertical in the beginning makes sense as start-ups can’t afford to solve this issue in multiple verticals. No-one can build a Super App right from the get-go. Once an app excels and makes a name for itself in a vertical, why not leveraging existing traffic and offering users more reasons to stick around longer?

Examples of Super Apps

WeChat

WeChat started out as a messenger app. An engineer named Allen Zhang alerted his employer Tencent on a threat of other competitors taking away its market share and app engagement. To stay competitive, WeChat transformed itself into an app on which users could do everyday things on a single interface including payments, social media, e-commerce, doctor appointments, hotel reservation or ride-hailing. The pivot was a hit as the new services surpassed even the apps that inspired WeChat in the first place. 

Facebook

Facebook and its founding story need little introduction. Over the years, Facebook has added several services to make itself stickier as a platform. Nowadays, users can shop on a marketplace or Facebook-native stores; create new connections with Facebook’s own Tinder version; make payments with Facebook Pay or consume exclusive content from creators. With its ambition and virtually limitless resources, it won’t be a surprise that Facebook or Meta will expand its offerings in the future.  

Grab

The title of grab.com reads “Grab: The Everyday Everything App”. Its status as one of the biggest Super Apps in Southeast Asia is so different from its humble beginning. Grab was founded as a taxi-hailing business in Malaysia in 2012 by two Harvard graduates. The company gradually expanded into other areas, such as other modes of ride-hailing, food delivery & nonfood delivery, travel bookings, bill payment and financial services. In Vietnam, almost everyone in big cities uses Grab for daily tasks from food delivery, ride-sharing or bill payments.

What Grab mobile app looks like in Vietnam
Figure 1 – What Grab mobile app looks like in Vietnam

Uber

Uber was founded in 2009 by Travis Kalanick and Garrett Camp as a ride-hailing alternative to taxies. The company’s meteoric rise saw it become a global phenomenon, but the company today is more than just a ride-hailing app. In 2014, Uber launched a food delivery service called Uber Eats, which was later rebranded under Delivery. While Covid-19 decimated the Mobility segment (ride-sharing) as riders were restricted by stay-at-home orders, the pandemic was a catalyst for the transformation of Uber as a whole. Delivery has been growing substantially due to consumers ordering food and grocery deliveries. Its gross bookings have repeatedly surpassed Mobility’s and now reaches Mobility’s pre-pandemic level. Second, the company has made strategic acquisitions to expand beyond food delivery. In June 2020, Uber acquired Cornership, a popular grocery delivery service in Latin America. A few months after, it added Postmates, which is very competitive in coastal cities and offers delivery-as-a-service for non-food items. In October 2021, Uber took over an alcohol delivery startup called Drizly. The company has been tinkering with marijuana delivery in Canada and waiting for the green light from the federal government before launching it in the U.S. Powered by the new capabilities, nonfood categories make up around 5-6% of Uber’s overall gross bookings and are expected to grow more in the future. Uber’s ambition is very simple: be the go-to app when consumers have a transportation need. 

PayPal

PayPal first made a name for itself by being a secure digital wallet and online payment system, especially as the primary checkout option on eBay. Since its spin-off from eBay in 2014, the company has added plenty of services to its mobile app and become a formidable two-sided network, due to relentless acquisitions and product development. End users can access various services on the current PayPal app, including paycheck deposit, high-interest savings, bill payment, remittance, credit cards, debit cards, in-store & online payment, BNPL, PayPal Credit, P2P payment, shopping deals and investing. PayPal’s end goal is to be the go-to Financial app for its users.

PayPal's offerings to consumers and merchants
Figure 2 – PayPal’s offerings to consumers and merchants. Source: PayPal

Cash App

Cash App started out as a P2P payment app in which users could transfer funds to anybody in the U.S. Nowadays, users can pay for purchases in stores and online with Cash App debit card and Cash App Pay; invest in stocks and cryptocurrency; or make deposits into checking accounts. In November 2020, Square bought the tax filing division of Credit Karma and subsequently added to its flagship app the ability to file taxes and receive tax refunds. In August 2021, Square paid $29 billion for Afterpay, one of the major BNPL players in Australia and in the U.S. It’s just a matter of time before Cash App turns on BNPL for its users and merchants. Cash App’s ambition is similar to PayPal’s; which makes it interesting to see how the two compete in the future.

Pros and Cons of partnering with Super Apps

Merchants stand to gain an additional payment option as well as more sales from Super Apps, but the story isn’t all rosy. Too much reliance on Super Apps means that merchants’d risk ceding the control of direct customer relationships. In business, few things are more valuable than that. Take Apple and Amazon for instance. Apple’s customer base is so loyal and attached to their brand that almost all developers or other brands take the back seat in negotiations . Amazon’s scale and iron grip on the valuable Prime base allows them to dictate terms over merchants. When you buy from a merchant on Amazon, do you feel more related to the former or the latter?

For banks, Super Apps can have adverse impact in a couple of ways. First, services such as PayPal in 4, Afterpay, PayPal Credit or PayPal/Venmo credit cards can reduce issuers’ credit card spend and subsequently balance as well as revenue. Secondly, it’s in their interest to have users maintain an in-app balance and keep funds away from banks’ checking accounts. Think about it this way: would you feel more poised to use PayPal when your PayPal balance was $20 or $0? That’s why Venmo credits dormant users $10 for downloading and logging into the app again or why Square wants users to keep tax refunds in Cash App balance. The reduction in deposits can raise banks’ cost of funds as well as threaten to cut off the most fundamental relationship with customers. 

On the other hand, Super Apps present a battleground for financial institutions vying for wallet share. Once the connection between checking accounts or debit/credit cards and these Super Apps is established, users often don’t want to go through the inconvenience of updating their default payment method. Hence, every financial institution wants to be the primary source of funds for consumers on these Super Apps to have a leg up over the competition. In this sense, Super Apps offer a business opportunity.

In summary, as you can see above, there are multiple paths towards the Super App status, whether an app’s starting point is to be in messaging, digital wallets or ride-sharing. I think all successful consumer-facing apps have ambition to gain the Super App status. If not, they’d do something wrong. It’ll be interesting to see how these Super Apps compete for mindshare as feature parity is established (meaning they all offer similar features). For merchants, working with Super Apps can be a double-edged sword. While the benefits these apps bring are very tempting, merchants need to keep in mind the risk of losing customer relationships. Like people usually say: don’t miss the forest for the trees.

Weekly reading 13th November 2021

What I wrote last week

PayPal’s Q3 FY2021 results

Good reads on Business

A very good Business Breakdown episode on MongoDB. Database can be very abstract and tricky to grab your head around. Hence. I appreciate folks taking the time to share knowledge and translate a tricky subject into laymen’s terms. Check it out!

2021 Retailer of the Year: Dollar General. “Food and consumables accounted for 77% of Dollar General’s annual sales last year of $33.7 billion. The expansion of cooler and freezer capacity at new and remodeled stores has for several years been described as the Goodlettsville, Tenn.-based company’s most impactful merchandising initiative. Dollar General began selling fresh produce at select stores last year, expanded the program to 2,000 locations this year, and its current plan is to add produce in up to 10,000 stores.” The refusal to call itself a grocer, in my opinion, is spot on. The name of the store is Dollar General, not Dollar Grocery. To change it to grocery would be a mistake as consumers would wonder: what kind of grocery am I getting for $1? Plus, the brand is about getting daily items for at a low price (may not necessarily be cheaper than at Costco, if you talk about unit economics). Hence, it doesn’t make sense to limit themselves to just being a grocer.

Why charging phones is a complex business. An interview with Anker CEO. A really interesting one in my opinion. They plan to avoid going into the phone business and stick to what they do best: accessories. Smart. Strategic.

Experts From A World That No Longer Exists. “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.”

Facebook launches Shops in Groups and Live Shopping for Creators. The investments and focus on eCommerce, in my opinion, are strategically helpful to Facebook. Its giant cash cow has always been advertising powered by surveillance tracking which falls out of favor of many stakeholders. Politicians, lawmakers, more privacy-conscious consumers, powerful companies like Apple. Facebook has literally millions of people and thousands of brands using its platforms every day. It’s in a prime spot to be an eCommerce powerhouse.

Meta CTO thinks bad metaverse moderation could pose an ‘existential threat’. Boz wasn’t wrong there. What is interesting is that Facebook’s biggest challenge right now, before metaverse, is….moderation. In spite of billions of dollars and an army of technology plus human beings, Facebook still can’t crack the moderation code at scale, without pissing off a whole lot of people. Moreover, because its cash cow is advertising, Facebook has an inherent incentive to encourage engagement, whether it’s toxic engagement or not. I am not saying that moderation is easy. It’s super difficult and, like Boz said, almost impossible. But if your existential threat is impossible to solve, then it should give investors some pause.

Debit cards are hidden financial infrastructure. If you are interested in the U.S financial system, subscribe to this newsletter. I think the write-ups are helpful.

Stuff I found interesting

Hundreds of Ancient Maya Sites Hidden Under Mexico Reveal a Mysterious Blueprint. “In a new study, an international team of researchers led by anthropologist Takeshi Inomata from the University of Arizona reports the identification of almost 500 ceremonial complexes tracing back not just to the Maya, but also to another Mesoamerican civilization who made their mark on the land even earlier, the Olmecs.”

Brazilian Farmers Who Protect the Amazon Rainforest Would Like to Be Paid. “Governments, corporations and business executives are calling for a world-wide market to trade carbon credits so Brazilian farmers like Mr. Weis can be paid to help protect forests on their lands rather than cut them down to make way for more crops and cattle. Existing regional markets for carbon credits, from Europe to California to South Korea, show that the interest—and capital—is there for a global market. The value of carbon markets in Europe and elsewhere grew 23% last year to $274 billion, according to data provider Refinitiv Holdings Ltd. In a global market, carbon credits generated anywhere would be easily tradable anywhere else, just as a security issued by a Brazilian company can be bought and sold on the Nasdaq. Landholding farmers, indigenous groups, state governments and environmentalists could all sell credits.”

Spiders are much smarter than you think. ““There is this general idea that probably spiders are too small, that you need some kind of a critical mass of brain tissue to be able to perform complex behaviors,” says arachnologist and evolutionary biologist Dimitar Dimitrov of the University Museum of Bergen in Norway. “But I think spiders are one case where this general idea is challenged. Some small things are actually capable of doing very complex stuff.””

The nation’s last uranium mill plans to import Estonia’s radioactive waste. The tribes that live close to the U.S’ last uranium mill protest unambiguously and loudly the mill’s owner’s plant o import radioactive waste from Estonia since the water that feeds the tribes is ALREADY contaminated enough. Yet it seems that their concerns fall on deaf ears.

Perfecting the New York Street. “An achievable, replicable plan for a city that’s embracing public space as never before.” Yes, please. Fewer cars, less space for parking and more space for pedestrians

Stats

Cloud Computing Spend is expected to reach $848bn in 2025, according to Battery Venture

Vietnam is forecast to have 53 million online consumers by the end of 2021. The country has a population of 96 million people

“65% of U.S. consumers say they watch free, ad-supported video services”

PayPal Q3 FY2021 Results

The last quarter featured some great developments, acceptable numbers and a couple of concerns for PayPal, from my point of view.

The earning call started with the news that Amazon would let U.S customers check out on their website with Venmo. It’s a great win for the payment company as Amazon is the biggest eCommerce in the U.S, which is PayPal’s main market. The management team didn’t reveal much about the terms of the partnership, but given that Amazon has more bargaining power here, my guess is that PayPal has to offer some sweet economic incentives like a lower rate. In the 9 months ending September 2021, Amazon’s U.S sale was $197 billion, including hardware, physical stores, subscriptions etc. The company doesn’t break down the sale volume for its eCommerce, but for the sake of simplicity, let’s assume that Amazon.com generates around $200 billion in sales ever year. Even if Pay with Venmo processes 1% of that, it will still give PayPal a boost of $2 billion in Total Payment Volume (TPV). Not bad. You may ask given that Venmo TPV for this quarter is $60 billion alone, why is $2 billion lift a year not bad? Well, that’s because Venmo would actually generates money on this $2 billion lift in TPV while the reported $60 billion includes person-to-person (P2P) payments that earn Venmo almost absolutely nothing.

This kind of partnership is possible in the first place because PayPal is no longer constrained by legal obligations with eBay. Hence, we should see the company strike more similar deals in the future. Speaking of deals, PayPal also announced collaboration with Walmart, Booking.com, Fanatic, Phillips 66, GoFundMe and Everlane. At first glance, some of these deals make a lot of sense to me. Walmart is the biggest grocer in the country and a major retailer. Adding PayPal as a checkout option is huge and can help elevate PayPal’s TPV in the same way as Amazon would. 2/3 of Booking.com reservations are online. Since PayPal is already a checkout option, adding Venmo is a logical step to capture more of that payment share. Meanwhile, Everlane, as a fashion retailer, serves as a good case study for Happy Returns, which will be important to PayPal in acquiring and retaining merchants. Last but not least, offering QR codes at gas stations such as Phillips 66 and Valero facilitates seamless payments in a very familiar use case for all consumers.

PayPal Q3 2021 wins
Source: PayPal

BNPL has been an astounding success for PayPal. Launched in August 2020, the service already amassed $5.4 billion in transaction volume, $2 billion of which came in the last quarter alone, 9.5+ million users and 950,000 participating merchants. That’s about 2.5% of PayPal’s consumer base and 3% of its merchant base in only 6 markets so far. The potential growth is enormous. The company is introducing PayPal in 4 in Spain and Italy in Q4 2021 and planning new different flavors of its BNPL in the first half of 2022. I won’t be surprised if PayPal has $8-$10 billion in BNPL volume in the next 12 months (60% or 100% growth).

One of the biggest initiatives for PayPal is the launch of its new mobile app. It’s a major milestone towards being THE Super App for consumer financial needs. The early results, as reported by the company, were great. I don’t take much stock in them, though, because 1/ it’s still early and 2/ I don’t fully understand what all of the reported lifts mean. I’d rather wait for a couple of more quarters to see how the new app fares and hopefully the management team can give more color.

Early results of the new revamped PayPal app

On to the numbers. The last quarter’s TPV stood at $310 billion, a 26% YoY growth. Excluding $10 billion in eBay TPV, which is 3% of the total figure and trending down, the YoY growth is 31%. While eBay is gradually becoming the past for PayPal, Venmo is increasingly looking like the future. Its TPV last quarter was $60 billion, up 35% YoY, faster than the main app itself. Even though it’s only available in the U.S so far, Venmo managed to grow its TPV by more than three folds since 2018. In terms of active accounts, as of Q3 FY2021, PayPal had 413 million active accounts, including 80 million Venmo accounts and 33 million active merchants. Transactions per active account came in at 44.2. Transaction and total take-rates continued to trend down, standing at 1.88.% and 1.99% respectively in Q3 FY2021. As the reliance on eBay tapers off and the product mix is unfavorable (more bill volume or more volume from partners like Amazon that have lower rates), I expect this trend to continue for the foreseeable future.

The decrease in take rates will continue to heap pressure on revenue. Q3 FY2021 revenue growth already slowed down to 13%, much lower than what was reported in the previous four quarters. If we isolate the revenue from value added services which have little to do with the core business of PayPal, revenue growth is clocked at 10%. International revenue only grew by 2% YoY. This is particularly concerning if the management team wants to meet the goal set on Investor Day. To reach $50 billion in annual revenue at the end of 2025 starting with $25 billion in revenue this year, PayPal would have to grow the top line by at least 25%. Growth at the current clip is not going to cut it. On the Q3 Investor Update presentation, PayPal mentioned that the acquisition of Paidy would add 3 million new net accounts in 2021, but said nothing about revenue lift. I suspect that the company will continue to use M&A to aid with the growth numbers in the future. Is it a good approach? It could be, though every M&A carries a certain level of risks and you can’t fault people for doubting your own organic growth if you rely on M&A.

PayPal revenue and growth

Back in Q2 FY2021, PayPal made a major change to their pricing that went into effect on the 2nd of August 2021. Essentially, merchants will have to pay PayPal more in commission when consumers use the company’s branded mobile wallets such as PayPal, Pay with Venmo, PayPal in 4. On the other hand, when consumers key in card information without using PayPal’s wallet options, merchants will incur slightly lower rates. The assumption behind this move is that PayPal is confident in the attractiveness of its own mobile wallets. According to the latest 10-Q, the company claimed that the pricing changes didn’t meaningfully affect revenue. While it sounds encouraging, it has been only two full months. So we’ll have to wait a bit before rendering any verdict.

In summary, I’d give the quarter around 7 out of 10. The numbers aren’t catastrophic. We may just see the effect from a tough comparison from last year and the rule of big numbers. What concerns me more is that I don’t have enough information as of now to believe that they can hit the aggressive goal set for FY2025.

PayPal Total Payment Volume (TPV)
PayPal TPV YoY Growth
PayPal Active Accounts

Weekly reading – 23rd October 2021

What I wrote last week

PayPal in talks to buy Pinterest

Book review: Richer, Wiser Happier: How The World’s Greatest Investors Win In Markets & Life

Good reads on Business

Jokr and Personalized Instant Commerce. The article lays out useful data and information on Instant Commerce, especially Jokr. However, I am still a bit unsure about the unit economics of these delivery services. Last-mile delivery is hard and expensive, especially at scale. The consumer stickiness is naturally low and requires constant incentives to nurture. Competitors are everywhere. Plus, the good-old brick-and-mortar alternatives generally offer sufficient value and people, like myself, like to go out once in a while for some fresh air.

Netflix Loses Its Glow as Critics Target Chappelle Special. Netflix has started to encounter what the likes of Facebook and Twitter have for years: content moderation. The company can’t please everyone; so in this case, it’s natural that one or two stakeholders are disappointed with the Dave Chappelle show. The management team believes that the show brings net benefits to Netflix and acted accordingly. Agree with them or not, you should see where they are coming from. On the other hand, some employees reserve their right to disagree with that decision and be disappointed. That happens to even within families, let alone strangers that merely work at the same place. What remains to be seen to me are 1/ how would this affect staff turnover and talent management at Netflix; 2/ how would Netflix users think about the show?

Inside TSMC, the Taiwanese chipmaking giant that’s building a new plant in Phoenix. “TSMC makes key components for everything from cellphones to F-35 fighter jets to NASA’s Perseverance Rover mission to Mars. Earlier this month, it announced plans for a new factory in Japan, where it will produce chips with older technologies, for things like household devices and certain car components. TSMC is also Apple’s exclusive provider of the most advanced chips inside every iPhone currently on the market and most Mac computers. TSMC alone was responsible for 24% of the world’s semiconductor output in 2020, up from 21% in 2019, according to the company. When it comes to the most advanced chips used in the latest iPhones, supercomputers and automotive AI, TSMC is responsible for 92% of production while Samsung is responsible for the other 8%, according to research group Capital Economics. ”

How YouTube Makes Sure Its Hitmakers Don’t Stumble. YouTube spends tens of thousands of dollars on the top YouTubers to grow their content and ecosystem. Their in-house digital agency also offers guidance and consulting services to these personalities so that they can sustain attractive videos and high viewership. This kind of support, along with YouTube or its parent company’s resources, makes it difficult for other competitors to match.

Squid Game’ success shines a light on how cheap it is to make TV shows outside the U.S. “The total cost of making “Squid Game” was just $21.4 million. Episodes of Disney+’s Marvel shows, such as “WandaVision” or “The Falcon,” cost Disney $25 million per episode — more than all nine episodes of “Squid Game”“. I’d also prefer local characters being played by true locals to by Americans.

Is Best Buy undermining its storybook turnaround? I don’t think it’s a good idea to mess with a formula that works. Especially, that formula is around customer services and satisfaction. If I were a Best Buy shareholder, I’d send the CEO and the Management Team this article with a lot of questions.

Business Breakdown episode on Uber. If you are interested in gig economy and especially Uber as a business, have a listen. Whether you are a bull or a bear, I think it’ll be worth your time

How Many Users Does Facebook Have? The Company Struggles to Figure It Out. “A separate memo from May said that the number of U.S. Facebook users who are in their 20s and active at least once a month often exceeds the total population of Americans their age. “This brings out an elephant in the room: SUMA,” the memo’s author wrote, using an internal abbreviation for “Single User Multiple Accounts.” The author added that the issue could render Facebook’s ratio of users active each day “less trustable. Facebook said in its most recent quarterly securities filings that it estimates 11% of its monthly active users world-wide—which totaled 2.9 billion for its flagship platform in the second quarter—are duplicate accounts, with developing markets accounting for a higher proportion of them than developed ones.”

Other interesting stuff

Your Guide to the Third-Party Cookie. A very useful primer on the key factor in the digital advertising world. I have been on both sides of this issue. As a marketer, I can see why companies want to get as much data as possible to hone their targeting and make the best use of their ads dollars. On the other hand, as a consumer, I absolutely hate the feeling that somebody follows me everywhere across the Web. Privacy has been on the rise and will continue to be. iOS users now have a choice to voice their opinion on the matter with ATT. I don’t know how this all will shake out, but I would think that marketers would do well if they pivoted from 3rd party tracking.

Belgium’s shift from nuclear under fire as gas price surge strains Europe. It is baffling to me that countries are moving away from nuclear energy for gas-based power.

The Greek region too remote for maps

New Viking artifacts may mean that Christopher Columbus might not be the first one to discover the America continent. I guess it’s time to keep the holiday yet change the freaking name

Stats

Gas bills this winter can be at least 30% higher than last year

PayPal reportedly in talks to buy Pinterest

A couple of days ago, media outlets reported that PayPal was in talks to buy Pinterest for what could be a $40 billion deal. Per WSJ, “the talks are at an early stage and may not lead to a deal, some of the people cautioned.” If that went through, this acquisition would be PayPal’s biggest ever. But what does it mean for the iconic PayPal? Below are my thoughts.

Overview of PayPal & Pinterest

Before we go further, let’s recap quickly what PayPal and Pinterest do, how they make money and how their businesses are at the moment.

Formerly known as a check-out and Person-to-Person (P2P) function, PayPal has grown leaps and bounds in the last few years with grandiose ambition to be THE Super App for payments, consumer financial services and eCommerce. PayPal’s services now include almost all the things that consumers need such as debit card, credit card, BNPL, online & offline payment, P2P or remittance, just to name a few. On the merchant side, PayPal has added a plethora of Merchant Services and Marketing Tools in addition to its well-known payment processing. As a two-sided platform, PayPal needs to deliver value to consumers in as many ways as possible, including enhanced and seamless shopping at merchants, while appealing to merchants with tools to grow their business from both marketing and operations standpoints. Last month, the company took a big step towards their grand vision with the new PayPal mobile app.

There are several revenue streams for PayPal. First, a bulk of its revenue is from transaction processing. For each transaction that goes through PayPal, the company takes a cut. Hence, the bigger the volume, the bigger PayPal’s top and bottom lines. Second, PayPal also charges merchants on value-added services such as loans, inventory management or point of sale. Then, it also generates fees from other services such as remittance or credit card-related fees.

The transformation of the business is also evident in the numbers. PayPal’s number of active accounts grew from 244 to 403 million from 2018 to 2021, including 76 million Venmo accounts, while the merchant base expanded from 19 to 32 million. Its quarterly Transaction Volume exploded from $139 to $311 billion, more than $1.2 trillion in annualized volume. In Investor Day 2021, PayPal disclosed their target of $2.8 trillion in annual volume, 750 million active accounts and $50 billion in annual revenue at the end of FY2025. Quite an ambitious target.

PayPal's consumer and merchant services
Figure 1 – PayPal’s consumer and merchant services. Source: PayPal

The other side of the rumored deal, Pinterest, is a visual-centric social platform whose mission is to bring inspiration to people’s lives. “A photo is worth a thousand words” is essentially their value proposition. Every day, thousands of users & brands, called Pinners, post their ideas in the form of images or videos, called Pins, to the platform. Pins can be grouped together in personalized Boards that are accessible to others. Similar to other social media platforms, Pinterest deploys machine learning algorithm to personalize suggestions of new ideas to users, based on their previous activities. Meanwhile, advertisers can take advantage of the visual-centric experience, the global audience as well as data on consumer preferences calledTaste Graph on Pinterest to optimize advertising dollars and grow their business. Over the last couple of years, Pinterest has invested in features and partnerships to enable commerce on its properties. For instance, it launched Shop from Boards, Shop from Search and Shop from Pins in April 2020. The month after, it announced a partnership with Shopify that allows Shopify merchants to upload their catalogue to Pinterest seamlessly. Earlier this month, the company introduced a few new features to help merchants and creators showcase their hard work and generate more revenue/income.

Pinners saved nearly 300 billion Pins across more than six billion boards. We call this body of data the Pinterest taste graph. Machine learning and computer vision help us find patterns in the data. We then understand each individual Pin’s relationship not just to the Pinner who saved it, but also to the ideas and aesthetics reflected by the names and content of the boards where it’s been pinned. We believe we can better predict what content will be helpful and relevant because Pinners tell us how they organize ideas. The Pinterest taste graph is the first-party data asset we use to power our visual recommendations.

Source: Pinterest

According to the latest filings, there are 454 million Monthly Active Users on the platform, 2/3 of which are female and 80% of which are outside the U.S. Even though it makes up only 20% of the MAU base, the U.S generates 78-80% of Pinterest’s revenue which came in at $485 million and $613 million in Q1 and Q2 2021 respectively. Pinterest was operationally unprofitable in the last three years, but has turned in some profit in the first 6 months of 2021. As a result, their free cash flow (FCF) has improved markedly. The company had negative FCF in 2018 and 2019 before turning in an FCF margin (FCF over revenue) of 0.73% in 2020. Their FCF margin for Q1 and Q2 2021 was 55% and 17% respectively. To put it in perspective, PayPal’s FCF margin in the last two quarters was 25% and 17% respectively.

Pinterest quarterly revenue
Figure 2 – Pinterest’s quarterly revenue. Source: Pinterest

Would the acquisition be about increasing active accounts for PayPal?

I doubt it is the primary reason why PayPal entertained this move. At the moment, these two are completely separate apps. Having Pinterest under PayPal would provide absolutely no incentive for Pinterest users to become PayPal users. Merchants that are already on Pinterest have no extra incentive to work with PayPal just because of this alleged acquisition. If PayPal decided to force the issue and fold the red app into the blue app, it would be catastrophic for both and a value killer for shareholders.

Would the acquisition be about improving free cash flow for PayPal and padding the sheets?

While Pinterest indeed posted higher FCF margin in the last two quarters than PayPal, I don’t think improving FCF margin is the driver of this move either. Competitively, PayPal is in a far stronger position than Pinterest. The former is one of the most iconic brands globally with millions of users and merchants in its network and in the leading position in its field whereas the latter is no match in terms of advertising capabilities with the likes of Facebook, Instagram or Google. The remarkable turnaround in FCF margin only happened in the last two quarters; hence there is no telling what the future would be, given the lack of strong competitive advantages. Plus, the price tag is more than $40 billion. It’s unfathomable to think that PayPal’s board would authorize such a gigantic splash for this reason alone.

Would the acquisition be about the upper marketing funnel and closing the loop for PayPal?

At the bottom of the customer experience, aka the checkout page, is where PayPal excels with its breadth of both consumer and merchant services. What it doesn’t excel at, yet, is at the upper funnel where the interest seed is planted and where reach is generated. In other words, PayPal doesn’t have the capability or expertise yet to help merchants expand the customer pool. Last year, the company paid $4 billion for Honey, a browser extension that finds online deals and presents them to shoppers. To some extent, Honey helps PayPal address the issue of lead generation, but as a browser extension, there is only so much that Honey can do, especially on a global scale. At the time of the acquisition, Honey had 17 million active users. Not everyone who uses PayPal installs Honey on their browsers. Yours truly is one of those people.

With more than 450 million users across the globe, theoretically Pinterest could be the solution to this problem. However, the question is what the customer experience of PayPal + Pinterest would look like. The ramifications may have significant impact.

At the time of this writing, users can browse for ideas on Pinterest and be directed to merchant websites for further actions without even having to leave the red app if they choose to click on the hyperlinks that come with the Pins. The problem for PayPal is that this whole journey has nothing to do with them. Merchants choose which payment processor offers the best value, not which one owns Pinterest. If PayPal forced merchants to use their own product to use the social platform, it would backfire. In this scenario, there is no strategic value add for PayPal.

One possibility floated on the Net is that Pinterest could be PayPal’s eBay. Ironically, eBay owned PayPal from the early 2000s till their divorce in 2015 and since then PayPal has gradually reduced their reliance on eBay for transaction volume. I am not sure that PayPal wants to pay a mountain of money for something that they want nothing to do with any more. Even if PayPal wanted Pinterest to become their own eBay, running a two-sided global marketplace is a resource-consuming endeavor. After pouring $40+ billion in acquiring Pinterest, PayPal would have to spare valuable resources to help the acquired firm. Given the intense competition that PayPal faces and the head start in terms of marketplace that Facebook and Instagram have, this possibility, while not too wild, doesn’t sound appealing.

What I suspect is the crown jewel that might interest PayPal is the Taste Graph mentioned above. While the new PayPal app is definitely an improvement over its predecessor, the Shop tab is underwhelming. There are a bunch of offers on the tab, but there is little personalization. Hence, I don’t think at the current state, it helps merchants drive a lot of sale. In theory, PayPal could do a lot more personalization given the data on shopping behavior that it possesses. By mining transaction data, PayPal could know which merchants are one’s favorite, how often one shops at those merchants, which product categories (using Merchant Category Codes) are popular and even what items (SKU data) are shopped the most. By working with bureau agencies like Experian, PayPal could learn about financial status of its users such as how many trades are open, the total balance of all trades, the delinquency history and all that.

The Shop tab on PayPal's app
Figure 3 – The Shop tab on PayPal’s app

What PayPal doesn’t have is the interest data outside of the transactions processed on its platform. Let me give you an example. I am a huge fan of Manchester United and Scuderia Ferrari F1 team. But you wouldn’t know it if you merely looked at the transactions on all my credit cards, let alone only my PayPal account. PayPal could work with another company to acquire this data; however, this presents two challenges. If the data is not 1st-party data, it’s usually very unreliable. The Taste Graph is Pinterest’s intellectual property and 1st data. The reliability is certain. The other problem is that who has the global footprint that Pinterest has and available for an acquisition. Facebook, Google, LinkedIn, Twitter or even Snapchat isn’t available. I am sure PayPal could find another company with 1st party interest graph for the U.S market, but it’s not easy to find it for the global audience. If PayPal is serious about meeting their 4-year target, the U.S market alone wouldn’t cut it.

For good measure, PayPal likely doesn’t have the top of wallet share for its users. In other words, if an average person spends $1,000 a month, I don’t think that user will spend everything through PayPal. If I have to guess, PayPal only sees less than 30% of the wallet share. The implication is that they have no idea about the spending pattern and interest that lies in the other 70-80% of the wallet. So if they wanted to operate a serious deal-recommending engine on the PayPal app, they would want as much data as possible. As PayPal already strives to get users to spend as much as possible through their platform, increasing the wallet share organically takes time.

PayPal offers consumers all possible checkout options: BNPL, its mobile wallet, debit card, credit card and line of credit. It definitely wants the app to be the ultimate shopping app for consumers. Right now, a PayPal user like me doesn’t open the app unless I need to send somebody money. I figure that PayPal wants users to actually open the app and spend time there every day. To do that, they need to incentivize shoppers to visit and the best way is personalized deals. To grow its merchant base, the best way is to generate sales and leads for merchants. In my mind, the alleged acquisition of Pinterest could help with these two objectives. With that being said, $40+ billion is a huge price tag and acquisitions are generally challenging to pull off, especially expensive ones. I am also concerned about how much overlap there is between the two user bases. There is also a question of engagement of international users. Despite making up 80% of Pinterest MAUs, users outside the U.S bring only 20% of revenue. Is it because Pinterest isn’t popular among international advertisers? (I know there are Pinterest users in Vietnam, but I doubt there are brands and advertisers that actually use the platform) Or is it because user engagement isn’t high? While I can try to see the logic, I am not too comfortable with this major move.

Appendix

Shopping intent on Pinterest stats
Figure 4 – Shopping intent on Pinterest stats. Source: Jareau Wade
Consumer register preferences at the start of the shopping journey
Figure 5 – Consumer register preferences at the start of the shopping journey. Source: Thomas Paulson

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