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

Let’s talk Paypal. No longer merely a P2P player

The story of Paypal started in 1998 when Max Levchin, Peter Thiel and Luke Nosek founded Confinity, a digital wallet company. They later merged Confinity with X.com, launched by Elon Musk, and altogether rebranded the new entity as Paypal. In 2002, the company went public under the ticket $PYPL. Later in the same year oof its IPO, it was acquired by eBay and became the prominent payment option on the famous marketplace. In 2015, Paypal left the eBay family to become a separate and independent entity. Six years later, it is now one of the most trusted brands in the world, available in more than 200 countries and valued at almost $300 billion.

At the core, Paypal provides payment and financial services to both consumers and merchants. Originally, it used to be one of the primary methods of person-to-person (P2P) transactions. Over the years, Paypal has transformed itself into a more expansive platform. Consumers can now use Paypal to send and receive money from others as well as to pay merchants, whether the transactions are online or in stores with debit cards, credit cards, tap to pay and QR Codes. On the merchant side, Paypal offers a host of solutions, including payment processing, marketing tools and financing options.

Paypal's breadth of services
Figure 1 – Paypal’s services. Source: Paypal

As a two-sided platform, Paypal needs one side to feed the other. From the consumer perspective, they only find Paypal useful when they have friends and families on Paypal network. Additionally, Paypal must be accepted at various merchants, whether transactions take place in physical stores or on websites. Otherwise, what would be the point of having a Paypal account? From the merchant perspective, Paypal’s value propositions lie in their payment solution and the brand name as well as trust cultivated with consumers. If consumers didn’t trust or use Paypal, there would be plenty of other alternatives. But that’s also one of their three moats. It’s super hard to be a two-sided platform because of the chicken-and-egg problem. Not only did Paypal have to solve that problem between consumers and merchants, but they also had to deal with it within the consumer space.

Another moat of Paypal is that the company has cultivated trust in consumers and merchants alike with its track record of security. Even though security breaches are almost inevitable to any company, so far Paypal hasn’t recorded too many incidents. When it comes to handling people’s money, security should be at the top of any company’s agenda. I mean, anyone can boast that they can exercise two hours in a row. I don’t doubt it. But it’s a completely different challenge to exercise two hours a day for 30 days in a row, let alone for years. To replicate such a track record, a competitor needs to invest in security and more importantly, it needs time. No matter what a newcomer says about its own security, only time can seed the trust in the constituents of its network. Unfortunately, time isn’t something that human brains or money can buy. And while a newcomer or existing player builds up its track record, Paypal is not likely to stand still. Just look at their M&A activities in the last few years: Venmo & Braintree (2013), Xoom (2015), iZettle (2018), Honey (2019), GoPay & Happy Returns (2021).

Finally, Paypal is operating at an enormous scale. In Q1 FY2021, it processed $285 billion in transactions, growing at 49% YoY. That annualizes to more than $1 trillion. As you may know, scale is the magic in business. Paypal’s gigantic scale should give the company a cost advantage over competitors. Plus, the breadth of Paypal offerings poses a daunting challenge to anyone wishing to match them. Just look at Figure 1 to see how many services are available, not to mention the acquisition of Happy Returns. It’s hard to spread resources and make investments on multiple fronts when you are on the back foot in terms of unit costs. Just to give you an example of what the scale of Paypal’s existing active account base and its brand name can do, let’s take a look at the rollout of Buy Now Pay Later and QR Code. Paypal introduced its Buy Now Pay Later only in August 2020. As of Q1 2021, its Pay in 4 already had over $2 billion in TPV globally, of which $1 billion came from the US. Pay in 4 also had 5 million unique customers. In addition to its popularity and reach, Paypal offers the service to merchants without charge. Normally, merchants have to pay BNPL providers several times the normal interchange, but Paypal is willing to subsidize merchants to gain market share. Also, the company enabled pay by QR Code some time in the latter half of 2020, but it already amassed 1 million merchants as of Q1 2021 that used the service, up from 500,000 two quarters prior.

How Paypal benefits merchants
Figure 2 – Value propositions of Paypal to merchants. Source: Paypal

How does Paypal make money?

We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services.

We generate revenue from consumers on fees charged for foreign currency conversion, optional instant transfers from their PayPal or Venmo account to their debit card or bank account, interest and fees from our PayPal Credit products, and other miscellaneous fees.

Source: Paypal’s latest Annual Report

In short, Paypal charges merchants on every processed transaction and for other additional services. On the consumer side, P2P transactions don’t yield much revenue, but if consumers want to have instant deposits or have an outstanding unpaid balance on their credit cards with Paypal or Venmo, then the company earns additional fees and interest on the balance.

Take-rates which indicate what Paypal gets in revenue over the transaction volume depend on the kinds of transactions. Normally, bill payments and P2P transactions have low take-rates. Transactions funded using debit or credit cards are more expensive to process than those funded using bank accounts or balance within Paypal or Venmo. Commercial transactions such as those on eBay or cross-border transactions that require a foreign exchange are more lucrative. Obviously, Paypal would love to maximize revenue and profits, but there is necessarily a balancing act to be had here. Although bill payments and P2P have a low yield, they are sticky. They are what keeps users engaged and in the network. Payments is a highly contested industry. Any transactions processed by legacy banks, other providers such as Square or Apple Pay and fintechs are transactions that Paypal loses. Hence, I think for the time being, it’s better for the company’s future that they are prioritizing the growth of the active account base and engagement.

Venmo and Paypal TPV
Figure 3 – Paypal and Venmo TPV
Paypal's active account base
Figure 4 – Paypal’s active account base
Paypal and Venmo YoY Growth in TPV
Figure 5 – Paypal & Venmo YoY Growth in TPV
Transactions per active accounts from Paypal
Figure 6 – Transactions Per Account

In short, I am bullish on Paypal. The company has a brand name known and trusted in many countries around the globe. It has the expertise after spending more than two decades in the industry and the ability to transform itself into a more expansive and competitive entity. It has a nice track record of acquiring other businesses to add needed capabilities. Currently, Paypal is the only Western company with 100% ownership of a Chinese payments company after it acquired 100% stake in GoPay. Additionally, it announced the acquisition of Happy Returns with the aim of offering merchants as well as shoppers convenient return services. As payments are pretty fragmented, I believe Paypal will not have any trouble from regulators with regard to future M&A. Yes, competition is plenty and stiff, but as you may already see at this point, there are reasons to like Paypal and what they are doing.

Disclosure: I have a position on Paypal.

Weekly reading – 15th May 2021

What I wrote last week

App Tracking Transparency & Apple Search Ads

Business

Why DoorDash and Uber Eats Delivery Is Costing You More. The service and delivery fees seem to be bigger than they were before Covid. I am not so sure if that trend is positive to the future of these delivery companies. At some point, it would hurt the relationship with merchants

Walmart is losing its grips on grocery. I don’t really expect Walmart to catch up with Prime soon, but it’s a bit surprising to me that the company is losing its lead in grocery, their bread and butter.

A sensible and good writeup on Epic vs Apple. I may be biased towards Apple as it is my first ever stock, but if you are a reasonable person, you likely won’t look at what Epic did and does, and support them.

Vietnamese startup Nano raised $3 million seed round. I believe this should be one of many fintech startups from Vietnam in the near future.

The Korean Chatroulette-style dating app quietly taking over the world

JPMorgan, Others Plan to Issue Credit Cards to People With No Credit Scores. It’s past time that companies take into account other factors in giving prospects credit cards or not.

What I found interesting

Biggest ISPs paid for 8.5 million fake FCC comments opposing net neutrality

Apple AirTags vs. Tile: The Best Tool for Finding Your Lost Stuff. The current generation of AirTags may have weaknesses and their performance isn’t eye-opening yet. But give it some time and I believe it can be another great segment in addition to AirPods and Apple Watch

Fact-checking Modi’s India. It’s just mind-blowing how the truth can be bent that much so that some people gain so much power.

The Verge has a good article on Federated Learning of Cohorts (FLoC), a new initiative by Google as preparation for life after 3rd party cookies

Jony Ive’s advice to the next generation of designers

Stats that may interest you

Consumer prices increased by 2.6% for 12 months ending March 2021. Perhaps it’s time to be rigorous in saving your money, unless you can increase your income.

App Store stopped more than $1.5 billion in potentially fraudulent transactions in 2020

A Look At “Buy Now Pay Later”

“Buy Now Pay Later” (BNPL) lets consumers break down purchases into smaller installments, either for free or with a charge. Sounds familiar? BNPL isn’t a new concept. Your credit card is essentially the OG of BNPL. When you put a big purchase (like a mattress or a new smart TV) on your credit card, you can spread out the outstanding balance into smaller chunks over a few months. If you make prompt payments every cycle, there will be no finance charge or late fees. Otherwise, you’ll incur penalties which can be fairly expensive as credit cards’ APR is usually in the high teens or the 20s.

What is the difference between BNPL and credit cards then? While credit cards can be convenient, securing approval isn’t always easy, especially for low FICO customers. Even though possession of a credit card can boost one’s FICO in the long term, upon an application for a new card, consumers will likely receive a hard FICO pull which hurts their standing in the short term; the price that some customers are reluctant to pay. Furthermore, it can take a couple of weeks for consumers to receive their plastics. With BNPL, consumers can receive a decision from BNPL online in a few minutes and there is only a soft FICO pull that doesn’t hurt their credit standing in the short term. As Covid-19 forced businesses to move from brick-and-mortar to online and it placed significant financial constraints on consumers, it created a perfect environment for BNPL to thrive.

Who are the main players and what do they offer?

  • Afterpay is among the biggest BNPL lenders in the US. Hailing from Australia, the company only entered the US market in 2018. Remarkably, the US has quickly become the biggest contribution to the company’s revenue in only 3 years. Afterpay doesn’t charge interest. Consumers make the down payment at the time of the purchase and have to pay off balance in 6 weeks (a payment every 2 weeks) to avoid late fees.
  • Klarna is a Swedish startup that offers payment and financial services, including BNPL. It entered the US market in 2015. Klarna allows consumers to make interest-free installments within 30 days or 6 weeks. It also offers high-interest financing options that spread out payments in a longer term.
  • US consumers should be very familiar with Paypal. The company launched its BNPL offering last August. Paypal’s BNPL is similar to Afterpay’s, allowing consumers to break down purchases into 4 interest-free installments.
  • Affirm was founded by ex Paypal, Max Levchin in 2012. Its model is slightly different from other BNPL lenders’ in a sense that Affirm doesn’t charge consumers usage or late fees. Payment options include monthly interest-free installments in 3 months or installments with interest over a longer period.

These startups have played an important role in popularizing BNPL. Now, banks joined the party. Amex launched its BNPL a couple of years ago, but on a fairly limited basis. Since then, it has opened it up to more customers. Chase also introduced its own version called “My Chase Plan”. These banks let consumers make interest-free installments with a monthly fee equal to a percentage of the purchase’s amount. This gives borrowers incentive to pay off their balance as soon as possible, because the longer the plan is, the more fee they will have to pay. Amex even lets its customers combine multiple purchases into one BNPL plan. Unlike startup BNPL providers, these banks impose a minimum requirement of $100 per purchase, along with other criteria, to ensure that customers aren’t overextended.

 InterestInstallment FrequencyFee to use BNPLLate fees
After Pay0%Every 2 weeksNoneYes
Affirm0% – 30%Monthly, up to 12 monthsNoneNone
Amex0%Every month% of each eligible plan’s total amount. Yes
Chase0%Every month between 3-18 months% of each eligible plan’s total amount.Yes
Klarna0% – 19.99%Every 2 weeks or in 30 days for 0%Every month up to 36 months with APRNoneYes
Paypal0%Every 2 weeksNoneYes
Quadpay0%Every 2 weeksNoneYes
 AmexChase
How many plans can an account have?10 active plans at a time10 active or pending plans at a time
Minimum purchase requirement$100$100
Penalties for paying off plans earlyNoNo
Rewards on BNPL purchasesYesYes
Are refunds/returns automatically applied to an account’s balance?No, customers must call the issuerNo, customers must call the issuer
Can authorized users set up plans?Only card owners or Authorized Account Managers with Full Access can set up a planOnly card owners can set up a plan

What do merchants and consumers get from BNPL?

For shoppers, BNPL lets them spread out a big purchase into smaller interest-free installments quickly and without a credit card. As mentioned above, the convenience and speed that BNPL brings are even more attractive during Covid-19, especially to younger shoppers who may not build their credit yet or may not have a credit card. Klarna and Afterpay claimed that 90% of their transactions were with debit cards, and 72% of those customers had enough balance on their checking account to cover 2-5x the purchase amount. To lock in customers, BNPL providers such as Klarna and Afterpay launched loyalty programs respectively with additional benefits for their most engaged customers. Klarna’s rewards program Vibe was launched first in the US in June 2020. The no-fee program allows customers to earn 1 point for every dollar spent. The points can be later redeemed for gift cards. Klarna reported that the program exceeded more than 1 million members. On the other hand, Afterpay’s loyalty program Pulse offers a different set of benefits. Registered members in the program can opt to pay nothing up front, choose to reschedule up to 6 payment dates and buy Afterpay gift cards. With Amex and Chase, shoppers accrue points to their bank rewards accounts and can be redeemed later.

However, there are risks for consumers when using BNPL services. A study found that many shoppers incurred late fees, not because they couldn’t make payments financially, but because they lost track of their payment schedule. While this prospect is real, BNPL providers are taking steps to make it easier for shoppers to pay on time. Klarna lets customers set up automatic payments and send out notifications. In the long term, it will be better for BNPL providers to rely too much on late fees. The second risk lies in the consumer protection or lack thereof and the difficulty when it comes to refunds/returns. Credit card issuers have to stop payments when they are disputed. With other BNPL providers, consumers first have to contact sellers, get credit and then proceed to the next steps with the lenders and the outcome is less guaranteed.

From a merchant’s perspective, BNPL brings more customers as the service providers spend a lot of money on marketing and user acquisition. Regardless of whether borrowers make payments on time, merchants get paid in full up front and they don’t have to bear the risk of chargebacks or fraud. In return, though, merchants have to relinquish a fee for each transaction to BNPL providers that can be multiple times higher than what they usually pay in interchange. Plus, merchants risk losing their relationship with customers. I wrote about the importance of owning your relation with your customers. If shoppers feel more attached to BNPL providers than merchants, in the same way shoppers feel more attached to Amazon than the sellers on Amazon’s website, merchants run a risk of losing bargaining power.

BNPL adoption

Because it brings flexibility in payments, BNPL became a hit with shoppers in 2020. Klarna reported that at the end of 2020, it had 14 million registered consumers, 3.5 million monthly active users and 60,000 downloads in December 2020 alone. As of Feb 2021, Affirm had about 4.5 million users that had at least one transaction in the last 12 months, up from 3 million users from one year prior, an increase of 50% YoY. Likewise, Afterpay had 8 million active users as of Feb 2021, up from 5.6 million in June 2020, and the US is now its biggest market. Paypal introduced its “Pay in 4” product in the US market in August 2020 and said that it was the company’s most successful launch ever. 

The rise of BNPL also benefits merchants. In December 2020 alone, Klarna drove 22 million lead referrals to more than 6,000 US retailers. Reportedly, Sephora’s in-store and online orders through Klarna in the US saw an increase in average order value by 65% and 35% respectively. Additionally, Afterpay delivered 45 million lead referrals to its partners globally in December 2020. As the US is Afterpay’s biggest segment and the world’s biggest retail market, it likely made up more than half of those referrals. Over the last 12 months, Afterpay reported a 141% increase in the number of active merchants in the US, from 7,400 in Dec 2019 to almost 18,000 in Dec 2020. Furthermore, Affirmgrew its merchant network by 39% during the last 6 months of 2020, to almost 8,000. 

According to the latest Global Payment Reports by FIS, BNPL will make up 4.5% of North America’s eCommerce in 2024, up from 1.6% in 2020. 

How do BNPL providers make money?

For providers that have an option to charge interest up front like Affirm, interest income can be a significant source of revenue. In fact, it’s Affirm’s second biggest revenue stream. Late fees can be another stream, though, as I already mentioned, they should constitute a small percentage of a provider’s income. Afterpay’s late fee only makes up 7% of the company’s revenue. Most of these providers make money from a fee that merchants have to pay them on every transaction. This fee helps BNPL providers offset the cost of fund placed on the balance allocated to shoppers, the interchange fee that these providers later have to pay to card issuers when shoppers make payments and operating expenses. As BNPL lenders become more popular, I suspect they will eventually launch advertising services whose revenue is high margin, compared to their current margin structure. For banks such as Amex and Chase, a minimum purchase requirement of $100+ means a higher interchange revenue. Plus, they charge customers a monthly fee to use their BNPL service. On the other hand, banks have to incur more expenses as they are much more regulated.

In short, BNPL is a trend born out of unaddressed needs of consumers and accelerated by a special market environment (Covid-19). It’s similar to something that once you saw, you can’t unsee. Once consumers experience it and come to like it, as evidenced by the rapid growth of BNPL providers, I don’t see how it will go away in the future. It will be interesting to see 1/ how these providers work to be more efficient, grow their machine learning capabilities so that they can minimize their losses, and acquire users and 2/ how lawmakers catch up to what’s going on in the market and what ramifications potentially new laws would bring.

Weekly readings – 1st August 2020

What I wrote

This sleeping software company has a lot of growth. Learn how the maker of of AutoCAD has a bright future ahead

I gave reasons why I am pessimistic about America’s outlook till the end of the year

Read my thoughts on the antitrust hearing this week

Take a look at this hybrid product of a credit and debit card

My notes on Amazon Q2 FY 2020. A very impressive performance

Business

Paypal’s study on how consumers used their rewards during the pandemic

A good thread on the CEO and Founder of Amazon

American SMBs had an average of $160,000 in sales by selling on Amazon, up year-over-year from about $100,000.

Technology

The Next Generation of Fintech Infrastructure: How API Platforms are Disrupting Banking & Payments

What I find interesting

A story on how Iceland managed to persuade teenagers to stay away from drinking & drugs

The percentage of 15- and 16-year-olds who had been drunk in the previous month plummeted from 42 percent in 1998 to 5 percent in 2016. The percentage who have ever used cannabis is down from 17 percent to 7 percent. Those smoking cigarettes every day fell from 23 percent to just 3 percent.

Source: The Atlantic

This country regrew its lost forest. Can the world learn from it?

The 2nd stimulus package, if passed, is going to be an important event in our fight against Covid-19 and its implications. Both parties offered their own version of the package. The New York Times broke it down visually so that everybody can follow

Image

An excellent commercial ads by Nike. This is very very well-done

Weekly readings – 30th November 2019

The bus ticket theory of genuis

What to Do When a Work Friendship Becomes Emotionally Draining

Do Ridesharing Services Increase Alcohol Consumption? Do they add net benefits to our societies?

Why Are Canadian Construction Costs So High?

The California DMV Is Making $50M a Year Selling Drivers’ Personal Information

A Brief Cartographic History of Hai Phong 1898–1968

Inside the fall of WeWork. It’s mind blowing that there continues to be more investigative pieces on how dysfunctional WeWork is. It’s inconceivable to think without public scrutiny how the company would be and how it would harm public investors’ interest. One notable quote from the piece is that WeWork’s operations make the current White House look like a well-oiled machine.

Platforms and Publishers: The End of an Era. A pretty long yet interesting read on platforms and publishers

Comparing unit economics of food delivery companies

The climate crisis has sparked a Siberian mammoth tusk gold rush

How Disneyland got its start

Prisoners have to pay to….read. This kind of heartless and soulless opportunism is morally corrupt and distasteful

PayPal Acquires Honey, What Honey Is, PayPal’s Play

The making of Bloggi

Interactive map of Apple’s supply chain. I attempted to make such a map, but Apple makes it super difficult to get the data from their weirdly designed PDF instead of a CSV. Kudos to The Prepared for this tool