How Walmart is pursuing omnichannel profitability. Automation can indeed help retailers like Walmart pursue profitability. Increased productivity and lower labor costs are the key main drivers, However, it should be pointed out that Amazon has been using automation in their fulfillment centers for years and look at what happened to their eCommerce site. Last quarter, their profitability mostly came from AWS and their US operations suffered a loss. Walmart may have a few short-term wins, but in the long run, will the gains from automation persist?
The global microchip race: Europe’s bid to catch up. Even though the US and Taiwan are the two prominent names when it comes to chip design and manufacturing, Europe has the potential to catch up. It is home to a handful of companies that are indispensable to the industry such as Carl Zeiss SMT, ASML or Trumpf. Without them, ASML would not be able to produce extreme ultraviolet lithography (EUV) machines; TSMC would not have the equipment to manufacture cutting-edge chips; the likes of Apple would be constrained technologically and consumers would be deprived of the latest advances. However, Europe doesn’t own other pieces of the chip value chain nor does it set aside enough capital to compete with other countries. Most importantly, there is a shortage of skilled labor. Europe can address that problem by aggressively wooing talent and taking advantage of the terrible immigration policies of the US that don’t seem to get better any time soon. The question is: will they?
What the Kroger-Albertsons merger means for their private label portfolio. Putting Kroger’s private labels in Albertsons stores and vice versa is an interesting idea, but it would also come at a cost. What makes private labels valuable to retailers is the exclusivity. Breaking that exclusivity may lead to cannibalization of store revenue and perhaps some unintended and unforeseen consequences. What I am interested in is the bargaining power that the combined company would have over suppliers for their private labels. A roster of private labels worth $40 billion in annual revenue must command a lot of respect.
Bob Iger vs. Bob Chapek: Inside the Disney Coup. Great reporting into the frayed relationship between Chapek and the CFO as well as that between Chapek and Iger. Hiring is hard. The fact that Chapek was Iger’s pick and he personally wrote a public recommendation for him just for Iger to be disappointed at his successor is high-profile evidence of that. Moreover, Christine took a lot of risks by pitching Iger on the prospect of returning to the CEO spot and taking the idea to the board. But she did so reportedly from the place of love. You have to love the place you work for enough to rush to a return from a battle with cancer while caring for a sick spouse. Last but not least, I do think the board and Iger himself have to take responsibility for the mess that Disney has been through.
Visa to invest $5 billion in Africa in the next 5 years. There are half a billion people that are unbanked in the continent. Africa is also home to the youngest population on Earth. The growth prospect is limitless. And that’s why Visa commits this amount to tap into that growth. Apparently, their rival Mastercard shares the same feeling
Other stuff I find interesting
($) California Long Ruled U.S. Shipping. Importers Are Drifting East. “The hierarchy of U.S. ports is getting shaken up. Companies across many industries are rethinking how and where they ship goods after years of relying heavily on the western U.S. as an entry point, betting that ports in the East and the South can save them time and money while reducing risk. The share of all U.S. containerized cargo handled by Los Angeles and a neighboring port in Long Beach fell through the first 10 months of the year to a combined 25% as measured by weight, according to census data analyzed by Jason Miller, interim chair of Michigan State University’s supply chain management department. That was their lowest level in nearly two decades, down from a height of 33%“
($) TikTok Turns On the Money Machine. “ByteDance’s hit video app is on track to triple revenue this year to $12 billion, threatening Facebook’s hold on social media. TikTok has an edge against Meta that Apple Inc. helped solidify. Last year, the Cupertino, Calif.-based company updated its iPhone operating system so that users have to opt in to let apps like Facebook track their activities as they used other software on their phones. Most users decided not to let Meta track them, a change Zuckerberg has blamed for financial troubles like those in February. TikTok, it turns out, isn’t relying so much on that kind of tracking data. Its artificial intelligence discerns a user’s likes or dislikes largely from activities on the platform, picking up on how long you watch, say, a cat video, a skateboarding clip or lip-synced dancing. TikTok’s algorithms can then match up users with not just content, but advertising too.”
($) Americans Have Had It With Inflation. Consumers are showing signs that spending is not as strong as some companies make it out to be. With damaging inflation showing no signs of abating, persistent supply chain issues and vulnerable consumer spending, the future looks bleak
How the man behind the Apple Store presided over a Spac catastrophe. Ron Johnson is richer and more famous than most of us, but one thing that we haven’t done is to lose millions of dollars in a business catastrophe in a short time. Past credentials are useful as signals, but they don’t guarantee the same success in the future. Just because someone is rich and famous doesn’t also mean that they have the right opinions or can do everything.
Online grocery shoppers spend more but less loyal. “The vast majority of the 45% of consumers who shop for groceries online are omnichannel shoppers. While their monthly average grocery spend is $594 compared with $388 for in-store-only shoppers, online shoppers spend their dollars across a greater number of retailers monthly, between 3.9 to 6.6 stores per month compared with 3.2 for in-store only, the customer data science firm said.”
($) Intel Bets 17 Billion Euros on a Tech Revival in Eastern German. Intel has made a lot of headlines lately with their planned investments. The key here is that everything is just a plan and full of promises. Nothing has actually come to fruition yet. Intel fell far behind their competitors in terms of technology. In the world of semiconductor, it’s very challenging to make up ground. And I wonder how Intel will pull that off while fulfilling their promises to build plants in Europe and Ohio. Or is that the case of, and I quote somebody in the article, “promises are cheap”?
The local news crisis is deepening America’s divides. You can’t make great decisions without being informed. I don’t think national news outlets have the resources to cover everything in every local community. As more regional news outlets shut down, citizens don’t have enough information on their communities; which affect their votes and decisions. And if there is one thing everybody should know about politics in America in the last 10-15 years, it’s that voting matters at every level.
Japan’s shochu capital becomes new hot spot for whisky.“Traditionally known for its shochu, a clear liquor made from grains, potatoes, sugar cane and more, Japan’s southwestern region of Kyushu has become home to a budding whisky industry as craft distillers chase a larger, more global audience. Surrounded by vegetable fields and rice paddies, Shindo Distillery began producing whisky in the Fukuoka Prefecture city of Asakura in summer 2021. The facility belongs to Shinozaki, a storied barley shochu maker founded in 1922. Shinozaki is branching out “because demand for Japanese whisky is skyrocketing,” said Michiaki Shinozaki, who is part of the eighth generation of the founding family.”
What Is the Pesco Mediterranean Diet? I am actually following the Pesco Mediterranean Diet right now. It’s more about my love for sea food than trying to meet the daily protein intake. It also makes the transition to a plant-focused diet such as Mediterranean Diet easier. If you are looking for a diet that is great for your health, look this up.
Have you ever wondered why some merchants enforce an additional fee when customers pay with credit cards? Or why do some merchants politely request customers to pay by cash when a purchase is less than $5? Or why can some fintech startups offer debit cards with rewards when big banks don’t seem to bother?
The answer is Interchange. Cash has been the medium of transactions for centuries. When a shopper hands cash to a merchant in exchange for goods or services, the merchant takes 100% the amount of such exchange and deals with taxes when the time comes. The problem with cash is that 1/ storing a large amount of cash requires a lot of effort for merchants and 2/ not many customers find it convenient to carry cash around, especially for large transactions. Card transactions bring convenience. Merchants get paid in the form of increased balance in a bank account while consumers can spend without carrying a thick purse or wallet. With credit cards, consumers can transact on the credit line extended by a financial institution. But as the old saying “there is no free lunch” goes, such convenience comes at a cost and that cost is Interchange.
Interchange is a small fee that merchants have to pay on every card transaction. The recipient of interchange is financial institutions (FIs) that issue debit or credit cards to shoppers. These FIs use this revenue stream to either pay for their operational expenses or fund rewards that are promised to consumers. Since doing business nowadays always involves card payments, interchange is one of the expenses that merchants can’t avoid.
How much do merchants have to pay on every transaction? The amount of interchange is determined by interchange rates mandated by networks such as Visa, Mastercard, Discover or American Express. There are a lot of factors that can influence these rates and below is a list of factors that I know (by no means, it’s an exhaustive list):
Merchant Category Code
Merchant Category Code (MCC) is a 4-digit code that represents the type of business area in which a merchant operates. For instance, 5411 refers to grocery stores while 5300 represents wholesale clubs. Some companies such as Walmart or Amazon can span across multiple MCCs because of the breadth of their offerings while others like mom-and-pop restaurants have only one MCC. In some industries, including airlines or hotels, a merchant can have its own code. For instance, 3000 and 3001 are assigned to United Airlines and American Airlines respectively.
High frequency categories such as Gas and Grocery carry low interchange rates while others such as Dining or Travel fetch higher rates. Whenever there is a push to promote a specific area, networks raise the interchange rates as an incentive for card issuers. Take Electric Vehicle Charging 5552 as an example. Its rate for consumer cards is 3%+ which is much higher than the average 1.7% across other categories.
Sometimes, it’s easy for consumers to guess MCCs of their purchases. However, it’s much trickier when it comes to big merchants such as Walmart or Amazon. The only way to know is to wait for the transaction to be posted.
Giant merchants such as Costco, Walmart or Amazon command great bargaining power and can negotiate a special low rate with the networks. Think about it this way. The rates that I have seen for these companies are around 0.7%. At $500 billion in annual revenue that the likes of Amazon or Walmart generate, interchange expense amounts to $35 million a year. If they had to pay 1.4% in interchange, the expense would double to $70 million. Their retail business margin is not big enough for them to ignore that difference.
Card-Present or Card-Not-Present
A transaction is considered as “card present” only if a card is swiped or tapped or if an EMV chip is processed. A transaction by fax, Internet, mail or over the phone is considered “card not present”. Since card-not-present transactions do not require a cardholder or a physical card to be present at the time of the transactions, the risk of fraud is higher. Hence, issuers receive higher interchange rates on CNP transactions for taking on additional risks.
There are a few major networks such as Visa, Mastercard, Discover, American Express and JCB. Each has its own pricing schemes and that can affect the rates that merchants have to pay.
The type of your card also influences interchange rates significantly. On the Visa Consumer side, there are usually three types of cards: Visa Classic, Visa Signature and its highest tier, Visa Signature Preferred. Visa Signature Preferred comes with much higher rates than Classic or Signature. Normally, if your credit limit is above $5,000, your card is qualified for Signature. To qualify for Signature Preferred, a cardholder typically needs to meet a certain spend threshold. To my knowledge, an issuer sends a list of cardholders that meet certain criteria to Visa so that they can flagged as Signature Preferred. If successful, the issuer can earn a decent amount of additional interchange revenue. On the Mastercard, there are also similar schemes and tiers.
Consumer or Commercial
The rule of thumb is that commercial credit cards have higher interchange rates than consumer cards.
Credit or Debit
Credit cards command higher interchange rates than debit cards, simply because credit cards are much riskier as a product than debit cards.
Sometimes, the size of a transaction can affect how much merchants have to pay. For instance, American Express has different rates for different ticket size tiers across key categories. Typically, the bigger a transaction, the higher the interchange rates.
Point of Entry
If you shop in store, whether you use an EMV chip, swipe your card, tap your plastic on the card reader or pay with a mobile wallet can affect the interchange rate of that transaction. To make it more complex, the type of mobile wallet that consumers use is also a factor. For instance, staged wallets (PayPal, Cash App) which break down a transaction into funding and payment stages command slightly higher rates than pass-through wallets (Apple Pay, Samsung Pay) that pass payment details directly to merchants. The alleged reason why there is such a difference is that staged wallet providers do not provide as much information regarding payments as the networks would like and that could make the verification task a tad more challenging.
To help smaller banks compete, the US government allows debit card issuers with less than $10 billion in assets to charge significantly higher interchange rates than bigger issuers. That’s usually known as the Durbin Amendment. Fintech companies use this loophole to partner with small less known banks to offer debit cards with rewards. In many countries, including the European Union, interchange rates are capped by laws and much lower than what we see here in the US.
‘Batman’ and the Movie Pricing Predicament. A good article on AMC’s move to charge one more dollar to every ticket for the upcoming Batman movie. Yield management by theaters often involves higher ticket prices in the evening or on Fridays and weekends. Charging more for a specific movie is rare. I look forward to seeing how this will benefit or harm the theaters.
Metaverse is all…hype? Google introduced Google Glass years ago. Today, you’ll have the same odds of seeing that Glass on the streets as finding Nokia’s iconic flip phones. I don’t know what these tech visionaries see, but I won’t bet my money on seeing metaverse or whatever the hell it is in the next 10 years.
Visa, Mastercard Prepare to Raise Credit-Card Fees. Visa and Mastercard are going to charge higher interchange fees to big merchants while lowering the fees for small merchants whose annual revenue is less than $250,000. Visa said merchants could avoid paying more by offering more transaction data and using its tokenization services. I look forward to seeing how this increase will harm consumers as merchants are likely to pass on the higher expense. It’s no wonder why lawmakers want to look into this sort of duopoly enjoyed by Visa and Mastercard. They simply have too much power
The Three Sides of Risk. “You realize that the tail-end consequences – the low-probability, high-impact events – are all that matter. In investing, the average consequences of risk make up most of the daily news headlines. But the tail-end consequences of risk – like pandemics, and depressions – are what make the pages of history books. They’re all that matter. They’re all you should focus on. Once you experience it, you’ll never think otherwise.”
Fraud Is Flourishing on Zelle. The Banks Say It’s Not Their Problem. “Nearly 18 million Americans were defrauded through scams involving digital wallets and person-to-person payment apps in 2020, according to Javelin Strategy & Research, an industry consultant. When swindled customers, already upset to find themselves on the hook, search for other means of redress, many are enraged to find out that Zelle is owned and operated by banks. Banks say they take fraud seriously and are constantly making adjustments to improve security. But police reports and dispatches from industry analysts make it clear that the network has become a preferred tool for grifters like romance scammers, cryptocurrency con artists and those who prowl social media sites advertising concert tickets and purebred puppies — only to disappear with buyers’ cash after they pay.”
The story of how Swahili became Africa’s most spoken language. “During the decades leading up to the independence of Kenya, Uganda and Tanzania in the early 1960s, Swahili functioned as an international means of political collaboration. It enabled freedom fighters throughout the region to communicate their common aspirations even though their native languages varied widely. Swahili lacks the numbers of speakers, the wealth, and the political power associated with global languages such as Mandarin, English or Spanish. But Swahili appears to be the only language boasting more than 200 million speakers that has more second-language speakers than native ones.”
What the Tech? The Apple Watch’s Straps Are More Than Just a Finishing Touch. “For us, the band is not at all about technology — each band expresses our love for materials, craft, and the process of making.” When we look at the Apple Watch, we may wonder how obvious the band looks. But I believe that a lot of research and technology went into bringing the band and Watch together into beings. We are used to having the tail of the band stick out on normal watches. On the other hand, the Apple Watch tucks the tail under the band itself. Even that little detail is worth commanding.
A couple of good posts on Visa here and here. If you aren’t familiar with what the company whose logo is on your debit or credit card does, have a read.
Web3 is Bullshit. The article is as provocative as the headline. I do; however, agree with some of the points the author made, regarding cryptocurrencies.
Kohl’s Urged to Consider Sale by Activist Investor. Engine Capital estimated that Kohl’s eCommerce business can be worth around $13 billion. My question concerns whether that estimate factors in the value of the physical stores. Walmart, Target and Best Buy know the importance of using stores to enhance customer experience and fulfill online orders. If Engine Capital or other activist investors want to separate the online business from physical stores, how do they think the online business alone would fare against the likes of Amazon?
Grapefruit Is One of the Weirdest Fruits on the Planet. An interesting article on grapefruit. “Because those base fruits are all native to Asia, the vast majority of hybrid citrus fruits are also from Asia. Grapefruit, however, is not. In fact, the grapefruit was first found a world away, in Barbados, probably in the mid-1600s. In 1664, a Dutch physician named Wouter Schouden visited Barbados and described the citrus he sampled there as “tasting like unripe grapes.” In 1814, John Lunan, a British plantation and slave owner from Jamaica, reported that this fruit was named “on account of its resemblance in flavour to the grape. A Frenchman named Odet Philippe is generally credited with bringing the grapefruit to the American mainland, in the 1820s. He was the first permanent European settler in Pinellas County, Florida, where modern-day St. Petersburg* lies.”
The Many Worlds of Enough.“Ambition is largely driven by self-actualization, or the desire to become a more capable person. And when this happens, it’s only natural that good outcomes arise. You’ll witness bumps in your reputation, be offered higher salaries, and so on. But these things happen as a byproduct of your ambition, and not because these outcomes were your primary desires. Greed, however, is when those outcomes become your primary desires. When prestige, praise, and power are the reasons why you are ambitious, that’s no longer driven by self-actualization. That’s when you lust for everything that is external to you. It’s rather difficult to know where this point is, as the boundary between ambition and greed can be blurry. But for the most part, you’ve entered the domain of greed when you no longer pursue an endeavor because you’re curious about it. It’s when the coldness of utility replaces the warmth of curiosity.”
Why U.S. Infrastructure Costs So Much. “Mile for mile, studies show the U.S. spends more than all but five other countries in the world on public transit, and more on roads than any other country that discloses spending data. In 2013, Portland’s 7-mile Milwaukie light rail extension cost more than $200 million per mile, as much as a full subway system would cost in many European cities. The first phase of the Second Avenue Subway in Manhattan, the most expensive subway project in the world, cost $2.5 billion per mile, nearly five times the cost of a similar extension in Paris. Spending swelled across three problem areas: over-design, inefficient project management and misaligned politics”
Uber introduced the new membership plan called Uber One. Perks include unlimited $0 delivery fees for qualified orders ($30+ for groceries and $15+ for other stuff), 5% off on eligible rides & deliveries, $5 refund if a delivery arrives after the Latest Estimate Time and other perks. It’s the same as DoorDash’s Dash Pass or Instacart’s subscription. The difference is that Uber’s plan also includes rides.
More than Joe Rogan: Inside Spotify’s audio revolution. “The same could be said for Spotify, which over the last three years has transitioned from a groundbreaking music streaming service to one that also now offers 3.2 million podcasts on its platform. The expansion has been nothing short of meteoric when you consider that Apple, which has been offering podcasts since 2005, has just over 2 million audio shows. Spotify’s gains were highlighted in its third-quarter earnings report in late October, when it revealed that 3.2 million figure, as well as the fact that advertising revenue from podcasts helped drive total ad revenue up 75% year over year. Stockholm-based Spotify is now on track to pass 1 billion euros (more than $1 billion) in ad revenue for the first time this year.”
Apple taps TSMC to build custom iPhone 5G modem in 2023. A competitive advantage is what you do so much more efficiently and better than your competitors. In the case of Apple, it’s the integration of hardware and software. Within hardware, it’s a combination of so many things, including chip, industrial design and supply chain. Reliant on Qualcomm for the modem chip in the iPhone, Apple decided to be more independent and bring deeper integration by designing its own chip and outsourcing the production to TSMC. Think about it this way. Apple became the most valuable firm in the world while relying on others for parts of their products. Now they gained the capability to own most of the production process. What a company.
Starbucks has opened a store with Amazon Go. “At this store, customers that have ordered ahead of time via the Starbucks app can walk in, look to see if their order is ready via the large digital Order Status sign, pick up their drink and walk out. They can also use their Amazon app or credit card to scan into the store and pick up a Dominique Ansel pastry (or a number of other New York City-specific items Ess-a-Bagel), Amazon Kitchen sandwich or sushi roll from the marketplace and just walk out. Once they exit the store with the item, they’ll be charged via their Amazon account via the Amazon Just Walk Out Technology as seen in the Amazon Go stores.” The more Amazon tests this technology, the better it will become. A few years from now, they’ll be miles ahead of others in reimagining the retail experience
The Humble Brilliance of Italy’s Moka Coffee Pot. “The various species of Coffea, the seeds of which are dried, roasted, and ground to make coffee, are native to east Africa, particularly Ethiopia. Coffee as a beverage first shows up in the historical record—which is not necessarily to say that it wasn’t consumed in its native Ethiopia first—in what is now Yemen. It spread quickly throughout the Middle East, North Africa, and firmly established itself as part of the culture in what are now Turkey and Iran. Italians began coming up with their own gadgets for brewing coffee in the 19th century, but the biggest by far was the idea of applying pressure to coffee in order to create a strong, and more importantly fast, drink. This is the age of steam, a miraculous source of power that can unlock the world, and though it’s not entirely clear who originated the idea of using steam to brew coffee, certainly it was in Italy that it was popularized. The first known patent for a machine we might now recognize as an espresso machine was registered by Angelo Moriondo, who created a giant complicated steam-driven machine in 1884, but who never bothered to manufacture it. Luigi Bezzera, from Milan, modified the Moriondo patent, and hisdesign was further modified (though less so than Bezzera’s) by Desidiero Pavoni, whose La Pavoni introduced the world to espresso in 1906, at a world’s fair held in Milan.”
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.
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.”
Visa Inc. (NYSE: V) today announced the addition of Shipt, Skillshare and Sofar Sounds – as exclusive benefits – for Visa’s U.S. Consumer Credit cardholders. Eligible cardholders can now get a free Shipt membership to receive free same-day delivery on groceries and household essentials on orders over $35; boost their creativity through Skillshare’s online learning community; and get access to presale tickets plus be eligible for a free concert ticket while discovering Sofar Sounds’ global community of music lovers.
Specifically, the benefits vary from one product to another. Signature/Infinite credit cardholders will be able to enjoy more benefits from Visa than other cardholders:
Up to three yearsof free Shipt membership (normally $99 per year)
Free membership for three months plus 30% off annual renewals
Seven-day Visa Exclusive Presale to Sofar-presented events, plus a free ticket with each purchase of one or more tickets to a show during the presale window
Three months of free Shipt membership, then nine months of membership at 50% off
Free membership for three months plus 20% off annual renewals
Same as Infinite
One month of free Shipt membership, then three months of membership at 50% off
Same as Infinite but limit two free tickets per year
You may wonder now if you are qualified for Infinite or Signature benefits. Infinite cards are typically high-end premium cards with a significant annual fee such as Chase Sapphire Reserve or U.S. Bank Altitude Reserve Visa Infinite Card. Hence, if you are already paying in the hundreds of dollars a year for a credit card, chances are that you have an Infinite card.
It’s a bit easier to get a Signature card. Every year, issuers have campaigns to increase credit limit for qualified customers. There are two reasons for it: 1/ a higher credit limit can stimulate more spend from customers and 2/ a Signature card earns an issuer more interchange revenue than a Classic card. One of the key criteria for an upgrade is that customers must have less than $5,000 in credit limit, which is the threshold for a card to be considered by Visa to be Signature. After an upgrade, a Signature card will have more than $5,000 in credit limit.
Therefore, if you have a good credit history and standing, ask your issuer to increase your credit limit to above $5,000. Do check with them if it means you are getting a Signature card. Each issuer will have a different set of criteria to look at, in addition to credit score, to see if they will upgrade your account. There may be a hard/soft credit pull involved and as a result, your credit score may take a hit. However, if your monthly balance doesn’t change, a bigger credit limit means that your utilization would be lower and hence, your credit score would bounce back soon.
I don’t know the exact agreement between Visa and these companies, but if I have to guess, it won’t be Visa that subsidizes these benefits. Visa only earns a tiny piece from every transaction (like 0.2% give or take). The maths don’t add up for them to subsidize these benefits. On the other hand, the likes of Shipt, Skillshare and Solar Sounds have a perfect partner in Visa to market their services and acquire new users. Visa is the biggest card network in the world and in the U.S. It will be highly challenging to find an issuer that doesn’t have a Visa product. After this announcement, issuers will include the new benefits in their marketing: social media, direct mails, emails or websites. Credit card is a highly competitive and fragmented business. Every player pours millions of dollars into marketing and user acquisition every year. Hence, the names of Shipt or Skillshare will be more popular. I also think they will get more new users to the door. The difficult part is to make them stay. But hey, if you want to keep someone close, they have to be familiar with you first. This is about it.
For Visa, this is a good move to deepen their moat. Not only does the network have the biggest pool of merchants AND consumers in the U.S, but they also have the same advantage globally. While powerful, this moat doesn’t guarantee future successes. Visa has competitors circling. Apart from the traditional competitors such as Discover, Mastercard or American Express, there are new challengers on the horizon such as this startup Banked from the UK as well as alternative payment methods such as BNPL via ACH. This new slate of benefits is a plus for consumers as well as card issuers, at no additional cost. It is aimed to acquire new cardholders and keep them on the network as long as possible.
In this post, I will touch upon digital wallets & checkouts as well as some market movements that make me believe that it will be strategically important for issuers to occupy consumers’ digital wallets.
Fast checkouts and payments are on the rise
Consumers love convenience. Instead of spending time to fill out addresses and credit card credentials, shoppers can finish the job with just a couple clicks. The same goes for in-store check-outs. It’s a far more convenient experience for consumers to hover the phone or a smart watch over a card reader than to drop whatever they are doing with their phone, reach for a wallet and pick out a card. Granted, even though they may not appeal to less tech-savvy shoppers, these fast checkouts, when absent, may be a deal breaker to the more technologically shrewd crowd. I mean, there has to be a reason why many stores accept the likes of Apple Pay or PayPal, despite losing a bit more revenue. Businesses know that by not enabling convenient payments and checkouts, they risk losing a whole lot more.
The more these payment applications are accepted at stores, the more they become useful to consumers and the more consumers they can acquire. The more consumers these wallets acquire, the more they can appeal to stores. The virtuous cycle keeps going. As they become popular, the mobile wallets become something like downtown Manhattan to card issuers. While it doesn’t guarantee success, being present in consumers’ phone and wallets suddenly becomes more critical. Furthermore, there are developments on the market that highlight the importance of this point, starting with Visa.
In April 2022, Visa will introduce updates to existing domestic interchange programs with categories and rates for card not present Visa EMV token transactions. This includes both network tokenized transactions and digital wallets. With this update, a roughly 10 basis point reduction will apply for many card not present transactions that are Visa EMV tokenized in most segments.
In some cases, interchange rates for non-token transactions will go up, so while the net benefit may not reach 10 basis points, merchants that do not take advantage of the digital wallet incentive will undoubtedly be leaving money on the table. As ecommerce continues to grow, shifts like these to the overall cost of payments will have significant cost implications and influence a merchant’s product development roadmap.
The gist of this news is that Visa will allow merchants to keep more money from mobile wallet transactions but make them pay more whenever customers have to type in their information and card credentials. A few basis points may not sound much, but if your online sales is $1 million/year, the savings can be up to $10,000. Visa is the biggest network out there, accepted in virtually every store around the world. When the new rule comes into effect in 2022, its impact will be wide-ranging. I expect Mastercard to follow suit soon. The question for issuers now becomes: can they sit idly and let their rivals occupy the valuable real estate on our phones?
Apple Pay is a proprietary mobile wallet by Apple that enables convenient payments by just a phone tap in stores or one click online. The feature is compatible on iPhone 6, all the models that came after and all Apple Watch. That should cover pretty much every iPhone user in the U.S, which makes up 60% of the mobile market domestically. Since its debut in 2014, Apple Pay has grown increasingly popular over the years. As of January 2021, Apple Pay is available in 90% of stores in the U.S and hundreds of websites, including those of major brands. According to the 2020 Debit Issuer report by Pulse, mobile wallet debit payments in the U.S in 2019 by Apple Pay, Samsung Pay and Google Pay totaled $1.3 billion, of which $1.1 billion came from Apple Pay. As of this writing, major cities such as Chicago, Los Angeles, New York City, Portland, San Francisco & Washington D.C already allow passengers to ride transit with Apple Pay. This kind of integration will only boost its popularity more in the future.
Almost all issuers in the US enable integration of their cards into Apple Pay. American Express lets users who are instantly approved add their cards to Apple Pay immediately. In July 2021, it’s reported that Apple is working on a BNPL service for Apple Pay transactions. Historically, Apple offers a payment plan for its select products & services via Apple Card. Apple Pay Later will allow approved customers to make four interest-free payments due every two weeks or monthly payments at an undisclosed yet interest. Customers can connect their Apple Pay with any card that they want and it’s not required to own an Apple Card. This service will make this mobile wallet even more attractive to customers, though right now whether or when it goes to market remains to be seen.
Many people know PayPal as the known P2P platform or that payment option that used to be on eBay. Over the years, PayPal has transformed itself into something much bigger. It now provides a lot of services for both consumers and merchants. No longer restricted to online purchases, consumers can now use PayPal online and in stores with services such as QR Code, mobile wallets, contactless, debit card, credit cards, PayPal Credit and PayPal in 4.
The brand and the scale of PayPal are not to be underestimated. In Q2 FY2021, PayPal processed $311 billion in transactions, almost twice as much as $170 billion in the same quarter two years ago. The company’s YoY growth in transaction volume topped 40% in the last two quarters despite operating at an incredible scale. If you take out eBay, the growth rate was never lower than 45% in 2021. Additionally, there were 403 million active accounts, including 76 million Venmo and 32 million merchant accounts. Venmo’s transaction volume doubled in the last 18 months from $29 billion in Q4 FY2019 to $58 billion in Q2 FY2021. The scale of PayPal is also reflected on how fast they roll out new features. PayPal in 4 was launched in August 2020. Since launch, the service generated $3.5 billion in transaction volume, of which $1.5 billion alone took place in the last three months. Meanwhile, the number of merchants that enabled payments by QR codes leaped from 500,000 in Q3 FY2020 to 1.3 million in the most recent quarter.
On the earning call, the CEO of PayPal highlighted its imminent push into the in-store space.
Clearly, on the branded side, we think we add a tremendous amount of value, things that John talked about, buyer and seller protection, Buy Now, Pay Later at no incremental cost, fraud protection, highest checkout conversion, etc. But we took down rates for basic full-stack processing. That also was reduced somewhat substantially from the 2.9%, plus $0.30 to 2.59%, plus $0.49. And that is going to enable us to aggressively compete for all of the payment processing of the merchants that do business with us.
And you’ve heard us say time and time again, David, that we were going to move into the in-store space. We’re going to move so aggressively in there. We rolled out Zettle in the U.S., is a really beautiful full package. It doesn’t just include card reader but inventory management, sales reads out and allows a merchant to seamlessly load inventory in both their online and in-store locations and then, across multiple channels as well.
And so we’re, obviously, gonna be very aggressive on moving into in-store, and it’s always been part of our strategy. And by the way, if a small merchant does all of their business with us, they can actually see their overall costs come down. And we wanna encourage them to do all of their business with us because we are a trusted platform. They do turn to us, and we price, we think, the right way.
If PayPal successfully becomes one of the de facto checkout methods in stores, given it’s already a popular checkout option online, how would smart issuers ignore the need to get into consumers’ PayPal wallet?
Shop Pay is the native checkout feature by Shopify. Shopify is an eCommerce platform from Canada. It provides businesses with the tools necessary to build a customized online presence. When merchants list their products on Amazon or Walmart, they just rent a space and have little flexibility for their own branding. Plus, these merchants have to pay numerous fees to the likes of Amazon and Walmart. With Shopify, they pay a monthly subscription and a usage-based fee for some paid services. But stores can keep their own branding and gain more control over their destiny.
Shop Pay works similarly to Apple Pay, PayPal or Visa SRC. Once a credential is stored, customers can use Shop Pay across all stores powered by Shopify. In February 2021, Shopify expanded their checkout feature for the first time to all Shopify-powered stores on Facebook and Instagram. The collaboration was successful that a few months later, they decided to roll out Shop Pay to all merchants on Facebook and Google. This move can bear significant ramifications. Facebook owns the most popular social networks in the world like Facebook, Instagram, WhatsApp and Messenger. Their access to billions of consumers is what retailers want. Google has the dominant market share in search and as a result, a unique access to consumers globally. As these tech giants make a push into eCommerce, Shop Pay will benefit from this partnership and grow even more.
Between its launch in 2017 and the end of 2020, Shop Pay facilitated $20 billion in transactions. The cumulative figure increased to $24 billion as of Q1 FY2021 and $30 billion as of Q2 FY2021. As you can see, Shop Pay is growing increasingly fast. The growth of Shop Pay coincides with the growth of Shopify. In the last quarter, Shopify processed more volume than it did in the entire year of 2018. As this company continues to expand and by extension, so does Shop Pay, how long can issuers be absent from this checkout option?
Engaged customers will add their favorite card to their mobile wallets. The challenge is for issuers that don’t occupy the top-of-wallet position yet. Customers can still rotate cards and choose a certain one at the time of purchase. Hence, being in a customer’s wallet doesn’t mean a card will be used often. Card issuers still need to offer values and work hard to increase engagement. But as the saying goes, you have to be in it to win it.
Japan launches bid to regain its semiconductor crown. “Japan’s plans are less about boosting output than about avoiding being caught in the crosshairs of global tensions, notably the fierce competition between the US and China for dominance of future technologies.” It will be hard to play catch-up in the semiconductor industry, but I wouldn’t rule out Japan.
Universal films will head exclusively to Amazon Prime Video after their run on Peacock. Amazon has been aggressively investing in content on Prime Video. First it secured rights to stream NFL Thursday games starting next year. Then, it bought MGM Studios. Now, it will bring over Universal films after the initial premiere on Peacock. Amazon has been on the record pleased with Prime Video as an acquisition and retention tool for their lucrative Prime customer base. The Prime customer base in the US, since streaming rights are geographically dependent anyway, should be big enough to justify Amazon’s outlay.
Didi Tried Balancing Pressure From China and Investors. It Satisfied Neither. “The regulators in Beijing were under the impression Didi would pause its initial public offering while it addressed data-security concerns, according to people familiar with the company’s conversations with regulators. In New York, Didi offered assurances that Beijing had given it the green light, said people close to the listing process.”. It sounds like Didi wasn’t honest and straightforward with investors; which you know is a crime. On a side note, unless somebody lives in China or really understand what goes on in the country, for the life of me, I don’t understand why they will invest in Chinese companies. Just look at Didi and Alibaba as examples.
What I found interesting
The Senator Who Decided to Tell the Truth. I’d have a beer with this Senator. As a GOP politician, he was brave to tell the uncomfortable truth when his constituents didn’t want that truth. Whether you agree with his report, we definitely need more truth-telling and honest people like McBroom
A new road to an inaccessible land. An awesome write-up on the highly remote Wakhan Corridor in Afghanistan. The area looks pristine and beautiful. I love this kind of exploratory pieces that can educate people on places that they would not hear about
Steve Jobs in Kyoto. Just a beautiful story on Steve Jobs. He made the world a better place and was gone too soon. But he is still an inspiration to many now and in the future.
Casualties of Perfection. “If your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.”