From prepaid cards to peer-to-peer payments to payment apps, there seems to be a war on cash these days. Over time, cash is becoming less and less a part of the U.S. economy, and it doesn’t seem like this trend will end anytime soon.
In this episode of Industry Focus: Financials, host Michael Douglass and financials specialist Matthew Frankel discuss three stocks that could be big winners.
A full transcript follows the video.
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This video was recorded on May 21, 2018.
Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It’sMonday, May 21st, and we’re doing a special episode on theso-called war on cash. Listeners, whenever you send in a question viaemail, Twitter,letter in the mail, really whatever, we try to either answer it in email or devote an episode to it. Cam from the U.K. asked, “Whatdo you think are the three best stocks to own to benefit from the war on cash?” So,I figured we’d step back and think big picture for a minute.
The so-called war on cash is this idea that the world isgradually transitioning away from cash,or, at least, that it will in the future. Certainly, there’s plenty of data out there showing that increasing proportions of people are using non-cashmethods of payment: debit cards, credit cards,mobile transfer services like Venmoand the like. In fact, the BBC reportedlast year that cash was used in under 20% of transactions in Sweden, for instance. So, certainly, we’ve seen this movement.
But, the fact of the matter is, cash still reignsacross the world. In fact, American Expressrecently highlighted this as anopportunity. They had this presentation in which they describedjust how much runway there is stillto take over from cash.
Matt Frankel:There’s acommon misperception among American investors and consumers that the credit card market isgetting kind of saturated. AmEx came out withstatistics that said the uncapped payment market is actually pretty huge. Right now, there’s about $12 trillion in consumer paymentsgoing through cards, and they think that the addressable market is actually $29 trillion, so more thandouble the current size. The commercial side of things, it’s even more of an opportunity. Right now, it’s about a $2 trillion market, and they think it could be a $19 trillion market. So,there’s still a lot of room to move toward a cashless society, is the takeaway there.
Douglass:Yes. Even in Sweden, where it’s roughly 80-20, there’sstill opportunity. But, in most places, we have a lot more going through in cash. The second piece then, of all of this, as we’re thinking about this, is,what will they go to? If cash becomes less common,what are people going to spend with? Here in the U.S. and in Europe, theanswer has been cash to debit/ credit cards to mobile payments in addition to debit/ credit cards. A lot of people argue in favor of thecredit card stocks because they’re expecting a similar move among other countries. Now,in my view, certainly, there’s an opportunity for credit card companies, andthere’s reason to think that they have plenty of market to expand into.
Butit’s increasingly clear to me that,particularly in the really high-growth emerging marketsthat we talked about last week,people are really moving straight to mobile payments from cash and bypassing credit cards to some extent. Forexample, according to Capgemini’s2017 World Payments Report,50% of Chinese smartphone users are expected to adopt proximity mobile payments by 2020.
So, we’re bullish oncredit card companies, at least I am. Personally,I’m a MasterCardshareholder. Butwe don’t actually really see them asthe best way to play the specific war on cash. So, here, we’veput together threeof our favorite stocks. The first one isGreen Dot Corporation (NYSE:GDOT),ticker symbol GDOT.
Frankel:Yeah. On that note,I’m an American Express shareholder myself, and they’renot the best way, we feel,because credit cards are expensive. The trend in financial technology, as we discussed in anepisode a few weeks ago, is toward no fees. So, we’re looking at companies that offer low-fee payment solutions, Green Dot being the first one.
They’re arelatively small company. The market cap is just under $4 billion right now. And,in addition to a few other things, which we’ll get to in a second, they’rethe leader in prepaid cards, wherepeople have their paycheck directly loaded onto a prepaid card. You seeall the prepaid Visacards at the Walmartcheckout, those are usually Green Dot products. Green Dotfocuses on what are called the unbanked and underbankedsegments of the population, meaning people who don’t necessarily have a checking account. If you have, say, credit issues, you’vedefaulted on loans before,you’ve had charge-offs onchecking accounts before, it can be really tough to get a bank account. These are the people who Green Dotfocuses on. And a lot of the people who still use cash for everyday purchases are slowly transitioning to Green Dotproduct because it’s getting less and less convenient to use cash. That’s the best way I could sum up Green Dot –it’s a play on the inconvenience of cash over time.
Douglass:Yes. And, as you pointed out, it does a lot of things with a lot of different cards. It’sinteresting. I was not familiar with Green Dotuntil Matt pitched it to me a couple of days ago. Andwhen I looked at the company, a couple of things really jumped out. Thefirst one is that they have just reallydiversified revenue streams. If you look at the mostrecent quarter, out of roughly $315 million in revenue, about $130 millioncame from card revenues and other fees, $100 million fromprocessing and settlement services, and then about $85 millionfrom interchange revenues. So,what you see there is that they’re playing in related areas, but they don’t have all of their revenue really tied to one place,which is a really good thing to see.
Theother thing is, you’re seeing pretty impressive growth. Revenue last quarter grew by 16% on the organic side. Now,they actually had an acquisition which juiced revenue up further, but net of that, revenue grew by 16%. So,that’s a really good sign that they’ve made a series of products that are really attractive to a lot of people.
Frankel:Green Dot,in addition to being an issuer of its own products, sees itself asmore of a technology platform, whereas other companies can go and use their technology to offerfinancial services that suit them. Justa couple of examples, Walmart MoneyCard is a big,big partner of Green Dot. More recently, Uber has started issuing the Uber Debit Card through Green Dot’splatform. Most recently, in December, Appleannounced that it’s using Green Dot’s technology for its Apple Pay Cash platform. Which, you can’t really get a better partnership than that, as far as peer-to-peer payments.
Douglass:Yes. It’sinteresting, because, the way Green Dot puts this is, it’sbanking as a service, or BAAS. You’ve probably heard of technology as a service, software as a service, etc. They’re trying to comp themselves, I think, to a lot of these other companies. Essentially, what that means is,it’s this mobile platform that can work in a lot of different areas. Now,whether or not you would really comp that to a tech stock issomething that I think there could be a very healthy debate about. But,I think, what’s very clear is,this is a company that’s serving ahistorically underserved niche in the market and has reallyput together some really impressive growth with that.
Frankel:Yeah. The other twocompanies we’re about to talk aboutfocus on markets where people could use credit cards and things right now, it’s just, they want to make it more convenient and less costly. Green Dot isfocusing on people who don’t have many other options. It’snot too much of a big deal right now to carry cash. It’sgetting inconvenient in certain places. But, over the next few decades,it’s going to start getting very inconvenient to use cash for certain things. Andthat’s really why I like Green Dot as a long-term way to play the war on cash.
Douglass:Right. Alright, let’s turn to our next stock, which is PayPal (NASDAQ:PYPL). Everyone knows PayPal as,well, PayPal. [laughs]Sort of like how everybody knows Facebookfor Facebook. But,like Facebook, PayPal is also invested in other properties that are not its namesake — chief among them, of course, Venmo. Which,if you’re a millennial or know a millennial, you’ve probably heard about Venmo and how great it is for basically helping people not have to split the bill at restaurants.
Frankel:Yeah.I personally don’t use Venmo, but I’m an older millennial. We’llchalk it up to that. I’m a millennial by about three months. [laughs]But,the statistics don’t lie. Venmopayment volumes up 80% year over year. That’s enormous growth. People thinkPayPal is kind of a mature company,but they’re really not. Peer-to-peer payment volume, they’regrowing at a 50% year over year rate, and it’s about a quarter of the total right now. So, PayPal is really not just eBay’s payment processor anymore,which is where they were years ago. PayPal used to be part of eBay, ifpeople aren’t familiar. But, they’re really transitioning intoa new jack-of-all-trades payment company.
Douglass:Yeah. It’sinteresting. One of the things that PayPal execs always highlighted about Venmo –and I had been skeptical about it — is this idea that thesocial aspect is really a differentiator. If you use Venmo,basically, you send someone money, and you can give areason that you’re sending money. You can say rent, orbrunch, or something completely ridiculous, if you want. And they reallyhighlighted the social aspect of being able to see what other people are payingeach other for asbeing a differentiator. I have been skeptical. But, I will note, John Rainey,PayPal’s CFO,at a recent conference noted,and I’m quoting here, “Theconsumers that are using that are opening the app four and five times a weekjust to check the social feed.” Now, I mean, is it just to check the social feed, or is it because they forgot what they were paying for? I don’t know. But, it’s certainly interesting to see thatthere’s some data backing up that assertion.
And, I mean, at the end of the day, a lot of people talk aboutdifferent thingslike Zelleas potential competitors to Venmo. But the fact of the matter is, even with Zelle’s launch, Venmo’sgrowth has continued to accelerate, andthey haven’t seen any drawback. A big part of that is, Zelle, whichunderlies a lot of the banking,peer-to-peer payment apps, the average size of transactions on Zelle isa few hundred bucks, whereas for Venmo, it’s more like upper 50s, low 60s, according to PayPal execs — which is, again, a sign that you’re using those apps fortwo different, complementary, things. So,they can both win in an increasingly mobile-first society.
Frankel:Anothergood thing about PayPal is, not only is the peer-to-peer side of their businessdoing really well, but their core business isstill growing quite rapidly. They added overeight million new accounts in the first quarter alone,15% more accounts than they did this time last year. So, their corepayment business is really doing well, andpeople who are using PayPal are using it more. Per account, the averagePayPal customer uses their account almost 35 times a year. That’s anincrease of about 8% from last year. So, their corepayment business is doing really wellin addition to their peer-to-peer business. And the core payment business, at least for the moment, iswhere they’re making their money. That’s the big revenue driver.
Douglass:Yeah,and that’s one of the things that’s sort of an opportunity and a danger for PayPal. Atsome point, they’re going to want to try to monetize Venmo. And they’ve begun thinking about this a little bit with what’s called pay with Venmo, which isessentially rolling things out so that people can use Venmo to pay merchants directly. So,certainly, there’s some opportunity there.
But, execs, I think very appropriately, have beenvery cautious in their outlook, and said, “Listen, we’renot going to try to hit some amazing numberon the revenue side with this and tank the whole experience,” I think because they recognize thatfundamentally, Venmo isn’t a terribly sticky product. So, if you make things incrementally more difficult for really anybody in that chain –from consumer-to-consumer to business — then there may be asignificant push to something else, whereasif you wait and allow that network effectto get stronger and stronger,it’s going to become increasingly difficult for people to break away, andthat’s where there might be some monetization opportunity. But,that’s years down the road.
Frankel:One more little thought on the monetization of peer-to-peer payments — bearin mind how young that industry is. It wasonly about fiveyears ago, people didn’t think Facebook would be able to monetize its business. Thepoint is, this is still in its early stages of evolution. There could be many different avenues they could take it tomonetize payments without charging fees or things like that. It’s avery, very young industry still.
Douglass:Yes,and a lot of opportunity there. Alright, let’s turn to our third stock. Bythe way, I forgot to mention earlier, PayPal, that’s ticker symbol PYPL.Square (NYSE:SQ)is our third one, which is ticker symbolSQ.
Frankel:Square is,in many ways, similar to PayPal. It’sabout one-fifth of the market cap. In terms of payment volume, it’s a lot smaller. It’s about one-eighth of PayPal’s payment volume right now. While PayPal started out focusing on consumers payingbusinesses, Square is more of asmall business-centered company. Youcan’t walk down a craft market in America right now without everybodytaking credit cards with Square payment readers.
But, they’returning into so much more than that. They’re really building, they call itomnichannel commerce. It’s kind of a whole one-stop payment ecosystem for businesses, consumers. For example, they have a Square Capital platform that lends to small businesses, the Square Cash app, which is kind of what we’re talking about with the war on cash. Theirpeer-to-peer payment app is the No. 1 appin the Apple App Store. So,they really transformed themselves from just the small business payment company to a small business and consumer ecosystem of payments.
Otherintegrated features are what they’re going for, with their Caviarfood delivery app. They just acquired Weebly, whichallows people to make their own websites,integrating that into their processso their customers don’t have to go elsewhereto build their own e-commerce sites. Just,a lot of potential, and it’s still within the early stages offiguring out how muchof the business environment they could capture.
Douglass:Yeah. For me,I’m a Square shareholder personally because of the optionality. Youlook at Caviar, it’s tiny compared to a GrubHub. It’s distinctly possible that GrubHub orone of the various other food ordering services willcontinue to, pardon the pun,eat their lunch, because, you know, Caviar has a single-digit market share. But,long-term, maybe it can grow. Maybe it can differentiate. Maybe it can find some way to really succeed, particularly if they use it as an omni-channel,to use their terminology, cross-sell opportunity.
They might charge a certain percentage to merchants who aren’t using other Square services,but if they are using other Square services, maybe Caviar is free,maybe it’s bundled, maybe it’s alesser percentage of revenueon the sold food that they’re charging.So,there’s a lot of opportunity, I think, if Square can really, really make entrepreneurship easy. And that’s really what their goal is.
Frankel:Another thing with Square is,out of the three stocks we’re talking about, they’rethe ones who are really embracing the whole cryptocurrency trend — more so than the other two, anyway. You can now buy Bitcoin through the Square Cash app, if youtalk about the ultimate war on cash. It’s kind of still a small part of Square’s business, but it’s getting there, and it could become a big part if it’s integrated into their small business solutions,whereas you can hold Bitcoin in Square Cash and use it at Square payment terminals, that could be a game-changer for the cryptocurrency world.
Douglass:Yeah, it’s kind of a weird thing. It feels very different from pretty much everything else that Square is doing. But, again, this is a management that has unhesitatingly diversified, taken on opportunities.I think, in a lot of ways, they’re justthrowing a bunch of things out thereand seeing what works. Andthat can be a bad strategy whenit doesn’t have a master plan behind it and an integrated experience that they’re going for,or if it’s just out of desperation. But Squarehas just been growing impressively. I think this is management’s attempts to say, “OK, howdo we take that growth,better monetize it, andbuild out that platform further and further, andstay ahead of the competition?” And thus far, Square really has done a good job of that.
Frankel:Yeah. This was the thesis on IBMa long time ago, in that the more parts of a company’sbusiness they rely on you for, the higher the cost of switching is. So, Square is turning into a very sticky business, to borrow a Warren Buffett term.
Douglass:Yes,indeed. Cool. Those are our three stocks,personally, my and Matt’sfavorite picks for the war on cash. Matt,of the three, is there one that stands out to youas your personal favorite?
Frankel:I own Square and PayPal. I owned Squarewhen it was about the size of Green Dot,and it’s really been nice to see where it evolved. I see that it has a whole lot more potential to grow,ultimately, to the size of PayPal,I could see it getting. Not that it will, I’m not saying that it will. But,I could definitely see Squaredoubling or tripling in size, even from here.
Douglass:Yeah. Square is the only one of these three that I personally own, so it’s probably not surprising thatit’s the one I’m most bullish on right now.I usually try to buy companies that I like. [laughs]Itsort of makes sense as an investor.
Folks, that’s it for this week’s Financials show. Questions, comments, you can always reach us at firstname.lastname@example.org. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so, don’t buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, I’m Michael Douglass. Thanks for listening and Fool on!