1. PayPal Holdings (PYPL) -- Head of Consumer Doug Bland interviews with RBC, Grubhub & a BNPL Update
a) Head of Consumer Doug Bland Interviews with RBC
As a note, Bland came to PayPal as part of its Swift Financial acquisition several years ago. Like most of PayPal’s M&A activity, the acquired leadership generally sticks around which is a great sign of strong culture and integration capabilities.
On Honey:
The Honey acquisition was about driving more two-sided value within PayPal’s network. The entity’s automated deal tracking and wish list building is immensely more valuable when it plugs into tens of millions of PayPal merchants vs. the 700,000 that Honey had beforehand. Furthermore, consumers benefit from far more seamless and broad deal discoverability. PayPal’s north star is maximizing the payment volume processed through its network. To do that most effectively, it needs to stand out from a value proposition standpoint with both consumers and merchants -- and Honey helps accomplish that objective. More merchants will now be attracted to Honey thanks to PayPal’s 400 million+ consumers and more consumers will use Honey with the vast injection of new merchants and deals. It’s a compelling flywheel.
Speaking of Honey, Bland was asked if the platform was nimble enough to shift deal flow away from discretionary purchasing and to necessary goods as inflation rages at generational highs. He indicated that it is nimble enough and is actively doing this today.
On QR Codes and On-Premise:
PayPal leadership has frequently discussed “doing fewer things better” over the last few months. It hadn’t offered more color on where it would actually cut back, but Bland did that this week. The company is moderating investment plans in its QR code endeavors. It’s gaining far more on-premise traction with Zettle and its cards and will focus there instead. Interestingly, Bland told us that there’s a new debit card launch coming soon (he wasn’t supposed to share this but I'm glad he did).
QR is still part of the long term plans, but it’s becoming a smaller piece.
On if PayPal Would Consider Selling BNPL receivables like it did with its consumer receivables a few years ago to Synchrony:
“Yes absolutely. We’re constantly exploring that. We’re not a bank or a lender. We’re a payments tech company." — PayPal Head of Consumer Doug Bland
On Credit Delinquency Trends:
“We see all of the articles that are coming out around credit delinquencies and compression of margins, but we’re a bit unique. We’re not immune… but we feel really good about our position. We have dense customer data… the vast majority of all our BNPL is with existing PayPal customers which is a very different position than if you were a stand-alone BNPL firm trying to learn your way on a one-off transaction basis… This is a credit product and we said that from day 1 even when it wasn’t in vogue to say that. But it is a credit product and we take it responsibly.” — PayPal Head of Consumer Doug Bland
On Venmo:
- The drop-off in user growth Venmo experienced after the pandemic pull-forward has now recovered.
- Trends with other large merchants using Pay with Venmo are “better than expectations.”
- Bland spoke on the extreme caution Venmo has acted with in terms of adding monetization features to ensure it doesn’t turn off its vast, loyal user-base. On the surface, this has resembled slow innovation within the company. It’s starting to press the gas pedal here and is not seeing any negative impacts pertaining to churn or user growth. That is a good sign considering leadership thinks Venmo has a 10X average revenue per account (ARPA) opportunity.
On His Mood in Light of PayPal’s Stock Getting Shellacked:
“I’ve been doing this for a long time and I’ve never been more excited about PayPal and the brands we have with this scale. There’s such an opportunity here to unlock value and that’s exactly what we’ll do.” — PayPal Head of Consumer Doug Bland
b) Grubhub
Grubhub partnered with PayPal and Visa this week to power instant payouts for its drivers through PayPal’s Hyperwallet and Visa Direct. Partnerships and more integration capabilities are an essential piece of PayPal remaining engrained in the competitive payments space. This is a small piece of positive news.
c) Buy Now, Pay Later (BNPL) Update
PayPal introduced a new “Pay Monthly” plan through WebBank for its BNPL product. This launch extends the maximum lifetime of these installment loans with no late fees. It also raises the cap for BNPL purchases from $1,500 max to $10,000. PayPal has clearly telegraphed its plans to extend BNPL to larger purchase sizes and longer maturity schedules. It has found historic success with this installment loan product launch in the face of several competitors already well-entrenched in the space -- so it is leaning in even more to grab incremental share.
2. SoFi Technologies (SOFI) -- CEO Anthony Noto Interviews with Morgan Stanley & Insider Buying
On Macro from SoFi’s Perspective:
SoFi’s attempt to insulate itself from Macro-cycles is not new. Not only has it sought to do so through product diversification and the bank charter lowering cost of capital, but by adding more funding options as well. In 2018 when the taper tantrum was wreaking havoc on capital markets, SoFi aggressively expanded its funding diversification. This ambition 4 years ago is paying off today.
The banking charter made loan holding more flexible and profitable and that helped greatly, but SoFi still taps into Whole loan markets when the economics are better than simply holding. Its commitment and consistent delivery of variable profit margins per loan of 40-50% along with its relatively affluent borrower cohort have both kept institutional demand for its paper robust through all of this. SoFi’s 7-8% loss rate target is not a goal, but an imperative for the company -- this is how it maintains investor confidence as macroeconomic tailwinds shift to headwinds.
Luckily, SoFi’s institutional demand is satisfied in the Whole loan market and so it hasn’t needed to use securitization markets in a long time. Whole loan investors are more often “hold-to-maturity” players that don’t rely on quick flipping of loan pools to generate profits like in securitization markets. Whole loan markets are far more durable across economic cycles than securitization markets are. These whole loan purchasers -- per Noto -- are seeking out higher quality borrowers and that’s exactly what SoFi provides.
SoFi’s weighted average cost of capital has risen in the very recent past with the sharp rise in the treasury yields it uses as benchmarks. Luckily -- and again thanks to the financial health of SoFi’s typical consumer -- it has been able to pass on the vast majority of this cost increase to its borrowers with volumes still in line with expectations. The end of stimulus -- which cut into loan volumes -- is surely helping with pricing power and inelastic demand here.
Quick Notes on Loans:
- Home loans “continue to under-earn relative to where they could be long term, as we’re re-tooling the back-end operation there for purchasing vs. just refinancing loans.”
- Student loan volume continues to operate below 50% of normal volume in light of the moratorium.
On Path to Profitability:
Noto told us this week that the financial services segment for the company would become contribution-profit positive by the end of the year. Management likes to say that the segment is already there when you sub out marketing costs, but that item was a massive piece of the top line growth allowing for this profitability inflection. By the end of 2023, the segment will be profitable enough to also cover fixed costs and will thus be generating a positive net operating profit like its other two segments.
Noto also reiterated that stock-based compensation as a percent of revenue would fall from the mid 30% range to single digits by 2024. This is when SoFi expects to become GAAP profitable -- but this timeline is overly conservative. It assumes student loans remains challenged with the moratorium through 2024, doesn’t factor in things such as improvement in the home loan business and ignores expected revenue segments blooming from the banking charter like serving in a sponsor bank role for Galileo clients. These high probability tailwinds would move that profitability schedule up materially.
On the bank:
This has been the central piece of SoFi’s rapid success in attracting direct deposits (which greatly bolsters its customer lifetime value (LTV)). How? It has allowed them to pocket an additional 1.5% in cost of capital to profitably offer the 1.25% annual percent yield (APY) on its savings accounts. It’s the only company with this rate in place without any deposit maximums.
As long as SoFi stays above $100 million in new deposits per week, it does not plan to raise this rate again. But it doesn’t sound like this rate will be lowered either which many, many analysts expected out of the gate. If it needs to, it has significant room to profitably raise its rate further. It just doesn't feel that need yet.
“We’ve only passed 25 basis points of the Fed’s rate hikes onto our consumers (raised APY from 1% to 1.25%) and it’s really doing well where it’s at.” — SoFi CEO Anthony Noto
Separately, the bank charter also puts SoFi in a better bargaining position with those aforementioned whole loan investors. Why? It gives SoFi far more holding period flexibility which raises the bar for what these investors must offer to justify SoFi forgoing the added net interest income.
On Technisys:
SoFi was missing a multi-core technology interface across all products. It had it for lending and payments with Galileo, but will use Technisys as a unifying layer to build one singular platform encompassing every product that an enterprise customer could need. This will also allow SoFi to fully vertically integrate its product suite to drive faster innovation and lower cost.
“Technisys is really brining clients to the table from the traditional financial industry that wouldn’t have come to the table with just Galileo before…. it’s really complementing Galileo… Galileo was a huge home run and it looks like Technisys will be too.” — SoFi CEO Anthony Noto
On the reserve stock-split:
“The headline is that this is in case of emergency. I’ve lived through the GFC, and dot.com and we’re obviously going through a huge dislocation now… we wanted to give our Board the option to reverse split if we enter an even more irrational market. Our confidence is in no way reflected in the ask to vote. What is reflected is prudent management… we’re one of the few companies to exceed Q1 expectations and raise guidance.” — SoFi CEO Anthony Noto
He is all but obligated to say this, but I still find it somewhat encouraging.
On the future:
- SoFi will become an insurance principal at some point. It’s currently shipping about a billion in premiums per year to referral partners but wants to bring this in-house in the coming years.
- It will enter tax planning and payment in the future as well.
- SoFi plans to launch “SoFi Plus” this year which will be similar to a subscription service where you get a whole host of member benefits in loans, investing rewards and more if you direct deposit with SoFi. This will be free for direct deposit users but will be a paid subscription for others.