Banking of the Future

In this episode of Industry Focus: Consumer Goods, host Dylan Lewis talks with Motley Fool contributor Dan Kline about what he saw at this year's Money20/20 conference, a hub of the world's biggest fintech companies. Learn more about banking as a service -- why Uber (UBER -2.69%) is offering bank-like services to its workers, and what company is working behind the scenes to make services like this possible. Plus, learn why we may witness the death of overdraft fees in the not-too-distant future, why T-Mobile (TMUS 0.58%) is getting into the banking game, where the Apple (AAPL -1.10%) Card fits into the fintech picture, how different banking-as-a-service companies are working to make banking easier for everyone, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 5, 2019.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Tuesday, Nov. 5, and we're talking Money20/20. I'm your host, Dylan Lewis, and I've got fool.com's Dan Kline with me on Skype. Dan, what's going on?

Dan Kline: Survived four or five days in Vegas. Anytime that happens, you have to chalk it up as a win.

Lewis: You want to at least net even on a work trip to Vegas, right?

Kline: [laughs] I think I came out a little bit ahead, but I will thank the Nationals for that. Matt Frankel and I put a fairly big bet in on game six and game seven at very good odds. That covered up some of the stupid bets we made earlier in the week.

Lewis: So, you're happy. Our producer Austin Morgan and MarketFoolery producer Dan Boyd are also very happy. It's a pretty good time to be a DC sports fan, Dan.

Kline: Not a DC sports fan, but I made the decision that I wasn't going to bet against my friends. I figured if Austin found out I'd bet on the Astros, he would have taken me out. So, all of my bets were on The Nationals.

Lewis: [laughs] That's an easy way to lose the rotation of Industry Focus contributors.

Kline: [laughs] "Hey, I haven't been on in three months. I wonder why!?"

Lewis: Yeah, what color hat are you wearing? Orange or red?

Kline: Red Sox are coming back next year, though.

Lewis: I'm right there with you, man. I'm a Sox fan. Dan, all right, we are chatting today because you went to Money20/20. That's why you were in Vegas. That was the work trip that we were talking about before. We're going to talk about some of your big takeaways, some of the folks that you spoke with at that conference. 

But first, do you want to give people a quick overview of exactly what that is? It's kind of a newer conference. 

Kline: You hear the term financial technology or fintech thrown around. Money20/20 is where all of the big players in that come together. Much of it is stuff you never think about. It's security, how transactions are processed, all the back-end stuff that is evolving very, very quickly and we don't really know all the answers. And then there's little bits of consumer-facing news that comes out. All your major retailers are there, but they're there as attendees, seeing what's going on and what's changing, and how they might process payments differently. You get everybody there from your PayPals to companies that are huge that do security that you've never heard of.

Lewis: Having been there for a couple of days, Dan, what were some of the major themes that you noticed that a lot of companies seemed to be paying attention to?

Kline: This was the coming out party for banking-as-a-service or BaaS as we learned it is pronounced, like the fish. This is something that's been going on for a long time, but it's very behind the scenes. If you're a really big company -- Apple, Walmart, Target -- you are not going to become a bank just so you can offer a credit card or banking-like services. In this case, what BaaS does is they let non-banks offer banking-like services -- credit cards, other things. This was really the first time I've ever heard the term out loud. There were some panels on it. There were a lot of big announcements around BaaS. 

Lewis: Yeah, I could see that written and understand the confusion of how to pronounce it. We now know it's BaaS thanks to your on-the-ground reporting. People that listen to the Financials show with Jason Moser and Matt Frankel, your good friend, are probably familiar with the name Green Dot. They talk about it quite a bit over on that show. That is one of the leading companies that is doing a lot of the behind the scenes stuff for some of the bigger retail names when it comes to BaaS.

Kline: I think it would be fair to say that Green Dot created the category. There are many other players now, but they go way back when Walmart first offered some banking-like services. They were very, very public at this show because they announced a banking service for Uber drivers. What this means is, if you're an Uber driver, you can actually, as soon as you make money, transfer it into your account. That helps you cover the expenses of driving. It's a very practical tool. Basically, Green Dot is the only company that scales large enough to deal with these massive players. The problem you have is -- for example, they provide the Walmart debit card. The last thing you would want is something on as big a scale of Walmart to have a breakdown, where payments can't be accepted. Doesn't mean no other company will get there, but right now, if you're Uber, if you're one of these big players, you're probably going to go to Green Dot. 

And I have to be honest, that's a company I heard of for the first time when they sat down next to Matt Frankel in the media room, and I just happened to be working on something and listened in on the conversation. This is not a company -- even though they do sell some public-facing products of their own -- that's really going out there to let you know who the name is. They want their partners, which include Apple and Uber and Walmart, to be the stars.

Lewis: Yeah, I want to talk a little bit about their relationship with Walmart. I think it does a good job illustrating exactly what they're trying to do, and the dynamic between Green Dot and some of these retailers. They've had a partnership going back to 2006. They actually just recommitted to that partnership. They're going to be doing this joint fintech accelerator called Tailfin Labs. You mentioned before, they are the go-to for the online checking and general bank services that you can get at a Walmart. I think it's easy for us to look at something like this, Dan, and say, "OK, this is Walmart moving a little bit more into the 21st century with fintech with the help of this new upstart company that really understands this space." But I think it's worth mentioning, with these types of partnerships, Green Dot immediately gets access to 4,500 retail locations that Walmart has. So, these are these very nice, symbiotic relationships for both the financing side and the retail side.

Kline: It's a very smart partnership. On the Walmart end, and to a certain extent on the Uber end, this actually helps the people who need help the most, people who do not have access to a traditional bank account for one reason or another. These are backdoor ways to have bank access. Uber actually talked about how in other countries, not the U.S., the biggest barrier to onboarding drivers is that they don't have a bank account. This partnership allows them to have, let's call it a bank-account-like product tied to a debit card that you can use to transfer money, you can use to make purchases, and that's very much how this Walmart partnership has worked since 2006. 

Tailfin, I will point out, is, as you might expect, a hybrid of reTAIL and FINancial. They could have gone with Renancial or all sorts of other things, but they've gone with Tailfin. And the goal there is to work together to figure out the next generation of this type of retail-driven bank-backed project.

Lewis: Dan, you can't see it because you're not in the studio, but my head just exploded. [laughs] I did not put two and two together with that name. I love it when you get those little elegant Easter eggs in there.

Kline: [laughs] Well, actually, they explained that during their press conference, because they didn't want people to think it had some sort of fish connotation, that the mascot was going to be a bass. Because, obviously, there's that tie-in as well. 

Honestly, this is partly why we go out to shows like this. Green Dot is mentioned in the Uber press release. I did a story on it, I mentioned them once. They're not trying to outshine their partners. If you get an Apple or an Uber or a Walmart bank product, that's the name that's lending it the credibility. That puts a lot of pressure on a company like Green Dot. If they mess up, they're actually hurting the integrity of the brand they're partnered with. 

Lewis: There are a couple of other instances of mobile fintech and traditional retail coming together beyond just Green Dot and Walmart. I want to talk about that a little bit so we can explore this trend a little bit more. Another company that is addressing the unbanked in an interesting way is T-Mobile. 

Kline: Yeah, absolutely. The one thing we don't know is how many people have taken T-Mobile up on this offer. They've partnered with BankMobile, which is a division of Customers Bank, to offer bank accounts to their mobile phone customers. And in a very typical T-Mobile fashion, they've tried to get rid of consumer pain points. That means that customers can go into the red without penalty -- only $50, but still. It prevents that nexus of, "Jeez, by paying the cable bill, did I overdraft and cost myself an extra $50?" There's actually some protection on the Green Dot-Uber thing, where they're letting drivers borrow $100, so if they can't get started in the morning because they can't afford a tank of gas, that's no longer an impediment. T-Mobile is offering lower interest. They're making it very friendly. It's trying to find a way to get people who have been afraid of the banking system to use the banking system.

Lewis: It's important, it really can limit you financially if you aren't on the grid, so to speak, with your accounts. It can really hinder your ability to get money quickly. It's nice to see all of these companies addressing that issue. 

I will say, there is a very clear strategy behind this for these companies. You do not need to be a wireless customer of T-Mobile to get one of these accounts, but it greatly benefits you to be a customer and have the account. They tout that there aren't these fees on the overdraft side, it's unclear what the case is if you're not a customer of T-Mobile. But the biggest selling point for the account is, they offer a 4% APY on balances of up to $3,000, and then 1% on every dollar over $3,000 -- that's if you sign up with a T-Mobile ID. I believe the interest rate is closer to 1% if you are not a customer. So, this is a case where they're trying to use the features of these services that they're creating to make their own ecosystems a little bit stickier.

Kline: Yeah. It's very easy, we know, to switch mobile carriers. But if you also have banking with T-Mobile, it means you're less likely to leave when another carrier offers a deal. I know you've switched mobile phones a couple of times since I've known you because somebody was specifically offering a below-market rate. This might make you less likely to do that. It's sort of like all the different streaming services being offered by various carriers for free. If I get Netflix for free from T-Mobile, which I do, maybe I won't leave T-Mobile because I would also then have to pay for Netflix.

Lewis: Yeah, I am on my third wireless carrier in two years. I'm always hunting for the deals. I'm the man that wireless carriers hate, for sure. This is certainly an attempt to address that. I think we see something similar when we look over at the Apple Card, another instance of banking-as-a-service. This one, a little bit more high-profile, maybe a little bit more luxury, Dan.

Kline: This is Apple, one, trying to keep you in its ecosystem, but also trying to disrupt the credit card market a little bit. Now, they're not a bank. Goldman Sachs is actually issuing the cards here. But what Apple did, and I've talked about this before on shows, is they made getting the card very easy. It's a simple application through the Wallet app. And once you are approved, it shows you right away what your credit limit is, what your terms are. You pay a different interest rate depending on some of your credit card worthiness. And then there's a lot of cool features. It will show you, "You owe this much. If you want to pay less in interest, you should make at least this much of a payment." It's a very customer-friendly -- and that's a theme we'll keep coming back to -- version of a credit card.

Lewis: When I look at this card, I'm looking at it through the lens of someone who enjoys getting those credit card bonuses, will regularly work through several credit cards over the course of the year. If that's your outlook with a card, this is probably not the card for you. They have 3% cashback on purchase From Apple, Uber, Walgreens, and a couple of other retailers; 2% on all purchases via Apple Pay; and then 1% cashback on your other purchases. The selling point here is, there's no annual fee, and no foreign transaction fees. But unless you're spending a ton of money with Apple or Uber, it's probably not going to give you a better effective rewards rate than some of the more churning-oriented credit card activity you could do. 

That said, it's clear, very similar to the T-Mobile approach, if you're going to spend a good amount of money with Apple, it might benefit you to have the Apple Card.

Kline: I got the Apple Card and used it to buy my new Mac. It maximizes rewards there. It's also very integrated into the iPhone, which gives me some security when I'm someplace where I don't have a wallet. Not that you can't put other cards through Apple Pay, but it's very integrated. It's very easy to follow. And you get the cash back on a daily basis. They send you a little pop up notice, like, "You got $2.82 back," which you can actually just apply to toward your bill if you'd like to.

Lewis: Dan, when we were intro-ing the general theme of banking-as-a-service, you were talking about how a big part of this is reducing pain points, both for customers and, in the case of Uber, for folks that are working for the company. What else are you seeing out there in terms of what companies are trying to do to address customer needs?

Kline: It's very hard to differentiate financial services. You can play with interest rates, you can give people a toaster when they sign up for a bank account. That's something in the 60s and 70s that was popular. I didn't meet with a ton of people at Money20/20, but I tried to pick and choose my spots. What I saw is that every company I sat down with -- that includes Intuit, Discover, the credit card company, and SunTrust Banks -- they all talked to me about the consumer. One of the examples, Varun Krishna at Intuit, he's the senior vice president of product, so he runs their whole product side, he told me that Intuit has your information. They know what you get paid. They know what your tax refund is. So if you tell them, and they ask the question, what your goals are, they can help you make a plan to reach those goals. They can get you offers. Maybe it's a refinance your credit card offer, so you can be spending less money and pay your debt down. Maybe it's a good offer on a mortgage, if you tell them you're saving to buy a house. Whatever it is, they can automate your savings goals and help you celebrate milestones along the way. Every company I talked to was very specifically putting the consumer first. You know that in banking and credit cards, consumers have not always gone first.

Lewis: No. It has been a space where, you've had to have a bank account, like I said before, to be on the grid and to be able to participate in so many activities in society. There are only so many banks that have a decent number of ATMs in whatever region of the country you might be in. So you're a little beholden to whoever those banks are. We're hitting a point where it's a slightly better time to be a customer.

Kline: It is. One of the other things I saw is, the war on cash is real. Yeah. Jason Moser talks about this one a lot. I met with Amy Parsons, who's the senior vice president of global acceptance at Discover. She talked about how, we don't know what the winners are going to be yet. So, something like tap to pay, which I'm starting to see more often, which is very big in certain parts of the world, that might be the technology. It might be Apple Pay and Samsung Pay and paying via a code on your watch. But cash is going to go away. In fact, she told me that she expected that the physical credit card, which is somewhat unnecessary now, will actually outlive the average person carrying cash around.

Lewis: That's an interesting observation. I always like to have a $20 in my pocket just in case something goes wrong. Not everything takes credit card. But I could see that possibly happening.

Kline: No, but one of the stories I always tell when I'm speaking to people like this is going out to dinner with some of you at Fool who are largely younger than me. Somebody pays for dinner, and then after, there's a parade of Venmo, sharing money around, because nobody has enough cash on them to cover a $30 or $40 sushi meal or wherever we went out to eat. So you're starting to see it. You're starting to see adoption very much among the younger generation. But really, as it becomes easier and easier -- if all you have to do is tap your credit card, well, my mom can figure that one out. She doesn't need to sign up for Venmo. We're seeing these consumer-friendly changes and a march toward, if everything is digital, it makes it much easier to track, and that's very consumer-friendly as well.

Lewis: I think there are a lot of parallels with what's going on in banking right now and what's going on in investing right now. You look over at so many of the online brokerages deciding, "OK, it's time to remove the commissions that people are used to paying," and they got their hand forced there because Robinhood hopped into the space and made it possible for you to trade for free. We're starting to see the fees come down a little bit in banking. We're starting to see companies be a little bit more forgiving when it comes to things like late fees, and adopt those as formal policies rather than things that you need to call in and make happen. Those are all very customer-friendly.

Kline: Yeah. This is a slow revolution. But I think you're going to see what happened in the wireless space. Once one company starts being more customer-friendly, eventually, all the other ones are going to have to do it. If you have an Intuit leading the way with changing how people meet goals and how they save, that's going to have to spill out to other people. Now, you'll get your old-line banks that decide, "Well, we've done it this way." But, like AT&T and Verizon did with wireless, eventually, there's going to be certain things that are simply table stakes. You might not be able to charge the big overdraft fee. You may have to let people link a credit card to prevent that from happening, whatever it is. I think we're in the very early stages of that revolution.

Lewis: You mentioned before, the fracturing that's going on, and how it's not entirely clear which types of technology, which payment methods, are going to win. I'm sure that can make it a little hard for investors to hear. We like the stability of knowing, "OK, credit cards aren't going anywhere." When you look out at the landscape, Dan, and you think about the things that you came back home with from Money20/20, was there a winner in mind, or company that you're really watching? 

Kline: Yeah, I think Green Dot -- they're at scale, they're partnered with the right people, they've extended their key deals. This Uber deal, obviously, has massive potential for them. I can't tell you that I've drilled into their financials. I absolutely am going to in the next couple of weeks. But that's a company that gives you exposure to a lot of really solid companies. Uber is not such a solid company, but for the most part, their retail partners are brands you'd want to be associated with. This might be a way to be betting on those, and have more than one, with a company that in theory should be very cash positive.

Lewis: Yeah. It can be helpful, I think, to pick up shares of businesses that don't necessarily have the name recognition that an Apple does. I think there's a little bit of a discount that can be given to companies that don't quite have the brand recognition. Green Dot's certainly one of them. Being a business that powers things behind the scenes, they aren't known quite as well by the average investor.

Kline: Yeah. It removes some volatility. Apple's stock can go down because of something that really has nothing to do with its business fundamentals. Maybe the music service goes down for an hour, and the stock drops 8%. That's not likely to happen with a Green Dot because their entire business is making sure nothing goes wrong.

Lewis: It's a good business to be in. Dan, thank you for hopping on today's show and reporting back with what you saw over at Money20/20!

Kline: Thank you for having me!

Lewis: Listeners, if you're looking for more stock ideas and recommendations, we have our Stock Advisor service. Get recommendations from David and Tom Gardner every month, Best Buys Now, and more. Just go to if.fool.com. We've got a special 50% discount for all of our listeners. That's if.fool.com. 

That's going to do it for this episode of Industry Focus! If you have any questions or you want to reach out and say hey, shoot an email over at [email protected], or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or catch video content over on YouTube. Tons of great stuff over there. 

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Taylor Harris for all his work behind the glass today! For Dan Kline, I'm Dylan Lewis. Thanks for listening and Fool on!