With tons of regulatory uncertainty and reports that some key partners are having second thoughts, will Facebook (NASDAQ:FB) still move forward with its Libra cryptocurrency?
And negative interest rates are more prevalent than you might think around the world, but what would happen if they came to the U.S. markets?
Plus, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the latest results from foreign fintech favorites StoneCo (NASDAQ:STNE) and PagSeguro Digital (NYSE:PAGS). All this and more on this week's episode of Industry Focus: Financials.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 26, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, August 26th. I'm your host, Jason Moser. On today's Financials show, we're going to discuss the future of Facebook Libra. We'll review a couple of earnings reports here for a couple of the companies shaping the Latin American payments space. We'll talk about the implications of negative interest rates. And as always, we'll have a couple of stocks for you to watch. Joining me in the studio this week as always, Certified Financial Planner Matt Frankel. Matt, how's everything going?
Matt Frankel: Pretty good! I'm fighting a little bit of a cold down here, which is always fun during the summer in South Carolina.
Moser: The summer cold!
Frankel: Other than that, doing well. Wouldn't miss this for the world!
Moser: Nope, nope. I think we've got a good thing going here. We'll bring you in whether you're sick or not. You're going to have to opt out, as they say, Matt. You'll have to opt out.
Frankel: I'm good to go. As long as I'm here, I'm here.
Moser: Perfect! OK, good deal. Well, we wanted to open up the show this week talking a little bit about Facebook's Libra project. For folks out there who maybe don't know much about Facebook Libra, what it is, this is essentially Facebook's effort at developing its own cryptocurrency, for lack of a better description. It's not something where Facebook would be directly running this operation. It's a subsidiary of Facebook's, something Facebook would be affiliated with through partners in the industry as well. But ultimately, what we're looking at here is the goal to launch something here by 2020, 2021. I mean, as we figured, it is certainly coming under plenty of scrutiny. A lot of scrutiny on the regulatory side, because anytime you think about launching a new currency, well, that just makes sense. There are global implications here with the size of Facebook's network, clearly. That's a lot of people that could take advantage. And we're talking about a potential new currency here, there's probably going to be some bad actors in the process there, Matt.
But we've been looking at this project, Libra, and trying to understand exactly what they want to accomplish and what some of the challenges may be. Now, Matt, it seems like there are even some of the partners that are starting to express a little skepticism as well.
Frankel: Well, it's not just that there's regulatory scrutiny. I don't think anyone really was surprised at that. It's how much regulatory scrutiny there is that I think is scaring everybody. They're facing it from literally everybody -- like, both parties in the U.S., the Senate Banking Committee, the House Financial Services Committee, the Treasury Department, the Federal Reserve, I think the European Union even voiced their objections to it. Literally nobody in power has said this is a good idea. That's, I think, where some of Facebook's partners are getting nervous. Including Facebook, there's 28 companies partnered in this. It was recently reported that I think two of them are getting ready to back out.
Moser: And those two were not named. It was two, but we didn't actually get the names of the companies that were thinking about backing out, right?
Frankel: Right. We don't know if it's one of the giants like Visa or MasterCard or any of the other ones. We don't know that yet. A third unnamed backer is really not in support of it at this point anymore, really worried about what the regulatory environment is. Anytime that you're going into business and your partners start to really get cold feet, and pretty much no one's telling you that your business plan is a good idea, in my mind, that usually sets off bells, if I'm trying to do something and literally everybody in the world is trying to talk me out of it. So, I don't know.
The other thing I feel is that Libra doesn't do anything that doesn't exist already. It's a stable coin, which means its value is going to be pegged to the U.S. dollar, not like Bitcoin that can jump up and down. It's a stable coin. Those exist. There's a big one called Tether that already exists in the cryptocurrency world. So this isn't a brand-new technology. It's not like this is a new concept that does anything too special. So I don't know if it's worth the regulatory hurdles.
Moser: You bring up something that's really what I wanted to get into here, the goal of this project. If you read the goal of the project according to Facebook, it's to provide a fast, low-cost way for people around the world to transfer money, especially those who don't have access to traditional banking services. Now, we're talking about the world, obviously a very big place. To me, though, when I read that, there are a lot of low-cost ways to transfer money all over the world now. There are a slew of options out there for people to get money from point A to point B. And I do understand, perhaps there are some countries where expenses are high, and that is based on geopolitical risk and a financial system that's not nearly as established or reliable as something like ours, or perhaps other first-world countries.
But when I'm looking at what Facebook's trying to do here, it seems like they're ultimately trying to help serve the unbanked and the underbanked. For me, the simpler solution is to develop products and services that help people deal with that. Whether they're unbanked or underbanked, helping to bring people into the banking system is the more logical step. Introducing a currency is not. I mean, you've just gone over all the different types of concerns here from countries all over the world. That's very understandable because you're talking about a new currency with a network that's obviously very, very big in Facebook and its affiliated properties. To me, establishing a new currency for this problem that they're trying to address doesn't seem like the most rational first step.
Frankel: Right. And I get the drive to want to use a cryptocurrency as opposed to a traditional banking product. Not only is it low cost, but it's usually instantaneous. There's ways to instantly transfer money within the U.S. When I did a wire transfer to buy my house, it was at my closing attorney within five minutes. But that's not the case if you're transferring it from here to, say, some third-world country.
Moser: That's not necessarily true, though. I mean, there are companies out there like Xoom, for example, that PayPal now owns, that focus specifically on that market, U.S. outbound remittances, to countries all over the world. Whether it's a developing economy or a developed economy, Xoom exists solely for that purpose and has done quite a good job. Now, granted, we don't know as much about Xoom now because PayPal acquired it, but when it was a public company and we had access to those metrics, it was clearly doing a lot of good things there. But I do understand your point. But again, I go back to, there are a lot of different ways to get money from point A to point B these days. I don't know if what Facebook's coming up with is necessarily the most reasonable first step, I guess.
Frankel: Right. If it was the first stable coin, I could even understand that the regulatory scrutiny might be worthwhile. Like I said, there's already a couple of big ones out there. Tether, I think, is $4 billion in size. The technology already exists, it's already there. There's a bunch of big cryptocurrencies that have already specialized in cross-border payments, like Ripple, for example, is one of the big ones.
My personal take is that Facebook is going to get into the cryptocurrency game, just not through its own.
Moser: Yeah. That was going to be my follow-up with you -- where do you see this ultimately going? I tend to fall in line with that thinking. My personal opinion is we've seen the beginning of the end for Libra as we know it. I think all it's going to take is just a few companies to jump in there and say, "You know, we're having second thoughts about this," others will fall in line very quickly. Whether rightly or wrongly, I think that all you need is a little bit of concern, really, with your partners, because we've already seen plenty of concern via regulators and politicians and whatnot around the world. Is this worth going through all the trouble? Is the juice worth the squeeze, as they like to say? I mean, I just can't believe that they would come to the conclusion that it is, at least at this point.
Remember, it wasn't all that long ago when we were talking about, Facebook was this massive new network and this way to keep in touch with everyone, and wow, it was making the world more connected, and everybody was just thinking it was the greatest thing ever. Now we're to the point where the question, and I think it's a legitimate question, is, "Is Facebook a net positive or negative for the world at this point?" And we have a lot of different opinions out there. All sorts of great thinkers will give you their take on that. But it's just interesting to see how we've come from a point where it was generally perceived as a positive to, now, a lot of people are on the fence, there's certainly plenty of people out there who find it to be a negative.
I wonder if you wouldn't see the same evolution here with Facebook trying to get in the payments industry in some way, shape, or form. Sure, on paper, it sounds really great that you want to make financial services more accessible to the masses at lower costs, but is that something you're really going to be able to pull off? Is this something that they do well? I think there are questions, at least, out there to make you take a little bit more of a skeptic's view like I do, I guess.
Frankel: Yeah. I mean, I could see Facebook ultimately partnering with one of the big crypto companies like Ripple or one of those, or even one of the big payment processors that already has a crypto operation. Square, for example. MasterCard, we were talking about last week. They're starting their own crypto division. So I can see Facebook partnering with one of them, or even a banking-as-a-service company to do a non-cryptocurrency payments method. But I agree. I think Libra's dead in the water.
Moser: Interesting. So, for listeners out there, when Matt and I were talking about this this morning, we came to the conclusion that we were going to offer our opinion on what was going to happen with Libra, but we kept it secret. We didn't share our opinion with each other. So it was interesting to see you and I essentially falling on the same side there, it sounds like, Matt.
Frankel: Great minds think alike! It sounds like all the regulators agree with us, too.
Moser: I'll leave it at that. We'll just go on to the next story here. We've got a couple of earnings stories over the past couple of weeks, companies that our listeners I know enjoy hearing about and follow. Matt, you and I dug into a couple of these companies recently in StoneCo and PagSeguro, a couple of payments companies over in the Latin American space. Talk to us really quick about the most recent quarter from StoneCo. It seemed like, generally speaking, it was a pretty positive quarter.
Frankel: Yeah. StoneCo missed revenue estimates, but they grew revenue by 69% year over year. With that kind of growth, who cares what the estimates are? [laughs] That's my opinion on that.
Moser: It's a good one!
Frankel: Net income almost tripled year over year. The actual business numbers were even more impressive -- 360,000 active clients. Last year, it was just over 200,000. Even more impressive, StoneCo now has a 7% market share in their core payment processing business, but, even given that their market share is getting large, their growth is still accelerating. They added over 50,000 new clients in the second quarter of this year as opposed to less than 40,000 in the second quarter of last year. So, not only is the growth continuing, but it's even getting faster. The encouraging stat that I read, they're really focusing on building out the rest of their ecosystem.
You've heard us talk about Square, so this probably sounds familiar. Providing credit to small businesses is a big focus area, kind of similar to Square Capital. I mentioned they have a 7% market share in payment processing. They estimate they only have roughly a 1% market share in small business credit. That gives a lot of potential to ramp up that business to keep the growth going. And they're really focused on being a total ecosystem for merchants. They're even talking about figuring out ways to provide logistical support like last-mile delivery and things like that.
StoneCo, I always refer to it as the Square of Brazil. I think there's a lot more to it than people think. Right now, it's more of a payment processing company. It's still in the earlier stages of building out its ecosystem. But the numbers definitely look promising.
Moser: Yeah, I like that comparison to Square. I think that's something I noted on Twitter a couple of weeks ago. They have a very Square-like focus on the customer and developing that holistic solution. And the capital part of the business there, I thought, was really clever as well. I do agree. I think StoneCo is an exciting business. For full disclosure for listeners, I disclosed this last week on Twitter, I did actually open a position in StoneCo with the intention of holding it for a long period of time, because I think there's a lot of opportunity there, so StoneCo is now one of my personal holdings.
My goal is to make this next company a personal holding as well, Matt, as long as I can shut up for long enough about it -- PagSeguro, another company we talked about here in that payments space, performing very well. Second-quarter metrics were all really heading in the right direction. Total payment volume was up 59% from a year ago to R$26.8 billion. They have 4.7 million active merchants now, up 1.2 million from a year ago. Revenue was up 38.7%. Net income up 41.8%. They're seeing expenses as a percentage of sales actually shrinking, which is nice. I think that, interestingly enough, something they introduced here recently they're focusing on called PagBank, which is essentially taking their market opportunity beyond just the payments space and looking more toward the banking space and the opportunities that exist there. It expands their market opportunity significantly. While that's something that's really just getting underway, I think it is something that is going to give them a lot of optionality in the coming years and new ways to utilize the data with the merchants and the customers that they have today.
Again, I think that when you look at these two businesses together, and as we went over them a few weeks back thanks to that listener email prompting us to do so, these are two really good businesses that I think continue to do really good things in that space. So yeah, positive course in both companies. I think that if you're an investor in either or both, you should probably feel pretty good about that right now. We'll keep following those companies and keep everybody updated with what's going on there.
Now, let's turn over to another story that you and I were kicking around here recently, Matt. And that is in the face of these falling interest rates, something we're seeing in certain areas around the world right now, it hasn't really made its way here, but this concept of negative interest rates is really fascinating. It essentially defies all logic and the tenets that the banking and lending system were built on. Explain to our listeners what negative interest rates are and what's going on right now with this.
Frankel: Negative interest rates, it's kind of a foreign concept. As you mentioned, it hasn't made it to our shores yet. It basically means that you're getting paid to borrow money. For example, if you have a mortgage with a negative interest rate, that means you're actually going to end up paying less than the price of the house to borrow money. The idea behind negative interest rates is that they're designed to discourage banks from keeping too many reserves with central banks. That's the general idea, to encourage them to lend, to encourage people to borrow money -- because if you can borrow money for less than it's worth, why wouldn't you do it?
Moser: We're seeing a lot of people doing that too, right?
Frankel: Right. I think Denmark is actually the first place where we see negative mortgage rates, where people are essentially being paid to buy a house.
Moser: It's fascinating!
Frankel: Yeah. The enormity of the negative-interest-rate market is really shocking right now. About 45% of non-U.S. bonds around the world have negative interest rates right now. Like you said, it's a foreign concept to U.S. investors. A lot of people are shocked to hear that. It's about $15 trillion worth of bonds altogether. Even some U.S. companies -- like when Apple issues European-dominated bonds, they have negative interest rates. Apple's borrowing money and getting paid to do it.
On the surface, it might sound like a good thing. It's definitely a good thing for consumers that want to borrow money and buy things. If mortgage rates go negative here, I'll probably buy a couple of investment properties, to be honest with you. It'd be great for real estate stocks because they are high-yield companies that generally move the opposite direction of interest rates. But it's bad for the economy in general. This is the Financials show -- it'd be terrible for bank profits if that happened.
Moser: It would.
Frankel: Can you imagine if Bank of America had to pay everybody to take its money?
Moser: It's astounding to think about, really, but that's the concept, [laughs] which is why it's so crazy.
Frankel: It'd destroy their profit margin. Pension plans are all fixed-income investments, they would really lose out. You think we have underfunded pension problems right now? Wait until interest rates go negative. Any investor who relies on recycling their fixed-income investments every few years -- my father, for example, uses a bond laddering strategy. Every few years, a few of his bonds mature, then he buys new ones. So if he has to buy negative-rate bonds, would he still do that? Probably not.
Frankel: And it's just a really bad economic sign, when you have to make your interest rates turn. Even during the financial crisis, we didn't have to do that.
Moser: Right. That leads me to my next question -- do you feel like this is something that we will actually see take place here in our domestic economy? I understand anything's possible, but it seems like we also have a lot of tools at our disposal to try to prevent something like this from happening.
Frankel: The chances are low, but you have to realize that the trade war could get a lot worse than it is; we have a lot of political pressure, not just from the president, to lower interest rates from where they are right now --
Moser: Which is so insane to me. I can't get over that. [laughs]
Frankel: Right. If the president got his way, interest rates would be zero right now. If the Fed lowers interest rates, say, three or four times the rest of this year and we end up with a recession, it's entirely possible that they'll have to either do some major quantitative easing or bring rates negative. I'd call it a low possibility, but it's certainly out there.
Moser: Well, I guess we'll keep our eyes on that. I mean, it doesn't sound like it would really be a good thing any which way you cut it, unless you're a consumer and you're looking to borrow a ton of money. Then maybe it works out alright for you. To be continued, I suppose.
All right, before we get into our final segment of the day, One to Watch, I did want to just take a minute here to read a tweet that came across our feed yesterday. It's from @ColemanEtelkuzi. Coleman, I hope I pronounced your name correctly. Coleman says, "August marks my first full year of listening to The Motley Fool's podcasts. Thank you for enlightening me, reinforcing your taught positive outlooks, and enriching my everyday life with all the wonderful work you all do. #podcastforthewin #missionaccomplished."
Coleman, let me just say thank you so much for the kind words there! Happy anniversary! We're thrilled that you listen. We aim to do exactly what you just said, right there -- keep it fun, keep it informative, and hopefully help you build out a lifetime full of financial independence. It sounds like you're on your way. Really appreciate those thoughtful words!
Listeners out there, listen, we love getting your tweets. Don't ever be scared to tweet us @MFIndustryFocus. Or you can even email us if you're not on Twitter at email@example.com. Keep those questions coming in. We always love bringing new stuff to the shows here.
OK, Matt, let's wrap it up here. We've got our One to Watch this week. What stock do you have on your radar?
Frankel: One that I've said a few times in the past. Goldman Sachs, GS, just rolled out its Apple Card. It's getting a lot of attention -- some good, some bad. But you know what they say, there's no such thing as bad press. And the bad press isn't necessarily about the card itself. I don't know if you read the article that said Apple's advising people not to put the card next to leather or denim?
Moser: Oh, I read it, Matt. I read it once. I read it twice. I even had to read it the third time. And then Chris and I had a little fun with it on Market Foolery last week. We'll talk about that after the show.
Frankel: When I first saw the headline, I said, "Am I reading The Onion? What is this from?"
Moser: [laughs] It came across that way, I will say.
Frankel: But all the early reviews sound like it's actually a pretty solid product and that a lot of people are getting approved for it. Not necessarily subprime customers, but people with lower credit scores than would normally get approved for a credit card. I trust Goldman's risk management. Marcus, their consumer lending division, has been approving people with lower than traditional banks would approve credit score wise, and with a lot of success. I trust their underwriting abilities. This sounds like a pretty big product. And what really encourages me is that CEO David Solomon just said that Apple Card is big, but it's also just the beginning, and that in the decades ahead, he expects Goldman to be a leader in consumer banking, which is a bold statement.
Moser: A little bit of a pivot for them.
Frankel: Right. Goldman currently trades for 10% less than its book value, so it could be a good time to check it out.
Moser: OK. What's the ticker for Goldman?
Frankel: It's GS. Thank you for reminding me about that!
Moser: All right. I'm going to go with a company, I don't think we've mentioned this one here before, it's called Live Oak Bank, LOB. This is a North Carolina bank. Small-cap, just around a $700 million market cap. About $3.7 billion in deposits, which was up about 5.5% from the previous quarter. They carry about $4.3 billion in total assets. Chip Mahan is the CEO and co-founder, and he's been in banking since 1973 when he got into the industry with Wachovia. You remember Wachovia, don't you, Matt?
Frankel: I do. They were my bank until they got acquired by Wells Fargo.
Moser: Yeah, they were my bank for a time, too. We may have the good fortune of actually getting Chip here on the show, which we would love. Anytime we have a CEO in the banking space, it's always a treat for us. We're going to keep on working on that. But certainly, Live Oak is a company I'm going to dig into, learn more about it, and learn more about Chip Mahan and what their ultimate goals there with the bank are, and how they may be dealing with this current interest rate environment and the potential for negative interest rates as well.
Matt, it's always good having you here! It was good talking to you this week. Thanks for joining!
Frankel: Always! It takes more than a cold to keep me away from you guys.
Moser: Excellent. Well, we will be away from you next week. Monday, remember, is a holiday, so we will be off. But you know what? I'll tweet out a show. We'll reach back into the library. We'll pull out a special interview for you all to catch up on if you didn't catch it before. But we will see you the following week, for sure.
As always, people on the program may have interest 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. Today's show was produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next time!