A new report predicts that banks are likely to lose as much as $280 billion of their payments revenue by 2025, thanks to fintech disruption from companies like Square (NYSE:SQ), PayPal (NASDAQ:PYPL), and others. Here's why investors may want to take notice, and one new way Square is trying to capitalize on its growing payments platform.
Plus, Industry Focus: Financials host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss The Motley Fool's new real estate investing brand, Millionacres, and share the latest stocks on their watch lists.
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 Sept. 16, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, September 16th. I'm your host, Jason Moser. On today's Financials show, we'll take a look at a recent report that seems to be good news for fintech start-ups...maybe not such good news for big banks. We'll continue the conversation from last week on our new real estate service here at The Motley Fool, Millionacres. We'll hit on some listener emails and tweets from our "What was the last stock you bought?" segment last week. As always, we'll have One to Watch for you.
Joining me in the studio via the magic of Skype, as always, Mr. Matt Frankel, Certified Financial Planner and proud owner of a couple of dogs. We're sitting here, watching them right now on the Skype video, just chilling out, lounging. I think they put you at ease, Matt.
Frankel: They do. The big one, especially, is always my work companion. For those who aren't watching the video, he's a 95-pound German Shepherd/pit bull mix. He's a gentle giant, just kind of sits next to me all day while I'm working. The little one over my shoulder is a handful.
Moser: [laughs] We have a little one, too. We have three dogs. Two fairly big ones and one little one. It seems like the little one is the handful of the bunch. But hey, there's only so much you can complain about when you have a house full of dogs, right?
Frankel: Exactly. Two dogs, two kids, I got a nice, full house here.
Moser: Life is treating you well. Let's jump in. First thing we wanted to get to this week, something we were reading this morning, actually -- a report from Accenture recently, talking about this massive land grab out there in the form of $280 billion in banking payments revenues. They're talking about start-ups in the fintech world slated to grab much of that money by 2025. The big banks are going to be suffering from perhaps a little complacency, perhaps a little bit of a failure to fully adopt technology into their business models. There's a lot to unpack here with this story. This is something where it's seemingly good for payments companies. You wonder, can the banks pivot? There's a theme in here talking about, essentially, the payments space, you'll get to this point at some point years from now where payments are essentially free. If that's the case, what does that mean for some of these fintech start-ups like Square and PayPal and whatnot?
Matt, let's kick it off here first and foremost by talking about this opportunity that's coming up for these start-ups vs. the big banks. What were a couple of your key takeaways after reading the report?
Frankel: One thing to point out. Even though, yes, the report says that banks are going to lose up to $280 billion in payments revenue per year by 2025; you have to remember, that doesn't necessarily mean that these fintechs like Square and PayPal are going to gain $280 billion. We're talking about a trend toward lower payments and things like that. Maybe the fintechs will get $50 billion in revenue, and the banks will lose out on $280 billion, because the payments companies are doing it cheaper.
Moser: Yeah, we've been talking about that a lot. To be fair, for the longest time, we've been talking about, that is one of the advantages that your Squares and PayPals and Stripes of the world have. They're making these payments cheaper than they've historically been.
Frankel: Right. We're not exactly saying that Square and PayPal are going to have $280 billion in revenue, although that would certainly be very nice.
Moser: I wouldn't complain.
Frankel: Right? But, no, it's definitely a net positive. The global payments business is expected to swell to about $2 trillion by that point. This is about 15% of the total. We're not saying that big banks are going to be bankrupt, or American Express is going to go out of business because of disruptive payment technology.
The other big thing is, yes, payments are trending toward free; they're never actually going to get to free. Even the payment methods that people think are free -- like, say, Bitcoin today -- really cost a decent amount of money. It's usually cheaper than using a credit card or sending an international wire transfer or something like that, but these aren't exactly free. It's not just the payments revenue that these payment companies are getting. We've discussed a few times that Square really makes nothing off of the transfers on its Cash app. It's the other things that it could do with this stream of business and customer base. We'll talk about one of them in a minute. A little teaser there. There's a lot of big implications for these fintech companies beyond just payments revenue itself.
Moser: Yeah. Like you, I'm thinking about this statement of payments getting to free. They're never going to be truly free. You're trying to whittle those costs down as much as you can, but there is a cost of doing business always. For our purposes here as investors, in this lifetime, you look at some of these businesses like Square and PayPal, it really shows you the importance of what they're building beyond just being some type of company that gets a scrape off of payments transactions. It's the importance of these businesses building out attractive two-sided networks, where it focuses on buyers and sellers, but also more diversified business models. Square today, yeah, the lion's share of its revenue comes from transaction fees; but you're talking about a business here with a transactions side of the business, a subscriptions and services side of the business, you've got Square Capital -- they've got a lot of different ways they can go. They're building out software ecosystems to help businesses run their businesses. Whether you're in retail or restaurants, these companies are building out technology platforms that help these businesses run their everyday operations. It extends well beyond just transactions and these lower and lower cost payments.
Frankel: Right? Every time you hear lower and lower cost payments, that's a very good thing to keep in mind. At the end of the day, Square and PayPal are not not-for-profit corporations. They're in business to make money. Payments aren't going to be free. They might find more efficient, cost effective ways to do it, which they're already kind of doing. And it's not just the cost, it's the efficiency of the whole process. How long does it take right now to send a wire transfer to somewhere in the middle of Africa?
Moser: It's interesting you say that. When I worked at Bank of America back in the day -- this was like 2001 -- I was a loan officer there. A lot of what I did was based around getting money from one account to the other. There were a lot of wire transfers that I had to be a part of. I had to initiate or take care of wire transfers. You want to talk about a convoluted, slow, and expensive process? Back then, that was it. To make one wire transfer, in many cases, would cost $40 to $60, unless you had some extensive relationship with the bank, and then they would give you a wire transfer for free or whatever. But, it was regardless of the amount, whether you were moving $100 or $100,000. It seemed to be a very cumbersome and slow and expensive process. Certainly, that has changed.
But we also see the Fed now working on revamping the Automated Clearing House system to be able to provide more instant transfers, not only here domestically but around the world. The big banks, not very happy about that, because that's taken away from some of their business and their ability to charge those fees. Smaller banks thinking, "Hey, we like that. It helps us remain competitive in an environment where big banks seem to always have the upper end." Yeah, when you talk about money moving around the world, it's well beyond just swiping a card and payment fees.
Frankel: Right. There's a lot of disruption going on in the payments space, and it's not all just having to deal with fees.
Pivoting to the other thing I wanted to talk about here, cryptocurrencies. We talked a little bit the other week about Facebook's Libra and... I don't want to say a "what's the point" discussion, but it kind of led to that.
Moser: This news made me want to ask you that question. When you read something like this, how does this make you feel about Facebook Libra?
Frankel: I'd actually say it more in terms of the broader cryptocurrency space. Payments companies are developing ways to pretty much do everything that cryptocurrencies do with U.S. dollars. Cryptocurrencies, the original reason they were created is to make transactions cheaper, faster and more private. They still have the privacy advantage to some degree, although they're losing that somewhat as things get more and more regulated. But even Libra, which is denominated in U.S. dollars, it's really tough to see the use case. There are people working at Facebook who are smarter than I am. Maybe they see something that I don't.
Frankel: Maybe they see something we're missing, but I really don't see how. Just think of how much the payments space -- Square, PayPal, and even the technology from the big banks, like Zelle -- have evolved in the past three or four years alone. It's really tough to fast forward another three or four years and not see payment technology being as functional as cryptocurrencies.
Moser: One of the first questions that came to my mind in reading about this report was -- I think I've been very clear, I'm a skeptic when it comes to Facebook Libra. I don't quite understand the ultimate point behind that. While their stated goal is to bring more financial services to the underbanked and unbanked of the world, to make the cost of doing business go down, to make banking, generally speaking, more transparent, more understandable, more available to the masses -- that is what is going on right now with all of these companies in this space. That's what these fintech companies that have been in this space for the last five, 10-plus years, that's what they've been doing. So I don't understand exactly why this Facebook Libra initiative is going to be any better. Frankly, to me, it seems like they've got a heck of a lot more work to do because they're so far behind what a lot of these companies have been doing already. Just because you say cryptocurrency doesn't make it better. It just doesn't.
Frankel: Right. I kind of get some of what they're saying. They want an easy way, especially in parts of the world where there's less access to financial services. They want to make it easier for people to transact. But who's to prevent Square Cash or Venmo from doing that?
Moser: Of course.
Frankel: Like I said, I'm not seeing the use case for Libra right now. It seems like a whole lot of money Facebook's investing to build this out, and a whole lot of legal headaches they're willing to go through, and I'm really not sure why at this point.
Moser: Yeah. We were talking about Square for a minute. We talked about a number of the different ways Square makes money. You'd been looking into something that Square is dipping its toe into here that could have a profound impact on the business over time if they're successful. It's more along the lines of the kind of stuff that we're doing here every day, isn't it?
Frankel: I saw a report last week, I think Friday. Square is testing, on a small scale, stock trading capability in the Cash app. Think of a similar platform to Robinhood. Free stock trading, simple platform. It's designed to compete with like a Robinhood type of thing. This is not a direct competitor to things like E*Trade, TD Ameritrade. Different clientele. These are people who don't necessarily want to research or report on the stock they're buying. They just want to dip their toes into the stock market a little bit.
Square has a couple of advantages. One, the Cash app has 15 million active users right now. Just to put that in perspective, Robinhood has six million users. Robinhood all by itself as a stand-alone platform got a valuation of almost $8 billion in July in a private funding round.
Moser: Yeah, but that doesn't necessarily make it right. WeWork is a good example of the danger of the private market valuation.
Frankel: [laughs] Fair enough. But, having said that, you have to figure, a platform with six million users that pretty much gives its service away for free -- Robinhood has some ways of making money -- is valued at almost $8 billion. Square has 2.5X the user base already that it could market this stock platform to. I don't know if you've used Square's Bitcoin trading platform. I did it just to see how it worked with a tiny amount of money. It's a very easy, user friendly platform. If they can translate that into the investing world, and make something that's really easy for the average American to buy their first stock, there's a lot of potential to market this, especially because now, this is the first time you'll be able to link your bank account, your investments, and a peer-to-peer payment platform together. It's another step on Square's journey toward being the one-stop financial shop. I don't know of any other thing that links those three. Does Robinhood have a peer-to-peer payment app at the moment?
Moser: No, I don't believe it does. Robinhood tried to dabble in the checking and savings area, and quickly found they were in over their heads. To your point there in regard to size, not only does Square have the bigger user platform, but ostensibly far more resources. I would think probably a greater team of people that can come up with generally better ideas. More innovation in an environment like that. You look at a company like Square, or Stripe, or PayPal, all of these companies are doing the same kind of thing. It essentially seems to me like they're building the banks of the 21st century. They're building the financial services companies of the 21st century. What used to be very much just a few big players in a space in the form of big banks that really pulled all of the strings, technology has changed that in a lot of ways. Banking has evolved far beyond just banking. It's financial services. You're seeing a lot of these smaller, more nimble companies really making those early investments, trying those new things. They're not all going to work out. Some will work, some won't. But this is the time you have to try those things, because you've got big customer bases and a lot of different ways to get things done.
Frankel: Yeah, definitely. We also saw another encouraging thing. Square is reportedly buying a company called Third Party Trade. They build out the backend functionality for trading platforms. It's looking like this is going to happen sooner rather than later. It could be a great way, like I said, to monetize those Cash app users in a way that even Venmo isn't doing. I'm excited to see where this goes. I'm still a big Square fan, as everybody here knows.
Moser: Yeah, me too. I love them all. I own PayPal, Square, MasterCard, Visa. I feel like there's room for all of those businesses to continue doing well here in the coming years. It's a fast-changing space. You want to be there with the companies that are shaking things up, the companies that are implementing those changes, as opposed to the companies that are responding to the changes. We'll leave it at that.
Matt, we wanted to follow up from last week's conversation. You introduced our listeners to something you've been working on here for quite some time now with the team, Millionacres. It's The Motley Fool's real estate investment service. A lot of cool things going on there. Now you've got this thing out there. People are reading the content, learning about what we have to offer. Talk to us a little bit more about Millionacres. Maybe discuss some of the different ways you and the team at Millionacres view investing in real estate.
Frankel: Sure. If you've listened to the podcast for a while, you've heard me talk about REITs, real estate investment trusts, quite a bit. There's a lot more to investing in real estate than just REITs, although on Millionacres, we do give you a whole lot of in-depth coverage on that as well. We also go into a lot of other ways you can invest in real estate and some other strategies you can use, like investing in properties. I own a handful of investment properties myself. We go over things like how to finance an investment property, which a lot of people don't know how to do; what a property manager would do for you; do you need one; the advantages and disadvantages of choosing that as opposed to something like a real estate investment trust. You're putting all your eggs in one basket, as opposed to a company that invests in thousands of properties. But, on the other hand, there's potential for a lot of great long-term returns if you have the patience to deal with all those things.
We also go into a relatively new way of investing in real estate called crowdfunding. You've probably heard of crowdfunding platforms like GoFundMe or something like that.
Moser: Oh, sure!
Frankel: People raise money for medical bills, whatever they need. This has also emerged as a way to invest. Crowdfunding lets people get in on real estate deals that they otherwise wouldn't be able to afford to do or wouldn't know how to do. For example, if an experienced real estate developer wants to buy a hotel, renovate it, and try to increase its income, it might put up a little bit of the project's money itself, then advertise to investors like you and me, where you can get a piece of the project in exchange for an equity interest. That's a really exciting way to invest, but there's a lot you really need to know before you jump into one of those, in terms of risks, what to expect, how to analyze the deals as you're reading them. A lot of really interesting ways to invest in real estate.
There's also a lot of big tax implications of real estate investing. There's a lot of advantages that come with real estate investing when it comes to taxes. But it really is complicated. You need to understand it. There are some tax strategies that you can use to prevent from seeing your tax bills go up after becoming an investment property owner, or even a real estate investment trust or crowdfunding investor. A lot of people don't realize, for example, that REIT dividends are a lot more complex than the ones you get from the average stock. They're usually broken down into several components, and are not usually taxed as qualified dividends. There's a whole lot to really unpack when it comes to real estate investing, which is what we're trying to do over there at Millionacres. I encourage anyone listening who's interested in real estate, or even if you're not, come over there and see why you should be.
Moser: Yeah, most definitely. I tell you, everything you've been doing on it, it really looks cool. I worked with Matty Argersinger for many, many years now. We served three years together on Million Dollar Portfolio. To see him be able to go into this real estate service -- real estate's always been a real passion of his, and I know it's one of yours as well. When you put passionate people on something, you can't help but get good results, because you're happy doing what you're doing. So, yeah, make sure, listeners, you can go check out millionacres.com to learn more about what Matt was talking about there. And, give them a follow on Twitter, too. They're on Twitter. They're tweeting out all sorts of great tips and ideas and things to make you smarter and happier about investing in real estate. You can get them at Twitter @Millionacres_CO.
All right, Matt, last week, we introduced a new segment to the show. We were just giving it a test drive to see how people felt about it. It was What was the last stock you bought and why. It's not something that you and I can do every week because we're not buying stocks every week. But we figured, every once in a while, we'd probably throw it in there. We got some good feedback. We had a lot of people that said they liked it. They thought it was really cool. We got some responses from listeners, both via email and Twitter. I thought we'd read a couple of those off for you here.
We have an email from Marianne Ford in New York City. Marianne says, "I bought Twilio and The Trade Desk today. Yikes! They each dropped by about 10% today for no discernible reason, so I took this opportunity to pare down my too-large position in Nvidia. Glad I could sell it at a solid 15% gain and use that cash to add to my Twilio and Trade Desk positions. I've been wanting to do this for a while, but I didn't have the do-re-me. But, since Nvidia came out of the red recently to give me a small but respectable return, I trimmed shares there to buy these. I'm slowly moving large-cap companies like Apple out of my Roth IRA so I can move to growth stocks with the potential to make a whole lot more for me tax-free, trying to create a portfolio that consistently outperforms the market, while also holding a few potential multi-baggers and moonshots in my Roth, hoping they'll help me make up for having gotten started investing much later than I ever hoped to. Fool on, peeps! MFK in NYC."
Congratulations, Marianne! I really liked that last part you said there about having gotten started investing later than you really had ever hoped to, but you still had some ways to try to deal with that. And hey, listen, I own The Trade Desk, too, so congratulations there! I think that's a company that still has a lot of opportunity in front.
On Twitter, Daniel Trende hit us up. He said, "The last stock I bought was Roku, as it has only positive news, smart sound bar, growth prospects, etc. and has been knocked almost 20% from its all-time highs. Took a chance to add to my position." Well, congratulations, Daniel! There are a lot of folks here that really like Roku and what it's doing. I think the chances are pretty good there you might be hanging on to a winner as well.
What's the last stock you bought and why? Reach out to us with email here, firstname.lastname@example.org, or hit us up on Twitter @MFIndustryFocus. Tell us about the last stock you bought and why. We'd love to tell everybody else listening exactly what you told us.
All right, Matt, last segment for the day. Talking One to Watch here, as always. What is your stock for our listeners to watch this week?
Frankel: Continuing our real estate and Millionacres theme, I am going to recommend another REIT, but this one's a really cool and unique one. It's called MGM Growth Properties, ticker MGP. This is the company that owns a lot of the casinos that bear the MGM brand name. Anyone in the D.C. area knows the MGM National Harbor, which is right near where Jason is right now. I don't know if you've been to that one, but it's a pretty impressive property. I think The Fool actually had an event there not too long ago. They own the Borgata in Atlantic City, which is where I had my 21st birthday way back in the day. They own seven of the MGM casinos in Vegas.
I love this as a play on the legalization of gambling that's spreading throughout the country. The stock yields a little over 6% right now, so it's a great dividend stock. It's got, like I said, irreplaceable assets, which is one thing I really look for when I'm looking for a real estate investment. It's got a natural acquisition pipeline. As MGM builds more casinos, they sell them to their real estate investment trust that bears their name. They have a bunch of advantages. They can see the unit-level financials of their tenants, which is very unique in real estate. They've been able to grow their dividend really impressively in their short history since they became a public company. I just really love this as a great dividend play to hold onto for the long run.
Moser: OK, nice! I'm a little bit in line with you, I suppose. The stock that was on my radar for last week's Motley Fool Money, I'm putting it as my One to Watch this week as well, is Churchill Downs, ticker CHDN. Matt, I don't know if you knew this -- the Kentucky Derby is the longest continuously held annual sporting event in the United States. With that said, Churchill Downs is far more than just the Kentucky Derby company. It actually operates casinos and other tracks and online gambling sites, including TwinSpires, which is the largest legal online horse racing platform in the U.S. Of the three major revenue buckets in racing, online wagering, and casinos, right now, it's casinos that are the big moneymaker for the company. But, all three play a nice important role. As you mentioned, we continue to see this regulatory landscape evolve in the U.S. as gambling becomes legal in more places. I think Churchill Downs certainly could be in a very good position to benefit from that, given their experience in the space. So, one I have been digging into, and I'm liking what I'm seeing. There you go!
Matt, that's going to do it for us for this week! It was great catching up with you, as always! And hey, man, looking forward to actually seeing your face to face here next Monday, right?
Frankel: Yeah, I'll be flying up there next Sunday. We'll be spending a couple of days up around headquarters.
Moser: All right, man! Safe travels! We'll grab a beer when you get here!
Frankel: Sounds good!
Moser: 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 Dan Boyd. For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next week!