Why Venmo Just Launched a Credit Card

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines from Wall Street. Venmo takes another step toward expanding its payments platform. The guys discuss the latest developments in the entertainment sector, answer a listener's question about rebalancing a portfolio, and much more.

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This video was recorded on October 5, 2020.

Chris Hill: It's Monday, October 5th, welcome to MarketFoolery. I'm Chris Hill, with me today, it's a Moser Monday, Jason Moser, good to see you.

Jason Moser: [laughs] Hey, good to see you. Man! Normally it's merger Monday, but Moser Monday, man! I can get behind that.

Hill: It's new branding, I'm testing it out, see how it goes. We have got some entertainment business news. We're going to talk about portfolio allocation strategies, but we're going to start with the War on Cash. Earlier today, Venmo, which is the mobile payment service that is owned by PayPal (PYPL 1.96%), unveiled its first ever credit card. Jason, you know I'm a PayPal shareholder, you know I'm a fan of Venmo, and yet when I saw this story the one-word question that popped into my head was, why? Why are we doing this? Isn't that why I'm using Venmo?

Moser: [laughs] I was going to say, you mean why, from the physical card perspective, or why would you have a credit card from Venmo?

Hill: I guess, kind of, both. All kidding aside, what is the thinking here on Venmo's part?

Moser: I guess that's a fair question, I guess. Let's remember that it's a Venmo Credit Card. Now, it is actually something that is backed by Synchrony Bank, which is a longtime partner of PayPals and it's a Visa card. So, those are all the players in the value chain there. Ultimately, you know, when we look at all of the things that PayPal is doing beyond just Venmo, but when we look at what they're doing with Venmo too. It's really about driving daily use and engagement. And so, the card is really another step in that direction. And it's not a surprise, I mean, we knew that they were going to be bringing this to market at some point. And so, the idea generally is to drive daily use of Venmo's platform, whether that's in the form of a credit card or in the form of using your phone.

Now, we hear all of the time, sort of the, well, do you want to pay with your phone or do you want to use a physical credit card? I mean, the friction is there regardless, right, you got to pull your phone out of your pocket or you got to pull your card out of your pocket. So, using one or the other I don't think is really that much of a difference. But I do think that what they're doing with the card and what they're doing with Venmo in general, speaks to sort of that tech drive there. And specifically, I'm talking about the QR code strategy that they have. With the Venmo card, they're going to have the actual QR code on the card.

And so, with Venmo, for example, like, the QR code is just another way you can use your phone to scan a merchant's code so that you can then pay via your phone if you want. And so, I think that when you look at what PayPal is doing with Venmo, whether it's the card, whether it's the QR code strategy, it's really just all about driving daily use. And so, they've tinkered around with the reward structure on this card a little bit to where it's a little bit different than what you might find with typical cards. And so, you have 3% cash back on the category in which you spend the most, then you have 2% back on the second highest category, and then you have 1% back on all other purchases. So, it's neat in the sense that it gives every cardholder an opportunity to take advantage of their individual spending behavior. With Amazon, for example, that Prime Card really focuses on Whole Foods purchases, for example, or Amazon purchases. And so, with Venmo's card, they're looking at this younger generation of consumers and understanding that they want to reward them just for really where they're spending their money as opposed to just encouraging them to spend their money or use that card one place or another. And I do think that makes a lot of sense, but between the card and what they're doing with QR codes strategy, it really is just a matter of driving daily use and engagement for a particular demographic. And certainly, Venmo is keyed in on that younger demographic. I think it's a sensible move.

Hill: Yeah. And I didn't mean to come off as, I think it's a bad move, I think it's a sensible move. I guess I just look at it and think, OK, what does success look like, how much does this show up in PayPal's quarterly results? And it may not be a big driver in terms of new users or that sort of thing, I do see, however, how it could make Venmo even more sticky.

Moser: Yeah, I think you made a very good point right there. And I think to answer your question, it is extremely incremental at this point, the economics of this are incremental, and management has acknowledged that. This is less about the bottom-line and it's more about really building out this card, this financial relationship with Venmo and its users, that users feel comfortable with it, they want to use on an ongoing basis. And so, I mean, you just look back to their most recent quarter where they reported, obviously, very strong results for the business, in general. But Venmo had a really strong quarter as well. Net new ads were very strong. They now have +60 million users in that platform, and they grew the total payment volume by 52% to almost $37 billion. And so, I mean, this card, if it doesn't exist, is Venmo still going to be successful? Yeah, absolutely. But it is something that they can add another dynamic to the relationship, give consumers one more way to participate to use that platform, to benefit from the platform with that unique rewards structure.

They look at this data where they acknowledged that 70% of people have health concerns right now about shopping in-person. And frankly, it seems like that number should be a little bit higher. And that certainly goes toward the QR code strategy that they're using. Back in August they announced this partnership with CVS to where now you can actually use your PayPal and Venmo QR code in the store. And again, that's that contactless-style payment. And so, it really is all going back to figuring out ways to make it contactless, to address the fact that people have concerns about contact, about using cash, you know, figuring out new ways to do things. And I think the card, the QR code, those are all pieces of that greater strategy to build out this new fintech, sort of, company that's just changing the way that money is moving around.

Hill: Movie theater stocks are getting hammered today. Cineworld Group, which is the second largest movie theater chain in the world, announced it is closing its theaters in the U.S. and in the U.K. Here in the U.S., it's Regal Cinemas, in the U.K. it's Cineworld. So, all told, we're talking about more than 650 theaters, roughly 45,000 employees who are going to be out of a job. And the stock is down 40%. And in sympathy, I guess you could say, shares of AMC, which is the largest movie theater chain in the world, down 10%. Cinemark down 15%. We've seen, sort of, this drip, drip, drip of tentpole movies having their release date pushed back. The latest James Bond movie, which was supposed to come out this past April, got pushed to November. And over the weekend it was announced it's getting pushed to next April, and it's, among other things, Jason, it is a reminder of how those big action tentpole movies drive this business.

Moser: Oh, yeah. And it's not just the theaters that are really feeling the pain today too, EPR Properties, that's a REIT that focuses on the entertainment arena in general, but they have a lot of exposure to movie theaters and certainly EPR is feeling a little bit of that pain today as well, given what we know is playing out at the movie theaters. And when you look at Cineworld, I mean, the first thing [laughs] it made me think of, it's kind of like Pluto. When Pluto was downgraded from planetary status, like, Cineworld is more like a dwarf planet now, like, this isn't a world anymore, this is really a company that's just struggling to figure out how to survive at this point. Because they've got two problems, they've got two really big problems. They've got a supply problem and a demand problem. And like you noted with the actual releases, having the content to get in those theaters, that's one problem. But then the other problem, obviously, the health concerns regarding the pandemic. I mean, people just don't want to go sit in a movie theater like we used to. And so, all of this is playing out on these theaters, big and small.

And when you look at Cineworld's financials, they are facing the same problems as everyone else. They're witnessing revenue falling off a cliff, they've got a slug of debt on the balance sheet, $8.5 billion, now, half of that is in lease liabilities, but that speaks to the weight that those theaters can serve, right, that drag that they can serve when they're not being used. And a theater is just like a restaurant, it's just like a retail store, there are all of these high fixed costs in keeping those theaters open and paying for those leases, keeping them staffed and open. And so, you need traffic to go through them. The more traffic that goes through them, the more profitable they become. And that's great in good times, but in bad times, as we're seeing now, that profitability just vanishes.

And I think the trouble that they're facing is that, you know, when you start looking forward and you try to figure out exactly how people are going to be feeling about going to the movie theater when all of this stuff passes over. I mean, when we finally turn the corner and the concerns for our health aren't the same as they are today, are people going to want to go back to the movie theaters like they did before? I mean, some will, no doubt. But for all of the time that passes while we're not going to those movie theaters, all of the time that those theaters are suffering, other forms of entertainment are gaining, right? Other forms of entertainment are becoming more and more an option, a nice substitute for folks, whatever that may be, all the way down to new ways of catching movies. And so, we're seeing distributors figuring out new ways to get movies out there, we're seeing consumers figuring out new ways to actually watch movies. And all of a sudden a year from now, and I mentioned this on Twitter earlier today, all of a sudden you really have to be aware of that "good enough" risk, in that, like, hey, you know what, it's not the movie theater, but I'm sitting at home, I'm eating the pizza, I'm watching a new movie, that's good enough for me and I'm OK with that, I don't need to get in my car and go to a movie theater.

And so, the more time that passes, I think the more difficult it becomes for these theaters to really get back to where they once were. And unfortunately, it feels like we're going to be dealing with this, certainly, for the rest of this year; I mean, granted we only have a couple of months left, really, a few months left. But, you know, going into 2021, what does this look like when April or May comes around? I don't know, we don't know enough yet. But when you look at Cineworld itself, I mean, it's really "Cine-United States," I mean, 75% of their revenue comes from here. So, what's going on here really matters to this business, and right now it's just not looking good.

Hill: Yeah. And one of the thoughts I had when I was reading through this stuff this morning was, remember when Warren Buffett bought of the Omaha World-Herald, there was just, sort of, this -- like, for someone who is so rational in his investing, it kind of seemed like he let nostalgia get the better of him. And you know what, he can do whatever he wants with his money. Although, [laughs] he did sell the newspaper earlier this year. But it reminded me of that. And I just thought, I think there is a possibility where some very wealthy person, at some point [laughs] in the next year or two, maybe not to buy AMC Holdings whole cloth, but it wouldn't surprise me if someone was just like, no, no, no, I love movies and I want this to survive, and if it's breakeven, that's all I care about. But other than, sort of, a very rich angel coming in, given everything you just laid out with the business, I mean, I like how you put it, [laughs] it's not just a supply problem, it's a demand problem as well.

Moser: Well, hey, listen, apparently Jeffrey Katzenberg has got some pretty deep pockets. I mean, Chris, are you thinking what I'm thinking? Quibi Theaters, I mean, it just rolls right off the tongue, doesn't it? Quibi Theaters. Hey, it's a possibility.

Hill: [laughs] Anything is possible in 2020. Our email address is [email protected]. We got a note from Collin in Arizona, who writes, "I'm 25 years old, and since I was 19, I've invested between $300 and $500 a month in a low-cost index fund." Let me just stop right there and say, that's fantastic. Like, we'll get to Collin's question in a second, but Collin, way to go. [laughs] Way to go. He continues, "However, I've recently found a new lower cost and higher yielding index fund that I would like to move the invested capital into. Would you suggest selling the existing position for cash and then moving the capital into the new fund in one buy order or is losing the benefit of dollar-cost averaging from periodic monthly investment something to consider when rebalancing portfolios? Appreciate your help very much with this question, as I'm sure this situation will pop-up many more times in my future."

Jason, I feel like Collin answered his own question with that last line. Where he says, like, I think I'm going to keep doing this. And so, anyway, I have my thoughts, but what are yours?

Moser: Yeah, I mean, just like he said, from 19 to 25, that kind of behavior. I mean, congratulations first-and-foremost, that's just amazing, that's awesome from so many different angles. And I think without knowing the fund that you're considering, without knowing your gains that you're looking at, because I'm assuming, you know, over six years or so, you definitely are sitting on some pretty nice gains there. So, my default is to avoid selling if I don't have to, I try to figure out, OK, what do I need to sell? If I don't need to sell anything, then typically I'm not going to sell it, unless the businesses have been impaired, the thesis is changed, or I just feel like there's a better place for that money.

But it sounds like in this case that, the $300 to $500 per month, if that can continue, I think my first move would just be to start diverting that money into the new fund, and say, OK, you've got this one fund that you've been investing in over the last six years, now let's start diversifying a little bit and putting some money into another fund and keep that ball rolling. Because there's no doubt you're witnessing some compounding gains that exist there over the course of that time. And you always want to be aware of that. And furthermore, depending on what kind of account this is held in, if it is a non-tax-friendly account, then you will have a tax bill to consider most likely, if you do sell.

So, I think my first move would be to try to figure out, do I need to sell? If I don't need to sell, then maybe don't, or maybe take it slowly or maybe divert some of that money away and then put it in the new fund.

Hill: Well, and just back of the envelope math, without factoring in any gains over the last six years, imagine the prospect of you're 25, let's just say conservatively you've got $25,000 in a low-cost index fund, and then you just decide, see you in 30 years. I'm going to leave this thing; I'm going to go start investing in other ways in other funds. And look, we work with people who like to invest in multiple indices, put a little in the queue, queue, queue, you know, have that S&P 500 low-cost fund as sort of your base. So, yeah, I sort of had the same thought, like, I really try to avoid selling unless I really need to, and I don't know, it doesn't sound like he needs to.

Moser: Maybe not. I mean, it doesn't sound like the thesis here is busted by any means, it sounds like you found a fund that has lower cost and what you say higher yielding. You know, if you unload everything and move it into that new fund, you always run the risk of, well, maybe that fund ends up not working out as well as you think it might. I mean, we are very fallible as investors, we make lots of mistakes and we have to admit that and understand that. So, rather than -- you know, at that age, I know you want to do something, right? You feel like you buy, sell, do something. And a lot of the best investing is just by doing nothing, it's by literally just putting that money to work and then getting on with life. And so, in a lot of cases, I've seen that work out really well.

So, yeah, I think if I could avoid selling, I would. And the caveat there is that if you feel like the money in this fund currently. I mean, if you feel like this investment thesis is changed, if there's something that has changed that makes you not want to be invested in that fund anymore, that's something to consider as well. I mean, there are a lot of considerations. But I'd just go back to my default, I don't sell, if I don't have to.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: 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.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.