In this week's installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a closer look at the new Venmo credit card -- what makes it unique and why it could be a win for both PayPal (NASDAQ:PYPL) and Synchrony Financial (NYSE:SYF). Also, the pair takes a look at Square's (NYSE:SQ) recently announced investment in bitcoin. And finally, with earnings season upon us, hear what to watch as Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), and Bank of America (NYSE:BAC) report third-quarter results later this week.
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This video was recorded on October 12, 2020.
Jason Moser: It's Monday, October 12th. I'm your host Jason Moser, and on this week's Financial show, we've got a new "war on cash" credit card; Square is taking its relationship with bitcoin to the next level. And in case you hadn't heard, it's earnings-palooza eve, people; the banks start reporting tomorrow; and we've got a couple of thoughts.
Joining me this week, as always, it's Mr. Matt Frankel, certified financial planner. Matt, how's everything going?
Matt Frankel: Hey! Good to see everybody; hope you had a nice weekend. It's been rainy in South Carolina, but good weekend nevertheless, so.
Moser: Good weekend, got some good football in there; it's October, Fall is in the air, this kicks off a really nice stretch of the year, I think. You got October, November, December, three fun holidays, a lot of good food to eat, you know, you build a fire or two here. I like this time of year a lot.
Frankel: Me too. I think Fall is my favorite; if I had to pick a season.
Moser: Well, let's hope it just continues to be a good Fall and let's hope everybody out there is staying happy and healthy. You know, it seems like we're hopefully closer to the end of all this chaos, but you know, we just keep on keeping on.
Matt, we were talking about this a couple of weeks ago when we were discussing PayPal and all of the different types of things that PayPal has been doing with the business. The honey acquisition, the different things it's doing in regard to digital- and mobile wallet and whatnot. And PayPal came out with some news here recently in regard to the Venmo side of the business. The company, they're introducing a Venmo Credit Card. It's something that will be in partnership with Synchrony Bank, which is obviously a longtime partner of PayPal's, Venmo, as we know, was a part of PayPal's business when they made that Braintree acquisition. You know, it's a credit card. I know this probably isn't a big driver for the business at least today. And reading through all of the nuts and bolts of this deal of this product here, I really do like the move, it feels like it creates yet another reason to be in that PayPal universe.
Frankel: Yeah. Well, for one, I think this is a win for Synchrony, before we actually get into PayPal.
Moser: Well, I like that angle too. [laughs]
Frankel: [laughs] Synchrony is, as you know, the big store credit card company. And they are the issuer of the PayPal credit card. But being honest, Venmo is cooler than just PayPal, it just is. And this card, [laughs] what really struck me about the card was the rewards structure, it's a 3% cashback rate in one of eight spending categories. But the cool thing about it is, it's whatever spending category you use most, it's not like the rotating categories where you only get the best rate on gas and groceries if you don't even use the card for that.
Moser: Yeah, and they're not, like, trying to push you into some sort of consumer behavior, they're just rewarding you for your behavior that you just kind of do every day.
Frankel: Right. You know, 3% back on your most used category, 2% back on the category you use the second most. And just looking at it, it's groceries, bills and utilities, health and beauty, gas, entertainment, dining and nightlife, transportation and travel. So, if you want a credit card that gives you 3% back on travel, get the Venmo card and use it exclusively for travel. It's a lot of optionality for the customer which is really nice, and I think that's going to be the edge. So, I think this is a win, both for Venmo users and for Synchrony.
Moser: Yeah, I tend to agree. And it's a Visa card; if we didn't mention that. So, I mean, those are the three players in that value chain, so to speak; you've got Visa, Synchrony and PayPal. The other thing I found interesting about this card, and this sort of couples with PayPal's recent tie-up with CVS. They recently forged a relationship with CVS to display the QR code in CVS stores. You know, the QR code, it's yet another way to really implement that mobile payment system. That's where you can actually scan that QR code, and essentially, it makes things operate more quickly. I mean, you get from Point A. to Point B., I think, just a little bit more quickly.
And in the case of the card, they're going to actually put the QR code on the front of the physical credit card. The physical credit card still has a place [laughs] in this world. I know that some people like to think, oh, I can just pay with my phone. The fact of the matter is, if you're going to pay for something, you're going to pay with your phone or you're going to pay with your card, but either way, you've got to get something out to make that payment, right, there's still that point of friction. So, I mean, we've seen where Amazon is trying to fiddle around with being able to just kind of show your hand, right, they wave your hand and make that payment. And hopefully, that's technology that continues to develop and one day maybe take mainstream adoption, but we're not there yet, obviously. But I do feel like having that QR code, that's something that's very much in touch with the younger audience that uses Venmo to begin with. Which kind of goes back to that point that you made, I know that was a little bit tongue-in-cheek, but really it was spot on, Venmo is really, I think, perceived as being cooler than the PayPal brand.
Frankel: It is for sure. And the QR codes definitely help it. It makes things easier. For example, if you're paying the bill and you're with six of your friends, you take your Venmo Credit Card out to pay the bill, they all take their phones out, scan your QR code and send you money. That's why you don't have to physically pull up your QR code while you're trying to pay the check with your credit card, it makes things less complicated, especially, like you said, for today's consumers. I mean, I don't know even if I have six friends anymore, but back when I did, [laughs] splitting the bill was a chore. You know, you sit there and everyone has to get change and it was a pain. And this kind of simplifies an already simplified process by Venmo even a step further, I think.
Moser: Center of controversy there, are you, Matt, you know, scaring those friends away, are you?
Frankel: No. Did you have friends when you had a four- and a two-year-old? I mean, I certainly don't. [laughs]
Moser: I mean, yeah, I guess that's a good point; I guess, technically I have them, I just don't really see them as often as I did. But you know, you get to that, you get down the road, they get a little bit older and they can become a little bit more self-sufficient and life, kind of, takes a little bit of a turn back into that direction that you're more familiar with. So, you know, [laughs] just hang in there.
All right. Well, let's talk a little bit about Square, because this is funny, because we didn't plan this, but this really did turn out to be, kind of, a War on Cash themed show here. You know, we've got PayPal with the Visa credit card, now we're talking about Square. This is a little bit of a different story here, and I want you to convince me this is a big deal because I'm not really sure that it is. But the fact of the matter is that Square has taken its relationship, its belief in bitcoin to the next level. Not a surprise. We know Jack Dorsey is a big crypto evangelist, we know he believes in that and it's a way to democratize finance. But now, Square is going to hold, I think it's $50 million worth of bitcoin on their balance sheet. Is this really a big deal?
Frankel: Meh, kind of. I'm going to make a very unpopular statement right now. Square's interest in bitcoin is my least favorite part of the company.
Moser: [laughs] I think I'd agree with you there. I think I actually agree with you there.
Frankel: I mean, as an investor, I mean, I like to say that I bought Square before it was cool to buy Square. I got it right after the IPO when everyone hated the idea of it going to go anywhere. But anyway, the $50 million of bitcoin, it's roughly 1% of Square's total assets. So, this isn't an insignificant amount of money that they're stashing in bitcoin, I mean, this is money that was sitting on in cash anyway on their balance sheet, so it's just kind of moving from -- it would be the same, in my mind right now, if they said we're going to hold $50 million of euro on the balance sheet. But it does kind of add a next step to their interest in bitcoin. We know that Square allowed people to start buying bitcoin through the Cash App in 2018. Since then, they launched a Square Crypto Division that, kind of, focuses on solving bitcoin related issues. They're participating in a few other nonprofit initiatives when it comes to crypto. But it's always been more of a business function, not that Square was directly investing in it. You know, they were letting their users buy bitcoin, they were trying to figure out how best to use cryptocurrency to solve future problems, they didn't actually think of it as an investment.
This is maybe the biggest investor I know of, or the biggest company I know of, that's actually calling bitcoin an investment.
Moser: So, I wonder, you know, I think about several years back when bitcoin really was just starting to gain headlines here. We're talking about the big challenges for bitcoin between the two big challenges, as a medium of exchange and a store of value. And you could see there were hurdles to clear on both sides. Now, I think that the medium of exchange hurdle has -- I'm still not convinced, I mean, I don't know the mass majority of people out there are using bitcoin to buy anything. It does seem to me, though, that it's starting to make its case a little bit more as a store of value. This, to me, for Square, strikes me as more of a hedging strategy than maybe anything else. And maybe it's a way to gain a little bit more headlines. Maybe it's a way for Jack Dorsey to get folks to believe a little bit more in the merits, the potential of cryptocurrency, you know, bitcoin and whatnot. So, maybe it's a multi-serving move there. But it does seem to me, at least, it seems to bolster the argument that bitcoin does hold a place in that store of value argument.
Frankel: Yeah. And I would say over the last year or so, the price of bitcoin has stabilized significantly. I don't know if you remember a couple of years ago, when you know, one month it would be worth $4,000, the next month it'll be $20,000, the next month it will be $3,000. Who wants to store value in something that's going to do that? But bitcoin has been roughly $10,000 for a pretty long time now. I mean, give or take. I mean, it fluctuates just like any type of currency. But now it's behaving more like a currency rather than just a crazy speculative asset. So, in that regard I could also say it's more of a store of value. That's why I say, right now, this move to put $50 million in bitcoin, to me, isn't that much different than putting it in euro or something like that from a financial point-of-view, because now the value has become a whole lot more predictable.
Moser: Yeah, that makes a lot of sense. Well, as we enter the top of the show, it is Earnings-Palooza eve, and that is officially a holiday, people. I mean, like, you got to know, four times a year, Earnings-Palooza eve is something we celebrate, it's exciting. We get amped up for this, because it means we have about a month ahead of us to not only dig into all of our favorite businesses, but we're going to have fun stories to talk about as well. And, you know, for investor nerds like us, that's nirvana, so to speak, right? We're just one with everything once Earnings-Palooza hits.
But first up here, as Earnings-Palooza does kick off, it's really the big banks that get it started. And so, for us here on the Financial show, that's a point where we can talk about what we're looking for from these banks as they report earnings. And it's been a difficult time, obviously, for banks, particularly smaller banks I would say, just from the sense that the interest rate environment is so -- I mean, it's almost nonexistent, [laughs] right? Interest rates are so low. At least big banks are big, and they can offset some of those challenges with their scale.
But the banks that we typically focus on, as these earning reports start rolling out, Matt, we talk about Wells Fargo; we talk about Bank of America, which I know you're a big fan of; Goldman Sachs, another one we talk a lot about on the show. What are some of the things that you're looking for from these banks as these reports start rolling out this week?
Frankel: Well, one, just as a general theme, it's not as much about interest rates right now as it is about loan losses. Banks can make money in low interest environments. I mean, if you go for an auto loan at, say, Wells Fargo right now, it's not going to be 0%, it's going to be, you know, you're still going to pay them 3%, 4%, 5% interest depending on your credit. So, they can still make money in a low interest environment.
Remember, rates were around 0% from the end of the financial crisis for the next, what, six or seven years, and banks were making money. So, that's not the big issue, the issue is how will the economic fallout from the COVID pandemic impact loan losses.
Just in the second quarter alone, I'll start with Wells Fargo. In the second quarter alone, Wells Fargo set aside over $8 billion in anticipation of loan losses. Now, at the time, remember, the $600 unemployment boost was still in effect. Pretty much everyone thought that would be extended in some form; yet to be done. So, that $8 billion might not be enough if things go wrong. Unemployment has decreased quicker than we would have anticipated, but at the same time, the help coming to the people who are unemployed has gone away.
So, the real key thing to watch, especially with Wells Fargo, which Wells Fargo is purely a commercial bank for the most part, they have a small investment banking operation, but for the most part they make money off of consumers and businesses. So, watch the loan loss ratio. I think their net charge-off rate was 0.46% in the second quarter; that's a key number to watch and see how it ticks up in the third quarter, because now we're going to really start seeing what the economic effects of the pandemic have been. There are some effects, but it's a question of just how bad it's going to happen.
And remember, Wells Fargo was the only of the big banks to slash their dividend recently. They need profits to bring it back. I think that the formula has to do with the last four quarters of earnings. Wells Fargo produced a pretty big loss in the second quarter. So, I mean, normally I don't pay that much attention to the bottom-line number, but in Well Fargo's case, it's kind of important, because it's where their dividends come from. And now more than ever, now they really have to be able to justify their dividends. So, that's Wells Fargo, what I'm watching.
Goldman Sachs is kind of the other end of the banking spectrum, meaning that it's almost exclusively an investment bank. There's some consumer banking, like the Markets platform, Apple Card and things like that. But Goldman Sachs, for the most part, is an investment bank. And investment banks do better when the market is, kind of, going crazy, like it was in the second quarter. The second quarter was their second highest revenue ever for a quarter. It was their highest investment banking revenue ever for a quarter.
Moser: And we've seen a lot of IPOs here recently too. That activity has picked back up a little bit. I mean, you know that that can't be bad for a bank like Goldman Sachs.
Frankel: No. And that's part of the investment banking revenue. They had record equity underwriting revenue, which is IPOs, in the second quarter. Trading revenue was the highest it's been since the financial crisis. Now, I'm expecting Goldman's earnings to, kind of, take a breather during the third quarter. The third quarter was not nearly as crazy as the second one was when it comes to how the market was reacting. Thankfully, [laughs] the April and May drama in the market only happened once. [laughs] So, that didn't repeat itself in the third quarter to any meaningful extent. So, I'm expecting the volatility related benefits to, kind of, taper off. But as you just mentioned, the one thing I do want to watch is the equity and debt underwriting, even if the Investment Banking division should be pretty strong.
So, those are like the two ends of the spectrum. And then Bank of America is a nice combination of the two. Nothing really particular I'm watching, but a lot of the big banks, Bank of America is not the only one, JPMorgan Chase is another, Citigroup, that have a nice combination of consumer and investment banking. So, I'd like to see how those really hold up.
Moser: Yeah. You know, Bank of America is one, I mean, I feel like we talk about this every quarter, but it just never ceases to amaze me how the conversation over time has changed with this company. It went from, I mean, just a pariah to really one of the leaders in the space in just a short period of time. I mean, it did feel like every day years ago, every day there was a new headline [laughs] that was not working in their favor.
And you fast-forward to today. Clearly, the focus on the consumer remains, the presence in investment banking is strong. And then it doesn't hurt their cause that Wells Fargo has, kind of, taken their place as the major financial institution that just seems to just step in [laughs] day after day now, right. I mean, it seems like they've really, kind of, traded places.
Frankel: Yeah, I mean, it's really weird how the order has kind of shifted. When you think of the big four banks, it used to be JPMorgan Chase and Wells Fargo battling for that No. 1 position. And you can usually make the case it was Wells Fargo when it came to profitability and efficiency and things like that. So, those were the one and two, and then you had Citigroup and Bank of America, kind of, battling for the last place. And now, Citigroup is a firm third place, and Wells Fargo is all the way in fourth. And I would say, it's JPMorgan and Bank of America kind of jockeying for that first-place spot. I mean, JPMorgan Chase is a more profitable and efficient institution than Bank of America right now, they're also a lot more expensive when it comes to price-to-book, so. I mean, I can make the case that Bank of America is the best investment of the big four banks right now.
Moser: Yeah. I think a lot of people would listen.
Frankel: But on Friday when we've heard from all of these big banks, who knows what's going to happen? I mean, Wells Fargo could have lost $15 billion or $3 billion, we don't know. And if it was only $3 billion, that means they set aside $5 billion too many and that goes back into investors' pockets at some point. So, I mean, it's too early, there's a lot that can happen this week. It's going to be exciting -- normally exciting and bank earnings don't really go in the same sentence, but ...
Moser: [laughs] We're changing the conversation of that. We're changing it up here.
Frankel: [laughs] Right. So, it'll be an interesting week.
Moser: What do you think -- you know, we saw the news last week, and speaking of big banks, and one that we really don't talk about a whole heck of a lot, but I think some news that was at least noteworthy here, Morgan Stanley acquiring Eaton Vance. And we talk a lot about consolidation in the space, I mean, this is certainly an effort from Morgan Stanley to boost that investment wing of the business. Eaton Vance holds somewhere in the neighborhood of $500 billion in assets under management. I mean, from the perspective of Morgan Stanley, not the biggest deal in the world, you know, Morgan Stanley is a considerably larger business. But it's not just some little bolt-on acquisition either, any thoughts there?
Frankel: Well, not to brag or anything, but a couple of weeks ago, when you said what trends you are watching in the rest of 2020 in banking, I said consolidation in the brokerage space.
Moser: Well, then brag a little bit, by all means, Matt. That's one of the reasons why we're here, right, talk your own book. [laughs]
Frankel: Well, I didn't mention Eaton Vance. I mean, that was one I really didn't think was going to get bought out. I thought someone would require, like, a Robinhood or something like that to get more techy, I guess you'd say, and appeal to the millennial crowd. And remember, Morgan Stanley just acquired E*Trade, like that just happened. So, they're really making a big push to scale up their business.
And from that perspective, when you combine their existing clientele, which off top of my head, I don't know how much assets Morgan Stanley already had, but I got to say it's over $1 trillion. And then combine that with all the E*Trade retail brokerage assets, and the $0.5 trillion of Eaton Vance's wealth management assets, all of a sudden you have a much more scaled and potentially profitable business. So, I said that a couple of episodes ago, like, I mentioned that consolidation was something to watch and the reason is because, you know, fees are coming down, the way you're going to make your money is through scale and efficiency, among other -- I mean, brokers have other ways they make money. But I mean, even though TD Ameritrade's commissions went to 0% that didn't mean they were going broke, so. But this is going to be a longtail trend, I think, in the space. I still think somebody is going to step in and acquire Robinhood.
Moser: Yeah, I think I would probably put money on that as well at some point. I mean, there were a couple of things. To your point there, this acquisition, Morgan Stanley is going to oversee close to $4.5 trillion of client assets across all of its wealth management divisions, which is just, that's obviously an astounding number.
I think it's interesting too, this will give them a bit more of a presence on the ESG [Environmental, Social, and Corporate Governance] space, right? That's obviously a direction where a lot of these firms are headed, a bigger focus on ESG investing, and rightly so. I think that is going to be something that just becomes more important as time goes on for investors. But then there was a telling quote from Morgan Stanley, CEO, James Gorman. He said in an interview "It was sort of obvious, if we didn't do this, someone else would have." And that really, I think says it all right there. They've been thinking about this for a while and really kind of came to the collision that this deal had to happen.
Frankel: Yeah, I mean, it was kind of the same, in my mind, the same reason Schwab acquired Ameritrade. Just because, like you said, if they didn't do it, someone else would. It's a powerful franchise. They were one of the, according to many lists, the top-rated broker in terms of functionality and stuff like that. So, when commissions went to 0%, it's just a matter of time before there is, kind of, like land grab for all the smaller firms, including the ones that were already doing zero commission, like Robinhood. I can see a company like Square buying them out.
Moser: Yeah. And we've talked about that before for sure.
Frankel: Or even PayPal, maybe they do brokerage in their Venmo app.
Moser: Yeah. You know, that would be an interesting idea there, because that certainly would pivot away from what PayPal has been so focused on, wouldn't it?
Frankel: Yeah. I wouldn't call PayPal and Square direct competitors in most ways, but in terms of the Venmo and Cash App thing they're pretty close in terms of ...
Moser: Let's, before we wrap up here, Matt, one thing I did want to bring up, because this is not really directly related to Berkshire Hathaway, but this was the headline that hit this morning, which I thought was pretty fascinating. Dillard's, the old department store from the mall -- I mean, we talked about the challenges malls are facing. It was very interesting to see this news that Ted Weschler, who is an Investment Manager for, of course, Berkshire Hathaway, bought a massive stake in Dillard's. And Dillard's stock is up around 40% right now on this news. It's not a Berkshire Hathaway investment, though, from what I can understand, this is a Ted Weschler investment, correct?
Frankel: It is, and that's what makes it all the more surprising, I wouldn't really put it past Buffett to do like a deep value play like this. But Ted Weschler and Todd Combs, they're two investment managers. They're the ones who, you know, buy Amazon, and Snowflake, and StoneCo and those types of companies recently. You know, they're not buying Coca-Cola and AmEx, like Buffett is, they're buying the tech plays.
So, it kind of surprised me, I mean, it's definitely a value play in my mind. The thing that I'm -- I mean, obviously, no one knows what he's thinking. But one thing that came to my mind is that maybe it's kind of like the Best Buy effect when you think of Best Buy 10 years ago, they had Circuit City competing against them HHGregg, a few other big ones. What happened, the weaker competitors went out of business. And even though Best Buy was competing with Amazon and e-commerce, there was still some need for a physical electronic store presence, so they picked up all that market share that Circuit City and HHGregg left behind. And now they're that much stronger as a result.
So, Dillard's is -- I mean, no department store is terribly strong right now. But I would put Dillard's, I mean, obviously in a category above, like JCPenney, which is already bankrupt. But even above Macy's or some of the other ones, Dillard seems to be doing better than all of its peers. So, I'm thinking maybe they're thinking it might be like a last man standing type of play; I don't know, what are your thoughts on that?
Moser: Just to me, yeah, it's difficult to really fully reconcile. I mean, I always look at something like this and I feel like, you know what, these guys have access to a lot more information and they're certainly very talented, very smart investors, there's clearly something there that we maybe can't see based on information that they have. I don't know that.
It reminds me of the Buffett-Bank of America deal. This is probably something, this is something where they're able to do something through this investment that your typical retail investor probably wouldn't be able to accomplish, and maybe --
Frankel: I wouldn't be surprised if he got a board seat or something like that out of the deal. [laughs]
Moser: Right, exactly. And maybe that is something to come, but you know what, it's easy to look at that big absolute number and think that's "wow," that's a big absolute number. But remember, I mean, they're dealing with big numbers every day. And so, for them it's not necessarily this crazy of a -- at least on the outside, it's not necessarily as crazy looking an investment as maybe some might think it's a really difficult time for those department stores and malls and retailers right now. So, maybe this is a "Hey!" trying to buy a good operator in a bad time. And I certainly appreciate that style of investing and that way of thinking, so it'll be really fun to watch that play out and to see how that ends up working. I don't think Dillard's is some kind of a serious story, though, I think there's probably some value there that it could end up helping to bring out a little bit more value.
Frankel: Well, I mean, it's the same reason. That's the same reason I bought Simon Property Group, it's not because I necessarily think that malls are a great business right now, it's that they're the best in breed, and I think that it's going to consolidate around them and they're going to kind of be the wave of the future, when this is all said and done. Not necessarily that I think the mall business is a great one to be in right now, just like the department store business is clearly not a great one to be in right now. But maybe he knows something there, like you said. [laughs]
Moser: Yeah. I tend to approach it from that perspective. And just an update here to confirm, apparently that was my dog taking the other side of the consolidation argument there; the consolidation case. So, I don't know, I'm with you, I am bullish on the consolidation case; apparently Wally is not. We'll see how that plays out. I have a feeling that we're going to be running that in Wally's face here soon enough though.
Matt, I think that's going to take care of it, I think, for us this week. And I appreciate, as always, you taking the time to tune in and to join us on Zoom and the show here. It's always fun catching up with you, and I'm really excited to see how the stuff plays out for earning season. And I feel like we know exactly what we'll be talking about next Monday.
Frankel: I can already see it happening. [laughs] Who knows what's going to happen, but I know what the topic will be.
Moser: We will be watching closely. Have a great week, buddy. And for us, that's going to do it this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus, you can also drop us an email at IndustryFocus@Fool.com.
As always, people on the program may have interests 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.
Thanks, as always, to Tim Sparks for putting the show together. For Matt Frankel, I'm Jason Moser, thanks for listening, and we'll see you next week.