Google Gives Up on Bank Accounts

We recently learned that Alphabet's (GOOGL 1.42%) (GOOG 1.43%) Google is abandoning plans to create its own bank accounts, and Industry Focus host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what investors need to know. Also, despite rising wages and lower interest rates, home affordability in the U.S. is at its worst level since the financial crisis. And finally, Matt discusses why SoFi (SOFI 1.97%) is the stock he's most excited to read third-quarter earnings from in the coming weeks.

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This video was recorded on Oct. 4, 2021.

Jason Moser: It's Monday, October 4th. I'm your host, Jason Moser. On this week's Financials show, Google is abandoning plans to offer bank accounts. It's becoming prohibitively more difficult to own a home these days and earnings season is just around the corner. We've got one company that my guest here has got his eyes on and yes, he is my guest every week. I'm always happy to connect with him and bring him on the show here. It's certified financial planner, Matt Frankel. Matt, how's everything going?

Matt Frankel: Good. Am I really a guest anymore? I feel like, instead of a house guest, I'm like a cousin that has a key to the house.

Jason Moser: I guess I'm trying to be technical because really, honestly, at this point, I would refer to you more as a brother. But technically, I guess I'm the host, you are the guest, but this is way more of a collective effort on our part. Maybe let's come up with a better word for the next week.

Matt, we were talking about this toward the end of last week. This is just an interesting headline that caught our attention here because of the ramifications, but then also you wonder about this just bigger picture perspective on big tech and how invasive they really could potentially be. Google is abandoning its plans to offer bank accounts to users. Now they've been looking for years now to get their foot through that door, so to speak, in financial services, fintech, whatnot. Their goal, they were going to partner up with banks and figure out a way to offer banking accounts to users. Now, that plan has been abandoned. What's the headline here for you in regard to this move?

Matt Frankel: The big headline is that banks aren't as disruptible as we might have thought. Google announced this in 2020. They announced they were going to create a checking/savings account like an all-in-one product called the Google Plex account, and they were going to partner with Citigroup and Stanford Federal Credit Union. There was pretty concrete plans. They had a name for it already picked out, and they recently just announced that they're going to abandon those plans to focus on "digital enablement for banks". Instead of being a competitor to banks, they want to be a partner to banks, and there's some big reasons for this. Google does it, and other big tech companies, for that matter, don't really need to be making enemies with the big banks. These are companies they rely on for revenue. A lot of these banks are cloud service customers in Google's case and in Amazon's case. You remember [...].

Jason Moser: Advertisers as well.

Matt Frankel: They're advertisers as well. Remember back in 2018, I'm pretty sure we talked about this on the show. Amazon announced plans to do something similar. We never heard another word about it.

There's two real reasons here. It's that they don't want to be competitors to banks. They want more of a mutually beneficial relationship. Google partners with Citigroup, and Wells Fargo is one of their big cloud customers. I don't know if that's true, but to say, that alienates one of their big customers. The same could be said in Amazon's case because I guarantee you Amazon Web Services has a lot of banks as customers.

Jason Moser: Most certainly.

Matt Frankel: That's reason number 1. Number 2 is the one we always talk about, with everything regarding banking is regulation. This wouldn't exactly involve Google becoming a bank itself. It would be using Citigroup's infrastructure to offer the product, but at the end of the day, you're still offering financial products and services to customers and that could make regulators take a little bit of a closer look. I don't know, which reason do you think is the big one behind this?

Jason Moser: I thought about this from a number of different angles, and there are a lot of questions that came up because on the one hand, it does feel like there are other examples of big tech companies trying to get some entry way into a meaningful market opportunity. Payments is clearly a massive market opportunity. This makes me think of Facebook's efforts to try to get into payments, and they're still fiddling around with their digital or virtual currency whatever you want to call it. I don't even know that's really a thing still. It makes you wonder, Number 1, is there a point where a consumer say you know what, I don't really want that. It's one thing to come up with something that a consumer doesn't even know they want yet. That was Steve Jobs's MO. He was always coming up with design, and form factors, and things. This is what the consumer wants, they just don't know it yet. To a large extent that worked out pretty well, but when you look at a lot of these big tech companies, I think there's a line that people start to feel they are willing to draw like, listen, I like Google for X, Y, and Z, but I don't want it doing A, B, and C, I'm not interested. Maybe this is saying, guys, maybe you need to stay in your lane. I don't know.

Matt Frankel: I actually wonder how much upside there would be, let's say this product did work out, you really have two financial accounts. You have people who use traditional banks, like me, I think, you too, you mentioned on the show.

Jason Moser: Sure, I am.

Matt Frankel: Then you have people who use things like Cash App, and PayPal, and Venmo primarily for their money transfer needs. Where does the Google checking savings account really flick? How many people would it take away? I feel everyone is relatively happy with one option or the other out of those either traditional banks or the new fintechs. Is there really that much demand for new a banking product from these big tech companies?

Jason Moser: Even looking away from finance, and we've seen over the past few years efforts from big tech Amazon, namely, trying to figure out ways to get their foot in the door of the healthcare market. You've got Amazon owning PillPack, I think it is. There's a little bit of an opportunity for them to exploit their logistics expertise. But, like banks, I think if you look at the current state of the healthcare industry, it's just a very difficult industry to disrupt. It's one thing to say you want to go in there and make it better, it's another thing entirely actually to do that. It does feel like even success there is going to be incremental maybe at best.

Matt Frankel: Yeah. Like I said, this is bullish for banks because it's showing what a hard industry that's going to be to disrupt. Even all the new fintech players are getting bank charters now when you think SoFi, Square. I wouldn't be surprised to see PayPal do something like that, but all the new fintech providers are getting banking licenses. It's really tough to disrupt banking without being a bank.

Jason Moser: That's very well put.

Matt Frankel: Square has done a good job, but even they're seeing there's an upper limit, same with SoFi. There's an upper limit to the financial ecosystem they can build out because, yeah, their landing platform is great, their investment platform is great, their money accounts are nice, but at the end of the day, I still need my Wells Fargo account to be able to go to the bank, and to be able to write checks, and things like that, by having an actual physical branch network, which is what SoFi is going to ultimately end up doing. They acquired a branch-based bank not that long ago or announced plans to do so. It's really tough to offer a banking alternative without being a bank and, like in Google's case, to do it, they would've had to piggyback off Citigroup, which would've made enemies out of everyone else in the banking sector which they don't want.

Jason Moser: That's a good point. Final question before we go to the next story. Do you feel it's not that Google is saying they don't want to be a part of this, but they seem to be focused on maybe coming at it from a different direction now, like you said, enabling financial services, enabling the banks to do more. Now that, admittedly, it's a little bit more behind the scenes, but even still, given where things stand today, the quick development we've seen in the fintech space and some of the consolidation that we're seeing, it feels to me this perhaps results in Alphabet making some acquisitions in order to build up its presence, do you feel that's a possibility?

Matt Frankel: Yeah, I wouldn't be surprised to see Alphabet or some of these other big tech companies, like Amazon, ultimately acquire some fintech providers. One thing Google mentioned, in particular, was virtual cards and improving the security of online payments. I could see them acquiring a fintech that maybe it's developing some technology to that end, but that's a big problem. Online payment security is a big problem. All banks need that. All banks will benefit from that service.

Jason Moser: Yeah. That sounds a lot like a company out there, I think we've talked about it before on the show, Marqeta, which is in the card-issuing, and the virtual cards, and the APIs for its customers to be able to tackle that issue. To me, if you look at something like Marqeta, it's small enough still, granted it's brand new to the public market. It's still small enough today. It's not out of the realm of possibility. That could be a big elephant gun acquisition type move for something like Google if they decide that they wanted to pursue that opportunity.

Matt Frankel: Yeah. It's a way to use their reach to benefit from banking innovation without actually trying to be a bank themselves, and I think, at the end of the day, that's really where all these big tech companies are going. Even Apple, you see Apple's partnering with Goldman Sachs on a credit card, but that's because Apple is a consumer products company. That's not because Apple wants to be a bank. They have some financial services just like Google does. Google still has Google Pay, things like that. But Apple, to my knowledge, has never said they want to actually offer bank accounts, and I could see it staying that way. I don't really see that being the way that all these tech companies are going.

Jason Moser: Matt, mortgage payments these days are getting a little bit more difficult to afford for a lot of people. According to the Federal Reserve Bank of Atlanta, the median American household would need 32.1 percent of its income to cover mortgage payments on a median-priced home. Now that's the most since November of 2008 when that number was 34.2 percent of income. Clearly, there is a confluence of events going on right now pushing house prices up, and it feels we're getting to a point, we're seeing some signs. You're seeing a lot of folks that are being priced out of the housing market again. We've seen how that shakes out historically, but what do you make of this data?

Matt Frankel: One, it's not just that mortgages are getting less affordable, it's that they're getting less affordable very quickly. Let's start at the beginning of 2020 before the pandemic hit. When the pandemic hit, mortgage rates plunged from about four percent to under three percent. Home prices stayed relatively flat for the first 6-7 months of the pandemic. That made home prices more affordable, and not to mention all existing homeowners were refinancing, getting their mortgage payments down. My mortgage payment fell in 2020. I'm sure did yours too. I think you refinanced yours.

Jason Moser: Oh, yeah. We refinanced, absolutely.

Matt Frankel: So what you're seeing now is a perfect storm of factors that are not letting homes become affordable. Twenty-three percent year-over-year price gains in the median home in America, 23 percent.

Jason Moser: That's not even close to normal.

Matt Frankel: No, normal is about three percent. Home prices generally keep up with inflation which is about three percent a year. The problem is there are some factors that are helping homes become more affordable. Wages are up three percent year-over-year, for example, so that makes affordability a little bit better. Interest rates are still way below where they were at the beginning of 2020. But just to put that in perspective, the difference in a 30-year fixed rate mortgage payment between a four percent mortgage rate and a three percent mortgage rate is about 12 percent. When you have home prices rising by 23 percent year-over-year, and the cost of an X amount mortgage falling by only 12 percent, you can see how that doesn't really work in the buyers' favor.

Jason Moser: [...]

Matt Frankel: Homes are definitely becoming less affordable, and it's due to higher home prices. But that's caused by things like low inventory, a labor shortage that's affecting home builders, supply chain shortages that are affecting home builders. Home builders have a big backlog. Some even stopped taking new orders. It's a big inventory gap right now that's driving home prices higher. Who knows how long it's going to last? Home prices are generally more stable than the stock market. Anything that can rise 23 percent in a year can fall. I'm curious to see how this plays out.

Jason Moser: It feels too like there's a psychology at play here. Whether it's stocks, or real estate, or precious metals, whatever it may be. There is that fear of missing out, that FOMO, and it starts to drive that human psychology a little bit to where people behave somewhat irrationally. They do things they don't necessarily need to do, and maybe someone is feeling like, "Oh my God, this is the last chance we're going to have to buy a house. We better do it now, even if we have to pay up for it," without even thinking really forward that "You know what, historically speaking, these things do correct themselves, and this is a bit of an outlier event." It seems reasonable, at least, to assume that, at some point or another, housing prices should normalize. It's a lot more difficult I think to convince people about that. That human psychology is very powerful when comes to, especially, something like a home, where so many people have that goal of becoming a homeowner. That's like the top of the mountain for a lot of folks. Now, all of a sudden, you're saying that that may not ever quite be within reach, so you better just stretch yourself as much as possible now, or else.

Matt Frankel: The other side is we don't know if home prices are going to normalize or come back down a little bit. Right now, everyone is basing all of their economic assumptions on the premise that inflation is going to be temporary. If that turns out not to be the case, and inflation stays at 5-7 percent for the next several years, home prices might not come down.

Jason Moser: It might take a little bit longer for them to.

Matt Frankel: Right. If $100,000 today is worth $70,000 in a few years, your home prices are not going to come down, especially not to the previous level. They say inflation is transitory, but that doesn't mean things are going to go backwards. Transitory means it's a temporary bump, and then it's going to level off a little bit. But you're still going to have that new kind of price forward. [...]

Jason Moser: When you start raising people's wages, you can't pull that back. When companies start raising prices on things like burritos and toys, they can pull that back at will when they want to do sales by discounts, and offers, and things like that, campaigns, and whatnot, but typically, again, they don't want to take that back. Certainly, you see those prices, they start to go up, and we're seeing a lot of the economic conditions that are really prompting that. Matt, I guess, we're really a couple of weeks away from earnings season starting up. I know it feels like we wrapped up earnings season, but our lives are really just one perpetual earnings season, and that's OK because we love it. But earnings season is around the corner. JPMorgan unofficially kicks things off for us on Wednesday, October 13th. We'll talk about this next couple of weeks here, I wanted to highlight a company today though, a company that you are paying particular attention to this quarter as earnings reports start to start to come out.

Matt Frankel: There's a few. You just mentioned JPMorgan. They generally set the tone for earnings season, so I will be paying close attention to them. Wells Fargo is my stock to watch in 2020, so of course, we're going to pay that attention to them. One that I find really a fascinating case is SoFi, ticker symbol S-O-F-I. This one that went public by SPAC earlier this year. The reason I'm really excited about this one, it's not because their recent earnings numbers have been impressive, their recent growth numbers have been accelerating, which is really rare for a company that's growing that fast. Let me name a couple of statistics. SoFi grew its member count at 113 percent year-over-year in the second quarter, so more than doubling. Not only was that an impressive growth rate, that's the eighth consecutive quarter that that growth rate has increased. In the first quarter, it was 110 percent. In the fourth quarter of 2020, it was 90 percent, the year-over-year growth rate. In the third quarter, it was 74 percent, and on, and on. If that number keeps accelerating, things could get really interesting for SoFi. The part of their business, there are two main products that SoFi offers. There's lending products, which is how it got its start. They're an alternative lender. Then financial services product, which is a new and, by far, the more exciting part of the business. This is their investment platform, their money accounts, their credit cards, things like that. That part of the business is growing exponentially. I wish I could share with podcast listeners this chart. If I were teaching exponential growth at a math class, this is the chart I would use to show a real world example.

Jason Moser: That's great.

Matt Frankel: The count of financial services products that customers use was up 243 percent in the second quarter. Two hundred forty-three percent, and this is not a small business. This is, like, it went from 1 to 4, their product count is in the millions. If that growth stays anywhere near that level, it's going to be a really interesting quarter and an interesting couple of years because financial services products, we know. We've talked about this in our bank accounts, I believe, Wells Fargo, for both of us. The customers don't like to switch those. So once SoFi lands a customer, that's usually years of recurring revenue and a long-term relationship between them. Two hundred forty-three percent growth in customers that could stick around for years and years is pretty impressive. They were profitable on an adjusted EBITDA basis. They're still losing money. They've been raising capital hand over fist in a good way at a very cheap cost of capital. They're doing this tech trend where they raised $1.1 billion recently in convertible notes that pay zero percent interest. They let the barriers convert that to common stock at about 40 percent over the current stock price.

Jason Moser: Wow.

Matt Frankel: Before there will be any dilution, stockholders would have to win by 40 percent. [...] It's an incredible cost of capital.

Jason Moser: It is, but also that's certainly a sign. You don't read too much into it, I guess, but it's certainly a sign that there is a lot of faith out there, that what SoFi is doing is working.

Matt Frankel: Oh, for sure. There are people who think this is going to be the next 10 bagger in the financial sector. I don't know if I would go that far, but I'm a big believer in the company. I'm a shareholder myself. I've added to my position several times since I went public. This is one that I will really be paying attention to just because it's accelerating growth is really exciting. Strong growth is great, don't get me wrong. All the growth companies we follow have impressive growth, but accelerating growth, especially when it's a three digit number, is really impressive.

Jason Moser: Folks, you've got it there. SoFi is one we certainly talked about on the show from time to time. I look forward to catching up with you again, Matt. When the quarter drops, we can go over the results on the show, and then hit the good, the bad. Hopefully, there is no ugly. Hopefully, there is no, but we'll just have to wait and see. But I agree, so far to me, it's just a fascinating business from a number of different angles. Really, I am fond of leadership there. I think Anthony Noto has done a tremendous job. He's a tremendous advocate and ambassador for the brand, but I think he also, given his work history, it just really feels like this is the guy who knows exactly what he is doing. I think there's a lot of faith there that that leadership is making the right decisions as well. But we will catch up on that when they report. Next week, we'll give you the chance to shine the light on another company you're looking forward to this coming earnings season. But I think now, for today, at least, that's going to do it for us, Matt. As always, I appreciate you taking the time to join us.

Matt Frankel: Awesome. Thank you for having me as usual, and we're going to have to make a better title than guests for next time.

Jason Moser: We're going to work on that one next week. I promise we can come up with a better name than guest. Brother-in-arms, something like that. I don't know. Guest is, just, I'm not feeling the love there.

Matt Frankel: I've been here every week for five years.

Jason Moser: That's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter@MFIndustryFocus or drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about or the Motley Fool may have formal recommendations for or against so don't buy yourselves stocks based solely on what you hear. Thanks as always to Tim Sparks, for putting the show together for us. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.