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- This week's newsletter encompasses financial inclusion; philosophical musings about earnings; speculation about direct listings; falling dominoes; and lots of charts. All in 1,787 words.
1 big thing: The financial inclusion balancing act
Can the private sector, and technology companies in particular, bring critical financial services to those who have been excluded from the global financial system?
- Libra, the wildly ambitious and probably doomed Facebook-backed cryptocurrency, is innovative in many different ways. But there's one part of it that's deeply familiar — the way in which it sells itself as a way of bringing millions of people into the global financial system.
The big picture: Most fintech startups espouse two lofty goals: disrupting the banks and serving the underserved. But 20 years after Elon Musk founded the early fintech X.com (it later became PayPal), banks still dominate in almost every economy in the world. Meanwhile, the ranks of the underserved, at least in developed markets, have barely shrunk.
- The big financial-services win for tech companies has been in China, where giants like Ant Financial have effectively replaced banks, and where mobile payments over systems run by privately owned technology companies are the rule rather than the exception.
- Next on the list might be Indonesia, where tech giant Go-Jek's Go-Pay service is growing fast. But the velocity of old-fashioned cash is much higher in Indonesia than it was in China, which means that displacing it will therefore be that much harder.
- Also notable is Kenya, where Safaricom, the big telecom monopoly, did a fantastic job of rolling out a nationwide mobile payments system. Safaricom, which is part of telecoms giant Vodafone, is not really a tech company, but neither is it a traditional bank. M-Pesa is now in 11 countries, including Albania, but has struggled to replicate its early success outside Kenya. It is shutting down entirely in South Africa.
In the U.S., the poor tend to be excluded from much of the financial system for various reasons. If you have unpaid debts, money in a checking account can be seized; banks also extract billions of dollars in fees from the very people who can least afford them.
- Credit unions are generally much more consumer-friendly than banks, but their job is to serve their membership more than it is to provide financial services to the poor and the currently unbanked.
- The fintech solution for financial inclusion is generally some kind of reloadable debit card. Increasingly, these cards can be virtual as well as physical, living in a wallet on your phone. Square's Cash app is one fast-growing example.
What all the fintechs have in common is regulatory arbitrage: They don't want to be regulated as banks. Just about every bank function is also offered by a fintech, and if cryptocurrencies gain broad adoption, then even central bank functions will start being offered privately.
- As a recent IMF policy paper says, "if the usage of crypto-assets as money becomes more widespread, monetary policy effectiveness could be undermined."
Why it matters: Central banks have broad powers to shape the financial sector. In countries like Sweden and India, they can mandate moves toward a cashless society and build payments systems to encourage that. They also, crucially, monitor the health of the banking system. But if fintechs start disrupting hidebound banks, or start to dominate the financial sector, then sovereign nations will find themselves with a severely diminished macroprudential toolkit.
2. The ontology of unpaid earnings
Nonbank lenders, including startups, all claim to be providing a valuable service to the underbanked. But distinguishing the helpful from the predatory can be extremely difficult.
- When lenders like Earnin have substantial marketing budgets, that's inevitably going to increase the number of people who borrow against their next paycheck. By setting and asking for "tips" rather than charging interest, Earnin has granted itself the ability to use well-understood behavioral engineering techniques to maximize its own profits, at the expense of its customers.
- Point-of-sale lenders like Affirm offer installment loans to people who want to buy big-ticket items and don't have a credit card. That's a useful service, and it's significantly more transparent than the ways in which credit-card lenders make their profits.
PayActiv is a particularly interesting innovation. Marketing itself as a "financial wellness solution," it plugs into employers' time-and-attendance systems and allows employees to withdraw up to $500 of their earnings before payday, for a fee of $5 per pay period. These aren't one-time withdrawals: You get an unlimited number of transactions, including cash withdrawals, Uber rides and debit-card payments, for the one-time fee.
- PayActiv's biggest client is Walmart, which allows its 1.4 million employees to use the service up to 8 times a year free of charge.
The ontological question: Waged employees generally earn hourly, but get paid only once every two weeks. So, what's the status of unpaid earnings? If I cash them out today, is that a loan to me that needs to be repaid on payday? Or was I making an interest-free loan to my employer all along, and my employer is now just paying me earlier than normal? In the latter case, why should I pay for this service?
- Back when paychecks were literal checks, there were good logistical reasons why employees couldn't get paid daily. Even today, the big payroll companies simply aren't set up to implement such a system. And since employers benefit financially from paying in arrears, most of them are uninclined to change the status quo.
- Still, PayActiv CEO Safwan Shah tells Axios that about 20 of his corporate customers pay his company themselves, rather than putting that burden onto their employees. They consider it a not-very-expensive employee perk, one that significantly reduces employee turnover and even health care costs — since health issues stemming from financial stresses are very real.
My thought bubble: One interesting way of telling the difference between Earnin and PayActiv is to see whether they're Sharia compliant. Shah tells Axios that his service comports with Sharia law; because it's a membership program, there's no interest and the fee is unrelated to the size of any transaction. Earnin, on the other hand, fails the Sharia tests on multiple counts.
3. Will there be a direct-listing IPO?
There are 3 ways that a company can go public: a traditional IPO, a Dutch auction (Google being the prime example), or a direct listing.
- There's a catch with direct listings, however: The way that SEC regulations are currently set up, companies can't raise any money that way.
The question, asks Axios' Dan Primack, is whether that can change, with corporations issuing stock into a direct listing. His answer: Yes, probably.
- The highest hurdle would be finding a company that wants to do it. Most companies don't want the hassle of working out all the complications with SEC officials.
- The most likely candidate: Airbnb is going public in the next year, more likely in Q1 2020 than in Q4 2019. It's unclear whether CFO Dave Stephenson has the appetite to blaze a new trail.
The bottom line: Just because it can be done doesn't mean it will be done. VC-backed unicorns rarely extend their "disruption" philosophy to their own securities.
- Creating the perfect IPO (Dan Primack, Axios)
- Slack: Direct listings are a bit more like IPOs than you think (Mark Baker, Euromoney)
4. Dominoes fall
First it was China. The end of May saw the collapse of an obscure Inner Mongolian bank, Baoshang, which had about $90 billion in assets and which had seemed perfectly healthy. The government blamed misappropriation of funds by the bank's owner, but the damage was done. The interbank lending market in China seized up, especially for smaller institutions.
- Small and medium-sized Chinese banks are collectively as big as the large players, and they're very reliant on interbank funding. After Baoshang defaulted on its interbank obligations, it became very hard for smaller banks to convince larger ones that they were safe. The central bank ended up having to step in with $125 billion of emergency liquidity, and things still aren't back to normal.
Next came investment funds. The GAM Greensill Supply Chain Finance fund, in Switzerland, imploded in early June, followed in short succession by Neil Woodford’s Equity Income fund in the U.K. Then came French asset manager H20 Asset Management, running into similar problems.
- Much like Chinese banks, funds that invest in illiquid securities suddenly find themselves under extreme scrutiny. Each bad apple seems to infect another.
Be smart: This isn't a financial crisis, although it's very similar to how many crises start. Every bull market has a massive "bezzle," to use J.K. Galbraith's famous term. We're seeing the beginning of a rise in skepticism, and a shrinking bezzle. That's good for honesty; it's less good for asset prices.
5. The stock market's volatile rebound
The S&P 500 closed the first half of 2019 at 2,942 — less than 1% shy of its recent all-time high.
- Its first half performance, rising 17% from 2,507 at the beginning of the year, was the strongest first half seen in over 20 years. That said, the index has risen only 3% in the 17 months since Jan. 29, 2018.
Be smart: By the standards of 2016 and 2017, the past 18 months have seen the kind of volatility you might expect in a world of great uncertainty. But the market can always get more volatile — especially if Jay Powell's Fed doesn't deliver the rate cuts it's expecting.
6. The longest economic expansion ever...
Tomorrow is July, which means that we will officially be entering the longest economic expansion the U.S. has ever seen.
7. ...might be coming to an end
If the bond market is to be believed, however, a recession is in the stars.
8. The week ahead: June's jobs report
The June jobs report is out on Friday, writes Axios' Courtenay Brown, and it will get even more attention than usual after May's dismal numbers.
- The economy is estimated to have added 165,000 jobs in June, while economists say the unemployment rate will likely hold at 3.6%.
OPEC and its allies will meet in Vienna tomorrow and Tuesday.
- It’s all but certain the group will extend the oil production cuts they agreed to last year — particularly given the Russia-Saudi agreement at G20 — though some member countries wanted a more dramatic deal.
U.S. stock exchanges close early on Wednesday and will be closed entirely on Thursday for Independence Day.
9. Building of the week: Apple Park
Jony Ive, the great Apple designer, is leaving the company. He reportedly spent most of his time in recent years on Apple Park, the controversial new $5 billion HQ that includes things like the largest carbon fiber roof in the world, atop the Steve Jobs Theater.
- The circular main headquarters building is 2.8 million square feet. The architect of record is Norman Foster, but Ive was closely involved in all aspects of construction — as was Jobs, before he died.