I’ve read with interest posts on this board regarding SQ entering the consumer lending space. This community eschews the foolish practice of using much consumer debt…it just not Foolish. Not to minimize the analysis done and previously presented, but I can’t help wonder how this paradigm (and may I say bias) affects our impression of a company deliberately entering the space.
but I can’t help wonder how this paradigm (and may I say bias) affects our impression of a company deliberately entering the space.
I find investing in credit risk is too risky for me. Credit risk is what blew up the market in 1998 and 2008.
Long-Term Capital Management Hedge Fund Crisis
How a 1998 Bailout Led to the 2008 Financial Crisis
Debt can be harmful to your wealth!
“This community eschews the foolish practice of using much consumer debt…it just not Foolish. Not to minimize the analysis done and previously presented, but I can’t help wonder how this paradigm (and may I say bias) affects our impression of a company deliberately entering the space.”
Most smart users of debt via credit cards do not pay interest, they pay in full each billing period. Of course there are people who get in trouble, have a setback, or or undisciplined and get in trouble that way. But Visa and Mastercard seem to flourish by extending short term loans to their customers ( in my opinion a credit card balance that is not paid in full each month is just a short term loan ). It’s also super convenient, and we all know how much convenience is valued in society.
I’m not up on what Square is trying to do, and I do realize that Visa and Mastercard have deep pockets,but extending credit seems to be quite profitable for some companies.
But Visa and Mastercard seem to flourish by extending short term loans to their customers ( in my opinion a credit card balance that is not paid in full each month is just a short term loan ).
I’m not up on what Square is trying to do, and I do realize that Visa and Mastercard have deep pockets, but extending credit seems to be quite profitable for some companies.
The credit is extended by the card issuer, not VISA or MasterCard. By contrast, AmEx does take on the credit risk. Citi recently switched my card from VISA to MasterCard. V and MA are just intermediaries. An important difference, not for the user but for the investor.
“The credit is extended by the card issuer, not VISA or MasterCard. By contrast, AmEx does take on the credit risk. Citi recently switched my card from VISA to MasterCard. V and MA are just intermediaries. An important difference, not for the user but for the investor.”
thanks for clearing that up for me, I was confused about that. Damn, Visa and Mastercard got themselves a helluva business: a small charge on every transaction, and not assuming any financial risk of customer default.
You seem to have a good understanding of this so maybe you can shed light on this:
When a company offers a co-branded Visa card, Costco Visa by Citi, for example the issuing bank assumes credit risk not Visa. There are many stores offering such Visa cards not just Costco so what do we mean when we say V and MA are not in this business? Is it pure consumer lending i.e. no bank involvement? Not sure V and MA will ever want to get into that.
When Square is offering a similar consumer loan even if SQ bundles the loan and sells it the risk is what if SQ cannot sell that loan or if it has to sell at lower interest. Is that correct?
Paypal had a similar set-up and got out of that business. Article below says paypal sold its consumer credit receivables. Sounds like they did not bundle and sell the loans like SQ is proposing. Is that correct?
On a related issue, in a private mortgage insurance business if a private mortgage insurance company, company A, reinsures to company B doesn’t that reduce Company A’s risk. I suppose if company B defaults then Company A will be on the hook.
I don’t have the answers to all your questions, but for #1 - from Wikipedia - Synchrony (SYF) is the largest provider of private label credit cards in the U.S. In 2014, the company comprised 42 percent of the private label credit card market. The company provides private label credit cards for such brands as Amazon, Cathay Pacific, CheapOAir, OneTravel, Walmart, Lowe’s, Guitar Center, Gap, BP, Ashley HomeStores, Discount Tire, J.C. Penney, and P. C. Richard & Son. Not sure who offers the other 58 percent.
I know from personal experience that Walmart’s private card was either V or MC (can’t recall which).
And, the article you linked notes PayPal sold their consumer credit receivables to Synchrony.
2. When Square is offering a similar consumer loan even if SQ bundles the loan and sells it the risk is what if SQ cannot sell that loan or if it has to sell at lower interest. Is that correct?
I believe that to be correct and that would only likely become a severe issue if we have a similar type Great Recession scenario in which the credit system almost collapses which would be very unlikely but still possible.
A Garden variety recession would hurt holders of credit risk but likely would not destroy them unless a credit issuer takes on too much risk. For a tech company like Square, what everything would depend on would be how conservative would Square be over the full credit cycle.
Among the reasons why I don’t like Tech companies taking on too much credit risk would be because most Silicon Valley type tech companies seem very aggressive and like taking on high risk which would not be necessarily a good thing with credit.
Banks often operate conservatively with credit and even banks when forced to make “numbers” will sometimes go too far out on the limb on the risk scale and when a crisis hits, Warren Buffett would be standing on the shoreline waiting to hand out towels to those swimming in the nude when the tide goes out. In the Great Recession, even Goldman Sachs needed a towel.
So, I am not overly trusting with tech companies who will eventually start hyping things by saying, “Our AI can perfectly predict default rates in any environment, in any scenario” which will give me flashbacks to when I first came on the Fool in 2007 and invested in a Hidden Gem recc called First Marblehead who essentially said the same thing about using decades worth of data on student defaults to be able to predict what will happen in any environment. A First Marblehead investment in 2007 was dust by 2010, so when people eventually show up on the Fool repeating similar Hype as a reason to invest, I will exit stage left on that type of philosophy and probably invest elsewhere. I do not trust the “Move Fast and Break Things” ethos of Silicon Valley to do credit well. Tech companies might start out operating conservatively but human greed near the end of the credit cycle will probably blow up a few tech companies dabbling too hard in credit because if even conservative banks can not resist the siren call to creep up on the risk scale then how will tech companies with the DNA to be aggressive resist the siren call?
Yes that was the point I was making. Store credit card business is old. Even smaller local stores offer it for big tix items like furniture. V and MA are already playing in that field. Seems like SQ wants to get into a similar action by helping it customer’s customer get credit (kind of store credit). So, don’t see how V and MA are missing out on this business as it was implied in the other thread.
Paypal got out of a similar business, looks like they were financing themselves but decided to sell that to Synchrony. SQ wants to get in they believe they can successfully sell the bundled loans unlike paypal.
This is the kind of discussion Saul does not want here. I thought it important to point out that VISA and MasterCard don’t make loans, they don’t have credit risk, SQ wants to take on credit risk which is a red flag for me. GE almost went broke over their credit business. The way I see it, when a retailer finances a customer it has not made a sale but granted a loan. That’s not what retail is about, leave it to the financial sector. You can get into terrible habits like selling at a loss because you think you’ll make it up on the credit. It sucks!
I’ve already answered Q1 and I don’t want to answer the rest. Sorry.
A friend of mine who had a photo store had a neat way of explainng why he didn’t cash checks. He told people about the arrangement with the bank next door: “We don’t cash checks, they don’t sell cameras.”
This is the kind of discussion Saul does not want here.
Not sure why this discussion is invalid. SQ is a stock owned by many here and its increased risk (or lack of) should be a matter of interest. Paypal is a growth stock (albeit slower) but it seems to have gotten out of this exact consumer lending business just recently. It is important to understand the difference between how paypal was doing it and how SQ is approaching it. Seems to me Paypal was not bundling and selling the loans, they were self financing. The point was made in the other thread that V and MA are missing out on this action. But V and MA and numerous CC companies are already in the store card business which seems similar to what SQ is doing w/o but without any credit risk.
The point about PMI business was that risk transfer through reinsurance may still not reduce the original company’s risk if the reinsurer defaults. Maybe not a good comparison to SQ but the point is sometimes SQ may not be able to bundle and sell or may have to sell at a loss. Any way thanks.
Not sure why this discussion is invalid. SQ is a stock owned by many here and its increased risk (or lack of) should be a matter of interest.
Let me put it this way, the credit risk question is relevant and I posted about it and answered questions about it. The risk of reinsurance isn’t. Threads have a way of wandering off to lala land
BTW, I worked in insurance a one time. Even if the reinsurer goes broke, reinsurance still reduces the primary insurer’s risk. To explain I would have to discuss risk and that is off-topic for the board. Why discounting a loan portfolio is not the same as insurance, another long off-topic discussion.