#235: Cash App Could Offer a Cheap and Humane Alternative to Expensive Payday Lending, & More

Square’s Cash App apparently is testing a new lending product that will enable users to borrow between $20 and $200 dollars at a 5% fixed fee for four weeks plus 1.25% in non-compounding interest for each additional week borrowers extend their loans. The fixed fee averages 60% at an annual rate (APR), which is much lower than “payday” loan storefronts charge. By cross selling and leveraging its low fixed costs, Cash App can offer payday loans at much lower rates potentially preventing ‘debt traps’ and revolutionizing the single-payment credit market.

In 2017, 14,348 payday loan storefronts were ubiquitous in the US, outnumbering the 14,027 McDonalds and highlighting how many consumers are stretching to make ends meet. Each year, roughly 12 million Americans take out $27 billion in payday loans, racking up $4 billion in fees according to several estimates. Legal in only 32 states, the average payday loan APR is 391%, double that of a bounced check fee, nearly 3x the late fees on credit cards, and more than 6x those on late car payments. Borrowers in Texas pay an astonishing 661% APR on average for payday loans.

Because 7 in 10 payday loans defray recurring expenses like rent and utilities, borrowers roll 80% into the next month and seek another loan within 14 days, essentially falling into debt traps. Defaulting on payday loans results in more onerous charges, including fees for overdrafts and for Non-Sufficient Funds (NSF).

Cash App is likely to disrupt and seize the traditional payday loan market in the absence of a competitive response. Payday lenders typically charge $15 per $100 borrowed over two weeks and an additional $15 per $100 for a two week rollover, turning an initial $200 loan with four rollovers into a $350 debt obligation in 10 weeks. In contrast, a $200 Cash App loan rolled over four times would mount to a $230 obligation, 35% less than the payday loan balance, over 10 weeks. Put another way, Cash App’s obligation after 10 weeks is equal to that due to typical payday lenders after only 2 weeks, without any roll-overs.

Federal Reserve Board Governor Lael Brainard announced Thursday that the Fed is testing a Central Bank Digital Currency (CBDC). Issued by the Fed, the CBDC would serve as digital legal tender, similar to cash, primarily for retail payments.

While similar cosmetically to cryptocurrencies like bitcoin, a CBDC would pose more of a threat to commercial banks than to cryptocurrencies. A CBDC could eliminate any dependence on intermediaries by handling the functionality of payment services like account management and customer due diligence, specifically Know Your Customer (KYC) and Anti Money Laundering (AML).

Although the launch timing is uncertain, the Fed is partnering with the Massachusetts Institute of Technology (MIT) to develop the CBDC over the next two to three years. In the press release, Brainard acknowledged the existence of other CBDCs and private cryptocurrencies like bitcoin and Libra, underscoring the need to evaluate them in the US with the following comment: “This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems. Moreover, China has moved ahead rapidly on its version of a CBDC.”

Other central banks are evaluating digital currencies as well. Reuters reported that the European Central Bank is discussing plans for a European public digital currency. Turkey also has announced plans, with trial runs expected by year end. Meanwhile, China continues to stand firm that it will launch its own digital currency this year, after planning and developing it for the past 5 years.

In a deliberate and calculated move last week, Epic Games updated Fortnite and declared war with a direct payment channel that will circumvent Apple’s and Google’s 30% fee on in-app purchases. In response, both Apple and Google removed Fortnite from their app stores. Epic Games then filed suit against both Apple and Google, released a smear ad using Apple’s famous “1984” commercial, and started the hashtag “FreeFortnite” which has gone viral. Apple and Google seem to have played right into Epic’s marketing campaign.

Important to note, this attempted coup involves more than Epic Games, Apple and Google. CEO Tim Sweeney claims that Epic Games is “fighting for open platforms and policy changes equally benefiting all developers.” Epic Games doesn’t want a sweetheart deal: it wants radical reform.

Now the question is: will this revolt devolve into background noise as was the case with Hey’s stance against Apple, or will it set a new precedent for the digital economy?

This week, Pacific Biosciences of California (PACB) raised nearly $87 million in a secondary equity offering, causing some excitement and an approximate 23% pop in the stock. With a strong balance sheet, PacBio should be able to improve its flagship Sequel II platform, enrich its clinical footprint, and expand its value proposition for translational research customers. Once upgraded, we believe Sequel II could be superior to category leader Illumina (ILMN) as measured by cost, accuracy, and features.

Unlike short-read sequencers, Sequel II uses high-fidelity (HiFi) long-read chemistry. While less expensive and more efficient, short read systems fail to recognize certain types of mutations, importantly structural variants. They also can be biased by upstream chemistry steps and are unable to detect epigenomic changes like DNA methylation without specialized reagents.

Though historically more expensive, HiFi long reads can overcome all of these challenges. In the recent precisionFDA challenge, an open competition among sequencing platforms and analysis pipelines, 96% of the winners used PacBio HiFi reads. Compared head-to-head with the same analysis tools, Sequel II had 2.5x fewer errors than Illumina’s NovaSeq and roughly 30x fewer errors than Oxford Nanopore’s PromethION system. In our view, with time Sequel II could have more advantages beyond superior accuracy and comprehensiveness.

According to our analysis, given its track record and access to capital, PacBio could optimize Sequel II to sequence whole human genomes for less than $1,000 within the next 24 months. Sequel II also should be able to generate as much data per day as the NovaSeq, perhaps forcing Illumina to lower reagent prices or integrate super-resolution optics into its high-throughput instruments more rapidly than otherwise might be the case.

An EV brand spun out of Volvo and Geely, Polestar 2 is migrating from Europe to the US at a base price of $59,900. Early reviews suggest that this EV sedan is well-made and fun to drive. Though its drivetrain is less efficient than that of a Tesla, its fit and finish is better.

Piquing ARK’s interest, the Polestar 2 is the first car using Google’s Android Automotive Operating System (OS). Unlike Android Auto and Apple CarPlay which connect smartphones to vehicles, Android Automotive is a deeply integrated OS, allowing voice commands to control infotainment systems, climate controls, and other basic functions.

While its functionality seems limited relative to Tesla’s OS today, ARK is keen to learn how Google ‘s OS will improve and evolve in the global automotive ecosystem.