Earnings

What Earnings Portend For Payments, Lending, Fitness And The Gig Economy

For the last several weeks speculation has run rampant on what the real effects of the COVID-19 pandemic and resultant shutdown would end up being by the numbers when the Q1 earnings officially hit the wires. As of this week, a lot of that speculation is coming to an end, as the official revenue figures are rolling in and illustrating mathematically what the before and after of the global pandemic has looked like.

And while there were many striking individual results, the most interesting and observable trend is how uneven the effects have been on the whole. It is not quite the case that this has broken down into a “winners” and “losers” situation — as there have assuredly been no winners. But while it is fair to say that all firms have soaked in some damage, the earnings have made clear that the damage has been far from  distributed equally.

Some firms are still soaring despite the hits, some are sinking and others face deeply uncertain futures as Q2 starts up and the whole world watches and waits for recovery to begin.

Joining Karen Webster for the latest edition of This Week In Payments, Spreedly CEO Justin Benson sat down to remotely chat about the recent run of earnings and what they mean for the payments and commerce ecosystem’s long-term prospects. The ongoing theme, he noted, is that the trendlines emerging aren’t new, they are just on overdrive in response to an unprecedented event that flipped the world to digital only overnight.

PayPal, Square and the Power of Scale in Payments 

As a payment player, Benson said, he has long since believed that payments are the lifeblood of any business — but of late, he noted, it is an idea that has found more mainstream purchases.

“That is really playing out across the board as these digital payments players in some cases are taking on a whole new relevance, even though as a whole the segment isn’t doing wonderfully due to the challenges in individual sectors and verticals,” he said.

PayPal and Square’s respective outcomes illustrate this, Benson and Webster noted. Square’s Q1 ended with slowing gross payment volumes, pushed by the pandemic and the shuttering of merchant locations, while the company also took reserves against potential losses. There was some upside to Square’s earnings report — the surging popularity of Cash App pushed by stimulus payment deposits. But while Square does have genuine bright spots, Benson noted, its early determination to focus on card present transactions at physical retailers, and its relative slowness on card not present (CNP) transactions has had unfortunate dividends now as its core retailer set has been largely forced to close their doors.

PayPal, though it also took losses — particularly in hard-hit verticals like travel — is a different story, Benson said, largely because of its size, scale and status as a network.

“Because of their size PayPal has many stories in play so they see both tailwinds and headwinds at the same time,” he said. “So we can see Q1 was a bit of a miss in some places, but they then went on to put up some incredible metrics in response to the tailwinds that have started blowing because of the epidemic on them. The lesson here is the larger providers are, the more diversified they are, the better they do offsetting those headwinds.”

Which in PayPal’s case, he noted, has meant that May 1 was the firm’s biggest transaction day by volume in the year, outstripping both Black Friday and Cyber Monday, and it has signed on a record number of new users and merchants. Shoppers, particularly those newish to eCommerce, are lured the seamless checkout experience, Benson noted, while merchants like that PayPal’s management of the payment essentially takes over not only the transaction part of the payment, but also provides “99 percent” of the Know Your Customer (KYC) authentication piece, which in an era of rising fraud attempts is a critical advantage.

An advantage, Benson noted, that will persist past the pandemic, and help PayPal not only pull in those new customers, but keep them in the post-COVID-19 world.

“This is what was going before the pandemic, and we think that acceleration is going to continue far past it,” Benson said.

And in a variety of verticals.

The New Face of Keeping Fit 

While there is no firm that has been universally positively affected by the pandemic, it is likely fair to say that Peloton is the firm that has gotten the closest. Though it has suffered some supply shortages and shipping delays, the connected fitness company’s Q1 earnings indicate that for fitness fans, it is offering a very attractive opportunity to relocate their routine to their living room. Or bedroom. Or basement. Or solarium. That  is the appeal of the product, Benson noted — transporting much of the best of what a gym offers into a private home.

“The problem to be overcome with fitness is often motivation; gyms are one way of solving that. Connected devices, we are seeing, also solve the motivation problem by offering many of the same things gyms do — peers, competition, one-on-one instruction and a ton of data you can map your progress with,” Benson said.

That is why, he noted, despite predictions that people would buy Pelotons for Christmas and then put them up on Craigslist in January, the experience is in fact enjoyable and compelling and keeps people coming back more than a standard exercise bike or treadmill might.

And that appeal, he said, is only going to deepen going forward, because Peloton and other connected fitness devices now offer all the benefits that made them attractive before COVID-19, without many of the problems that will make gyms unattractive for people going forward. Sharing equipment with other people is about to lose a lot of appeal, he noted, as it is being an indoor space where people are breathing in and out both more often and more heavily than normal. And working out wearing a face mask is appealing to basically no one.

That isn’t to say gyms will disappear after the pandemic, Benson told Webster — there are things gyms can provide in the way of specialty equipment that are unrealistic for consumers to put in their basement, and that niche set of super-enthusiasts will likely continue to flock to gym locations. But, he predicted, there will likely be fewer gyms, as people realize there is a lot to be said for working out at home.

Airbnb and the Gig Economy 

Among the firms with the more uncertain fates coming out of the pandemic, Airbnb presents an interesting case. At present — facing layoffs, paused bonuses, a miniature revolt by some of its hosts, discontinued initiative and revenue projected to be cut nearly in half — things are demonstrably tough for the company. In fact, by its own CEO’s description, times have been “harrowing.”

What comes next, however, is an interesting puzzle. On the one hand, when consumers do eventually start to travel again, they might be drawn the relative privacy of Airbnb homes — especially, Benson noted, if the firm created add-ons like allowing people to book properties that haven’t been occupied in 48 to 72 hours, since the coronavirus can only live on surfaces for a limited time. Hotels have a lot of easily crowded public spaces like lobbies, and a lot of communal elevator buttons, Webster noted, and that might be something travelers will make a priority to avoid.

Alternatively, Benson said, consumers who are really concerned about health and possible exposure might instead decide that what they most want is mainstream brands with names they are very familiar with, and cleaning and virus control measures that have been clearly laid out and made standard across the chain. Uniformity and familiarity have a lot of appeal in uncertain times, Benson noted, and for anxious customers the perception that Marriott is cleaner might win the day over Airbnb bookings which are still known to be “inconsistent.”

In either case, he said, the bigger issue to be looking at across the gig economy as a whole may not be demand, as it is currently taking up all the attention, but supply. As a two-sided marketplace, he noted, the platform needs both — and as long-term rental availability is suddenly going up in a lot of Airbnb’s top cities, he said, it is becoming apparent a supply problem may be brewing.

“Gig economy players need that supply flywheel,” Benson said, which means they have to think very carefully going forward about how to maintain that side of their platform.

And, he noted, they aren’t alone.

Online Lenders’ Uncertain Times 

By the numbers, LendingClub had a tough first quarter as they were hit by a collection of COVID-9 related headwinds. Loan originations were down 8 percent to $25 billion —  a high as consumers held back and investors shied away from debt markets. LendingClub also reported that as a result of the economic stagnation and mass unemployment created by the pandemic, 11 percent of its personal loan customers had enrolled in LendingClub’s Skip-a-Pay payment deferral plan.

What will be interesting to see, Benson told Webster, is how that number actually stacks up against those of traditional lenders, as hard-hit consumers skipping payments has become a very common story across verticals of late. In some places, he noted, people are skipping rent 50 percent of the time, so it will really be worth watching how mainstream lenders report their skipped payment rates and how it compares to alternative lenders like LendingClub.

“They have talked for a long time about how they have a superior model for underwriting. Some do, some don’t. This will be the event that separates those firms from each other,” Benson said, “and demonstrates who really did have the better model.”

As for how firms like LendingClub will fair more broadly, Benson said, that is much more of a mystery. There are reasons to think institutional investors and banks will be less likely to want to get on board, he noted, but it is also reasonable to assume that with interest rates so low, and money floating around in great and inexpensive piles, investors will be looking to “put all that money sloshing around out there somewhere” it can make money. Alternative lenders, he ventured, might offer an attractive path to more lucrative margins.

But, he noted, whether or not they will is an open question — one of many the current crop of earnings has left the world with. The number reveal how much damage COVID-19 did — two weeks of it managed to unmake all the progress firms made throughout the rest of Q1.

What remains to be seen, Benson said, is if there will be enough recovery time in Q2 to start offsetting that early damage.

“It is possible the full quarter may take a big hit in April but start to come back in May and June. We’ve all seen the scary results and found out they were almost entirely generated by the last two weeks of March,” he pointed out. “With 12 weeks between now and the next run of reports, we might have a better picture, and a lot of firms that look terminal today will look a lot more stable by then.”

Only time will tell.

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