In this podcast, Motley Fool senior analyst Jason Moser discusses:
- Whether Robinhood Markets' 1% match on new IRA accounts will force other financial institutions to do the same.
- If the new service from the still-unprofitable Robinhood will reward shareholders.
- A new survey from Forbes Advisor about the increase in buy now, pay later activity and what it bodes for consumer savings in 2023.
Motley Fool senior analyst Asit Sharma talks with Endava CEO John Cottrell about digital payment trends and differentiating from the competition.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Dec. 07, 2022.
Chris Hill: It's the season of giving and one financial services company wants to give the gift of cash, Motley Fool Money starts now. I'm Chris Hill, I'm back by popular demand. Motley Fool Senior Analyst, Jason Moser, thanks for being here.
Jason Moser: Popular demand, you sit on a throne of lies. I could only wish that were the case, but I'm happy to be here nonetheless.
Chris Hill: Let's begin with Robinhood, shall we? Because the stock trading app is trying to broaden its offerings and this week rolled out something that caught our attention. For anyone who opens an individual retirement account on their platform, Robinhood is offering to match one percent of the funds that customers contribute. The catch is you have to keep the retirement funds with Robinhood for at least five years to get the match. I like that as someone you're with me and everyone here at The Motley Fool, we really focus on long-term investing. So I like that for customers. Do you like this for Robinhood and their shareholders?
Jason Moser: Well, ultimately, yes, I think you're right. I mean, this is regardless, this is a really positive message. This is the thing we love to see. It is encouraging folks to think longer-term, start preparing for retirement. Robinhood's demographic does skew a little younger. So that I think is important to remember as well because you're trying to educate younger investors, give them that mindset of thinking in the context of many, many years as opposed to quarters. But generally speaking, I like in this kind of to a rewards program for credit cards and my only concern, I don't know, like one percent. I don't know that one percent is going to be enough to really push meaningful results from this, but it is a good first step. I think for Robinhood, the key for them in their line of work, once you get these account holders and they've got 23 million funded accounts.
It's not a small operation. As we say with banking and typically with financial services, the longer that you stick with those particular providers, their switching costs they grow over time. You don't want to bother with extricating yourself from your banking relationship or your investing relationship. So you tend to just make do. I think that this is something that certainly could play into their favor if they are able to grow that account user bases, funded accounts. Once you get those account holders in there, then it really that's hard work. Then it really just becomes about adding more services for those account holders, bringing more value to the platform and that's what this seems like. It's just one more small step at attempting to bring more value to the platform and yeah, I think that's a good thing.
Chris Hill: If we're going to give Robinhood credit for trading fees, basically going to zero and I think they deserve some if not all of that credit.
Jason Moser: For sure.
Chris Hill: Do you think we could see history repeating itself? Do you think in the next year or two, some other financial services firm, a larger one, maybe with more customers, offers this, this is a one-time deal. It's like, hey, this is not year after year. This is not a 401(k) plan, we're just going to keep matching every time you put in money. It's a one-time thing. Could you see others doing it?
Jason Moser: I am glad you bring that up because I absolutely do. I think definitely Robinhood deserves a lot of, if not all of the credit for really spearheading the dwindling cost and ultimately bringing commission costs to zero. The one thing when you look at this space, it's obviously it's a very large space and this is going to be something that really particularly focuses on the retail investor. If you're an employee of a company and you have a traditional retirement plan, that's going to be more meaningful than the limitations that an IRA typically has. But to me, go back to that I like it to rewards program for credit cards. To me it feels like there's no reason in the world why other brokerages wouldn't see this as an opportunity to try something new and attempting to bring more value to their platforms.
Because again, it is about keeping those account holders that you have and also coming up with new reasons for new account holders to consider giving you a shot. Then you're going to look to the platforms that are charging you the least and now they're all on the same playing field there. Then you look for the platforms that are going to offer you the most in the way of value, whether it's matching on an IRA, whether it is research. We're seeing public.com for example building out more and more research and advice for their brokerage platform. I think that between the two of them, to Robinhood and public in their ilk, I think that you're going to see more and more of this as time goes on. Because ultimately, yes, it really is about creating the platform that brings most value.
Chris Hill: We've talked about how important the holiday season is for retailers and we've also talked about the increase in buy now, pay later. These two stories have merged because Forbes advisor surveyed 1,000 Americans who have used by now, pay later, at least once to get a sense of what the usage might look like over the next few weeks. Couple of things from the survey, Jason, 64 percent said they will use buy now, pay later this holiday season. Forty percent said they we will use it for a purchase under $100.
Jason Moser: Yeah.
Chris Hill: I feel like this is the scene in the action movie where one of the character says, I've got a bad feeling about this.
Jason Moser: Yeah, I feel that way myself. When you look, I'm not surprised to see more and more people resorting to using BNPL. I've never personally used it, have you?
Chris Hill: I have not. Despite being offered the chance multiple times.
Jason Moser: To me, maybe a couple of reasons why I never use it. One is I have a good credit card with a good rewards program. But then two, it feels like just, and I'm not going through experience so I'm sure maybe I'm overreading too much into it, but it feels like the process of using buy now, pay later is just it feels like there's more friction involved. It feels like it's just a more difficult experience than just checking out with PayPal or your credit card. But nevertheless, I do feel like this is something that could end badly. When you look at the broader data, just the broader consumer data and we were talking about this, I think on the radio show on Friday. You've got now, this year, you've got more Americans living paycheck to paycheck. Sixty percent versus 56 percent a year ago. We got the personal savings rate, essentially what it looks like, an all-time low at 2.3 percent.
You see credit card balances that are set to cross over $1 trillion for the first time ever. Now, you add that to the options there with buy now, pay later. Buy now, pay later just seems to be another lifeline when you're running out of options. I guess that's good, but it certainly isn't ingraining, I think, responsible consumer behavior. If you have to stretch out, purchase under $100 like that, maybe rethink the purchase. I know that obviously inflation is causing a lot of banks for a lot of consumers out there but there is data out there. There have been studies conducted. There was a study conducted by researchers at the University of Washington, University of California, Irvine in Singapore management university they found and this is a recent study that using buy now, pay later services results in, shocker, more bank overdraft charges, more credit card charges and more credit card late fees.
All three of those are bad, and all three of those impact consumer's financial health negatively. Then furthermore, they forecast that spending with buy now, pay later is projected to reach and I through that one trillion-dollar number out there for credit card balances. Spending with buy now, pay later is projected to reach one trillion dollars by 2025. So this is not going away. This is something that is becoming very meaningful and for consumers, I think it's just imperative that you really spend wisely, spend thoughtfully. It's one thing to have these lifelines, but understand the debt that you're taking on and the responsibility that exists in needing to pay it back.
Chris Hill: The big ticket items. I can see it.
Jason Moser: Yeah.
Chris Hill: There's a lot of, this is a pretty comprehensive survey that Forbes advisor commissioned. There are a lot of data points, that's the one that leaped out to me, the 40 percent saying they're going to use it for purchase under $100 because when I said I've been offered multiple times, there are more and more sites that are just offering it when you go to checkout, it's just like, oh, here's this thing, I'm buying a single item for $25, would you like to spread that out for four payments? No, I got the $25.
Jason Moser: Yeah. That and restaurants, you see a lot of data that shows that people are using it to go out to eat which again, I know that the times are tough. It's just I don't take on debt if you don't have to, I guess.
Chris Hill: Jason Moser. Thanks for being here.
Jason Moser: Thank you.
Chris Hill: Sticking with the broad spectrum of financial services, when businesses need to build systems to accept payments, some of those businesses turn to Endava. Company's had its stock cut in half this year, but Endava is still growing revenue and has positive free cash flow. Motley Fool senior analyst, Asit Sharma caught up with Endava CEO John Cotterell to talk about digital payment trends and what makes his company different from the competition.
Asit Sharma: John, I wanted this begin by asking you to describe Endava for those Motley Fool members who may not be familiar with your company.
John Cotterell: Sure also, we sit in that exciting space of technology, essentially helping our clients adopt technology waves that are rolling through their industries. We do focus on industries that are experiencing substantial technology-driven change. The way in which we do that is through multi-disciplinary teams that help our clients to play around with technology, find things that are going to make a difference to their business models to the consumer relationships, prototype it, get it into production, scale it as it's successful. We do that with a delivery model that includes people from near-shore locations in Latin America and in Central Europe so that we can offer exciting change to clients, but with also a reasonably competitive price point.
Asit Sharma: In this industry, which is characterized by finding great talent and having that talent to help other companies, how would you say that Endava is differentiated by some other players? I think across the spectrum we've got some very large tech consulting companies and we've got some smaller players like your company, which are more specialized. If you were to describe what makes Endava different to a prospective client and to our Fool audience, how would you do that?
John Cotterell: I think one of the most important things is that space of helping clients take product ideas using new technologies from ideation through to production and then scale in the markets as they're successful. We do that with multi-disciplinary teams. We pull together not just engineers who can build software and build technology into solutions, but also the creatives and the designers who think about usability, who think about the clients, the customers who are going to be using the systems, how do you make that an exciting experience for them?
When you twine all of these things together, you end up with products that are much more exciting in the market and that's what we offer our clients, that's why they keep coming back for more. As a result of that, we end up with large-scale clients with long-term relationships where they're growing what they do with us and that becomes a major point of differentiation for us. Each year about 60 percent of our growth comes from our existing clients spending more and then we're just topping up a little bit on top with some new clients where we're doing some of that ideation work to get them into understanding how Endava operates and start using us.
Asit Sharma: Endava has seen great success in the financial and payments sector. It's a large part of your revenue. I was hoping you could explain to our members what your core competencies are in this space.
John Cotterell: Yeah, the financial services space is where we started. Essentially, the business started in 2000. We were focused on the city of London with all of the payments and financial services and investment banking communities that exist in London. That's where we started, it's where we learn our space going up to 23 years ago now. But as we've grown, we've scaled the business outside of the UK and outside of financial services but as you rightly call out the financial services space is our core and still around half of our revenues is in the financial services space.
The big area that has grown for us has been in the payments area essentially over the last 20 years since there has been a big shift from people paying by physical means, whether that's cash or checks moving into the electronic space with cards, increasingly with real-time payments, interact directly with your bank account and building those solutions and capabilities for clients as well as the large transaction stuff that happens in the banking world and helping all of that volume back-end that occurs with clients. Is part of that capability that we bring together, that ability at the front-end to be ideating new products and bringing the creative to pair on what our new products would be right through to building large systems that are highly scalable, and highly resilient in the transaction space. You put those two things together, you get products that are exciting to use but then when you get them in the market, they work.
Asit Sharma: It would seem there are many years ahead to plum this space. I was thinking of fellow company that's domiciled in the UK WisePLC and just the challenges they're trying to solve in terms of cross-border payments, plugging sometimes directly into the treasury function of some countries, it would seem that you've got a lot that you can still, partly into growth, was curious. Have you developed any of these competencies that you can then lift and shift into other verticals as you've worked so many years in financials and payments?
John Cotterell: Yes. It's one of the areas where we're seeing substantial interest and growth, particularly as open banking and the regulatory rules are opening the platforms a little bit. Are using other sectors who use payments, obviously, if you're a retailer, there's everything that you sell goes through a payment system. Actually, retailers end up with very complex payment systems spread across the globe and being able to help them design new solutions that are still using banks and payment processes at the back-end, but enables them to orchestrate what they're doing, get much better customer information out of the transactions that they're doing is an area where using our payments expertise we're then able to help retailers.
We see it across a number of sectors that there's insurance where micropayments are coming in so, ensuring the journey rather than the car type shifts in the way in which insurance is working. Mobility is a space making the car the payment device so that when you park it, it sorts out the car parking fee rather than you having to go to a machine, all of these trends which are coming down the line are actually ones where we are able to work with clients in those different industries around how the payments back-end can help them drive a frictionless solution essentially from a customer point.
Asit Sharma: This is a good segue into my next question because you've mentioned many technologies that seem next-generation, alluding to things like telematics in the insurance industry. Endava has a well-deserved reputation for being a next-generation type company, looking to help clients bridge where they can grow in the future but one thing that strikes me about your company is that the approach is very pragmatic. For example, you have some developing services in the metaverse, but it's not what most people would recognize as the hyped version of the metaverse. To me, it's more of a plumbing to help companies that may potentially play, let's say in virtualization, etc. Could you talk a little bit about what next-generation means to you and then maybe we'll plumb that a little further.
John Cotterell: Sure. It means different things with different technologies, but as you say, our approach is very pragmatic, it starts from that prototyping approach that we take with clients where if we think as a technology can have an impact on their business, the first thing we do is prototype what it might look like. Now that immediately takes you into the pragmatic place because you're not envisioning something on PowerPoint or something, you're actually showing a working solution. Then, as the client sees that they get excited about it, we then start scaling into being real product. Talking about the Metaverse, we had our first client Metaverse event last month, which I was actually slightly nervous about whether the Metaverse was ready for it but it was actually an amazing experience to actually stand on a stage in the virtual world with a load of Avatars out there listening to you and feel like you had a real audience.
Then after the event, I dropped down into the auditorium and have real conversations with people who looked at you and you spoke to them and responded. We're working on the technologies that bring human emotion into those avatars and just make the experience more and more real. There's a way to go on the Metaverse, this is not something that is going to feel like a real life experience in the next year or two but it is something companies are starting to work with so that they get the experience and the familiarity with the sorts of things that you can do and then start creating products that's coming through. There's so many technologies that are coming through where that evolution has some way to run whether you're talking about autonomous vehicles, frictionless payments, we've already mentioned the things you can do with 5G and the Internet of Things connectivity that's going to bring the products that that will bring out.
Language, AI, all of those things are going to bring new technologies to sweep across industries and create a lot of change. It's interesting, I love a Bill Gates quote which he stole from someone else which is that in the short term, people imagine technology is going to have an impact and there are obviously a little bit disappointed by how quickly that happens. But in the long term, people can't even imagine the depths of impact and the level of impact new technology that's coming through is going to have and I think you see that with the internet, 20 years ago there was all the excitement about it. Then come down a little bit and then you saw the change come through in the following 10 years or so and we're hitting a whole bundle of new technology areas where that's what's going to be coming through over the next 20 or 30 years.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
Asit Sharma has positions in Endava Plc and PayPal. Chris Hill has positions in PayPal. Jason Moser has positions in PayPal. The Motley Fool has positions in and recommends Endava Plc, PayPal, and Wise Plc. The Motley Fool has a disclosure policy.
