Written By: Ryo Hashimoto

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

Americans’ personal expenditure appears to increase substantially during holiday seasons. Take Christmas for example, during America’s favorite holiday Americans spend hundreds, perhaps even thousands of dollars to finance their holiday expenses. In recent years, more and more Christmas shopping started to take place online. As the competition arises, online merchants are bending over backward to attract more shoppers. As one of the strategies, online merchants started to provide customers with more check-out options – we are not talking about accepting more credit card brands, but whole new payment options. Among them, “buy now, pay later,” or BNPL programs are having a resurgence in popularity.

In recent months, retail giants like Amazon, Airbnb, and Walmart have announced new partnerships with BNPL firms like Afterpay, Affirm Klarna, and Seezle giving shoppers the point-of-sale option of splitting the cost of purchases into equal installment payments spaced out over a predetermined period of time often, without interest. They are essentially a new form of layaway, except shoppers get the product before paying it off without putting down an upfront fee.

According to the research conducted by Credit Karma, 44% of respondents in the United States have used BNPL at least once to make a purchase as of September 2021.[1] Surprisingly, 38% of BNPL users think BNPL services will eventually replace their credit cards, and more than half (56%) answered that they prefer BNPL compared to using credit cards for purchases according to the survey conducted by C+R Research.[2] 

So, the question now is why are BNPLs seemingly growing in popularity, and are they better than credit cards?

Why are BNPLs getting popular?

According to the survey carried out by C+R Research, one of the biggest draws of BNPL seem to be their simplicity and flexibility. Most BNPL services have either a fixed cost or no cost and are very upfront about showing you how much it will cost. I should say they are more straightforward compare to spending ten minutes reading through a ten-page credit card’s terms and conditions trying to figure out the interest payment. If you have a credit card, you have to pay at least the minimum payment at the end of the month, but with BNPL, you might have a three-, five- or 12-month option. You can set up the payment in different ways that work for you. Furthermore, for most BNPLs, all the payments take place on the mobile app which allows users to complete everything with the stroke of a key. Also, most BNPLs do not require any credit check and therefore, the buyers most likely get instantaneous approval. Simple and flexible payment structure and easy access clearly set BNPL apart from other payment options and make it an attractive way to shop.

Cost of Convenience

Well so, what is the cost? A lot of people have a perception where a massive “convenience fee” would creep up on you without you even realizing it when using such services. To my surprise, fees are not that terrible due to BNPL’s unique revenue model –  merchants pay a fee to the platform they partner with to offer the service and then count on offsetting that cost by enticing shoppers to spend more than they would if they had to pay all at once. Thanks to the unique fee structure, the “fees” tend to be relatively low compared to credit cards. BNPL interest rates and fees vary widely. Some options carry no interest or fees at all, which essentially makes it free financing for the consumer. (BNPL providers still make money on the merchant fees baked into the price of the product, much like payment networks do on interchange fees for credit cards.) According to the Federal Reserve’s data for the third quarter of 2020, the average APR across all credit card accounts was 14.54%.[3] Simply looking at the interest rates, BNPL seems to have an advantage.

Downsides of BNPL

The whole point of having alternative payment methods online is to promote people to spend more money that most likely does not exist in their bank account. Although the “install payments” might make it look less evident this means consumers are actually taking on a loan. Borrowing money has a strong correlation with low financial well-being. Particularly, younger people are susceptible to the risks of opting into BNPL plans. Credit Karma reports that more than half of the Gen Z and millennial respondents said they had missed at least one BNPL payment, compared to 22% of Gen X and just 10% of Boomers.[1] This makes sense when you consider that many of these platforms appear to be specifically targeting younger shoppers. This indicates that BNPL has a greater potential impact on the younger generation with little financial literacy and disturbs their spending habits. This problem is not something that did not exist in the past: I bet a fair amount of people have experienced the horror of falling into credit card debt. However, it is certainly true that BNPL is adding to this issue by offering more accessible and flexible ways to make purchases. 

So Credit Card or BNPL?

So going back to the original question, are BNPL products better than credit cards? Although, it seems like BNPL products might be a better deal than credit cards, it depends on the duration of payments. As long as you do not fall behind on scheduled payments, they are flexible and amounts are clearly stated upon the purchase. Is there anything that BNPL does not offer but a credit card does? Of course, there are. When you use a credit card to make purchases, you can earn cash back, points, or miles. If you have good credit, you can find a card that gives you at least 2% back on every purchase, which can add up to big savings. Credit cards also generally come with other benefits, such as purchase protection and insurance. BNPL providers don’t offer these kinds of rewards or protections, nor do they always offer the credit-reporting benefits of credit cards. Clearly, if you can pay the bills on time, then you are better off using credit cards. However, if you require a longer period of time to pay off the bill then, the lower interest rates that BNPL offers are hard to beat. Especially considering a lot of them offer no interest at all. After all, it is impossible to decide one way the or the other without looking to the conditions of each – duration of payments and interest rates play imperative roles in deciding which option saves more money. However, I am not surprised if BNPL appears to be the better option for a solid number of cases. I expect the BNPL will continue to attract shoppers and develops its unique market space.

Sources:

[1] “Buy now pay later surges throughout pandemic, consumers’ credit takes a hit” https://www.creditkarma.com/about/commentary/buy-now-pay-later-surges-throughout-pandemic-consumers-credit-takes-a-hit. Accessed 25 November 2021.

[2] “BUY NOW, PAY LATER STATISTICS AND USER HABITS” https://www.crresearch.com/blog/buy_now_pay_later_statistics. Accessed 25 November 2021.

[3] “Consumer Credit-G.19” https://www.federalreserve.gov/releases/g19/HIST/cc_hist_tc_levels.html. Accessed 25 November 2021.

Written By: Ryo Hashimoto

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

Digital World Acquisition Corp (NYSE: DWAC) skyrocketed by as much as 1,657% in October 2021, after former US President Donald Trump announced a deal to list Trump Media & Technology Group through a Special Purpose Acquisition Company, commonly known as “SPAC.” Both the number of SPACs IPOs and gross proceeds have seen tremendous growth in 2020; the Gross Proceeds have grown more than six times compared to the previous year. Some recent commentary has referred to a SPAC “bubble” and SPAC “hype” due to the rapidly-growing IPO funding.  However, are SPACs a cheaper way to go public?

While SPACs have been touted as a cheaper way to go public than an IPO, the question is: Is SPAC really a cheaper way for private companies to go public than the traditional IPO? There are a few factors that we need to consider to evaluate the real cost of a SPAC; such as: the underwriting fee, the promote and warrants. 

Underwriting Fees

Underwriters typically charge their clients 5-7% of IPO proceeds in traditional IPO. On the other hand, SPAC underwriting fees are typically between 5% and 5.5% of IPO proceeds, which are slightly less than the typical fees in a traditional IPO. One thing that we should always keep in mind is that in most SPACs, most shares are redeemed upon merger. When a SPAC proposes a merger, SPAC shareholders have an option to redeem their shares rather than participate in the merger. When the SPAC shareholders decide to redeem the share, they get back their full investment. The underwriting fee, on the contrary, is not redeemed and rarely is it adjusted at the time of the merger. So, if one measures the fee in relation to the funds ultimately invested in a company that goes public, the underwriting fee ends up being higher than 5 – 5.5%. Hypothetically, if 50% of a SPAC’s shares are redeemed upon the merger, the fee what was initially 5.5%, soars up to 11%. From the perspective of the merged entity, underwriting fees represent depleted cash. To the extent the post-merger company receives cash from the SPAC, the underwriting fee is the cost of receiving that cash. The table below displays underwriting fees for the 2019-20 Merger Cohort. The table is created based on the underwriting fees for all 47 SPACs that merged between January 2019 and June 2020. First, it shows the fees by IPO proceeds, as an underwriting fee is typically measured. The median is 5.5% of IPO proceeds. Then, it modifies the fee as a percentage of proceeds from IPO shares that are not redeemed and that are therefore invested in the target company. Measured that way, median fees are 16.3%. This clearly reflects what I have discussed in the earlier paragraph; redemption drives up the actual underwriting cost. Furthermore, the median redemptions are over 73%, and redemptions over 90% are not unusual[2]. With that being said, the effective underwriting fees in SPACs are a lot higher than that of traditional IPOs’. 

Mysterious Promote

In a SPAC, unlike IPOs, the Sponsor (forms a corporation and working with an underwriter to have the SPAC go public in an IPO) receive a 20% stake, called a “Promote,” Sponsors compensate themselves for the work they do for a SPAC by taking, at a nominal price, a block of shares equal to 25% of IPO proceeds, or equivalently, 20% of shares outstanding after the IPO. Nonetheless, this clearly dilutes the equity. As discussed in the previous section, shareholders’ redemption plays a significant role here as well; more redemption means greater impact of promotes on overall dilution. Since redemption happens too frequent, the percentage of promote tends to be higher than the rates shown. Promote fee structure is highly questionable; it is hard to believe that people who establish the SPAC spending a couple hundred thousand dollars for IPOing the blank-check company can walk away with almost a quarter of the stake.

Warrants

Lastly, let’s consider warrants. The role of SPAC warrants is to attract IPO investors and compensate them for investing in a vehicle that will hold Treasury notes between the time of the SPAC’s IPO and the time of its merger. But from the perspective of a post-merger company, warrants and rights are legacy claims that dilute post-merger share value. The dilution caused by the warrants and rights associated with redeemed shares is clear. The redemption price equals the IPO price of a full unit, and yet a shareholder that redeems its shares keeps the warrants. Warrants, therefore, are in effect given out for free to the extent of redemptions. For post-merger shareholders, this is straightforward dilution. Suppose, however, this SPAC experiences 50% redemptions. There will still be the same number of warrants outstanding. Effectively, then, the number of warrants per unit—and the resulting dilution per share—has doubled.

The sponsor’s promote, the underwriting fee for redeemed shares, and the warrants included in publicly issued units create an overhang of dilution for the SPAC’s eventual merger, and the redemption right amplifies that dilution. If the SPAC merger generates enough surplus to fill the hole created by this dilution, then the target and the SPAC shareholders can come out ahead although the dilution is still present as a cost.

The table below shows the total cost of these three sources of dilution: the sponsor’s promote, the underwriting fee, and the warrants and rights for all 47 SPACs that merged between January 2019 and June 2020. The first panel of the table shows the total cost as a percentage of the cash SPACs deliver to target companies. The cost shown here is staggering. The median cost of dilution is 50.4% of the money raised. In other words, if the median SPAC has $100 to deliver to the combined, post-merger company, the company will bear a cost of $50.40 in dilution.

Speaking of the most post-merger performance, SPACs are not performing well. Two-thirds of the 36 currently publicly traded SPACs that went public after Jan. 1, 2019, are reporting a loss in value. And for the most part, they are not small dips: The average depreciation in value of the 24 negatively performing post-merger entities is 26%, with the two worst performers reporting a loss in value of over 60%[3].

We agree with the claim that a SPAC merger may offer advantages over the IPO process for firms with information that is difficult to convey to investors or firms that investors have difficulty valuing. However, the costly structure of SPACs and their related poor post-merger price-performance leaves SPAC a big question. It is hard to believe that SPAC shareholders will continue for long to buy and hold shares through mergers that leave them bearing the costs of the SPAC structure. People might have noticed how ridiculous it is already – After the SPAC issuance peaked out in February 2021, the number of SPACs seems to be in the downward trend. Considering the very un-efficient fee structure and poor post-merger performance, I am not surprised if the bubble has already burst.

[1] ”SPAC IPO Transactions: Summary by Year”: 

[2]”A Sober Look at SPACs”:

[3]”ANALYSIS: YTD Post-Merger SPAC Performance Is Mostly Negative”:

[4]”SPAC IPOs by week”:

Written By: Ryo Hashimoto

 Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

Ever since the computer was invented, parents have scolded their children to get off their screens. The COVID-19 pandemic forced most children to live in a world where life became heavily dependent on screens. Far from scolding their children, parents encouraged children to get on the computer to further their education. The pandemic has drastically changed the normality of life for all ages; it not only inflicted a severe impact on our everyday lives but the entire economy has felt the turbulent disruption created by this unprecedented pandemic. In the United States, the unemployment rate reached an astounding 14.8% in April 2020[1], which marked the highest reported figure following the WWII era. Equally important, Gross Domestic Product dropped 3.5% in 2020, the biggest dip since 1946[2].

The fintech industry was impacted too – the pandemic continues to create substantial uncertainty for fintech companies that faced a number of challenges. Securing sufficient operating capital, keeping their workforce effective, or efficiently reducing the workforce were common challenges for a lot of fintech companies. However, some sectors within the fintech space have learned to convert pandemic-related hardship into business opportunities. In particular, some payment services have enjoyed significant tailwinds over the course of the pandemic. This includes Business to Customer (B2C) payments companies and Peer to Peer (P2P) companies. Both B2C (such as Square) and P2P providers (such as Venmo, CashApp) have seen strong growth in demand during the pandemic. Supporting this significant growth was Venmo’s quarterly Total Payment Volume of record-high $44.3 billion which was up 61% year-over-year[3].

Venmo and CashApp give consumers the ability to send and receive payments between bank accounts, credit cards, and e-commerce vendors. During the pandemic, the direct deposit volume on CashApp tripled and customers moved to store more than $1.3 billion in aggregate balances on their app[4]. Those platforms are perceived as safe ways to transfer money while maintaining COVID-19 protocols. Additionally, the growth in the outstanding balance was supported by its ability to receive stimulus payments. The revenue reported by PayPal, which owns Venmo, grew to $5.46 billion in the third quarter of 2020 up 25% from the same quarter one year earlier[4]. 

Square is mainly used by vendors to accept e-commerce and mobile payments. Venmo and Square focus on making the payment process as easy as possible for startups and small businesses. In addition to the conventional payment functionality, they expanded their services to financial services. Square launched “Square Banking”[5], a suite of financial products purposefully built to help small business owners easily manage their cash flow and get more out of their hard-earned money. By offering essential banking tools that work seamlessly within Square’s ecosystem of solutions, like payments and Square Payroll, sellers now have a single home for their entire business. This allows sellers to gain a unified view of their payments, account balances, expenditures, and financing options.

As a result of the pandemic, we had no choice but to rely more on digital technology. The payment services benefitted from the adoption of the “new normal.” While we are seeing the light at the end of the long pandemic tunnel, it will not stop those payment providers from innovating, and increased functionality will continue to attract more clients and potentially replace the traditional financial institutions.

[1] ”National Employment Monthly Update”: https://www.ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx

[2] “Gross Domestic Product, 4th Quarter and Year 2020 (Advance Estimate)”:

https://www.bea.gov/news/2021/gross-domestic-product-4th-quarter-and-year-2020-advance-estimate

[3]  “PayPal’s pandemic winning streak continues; Venmo reaches $44 billion in volume”:

https://www.americanbanker.com/payments/news/paypals-pandemic-winning-streak-continues-venmo-reaches-44-billion-in-volume

[4] “Disruptive Fintech during the Covid 19 pandemic”

https://www.sia-partners.com/en/news-and-publications/from-our-experts/disruptive-fintech-during-covid-19-pandemic

[5] ”Introducing Square Banking, a Suite of Powerful Financial Tools for Small Businesses”

https://squareup.com/us/en/press/introducing-square-banking

In 2021, the world began its journey into the metaverse, while in the real-world innovation in digital payments accelerated. Chatsworth Securities LLC, an investment bank with expert FinTech advisors in the digital payments vertical: recruited new talent, established fresh partnerships, and channeled the new skills required to effectively advise companies in digital payments.

Chatsworth has developed a range of new engagements in the United States and Europe and has established a bridge for US companies to take market share in Europe. “We have a niche that I have not seen anywhere else in the market, to bridge: language, technical know-how, and execution skills under one umbrella,” said Marcus Magarian, Managing Director at Chatsworth. “Being able to read code, advise customers using analytical data, understanding the importance of database structures, and having worked for SaaS companies’ gives Chatsworth a great advantage” continued Mr. Magarian.

Cash payments declined by 16 percent globally in 2020, stated McKinsey in its Global payments 2021: Transformation amid turbulent undercurrents. Why all the excitement? This will accelerate the growth of digital banks led by the mobile device: P2P payments and the contactless options aka tap and pay. According to the National Retail Federation (NRF), 67% of the retailers in the United States now accept some form of contactless payment. In Europe, Visa reported that 75% of in-store payments are now contactless. As a result, people are adjusting to tapping their smartphones to make a payment or scanning a QR code to cover their bill at a restaurant. 

In 2022 Chatsworth sees further payment innovation. The adoption of digital-only banking will continue to accelerate Decentralized Finance, leveraging blockchain technology,  while becoming more mainstream as it can provide lightning-fast, cheap, and reliable payment processing services without sacrificing security. Analytical data help tell the story and show the trends, and that data taken from the payments space is digital gold to any company attempting to sell a product.