Bank Earnings and Getting to Know Zelle

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In the latest edition of our Between Two Fools interview series, Fool.com contributor Matt Frankel, CFP, sits down with Lou Anne Alexander, group president of payments for Early Warning, the company behind person-to-person payment platform Zelle. Later, Matt and Industry Focus: Financials host Jason Moser discuss earnings from JPMorgan Chase (NYSE: JPM), and both tell listeners about the stocks on their radar this week.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 15, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, April 15, and we're talking Financials. I'm your host, Jason Moser. On today's show, we're going to talk about all of these bank earnings we have coming down the pike here. Some have already announced, some coming up here. We're going to dig into them all. We'll of course have one to watch for you as we wrap up the show. We begin today with a new installment of Between Two Fools.

While you've likely heard of Zelle, Early Warning Services is the company behind the network. Lou Anne Alexander is the group president of payments for Early Warning Services. Recently, Matt Frankel talked with Lou Anne about fintech, the state of person-to-person payments, and the role Zelle is playing in it all.

Matt Frankel: We are here with Lou Anne Alexander. Lou Anne is group president of payments of Early Warning. If you're not familiar with that name, you might be familiar with Zelle, which is their person-to-person payment platform. We're going to jump right. Hi, Lou Anne! Thank you for joining us today!

Lou Anne Alexander: Thank you, Matt! I appreciate the opportunity to be here!

Frankel: Excellent! How is everything going at Zelle these days?

Alexander: Zelle is going great! We are absolutely focused on changing consumer behavior and the way that they pay. We're getting great results from that, Matt!

Frankel: Excellent! We talk a lot on our show about the various person-to-person payment platforms -- all your competitors like Venmo, Square Cash, things like that. What do you view as Zelle's biggest obstacles to success?

Alexander: As I've said, Matt, consumers know two things about the way that they pay. They do not pay to pay, and it's really difficult to get consumers out of their current payment behavior. Just think about it -- you probably pay your landlord in the very same way; you probably pay for your groceries in a very different way than you pay your babysitter. As we're focusing on changing consumer behavior, we're having great success in helping customers understand that it can be fast, and it can be easy. But we also have to help them understand it also can be safe for them.

In our recent digital payments adoption study, for the very first time, we saw over 50% of first-time P2P users are aged 45 and over. It's not just the younger generations. It's older generations who are interested in P2P, and trialing it because of that better confidence and trust in digital payments.

Frankel: Would you say that one of your big obstacles is educating consumers on the value of peer-to-peer payments, especially the older generation that you just referred to?

Alexander: Absolutely! I think they're becoming more familiar with the Zelle brand. We're also expanding our marketing messages to target that daily and what I would call habitual user. We're making customers aware of the various ways that they can use Zelle. Our new marketing campaign is called Everyday Better. It launched last week. We're really trying to reach folks in digital media and dining locations and shopping districts, helping them understand that they can gift better, meaning, you may have a college student who absolutely would prefer to receive money. In fact, I just was forwarded a wedding invitation where the couple wanted very much to save for a purchase of a home, so they included their Zelle alias on the wedding invitation to help to receive money for their savings. Same way for a baby gifts. Maybe a third baby, so you may not need those diapers and clothing, and savings for college is what's most important. You'll see a lot of advertising targeted at educating consumers on the various ways that they can use Zelle on a daily basis.

Frankel: Excellent! When I read your study, the trend that surprised me the most is how successful you've been with the older age groups. What trends in banking in general in digital adoption have stood out to you as being the most surprising and most encouraging, even?

Alexander: We have a good level of success because Zelle is right in banking apps. In fact, most of our consumers are comfortable using it through their financial institutions. 52% of Gen X and 46% of baby boomers responded that they trust P2P payments, and are interested. 76% of Gen X and 74% of Baby Boomers also said that offered through their financial institution was the key reason that they would trial P2P payments.

Frankel: Just to follow up on that real quick, do you think the fact that you're integrated with so many banking platforms is a big competitive advantage for Zelle?

Alexander: Absolutely. There's no need to download an additional app, it's right there in the trusted financial institution, online banking or mobile banking app that I currently use. It's the same support group that supports me with all of my financial needs. And if I need to go to a branch, I generally can find one and look at somebody face-to-face. So, yes, all of that establishes that common trust and confidence in the Zelle brand.

Frankel: Speaking of competition, do you see Zelle, Venmo, Cash, etc., as being in competition? Or is there a ton of room for the whole industry to grow?

Alexander: Well, certainly, I think we view checks and cash as our competition. Just to give you some quick stats, we had our biggest quarter ever at the end of 2018. We did $35 billion in payments. That was 135 million transactions. For all of 2018, we moved $119 billion, 433 million transactions. So, certainly, it's large. It's growing. There's still a lot out there.

We really view digital payments as a revolution in the way that money moves. Certainly, being able to move money in minutes when both parties are enrolled is something that hasn't been available to consumers in the past.

Frankel: Definitely. You said that this is still very much evolving. Where do you see person-to-person payments going in the next, say, five or 10 years?

Alexander: We hear a lot about P2P, and Zelle certainly is a person-to-person payment technology. But we also offer disbursements, corporates sending money to consumers and small businesses. Some quick examples of that are financial aid disbursement. You may remember the days of standing outside of the financial aid office waiting to get your check.

Frankel: I do.

Alexander: Certainly beneficial for that student that's on campus, to have immediate access to their funds in order to rent their apartments and pay for the various things that you have to do there.

We see other uses in insurance claims. In fact, Matt, one of the largest transactions we've seen thus far is a $2.8 million transaction, which was one of our insurance companies paying out a home claim. As you might imagine, with all of the individuals who have been impacted by some of our recent disasters, being able to have that money very quickly right in your checking account, particularly when you don't have a mailbox anymore to receive a check, has been absolutely moving for us.

We also have helped the Red Cross in dispersing funds for immediate relief money -- money for dry clothes for some of the floods that we've seen with recent hurricanes Harvey and Irma; for food; and for other needs. I'm very happy to say now, with partners like Wells Fargo, you can also use Zelle to donate to the Red Cross.

Frankel: Just to be clear on that, that was a $2.8 million insurance claim that was available in someone's checking account within minutes?

Alexander: Within minutes, that's right.

Frankel: Wow! We dedicated a whole recent episode to the trend toward the cashless society. You may have heard us, I don't know if you've heard us, but we were ranting about how some stores in the airport refuse to accept cash these days, and Amazon Go stores are completely cashless. Do you ever see cash going away completely? Where do you see the trend away from cash? It seems to be getting less and less convenient to use cash on a daily basis.

Alexander: I laugh a little bit with you because we've been predicting the demise of the consumer check since about 1970. And we're still working on that. So, I don't see cash going away completely, but I definitely see its usage being decreased very significantly. In fact, Matt, five years ago, would you have hopped on a plane and gone cross-country without a dollar bill in your wallet? And many of us do that today. I think adoption of P2P payments is going to continue. We're going to continue to innovate and increase some of the uses of Zelle particularly, in the small business arena, where many checks and cash are used. So, I do think you're going to see significant declines in cash, but not necessarily going away completely.

Frankel: It's funny you mentioned the airport thing. There have been periods of a month or more where I don't have any cash in my pocket these days. That's something that was completely unthinkable just a decade ago.

Going a little bit further on that, I heard that Zelle has some big things coming up in the next year or two. Can you elaborate on where Zelle in particular is going over the next few months to years?

Alexander: I think you hit on it already. It's wherever check in cash is being used. Again, small business is one of the areas that we're focusing in. Many small businesses, as you know, run in the red, and cash flow is vital to their survival. Not only being able to get paid in minutes, but also be able to make very timely payments to their suppliers, is very critical. You'll see a significant emphasis from our financial institutions in the small business world.

I think the disbursements that we talked about, corporates using Zelle in order to get money into consumer accounts or employee accounts very, very quickly. The same thing with governments, and governments being able to pay their citizens or get money from their citizens very quickly.

Those are a few places that we're going to focus.

Frankel: One last question. You just mentioned payments, and that brings up an interesting point, paying employees and things like that. Do you see a lot more payments activity like employee payments going through Zelle these days? Or is it primarily still person-to-person?

Alexander: We do see payroll as one of the top use cases. Matt, as you might imagine, some of that payroll is from the gig economy. Others are what we would call exception items that normally would have to be paid through a wire transfer system, something like that. Mistakes in payroll that need to be corrected very, very quickly. Travel and entertainment reimbursements is another place that we see payroll application today within Zelle.

Frankel: Excellent! Well, I thank you so much for taking the time to sit and chat with us today!

Alexander: Matt, thank you again for the opportunity to be here!

Moser: Now joining me in the studio, not via Skype, we're face-to-face today, folks, it's Mr. Matt Frankel, Certified Financial Planner. Live, in the flesh, right here in the studio! Matt! Man, it's good to have the back and forth here today with you in the room for a change!

Frankel: Yeah, it's good to be here, and I didn't have to fight a snowstorm this time to get up here. Remember last time, it was pretty much just me and you in the building?

Moser: Yeah. [laughs] It was a little bit of rain, it sounded like, for you.

Frankel: I'll take it.

Moser: A little bit easier to deal with than the snow, for sure. Listen, great interview there with Lou Anne! I think that was something a lot of our listeners really appreciate understanding more about the role Zelle is playing in all of this. We talk a lot about Square and PayPal and all these fintech companies. We've had the questions on Twitter before -- Zelle is something that's out there, what's the role they're playing? Are they a competitor? Is this something these networks have to be worried about? Definitely appreciate you reaching out and getting that interview set up with Lou Anne. That was enlightening from a number of perspectives. And we've got some more interviews set up here to bring to our listeners in the coming weeks. I'm really excited about that!

Frankel: We do. I'm doing a few interviews. I'm not quite as experienced as Jason at it, but I'm doing my best. Hopefully you guys are learning something fun. Zelle had some cool points in there.

Moser: It's a skill that I'm still trying to figure out myself.

Frankel: I learned from the master!

Moser: [laughs] Before we get going here, just a quick reminder, as Matt also reminded me, and I didn't even think about this -- today's Tax Day, everybody! Make sure you get those taxes filed! Man, I did our taxes so long ago. I feel like it was a lifetime ago. This was the first year in a long time that we've been able to do our taxes ourselves as opposed to having a tax professional do them for us, because we were dealing with rental property for a time, and we recently had some real estate transactions; all of that stuff is beyond really -- I don't know how to maximize taxes when it comes to that stuff. So this was the first year in a long time we've been able to do them at the click of a button on Turbo Tax. It was a nice break.

Frankel: Yeah, this was definitely a simplification year. This is the first year in probably a decade I used a standard deduction.

Moser: Oh, that's right, because they doubled it, essentially.

Frankel: Right. Normally, we have mortgage interest and some charitable donations and property taxes. But it didn't add up to more than the standard deduction this year.

Moser: I was wondering how that would play out for us. I guess living up here, property is really expensive up here. In most cases, the interest on the loans that you're pulling out up here usually is more than that standard deduction. But I imagine at some point or another, we'll hit that point where it flips over. But this year, we were able to itemize. That helped our cause, I think.

Frankel: Nice. Mine were much easier than they were before. And, I got a little bit of a tax break!

Moser: Everybody, get out there, click that button, do whatever you have to do! Don't delay! This is the last day you can get it done.

With that, let's kick into earnings season here. We've got banks that opened everything up for us late last week and going into this week. Remind me, Matt. Last week on Friday, I think we had Wells Fargo report, we had JP Morgan report. I think we had Citigroup report this morning. What was it that stood out to you in regard to any of the banks in particular, or the sector in general?

Frankel: Friday, it looked like everything was going to be great for banks. JP Morgan is always the first. They have to beat Wells Fargo by about an hour. But they definitely started things off on a high note. They beat earnings. They beat revenue by $1.5 billion, which is a pretty big beat.

Moser: Yeah, what was the source of that?

Frankel: Their loan business is doing great. Higher interest rates are really translating into better interest margins. They ran a 16% return on equity, if that gives you any indication. We haven't even heard from all the banks, but I'm pretty sure that's going to be the highest. Fair to say.

Moser: Yeah, sounds like it.

Frankel: Loan portfolio grew by 4%, which a lot of banks didn't. Investment banking revenue popped by 44% year over year. Yeah. And net interest income was up by 8% thanks to the higher interest rates. That was a big part of it.

Moser: Yeah. We talked about a higher interest rates. It's all kind of relative. They still seemingly are very low, but they are higher. I mean, we talk about this a lot, as interest rates go up, banks do stand to perform better over time, even when it's just those little 0.25% rate increases. It doesn't take a lot.

Frankel: Right. Especially banks that have a big credit card business like JP Morgan does. Who doesn't have a Chase credit card somewhere in their wallet? I think most people have, it's fair to say. Amazon's a Chase credit card.

Moser: I was going to say, I think I do.

Frankel: If you have an Amazon card, you have a Chase credit card. It's a big credit card business. Their credit card business has been growing like wildfire. The credit card interest rates are the one of the few that are directly tied to the federal funds rate. As the feds hiked rates eight or nine times -- I think nine over the past few years -- it's really translated into higher profits for banks like JPMorgan.

Moser: Now, we read an article recently, it was the middle of the week last week as the bank CEOs were here in D.C. They were answering some questions that politicians were posing in regard to the banking system. Perhaps there are some folks who feel like the banks are getting a bit of a free ride, and business is almost too good, I guess. [laughs] If there is such a thing. Ultimately, what I took away from all of this was, it doesn't seem to me that we're in a position where we should expect legislation to change in such a significant way that it's going to impact these banks, certainly in the near term, and I don't even really think in the mid-near-term, if that makes sense. I think over the course of the next three to five years, it's going to be pretty much running as the status quo. I think these banks have a really friendly environment to be able to do whatever they want to do, right?

Frankel: It's a pretty friendly growth environment. Capital requirements are still relatively high in a historical context. If any regulations do get rolled back, I see it being the capital requirements on banks. But the tone is definitely not what it was a few years ago. You still have some politicians like Elizabeth Warren, smoke comes out of her ears every time she talks to a bank CEO. And maybe deservedly so! But, the tone is not as much, "We need to be restrictive on banks." A few years ago, especially in the few years following the financial crisis, the tone of any bank hearing was, "What are we going to do to keep these guys in check?" You're not really hearing that as much anymore. If anything, some regulations are starting to go the other way. Even a lot of Democrats were on board when they increased the SIFI requirement, the systemically important financial institution, from $50 billion to $250 billion a few years ago. So, you're even seeing some bipartisan support that maybe some of the financial crisis regulations went a little bit too far.

But yeah, I see it being businesses usual. This is probably the best growth environment for banks in about 30 years. If you roll back the capital requirements, it's definitely the best growth environment for banks. It could be a good few years for banks and their investors.

Moser: We're always talking about banks, of course, on this show. We talk a lot about the big banks. We talk a lot about the little banks. I think either which way you look at it, you need to have some dollars allocated to those companies. We talk, of course, a lot about the payments companies. That's a big part of it. But as we'll see in the coming weeks, whether it's the payments companies or the big banks -- and we're going to have interview here with Marcus coming up, where you're going to be shedding some light on what Marcus is doing there. I'm really excited for that. It feels like you have to have some investment dollars allocated to those banks. We'll keep an eye on them, of course. But I think if anything, this earnings season really tells us they are set up to succeed for a long time to come.

OK, listen, before we wrap things up, we want to get to One to Watch. Speaking of big banks, I think you have one of those very big banks for One to Watch this week, right?

Frankel: Right. I'm definitely watching JPMorgan Chase. So far, we've heard from four major banks. We've heard from them, we've heard from Wells Fargo, whose earnings were good, but not fantastic. We've heard from Goldman Sachs, whose earnings left something to be desired. Citigroup was also a revenue miss, but looked OK. JP Morgan has been the absolute standout of bank earnings so far. They keep growing. Every quarter, I think it can't get much that much better, they can't distance themselves that much more above the rest of the pack, and they continue to do so. That return on equity number I mentioned earlier, 16%, I mean, that's something that would have been unheard of for one of the big banks just a few years ago. So, I think JPMorgan Chase is definitely One to Watch in banking.

Moser: There you go I'm going to throw an insurance company in the mix here, one I've talked about before. I used to work there, Travelers, the Big Red umbrella. It has been a very good year thus far for Travelers. They have earnings coming up later this week. I'll be interested to hear how they see this year setting up. If anything stands out, we'll certainly be talking about it on next week's show. I feel like Travelers is one that's always snuck under the radar here. Certainly, when it comes to our services, it always surprised me that Travelers was never a company that was actually recommended. But it's one that you hear Buffett talk a lot about. In fact, I think that Berkshire still owns Travelers in their portfolio. I'll to double check that. But I'm pretty sure they own some of the Travelers companies in their portfolio.

Frankel: It's one of the few insurance companies they don't own outright but still invest in.

Moser: Yep. That's interesting! You talk about those big acquisitions they're looking for. Maybe that big red umbrella would look very nice underneath that big Berkshire umbrella, perhaps. We'll see, one day.

We will leave it there for you this week. Again, be on the lookout for some great interviews coming up here in the next few weeks. Matt has lined up some really great stuff. Excited to get that out to you! Until then, though, we will bid you farewell. Matt, it's always a pleasure to have you here on the show, but even more so to have you in the studio. Really appreciate you making the trip up to do this!

Frankel: Thanks for having me! I love it up here!

Moser: It makes it a lot easier for all of us. The listeners get a get a bit more out of it too, I think. We'll have to figure out more reasons get you up here in the near future, for sure!

Frankel: Definitely!

Moser: 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. Today's show was produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! And we'll see you next week!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Amazon, PayPal Holdings, Square, and Twitter. Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares) and Square. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), PayPal Holdings, Square, and Twitter. The Motley Fool has a disclosure policy.