In the latest edition of our Between Two Fools interview series, Fool.com contributor Matt Frankel, CFP, sits down for an interview with Steve Streit, founder and CEO of Green Dot (NYSE: GDOT). Plus, Matt and host Jason Moser dive into Square's (NYSE: SQ) recent earnings release and the surprise announcement of the sale of its Caviar food service platform, and they also take a look at Capital One's (NYSE: COF) data breach and what it could mean for investors. All of this and the stocks we're watching now in this week's episode of Industry Focus: Financials.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 5, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Aug. 5. I'm your host, Jason Moser, and on today's show, we'll take a look at Square's most recent quarter and the market's reaction, or overreaction. We'll also examine Capital One's recent data breach and what it means for investors. But we begin this week with another installment of Between Two Fools. Steve Streit is the founder and CEO of Green Dot, the financial technology and bank holding company based in Pasadena, California. Recently, our own Matt Frankel chatted with Steve about the company's new ultimate cashback account, what the future holds for Green Dot, as well as why he's not too worried about the tough year Green Dot's stock is happening.
Matt Frankel: All right, I am now being joined by Steve Streit, the CEO of Green Dot. Steve, thanks for taking the time to join us today!
Steve Streit: Matt, you bet! Glad to be here!
Frankel: Awesome! Just to give a little background, some listeners might not be familiar with what you guys do. There are two sides of your business. You have what we call non-traditional banking products, which we'll get to in a little bit. And then you have your banking as a service platform. For listeners who might not know what that means, do you mind giving us a quick overview of what banking as a service is?
Streit: You bet. Much like software as a service, which is where we got the nomenclature for the name from, we provide a technology platform that's integrated into a bank charter and a program management capability. Those are the three components that are required to execute a banking program. At Green Dot, over the years -- we're a 20 year old company, this is our 20th year -- we've built a fairly robust, very high scale platform to support our own products, which in the old days began in retail stores and then migrated into digital formats. The platform is a technology that allows a third party, with our permission, to access the innards, if you will, of our platform via API's and other integrations. Banking as a service means that a third party, like an Apple or an Intuit or an Uber or others who partner with us can take our API's and create their own custom bank account product or a P2P service or payments service or anything they so desire if our platform has that capability. And then, the capability keeps increasing. With every new product that's made and every new functionality component that's built, it enriches the platform that much more for the next customer.
That's what banking as a service is, meaning that you can become a bank-like entity offering your products to the public without yourself becoming a bank. That's the first part, the technology part.
Then, what's unique about Green Dot is, you have the program management piece, which is supply chain and fulfillment and call centers needing customer support and care, and fraud management, and the absorption of fraud losses when you have losses, which all banks programs do, compliance, risk management, and all that goes into that. So, just think of that massive program management component, meaning running it, dealing with customers and running the program.
And then you have the bank, the bank issuing. Every program has to have a regulated bank behind it. The bank by law owns the program, no matter who the market or the ultimate provider of the program is. The bank owns it legally. And the bank is the legally responsible party. In most places, either you're the bank yourself, or you have to contract with a third party bank to provide issuing services, deposit taking services, regulatory services. Green Dot is, of course, its own large bank. So, when customers do business with Green Dot on our banking as a service platform, the reason why we tend to win more than our fair share of those business relationships is that we have the technology, we have the proven high scale, we have the highly experienced bank that deals with the biggest names in technology. And, we're the low-cost provider. We have such high scale and we've done it for so many years that the incremental cost of producing a product on the Green Dot stack and infrastructure is unbeatable as it relates to price. And then, reputation, which is harder to tag. But if you're a large company, and you're coming in to do business with Green Dot, you generally take comfort knowing that every other large company has chosen us and speaks highly of us.
So, those are the reasons why we tend to win those accounts. That would be the platform side of our business.
Frankel: Excellent. Speaking of banking as a service, it seems like that's one of the big areas you guys are concentrating on investing in going forward. In your latest earnings release, you mentioned a big plan to get a little bit more aggressive than you had previously planned on when it comes to investing in both sides of your business. Since this is a show for investors, the market wasn't too happy about that, but can you give us a little bit of insight on why you and your team felt like that might have been the best move to take?
Streit: Listen, as investors -- and we all wear different hats in different parts of our lives -- if I'm the investor, and I'm wearing the investor hat, depending on the fund I have, I'm very focused on today, or maybe today plus 90 days. There's nothing wrong with that. I understand that. I respect that. Investors have a very, very difficult job in choosing who's going to be a winner both today and tomorrow. It's never certain, and you're always going to have winners and losers. In the case of Green Dot, we have to operate the company in three-year chunks, or at least that's how I operate the company. In other words, what is Green Dot today, and what will it be next year and the two years after that? And to do that, you have to think about consumer trends, you have to think about where the market and technology is likely to go. We've guessed pretty well over many years. We haven't been wrong many times. But it's hard. It's very tempting to say, "Look, we're going to do everything we can to make a quarter, even if that means a year from now, we're going to be in trouble." But it's not a great way to run the business and it doesn't generate long-term value. I think the reason we've been around 20 years -- and I think we stand alone in that. If you look at all the companies that have come and gone in the digital banking space, in the branchless banking space, however you want to define it, the number of companies that have come and gone are staggering. But Green Dot keeps reinventing itself. We have different segments of our life, if you look back at the company's history. And I think we've been pretty good about that.
But investors have never liked that. When we went into mobile banking back in 2012, investors didn't like it. When we went into banking in 2011, they didn't like it. Because it meant short-term pain. And we respect that and understand it. It means short-term pain for the employees and executives who are bonused on EPS and who have stock in the company that portends their wealth over time. Everybody pays that price. We never take it lightly. At the same time, you have to look at the business and say, "Well, gosh, here's where the business is going. Here's what's happening, even if it's not long lived, necessarily, with the market's pricing pressures." There's 15 or something like that free online players. Some have been there for a long time that have not been a threat to us because the accounts are more nuanced, and not used in a competitive way to Green Dot accounts. But others have been a threat. In fact, many have said, "Look, we're just going to be Green Dot, except we'll do it free. And yes, we'll lose a lot of money and spend $80-$120 million on marketing, and we'll be at a nine-figure loss for a couple of years. But once we have this land grab, we'll be able to add other services and features and one day become profitable." I can tell you from having done it for 20 years, that's a lot easier said than done. But that strategy is out there. And in the short term, it impacts the way consumers think about pricing. We can't operate the company with our head in the sand. We need to reflect and respect on what's happening in the market and what consumer tastes are and make sure that Green Dot is always one step ahead. And to do that, that means that we have to constantly reinvent our product bench, and how we market it. That's how we last another 20 years.
But in so doing, Matt, to your point, we announced that we're holding back $60 million for both technology build and for marketing, and that we're going to use that money to roll out several new products that we believe will put us in a competitive position to continue to be a top choice for consumers as the world moves more and more digital in financial services and as pricing and margins get compressed. We have to always reinvent our business model. We can never be afraid to chew off own arm on the short term if it means having a stronger body down the road. We've done that for years and continue to do that.
But, yeah, investors understandably had to rerate the stock based on our pulling $60 million of EBITDA, and that means tax adjusted EPS, generally, off the table. I think they understand that. I think many of them were supportive as to why we are doing it and why we have a lot of long holding funds in the stock. But that doesn't mean you're not going to have that short-term pain, and stock price reflected that.
Frankel: Definitely makes sense. You mentioned some new products. Let's get to the big news of the day. You just announced a new type of bank account that's essentially a combination of a bank account and a high-reward debit card product. First, before we get deep into the details, could you share some of the key features of that product that sets it apart from the competition?
Streit: Yeah. This product is classic Green Dot. There's a lot of things that we do consistently, as you said of the company. This product would be an example of it. If everybody's running left, we run right. If everybody's running right, we run left. We try to always start our day from, "What would the customer think?" This product is an example of that strategy. It's called the Unlimited Cash Back Bank Account from Green Dot Bank. What it is is, it's an account that comes with a Visa debit card like any bank account would, and it has the richest cashback rewards, we believe, in America of any card today, and in the history of debit cards, period. People today are accustomed to rewards on credit cards. If you have a FICO score of 700 or better, depending on the product you're applying for, and you don't mind paying some fairly significant annual fees when you look at the cost of American Express Black cards or the Chase Sapphire card or others, these cards are not free. They're expensive. But consumers look at that and say, "Well, I'm going to get benefits that overcome the expense, and it's well worth it." And they apply for the cards. And most people will be rejected, and some will be accepted. And that's the credit card business. When you have that credit card, you run the fear of going into debt. Credit cards, as you know, are not always in favor, especially with millennials, for good reasons.
At Green Dot, this is a debit card, not a credit card. It's just a bank account, a fully featured bank account like any bank account you get anywhere else, except its existence is to reward customers with high cashback rewards on any online or in-app purchase they make. We're paying 3% cash back on that. And it's called a cashback bonus. It goes into your cashback bonus balance that you can see in the app. And every time you make a purchase at any online merchant or in-app merchant -- by the way, in-app would be Uber or Lyft or Grubhub or Instacart or, trying to think what else, something you'd pay for in an app. A video game you're downloading, iTunes, whatever it might be. Think about things you purchase using an app. And then, online would be any internet merchant. Amazon.com, Walmart.com, eBay, Ulta.com, anybody. Any internet merchant would be an online merchant. Most American families -- Matt, probably like yours and mine -- spend increasingly large amounts of money on internet merchants and apps. It's a rare day in millennial America that dinner isn't being delivered to the house by Grubhub or DoorDash or Uber Eats or somebody like that. Just think of all the ways today that we use apps. Paying your Netflix bill, whatever it might be. These are all remote purchases. So, on all those purchases, you're getting 3% cashback put into your bonus. It's like a forced savings account.
And then every year, you get that money out, and you can do whatever you want with it. But we designed it that way because not only does it encourage usage of the card, of course, and the account, to make it more valuable, but it's a forced savings account. We came up with the idea because we saw in the research tremendous concern from people in the 30s about the future, their ability to save. The Federal Reserve recently came up with a study -- and we can provide you with the data -- and many others have as well, not just the Fed, that the average family that doesn't even have $400 in cash saved up. Not even $400. So something like a flat tire, or a co-payment at the doctor's office, can turn into a family threatening event. That's a real problem. Half the country doesn't have $400 saved up. If you look at millennial families, they have the lowest net worth of any generation in the last 200 years of America, and maybe the first generation that is not better off than their parents, in large part because of the cost of living, student debt, heavy use of credit cards back when they were younger when credit was more available. So, the result is, you have low net worth and a real fear that if you're 35 and thinking, "Oh, my god, how am I ever going to save up money to cover any kind of expense, let alone the bigger issues of retirement and long-term prosperity?"
That's what gave us the idea for the account. Can we create a checking account, a bank account, that offers a very big number on cashback on the kinds of places we shop every day, and make sure you don't blow it, so it's going to be there for you -- every year, you can see it grow, but you can't spend it until the end of the year. And then, on top of that, the account has a high-yield savings account that comes free with the bank account. You don't pay extra for it. And it's right there in the app and it pays 3% annual percentage rate on your money. A very, very high interest rate on your deposits. We do limit it. It's meant for real customers of the bank account. It's up to $10,000 in balances, which is way higher than what the average American will be able to save every year. So it's a very, very high limit for regular people. But we capped it at $10,000 because otherwise, what you have are what are called rate shoppers. There's nothing wrong with rate shoppers, but these are folks who take their money from bank to bank to bank to earn an extra 0.10% of interest. We don't want that kind of customer. That's not healthy for the bank and it's not good for the customer who's using the bank account in a normal way.
But for the vast majority of Americans who will use our account, that's a fabulous interest rate. There's no fee for the savings account. You have that savings account that pays a 3% interest rate. You have, every time you make an online or in-app purchase, you're getting 3% cashback put aside for you. And the account has very, very low fees, and for most people, no fees. So, when you add up the fact that the account is so inexpensive to use; that it's a debit card, not a credit card; and that the interest rate on savings and the rewards on purchases are so extreme, we believe that many Americans will flock to the product and will benefit, and they will have, because of Green Dot Bank, a true savings account at the end of the year. They could have several hundred dollars saved up without investing a penny of their own money, just using the bank's money.
Frankel: The first question that comes to my mind is from a business standpoint -- 3% cashback online purchases, that would be, as you said, an impressive reward rate for a credit card. For a debit card, this is unheard of. We know how credit card companies can afford to do that. They're bringing in a ton of interest income, interchange fees are a lot higher on credit cards. We've talked about that on the show. How can Green Dot afford to do this and still make money, is my number one question.
Streit: Right. We have years of doing rewards cards. We started with debit card rewards back in 2016 with the cashback Walmart Money card, and the cashback Green Dot 5% card that have limits. It's something, frankly, you can only do if you're Green Dot. And that's why we did it. In other words, when we do strategy preparation for the company, and planning sessions, we say to ourselves, "What can we do that others cannot?" Sometimes you have to do things like everybody else. There are certain table stakes -- online bill pay, or whatever the case may be. And you're going to do it because you have to do it, because it's what people expect when they use a bank account. But the best kind of competitive measures you can take are those that a competitor can be jealous of, can dream about one day doing, can hold meetings about doing, but can't really do without losing a tremendous amount of money. In Green Dot's case, we have the experience, meaning the years of data on millions of customers and usage behavior. We have the scale, where the cost of producing these accounts for Green Dot are fractional what it would be for a bank branch, and even more fractional to what it would be to a start-up, an internet neo-bank start-up, because we have 50 million customers in the company, and processing and platforms that can handle that and do that. The incremental costs of a new account on Green Dot is pennies relative to what the incremental costs would be for a different kind of company. We're using our branchless infrastructure, our years of being in business, and our high scale to offer a product that has extreme value to the customer, that few could match even if they wanted to. But at the same time, for us, we can make a profit. Of course, the amount of profit we make will depend on the ultimate usage and all that stuff. Because it's competitive data, I can't go into a lot of that. But to your point, it is a very, very rich offer. And it is an offer we expect a lot of customers will not only want to take advantage of, but their lives will be benefited from it. And we believe we can offer that extreme value at a price where we can make very good margin.
Frankel: You also said, in addition to 3% cashback, it pays 3% interest on money in the account. Is that fixed? Or will that change over time? In other words, if the Fed lowers interest rates a few times over the next year, will that drop? Or would it still be 3%?
Streit: For right now, it'll still be 3%. We always reserve the right, like every bank would do, to adjust our interest rates up and down. But the 3% is being paid for as a retention tool. It's a marketing cost to us. It's designed to keep people using the account. Every day, you have some new start-up spending other people's money liberally to try to get a person to switch a bank account. For the people who are in search of these free bank accounts, free is as free does. There's no switching costs. They don't always have, with great respect, the best security or know-your-customer procedures because they're in a land grab. Not anyone in particular, I'm not saying that, but our experience has been that they tend to look the other way on issues of CIP. Their goal is to get as many accounts as they can. Those customers churn in and out, in and out, in and out. I don't want that customer. That customer is not helpful to me. You want customers who are buying your account or opening your account because they believe the account creates value for them and that they can benefit from it as part of their daily lifestyle. We're using the savings account and the cashback and all the cool things about the account to say to our customer, "Look, this account is the best value. But there are reasons to keep it, and if you leave after three months, you're going to lose all these great benefits." So, right now, we don't have plans to lower the interest rate. It's a fee that we think we can sustain given the way the account's built. But of course, we'll revisit that over time.
Frankel: OK. Just looking at those numbers you said, the product sounds like it could be a big hit, especially among millennials, as you said. I consider myself an older millennial. I made the cut-off by a few months. But this is definitely an account that I would be interested in. But it seems like educating the consumer on this would be a big obstacle, just because Green Dot's not known for a product like this. This is kind of revolutionary. Is this one of the big marketing expenses you were referring to? Educating the consumer and things like that?
Streit: You mean in advertising? Yeah. The advertising campaign would be part of that $60 million that I mentioned, parts for technology built on best? Yes. The rewards are self-funding based on the account usage and how we believe the accounts will be used and adopted. But the cost of marketing is absolutely a big reason why we reserve the money. You have to get the word out. The good news is, we think it's a very compelling offer. We have great distribution and great assets that we can bring to bear. We think we can make a go of it. And, of course, the product, as you're hearing, this interview just launched, and time will tell. But we feel very good about the product, the effort, the quality of it. The app is amazing. The rewards engine, which was highly complicated to build, is very, very accurate. All the notifications that the customer gets are really cool and keep you up to date. Every time you make a transaction, you get a push notification that says, "You've just spent, whatever it is, $48 at Walmart.com and got your 3% bonus of $X." I wish my math was good enough to tell you what that is. "That's been added to your account." And you keep track of it as you go. So, that constant instant gratification, and that sense that you're doing something good for you and your family as you do the things you normally do, we think, is a very addictive and fun component of using the account. The slogan for the account is, "Spend like normal, save up like crazy." That's the whole mindset behind the account.
Frankel: I'm definitely excited to see how the rollout goes and how it catches on. We won't keep you too much longer. A lot of our listeners are avid readers. I always ask my guests to mention the best book they've read recently. It's completely fine if you don't have one in mind, but I figured I would ask because it's something we like to mention.
Streit: I'd like to tell you that I read a lot of books. When I was younger, I did. I don't have the time for it, unfortunately. But I do read a lot of Apple News, and I do read a lot about the industry and about business. I'm a heavy consumer of CNBC. But I must admit that I haven't read a book that's worthy of me bragging about it.
Frankel: [laughs] Well, it's certainly understandable, given what you do. I appreciate that insight. Thank you so much for joining us today! Hopefully it was a good experience for you. I'm sure listeners got a ton out of it.
Streit: Yeah, always fun to talk to you, Matt! You guys, do a great job! I'm a heavy reader and consumer of your products as well. I appreciate the time and talking with me!
Frankel: All right, thank you so much!
Moser: Now joining me in the studio via skype is certified financial planner Matt Frankel. Matt, nice interview there was Steve, man! Good get there!
Frankel: Thank you! I was especially happy he was actually willing to talk to me about how poorly the stock was doing. A lot of times, executives dodge those types of questions on stock prices. But no, he engaged it full on and was talking about how he's taking the long-term view. Really great discussion there.
Moser: I couldn't agree more. Actually, it's a little bit of a red flag to see a CEO talking a lot about the stock and how important the stock price is, and yada yada yada. In this case, he was very willing to sit there and talk about why it doesn't matter for him. That really is a good sign, that you've got a CEO that is focused, certainly, on the long term there, and not worried about short-term noise. So often, there's nothing they can do about that short-term noise, particularly if they're making investments for the future. We know the market will hold that against them. But I tell you, Mr. Streit certainly seems to know what he's doing.
Frankel: Yeah. If he's willing to absorb short-term pain, you know that if you make a big change in your strategic plan, the market hates uncertainty, you're going to get penalized for it. He especially has a ton of his net worth tied up in Green Dot stock. He thinks it's the right move, and is completely confident in the future. And the new account is above and beyond what anyone's offering right now. We'll see how it plays out.
Moser: Yeah. Hey, maybe if things work out well, he'll be happy to join us again. Speaking of the market penalizing performance here, let's jump into our first story of the week here with Square's earnings. Square earnings came out late last week. To say that the market has punished the stock, I think, is probably an understatement. It does seem like it wasn't very happy, perhaps more so with the guidance than anything else. What was your takeaway on the quarter? It seemed like it was a good quarter. What are your takeaways?
Frankel: Yeah, 46%, year over year growth in adjusted revenue. Cash app really stood out as something that was impressive. They've taken the Cash app from $1 million in quarterly revenue to $135 in quarterly revenue excluding Bitcoin over just a three-year period. Even the most optimistic analysts were expecting about $100 million in revenue by 2020. Square's Cash app has destroyed expectations.
The big thing that I think is throwing a wrench in the market is the surprise that Square is getting rid of Caviar. Caviar is a successful food service platform. There's a good case to be made for and against why they might have done that. People who are critical of the deal say they're getting out of a rapidly growing market. They sold it for $410 million, which sounds impressive, given that they bought it for $90 million; but remember, they bought it for $90 million in stock, which at the current price is actually worth a lot more than $410 million. So, you could say that they're selling at a loss. You can make that case. But on the other hand, Square got into the food service business to get their payment processing platform in a whole new industry. And it was successful. About $1 out of every $4 that Square processes right now is food service, so it's been a success. But competition in this space is tremendous. You have DoorDash, Grubhub, and a few others. The deal partners them with DoorDash. They're integrated into DoorDash's platform. Square's thinking, "Why limit ourselves to our own platform when we can integrate our payment processing system into everybody's?" Square Caviar was kind of proof concept, is the way I'm looking at it. They could definitely get a wider reach by partnering with bigger players in the space.
So, I'm not too concerned about it. Generally, I think the quarter was exactly what I wanted to see. To be perfectly honest, the Caviar sale did take me by surprise. Not that I think it's necessarily a bad move or a good move, but it was surprising. It adds uncertainty and surprise, which the market doesn't like in general.
Moser: The Caviar deal, I was actually pretty happy to see that. To me, Caviar has always been the one part of the business that didn't quite fit in with the rest of it. They stated, it's the low-margin part of the business, anyway. It was the low-margin revenue driver for the company. I think it was something that was a bit outside of the things where they were really trying to focus. Selling this thing to DoorDash will allow them the opportunity to continue to participate in this space, but perhaps more from a support role as opposed to dealing with the logistics that come with food deliveries. I don't know, for me, I was very happy to see that. It seemed to me like, the one thing that stood out in the call, an analyst made the point that they beat on the high end of guidance for the quarter, and that was great. And typically, when they do that, then you see them guide up. And they didn't guide up this time. But now, the reason why they didn't guide up was because of this sale of Caviar. They will be reaffirming guidance here shortly, as soon as that transaction closes later on this year. You can expect an update to guidance here soon. Again, I don't buy or sell stock based on guidance anyway. I don't know, it seems to me to be a very short-term reaction to some noise from the market. And then you've got this, I guess there's a double downgrade today on the stock which is playing out to the tune of another 6% or 7%, it looks like.
Frankel: Yeah, and the fact that the overall stock market's down a bit in the past weeks. This earnings doesn't really help.
Moser: Point worth noting.
Frankel: This definitely narrows Square's focus. Like you said, Caviar was definitely not in their main wheelhouse. It served its purpose. Like I said, bringing more payment processing volume. But it's not something they need to focus considerable resources on going forward. You mentioned it was a lower-margin business. They're focused on their small business ecosystem and their individual ecosystem with the Cash app and all that. This allows them to focus on the two key areas of the business.
Moser: Before we move onto our next story, I'll close with one interesting factoid here for you, Matt. Last quarter, when Square was preparing to announce earnings, the night before, the shares closed at $73 and change. The day after they reported earnings, the stock closed at $67 and change. Over the subsequent days, we saw it hit $62 and change. All of this was based on the same idea in regard to guidance. My point ultimately is that we know this is a volatile stock. It is a business that's building its way toward meaningful profitability. But it's going to take some time. It is going to be more volatile than other names. But it is still a good business. We've seen this happen before. I don't know about you, I think you'd agree with me -- I didn't see any red flags in this quarter that made me think, "Uh-oh, I'm not sure if I should be owning this stock at this point."
Frankel: No. I don't own Square because I thought they were going to be the leaders food delivery. That could be the only potential red flag. But that's not why I own the stock. All things being equal, if a company lowers guidance and nothing changes in my long-term thesis, that's a buying opportunity in my mind.
Moser: There you go. Let's take a look here at Capital One. There was some news that came out recently here in regard to a data breach. On July 29th, Paige Thompson, a former employee at Amazon, was arrested and accused of carrying out a massive theft of 106 million Capital One records. Now, for all intents and purposes, when you look at Capital One, most people know it as that credit card commercial on TV, but Capital One is a bank. I guess the question we have here first and foremost is, what should investors be thinking about this type of a breach, Matt?
Frankel: Well, Capital One's already put a number on it, first of all. They say it's going to wind up costing the bank between $100-$250 million. But going a little bit further, just to put this in perspective, you mentioned the 106 million customers that were affected. The vast majority of those were things like names, addresses, credit card balances -- information that you don't want anyone to have, but they can't do a whole lot with. When it comes to the sensitive information, 140,000 Social Security numbers, which out of 106 million really isn't very much; 80,000 bank account numbers. Which, don't get me wrong, that's 140,000 more Social Security numbers than we'd like them to lose. It affected about 1% of Capital One's customers overall in terms of sensitive information. To put that in perspective, a couple of the other high-profile data breaches over the years: in 2013, the infamous Target data breach. My mother had her identity stolen after the Target data breach. That was 41 million customers whose credit card account numbers were compromised. The next year, 2014, Home Depot, 56 million credit card accounts were compromised. That's a great example of how, over the long term, this really doesn't affect investors that much. If you look at a chart of Home Depot's stock over the past five years, you would never know that there was a massive data breach. They've done tremendously well.
Moser: Look at Equifax's stock chart. After all was said and done there, I mean, that was the shot heard around the world, basically. Equifax is still alive and kicking, which made me wonder -- this is just a blip on the radar, I would imagine.
Frankel: Right. Equifax was 143 million Social Security numbers. That was a big deal. Credit card numbers for a bunch of people. Like I said, the Capital One breach, it was mostly harmless -- I don't want to say harmless, but mostly non-sensitive information. It's really tough to steal someone's identity if you know their credit limit, for example. About 1% of their clientele was affected in a way that could meaningfully affect their identity. Capital One knows who those people are. They're alerting everybody whose Social Security number was stolen or bank account number, or, in Canada... what's it called? Their equivalent of Social Security number. I can't remember the name off the top of my head. But, a million of those were stolen. That was actually the biggest part of sensitive information. Those people are all being notified. About 1% of the total customer base.
From a long-term investor's perspective, I'm not terribly worried about it. Capital One is a pretty big company. Just looking, they're a $40 billion market cap. It's going to cost them about $100 million. That's a significant amount of money, but over the long term, that's a speeding ticket for Capital One. So, I'm not too concerned over the long term. I'd be more concerned about what happens to credit card business during a recession as an investor. Credit card default rates tend to tick up a lot quicker than anything else during a recession. Capital One, you mentioned, is much more of a credit card company than most other banks. Everyone knows their commercials with Samuel L. Jackson. "What's in your wallet?" They're much more tied to the credit card business. So, from a risk perspective, that's much more of a risk than this breach, in my opinion.
Moser: Yeah. This seems like it's probably third string junior varsity compared to some of the other stuff out there. As far as what's in consumers' wallets, I imagine they'll have access to a credit monitoring report for the next year to two years to help them deal with this. But I tend to agree with you, it just doesn't seem like it's that big of a deal. When you look at the actual business itself, Capital One is clearly a company that has been built on technology evolving with the times. From a bank's perspective, you look at the company, it generates return on assets at 1.6% and trending in the right direction. Strong financial position, you look at the deposits number there, deposits of $255 billion, that's up from $205 billion back in 2014. I feel like, yeah, this is one of those things that we'll forget about it in short order. If anything, I think it gives these cloud providers maybe a little bit of a wake up call. Whether you're Amazon or Microsoft or Google, you have to be thinking, "All right, what can we do to prevent this from happening again?" It looks just as bad for Amazon, in my opinion, as it does for Capital One here.
Frankel: Yeah. And don't get me wrong, socially, this is a bad thing. This is a bigger breach than should have happened. But from a dollars and cents perspective, for investors, we're saying it's not that big of a deal. We don't want anyone's credit card numbers to be compromised, or Social Security numbers. And yeah, this could be a wake up call to whoever is providing security services for Capital One.
Moser: OK, let's go ahead and wrap this up for the week here, Matt. As always, we want to give our listeners One to Watch. I'll go ahead and let you start it off here. What's your One to Watch this week?
Frankel: It shouldn't surprise anybody because I talked to their CEO. Green Dot, I'm watching this week, not just because I talked to their CEO, but because they're set to report earnings later in the week. This is their first earnings report since the one where they announced their ramped up investment plan that caused the stock to plummet in the first place. I'm curious what new comments they have to say about how they're actually deploying that capital. I know they're putting a lot of their marketing spend into this new account that they talked about. He confirmed that's part of the increased spending. I'm curious to see how the spending is translating into new products, higher technology. I'm curious to see how their vision plays out.
Moser: Cool. All right. I'm going to go with America's socially responsible bank, talking about Amalgamated Bank here. Listeners will recall, we had Amalgamated CEO Keith Mestrich on not all that long ago. Their earnings came out late last week. I think the bank continues to do what it's setting out to do. Average deposit growth was 19.4% annualized, now stands at $4.1 billion vs. $3.9 billion a quarter ago and $3.6 billion a year ago. Net interest margin ticked up 10 basis points from a year ago. We know that it's a very difficult interest rate environment, particularly for these smaller banks. Loan growth ticking in the right direction. Efficiency ratio as well. You recall that efficiency ratio essentially tells you that the bank is earning more than it's spending. Their efficiency ratio clocked in at 63% vs. 65% a quarter ago and 70% a year ago. Generally speaking, like the direction that they're going. Still a pretty new publicly traded company, but a neat bank with a neat message. I bet you we'll be able to have Keith on here again soon to talk more about what they've got coming up these next several years.
But Matt, hey, listen, I appreciate you jumping on with us this week. Always nice talking to you! Great job again there with Steve! That was a really great interview!
Frankel: Thank you! Always good to be here! That was one of my favorite interviews I've done so far!
Moser: All right, and just a teaser, listeners, we've got another interview for you next Monday. Not going to tell you who. You're going to have to tune in. It's another CEO. I will leave it at that.
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. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Amazon, Apple, Square, and Visa. Matthew Frankel, CFP owns shares of American Express, Apple, and Square. The Motley Fool owns shares of and recommends Amazon, Apple, Intuit, Microsoft, Netflix, Square, and Visa. The Motley Fool is short shares of Equifax and has the following options: short August 2019 $195 calls on Home Depot, short October 2019 $37 calls on eBay, long January 2021 $18 calls on eBay, short September 2019 $70 puts on Square, long January 2021 $120 calls on Home Depot, long January 2021 $85 calls on Microsoft, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends eBay, Grubhub, Home Depot, Uber Technologies, and Ulta Beauty. The Motley Fool has a disclosure policy.
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