Fintech

So what is Fintech? Fintech is a broad term, covering direct money transfers, crowdfunding, and direct to consumer lending. But an important part of fintech is embedding financial products in everyday consumer and business products. For example, Amazon offers free credit on every purchase, although it is often better to use an Amazon credit card for a 5 percent discount, assuming that you pay your credit card bill every month. Of course the Amazon credit card and the Apple credit card are actually fintech services as well. But Amazon went even further, partnering with Goldman Sachs to offer small business loans of up to $1 million to its merchants. Shopify has also rolled out loans to its customer base, loaning out over $750 million to date. A big advantage for existing companies in offering financial products to existing customers is a built-in client base, as well as knowledge of what financial services a customer may need.

Wirecard Turmoils

Creditors of German digital payment processor Wirecard, which advertised "Beyond Payments," may find that the company's debts are beyond payment. Wirecard also proved that accounting fraud is unfortunately worldwide when it filed for bankruptcy yesterday. The company said that €1.9 billion ($2.1 billion) in cash that was on its balance sheet probably never existed in the first place. Now, things have gotten bad for the company's auditors as the German shareholder association SdK announced that it had filed a criminal complaint against the company's auditor Ernst & Young (EY). SoftBank, a major investor, also announced that it planned to file against EY. In its defense, EY stated there were "clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world at different institutions, with a deliberate aim of deception" and that "even the most robust and extended audit procedures" were not enough to uncover the fraud.

Day Trading For Profit?

In our opinion, a negative financial outcome of the COVID-19 pandemic is the rise of day trading. Dave Portnoy, the CEO of Barstool Sports, has named himself "Davey Day Trader" and helped popularize day trading. And although not all are day trading accounts, Robinhood added 3 million accounts during the first quarter of 2020. One new investor, a 20-year old from Nebraska, tragically committed suicide after his account balance showed a loss of over $700,000. In fact, his account balance may have only been temporary until trades settled. It is important to note that short-term investors tend to do worse than longer term investors, and for day traders, the success rate is less than 10 percent, with only 1 percent or so who really make money. We do believe that investing is worthwhile, but do your research, diversify, and make longer term decisions.

Hertz SEO

We had previously discussed the Hertz bankruptcy filing. In an indication that the current economic conditions caused by the COVID-19 lockdown are unique, Hertz is planning a secondary stock offering while in bankruptcy. An SEO in the middle of a bankruptcy filing has never been attempted before. The company has warned prospective shareholders that it is unlikely that they will receive anything in bankruptcy, and barring a rapid improvement in the company's prospects, will almost certainly be wiped out. Based on the current stock price, Hertz hopes to raise $500 million. Hertz currently owes about $2.3 billion. This is certainly an SEO we are not trying to jump in line to buy.

Misunderstood Dividends

As we have stressed in the textbook, an investor should be indifferent between dividends and capital gains. And, in a world with higher taxes on dividends than on capital gains, investors should prefer capital gains. A recent WSJ article discusses the fact that many investors prefer dividends. In fact, the British Investment Association, which represents investment managers in the UK, argued that companies should not reduce dividends. It is surprising that professional investment managers would have such a strong view on high dividends. The preference for high dividends also appears to affect corporate finance as well. One survey mentioned in the article finds that about two-thirds of CFOs admit they would forego profitable projects if undertaking these projects would result in a dividend cut.