Ted Audio Collective Hi everyone, you're listening to After Hours.
I'm Young Mi and I'm here with Felix and Meher.
We're back with the first episode of 2019.
Yes, first edition.
Exactly. We're all back.
Yes, how's your 2019 going?
It's going okay. I have to say I'm feeling very envious.
Of? Well, both of you, which is for some reason I'm the only person here who's not on sabbatical.
True. So you've been on sabbatical, Felix.
What did you do wrong?
Exactly, that's what I'm asking myself.
So you've been on sabbatical, Felix, and Young Mi, you have just started.
I am. So tell us a little bit about the great lessons of being on sabbatical and why it's so great so I can feel even worse than I do now.
Well, at HBS, we don't call it sabbatical.
We call it renewal leave.
Indeed. So I'm on renewal leave and I feel renewed already.
It's like been two weeks.
It is amazing. And I've decided that this year I'm going to learn how to cook.
So I've been cooking and it's been...
I can't believe how good my food is.
I know that sounds a little immodest, but it's been so fun.
Really, really fun.
That's great. Wonderful.
Yeah. Actually, cooking is...
Meir, you know, you came to my holiday party and there was a bigger spread than ever.
And what's the explanation that there were so many different dishes?
I'm on sabbatical. So cooking is definitely a very good thing to do.
Okay, but we brought in stuff to talk about.
We got a bunch of emails from listeners asking us what we thought about Apple's latest announcement.
So maybe we'll talk about that.
Right. The China and the price drop was really something else.
Yeah, very interesting.
And then I thought we would talk about payday lending.
It's been a topic in the news for quite some time and we never had a chance to address it.
Excellent. Okay. All right.
So one of the first pieces of news that hit in the new year was Apple coming out and lowering its sales forecast for the quarter by $7 billion.
And Tim Cook came out with a letter and he blamed most of it on declining sales in China.
We've talked about Apple a bunch on this podcast.
And so the question I have is, is this really a story about Apple or is this a story about China?
So I'll take a little bit of a whack at this one, which is for me, I think it's primarily about China.
In fact, almost all of the decline that he reported is attributable to China.
And so I think the neat story that's coming out of this is a real question about how China navigates the next year economically.
They've revised downwards their GDP forecasts to the lowest levels in 20, 30 years.
And obviously those have been very high, but it's coming down.
It's coming down faster than we thought.
Those are the official numbers where there's always...
I don't know if you have a degree or you're growing at 6 plus percent, but there's a whole set of problems associated with the situation they're in, which is they've been trying to de -lever the economy, they've been trying to get rid of debt, consumers have been slowing down.
So growth is now slowing down.
So now they're reversing themselves on the leveraging policies.
And so they're really trying to walk this line, which I think is going to be really difficult to do.
So for me, the revelation was about China more than it was about Apple per se.
And I know I've kind of always been a little bit of a defender of Apple on this podcast.
But I see primarily a story about China here.
What about you, Felix?
So I actually think it was more a story about Apple.
And I think the interesting thing is, even if you believe that the Chinese economy is changing, even if it's true that the Chinese consumer is more price -sensitive today than say a year ago or two years ago, why is Apple hit so hard?
And I think the story there is there is a range of phones that are at least as good, if not better.
If you're just counting rear cameras, actually phones are better than Apple.
Apple has fallen behind in the number of cameras that it puts into its phones.
And they're reasonably priced.
They're great quality.
I think we're seeing what we talked about before in this podcast.
We sort of see a fairly level playing field on the hardware side.
Why pay a thousand dollars plus if you can get a Huawei phone and it's roughly what you would get if you bought an Apple phone?
I do think there's a tendency for us to think that as these countries modernize, that their markets look similar to our markets.
When in fact, if you look at that mobile phone market, Felix, to your point, it's playing out very, very differently in China.
So, for example, in the West, the single most important decision you make when you buy a phone is which operating system you're going to adopt.
Is it Apple or is it Android?
And that operating system is essentially the anchor for your entire mobile phone experience.
In China, the anchor is not the iOS.
It's essentially WeChat.
Yes, that's right. And in the West, I think people think of WeChat as a messaging system and they don't understand that in many ways it's like its own operating system that sits on top of that hardware, which removes a lot of the differentiation that Apple claims in the West.
This is maybe the part that worried me.
Now we heard, of course, Apple has gone public or information has leaked about their upcoming product plans.
And what worry me the most about those announcements, they're all about features.
And that's not Apple needs to give us a reason why we feel differently about ourselves when we buy the next Apple phone at whatever price it may be priced.
But if you're talking about, oh, the race in cameras or is it going to be a six hundred dollar phone versus a seven hundred dollar phone, I think if that's the degree to which you think you can differentiate, you lost already.
But I think just to come back to this, though, I mean, the data would suggest that the overall smartphone market globally is slowing in China.
The floor has come out from the smartphone market.
Deliveries are down like double digits.
And so, yes, the market share is heading in the direction of Huawei, NZTE and others.
But I think the primary story here is about consumers in China not liking luxury.
Right. To your point, that's primarily not a story about Apple.
That's a story about luxury brands and the Chinese consumer.
And I know these are hard things to disentangle, but I think we learned much more about China in the last week or two than we learned about Apple.
I'll say a couple of things.
One is historically, even in China, when the economy has slowed down, luxury brands have continued to thrive.
They withstand any kind of recession.
They do so in the West.
And that's been born out in China as well.
So if anything, you would expect that Apple would be able to ride this out better than other brands because of its status.
The second thing I would say is the status dynamics in China are changing.
It used to be the case that I think Western companies took for granted that the focal point of aspiration were Western brands in China.
You know, that Chinese people, once they hit a certain level of wealth, they aspired to own Western brands.
That is less and less true.
And you see that in category after category, beauty brands are another example.
Where you see the focal point of aspiration in China for beauty brands really moving to Japan and really to Korea.
And their own brands too.
And their own brands, absolutely.
Look, I don't have any doubt about everything that you said, which is Apple can't rely on its old ways of succeeding, that the status is changing.
I think we knew that.
What we found out in the last two weeks is China is weaker than we thought.
And this coming year is going to be worse than we thought.
I take all your points.
But man, the revelation to me was about China.
It was not about Apple.
So maybe China is more desperate than we knew.
And I think the same is true for Apple as well.
And one of the things that happened in the last couple of weeks at this announcement at the Consumer Electronics Show in early January was that Apple announced that going forward, iTunes would be available on Samsung Smart TVs.
And that is a big change.
That is basically the end of the walled garden idea.
And I think what we're going to see is that Apple will be much more aggressive making its products, making its services available on lots and lots of different hardware platforms.
But isn't that a fascinating shift, right?
You go to the Consumer Electronics Show 10 years ago, and everybody's trying to plug into the Apple ecosystem.
Everybody's saying, here's my thing that plugs into Apple.
And now you go to CES, and Apple's saying, we're going to plug into everything else.
But then my question when I heard that was, what is magnetic about their services?
In other words, why do I want iTunes on my Samsung TV?
I want—Netflix is magnetic, for sure.
YouTube is magnetic.
Anything magnetic about these Apple services.
And to your point, Netflix is now trying to opt out of the App Store, which is the App Store.
That's a third of that services business.
Having said all of this, I do also believe this guy is not necessarily following for Apple either.
I mean, their installed base is not shrinking, and the device loyalty continues to be so strong.
The refresh rate is slowing down.
Yes, so the problem with Apple is not that it's losing loyalty.
It's that historically they've monetized loyalty by getting you to buy a new phone every year.
And now you're still loyal, you just don't want to buy a phone every year.
So they have to figure out a new way to monetize.
I also am interested about this walled garden thing, which is, it seems to me, that's also a concession to different consumer tastes, which is taking down that wall is a reflection of part of how in China that doesn't work.
Like they just don't have the same preferences that American consumers do.
And they don't want a walled garden.
They actually want interoperability in a way that I think American consumers don't care about quite as much.
And that shows up in WeChat and in other things as well.
Yeah. Yeah. So I guess life within a few dominant apps really matters in China.
And then those apps, for one reason or another, historically, I think are not really tied to an operating system.
Exactly. Right. And so part of what I find really fascinating about this is I wonder if this is not also true for us.
You know, we always thought, oh, I'm totally tied to iOS.
And then, of course, now I have a Samsung phone and my Gmail is exactly the same.
Yeah. And my outlook is exactly the same.
And my everything is roughly the same as what I and so you can live in this imagination that so much of your life depends on iOS.
And then once you leave iOS, you think, what are the number of instances where I have a radically worse experience?
This is so true. Over the break, someone asked me if you were stuck on a desert island, what is like the one or two things that I want to have.
And they said, and you can't have your iPhone.
Okay. I was going through this thought experiment and I thought to myself, you know what, as long as I have access to the cloud, I'm actually fine.
You're good. You just need access to my Gmail, my Outlook calendar, access to Netflix.
And you begin to realize that in my imagination, I depend on that iOS.
But increasingly, as these services get better and better, the services themselves are the magnet and the device is just a portal to access those services.
And the more that becomes true, the more you realize, wait a minute, how is Apple going to compete in this service -dominant world?
They don't have any of the functional services.
They don't have an email, calendar, maps, I mean, those things aren't that prominent.
And on the entertainment front, they don't have anything like YouTube or Netflix.
You guys are making me rethink this, which is I've kind of been a device fetishist, you know, like I love my iPhone and I don't want to give it up.
But as you talk about this - If you were on a desert island, right here.
Well, I certainly would not answer the cloud.
I can assure you of that.
Really? No, I think - What would you do?
You'd be so bored. So, I mean, I could have like books or music or there's a lot of different things one could have.
But music is in the cloud?
Okay, maybe, but I just - it's just hard for me to get that excited about the cloud.
But I think you're right, which is when I really think hard about what I want out of my iPhone, I do fetishize it.
I love it. I love the feel of it.
The truth is I haven't even explored alternatives completely.
I have not actually looked seriously at a Samsung or Huawei phone.
Now, I don't know what the lesson of that story is.
It either is that Apple brand is so powerful that it sucked me in, or that there's just downside as I start to explore these things.
But this goes back to the predictions we made.
They really need to do something big this year, whether it's launch a membership program by Netflix, some of the things that we talked about in our crystal ball episode.
So I love seeing you guys double down on your predictions.
That's even better.
So you guys are doubling down.
I'm doubling down. You're doubling down.
Okay, good. Okay, we're back.
I fooked a little rusty talking about - I think it's all that wine while you're cooking.
I was going to say, you were supposed to say no, young lady.
You sounded completely articulate.
Okay, Felix, you wanted to talk - Yes.
So I wanted to get your view on payday lending, and then also talk a little bit about the moves that fintech players have made in the space in the last couple of years.
Just to remind everyone, there's about 40 million Americans who are officially counted as being poor.
But of course, the number of Americans who worry about their finances is much, much larger than that.
70 % of Americans or so have less than $1 ,000 in savings.
So even if you're a water boiler - 70 %?
Yeah, it's like really, it's astounding.
And part of the issue is that in particular, for people who make not a whole lot of money, their income tends to be highly variable.
And a lot has to do with the scheduling of work.
Where whether you're scheduled or not often also depends on, do the products arrive in store at the right time?
Right. And if the products don't arrive, there's no stocking needed.
And then, some states are cracking down now on these practices, but in some places, you will learn on very short notice that actually you're not going to work tomorrow.
And as a result, you get into financial trouble.
And this is, I think, where payday loans and similar products come in.
Maybe I can describe the typical transaction so that we're on the same page.
On average, a payday loan is about $350 or so.
So it's literally a bridge to something else.
It's about two weeks.
And for a $350 loan, the fee will be about $50.
So that amounts to about an annualized interest rate of 400%.
So they're very expensive.
After two weeks, if you cannot pay back the loan, what's going to happen is that you get a banking fee, but also these loans then get rolled over.
And so the game gets more and more difficult to play over time.
So maybe let's start there.
What do you think about these kinds of products?
Should we regulate the amount of existence?
Should we cap the rates?
What's the right response here?
This topic evokes very contradictory and schizophrenic feelings in me because I think there's something wonderful about this market, which is people who are struggling can smooth consumption in a way that's really powerful and very important.
Moreover, I think debt is misunderstood.
Debt is an important thing for a lot of people who are less well -off.
It enables them to do things beyond their current means, and that can be good.
So in that sense, I kind of think payday lending has gotten demonized.
The problem, of course, is twofold.
One is it's not just all about consumption smoothing.
There's a lot of bad behavior that is associated with payday lending, meaning there can be consumption binges.
And there's just maybe most importantly, there's a lot of confusion about the terms, which is people are undertaking financial obligations.
They don't even know that they're undertaking.
So I mean, my instinct about the way this should shake out is not like, you know, let's ban them.
Let's cap interest rates, but rather we have to be better about transparency and we have to be better about literacy, which is we have to explain to people what they're doing.
The primary problem, it seems to me, is not the existence of the product per se, but it's the confusion about what the terms are because the underlying function is actually actually really important.
So I don't know, I'm genuinely very contradictory feelings about this.
There's a reason why payday lending has such a bad reputation.
There's a reason why it's synonymous with predatory behavior.
And the reason for it is that it is predatory.
Here's the tension.
If you're poor, you are a credit risk.
Nobody wants to lend to you.
So lenders therefore, if they lend to you, they can charge a really, really high rate.
So what ends up happening is that the poorest people get charged the highest rate.
In other markets, when you charge a really high price to people who desperately want something, if you desperately need those $400 designer jeans, fine, go ahead and buy them.
But in this case, there's a normative overlay.
Is it okay to charge the highest prices to the people who are the most needy, the most vulnerable?
So even though it makes market sense for these companies, then you could argue that rationally, they're behaving like rational actors and they're going in and charging what people are willing to pay.
As a society, we have to ask ourselves, is this the way that we want this thing to function?
But this is like a centuries old debate about usury and about high interest rates.
And I think I'm finding myself in the direction of, I want debt available to people.
And I think, tell me what your solution is.
If you cap interest rates, then people who are below a certain credit quality will not get credit whatsoever.
If you ban the practice, I'm not even sure how you would do that.
The reason why I think regulation is necessary in this case is that there's an in -between point in which I believe, if you are a payday lender, you can make a nice profit and still not take complete advantage of the people to whom you're lending.
Let me add two, I think, interesting observations about the whole business that speak to me or your transparency issue and then the profitability.
So there is existing state regulation.
And so in some states, it's easier to be a payday lender.
In other states, it's more difficult.
And so one of the really interesting observations is in states where it's easier, where you see that we have a larger number of lenders and where there's more competition, you would think that drives rates down.
And I think that's been the standard way to protect consumers.
Oh, all you need to do is create competition once you have more competition, rates are going to come down.
And that's not what you see.
And so that, I think, to me at least, sheds a little doubt on, oh, if we have more transparency, the issue is going to go away because I think the reality of that situation when you go to a payday lender is you're not shopping around.
You're not reading the fine print.
You're not going online and comparing 15 products.
You're desperate. So that's part of competition and information doesn't seem to work the way it works in the regular markets.
And then, surprisingly, you look at the profitability of payday lenders and they're not as profitable as regular financial institutions.
And one explanation is, it's super risky to lend.
The other explanation is these payday lenders, incredibly inefficient.
They're poorly run businesses themselves.
They're run businesses.
And so it's both the sort of the simple view of, oh, let's just add transparency or let's just add competition or let's just – Add regulation.
I think it's not really going to work that well.
Well, and that's where fintech comes in.
That's where fintech comes in.
And so there's a number of fintech businesses now that think about how to improve on this situation.
One business is called Salary Finance.
It's out of the U .K.
It actually happens to be located in Boston, the U .S.
subsidiary. And the basic idea is that they cooperate with businesses.
And businesses will give them much better information about the compensation history of employees.
And as a result, Salary Finance can make loans available at much, much lower interest rates.
So they partner with businesses.
They partner with the business.
The other thing that's important to know is compensation for Salary Finance will come out of your salary first.
That is, there is not the risk that you're going to write a check to the payday lender.
And then the payday lender finds out that, oh, my God, there's no money in your bank account.
You will never even see the portion of your salary that is needed to support the loan that Salary Finance provided.
I love the fintech possibilities.
I almost wonder if we should go further in the role of employers, which is what the employers are doing in that arrangement is they're facilitating information sharing.
That's right. But there's a broader point about financial wellness that employers have to take seriously, which is they think now about mental health and physical health.
And they try to help employees in that regard.
They should be doing the same thing with financial health.
And in particular, you could imagine employers being much more aggressive about helping employees with debt problems, helping them actually navigate these choices, given their informational advantage.
So I'm a little worried about Salary Finance in the sense that you're just sharing information and then they're garnishing the wages.
You know, basically, and that is even more hidden than anything else would be.
But in a way, I think the answer is if you're Walmart or you're one of these large employers, you should understand financial insecurity is central to your employees lives.
And you should be undertaking real actions, not just literacy, but maybe even helping them consumption smooth.
You have the information.
And in many ways, you're responsible for that employee and think about what it'll do to performance.
So I guess I would love to see financial wellness being a bigger part of the way employers think about this, as opposed to just the information sharing.
I actually want them to be doing things.
If you're a corporate cynic and you listen to this conversation, you've got to be thinking the following.
OK, I'm a company and I have a bunch of employees that are financially insecure.
And therefore, I'm going to figure out a way to be a mediator to some other service provider that will provide them a loan.
And if you're a corporate cynic, you're thinking, why not just ensure them more predictability with respect to the salaries they're earning?
There's this weird tension here where, as companies have gotten better at predicting supply and demand, they've become much more precise and when they need people to work.
And one casualty of that precision with respect to how companies are run is that now the insecurity, the risk that companies used to bear has now been passed along to employees.
And so employees now have to bear the brunt of that.
So if you ask me in a scenario like that, should companies feel the responsibility to then come in and do something to help smooth out that financial instability?
My answer to that is yes.
Is the way to do it by going to some third party and mediating some loan?
I totally agree. But are you saying companies should play to bank?
No, that's also uncomfortable.
Why not? Why is that so uncomfortable?
Let's talk that through.
So in this case, they're not servicing the debt.
They're just acting as a mediator.
Another scenario you could say is basically just advance you your salary.
But then it starts to feel like now you're in servitude.
I mean, right, because, oh, I can't quit my job because I owe them three months of that based on an indentured servant.
Well, I mean, I think that's right.
And employers are going to have to figure that out because obviously they can't enforce contracts and they can't keep employees who want to leave.
We got rid of that.
But in a way, that's part of what employers have to figure out.
And they will. I mean, what's interesting is that when you look at the salary finance information that they provide, one of the big points that they stress is that once they collaborate with companies, you see much, much less churn among employees.
You see better retention.
Part of it is probably a good story in a sense that, oh, now I work for a company that cares about me and they care about my financial well -being, and it's a better place to be.
But part of it might also be I can't really afford to quit because guess what?
Not only is my health insurance tied up with my company, it's now also my financial well -being in a much more general sense.
And so I fear a little bit that we recreate what we did with health insurance.
Perfect correlation between jobs and all other dimensions of well -being.
And the moment I lose my job, I lose my health insurance.
I lose access to these cheaper loans.
I lose – I think this comes back to why this is such a hard problem, which is I don't think there's any easy solutions here, right?
I think cutting down this market is highly problematic for the people who want to borrow.
And letting it run unrestrained is clearly wrong.
The empirical work on this is pretty ugly, right?
I mean, especially the work in the UK suggests that when you make access to payday lending available, there's a lot of bad outcomes.
But I can't believe the answer is blunt regulation that caps or cuts out markets.
It's got to be something more subtle because underlying needs are so important.
If I go back to one of the early statistics you cited, which is that 70 percent of Americans have less than $1 ,000 in their savings account.
So, you know, even in the context of an economy that over the past few years has been booming, and even with low unemployment rates, it really gives you a sense of how precarious our economy is, and more to the point, how many people are vulnerable in this context.
And it feels so much more systemic.
And things like payday lending and things like that feel like band -aids that we're trying to apply to a problem that is just so much more systemic.
If you're well -to -do, the system really works in your favor because every company wants to service you.
Everybody wants you as a customer, and so everything works in your favor.
If you're poor, these natural market forces just work against you in so many ways.
So that sounds exactly right.
And what's really interesting to me is it is much bigger than I at least had always assumed.
So you look at people who make more than $100 ,000.
You look at people who make more than $150 ,000.
And things are not markedly better, right?
So even people who have really good salaries essentially say very little or nothing.
But this goes back to our fire conversation, which is part of this conversation has got to be about consumption that is unsustainable with current income levels.
That is part of what's happening here too.
Yeah. Part of it is behavioral for sure.
But again, the flip side is there are still many market forces working against you if you are poor.
If you are poor, everything is harder.
So I think financial insecurity is one of the defining moments of so many people's lives.
And it's not really been...
We've had a long and active conversation regarding the unbanked population.
Why don't you have bank?
But that's such a sliver of that much more general phenomenon that so many people feel so insecure about their financial future.
If you think about business opportunities that would really make a big change in how people feel about their current situation, I think that's got to be way at the top.
Okay, guys, I have a pick for you.
Oh, what is it? Okay, so remember how I told you I'm getting into cooking?
Yes. So one of the things I do is while I cook, I put on something that inspires me to cook.
So one of the things that I've been watching is this thing on Netflix called Salt Fat Acid Heat.
Yes. It's based on a book by Simon Nosrat.
I hope I'm pronouncing that correctly.
But it's just four episodes long and her personality and her authenticity just...
You've seen it. Yeah, actually, I think it's all about that though.
Part of it is this format of four things, but it's her.
It's her. And it's also she's an unusual...
She's so joyful. She's vibrant and filmed in a beautiful way.
Yeah. It's really lovely.
And she just gets so much pleasure out of eating.
And a big part of it is just looking at her tasting things.
Yeah. And her expressions and it's just so joyful.
Makes you... Yeah, it really, so...
Why cook? Exactly. So I have that much...
She's like my friend while I cook.
It's beautiful. Yeah.
It's really beautiful.
I have a pick that's related to your cooking story.
Okay. Like many households, we've been using foil.
You cook too much or you keep vegetables fresh and so on and so on.
And we have now just switched with, I think, great success.
Companies have developed these silicone stretch lids, which completely do away with your need to buy foil.
So the basic idea is, of course, you buy those little Tupperware, little pots, and then they come with a lid.
Can you ever find that lid?
No. Of course not. And so now they have made what's called a stretch lid out of silicone that basically can adopt to...
They stretch by a few inches.
And you can also use them for fruit.
So instead of putting the orange in a container and then close it up, you just put this thing directly on the fruit and it will stick to it and it will...
Wait, is this reusable?
This is reusable. Yes.
Because otherwise...
It's like Saranra. Yeah, like you sound like Saranra.
The whole point is that they're reusable.
That's the innovation.
Fabulous to think about if you're...
So would you have a break?
I really did for a minute.
I think you were recommending Saranra.
Saranra, I thought so too.
What do you think I'm an idiot?
I've been in the kitchen before.
I'm just learning to cook.
Okay. Me here, what about you?
So I have a toy suggestion.
So many of us with children want to encourage STEM and things like it.
So we found this thing that is fantastic.
It's called the Turing tumble.
So it's a toy for eight plus.
Turing like the scientist.
Like Alan Turing, exactly.
So it is kids build a mechanical computer.
It looks kind of like a pachinko board or like a King Kong's, a ball starts at the top and it falls down, right?
Except you design the way it falls down with little widgets and little things.
So it's like you're basically creating a bunch of if then commands, but that are physical on this board.
Fun. But then you learn, you're basically learning programming, but it's physical, which is what I really like about it, which is I don't want it to be like an app, right?
This is a physical manifestation of the intuitions of computer programming.
And it's fantastic.
And they provide a whole set of, I guess, basically kind of programs that, you know, you don't just, it's not free form.
You start by building things, they tell you how to build it.
I wonder how many of our listeners wish that you were their dad.
Okay, to this point, which is it is not just for kids, I'm loving it just to be clear.
I'm loving it. I'm loving it.
So adults, I think it's, in fact, I think it's really fun.
Deep love for if then statements.
Exactly. Exactly. Okay, but what's it called again?
It's called a Turing tumble.
That balls tumble down and it's Alan Turing.
Okay, great. Thanks guys.
That was fun.
