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Green Dot’s Disappointing Earnings and an Interview With Prudential’s CFO

Matthew Frankel, CFP, The Motley Fool

In the latest installment of our Between Two Fools interview series, host Jason Moser sits down with Prudential (NYSE: PRU) CFO Ken Tanji to talk about financial wellness and what the company is doing to try to improve the financial wellness of Americans. Plus, Fool.com contributor Matt Frankel, CFP, talks about why Green Dot (NYSE: GDOT) plunged after its recent earnings report, and you'll also hear what stocks are on our radar this week. All this and more on 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.

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This video was recorded on May 20, 2019.

Jason Moser: Welcome to Industry Focus , the podcast that dives into a different sector of the stock market each day. It's Monday, May 20th. I'm your host, Jason Moser. On today's show, we're going to discuss the state of Green Dot. We're going to talk about a potentially growing credit card problem. As always, we'll have One to Watch. But we'll begin this week with another installment of Between Two Fools .

Ken Tanji is the Chief Financial Officer of Prudential Financial, where he's held a number of positions over a three-decade career. Recently, we had the chance to speak with Ken about Prudential's financial wellness platform and how it ties to the company's purpose and long-term business strategy.

[...]

Moser: Ken, I think a lot of our listeners out there are familiar with the name Prudential. The company was founded back in 1875, so it's been around for a little while. Can you describe Prudential today? Give us some background on the company for our listeners?

Ken Tanji: Yeah, sure, I'd be happy to do that. As you mentioned, we've been around for over 140 years. And we've been serving customers with solutions that provide financial security and peace of mind. And we do that in innovative and high-quality ways. Prudential is very much a trusted brand and one of the most admired companies in the world. Our purpose is to make people's lives better. We do that by solving financial challenges in the midst of a changing world. With that purpose, we have three premiere business franchises that are very focused on their strategies, have scale, and strong market positions and together provide a breadth of capabilities that uniquely position Prudential to expand our reach.

I'll start in the U.S. with our financial wellness franchise. It serves about 20 million customers with workplace solutions that involve life insurance, disability, and retirement benefits. And we serve another five million individual customers, again, with life insurance and retirement income solutions. That's our first primary franchise in the U.S.

Our second is PGIM, which is our investment management franchise. And that's a global business. It's among the top 10 asset managers in the world, with over $1.2 trillion of assets under management. It has over 1,400 institutional clients, and they manage over half of the top 300 pension plans in the world. A combination of their breadth of investment expertise, their global reach, and strong investment performance has led to 16 straight years of positive asset flows from their institutional clients.

And then our third franchise is our international insurance franchise. That features our premiere life insurance company in Japan, which is recognized for its differentiated level of service and quality, and it's consistently grown year after year. In addition to that, we have a targeted presence in high-growth markets like Brazil, India, Indonesia, China, and Africa. That rounds out our international franchise.

While each of our three businesses are very strong and well positioned, we believe the collective power of insurance, investment, and retirement capabilities are together even stronger, both strategically and financially.

Moser: That definitely taps into needs for everyone. No matter what age we're at, financials are a part of our lives, whether it's planning for the future, whether it is dealing with retirement, whether it's figuring out the appropriate insurance products. It does sound like Prudential is tackling a lot of topics from a lot of different directions. And I think you're right on the brand of the company. You have a very strong brand. It's one that's very recognizable, even today.

I want to dig a little bit into the financial wellness part that you were talking about earlier. That chimes in on a lot of what we are working on here at The Motley Fool, in helping people take control of their financial destiny, so to speak. For Prudential, what is financial wellness? What does that mean to your business today?

Tanji: Thanks for bringing that topic up! Financial wellness has really been Prudential's focus since the beginning. Our commitment to helping people achieve financial security and peace of mind has remained consistent and is now stronger than ever before. And more and more, the burden of achieving financial wellness is falling on the individual. They need more education, tools, and advice to take the steps toward both setting their goals and achieving their financial goals. These burdens that are carried by the individuals is weighing on them and is a major source of stress that materially lowers their productivity in the workplace. And therefore, employers are looking for ways to help their employees overcome their financial challenges, in order to help them reduce their level of stress, improve their quality of life, and increase their productivity. And we believe Prudential is uniquely positioned to provide that comprehensive suite of financial wellness services and solutions to both the employees and to benefit their employers. We have deep resources in the knowledge of insurance, investments, and retirement, and we can deliver those capabilities in a form that best suits a customer's preference or their profile, and we can do that either in person, through a digital experience, over the phone, or a combination of those.

Today, we see the opportunity of financial wellness first as being really fully aligned with our company's purpose, and an attractive business opportunity to allow us to deepen relationships with existing customers, but also reach a broader market segment. That will result in driving a higher level of growth for our business and our earnings. I see this as a way to leverage our existing core capabilities, while at the same time investing in building technology and service delivery platforms, which will both strengthen our current business franchises but also create sustainable new growth opportunities. You can think of financial wellness as adding to our growth rate in multiple dimensions and also creating shareholder value that, once again, is very consistent with our focus and purpose.

Moser: Yeah, I appreciate the point you make about technology there. Clearly it is changing everything today. Whether it's travel or finance or shopping, technology has affected everything in our lives. And you talk about reaching that bigger market, that mass market. We talk about the need for financial literacy, financial education, particularly for younger people coming up, it seems like the opportunities are certainly there for those younger people to learn more, thanks to the opportunities that technology gives us. Can you talk a little bit more about how Prudential is using technology to reach that mass audience?

Tanji: Yeah. Technology is really key to what we're doing and how we're trying to bring new services. Both technology as well as the evolving customer preferences, it's really the big reason we're able to deliver financial wellness to customers that have really been underserved in the past. With the use of technology, and not just technology, but the customer's increased comfort with technology-enabled solutions, we can reach and serve more customers, in new and personalized and, importantly, cost-effective ways. Technology presents new ways for us to engage with our customers. And we can do that, whether it's through Skype or a fully digital experience. And it's really critical to our financial wellness approach.

Now, let me start with a few elements of how this plays out in the value chain, and the role technology plays. First, it starts with how we engage with our customers. A few years ago, we started some financial education seminars that were led in person, face-to-face, with our Prudential financial advisors. And they were really successful. We delivered it to about 450 employers that had about 4.5 million employees, and people liked it. It was really valued as an educational tool. But now, we've taken that, and we've digitized it. And we now have it in a digital platform that provides the same level of personalized education and training, but now, because it's digital, we can reach many more people with that, and we've made it now available to 3,000 employers and eight million employees. You can see how having the digital capability to talk about financial wellness and bring that to customers through the use of technology is much more powerful.

But it's not just engagement and education. Customers really needed advice to take action. We launched a program we call LINK by Prudential. What this is, it's connected to our online digital platform, and it's where customers can work with a trained and licensed advisor. They can do it either via video or over the phone. For an example, they can create a financial roadmap for an individual, personalized to them, in as short a time as 30 minutes. The service is customized and personalized, interactive. It also provides the advice component for people to take action.

And then, lastly, the solutions that we provide, technology plays a role there as well, and a big role. For example, the process of getting a life insurance policy used to take two to three months. What we've done in something that we call Prudential Fast Track, we use artificial intelligence to fine tune our underwriting process. And now a customer, by answering a series of questions, can get a life insurance policy in 48 hours. You can see, whether it's how we engage with our customers, how we give them advice, or how we deliver solutions to them, technology has really advanced our capabilities, and it hits all aspects of the value chain for us.

Moser: Yeah, that LINK by Prudential site is really robust. I would encourage listeners to google LINK by Prudential, it'll take you right to that site. That's an impressive setup y'all have there, with a lot of different resources. It can get you started, it seems, really quickly. This strikes me as a great indicator of your leadership in the space. But, what's that old saying, it takes a village. It's not just one company that is going to make it all happen. I think it really does depend on partnerships and whatnot. Can you talk a little bit about Prudential's leadership in the space, and maybe even some of the partnerships that perhaps you have built or are in the process of building at this point?

Tanji: It's a very important need for the marketplace as a whole, and therefore, it's not just Prudential that's looking to try to fulfill that need. There are many trying to serve this marketplace. But to be a leader in what we're calling financial wellness, it really takes a broad array of capabilities. We believe, if you think about across the board, Prudential is a leader in all the critical areas. First, it's important to have ready access to customers. A lot of times, one of the most costly and prohibitive parts is actually just having a reach into customers. But we already have 25 million customers with an existing relationship to Prudential. Not only do we already have access, but we're being endorsed by their employers. We feel that's a real benefit.

Financial wellness and advising people on their financial affairs takes trust. Again, as we talked, we think our brand, again, built over centuries, plays to our strengths. And, most importantly, customers want a personalized experience. As we described, if you think about things like LINK or the other tools that we have, we're able to deliver a personalized experience with the use of data and digital platforms.

And then, to then provide for financial wellness, you need a broad set of solutions to meet their customer needs. If you think about Prudential and our expertise across insurance, investment, and then retirement, we think we have a very broad solution set.

And then, importantly, customers want advice. We can deliver that advice in the form of their preference, whether that would be online, over the phone, a video, a Skype, or face-to-face. We have not just the current capabilities, but we have the scale and resources to continue to invest and keep pace with customers' needs and technology as that evolves.

So, although others are very competitive in the market space in certain areas, we think we're uniquely positioned, again, across the board to be a leader broadly in financial wellness.

Moser: Yeah, there's no question. The company's size, the financial resources. I appreciate the point you made there about, your customers want advice, you have many different channels to deliver that advice. At the end of the day, people want that connection, that human touch, that personalized feeling that someone cares. You can't just say, "Well, the computer told us to do that, so it happened, and the computer was wrong." People don't want to hear that. That's not a very good answer. Being able to take that connection, the relationships that you build over time, and then being able to scale that sounds like really a tremendous advantage.

We're stock analysts first and foremost here. For us, signs of success are simple. We look for the top line to grow. We like to see earnings per share grow. We look at the market capitalization of the company, we like to see the stock price grow. And given that Prudential the company has succeeded through the years, what specifically does success look like from your perspective regarding financial wellness? What are the targets out there that indicate success for you?

Tanji: Let me maybe start more fundamentally, if you will. We think the most important first sign of success, and fundamentally, the value we're delivering here, is that we are making our customers financially more well. That will improve their security, enable them to live better and more productive lives. And we're measuring that. And where we've been delivering our services, we see that improvement occurring. The value of our financial wellness capabilities is already showing signs of success in the form of greater sales in our work-site businesses, be it in retirement, where we've had $11 billion of sales that were attributed to the attractiveness of our financial wellness capabilities, or another $130 million of group insurance sales, also where they recognized the value of what we're delivering through our financial wellness capabilities.

And later, as individuals utilize our financial wellness services, we also expect they'll take action and increase their use of work-site benefits, whether they're increasing their 401(k) contribution, or increasing their level of life insurance or disability insurance within their group benefit plan. That's a form of doing more for themselves, and also doing more with Prudential. And then over time, also, having a more direct relationship and engagement with Prudential will lead them to take more action and pull down our solutions with our individual businesses, and see an impact on those businesses as well. And then collectively, adding to the growth of our business and the growth of our earnings growth rate.

Now, quality and relationships take time to build. Our progress is already underway. But again, we expect it to build over time.

Moser: Yeah, that's great stuff! It sounds like you've got a lot of pokers in the fire, but certainly, the resources to get a lot of things done there. And I appreciate you shedding light on all that you're doing there with financial wellness.

Let's take a little bit of a turn here. I like to wrap our interviews up here on Industry Focus . We are big readers here at The Fool, our listeners love to read, we're always looking for good book recommendations, Ken. Can you tell us a book you've read recently, one that you'd like to recommend to our listeners?

Tanji: Yeah, it's interesting, and one that maybe has some slight indirect connection to financial wellness or societal wellness, if you will. A book I recently read was called Enlightenment Now by Steven Pinker. I thought it was a refreshing look at progress in society over time. It's data driven. For us analysts out there that like data, you connect to that. And it reminds us that the progress made through science and reasoning, but also caring about each other, has been real. Sometimes these days, you don't always feel that way. But if you step back and look at a bigger picture, it is certainly there to recognize. I found it a bit refreshing.

Moser: Well, I'm going to have to put that on the list, and I'm sure our listeners will, too. He's the CFO of Prudential Financial, Mr. Ken Tanji, thanks much for taking the time to speak with us today!

Tanji: Well, thanks for having me! I really appreciate it!

[...]

Moser: And now joining me in the studio via Skype, certified financial planner Matt Frankel. Matt, how's it going?

Matt Frankel: Just great! We got a few technical difficulties sorted out, but here I am!

Moser: Here you are! How did your Mother's Day weekend go? You guys had a good time with the family?

Frankel: Pretty good! We had my aunt-in-law in town, which is about the closest I have to a mother in law. We celebrated Mother's Day with her this year. We all had a good time!

Moser: Nice! Good deal. Good deal! Well, listen, we wanted to get this week kicked off with a company I know you follow closely, one that we talked a little bit about after earnings came out. I tell you, earnings came out, and the market did not react very kindly to it. We're talking about Green Dot. Can you tell us what has the market in such a tizzy about this earnings release?

Frankel: Yeah, this was a bad downward move. It dropped 26% on earnings day.

Moser: Was it that bad?

Frankel: I don't think so. A lot of people who follow me on Twitter apparently did, because I got some not-so-nice tweets that day saying, "Thanks for recommending Green Dot!" and things of that nature.

Moser: [laughs] What? Nasty messages on Twitter?! No!

Frankel: But when you take a step back and look what actually caused it, first of all, Green Dot missed on revenue. Always terrible. But generally, that's not enough to send a stock down over 25%. What really happened is that Green Dot made an unexpected announcement that they're going to invest $60 million this year, which is a lot of money for a smaller company like Green Dot, to ramp up future products. Saying that they're going to focus on 2020 and beyond, essentially. Because of that, they reduced their earnings expectation for this year. They're expecting earnings to drop 13% year over year, which, in one of the best growth markets for earnings, is not what investors wanted to hear. Basically, this is a reaction to near-term weakness that's expected for this investment.

Now, Green Dot says over time, this $60 million should bring in about a million new accounts, which should translate to about $200 million to $300 million of earnings over time. So, this is a good investment if they get it right. But it just adds a big element of risk, saying, "We're going to focus on the future instead of today." And it's not what shorter-term investors want to hear. Now, from a long-term investor's standpoint, this is exactly what we want to hear. It's not really what we want, if we bought the stock at $70, like I'm sure a lot of people did. But this is the opportunity you want as a long-term investor, if you believe in what the company is doing.

Obviously, Green Dot's banking-as-a-service platform is catching on. It's got Apple on board, it's got Uber on board. Intuit , Turbotax uses it. There's a bunch of big companies who are really loving their product. Specifically, they're investing in the BaaS 3.0 and 4.0, the newest iterations of that. If they get this right, and it continues to catch on like it has, this could be a great positive long term. But like I said, the downside is, it creates a lot of wait-and-see and uncertainty in the short term, which is what the market's really reacting to.

Moser: Yeah. Is it safe to say that with Green Dot, they're focused more on the opportunity out there in the unbanked or the underbanked population? Is that a fair statement?

Frankel: Yeah, definitely seems like they're shifting to the banking-as-a-service. I don't know if they necessarily want to shift away, or if they feel like maybe they've maxed out that part of the business for the time being, as in, everyone who's going to buy prepaid debit cards is buying them. It's really hard to say whether they just feel like banking-as-a-service is a bigger growth opportunity, which I really think it is; or if it's really a fundamental shift in the business. And yeah, you're right, that's definitely something the market could be reacting to. Markets hate uncertainty. Anything you have to read between the lines for is usually bad.

Moser: Yeah. The prepaid debit card business, that's really been the bread and butter up to this point.

Frankel: Right. And you can see, Green Dot is best known for the ones that are at Walmart . Right by the checkout, there's usually a display of prepaid money cards, those are all Green Dot products. Like I said, they've already got Walmart. You could buy Green Dot money cards everywhere. Maybe they think the market for that is, for the time being, as big as it's going to get. It's wait-and-see mode, and markets don't really like that.

Moser: No, they don't. But I do agree with you. If this is an investment that ends up paying off, generally speaking, banking-as-a-service can be a pretty sticky business model if they get it right. That does offer its fair share of risk, maybe, in the near term. But if they do execute it, it sounds like they've got at least the brand identity, and a custom base that knows it well enough to where they've earned a level of trust with consumers, and maybe they can take this next step. Maybe you're talking about some headwinds in the near term, but again, banking can be a very sticky relationship over time if you get it right. I guess that's what we have to look for then, I suppose.

Frankel: Right. Like I said, I'm a buyer at these levels. Well, a few days after I talk about it, I'm a buyer at these levels. But I like Green Dot still for the future. I think banking-as-a-service makes a whole lot of sense for companies like Apple who don't want to be banks themselves. It makes a lot of sense, and it's a big growth market. You talked about brand name. Now you don't just have Green Dot's brand name, but you have Apple's brand name using Green Dot's products, and they're putting their name behind it. If you had a few more big players on board like that, this could turn into something big over time.

Moser: Well, makes sense to me. I guess we'll just keep an eye on it and look forward to seeing how the year shakes out for them.

OK, let's pivot away from debit cards and talk a little bit about credit cards. You and I were reading an article the other day that caught our eye. The gist of it was that young Americans are falling seriously behind on their credit card payments. This is data coming from the Federal Reserve Bank of New York. A little bit more than 8% of outstanding credit card debt among Americans between the ages of 18 and 29 was delinquent by at least 90 days. That's the highest level since early 2011. It's by far the highest share among age groups, which then leads us to asking the questions, Matt -- are these perhaps cracks in the foundation of what seems like a pretty strong economy to this point? Or is there something else at play here? What do you think?

Frankel: That's the concern. First of all, just to put this data in a little bit of context, you mentioned correctly, this is the highest since 2011. But before that, credit card delinquency rates were much higher. The peak for the 18-to-29 age group was 14% in 2008 -- during a recession, bad economy. But before that, the level has been above 10% since 2000 for that age group. So, it's still low on a historical basis.

The concern is whether the tide's starting to shift, and if we're going to see this continue to go up. 8% is not an extremely high delinquency rate for credit cards. The average is somewhere around the 5% range. Synchrony , which we talk about a lot, for example, has a net charge-off rate for all age groups of just over 6%. So 8% isn't an insane number. It would be if you were talking about mortgages. But for credit card debt, that's usually the first thing to go when people hit tough times. People are going to keep paying their rent, they're going to keep paying their mortgage, they're going to keep paying their car payment, but credit card debt, no one's going to come tow their car away or take their house because of it, so it's usually the first one to go. And if you're going to be financially irresponsible -- I'm not saying that all of the 8% that are delinquent are financially irresponsible -- but generally, if someone has had bad credit in their lifetime, it's because of irresponsibility when they just became an adult and don't know how to handle it just yet. I'm not saying that's all of it, but generally speaking, that younger age group has always been the highest delinquencies out of all age groups.

But there's a lot more pressure on this age group these days. Student loans have become a massive burden. Rent is going up in a lot of the markets where these younger people are finding jobs. There's a lot more they have to pay for right now. The concern is the additional burden that's being placed on people in the 18-to-24 age group. And maybe the economy starting to take a turn for the worse, as people have feared. And usually, like we said, the peak of delinquencies before was in 2008. We all know what was happening around that time. The worry is not necessarily that we're headed for another Great Recession, but that the economy is starting to take a turn for the worse, as we see credit card delinquencies start to tick up a little bit.

Moser: Yeah. Maybe not time to hit the panic button yet, but I guess you take this data, couple it with the data that we saw a little while back in regard to those car loans. There is a number of debts outstanding on car loans as well. It seems like maybe we are hitting a point where we need to start paying a little bit more attention here. It could certainly portend something to come down the pike here. It seems like, as things stand, the market is doing very well, it seems like the economy in general as well. Inflation is low, fuel is not a burden. And it makes perfect sense, like you said, that this age group is going to be the one that faces the most pressure in this type of situation, because they are so new to the economy, they don't have a lot of experience under their belt, and they typically are getting lower-paying jobs to begin with. Couple that with a credit card environment where a lot of these banks and companies are trying to sell credit cards to students while they're still in school, you can mount up a lot of debt in a short period of time if you're not careful. I guess we'll just pay attention to those numbers and see how they trend over the course of the year.

Frankel: If you are wondering, by the way, why it's been over 10% historically, and now it's not, right after the Great Recession is when the CARD Act took effect. You said trying to recruit students in school, now they're a little more limited in how they can do that. Jason went to college not far from where I did, and not too far time-wise from where I did. I'm sure you had the thing where they would give you a free pizza just for applying for a card.

Moser: Sure.

Frankel: They used to hang out by USC football games and offer to give you a football T-shirt if you filled out an application.

Moser: Oh, the incentives!

Frankel: They're not allowed to do things like that anymore.

Moser: We talked about that UltraFICO, they're trying to use a little bit more data, at least, to make more educated decisions and establish credit records for people, maybe they don't have credit, they can look at their banking relationships and get a better idea as to how worthy or unworthy they may be in regard to credit. But, yeah, it's a difficult landscape to maneuver for anyone, but certainly younger consumers, because there's still a lot to be learned.

OK, Matt, let's wrap it up this week with One to Watch as always. What's a stock you have on your radar this week?

Frankel: I know it's not really a financial-sector stock, but it's definitely a fintech-adjacent company: Apple. I already mentioned them a couple of times today. They do business with Green Dot. They're really ramping up their payment solutions, Apple Pay and Apple Pay Cash, which is the person-to-person app they use Green Dot's technology for. Apple's been getting crushed over the past week or so because of the trade war stuff. If you're not familiar, Apple gets a lot of their parts, I believe they still actually build their iPhone in China. So they're definitely a tariff-susceptible company and have been getting pummeled. I think over the coming weeks and months, we're going to see this work itself out. It's not going to be quite as bad as the market's trying to make it look right now. I love Apple anywhere below $200 or so, and it's well under that right now, so I'm looking closely at it.

Moser: Yeah, I like these blocks of time where those real short-term concerns get some of these better companies in a little bit of a defensive position. I agree. I think Apple is a business that's going to do just fine in really any environment. But if you can get those shares on sale, that's all the better.

I'm going to go with JPMorgan this week. It's because this brings two of my favorite industries together in fintech and healthcare. JPMorgan just made a deal to acquire InstaMed. It was a big acquisition. The numbers weren't published, but there was research that said it was a deal that was more than $500 million. This makes it the largest acquisition for JPMorgan in more than a decade. InstaMed is a payments company focused on the healthcare space, and they processed $94 billion in payments last year. I just think this could be a nice little catalyst for JPMorgan in the coming years. Certainly Jamie Dimon, a bit more of a forward-looking CEO in the bank space. I like how they're tacking this thing on there. I'll be interested to see what more they have to say about it.

But hey, Matt, listen, thanks for coming on this week! It's always a pleasure to talk to you!

Frankel: Always great to be here! Can't wait to talk more about it next week!

Moser: Sure thing! 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!

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Intuit, and Twitter. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .