Morning Brew Daily - Warning Labels for Social Apps? & IRS Closes $50B Loophole

Episode Date: June 18, 2024

Episode 346: Neal and Toby unpack US Surgeon General Dr. Vivek Murthy’s call for a warning label on social media apps before teens log on. Then, wealthy taxpayers have been exploiting a loophole and the IRS is fed up. Next, Wells Fargo’s partnership with Bilt Rewards has been a favorite among cardholders… Except it’s costing the bank millions of dollars. Plus, print magazines aren’t quite dead yet. Toby explains why he sees a thriving trend for high-end niche print magazines. Meanwhile, McDonald’s pulls back its AI-powered drive-thrus in over 100 stores due to its (quite comical) technical flaws. Lastly, customer satisfaction across 13 sectors are getting worse and worse. Have we lost the importance of customer service?  Download the Yahoo Finance App (on the Play and App store) for real-time alerts on news and insights tailored to your portfolio and stock watchlists. 00:00 - Last time the Celtics won… 2:15 - Social media warning labels 7:15 - IRS closing big tax loophole 10:15 - Wells Fargo regretting Bilt card? 15:00 - Toby’s Trends: print magazines 18:30 - McDonald’s AI drive-thru flop 22:30 - Customer service is a lost art Get your Morning Brew Daily Mug HERE: https://shop.morningbrew.com/products/morning-brew-daily-mug?utm_medium=youtube&utm_source=mbd&utm_campaign=mug Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning, Brew, Daily Show. I'm Neil Fryman. And I'm Toby Howe. Today, the tragic story of a Wells Fargo co-branded credit card. Then does social media need to come with a warning label? The U.S. Surgeon General certainly think so. It's Tuesday, June 18th. Let's ride.

Boston's long nightmare is over. The Celtics won the NBA championship last night over the Mavericks, ending the city's five-year title drought that may not seem like a long time for people in Minneapolis or Buffalo, but it's Boston's second longest. span without a title since 1960. It also marks the Celtics 18th championship, which moves them one pass the hated Lakers for the most in NBA history. Boston may not have affordable suburbs, but it's got plenty of trophies. I just want to take a minute to remind everyone, though, of the fact that the last time the Boston Celtics won the title back in 2008, Lehman Brothers

collapsed and the world economy descended into chaos just three months later. That's... Well, you know what happened in 2008, to me. That's all I'm saying. I'm not wishing that upon anyone, obviously, but just something you can have in the back pocket today to remind that annoying Boston sports fan of yours in the coming days. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next grill 3-burner gas grill, or get $50 off a select Weber Spirit grill and bring big flavor to your backyard. Then set the scene with Hampton Bay string lights.

that bring it all together. Shop spring, backyard days for seven days at the Home Depot. Now through May 6th. Exclusion supplies to home depot.com slash price match for details. Now let's talk Yahoo Finance. One thing about hosting a daily business news podcast is that it feels like you have homework assignments do every single morning. It's like having to do an oral presentation in front of the class every day.

And don't get us wrong. You guys are a great audience, very respectful, asking always good questions. But there's no textbook for business. News. No flipping to page five to brush up on the latest Elon Musk tweets. And that's where at Yahoo Finance comes in for us. It's the closest thing to a business news study guide you can get. You can keep tabs on what's going on in their news section, dive deeper into the fundamentals of a stock, or sort through an earnings report all in one place. Saves us clicks, saves us time, and helps us put together this oral presentation for you guys

every morning. All right, all right. Let's just call it a morning show. Okay, none of this oral presentation stuff. If you want to brush up on the latest news and market data, head to finance or download the app on the play or app store. Imagine logging on to Instagram or TikTok and being greeted with a warning label about its dangerous side effects. This is the future the U.S. Surgeon General Dr. Vivek Murthy is urging Congress to make a reality. He wants to introduce warning labels that regularly pop up and warn parents and children of the potential dangers associated with all that endless scrolling.

If this sounds like the labels that are on tobacco and alcohol, then you're not a lot of spot on. The surgeon general thinks social media should be talked about in the same breath as those advices. In a guest essay on the New York Times, Murphy cited studies that found nearly half of kids have some sort of body issues tied to social media use and that kids who spend more than three hours a day on it are far more likely to suffer from anxiety and depression. There's also a body of work cited by experts in tech CEOs that say the link between teen mental health and social media is lacking concrete evidence intends to get exaggerated. So do you think that something like adding warning labels to popular apps is overkill?

Are we heading in that direction? I don't know whether we're headed there because it would take an act of Congress, but this is Murthy, getting ahead of the PR conversation and saying, look, we don't know whether this is, we have evidence, perhaps, that it is harming teens, but then again, we have no evidence that it is safe either, and we're not going to take any chances here, and I would love to put these warning labels on social media platforms, because when I look at the stats here, I'm speaking as Murthy, I see that teens are spending five hours a day on social media, and that just as much as three hours a day leads to significant worse health outcomes.

So this is him just putting his stake in the ground, and he's done this before. He sounded the alarm going back years saying social media is not good for teens, and we need to do something about it because it's leading to this loneliness epidemic and a lot of depression among kids. Right. His approach to it is saying, let's not wait here. one of the quotes from his op-ed was, one of the most important lessons I learned in medical school was that in an emergency, you don't have the luxury to wait for perfect information. You assess the available facts, use your best judgment, and you act quickly. So that is how he's approaching

the social media situation. He knows that there's conflicting research out there. He admitted that, but he said, I'd rather take action now than wait till down the line until we have more concrete facts, more concrete information, because clearly he's seeing enough warning signs here that is causing him to take this recommendation action. And he's directly linking it to some of the most iconic, you know, consumer safety measures in American history, like the seatbelt, like helmets on bikes, especially the first thing that comes to mind here is the warning labels on cigarettes, which went into effect in 1965. And at the time, 42% of U.S. adults were daily cigarette smokers. Just think about that for a sec. Forty-two percent, wow. And then by 2021, after those labels came into

effect decades after, that had dropped to just 11.5%. Don't know whether causation's correlation. There's obviously a lot of other things going on, but those warning labels did come into effect in 1960s, and we saw a huge precipitous decline in cigarette smoking in the United States. And Murphy wants to go beyond just these warning labels, too. He had a lot of recommendations for policymakers. She's calling for legislation that shields some young people from some of the more violent or sexual content on social media. He wants to ban platforms from collecting children's data. He wants to restricts. push notifications, autoplay, infinite scroll, these features that he says prey on developing brains

and contribute to excessive use. And then he also wants to force social media companies to undergo this independent safety audit where they share data that they have regarding the health effects, regarding all those, these things that we've talked about with independent scientists and the public. So he's not just hand-waving here. He is coming with a litany of demands and a litany of recommendations on how we could make social media safer beyond just slapping on these warning labels. But I did go down a rabbit hole to see if warning labels actually do anything,

and there's quite a bit of a body of research over the years. It seems that they're so ubiquitous now. When you go into a grocery store, you go into a drug store, you see so many warning labels that their impact has maybe been reduced because you see so many, and each one sort of has a, you know, less of an impact on you. But they did a study that showed that the only kind of warning labels that actually do anything are graphic, graphic warning labels. So images that are graphic in nature that show you the impacts of what you're about to consume. Like if you show a person with very rotted teeth or bulging belly

for something like sugary drinks and a study by a Harvard Business Review, that was the only type of warning label that actually moved consumers to make different choices. Right, because I was going to say, I have limits on my social media where it pops up and say, hey, you've been spending too much time on Instagram, but I'm just so used to clicking by that at this point because you're right. It's just words. It's not really. inspiring anything in me. Yeah, consumer safety advocates say warning labels are the last resort. That only comes after making the actual products safe to use. This is a conversation that we're going to continue to have. Anyone listening extremely rich and is a partner in a hedge fund or

real estate investment firm? The IRS is coming after you. Yesterday, the agency announced a plan to close a major loophole used by large, complex partnerships to avoid paying taxes with the goal of raising $50 billion in tax revenue over the next 10 years. The crackdown targets a process known as basis shifting where businesses or people shuffle assets between related parties in order to shield them from paying taxes. The IRS calls this really just a shell game that provides no economic benefit to anyone except the people who lowered their tax bill. It's also part of a series of actions the IRS has taken recently to go after tax avoiders. Two years ago, the Biden administration plugged it with $80 billion in fresh funding, and the IRS wants to prove that's a

worthy investment by recouping tax revenue to bolster the Treasury and pay for itself. Yeah, so the IRS looked at the body of evidence here and said that the filings for these pass-through businesses that are used in this sort of basis shifting this tax avoidance loophole, those increase 70% from 2010 to 2019 up to almost 300,000 of these unique sort of filings. However, the audit rates for those types of businesses actually fell from 3.8% to 0.1% in the same time frame. And again, the IRS said, listen, our hands are tied here. We just don't have the resources to audit all these pass-through corporations that are being created. And so they're saying now that we have more resources, now that you gave us a little more money,

they're making a big show of saying, we are going to start cracking down on these because essentially they've just been used as a loophole for far too long. And just for some X's and O's here, a pass-through business is where it's very complicated, but the idea of it is of it and why it's called the pass-through business is because the income and losses are passed directly to investors. So you're not taxed at that corporate level. You're taxed at the individual level. And that's been a very popular mechanism or business structure, LLCs, S-Corps, things like that have popped up because they become more attractive in terms of sort of the tax scheme here. Let's look at some of the other initiatives that the IRS has been pursuing since they got that additional funding. In 2022, they've been pursuing people and businesses more closely for their usage of personal flights on corporate jets. That was a big one that we've spoken about on this show before. And then they are also trying to collect a bunch of these delinquent back taxes from millionaires who are trying to wriggle out of some of these back taxes. But yeah, it all goes down to saying that, listen, you gave us some extra funding, we have to show that we're doing something with it. It was initially $80 billion

of funding. Congress actually already clawed back $20 billion of that funding. So expect to see a couple more of these announcements dripping out in the coming months in years to say as a way for the IRS to show that it's doing something with the money it's been given. When a deal sounds too good to be true, the deal is usually too good to be true as Wells Fargo is beginning to understand. Back in 2022, a buzzy fintech startup called Built struck a deal with Wells Fargo to launch a co-branded credit card that comes with a pretty sweet deal. You can pay for rent using the card without incurring the typical fees from landlords. So you get a bunch of rewards points because rent is expensive without getting nickeled and dined by landlords. Consumers liked the sound of that and more than one million accounts were activated in the first 18 months after the card was launched.

Sounds like a success, right? But again, if something sounds too good to be true, it usually is. And in this case, it was Wells Fargo that was getting absolutely fleeced by this arrangement. Wall Street Journal published a piece that found the bank is losing as much as $10 million every month on the program as consumers take advantage of the card. According to the article, execs that the bank miscalculated on some key revenue drivers, including the likelihood cardholders would carry balances on their cards and how much they might use the card for purchases other than rent. Neil, this is a major egg on the face moment for Wells Fargo. What were they thinking here? It's bad for Wells Fargo. It's great for Built.

They built their valuation. No pun intended. To $3.1 billion through this partnership. Their founder is a billionaire. And if you look at the specifics of this partnership, which is really cool because we don't often get the details of a credit card partnership like this. Companies do not want this information leaking out. It looks like Built was making a lot of money.

First of all, you just said that a million people opened up the accounts. Well, Wells Fargo paid billed $200 each time a new account was issued. So that's $200 million. Right there off the bat. Wells Pays built a fee of about 0.8% on each rent transaction. And then they both split those interchange fees every single time someone uses a card to pay for anything other than rent, which is not as much as Wells Fargo at hope. So as sort of embarrassing as this looks for Wells Fargo, it looks like a great deal

for Bilt, and this is a deal that they can't, that is on the books through 2029. Right. Wells Fargo is trying to wriggle out of it, but Bill is not trying to wriggle out of it because it has been great for them. So what was Wells Fargo really thinking here? I mentioned it a little bit, but they thought that Bill would be more of a top of wallet card that people would use for everyday transactions as well, and they thought they could recoup some of their fees on those everyday swipes. But people said, wait, this is a card for paying my rent. I'm just going to pay my rent with it. Then they also thought people would carry balances on the card and Wells Fargo could charge interest on that. But again, rent, just

habitually thinking about how people pay rent, you pay it every month. It's not something that you let kind of sit as a balance on your credit card. I don't know why people's consumer preferences would change all of a sudden when you're paying it on credit. So it turns out that they just massively miscalculated on both those things, how much transaction fees they get on non-rent charges and how much interest they'd earn on balances carried each month. And that is what turned this into just a black hole of money for them. Can I offer an opposing view? So I read this article by Gary Leff, who writes a very popular blog about airline industry and credit card rewards called View from the Wing. And he said that this shows Wells Fargo actually coming across really well.

First of all, $10 million a month, they're losing. They make $7 billion in revenue a month. So it's just not that much at all. They were experimenting with a new car. They're trying to go after a new market, which is younger consumers. They had this concept that they could cross-sell mortgages off of that, which was, you know, maybe an interesting notion, maybe a good strategy, had it worked out. And then once they realized this was not working, they sort of packed up their co-branded credit card team, and they're mitigating their losses.

And they tried something new. And they're not losing a ton of money from it, $10 million, month is not a ton for them. So maybe this was just something that they should be applauded. Bill's obviously should be, you know, it should be applauded for what they did here. So that's just an opposing view that maybe shows that Wells Fargo isn't maybe this isn't, this isn't a particularly embarrassing episode for them because they tried something new. It didn't totally work out like they expected, but maybe it will going forward. My opposing to your opposing view, though, is that it seems a little desperate because they

just really wanted to jump into the co-branded credit card game. They wanted to make this splashy entrance. And when you see how much they miscalculated in terms of what they thought would be revenue drivers, that's where I think it's embarrassing for them. But you're right, it's good for consumers come out on top on this. So they should be applauded for taking that risk. Up next, hold on to your caffeinated beverage. Toby's trends is coming in hot. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the Jonas Brothers return to the Yamava Theater stage on April 30th. the powerful vocals of Demi Lovato on May 17th

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While supplies last, ends June 30th, terms at AKA.m.m.S. slash college PC. There is something so alluringly tactile about thumbing through nice, glossy magazine pages that just hits different in today's online world. Kids these days may not remember the sight, smells, and sounds of the age of magazine but gosh darn it, I'm going to do my best to paint them a picture on today's edition of Toby's Trends,

where I come through the internet for a trend that you guys should keep your eye on. And today's trend is not just about magazines, but the surging interest in very high-end, very niche magazines. There is this batch of independent mags focus on the great outdoors like Adventure Journal, Mountain Gazette, and Summit Journal. Then you have the Golfers Journals and Surfers Journals of the world, which target the obsessive hobbyists. One thing unites these publications. They are not meant to be consumed online.

Most don't even have a digital presence. They are instead meant to be browsed, toted around in a shoulder bag, or even just left on a coffee table for the vibes. They are collectibles, not disposables. And they are decently successful. The Surfers Journal has around 28,000 subscribers and sells yearly subscriptions.

Again, these are niche businesses, not huge corporations, but they are carving out their space in an increasingly flat and one-dimensional digital digital landscape. Yeah, the business owners here are painting these magazines, these high-end magazines as an antidote to our culture of constantly scrolling online. They say it's not necessarily nostalgia for print. It's more just the reading experience in general. They say when you read on a computer, as I'm doing now, you're leaning in. And when you read a magazine in print or anything

else in print, you're leaning back. And it's just much better experience for your body, for physiology, for your mental state in general. And that's what they're saying, their success hangs on. It's not necessarily nostalgia, like maybe records or things like that. I've seen a resurgence, but it's more just, this is a better reading experience. This is what people want. Yeah, I'm so glad that this exists in the world today, because you're right. It is just a delightful experience to chill back with a magazine sum through. I was talking about, like, the experience of feeling a magazine. And that is something that they take very seriously, Debbie Pezman, who is the Surfer Journal's publisher. She says, one, never underestimate the intelligence of the reader always

to deliver them quality as much as possible. But then she talks about doing things like printing a magazine on paper that's 18% thicker. And she's like, listen, it's not the best business decision. That's going to cast us an extra $22,000 in postage. But when you see the other magazines out there,

the only way you can really differentiate yourself is to just keep continually dialing up the quality and 18% thicker pages just screams quality. And also, we just have to say, too, these magazines are beautiful. Like, we were just marveling at, I mean, we were looking at them on a computer screen which you're not supposed to do, but the spreads, the photography, it just is a very luxurious product. And I'm just glad it exists in the world. Yeah, and some, you know, heavy hitters are actually getting into the space. We said most of this was mom and pop. But if you ever heard of the country singers Eric Church and Morgan Wallen, they just bought Field and Stream, which is an outdoors magazine that did not have print. They're bringing print back. And they're going to issue two, two magazines. magazines per year, field and stream, saying like, this was just what our parents had. I saw it on my

dad's truck every summer, and I want to bring this back. So there's some pretty heavy hitters getting into this space. It does seem like all these business models are somewhat similar. They charge a subscription. They offer two to eight magazines, or they even call them journals per year. And then they have a few sponsors on top to keep the lights on, like the Patagonias of the world. So that seems to be the business model. And Eric Church and Morgan Wallen are getting in. As any fan of Good Burger knows, nothing can replace the experience of a person taking your fast food order. Apparently McDonald's is just finding this out. The company is ending its test of drive-through automated ordering and removing the technology from more than 100 locations that had been using it.

McDonald's drive-thru AI experiment began two years ago with a partnership with IBM. Hopes were high that the tech could speed up drive-through lanes more clogged than your arteries after you eat McDonald's and shift human workers to other tasks. But the chatbots rolled out to take your order were no Kenan Thompson, and customers captured their frequent mess-ups and posted them to social media, where, of course, they went viral. In one spectacular fail, someone received an ice cream cone topped with bacon. Honestly, would try. Moving forward, McDonald's says this isn't the end of its push to AIify the drive-thru, but it might seek out a partnership with a different vendor than IBM. Toby, feels like more AI products are being rolled back than rolled out these days. Yeah, you know what they say?

you don't go broke buying IBM. It feels like McDonald's is going a little broke buying IBM here. All the official corporate statement on this was saying, like, no, we enjoyed our partnership. It was really great, but there is some rumblings that McDonald's did have a problem with IBM's technology itself. And clearly through the amount of social media videos that were posted, one of my favorites was someone wanted one sweet tea. And then all of a sudden it ordered nine sweet teas for them because it picked up some additional voices. from another drive-through lane. So there's just a lot of issues here.

One thing is for certain, though, I don't think that the restaurant industry is giving up on AI by any means. Like, this is definitely going to be something. If you can replace that cashier or reroute them to be doing something else rather than taking orders, it's going to save you a lot of time,

increase efficiency a lot. So this is definitely not the end of it, just the end of this specific partnership with IBM. No, and McDonald's, which has been so tech for it, has actually been less, aggressive in its pushing to AI than other chains like Carl's Jr., Wendy's, Duncan, Taco Johns, Hardee's, Wendy's especially into a partnership with Google last year to roll out AI

drive-through capabilities. But it's really interesting that the AI drive-through situation is very complicated for an AI chat-out. It's not so easy because when you're taking an order, a human can understand things that an AI may not, because when you're ordering at fast food, Sometimes you're using the term, you know, the company slang like you're ordering a frosty instead of a milkshake, you're ordering biggie bags instead of, you know, the more official term. So that is something that the AI needs to parse through. Meanwhile, you've got your family in the back. See, your brother's being annoying. They're all being loud.

So the AI has to parse through exactly what is being ordered. Meanwhile, how many times have you changed your order in the middle of the way through? You're like, yeah, maybe I want the medium instead of the large. I've been with you and you've done that. So the AI also has to do that. So this problem is not so easy to solve as it may be just like, oh, a simple query to chat, GPT. I mean, McDonald's publicizes the famous, can I get a while you're thinking about what to order?

But another instance that I think AI can enter the fast food service space is that a lot of these companies are training large language models on their own operations in procedure. So there are rumblings that Google also announced a deal with McDonald's in last December around the same time that they announced that deal with Wendy's to make a chat bot called Ask Pickles, which you could do things as an employee and go on and say like, hey, the ice cream machine is broken again. Like, how do I fix this? And then the Ask Pickles would walk you through how to fix that ice cream machine. So I do think that we're going to be seeing it, not just consumer facing, but also internal facing to try to speed up and spruce up those internal processes.

Well, that discussion is a perfect segue to our next story, which is that customer experience, ratings in the U.S. have declined for a third consecutive year to a record low, according to a new report from the consulting firm Forrester. Yeah, seems like most of you are not feeling the warm fuzzies after interacting with a company. To put a number on it, the average customer experience score people gave companies was 69.3 out of 100, down from a peak of 72 in 2021. The survey pulled nearly 100,000 consumer's perceptions of 223 brands across 13 sectors. Of course, brands want to provide better experiences because better experiences mean fewer angry customers, more repeat purchases, and higher sales.

But Forrester said that companies just don't invest the cash and resources that are necessary to get to that level. Toby, it reminds me of Jeff Bezos's famous quote. The most important single thing is to focus obsessively on the customer. Companies say they do that, but they don't really because it's too much work. It is interesting to see the nature of what is making customers mad because it has been changing over the years. Forresters has been doing the surveys since 2016.

And back a few years ago, it used to be pandemic-era stuff like shipping, delays, shortages, understaffing. That was largely what was impacting customer experience. But those issues are largely in the past now. Now consumers are a lot more skeptical of the value they think that they're getting from company. So stuff like shrinkflation where prices are going up, but your portion sizes are going down junk fees. Those are the things that are most top of mind for consumers right now. And it makes

sense. Like it doesn't feel like you're getting the best value these days and you're probably not. So let's talk about who's actually doing well because why now we're at the end of the show. Got to end on a high note. The top brand for three years running now is Chewy. Also in this elite category is Edward Jones, Etsy, Lincoln, Navy Federal Credit Union, Subaru, Tesla for the first time, Zappos. And I don't know whether it's Hebe or Hib or Hed. H-E-B. The Texas people are going to be out for it. I feel like I said it wrong the last time, so I'm just going to say both. H-E-B, Hib, I'm right, one of them. But those brands are doing it well. Meanwhile, the brands that are not doing it well, guess what's ranks last? The IRS, you know,

we just talked about them trying to remake their image a little bit. They were last of all the 223 brands with a score of 49.6 on the index. The final thing that surprised me at this report is that across categories, every single customer experience is declining in every single sector except for one. And that was airlines, which I would never have predicted that. But apparently people are feeling a little bit better about their airline experience these days. I would not expect that. All right. Let's wrap it up there. Thanks so much for listening. Have a wonderful Tuesday. As always, you can send a note to Morningbrewdaily at Morningbrew.com with questions, comments, words of affirmation. Let's roll the credits. Emily Milliron is our executive

producer. Raymond Liu is our producer. Olivia Graham is our associate producer. Eugenwa Ogu is our technical director. Bill Minino is on audio. Hair and makeup provides only the best customer experience. Devin Emery is our chief content officer and our show is a production of Morning Brew. Great show today, Neil. Let's run it back tomorrow.