The Public Ledger: PayPal Plans Financial Services Push...But Will It Work?

Hello, Fintech Friends!

During commentary about his plans to revive PayPal’s fortunes on yesterday’s earnings call, new CEO Enrique Lores revealed that among the company’s top priorities will be significantly penetrating and expanding financial service offerings (BNPL, credit, and debit cards, to start) across its PayPal and Venmo user bases, with the objective to make PayPal a more valuable part of their customers’ everyday financial lives.

Join the club.

While that’s a perfectly reasonable strategy, it’s not necessarily new, and PayPal is running headlong into an increasingly competitive market as battles for direct depositors heat up and fintechs dangle more and more incentives (enhanced rewards and higher savings rates, among others) to win customer hearts…and wallets.

So, what makes PayPal different, and potentially successful in this endeavor? Among their most obvious advantages is a significantly scaled two-sided network, backed by reams of spending data, providing a potential underwriting edge and BNPL acceptance at tens of millions of merchants.

The problem for PayPal is that competitors have largely negated these advantages by building sophisticated, and proven (up for argument), underwriting models, and working with other payment services providers to significantly expand merchant acceptance for its BNPL loans, avoiding the time consuming process of going ‘door-to-door’ to build direct integrations. Another problem for PayPal is that its user base may not be predisposed to adopting non-traditional financial services. The Venmo user base, in particular, skews more affluent and is more likely to be happy about their current relationship with a traditional bank.

The good news for PayPal is that not everything needs to break its way in order to boost its meager growth rate and prove the market wrong. According to PayPal, financial services already make up close to 20% of its transaction margin with growth rates significantly faster than the rest of the business. Further, it is demonstrating early success with BNPL volume growth accelerating to 26% in Q2, up from around 20% during the past couple of years, placing it near-or-above some of its largest rivals.

I think the market may interpret PayPal’s push in two different ways: by assigning some value to PayPal’s effort and potential success, or by placing downward pressure on multiples for lend-centric fintechs, signaling an even more competitive environment due to the more forceful entry of a large player like PayPal.

— Bob Hammel

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