Today PayPal announced a new digital wallet following announcements about supporting offline retailers, improving its mobile app and others, as well as PayPal Here, its new Square competitor. This could be waived off as yet another attempt to go into the coupon, Social-Local-Mobile-Offline-Small-Business trend that's flushing payment providers in the US. It can also be perceived as a hasty response - much like a lot of others' - to Square, a company whose effective PR machine turned it into the elephant in the boardroom for almost any financial services company (I think Square has a lot of potential, but also that a lot of companies don't understand where they're going. But that's a different discussion). But there are two things to take into consideration here that are unique to the Gorilla in the market of online payments.
Unlike other providers outside of banks or credit card companies, PayPal is the only company that can make money from the fact that people and companies want to move money around efficiently (that's why trying to compete on price is an effort that's doomed at inception). Even in cases where the source of that profit looks flimsy (such as FX arbitrage) it is not really the case - PayPal's global reach is not an easy position to attain and barriers to entry are high. No other contender has this ability as a financial institution or the deep understanding of regulations and how often they change. But I digress.
The way I see it, PayPal is doing what it's doing since its leadership understands that the company's long term growth can be stifled by two major components: its third party ecosystem, and the threat of shrinking margins.
Over the first 12 years of its existence PayPal focused on the actual move of money while growing an international presence. For its unique advantages it charged (and still charges) high fees. As a result of that focus, services grew around PayPal offering it as a payment options as part of a payment "wall" or some broader "checkout" solution. So PayPal enjoys a smaller share of wallet and a smaller share of revenues in return for all types of user acquisition channels - since the higher margin services are provided by these third party providers. From what I'm hearing behind the scenes, PayPal is cracking down on these services, forcing them to, for example, stop using a single bus account for all of their sub merchants and creating a direct relationship with these merchants, who are now forced to have their own PayPal accounts. In addition to the company launching more merchant focused features and acquiring relevant IP, I believe this is an orchestrated effort to reclaim the ecosystem.
The other part of margins. PayPal converts users to ACH to reduce transaction fees and be profitable. Google, ISIS et al (let's say these two are in the same league) do not have the same ability. No other company knows how to use ACH effectively, not to mention Bill Me Later style credit (trust me, we at Klarna know how difficult that is). But even with all this PayPal is feeling the shrinking margins - it was not able to bring BML to a large enough crowd; plus, its reliance on card associations is putting a strain on margins - despite the Durbin amendment making debit cards cheaper in the US, costs in the rest of the world don't really favor direct debit over cards. In addition, despite a lot of efforts PayPal hasn't found the formula the have people keep substantial account balances - and its customer care reputation doesn't help, either. The new digital wallet initiative is a smart way to bring BML to consumers, branded differently - not as a financing solution but as a flexible lifestyle solution.
Like any other payment company, PayPal has to worry about two major issues - user acquisition and access to capital. However, at its size and status and if it wants to continue growing, PayPal needs to be worried about a few unique challenges. While it's catering to its users needs, the company is also making a few smart steps in order to set itself for success in the future.
Unlike other providers outside of banks or credit card companies, PayPal is the only company that can make money from the fact that people and companies want to move money around efficiently (that's why trying to compete on price is an effort that's doomed at inception). Even in cases where the source of that profit looks flimsy (such as FX arbitrage) it is not really the case - PayPal's global reach is not an easy position to attain and barriers to entry are high. No other contender has this ability as a financial institution or the deep understanding of regulations and how often they change. But I digress.
The way I see it, PayPal is doing what it's doing since its leadership understands that the company's long term growth can be stifled by two major components: its third party ecosystem, and the threat of shrinking margins.
Over the first 12 years of its existence PayPal focused on the actual move of money while growing an international presence. For its unique advantages it charged (and still charges) high fees. As a result of that focus, services grew around PayPal offering it as a payment options as part of a payment "wall" or some broader "checkout" solution. So PayPal enjoys a smaller share of wallet and a smaller share of revenues in return for all types of user acquisition channels - since the higher margin services are provided by these third party providers. From what I'm hearing behind the scenes, PayPal is cracking down on these services, forcing them to, for example, stop using a single bus account for all of their sub merchants and creating a direct relationship with these merchants, who are now forced to have their own PayPal accounts. In addition to the company launching more merchant focused features and acquiring relevant IP, I believe this is an orchestrated effort to reclaim the ecosystem.
The other part of margins. PayPal converts users to ACH to reduce transaction fees and be profitable. Google, ISIS et al (let's say these two are in the same league) do not have the same ability. No other company knows how to use ACH effectively, not to mention Bill Me Later style credit (trust me, we at Klarna know how difficult that is). But even with all this PayPal is feeling the shrinking margins - it was not able to bring BML to a large enough crowd; plus, its reliance on card associations is putting a strain on margins - despite the Durbin amendment making debit cards cheaper in the US, costs in the rest of the world don't really favor direct debit over cards. In addition, despite a lot of efforts PayPal hasn't found the formula the have people keep substantial account balances - and its customer care reputation doesn't help, either. The new digital wallet initiative is a smart way to bring BML to consumers, branded differently - not as a financing solution but as a flexible lifestyle solution.
Like any other payment company, PayPal has to worry about two major issues - user acquisition and access to capital. However, at its size and status and if it wants to continue growing, PayPal needs to be worried about a few unique challenges. While it's catering to its users needs, the company is also making a few smart steps in order to set itself for success in the future.
3 comments:
Good article Ohad.
I agree with your assessment of PayPal wallet. It is quite smart way to sell BML/PayPal Credit; which wasn't a popular choice otherwise. It also helps PayPal keeping transaction expense low. This new system allows second interaction between User and PayPal and at that point PayPal can convince them to use cheaper options like ACH and it also increases checkout speed for User with PayPal which also preferred option for them. Wallet is really smart solution coming out of PayPal for many reasons. User reaction and adoption is yet to be seen.
PayPal here on the other hand doesn't make too much sense; as PayPal doesn't carry a reputation of great customer service and satisfaction with Sole Props and SMBs which is target market for PayPal Here. PayPal also looses its mix of CC and ACH which cuts the margin razor thin as you mentioned; so PayPal Here seems like an effort for presence than anything else.
It would be great to hear your thoughts about Square :)
Great article- I'd love to hear your thoughts on where Square is headed. A new set of rails perhaps?
Thanks for your comments. I don't think there's much hidden about Square at this stage - a lot of people wrote about them already - there are just a lot of intricacies with brand, distribution, and whether Square is a mobile payment solution or not (not) that raise a lot of confusion within traditional payment services.
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