Payments in the Pandemic – Paypal

Paypal is very well positioned to capture new volume both short term and long term growth

First off, best wishes to you and your family during these challenging times. I had intended to get this out last week, but found the need to invest in family. My family is doing fine, I’m fortunate to have all of my children, grandchildren and parents within 10 miles of Davidson North Carolina. We are like the rest of you, navigating needs for family support and volunteering in our community.. All of which has changed up our schedules. My hope is that we all find some way to create good out of this terrible event. 

In this Blog

  1. Massive disruption in Commerce has created fundamental changes in payments and consumer behavior. 
    • Discretionary and T+E spend is dropping 40-80%. Visa and Mastercard have both revised growth from mid teens to low single digits. Paypal has maintained low end guidance. 
    • eCommerce is clear winner right now, estimate that Paypal’s core eCommerce TPV could be 40-60% above average 
    • Consumer behavior changes driven by the pandemic will rapidly accelerate the move away from physical retail (See 1 April WSJ).
  2. Paypal is very well positioned to capture new volume both short term and long term growth.

Current State – Earnings

From a commerce (and payment) perspective, this pandemic has wrought fundamental change. McKinsey reports (see WSJ ) eCommerce purchase volume soaring over 80% (since Feb). Industry analyst Craig Mauer (Autonomous/AllianceBernstein) has done a fantastic job of breaking this down by vertical, geography and discretionary/non-discretionary. 

While T+E related verticals have seen revenue decline 50-80%, and discretionary spending take hit of 40-50%, non-discretionary has seen a rise of 20-45% (driven by grocery). Across all of these spend types there is a significant shift in volume to online/mobile (card not present) and away from cash/Card-Present: ordering groceries, amazon, food delivery, …etc. The impact of this change in consumer behavior is complex. Visa and Mastercard have both revised earnings with expected growth dropping from mid teens to low single digits (see Visa 8-K, MA 8-K). Visa’s 8-K provided the following

Paypal’s Feb 27 update, outlined the impact of Covid-19 on cross border eCom, but maintained guidance “at the lower end of our previously guided range of $4.78 – $4.84 billion. We are reaffirming our first quarter 2020 GAAP and non-GAAP EPS guidance”.  

Behavior Change

Clearly no one can estimate the change that will occur in the next 5 years. Our lack of preparedness for this event is shocking, particularly as leaders like Bill Gates outlined the impact of a highly contagious virus (2018 lecture). We have never been a more connected society. Pandemics have consistently come in waves.. And drive fundamental changes in social structure, healthcare and commerce.  Just as the Spanish flu of 1918 drove creation of public health, hygiene and social distancing.. This event will also forever change our society, including how we shop and interact.

Consumers behavior will change.. But how? What elements of this behavior change are likely to “stick” long term and drive a reassessment of long term growth. For example, yesterday’s WSJ (see 1 April WSJ) paints a bleak picture for shopping malls and physical retail. Direct to Consumer (DTC) was already the hottest growth area for CPG, how is it adapting in an economy with greatly reduced discretionary spend and disposable income? (note: this will be the subject of a following blog) 

Assessing Paypal

First off the obvious, I’m not a financial analyst and this is not meant to guide your investment decisions. Rather I’m breaking down how I evaluate Paypal and the long term implications of changes in consumer behavior. Paypal is no longer a one trick pony processing payments for eBay. They have 5 key lines of business. PayPal, PayPal Credit, Braintree, Venmo, Xoom, hyperwallet, and iZettle. Their 4Q19 investor presentation was widely viewed as the best investor communication in their history as a public (stand alone) company. 

While most payment players have offsetting CP/T+E losses with eCom/mCom gains PayPal is positioned well to capture significant new growth. I look at this business through a sensitivity analysis perspective. My estimates of how changes in behavior could impact Paypal’s core revenue drivers.

  • 1% increase in Active Users drives $163M in revenue
  • 1% increase in Customer Engagement drives $163M in revenue (Currently 38 transaction per year)
  • 1% increase in eCommerce Acceptance drives $150MM in revenue (2019 grew 29% 22M Merchants- FX Neutral)
  • 1% increase in new Merchant Services drives $20M in revenue (ex Honey)
  • 1% increase in Lending drives $8MM in Revenue ($10B portfolio, ~8% NIM)

There is a degree of overlap in the correlations between these numbers, but there is also a high degree of “network effects”. For example, great acceptance leads to greater number of transactions per user, who gets credit? Merchant acceptance? Or Active user growth?  This approach is useful for assigning business priorities and for accessing the size of the opportunity (change) for Paypal. 

Let me give an example of my math for case 1

  • 40 transactions per user
  • 250M Active Paypal users (not including Venmo)
  • $50 Average Transaction size
  • 260bps take rate (factoring out Venmo)

1% increase in Active = 2.5M consumers * $50 * 40 * .026 = $162.5M (annualized)

Scenario – Ridiculous

  • 10% increase in Active Customers
  • 20% increase in Customer Engagement
  • 10% increase in Merchant Acceptance

Revenue Impact – $6.4B (not likely)

Obviously this seems wrong. However, rumor is that Paypal has seen a 60% increase in volume during the first few weeks of the pandemic. Most would point out that consumer discretionary spend will be decreasing, and that only grocery and restaurant take out will be beneficiaries (neither of which are traditional PP Verticals). This would point to a new scenario with decreased consumer engagement, but increased acceptance (as Paypal works to attack growth verticals and expand merchant services). 

Scenario – Likely

  • 10% increase in Active Customers
  • 10% DECREASE in customer engagement (40% decrease in discretionary, 30% growth in eCom – channel shift)
  • 10% increase in Merchant Acceptance
  • 20% increase in Merchant Services

Revenue Impact – $1.7B (incremental – 22% above baseline)

Key Assumptions – Discussion

In my opinion, PayPal looks set to gain in most scenarios. While net consumer spend is decreasing, channel shift and opportunity to create new services allows PayPal to capture incremental growth (ex braintree menu hosting for small restaurants). If PayPal can execute on non discretionary (ie Grocery) or on other growth categories, increased engagement will drive a chain reaction “network effect”. 

Outside the scope of today’s discussion is how Paypal could play a role in Government subsidy payout or in small business lending.. 

I have not wrapped this up cleanly.. But wanted to get this out. 

New Bank Consortium Created Around Akoya

WSJ Thursday 2/20 – Fidelity Spinning out Akoya

Much more than a spin out.. 12-18 banks got together and purchased Akoya with FMR retaining some of the equity. The new entity will have a BOD and Advisory committee comprised of banks. 

Akoya is the “data middleman” between bank platforms and aggregates. For example, if JPMC or Bank of America had an existing OFX service, Akoya could wrap that bespoke integration, add tokenized credentials and be the common integration point for PLAID, Intuit or Yodlee.

Akoya, plays a critical role in eliminated screen scraping, and also in managing the complex operations of many 3rd parties (think Intuit Quickbooks). Technically they serve as the common integration, permissions, contract and operations hub. Additionally they manage consistent access agreements (with each requester) giving customers an audit trail of who is requesting their data. 

Akoya’s standardization of access does bring into question why a 3rd Party would integrate to Plaid vs. Akoya. While both are committed to standards (ie FDX, OFX, …), Akoya will hold the operational keys for both consumer and bank on all API access. This is a brilliant bank move..

Interesting that the Banks did not put this asset with either EWS or TCH..

Growth Vector #1 – Embedding Payments

Embedding of payments into new commerce and business flows will quickly drive $500BTPV gains over the next 5 yrs and replace eCommerce as the source of TPV growth. Cash, ACH, and other Networks (ex Swift) will lose, MVP, Adyen and others will gain.

Pardon Typos.. still in proof mode

Previous Blogs on Topic 

  1. Payments in the OS – Browser Tokens – May 2016
  2. Payment in the OS – mCom/eCom Converge – Dec 2014
  3. Apple Pay in Browser – Mar 2016
  4. eCom Thoughts – Sept 2015
Continue reading “Growth Vector #1 – Embedding Payments”

TCH – Real Time Payments

TCH’s RTP service is capable of much more than just P2P, particularly given its role in tokenization of all cards. I was rather surprised to hear 5 of 6 top banks would rather work with PayPal than Visa/MA on this.. (And this was a KEY reason I moved to buy Paypal stock 24 mo ago).

Its been 18 mo since my last TCH update. As a quick refresh, the reason everyone cares about the TCH project, is that TCH is the ONLY place that the top 6 bank CEOs get together to collaborate on payments. TCH operates CHIPS (the largest private ACH network in the world), settling around $1.5T of payments PER DAY (think stock market, B2B, V, MA… everything). Within the ACH scheme every member bank has a settlement account and a nightly Net Settlement process is run. 

Continue reading “TCH – Real Time Payments”

Payments 2020 – MVP Continued Domination?

What is the top performing industry group? MVP outperformed FAANG over last 4 yrs by 34 points.. will this trend continue?

I’m back to blogging after a 5 year hiatus… The CEO thing is rather all consuming. Glad to have an exit so I can get back to my fellow payment geeks. 

What to blog about first? Given we are in new decade I thought about writing some grand predictions.  But rather than look forward, we must spend a little time in the past, as the past 10 years have been JUST AMAZING in payments. I’m calling this blog series “payment growth vectors” where I hope to recap what has transpired in payments (history) to provide a trajectory for evaluation of the future course.  

Continue reading “Payments 2020 – MVP Continued Domination?”

Apple Card

Short blog on the Apple card and Apple’s history in bringing ApplePay to market

21 Jan 2020

iPhone showing Apple Card and stats.

I love my Apple Card.. both the physical card – with its wonderful “feel” – as well as the virtual card and how it is integrated into the Apple Pay Wallet. These payment jewels are all part of a Services Business growing at 20% CAGR that could be worth $650B by next year (MotleyFool).

Continue reading “Apple Card”

Adios Visa Checkout

17 January – Good news.. the right thing just happened.

branding nascar

This week we finally saw the “official death” of Visa Checkout and Mastercard’s “Masterpass”. Do you remember all those Superbowl commercials with Arizona wide receiver Larry Fitzgerald? Per my April 2018 blog, this “branded button” approach makes no sense at all at a time where Visa/MA are positioned to play a much more critical position as the central token directory. This means we will no longer see the “NASCAR like Checkout” I referenced 5 yrs ago when JPMC launched the much ridiculed ChasePay. Visa’s top 5 brand will no longer have an appended “checkout” on it (which no one used or understood).

Continue reading “Adios Visa Checkout”

Plaid – Quick Take

My quick read on Visa’s acquisition of Plaid

I’m back to blogging after a successful exit last month. The Plaid acquisition is a great way for me to jump back in. Why read this? A key to understanding payments, banking and data is to balance historical knowledge with a network of people that know what is really happening behind the scenes. As the former head of two direct banks, former Senior Director of Oracle’s advanced technology solution’s practice and Yodlee’s first customer I have an informed perspective on the market for this one. 

Continue reading “Plaid – Quick Take”

Big Moves in Payments

21 March 2019

Happy First Day of Spring! I don’t know how many people still read this silly blog. I’m in a CEO time warp and just realized I haven’t written anything since NOVEMBER!! This will be a short blog with some random thoughts.

Big moves in Payments this quarter.

  1. Visa, Mastercard, Paypal, Global Payments and others are at ALL TIME HIGHS today.
  2. Worldpay to be acquired by FIS for $43B
  3. First Data to be acquired by Fiserv for $22B (all stock)

Continue reading “Big Moves in Payments”

Payments and Rocket Science

My Forbes Article Last Week

What We Can Learn From Rocket Science About Closing The Sales-Marketing Loop

Payments plays a key role in trust, not only during the sale.. but also in providing transparency to merchants on marketing effectiveness. Sales is the ultimate report card on what happened.  Using this data in real time can double marketing effectiveness.

While Commerce Signals has taken me away from my Space Analyst stuff (see link), I’m very proud to know that my old team is landing Elon’s rockets (see Wiki).