PayPal – ?Super App?

Paypal has clearly won in the massive shift to eCom/mCom during the pandemic. A time where 10 yrs worth of consumer behavior change was compressed into 18 months (behaviors which will stick long-term). However, the future growth story must ride on something else AND Paypal must prove it can generate improving margins within that growth

PayPal has been my #1 holding for last 5 yrs, and it has been on a fantastic ride… especially so over the last 18 months! (see MVP – Continued Domination for more). 

Paypal announced 2Q21 earnings 2 weeks ago (7.28). TPV growth was 40% with eBay, 48% without out, while sales grew at a 32% clip without eBay versus 19% with. Earnings? Not so much as margin erosion has hit the business. One core driver of margin has investors particularly concerned: “Take rate” (net merchant revenue less cost to clear payments) fell from 2.21% in the fourth quarter of 2020 to 2.11% in the first quarter and 2.01% in the second quarter. 

Paypal has clearly won in the massive shift to eCom/mCom during the pandemic. A time where 10 yrs worth of consumer behavior change was compressed into 18 months (behaviors which will stick long-term). However, the future growth story must ride on something else AND Paypal must prove it can generate improving margins within that growth. Q: Why the “must”?.. A: The stock price is at 80x earnings. 

Note: PayPal’s CFO commented that reduction in take rate was largely due to increase in BillPay volumes: “Bill payment is a vertical characterized by both a lower take rate and an overall lower cost of funding than our e-commerce volumes”

PYPL – 7.28 Earnings Transcript

While the PayPal network is on a TPV tear (continued gains TPV of 30%+), the point of this blog is what can Paypal do to improve margin? and what is a Super App? Generically speaking, removing network growth (TPV) from discussion, a payment network business has the following margin levers: 

    1. Decrease cost of funds 
    2. Increase merchant pricing
    3. Increase consumer pricing/revenue
    4. Increase use of other products within MAU (compliments) 
    5. Introduce new products that operate at a higher margin (consumer, merchant, advertiser, …)

Lets drill down in the last 2 “product” options relating to new and additional products. PayPal’s most significant assets are the direct relationships with 400M consumers and 29M+ merchants. While PayPal has 20+ major products, it has a very strong reputation in the industry as a “one trick pony”: The PayPal Buy Button.  Product, technology, sales, consumer experience are all disjointed and poorly coordinated beyond payment. The best example of the decoupling is Venmo/PayPal/Xoom, as each product has significant functionality overlap, its own unique mobile app with poor integration in either UX, consumer terms or a common balance (Braintree acquired Venmo in 2012). 

The ability to cross sell other assets (Braintree, Venmo, iZettle, Honey, Xoom, hyperWALLET), among the MAUs of each is lacking. Will a Super App solve all this? 

Super App

What is a Super App? I feel dirty and a bit “idiot retro” in just using the term. WIthin the 28 July earnings call, PayPal provided some broad definition of the “super app” with “coding complete”.

    • Per Dan, “”What a super app wants to do is turn all of those separate apps into a connected ecosystem where you can streamline and control data and information between those apps, between the act of shopping, the act of paying for that,” Schulman said. “And then you have this common platform and common data that allows machine learning and artificial intelligence to kick in and give personalized recommendations to those consumers.”
    • “Obviously, the [user experience] is being redesigned,” Schulman noted. “We’ve got rewards and shopping. We’ve got a whole giving hub around crowdsourcing, giving to charities. And then, obviously, buy now, pay later will be fully integrated into it. … The last time I counted, it was like 25 new capabilities that we’re going to put into the super app.”

While it MAY make sense for PayPal to create a new unified interface for its own services. PayPal seems to be reaching for a brand new USE of its services in shopping and commerce.  Consumer behavior in payments, commerce and banking is very hard to change. For example why does Amazon lead in product search? Baseline price? Community reviews? Ubiquity?  Speed from selection to delivery?  Can you imagine the challenge in breaking into this process?  Getting consumers to come to you first? 

There are categories where Amazon does not play: specialized retail (Pet, furniture, home improvement, etc.). But few of these categories have recurring purchases necessary to establish either value or behavior change.  Ubiquity is required: You can’t be a super app if all you do is dog food and furniture

What is a super app? My first definition would be a buzzword that should never be used. But if we take it to mean the app at the center of a consumer’s life, what would its characteristics be? 

    1. Something you use 10x a day.
    2. Solves a consumer problem consistently. 
    3. It is ubiquitous. 
    4. It is unique in scale and reach. A network of willing participants.
    5. Unique in customer experience and cost to use.
    6. Leverages a virtuous cycle of data to create better products. 

My personal examples of apps fitting these characteristics are: Alipay, Amazon, and Google Search. None of which set out to be a super app. Rather they evolved from an initial value focused service to a place on trust based upon highly differentiated value delivery.  

Alipay Example (again)

A detailed account of how Alipay evolved is in this excellent articles: CGAP – History of Alipay and McKinsey – China’s Digital Economy. Alipay is a super app handling over 150,000 transactions per second. How did it get here? It started off solving problems of remote payments for TaoBao… Alipay/Taobao was symbiotic like PayPal/eBay but Alipay/TaoBao was much broader because it enabled mCommerce for 1B people. Additionally there were fewer large merchants creating a much larger (and stronger) network of very small merchants, across all shopping categories, in a highly differentiated mobile first experience. These unique market conditions enabled it to assume the position of primary service provider and expand into financial services. 

While Alipay has BOTH primacy in commerce, AND consumer financial relationship, PayPal has neither. A challenge for PayPal to overcome in any quest to act as either primary service provider or aggregator. 

Amazon India – UPI

If you are a payments professional and you don’t know the story here I recommend you spend 3-4 hours on this topic. India UPI is an amazing story and provides the best case study on open banking and open payments. Key reads

India’s investment in national ID (Aadhar) and open payments infrastructure has created a best in class open framework for payments that has revolutionized payments and commerce. It is unique to India, but accomplishes many of the goals of the ECB’s SEPA. The Unified Payment Interface (UPI) runs on top of Instant Mobile Payment Service (IMPS) and was created by India’s central bank – the Reserve Bank of India (RBI). 

UPI allows universal open access to the payments rails (enabled by Aadhar). For example, Amazon India submits over 25% of UPI transactions at no cost (to consumers, merchants or banks). See UI below

Pay bills, transfer money, purchase from Amazon transfer to card.. All at no cost. This scheme replaces “debit” and serves as the global model for a “bank centered” alipay. India succeeded where SEPA failed by end running the “merchant acquiring” problem and enabling investment by the one party with economic incentive: merchants. Merchants made the investment to make UPI work. SEPA assumed someone would make the investment in both consumer products AND in acceptance.. But as we know it didn’t happen. 

US Banks should pay particularly close attention to the India model as Visa/Mastercard look to create the equivalent “rails” for payment innovation as the only ubiquitous debit transaction set (OCT/AFT). As discussed in Open Payments and Open Banking – open is a great technical model but a rotten business one. In the US, TCH and their new acquisition of Akoya is the only bank pure play. But Akoya is focused on non-payment transaction sets (FDX protocol) and basic integration mechanics at the moment. 

The irony in UPIs success is that the beautiful technical creation of UPI, by the central bank of india, has enabled 3 large US companies (Google, Amazon and Walmart are responsible for 85% of UPI transactions) to revolutionize payments in India. Can you imagine the reaction if our federal reserve enabled these 3 companies to end run our banks? LOL!

As a side note, India is perhaps the one country where a CDBC would not make sense.. As the UPI system has already captured most of its benefits. Australia may be next in line to deliver a UPI type innovation on top of EFTPOS. Sorry for digression.. Back to Paypal. 

PayPal and the Super App

The second quote, within the 7.28 2Q21 earnings call, relates to new financial products. This direction would seem to indicate PayPal is aware of its short comings in the commerce flow and may seek to start the super app as a common banking/payments “super interface”. Perhaps the Super App is designed to compete with Google’ new Plex  (A move that makes some degree of sense as PayPal’s former COO Bill Ready is now president of Google’s Payments and Commerce).

While Paypal understands payments it does NOT understand banking.. Nor should it.  Retail banking is a low margin loss leader where the bottom 4 deciles of consumers are unprofitable. Checking balances, paying bills, moving funds are not high margin businesses. 

What is PayPal’s financial services play? Take a look at the list of services Dan mentions above: 25 new capabilities, rewards and shopping, giving hub around crowdsourcing, buy now, pay later. These are great services but, as discussed above, you can’t be a super app if you are not ubiquitous and and the starting point of commerce. In banking, you can’t be a super app if you don’t help with bill pay and payroll deposit. 

NOTE: Day after this blog published, PayPal announced partnerships in both payroll deposit (Fiserv). Bill Pay was discussed in the earnings call as the key driver for reduction in take rate. PayPal’s billpay solution is a mixture of organic and partnership (ex ACI Worldwide). 

Google’s Plex vision is much more mature, and is built upon a virtuous data cycle. Google can make its Plex efforts a loss leader and deliver a highly differentiated user experience by virtue of this cycle AND reduce costs for banks to deliver this experience through its control of the android platform. Google is seeking to solve a data and consumer permission problem – consistency. They are not seeking to create consistent consumer products, but rather to create a new experience that is powered by consistent permissioned terms in which consumers allow their data to be used. 

PayPal has its own branded products that it is bringing together in one roof. This is the equivalent of a mobile version of the Citi’s 1980s financial super market (courtesy of Sandy Weill – Citibank). Why did Citi’s financial supermarket fail? Because consumers did not want to be locked in to a super market. They wanted best in class products, and service, for each financial need. Products had to compete. This dynamic is even more prevalent today in the speed to open new accounts. 

As discussed previously, intelligence and the “steering” function within payment networks is moving to the ends of the network (nodes). For example in eCommerce Stripe, Shopify and Adyen enable merchants to integrate (and switch) to the lowest cost provider, or to any BNPL player. This means that network hubs (closed platforms) are losing their ability to concentrate (as Citi’s efforts demonstrate). In banking, the friction to both open and maintain multiple accounts is decreasing, products like BNPL demonstrate how “Fintech” is enabling real time competition for financial services at exactly the moment the consumer needs it. This is a future in which every product competes on its own AND integrates into everything else (see Open Banking blog). 

For example, Alipay is a closed network that competes with WeChat pay. It is logical that a small merchants would migrate to a Shopify like company that manages a brokering role between the two and keeps merchants in the drivers seat. Similarly Google’s strategy is also structured based upon their role in search, maps and mobile. They seek to enable merchants in competing against Amazon and have partnered with companies that are merchant friendly (see Google – Shopify).  A detailed discussion of this shift in power away from centralization is covered in Data Tipping Point

Where should Paypal go?

As outlined above PayPal is stunted in its ability to craft a better commerce experience (ie at the checkout “end” of commerce process today) or to gain critical mass in its own branded “banking” products (each must compete).  To craft new customer experiences they need to be at the starting point of the behavior and in a role where they do not over emphasize their own services, as only Apple has been able to create a profitable controlled walled garden. As I’ve often stated: payments work well, its everything else that is broken.

Today Paypal has separate mobile apps for Venmo, PayPal, honey, Xoom, iZettle, hyperWallet, and a few others. Does bringing these products together in one app make sense? Only where there is a common user base, opportunity to enhance experience, or solve common problems within the MAUs. For example money transfer is in Paypal, Xoom and Venmo. There are 3 different apps with 3 different sets credentials and terms. Internally each app is operating as a business with a unique marketing, pricing and a different compliance regime. Making sense of this would indeed be a super effort. 

Given PayPal’s tremendous consumer and merchant network, it’s future is in enabling the nodes of the network. Presenting consumers with a common way to access all of the features of PayPal is a monumental undertaking. But this is an internal effort to harmonize, aggregate and cross sell. Make no mistake, they should do this, but it is not the foundation of a super app.  Creating new experiences requires a connection from beginning to end. 

What is the size of this challenge? At one time Uber was PayPal’s largest merchant customer. Can you imagine Uber letting PayPal design a new customer experience? When do you use PayPal? Would another merchant want PayPal to cross sell something at time of checkout? Their excellent consumer reputation is based upon the quality of the service they currently provide. This consumer trust is domain specific. There is a reason we don’t access PayPal outside of a purchase or P2P transaction.

Thus, my view is that PayPal should ground their work in this reality and focus on those services that will generate cross sell. For example, if we assume that the average consumer NET revenue for active use of additional product was $0.50/mo (ex crypto/Honey). A 10% penetration of this product in PayPal’s 400M users (40M) would result in net revenue of $20M/mo ($140M/yr) a 2.1% lift to PayPal’s projected ~$6.6B+ of 2021 net revenue. This would move operating margin from 23.9% to 26%. This is VERY significant. Of course getting 10% of customers (40M) to actively engage with another product is not VERY hard. But it is much easier than crafting a completely new value proposition. Cross sell must be a core component of PayPal’s long term strategy. 

I strongly recommend shifting the Super App to become a consumer focused effort to harmonize, integrate and cross sell products with the goal of empowering the consumer node. Become the consumer champion of payments, transfers, rewards, and perhaps data.  

On the merchant side, payments are becoming embedded in platform. Braintree must seek its own strategy to enable the merchant node (beyond just payment). Adyen, Shopify, and Stripe operate as platform businesses, with SaaS margins. Payments is a dumb pipes business for them. PayPal seems to be highly biased toward a consumer financial products company at precisely the wrong time. Its future for growth is driven more by merchants than by consumers. 

On this last point, I’m concerned for merchant network growth driven by the new branded pricing. Merchants will steer to best cost/conversion option. This pricing would seem to open the door further for ApplePay to own all mCommerce and Safari.. And give incentive for others to try for remainder. 

8 thoughts on “PayPal – ?Super App?”

  1. Superb comment, as ever, focusing on the economic drivers rather than the superficiality. Some real food for thought. Thank you. Totally with you wrt the branded pricing – today, the brand (trust therein) surely is a/the core driver of merchant and customer demand/conversion, and the pricing seems to be asking for trouble.

      1. No worries – I’ll post you on my linkedin as well. You’ve made some superb calls about the industry over the years and hugely helped my understanding of payments. I’m an equity analyst by background (long since retired), and focused on media stocks, so not a payments expert, and I really appreciate you stripping it down to the crucial differentiators/barriers (plus, I’m even understanding most of the jargon these days!). Thank you.

  2. Tom,

    Thank you so much for taking the time to write this. Really enjoyed the piece. I have some thoughts on my own below.

    The decline in take-rate, as their CFO commented in Q1 earnings call, resulted from growth in bill pay volumes, less contribution from eBay and increasing Venmo volume. As the company transitions away from eBay, it should be a good sign. It also addressed one half of one of your comments above (In banking, you can’t be a super app if you don’t help with bill pay and payroll deposit). Today, ACI announced a collaboration with PayPal to enable bill payments through digital wallets. That, at least in theory, should help make PayPal more ubiquitous.

    I agree with this comment: “I strongly recommend shifting the Super App to become a consumer focused effort to harmonize, integrate and cross sell products with the goal of empowering the consumer node. Become the consumer champion of payments, transfers, rewards, and perhaps data”. I think PayPal is working hard to throw as many products/services at consumers as they can. In the very last earnings call, the CEO talked about going into stores aggressively. A few days ago, Giant Eagle announced that all 450+ stores of theirs would enable PayPal/Venmo transactions through QR codes at checkout. I imagine more will follow.

    On the merchant side, I don’t think PayPal is putting less efforts here. The number of stores that accept QR codes rose from half a million to 1.3 million in 12 months. It acquired Happy Returns and is launching iZettle in the U.S.

    I see what you are saying about the new pricing for U.S merchants. But I can’t help but think that by offering a lower rate for unbranded transactions, PayPal gives merchants more options and, like you say, competes on its own while integrating everything else. If the majority of merchant transactions are unbranded, this move will make PayPal more attractive to merchants.

    1. Very thoughtful response, thanks for taking time. I did not catch the bill pay. Perhaps PP should break out TPV.. 1) “paid volume” has a take rate 2) Venmo and Bill Pay are costs. With respect to Merchants they have the tools.. but I can tell you for certain that larger merchants, considering venmo at POS, will take a look at what PayPal just did to branded eCom pricing and ask “why would we want to give consumers an option that is a premium to V/MA” they are the devil we know.

      Also PP’s key to growing POS is not the assets they have, but creating a biz case for acquirers. PP lost their head of merchant solutions Jeremy Jonkers so the effort certainly lost a tad bit of momentum.

  3. Great article! Personally, the feature I’m looking forward most to is the option of transferring bitcoin directly to my new hard wallet.

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