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FORUM TRANSCRIPT

PayPal – Zettle POS System Roll-out & Super App Ambitions - 17 Sept

  • Public Equity
  • TMT
  • North America
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Specialist

Former Senior Director, Global Sales, Braintree & Venmo at PayPal Holdings Inc

Agenda

  • eBay's migration away from PayPal's (NASDAQ: PYPL) payment platform and PayPal's positioning against legacy and tech-forward competitors – Stripe, Adyen (AMS: ADYEN), Square (NYSE: SQ) and more
  • PayPal’s SMB positioning through roll-out of Zettle POS system in the US, while increasing its e- commerce merchant fees
  • Buy now, pay later offering and PayPal’s Paidy acquisition
  • Braintree positioning and outlook
  • Super app strategy and Venmo monetisation efforts

Questions

Transcript

1.
What are your thoughts on PayPal’s loss of eBay at a faster rate than expected? Assuming eBay accounts for roughly 2.5% of TPV [total payment volume] by the end of 2021, there are estimates calculating about 2.4% as a take rate. How are you assessing PayPal’s take rate as eBay completes the shift to in-house? What are the potential challenges to that take rate?

SP (Specialist): Definitely, I think it has been certainly accelerated, but I also think that the impact has certainly been somewhat offset by PayPal’s rapid acceleration and growth outside of eBay. I think that was the whole logic and intent behind the spin-off back in 2015, that PayPal could be more accretive as a standalone unit and getting more business outside of eBay than relying on eBay. Certainly, eBay was always PayPal’s largest customer and now no longer is. I wasn’t familiar with the number you said, that was a 2.4% take rate. That was forecasted for the balance of this year? I just want to make sure I understood that.

TB (Third Bridge): Yes, assuming eBay accounts for still roughly 2.5% of TPV through the end of the year, yes.

SP: Got it, I thought you said that was the take rate – I was like, that sounds low, so I had to challenge it. I think that’s in line, as I mentioned, because of the rapid acceleration. Of course, that was even more accelerated during the pandemic, outside of eBay. I think that’s probably a fair estimate. The relationship with eBay, given their model, for so long as the non-merchant of record and the independent seller taking on the liability, obviously PayPal was able to charge a premium somewhere in the 2.9% and USD 0.30 range. Of course, they’ve increased those publicly stated rates to 3.49% and USD 0.49. The impact would have been, I think, far worse if it was a merchant-of-record model already, but the fact that it’s moving to merchant of record, I think that impact has been a little bit less severe. That has been my point of view since leaving PayPal. I did leave PayPal, just for everyone’s knowledge, back in 2020.

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2.
What are your high-level expectations for PayPal improving the take rate across the broader business?

SP: I certainly think that on the small-business sector their move, which I think caught a lot the market by surprise, to move from that 2.9% and USD 0.30 publicly stated rate, which was a long-standing publicly standing headline rate, and raising that effectively 50 basis points on the variable rate to 3.49% and then also increasing from USD 0.30 to USD 0.49, I think a lot of the market felt that that was going to be a competitive disadvantage, but I actually that that was a long overdue change because if you take a step back and you look at PayPal’s M&A activity and the investments they’ve made over the last four-plus years, it was all aimed at enabling more solutions, more sophisticated services for small, medium and large enterprise merchants so that they wouldn’t have to regard PayPal as just as payment checkout wallet, but now you can enable marketing capabilities, risk capabilities, consumer engagement capabilities, etc, payout capabilities. When you have more of a unified one-stop shop platform, as they call it, the commerce platform, then you should inherently be able to drive and demand a premium from your customers. I think that was a move in that direction. Obviously, the larger you are as a merchant, you’re not paying those headline rates. You’re getting some sort of a custom rate based on your volume, based on turns, and so I think that their ability to charge, that’ll be, I think, where the rubber meets the road, where you have a lot of large merchants. They’re a smaller number, certainly, but they tend to drive a disproportionate share of the volume and the margin.

I think the ability to keep competitive against the Apple Pays of the world and others that they compete against, and still getting a premium, that will be where I think the proof is in the pudding. I think they still have a competitive advantage in that while they’re going out and trying to generate top-line growth with the legacy Braintree business and becoming more of a direct credit card processor, which obviously is a thin- margin business but it’s a huge top-line revenue growth, but you have that wallet that sits in there as a differentiator. Having that, you could charge a premium for your direct credit card processing and still demand a premium for your PayPal wallet plus all of these other attributes that you round out the stack with in terms of what you’re driving to that merchant in terms of the capabilities.

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3.
Can you share your thoughts on PayPal’s Zettle roll-out and how this positions the business for omnichannel SMB penetration?

SP: They’re going after Square in that regard. Square has got a stronghold on that market to a large extent. I know we’re not here to talk about Square and Afterpay, but that’s kind of an interesting strategy. They’re both going towards to the other’s strength in some regard with these acquisitions. Prior to Zettle’s acquisition, which obviously is a small-business point-of-sale processing company that was acquired, I believe, out of Sweden or somewhere in Europe, PayPal’s legacy business in North America and other parts of the world was PayPal Here, which is classically more of a taxi driver dongle-type experience, not so much a physical stationary point of sale, more of for those mobile payment use cases, maybe at a stand-up book fair or an outdoor tent event and things like that. They didn’t really have a capability that could be well-regarded, and that’s why Square was getting so successful, the competition is fairly limited. You had Clovers of the world and things like that. I think they’re going after Square in that regard and I think it’ll be telling because I think there’s a lot of incumbency business there to be had. It will be telling how they formulate that strategy because the one thing that they have, PayPal, that the incumbent processor doesn’t, is that e-commerce capability. If those small merchants are also looking to grow their business and reach customers both domestically and internationally through cross-border trade, then PayPal, they can weaponise that because that’s really their bread and butter. I think that they have a huge advantage with those. If you’re talking about non e-commerce merchants, physical point of sale only, I think it’s going to take some time to chip away at those small merchants because there are a lot of them. There are a lot of small mom-and-pops out there.

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4.
What’s your growth expectation for the Zettle offering? Can you elaborate on your e-commerce point and how merchant conversion to this POS offering might be challenged? How much friction could PayPal experience in that conversion effort?

SP: I think most small companies certainly don’t need to need to agree to exclusivity. I think they’re going to gravitate towards what’s the least friction-wrought, what’s the most affordable, and provide the best settlement reconciliation experiences. Assuming those things all check out from a capability standpoint, then I think PayPal, especially if they go… they have an install base of, what is it, 30 million merchants globally on their stack. So right there you have an installed existing customer base, merchant base that you can target, and I would venture to say that a disproportionate number of those 30 million have some physical point of sale, whether it’s a back-office store that they’re selling widgets, but they’re also selling a majority of those widgets online. That’s a big advantage because PayPal can get creative and offer some unique incentive to try to displace the incumbent, likely a Square, could be Clover, it could be whoever. Chances are, if you’re a merchant, you’re going to agree to that because unless PayPal is saying you have to be exclusive, PayPal’s shtick should be, “We just want you to give us a try, give us an option, make us one of your several.” My experience in dealing with small merchants just as a buyer is, if their Square reader goes down, they’ll have the PayPal reader. If the PayPal reader… they tend to have a few different options because they need to maximise their ability to get paid. Not every small business has that, but you’re starting to see a trend in that direction. It’s obviously a greenfield market. I think they have a huge advantage with that incumbent base to play offence.

You asked the question, where are there risks? I think it’s in those, probably as you get larger in those merchants that have maybe multiple store fronts, they still operate as a small business or a mid-market business, and it just becomes a bit of a heavier lift to rip and replace the point of sale. Any merchants, you think about the big-box retailers, the Home Depots, the Best Buys, they tend not to make changes because that’s really, it’s as if you’re doing a full-body transplant in that regard. It’s a huge risk, and even if you’re a small business, it’s a huge risk because you risk disruption to operations, disruption to your transaction flow and that’s your life blood. I think in those regards, again, they have some unique advantages that the incumbent competitor doesn’t have that they can weaponise and get creative around incentives and offers. The fact is that they sit on not just the 30 million merchants, but what’s the number up to? Over 300 million installed users that are PayPal Venmo users, PayPal Credit users, that they can bring to do the table and say, “Here’s an install base of shoppers.” I don’t think Square can say that.

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5.
Can you elaborate on the pricing increase being on the e-commerce side and what you said about PayPal having the omnichannel, whereas Square lacked on the e-commerce side? Do you think the Zettle roll-out and premium pricing on the e-commerce side could diminish the value prop that PayPal is going to market with?

SP: I do. That’s a really good question and I do agree with that. I think the timing was a little bit of a head- scratcher, knowing that you were trying to get in this space and at the same time you were going to take your rates up. I think the rate increase should have happened a year ago, probably during the pandemic when they had really… because if you think about it, everyone was racing to use PayPal because they had to, and so you were in a better position then to increase your rate because you had the merchant in a position where they had to have PayPal. A year later, when the world opens up, it’s a little bit of a different story. I don’t need to prioritise PayPal in my checkout, I could probably make it third, fourth or hide it because now it’s more expensive. The timing was questionable, but I think that in a lot of cases it’s going to come down to on the individual sale level. That’s where I just don’t know. I know there’s going to have to be a lot of marketing, account base marketing resources put forth to enable the Zettle roll-out because you just can’t hire enough sales reps and feet on the street to go try to break down what Square and Clover have built as their core business over the last 5-10 years. It’s not going to happen overnight, by no means.

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6.
You’ve drawn comparisons to Square and it’s interesting because the Zettle POS piece puts PayPal in a position to create a closed-loop system, similar to what Square has built. How do these closed-loop systems compare when combining Zettle with Venmo and Cash App with Square’s POS system? How might they differ and do you think PayPal has an edge on this front?

SP: It’s a really good call-out. I think the timing, I was wondering and waiting when the Cash App capability, when they would start monetising that as Venmo has. I think the fact that Venmo and PayPal have already got a head start on that, and they launched their QR code capability very timely with the pandemic as users, customers, buyers started to get more comfortable, at least domestically, with what a QR code is and how you use it, and you can actually use your camera to open it and pay for something because you were using that at restaurants to open the menu. I think PayPal got a little head start in that regard, given Cash App. If you look at the user bases, Venmo vs Cash App, Cash App has definitely enjoyed probably an unfair advantage in terms of the user growth and the app downloads and the usage. It is a very different audience. The user base for Cash App is not mainstream America, it is not probably many people on this phone call. It’s a very demographic- centric audience, and I think that’s Square’s biggest challenge, is how do you penetrate mainstream America, where PayPal and Venmo have already arrived there. I’m not going to say Cash App is under-banked, but it’s definitely some folks that may not be on the traditional financial services rails, for various reasons. While they have a high user count, I don’t believe that it’s going to be meaningful impact to what PayPal and Venmo have with their closed loop any time soon.

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7.
How else might PayPal win with its Zettle offering, beyond the idea of having the omnichannel where PayPal possibly fits better than Square? I think the interoperability of the platform with some of the merchant’s back-office functions such as inventory and order management is interesting – obviously, we can extend out credit based from those. Why might PayPal win here with that Zettle roll-out?

SP: I think if you look at the ecosystem that PayPal has built on the inorganic side of the business through channels, which is driving up that count, the 30 million merchants, is you already have these embedded integrations with Shopify, with Magento, with WooCommerce. Not that Square doesn’t have that, but the use cases and the propensity of adoption are much higher for PayPal. I think there’s a huge advantage there. With Square, I love what they did with Afterpay because I think it’s going to really help. I think it was overpriced, but that’s not the point of this call. It gets them into the enterprise space, or accelerates that, but I also have to say in what capacity? Because they really don’t have an e-commerce solution that’s competitive, with Adyen, with Stripe or with PayPal. They haven’t really built it. If they’ve built it, they haven’t launched it in any meaningful way. Is it the hope that you get broadened to big box and suddenly displace Chase Paymentech? As a user, I would love that because I actually like Square’s user experience and their point of sale, the hardware, but there are no benchmarks for that and I think that’s not going to happen anytime soon. For all those reasons, I think what I’m trying to say, it’s easier for PayPal to go swim with Zettle in Square’s lane than it is for Square with Cash App and what it’s been with Afterpay to go swim in PayPal’s lane in any meaningful way.

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8.
What do you make of some of the checkout players such as Bolt and Fast, who seem to be growing very quickly in the market? Could they have any material impact on PayPal’s checkout offering in the longer term?

SP: I really don’t view them so much as a payment enablement, more as an e-commerce buying experience enablement. I know that they have some payment capabilities, but no, I look at them as a ripe M&A target for a larger player that wants to compete with PayPal, so maybe in the long run, but as a standalone company, no.

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9.
How are you assessing PayPal’s buy now, pay later offering amid a crowded competitive landscape? The company announced its acquisition of Japan-based Paidy in September 2021. How does its in-house buy now, pay later offering or Paidy acquisition potentially differentiate it from Affirm or Afterpay?

SP: They’re obviously late to the party, very late to the party. I think for a long time the perspective was that’s noise, it’s Australia, it’s not mainstream. Then it started to become more relevant, Afterpay started to show up more on US-based merchant sites, etc. Then you have the growth, proliferation of Sezzle and the QuadPays and all these other players. Certainly, they’ve got PayPal’s attention, because the merchants were asking for it. “Where’s yours? You have PayPal Credit, but that’s credit. You have PayPal, which isn’t this, so I want that, and if you can give it to me, I’ll give you my business.” So they did that. It was a huge install base already, that’s a huge disruption risk for the buy now, pay later players. Then you look at the experience in terms of what the consumer sees, and as a user, I’m a huge PayPal advocate, and as a user I actually don’t love it because it’s not apparent in the flow. They moved to that choice model, which is great because it ingratiated them to the networks and to the issuing banks, but it’s noisy. There’s a lot going on in checkout as you’re going through the wallet, to sift through, “Do you want to use this?” and then if you do, what do you want? Do you want then put up Pay in 4? They’ve got some work to do to clean that up, in my opinion, to make that a little bit more frictionless and so that it stands apart, especially giving a merchant that wants that as a standalone, give them that core capability rather than having that folded into the broader PayPal experience, because it feels, as a user, it’s not very clear. It doesn’t jump off the page that that’s what it is. That’s been my personal experience as a user.

I know that they’ve touted some strong results, but I think some of that’s just share shift from moving normal PayPal users on to Pay in 4. That’s taking business away from the other players in the market. I think, at the same time, the fact that PayPal stepped it, and then you’ve got issuing banks trying to get in the space, Amex is already doing this behind this buy now, pay later after the fact on their credit instrument, and so I think it’s good for the space that PayPal is in there, and I think they’re going to continue to see a strong push towards buy now, pay later because merchants are screaming for… not everyone that comes into their stores or into their e-commerce, when you’re selling physical goods, can get approved for their proprietary card programme or want to use PayPal. They want to have some instrument that defers the balance over a period of time. I think you’re starting to see why that’s so widely adopted. I think what’s missing from the buy now, pay later guys, which I know they’re all scurrying to partner up with the banks, is also putting out more of a true credit, 0%, maybe 6-12-month offering. There’s this interesting intersection between the issuing banks and the fintechs, and they’re now working together. They’re buying each other. The banks are buying the buy now, pay laters. Eventually, what’s a very crowded space today is going to consolidate. Some will get sucked up by the payment processors like Square. Others will get sucked up by a bank or a Synchrony or an Alliance Data, which we’ve seen they bought Bread. I think the space will quickly consolidate in the next 12-18 months.

TB: Do you have any thoughts on the Paidy acquisition?

SP: It’s a standalone market. It’s a very mature market for PayPal. It was interesting because from the outside in now, I’m not sure why they just couldn’t enable their own Pay in 4 in Japan, unless this was just more of an acquisition for users based on a more popular payment type, which is very likely. I don’t have a great view of that because I didn’t know much about that organisation. I haven’t studied it because it just happened in the last couple of weeks. It was definitely, for the price point, I felt that USD 2.3bn could have probably been better spend elsewhere for getting the requisite lift that they need on the payback. In other words, I didn’t love it for a standalone market, buy now, pay later acquisition.

TB: That’s actually an interesting point in terms of you questioned why it didn’t just push its Pay in 4 product out into the new market, and that they bought Paidy for the users. I understand this is speculative in the sense that you haven’t really looked under the hood under Paidy, but do you think this brings any incremental technology benefit to PayPal, or was it purely for the customers?

SP: That certainly could have been an investment thesis for why that they built something that was unique and innovative that PayPal can then obviously tear down and rebuild into their own stack and replicate. Quite possible, and maybe that’s why there was such a premium. That’s actually a pretty reasonable outcome. Without knowledge of why the M&A guys thought that was a good acquisition, it’s hard for me to speculate because I didn’t know much about the company, but that’s certainly a fair perspective to raise.

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10.
What did you make of PayPal’s Pay in 4 offering? Prior to the Paidy acquisition, were there any gaps in the original offering on the tech side or with the go-to-market?

SP: I think how it’s managed, and from the outside in, I think they lumped this into their credit shop. They think about this more as a credit instrument than as a payment, quote, unquote, fintech instrument for enabling just spreading out payments. That’s what a lot of these players do. They’re not pulling a bureau. This isn’t impacting your FICO, whereas, obviously, with PayPal Credit they do do that. They do soft hits and things like that. How they manage it and how they’re thinking about this business I think is telling for the long term of where they see Pay in 4 going, and I think they’re actually… I don’t think it’s a bad strategy. As I mentioned before, the banks are trying to get in this lane. The fintechs are trying to get in the bank’s lane, and they want a uniform offering that’s pay in four over six weeks, pay in six over 12 weeks, you get the point. You graduate based on ticket size. I think, ultimately, that’s probably where this goes. The fact of the matter is that the regulators, including CFPB and OCC and others, haven’t really leaned into this space much. I think that’s going to happen. I think players like PayPal, because they’ve been through that journey and got slapped around by the CFPB back in 2014 for Bill Me Later, I think they’re being cautious, and saying, “We’re going to manage this in our credit shop,” and say, “We’re going to have to have tighter controls and tighter compliance requirements around how this is managed.”

All to say, I think that’s where this buy now, pay later product as it stands today evolves to over time. It just becomes an entry point, and merchants want that. They’ve been asking for, “Give me a graduation strategy.” There was a lot of buzz on the market four or five years ago about debit cards and having retail-branded debit, Target did it. They shut it down because it didn’t really work, but that was a graduation strategy. Open up a debit card because you’re not creditworthy and then I’ll off-sell you to my Target RedCard. That’s kind of what this is. Get into this, put your debit card in, pay in four over six weeks, and then as you mature as a buyer and build out your credit profile, I’ll give you better terms and more duration to spread out your transaction.

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11.
To what extent could PayPal command stronger economics in buy now, pay later compared to some of the competitors? Bundling products together for merchants would presumably be essential to that strategy. What do you think about that respectively?

SP: No doubt about it. That has always been a huge play, is bundling with a new sell or an upsell, cross-sell, is then obviously providing some level of discounting, modestly. I think what PayPal is really good at is driving there on the PayPal-branded business and PayPal wallet, for example, or the Venmo wallet, is charging a very competitive take rate when they have a great funding mix advantage, because they never disclosed to the merchant what the consumer paid with. They charged a fixed, it’s a fixed blended rate based on their experience, and that’s what they sell. Certain verticals, you can have a huge debit and ACH PayPal balance paying for funding mix, and that’s going to be quite advantageous for PayPal because their funding costs are going to be really low and they’re still charging 2.5% and USD 0.30. That’s what people at PayPal have always said, that’s the secret sauce. To your point, it’s a huge advantage. Given that most buy now, pay later right now is debit instruments, not credit instruments, that feeds that narrative.

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12.
How is Braintree positioned vs Stripe, Adyen, Checkout and legacy players? Stripe has made some very creative and innovative moves lately. How do you evaluate the relative positioning of some of these players across platforms and sales strategy?

SP: I think they’ve all come in at different points as disruptors. I think, obviously, that was Braintree back in the early part of the decade, the last decade, and then quickly gobbled up by PayPal to be their platform of the future. Rather than build it, they bought it and for USD 800m, that was a steal. Venmo was tucked into that platform at a USD 25m purchase price, when Braintree bought Venmo, so huge, huge return on that investment. Then, of course, comes Adyen, comes Stripe, but I think, bringing a little bit of different perspective to the table, I think Adyen has been more of an aggressor in the omnichannel space and they’ve done really quite well because they have that whole in-store and online capability, and they’re really good at it. Stripe, being more geared towards small business, business in a box, they’ve built their go-to-market around that, and then they hopefully land some of those unicorns, which they have, the DoorDashes and the Instacarts of the world, and they’ve grown with them. Also, that’s a blessing and a curse, and I’ll get into that in a moment. I think they’ve all come at it through a different growth thesis or strategy. Now they’re all trying to compete against each other. Certainly, I’ll put point-of-sale card-present aside for a moment because that’s not really PayPal’s bailiwick at the moment. It can be, but they haven’t chosen to really go ahead and embody it in any material way.

Based on those variances, what I’ve found is that Adyen plays exclusively and plays really well on the enterprise space where a merchant has omnichannel, and they’ve won an unfair share of those deals. On Stripe, hard to beat them on the small-business side because they’re so engineer-friendly, developer-friendly, business in a box, all those things I mentioned, but then the calling card is, once those merchants graduated up to USD 100m, USD 500m or USD 1bn in revenue, they find that they need to take some of that payment knowledge, payment infrastructure that they’ve been leaning on Stripe for in-house. That’s when they start to say, “OK, maybe I now need a payment gateway and I need to actually have more orchestration and I need some of these other capabilities that Stripe quite can’t do.” That’s when they would pivot and turn to Adyen and PayPal or Braintree, be it APMs, LPMs, different markets, and so Adyen and PayPal have that advantage. Then when you look at PayPal and Braintree, fortunately I think that while that was a great investment and acquisition at the time, I think the fact that Braintree hasn’t really, other than the One Touch delivery several years ago, which was PayPal’s most productive and successful product launch ever, PayPal hasn’t really invested in new product on Braintree to any great… there’s no in-store capability. The gateway is virtually the same as it was then, although they did relaunch it at one time, version 2.0. The point is that I think, in some ways, the PayPal acquisition of Braintree actually hindered what Braintree could have been. It’s serving the purpose for PayPal now, but I think there’s a lack of investment and keeping it current to the competitive landscape has been not impressive, that’s to say apropos, a better way of saying that.

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13.
Why do you feel there is a lack of investment into Braintree? To what extent is Braintree falling behind here, vs peers?

SP: I think it’s a couple of things. I think if you look at the marketplace, did they win eBay? Did they keep eBay? No. Adyen won eBay. Adyen went out and built a marketplace product for merchant of record. PayPal didn’t. They still don’t have it. They bought Hyperwallet and wanted to merge that with Braintree and it still hasn’t happened. That’s what I mean when they haven’t really invested. They’ve had this great platform and this great toolkit, but haven’t been able to sink it together in a way that is going to give a merchant the sophistication of use case that they need to solve but also the minimal level of effort to architect and build and code to it. Whereas, the Adyens and the Stripes, their marketplace offerings are much more out of the box and tried and true. PayPal is missing out on a huge opportunity in the market because of that. They’ve done quite well when it’s platforms that don’t have merchant of record. It was public several years ago where they partnered with Paymentus, which is their way to get into the utility bill-pay space. They did build a great product for that use case that’s probably better than what Stripe Connect and Adyen have. When it comes to when the platform aggregator wants to be the merchant of record and take the payment risk and then monetise payments, they still haven’t, they’re still not there.

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14.
Do you think Braintree is more vulnerable to market pricing pressures given the lack of investment and innovation lag you mentioned? How might this pricing pressure trend in the longer term?

SP: There’s been a huge race to the bottom since 2016-17 because of the proliferation of Adyen and Stripe and Checkout.com and others. When there are more competitors showing up to the merchant’s doorstep, they’re going to run an RFP and just engage procurement and take the payment processors out to the woodshed. That’s consistent for everyone, although you can look at Adyen’s financials and they’re still getting probably better pricing, but I think because they have better capability than Braintree, so yes, you’re spot on. Braintree has had to forcibly drop rate, but at the end of the day we’re talking pennies and basis points. They’re able to make that up by adding in some of the more premium offerings that they have on the stack to offset that. In other words, they’re willing to take a bit of a loss leader on Braintree to make up, to cross-sell and upsell, or bake into that initial sale those more premium offerings like PayPal, like PayPal Credit, like some of the business lending services that they have and Hyperwallet, etc. That’s been the strategy. By no means is Braintree’s plus plus bips and pennies going to make or break any given quarter on margin. The revenue is great when they get it because in the way that they’re orchestrated as a PSP and not an acquirer, to be able to recognise that interchange revenue is certainly significant to the top-line growth. I think in a lot of ways, in spite of that lack of innovation and lack of investment in Braintree, they still win deals, I think, but when it’s just straight up e-commerce, quite successful and probably they win more than they lose. When you start looking in-store they’re quickly disqualified because merchants don’t want to have discrete processors between online. If anything, they’ll bring in Braintree PayPal as a back up for their e-commerce channel if they have stores, but chances are they’ll just not do that because it just doesn’t make sense.

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15.
I understand there were two different pay with Venmo integrations – there was a Braintree and then a separate PayPal integration. Now there’s a revamp to combine or go with the more optimal integration. What happened there? What optimisation was made?

SP: There was a lot of pressure for PayPal to monetise Venmo at a point in time. Obviously some pent-up demand from investors, but also that they wanted users to get out and start using it. There was the, “Let’s get this quick and dirty in the market,” and so they’ve effectively enabled the Venmo wallet through the PayPal rails, and so every merchant that had a certain integration type of PayPal’s release, X.X, I don’t know what it was, it doesn’t matter. It was two million US merchants. PayPal effectively flipped the switch, and if you had a Venmo on your phone, the app, then you would see Venmo in checkout on your mobile web browser. The experience was very much commingled with PayPal, both on the flow but then also on the back end for the both the user and the merchant. Not ideal, but it would enable a way to get Venmo now showing up at checkout on a mobile browser. That integration did not support mobile app. That’s where you’ve mentioned the Braintree path. That was the native integration and that was a little bit more code, not much. A developer could knock it out over a weekend with testing. By dropping in a little bit more code on the native app channel and the mobile web, they can then, if you’re a Venmo user, that Venmo payment option would show up on the payment page, both on mobile app and mobile web. When Uber adopted, when Grubhub adopted and a lot of these large mobile-first merchants adopted Venmo, that’s the integration path they chose. Whereas, if you were out on Home Depot and you had Venmo and you were on your mobile phone shopping on Home Depot and you saw Venmo, it was the former, not the latter. I think that still continues to be the case.

Of course, it’s been several years since that initial launch. I think it’s generally probably been a bit underwhelming on the Venmo roll-out. It has been really just a matter of the lack maybe of good data from PayPal with merchants to say, “Here’s a case study that showed these results,” because that’s what merchants want. Did it drive incrementality? Did it drive new users? Did I get more revenue and more repeat business? I don’t think there has been strong both the anecdotal or factual data in the way of… because PayPal has always been good about to going to Nielsen and Forrester to do those studies and I don’t think there have been any compelling use cases to reinforce that. I think that’s scuttled their ability to ramp that into the market. The question is, “Why?” As a two-sided network, you have to cater to both sides. You can’t just put all your investment on the merchant side to enable it. You have to equally engage and educate your user base. I think that’s where PayPal has fallen short, is on their consumer marketing channels and capabilities to make this more readily understandable, that you can use if you’re a Venmo user, for peer-to-peer, to we go golfing, you pay me back, that now I can use that same app or funding device to purchase a pair of sneakers at Nike.

TB: It’s actually funny – I’m a Venmo user and I get e-mails, I can actively tell that it is turning a switch and trying to really emphasise the idea of using this to pay for goods and services.

SP: That wasn’t there for three years, though, that’s the point I’m making.

TB: Yes, it just started.

SP: They got the debit card. That was phase one, and that’s mild successful, mild success maybe, and then the QR code. It’s one thing after another. As an investor and fan and as a former employee, it’s frustrating because I know they’ve got a war chest of cash. What I really want is to say, “Stop going to buy bolt-on companies and put some money in your consumer marketing to drive some of these educational behavioural changes in your user base,” just to make them aware of all these things that you’ve done, they’re great. If you don’t educate them, they’re never going to know, so they’re never going to use it.

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16.
One of the big drivers for PayPal’s Venmo is getting greater merchant adoption and then converting many of its customers to the debit and credit offering. How are you assessing the challenges for those big drivers? What do you think about management’s ability to get 20% of the user base adopting the debit card by 2023?

SP: I think that the roll-out, and they made it optional, you had to opt in, I think they should have just taken the risk and the gamble of, if you had a Venmo account on your phone, you should have got a debit card in the mail. That should have been a strategy and it wasn’t. It was opt in. If you don’t know that you can opt in because you don’t know they exist, again, it’s chicken in the egg, right? I think that was a challenge and a flawed approach, and so if they flip that and they get debit cards into users’ hands, then I think that’ll be a great strategy. They’ll get more spend and, of course, now get more adoption, and merchants seeing Venmo show up on their statements, say, “Hey, look it. I better go talk to PayPal about this Venmo thing.” It just turns the flywheel. I love the extension of the Synchrony deal, if they get the Venmo credit Mastercard in the mix, because I think it goes back to that graduation strategy we talked about. I think it helps with the lifelong sustainability and lifetime value of a Venmo user and giving them those tools. Interestingly, the Venmo user base actually skews more affluent than you would assume. A lot of people think that it’s very much college kids, which it is, but it’s also college kids that were using peer-to-peer before Venmo got monetised. They’re grown up now and have got good jobs and they’re making good money and they have houses and cars. A lot of them still have Venmo. There’s actually quite an affluent user base within Venmo. While the credit piece is nice, but it’s good for the lower end, you’ve got to meet your customers where they’re at. I think there’s huge spending potential. If they can figure out how to get users to use Venmo to buy stuff and pay for subscriptions and interact with Venmo’s top of wallet, that’s huge.

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17.
How might ARPU trend for Venmo in the longer term? It is around USD 12 per Venmo user, but if PayPal can execute on pay with Venmo, paying bills and the debit and credit card offerings, do you think ARPU could significantly grow beyond USD 12? Secondly, do you think USD 1bn in 2021 revenue is possible for Venmo?

SP: The USD 12, that metric… I did not know that stat. It’s definitely underwhelming. I think there’s a huge uptick in that, but again, you have to do all those things that we talked about, and if you do those things, then I think that there’s a huge opportunity to grow that revenue substantially and even rival the revenue that they get on PayPal Credit. Obviously, it’s a much smaller user base, but with the interest revenue, it’s just going to multiply, it’s a compounding effect.

TB: What are your thoughts for Venmo hitting over USD 1bn in revenue for 2021?

SP: In 2021 – I would take the under on that bet for the reasons I cited. I hope that they over-deliver.

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18.
What are your expectations for PayPal’s super app? How might that take shape and how successful do you think it will be, broadly?

SP: They’ve got all the underpinnings to do it and do it well. I think if you look at what Revolut is doing, they’re setting up the playbook to go be what a super app is. They just don’t have the user base or the… no one in America knows what Revolut is. Everyone over in the UK does. What Revolut has is a great platform and super app built, they just can’t get the adoption, whereas PayPal has the reverse effect. They’ve got all these underpinnings, they just haven’t stitched them together. Absolutely, they’ve got the social, the commerce, you name it, in-store, with the QR code, etc. I think it’s just how you stitch those things together, but do it in a way that doesn’t disenfranchise your loyal customers and users and just make it easy. Again, it’s reinforcing consumer marketing. You’ve got to spend some money there if that’s really going to be real.

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