A series of partnerships with the card networks and now individual banks have positioned the online-checkout kingpin to make the leap to a mainstream digital-payments platform.
Ever since PayPal Holdings Inc. was spun off from eBay Inc. in 2015, its chief executive, Dan Schulman, has not been shy about warning financial-technology providers to re-imagine how money can be moved and managed. His reasoning rests on the idea that the change that will take place in this business over the next few years will be staggering.
PayPal itself—which has long expressed its aspiration to move beyond its niche as a popular, alternative online-payment option and transition into a mainstream digital-payments company—has been busy positioning itself in preparation for the coming sea change.
PayPal’s new strategy began taking shape in 2016 when it struck deals with Visa Inc. and later Mastercard Inc. to gain access to their respective tokenization engines. A similar agreement with Discover followed.
The deals were widely heralded as victories for the card networks because their terms required PayPal to drop a longstanding practice of promoting the low-cost automated clearing house network over higher-cost cards for account funding. Less noted at the time was how the deals would smooth PayPal’s way into physical stores.
In-store purchases, after all, still exceed e-commerce sales by a wide margin. During the third quarter of 2017, e-commerce sales accounted for $115 billion, or less than 10%, of $1.2 trillion in retail sales, according to the U.S. Department of Commerce.
Access to Visa’s and Mastercard’s tokenization engines not only gained PayPal entrée to more than 5 million merchants globally that are equipped to accept mobile wallets at the point of sale. It also ensured PayPal transactions at those merchant locations will be secure, as actual card-account data will not be exposed during a transaction.
The belief was that PayPal could leverage the security angle to actively promote to consumers the use of PayPal for in-store purchases and create demand for in-store acceptance.
The passage of time, however, has brought the benefits of the Visa and Mastercard deals into even sharper focus. While PayPal wants broader acceptance at the physical point of sale to help fuel long-term growth, it sees an even larger growth opportunity in becoming a platform provider for all digital channels.
It has been pursuing this broader initiative through a further set of agreements with financial institutions and merchants that supplement, and build on, the provisions of the original network deals. The idea is to deliver unique payment experiences to consumers through the PayPal wallet, regardless of whether they pay with a PayPal account or a bank card.
“Our aim is to become a scale-driven platform that interoperates with the card networks in the broader payments ecosystem to provide better user experiences, and maximize the users that come onto our platform,” says Jim Magats, vice president of core product for San Jose, Calif.-based PayPal. “The first steps we have taken along these lines have been to improve our core user experience.”
What are these new, improved experiences, in concrete terms? One of these allows PayPal users to set a credit or debit card within the PayPal wallet as their default payment mechanism. Others automatically update credit and debit cards in the wallet that have expired, were lost or stolen, or compromised by criminals. Still another enables users to move funds from their PayPal account to a debit card in real time.
“To become a scale-driven platform, we must have an environment that supports consumers who prefer to fund, and move money out of, PayPal accounts using Visa and Mastercard cards,” says Magats.
While PayPal will not provide specifics, Magats says automatic card updates have substantially reduced the number of customer-service inquiries, which in turn has increased operating efficiencies.
“About one-third of the cards in our wallets need to be updated annually,” Magats says. “Updating creates churn, and we lose a portion of those customers every year. Automatic updates help alleviate the churn.”
In addition, there has been a large number of withdrawals from PayPal accounts to debit cards. “Instant liquidity is an important feature to our customer base, because when we moved funds out of a PayPal account in the past through the ACH, it took one to three business days,” Magats says. “For our users that are small-business owners that need immediate access to those funds, that was too long a wait.”
PayPal declined to break out figures on the sums transferred between PayPal accounts and debit cards.
Cracking the Point of Sale
PayPal’s next steps have been to enhance the way PayPal users manage cards in their wallets and pay for purchases.
Through a string of deals with such financial institutions as Citibank, JPMorgan Chase, Bank of America, and Wells Fargo, PayPal has gained a marketing foothold with a large swath of customers it normally would not reach. In exchange for being able to load their cards into PayPal’s wallet, partner banks agree to market the wallet to their customer base.
But PayPal isn’t stopping there. Its deal with Citibank, which was struck last year, will enable customers enrolled in the bank’s ThankYou Rewards program to redeem those points at PayPal merchants online or in-app. The feature is expected to go live this year, PayPal says.
Such deals may provide the value-added hook that can accelerate consumer demand for merchant acceptance of mobile wallets, including PayPal’s wallet, at the physical point of sale.
“An advantage of an open platform is that it lets others into the ecosystem that can expand the customer base,” says Raymond Pucci, associate director for research services at Maynard, Mass.-based Mercator Advisory Group. “One of the reasons mobile wallets haven’t gained traction in-store is because consumers don’t see value in them. An open platform allows for competitive cooperation.”
Could PayPal now strike promotional deals on its own with merchants to build in-store acceptance for its wallet? That remains to be seen. The concept is viable, however.
Pucci points to an example: Mastercard’s promotion last year with Dunkin’ Donuts to reward Dunkin’ Donuts customers enrolled in the chain’s DD Perks loyalty program with a $5 credit on their Perks card for reloading value onto it through the Masterpass mobile wallet. More than 7.5 million consumers have enrolled in the Dunkin’ Donuts Perks program.
Starbucks ran a similar promotion last year. Visa rewarded customers buying a $10 Starbucks e-Gift card with a $10 bonus when paying with Visa Checkout.
“Promotional tie-ins with large merchants that reward customers for a PayPal transaction is a way PayPal can crack the point of sale in-store,” says Pucci.
If PayPal opts to go that route, it will be at least a year or two before it does. “While we envision ourselves as a platform for offers and rewards, we don’t see it happening until 2019 or beyond,” Magats says.
In the meantime, PayPal’s plans to focus on partnering with banks to promote its wallet to their customers. About 10 banks are now actively promoting the PayPal wallet.
“We are getting the benefits of our bank partners’ marketing arms encouraging their customers to add their cards to a PayPal wallet or to create a new PayPal wallet with just the banks’ cards,” says Magats.
Getting a bank to also agree to promote rewards redemption through PayPal’s wallet to its cardholders, a la Citibank, makes the PayPal wallet even more attractive to a bank’s customers, he says.
“This adds another dimension to the PayPal wallet that can make consumers more inclined to use it,” says Larry Berlin, a senior vice president with Chicago-based First Analysis Securities Corp. who follows PayPal.
Down the road, Magats foresees the day when rewards for PayPal wallets can be customized based on the card used. One potential scenario would be to peg the reward to the purchase. A PayPal wallet user purchasing an airline ticket, for example, could receive free flight insurance. Other rewards could be pegged to consumer purchasing behavior to encourage repeat purchases at a specific merchant.
“We see our platform as a way to bring card issuers and merchants together to expose consumers to more contextual offers,” Magats says.
PayPal can even use the data collected through its wallet to conduct attribution marketing to remind wallet users rewards are available for redemption at the time of purchase, Magats adds.
But what’s the payoff for banks in having their customers load their cards into PayPal’s wallet? It’s the opportunity to capture transactions they might not otherwise get from PayPal users, especially at PayPal’s 17 million merchants, observers say.
Many consumers, PayPal users included, will divide their purchases between different payment mechanisms based on the dollar amount, according to Magats.
For purchases of $70 or less, the favored purchasing method is a debit card or an ACH-based payment vehicle, he says, but for purchases of more than $70, consumers prefer to use a credit card.
“If our wallet only supports debit and ACH, then banks lose potential credit card transactions through our wallets,” says Magats. “Supporting credit cards helps boost conversions through our wallet for credit card issuers.”
Another benefit for banks is the opportunity to earn interchange fees when consumers use their cards to fund a PayPal account. “PayPal is a merchant to us, even though it has its own merchant base,” says Jennifer Roberts, head of digital products, including the Chase Pay wallet, for JPMorgan Chase. “We expect that our customers will use their Chase cards to fund their PayPal account.”
In 2017, Chase struck a partnership with PayPal to allow Chase customers to load their cards in the PayPal wallet and make in-store transactions through the wallet using tokenized credentials. Chase has not revealed the timeline for bringing those features to market.
Venmo at the Cash Register
The wild card in all of PayPal’s maneuvering is Venmo, the company’s peer-to-peer payments service. To Venmo users, the service is more than just a way to pay, it’s a social-payments experience. Schulman has publicly noted how Venmo users, who tend to be Millennials, not only attach emojis to their payments, they open the Venmo app to keep apprised of what their friends are doing.
That certainly gives Venmo powerful appeal, but the unanswered question is, can that appeal translate to consumer demand for in-store acceptance?
PayPal is already making a run at the merchant community with Venmo. Late last year, it announced that more than 2 million retailers are accepting Venmo online and through their mobile apps and that Venmo users can make online purchases at nearly all PayPal merchants.
Getting Venmo accepted at the point of sale is a way to monetize the service by charging merchant-acceptance fees, as Venmo does not charge for P2P payments. Merchants will pay the same fees to accept Venmo as they do for PayPal, starting at 2.9% plus 30 cents and declining with volume.
“Supporting Venmo at the point of sale is part of our platform,” says Magats. “All the capabilities of our platform will be available to any merchant on our platform.”
‘Just Scratching the Surface’
By all accounts, the partnerships PayPal has struck have put the company, which this year celebrates its 20th anniversary, on a steady march toward establishing a significant presence at the physical point of sale. Whether that happens this year or next or the year after that, only PayPal’s leadership knows for sure. What is certain is that PayPal these days is not shy about using partnerships to re-fashion how consumers pay, manage, and move money.
“That’s how we progress,” says Magats. “When we deliver the experiences customers want, we attract more customers, get more repeat usage, and have less churn. We are just scratching the surface.”
PayPal at a Glance
(Third-quarter 2017 results, with change from 3Q 2016)
Total Payment Volume: $114 billion, up 29%
Venmo Payment Volume: $9.4 billion, up 93%
Payment Transactions: 1.9 billion, up 26%
Active Customer Accounts: 218 million, up 14%
Source: Company reports