PayPal Is a Legacy Solution. That’s a Problem

For all its resources, the payments company faces a growth problem it may not be able to solve on its own.

This is a story about PayPal, one of the most trusted brands in e-commerce. It’s been one of the most trusted brands in e-commerce for decades. Today, it’s fastest-growing demographic is the 50-and-up cohort. And that’s pretty much the problem. Consider this the executive summary of its story.

Think of PayPal as the Facebook for payments. And, as my 12-year-old grandson told me recently, “Grandma, nobody is on Facebook any more.” This meant nobody in his age group, just to be clear.  Oh, there’s still lots of people on Facebook and lots of PayPal accounts that have one transaction of any kind per year (their definition of an active account).

This is called hitting a growth ceiling. When that happens, there are a few options:

1. Rationalize as coming from a bad economy, inflation, cyclical changes, Covid, or climate change, and project future positive change;
2. Sell to a larger company that wants more accounts, technology, resources, geographies, or all of the above;
3. Raise more money on new growth projections;
4. Move into a new market;
5. Shop your feature-functionality closet and stuff all the good parts into a new super app.

The first four options are hundreds of years old. So that leaves number five. As some of you who read Endpoint regularly know, I’m not a believer in the super app. I believe that apps instead have super powers. So what is PayPal’s? I think it’s being the leader in e-commerce payments, which is pretty much what its super power has always been.

In other words, what PayPal has come up against is the age-old problem of having a legacy solution that is still ahead of its competitors, but starting to show its age, so it’s now forced to go outside its core competency and compete for customer’s core banking services.

Further, competitors like Block (Square) and SoFi now have U.S. banking licenses, so they can directly acquire deposits, lend money, and issue cards. Stripe and Adyen are compiling meaningful services for the small-business market. Other issuer/acquirer mashups have taken place, like Fiserv/First Data and Global Payments/TSYS, and are ready to exploit the synergies of a two-sided marketplace.

This is not to mention Chase, Goldman Sachs’s Marcus, and digital wannabe banks like PNC. Actual digital banks like Chime. Retailers like WalMart and Walgreens. And finally, mobile wallets like ApplePay and GooglePay.

The Stuffed App

Ultimately, let’s be honest here, many of these solutions are boring old banking services, which means you’ve got to compete on the experience and relevancy to the user, and, at the same time, control for the capital-intensive effort of new account acquisition.

PayPal’s experience trying to incent new consumers onto its platform pretty much backfired when it offered a high-value rewards bonus for signing up. Ultimately, it had to purge millions of accounts that had taken the bonus and run. A back-of-the-envelope estimate to acquire a new retail bank account starts at $250 and can reach $500. New credit card? $150 to $250 per account. Another sobering statistic is that 30% of all bank-account customers switch accounts in the first three-six months.

Finally, it’s no secret that younger consumers like to pick and choose their financial services based on personal preferences. That’s a dynamic that makes a super app sound kind of intuitive, doesn’t it? Until you factor in what the user experience is like for an app stuffed with lots of feature functionality. Just check out the reviews on Google Play for PayPal’s super app. You’ll read a lot about friction.

That’s because what PayPal is chasing is a WeChat Pay-like experience. But the problem is that WeChat’s super app operates as a hub for externally delivered services that live in the app increasingly through mini-programs that decrease friction. To visualize this, think of the main WeChat app as a Web browser that enables access to lots of other apps through simple links that take us where we need to go.

By contrast, PayPal is primarily integrating into its app its own services, like Honey Rewards, Venmo, and PayPal Credit, alongside its own wallet and third-party prepaid debit card, credit card, bill-pay service, and savings account, none of which was built to interoperate. Comparing this experience to WeChat is a lot like comparing Facebook to TikTok. Similar on the surface, but a different experience altogether.

A Reach

This is not to say that PayPal doesn’t have quite a bit going for it, including, let me say again, being a market leader and trusted brand in e-commerce as well as in P2P payments via Venmo, along with its rich network. But even with all that, the problem it’s now running into is simply the sheer breadth of available financial services.

Net new markets in payments are pretty small and getting more finitely targeted all the time. For example, the unbanked part of the U.S. population is about
5%, which likely represents households that don’t want a bank account for one reason or another. In developing markets, like India for example, not only does PayPal face fierce local competitors but also a government that ensures its homegrown payment schemes
come first.

If you consider all of the solutions PayPal has to offer— e-commerce, money transfer, BNPL, debit and credit cards, deposit accounts, savings, cryptocurrency—the idea that it’s going to continue to grow these year after year in double digits through digital and physical payments via a super app seems like a reach.

Instead, I’d place my bet on a near-term merger. Just makes sense when you’re a legacy solution.

—Patricia Hewitt is principal at PG Research & Advisory Services, Savannah, Ga.