DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech leader, discussing its history, products / services, and how it has grown to be an industry leader.

The concept of financial technology (FinTech) companies dates back to the peak of the dot-com era in 2000. The top digital banks, wealth management apps, cryptocurrency, and financial services tools we see today as modern FinTech evolved from startups that emerged in the late 90s. No other company from this era had more success and growth than the global giant PayPal — a pioneer for FinTech and first truly global enterprise.

PayPal Holdings Inc (PYPL) is a global financial services platform for individuals (over 348M users) and businesses (over 30M). Originally focused on payments processing, the industry veteran experienced even more growth in the last 3 years with the shift from in-person/physical payments to digital/contactless. The pandemic drove this trend even further for PayPal as it added 72M new clients and nearly 40% in overall payment volume.

Direct competitors (such as Square Inc and Stripe) add new products at a faster pace, but PayPal still manages to maintain its market presence and expand its reach through strategic planning and acquisitions. Despite its long track record of success, its journey over the last 20+ years came with various challenges from established incumbents.

paypal’s HISTORY and growth

PayPal was originally established by Max Levchin, Peter Thiel, and Luke Nosek in December 1998 as Confinity — a company that developed security software for handheld devices. With little success in this business model, the group pivoted to a digital wallet and launched an early version of the PayPal electronic payments system in 1999. The investment community doubted the startup’s chances in chipping market share away from traditional payment networks such as Visa and Mastercard.

In March of the following year, Confinity was acquired by X.com, an online financial services company founded by Elon Musk. A firm believer in the future of payments, Musk decided that X.com would stop previous online banking projects and focus on this new venture. In October, Thiel replaced Musk as CEO of X.com — renaming the company as PayPal.

PayPal began to gain users early through its streamlined e-commerce experience and lower price point (compared to established payment processors). By 2001, PayPal began to impress the industry with its user growth of 100K. eBay, the online auction platform, took notice and considered how this payment system can complement its marketplace.

PayPal went public (via IPO) in 2002 at $13 per share (raising $61M). Shortly after PayPal's IPO, the company was acquired by eBay (October 2002) for $1.5B. Online auctions helped with early adoption across the US as over 70% of auctions allowed PayPal for payment (and 25% used this option). For most eBay users (even today), PayPal is the default choice.

Over the next 10 years, the company targeted key acquisitions and partnerships that enhanced its platform: Verisign in 2005 (provided additional security support), MasterCard partnership in 2007 (helped allow PayPal to be accepted on more websites), Fraud Sciences in 2008 (provided online risk tools and management), IronPearl (user engagement software), and Braintree (payment gateway) in 2013. The emerging payments leader now had over 100M users across 190 markets (as of 2010).

A critical move came in 2011 as PayPal decided to allow offline payment processing with its merchant services. In partnership with Discover Card network (in 2012), PayPal payments could be made at over 7M stores of their network. By the end of 2012, total payment volume processed stood at $145B (representing nearly 40% of eBay's revenue).

The original founders of PayPal (aka the “PayPal mafia”) did not agree with the eBay purchase, and some of the management team left in protest. By 2014, PayPal spun free of eBay as its own independent company once again.

Over the next years, PayPal would shine bright as an industry leader within the payment sector — averaging 10% customer growth annually. It’s expansive scope across countries, currencies, and online made it extremely difficult for competitors to catch up to its 80%+ market share. Even Amazon (who launched Amazon Payment in 2007) has less than 5% market penetration.

PAYMENTs as paypal’s core focus

PayPal allows users to make online financial transactions through electronic funds transfers — typical use cases are to send/receive payments, making purchases on a marketplace, and collecting disbursing donations. In using these services there’s no requirement to establish a PayPal account, but having one does allow for a streamlined experience for users (especially those with recurring payments). Customers link external bank accounts and credit cards as endpoints in transacting.

In 2007, PayPal acquired Bill Me Later, Inc., a company that provides online credit products. The new offering was rebranded as PayPal Credit with Comenity Capital Bank as the lender of record. Shoppers are able to instantly access an online revolving line of credit to spend at vendors that accept PayPal (based on credit approval) — similar to a traditional credit card. User access to credit allowed for increased payments within PayPal’s ecosystem.

Fast forward to October 2020, PayPal announced the use cryptocurrencies to shop in its network of 26M merchants starting in 2021. Leveraging Paxos Trust as a provider of back-end infrastructure, users are able to manage and trade crypto within respective regulatory guidelines. As part of the milestone, PayPal obtained the first conditional cryptocurrency license from the New York State Department of Financial Services to allow customers to purchase cryptocurrency. Bridging current and future payment structures helps the global leader stay true to its core focus and ahead of competitors.

strategy for expansion (within in the US and globally)

Despite early success with payment volume growth, PayPal maintained a calculated, strategic approach to expansion after being purchased by eBay in 2002. The company’s strategy had 3 phases, which it deployed between 2002 - 2014:

1st Phase focused on expanding services across eBay’s users in the US. Attracting as many sellers as possible (especially individuals and businesses unable to obtain approval for credit card processing), helped PayPal gain critical early traction. Enabling business services to underserved merchants would become a key competency throughout its history. Consumers (or bidders of auctions) also appreciated not sharing bank or card payment details directly to sellers. As an added bonus, the company incentivized new customers with a $10 credit.

2nd Phase shifted to minimize card processing disbursement costs and prioritize funds held on its platform (for interest revenue). PayPal honed in on business users and collecting service fees for various merchant features. Seller protection and support with chargebacks/disputes helped improve the merchant experience both in the US and internationally, and increase customer retention.

The 3rd phase had PayPal transition to becoming its own independent force (outside of eBay). Developing user growth on other platforms and marketplaces would help mitigate against downturns in volume from eBay. PayPal released a separate unit (Merchant Services) to capture external payment volume from small to enterprise level companies. Key incentives from this channel were: (i) lower transaction fees based on payments volume (from 2.2% to 1.9%), (ii) higher referral bonuses (up to $1K) for new merchants, and (iii) reducing costs for micropayments of less than $1. New sales staff were also added to focus on enterprise merchants and potential partners with credit card gateways (for new checkout options).

The introduction of PayPal Mobile (and its subsequent enhancements) helped deepen the usage among consumer users globally, who were now able to make payments via smartphones at anytime.

BECOMING a “FINTECH SUPER APP”

When PayPal originally launched in 1998, secure online payment options were still new in the industry. As mobile payments emerged after 2010, its application (for iOS and Android) pioneered access and money movement. In the last 7 years, PayPal expanded beyond payment processing by enhancing its app. Some of the features added include:

• various payment options — add/withdraw cash at stores, cash checks, send bank deposits/cash/crypto;

• wallet — holds fiat (USD, Euro, etc.) and cryptocurrency;

• apply for and access PayPal credit;

• ability to send charitable donations;

• access to a PayPal cash card;

• enable direct deposit (to receive earned wages);

As established fintech companies mature and evolve, a goal is to become an all-inclusive, “super-app” — capable of handling all major financial services requests from end-to-end. Fintechs in China are proficient in this model with top companies (WeChat, Ant Financial) expanding their reach across multiple verticals beyond payments. Replicating this dominance in the US may be more difficult due to the multitude of choices available and emphasis on using a trusted brand to manage money.

KEY VALUE DRIVERS for the fintech giant

What contributed to PayPal’s successful track record in financial services? Security, partnerships, and new products.

SECURITY: PayPal committed to having the latest in security, controls, and risk management from the beginning. Most recently the company adopted AI monitoring and network tokenization into its technology layer. A secure, reliable platform established trust with customers in its early days. The company continued to support this culture by building a 4K+ person risk management team to monitor transaction data and improve authorizations. The result: increased customer satisfaction that leads to revenue growth from merchants.

PARTNERSHIP: A key decision was made in 2015 to collaborate with payment networks (Visa, Mastercard, Discover) instead of compete with them. These deals lead to robust user adoption in the last decade, and paved a path for further partnerships outside of the US — Union Pay (China), MercadoLibre (South America), Gojek (Southeast Asia).

PRODUCT: Not resting on its huge market share, PayPal continues to push the bounds of innovation for its users by adding the latest products and features — cryptocurrency, QR codes, and installment payments (similar to Buy-Now-Pay-Later). Early statistics show these features increasing overall customer engagement and total payment volume between 12% - 19%.

Combining partnerships with product, the industry giant also started to offer standard bank accounts (that can receive direct deposit and provide high-yield savings).

COMPETITIVE LANDSCAPE and OUTLOOK

As of 2021, PayPal is operational in over 200 markets, 25 currencies, and nearly 400M accounts.

Even with their current market leadership, PayPal is still aware of competitors on the horizon from big tech, traditional and challenger banks, eCommerce giants, and other fintech leaders:

• Apple has an established foothold in the mobile/smartphone market and increasing usage of Apple Pay;

• Square has a set merchant base through its software and hardware platform and is expanding their consumer channel through Cash App;

• Google revamped Google Pay app to feature peer-to-peer (P2P) transfers, bill payments and splitting, and bank links for to help consumers with budgeting;

• Traditional banks are industry veterans with long-standing consumers relationships, which provides an outlet to customers wary of data privacy and protection from tech platforms;

• Challenger and neobanks (e.g. N26, Chime, Varo) are attracting younger consumer segments and unbanked with their platform. As these virtual banks mature, more payment features are being added to capture full banking relationships as users become financially independent;

• Stripe is part of all discussions in the payments sector due to its fast-paced growth and breadth of services. The fintech giant plans to help its merchants embed banking services through its Stripe Treasury program (launched earlier in the year);

• Amazon, Shopify, and Buy-Now-Pay-Later apps (such as Affirm, Klarna, Sezzle) experienced tremendous eCommerce volume during the pandemic. Their streamlined user experiences built loyalty with customers and open a path to add other banking services and payment capabilities;

Despite the varying levels of competition, PayPal looks to remain a global powerhouse in financial services — a milestone that will be difficult to replicate or even challenge. As one of the early Fintech companies, its clear to see how impactful payment startups can become within banking over the course of one to two decades. Stripe (mentioned above) is on a similar path of maturity and growth globally — likely becoming the closest comparable company to PayPal over the next 5 years.

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