Paypal has been making a lot of moves lately and I had the opportunity to sit down with Raymond Pucci, Associate Director of Research Services at Mercator Advisory Group, and Sarah Grotta, Director of the Debit and Alternative Products Advisory Service at Mercator Advisory Group, to talk about what their thoughts are on what PayPal is doing in the payments space. The following is a transcript of that conversation on June.
Are PayPal’s recent acquisitions possibly a first step in getting its ducks in a row to start pursuing a bank charter? First, Ray, let’s go over the recent acquisitions.
This is fairly amazing. PayPal is really filling up its shopping cart. When you think that in the last year, it’s made five acquisitions. I took a quick look at this, and each one of the acquisitions has been very synergistic and zeroing in on, for the most part, growth categories where PayPal is acquiring either market share or a technology.
If you look at these acquisitions, starting with the most recent one, which was announced June 21—Semility–that’s a fraud management and a fraud detection company for merchants. I’ve been feeling that in the last couple of years that within the payments sector, these security firms–and there are a number of emerging ones–they’re the hottest commodity that’s out there for a payments company looking to acquire technology. Basically in these firms, a group of engineers and software developers get together and they write algorithms and the next thing you know, they’re able to work with merchants on fraud detection. So Semility in the fraud detection area, which is hot right now. HyperWallet, an acquisition announced on June 19, is a play in the gig economy enabling independent contractors to get payment around the world. iZettle, acquired in mid-May, is the Square of Europe. So that’s your mobile–mobile POS–again another growth area. Swift Financial is the fourth of the five. They’re a lender to small and medium businesses. PayPal already has PayPal Working Capital. So Swift will be in addition to that. And last of the five acquisitions is Jetlore, which was acquired on May 30. That’s another machine learning firm, but its focus is predictive analytics for the retail industry. Each of these five is a crucial core competency that is really so synergistic to PayPal and part of what I think is going to be a winning formula for PayPal.
I think also that what also is interesting about these acquisitions is that a lot of them have a global footprint. So PayPal is not just confining itself to the U.S. at all. These acquisitions really expand its market much more broadly.
That’s a great point. Is PayPal one of the first payment companies that’s thinking in that regard? You have the other “pays”–Samsung Pay, Apple Pay, and Google Pay and the Asian “Pays”—Alipay, which is dominant in China. Is PayPal saying in essence, “Well, we recognize that we need to be on a global scale. Otherwise, we risk being sucked into being a pay for one particular country and we don’t want that. We want to be on a global scale”? Do you think some of these acquisitions have something to do with that—with PayPal essential saying, “We want world dominance and so we’re going to do whatever we need to do to get it.”
I think world dominance is certainly part of what PayPal is looking to achieve. And I think it’s so much more than just payments. As Ray was going through all of PayPal’s recent acquisitions; it’s also about fraud mitigation and security and it’s about lending. It’s really all about being a bank without being a bank.
If you compare PayPal with financial institutions, PayPal, through these acquisitions and through their own development have an incredible amount of technology which they own. And interestingly enough, unlike technology providers, they also own the customer. Now compare that to a financial institution. Financial institutions have customers, but they often don’t own their technology, right? They go out into the marketplace to buy it. So I think that’s another thing that’s unique about PayPal is that they’ve got the technology and they have the customers. Now I think what’s going to be a challenge, maybe the biggest challenge for PayPal at this point is whether they can really manage both the technology and the customer service piece.
That’s certainly an interesting challenge that PayPal’s going to face. But it almost sounds like they’re the Apple of banking in the sense that they want to control all aspects of it. They own the technology; they can own the customer part of it. And I know that that’s something that Apple has said for a very long time and still continues to say is that they want to own all aspects of the technology, of the hardware and everything, and not have third parties come in and muddy the waters as they have done in the past. That’s something that when Steve Jobs came back to Apple, he made it a point to say no, we want to own the whole thing.
I’m kind of curious to see if PayPal is going to continue in that focus of saying no. We saw that this model worked on the technology arm. So now they’re going to bring that into the banking sector and say, “Okay, we want to own this entire thing.” And then, does that ultimately benefit the customer and also allow PayPal to be able to charge premiums for that in the same way that Apple does?
Yes, quite possibly. I think the interesting thing too is that they’re able to do this without a banking charter. You know, they’ve got all the goodies without the icky parts. Certainly they have to comply, and certainly they have regulatory constraints, but they aren’t really drawn down by all of the minutia that goes along with being under the umbrella of a financial banking charter, which is absolutely fascinating.
On your point about Apple, Ryan, I think that there are some differences. Certainly the M&A Department has been working overtime at PayPal in the last year or so. But remember in the same period they’ve made several partnership agreements with the card networks and issuers so that basically some reciprocity on PayPal accepting Visa and Mastercard, say. And of course they’re really trading off getting more volume at a lower fee than they normally would have received when they were going on their own. They are, I think, cognizant that they need partnerships within the payments industry to be successful. So that might be a slight difference from the Apple example.
But I wanted to pick up a point, a good point that Sarah made: Can they execute this? This effort is tremendously distracting for a company. I don’t care how big an organization is, but when you try to assimilate and integrate five other organizations within your existing infrastructure, that is tremendously distracting. And you’re talking about companies–well in the case of iZettle, in other regions. At some point they’re going to have to settle down and make this all work.
But I will say, looking into the crystal ball, that they’re not done yet. There will be other acquisitions in my opinion sooner than later. They could be of different scales: As we’ve seen, the Semility acquisition is basically from the petty cash drawer, costing about $120 million, versus the multibillion that PayPal spent to acquire iZettle.
I also think we’re going to have to start to talk about PayPal maybe ii the same breath, as you’re mentioning Ryan, with Apple, but also, Google, Amazon. Keep in mind PayPal has over 200 million global customers. That’s a huge customer base. And incredible leverage. Revenue-wise PayPal exceeds Mastercard’s revenue. The last I checked, PayPal does about $13 billion in annual revenue, Mastercard does $12 million, and Visa does $18 million. So PayPal has become a force in its own right and definitely, a company to watch and to be reckoned with.
Do you think PayPal’s strategy is that they also understand that now we really are living in an AI world where AI is becoming more and more a part of daily life, that they understand that those with the biggest databases ultimately end up winning? So are they going through and trying to make all these acquisitions to say, “Okay, we have all of this data coming in from all these various types of sources and we’re able to compile this all together and then able to turn around and resell that data back to merchants or whomever it is that they would like or who has interest in the data”?
That’s a possibility. I think though that there will be pushback. There’s been more pushback recently for privacy reasons and regulatory issues that are going on in terms of sharing data, particularly cardholder data, account holder data. That is an area where PayPal will have to tread lightly. I think the play for PayPal is just the diversity and the variety of services that they’ll be able to offer. And let’s keep in mind that we’re talking a lot on the consumer side, but there’s a huge pie on the commercial side that I’m sure would be able to provide more growth for PayPal.
I agree that they are going to need to tread lightly on the data side. But that data is also very attractive, and it helps them to generate some nice income. And not all of these acquisitions are actually making money right now. It’s always fun to go out and buy these interesting companies and to work to integrate them, but then at some point you’ve got to start making money. So I think you’re right about the data. It will be interesting to watch to see if that’s the avenue that PayPal goes down to try and help to make these acquisitions income-positive.