Is PayPal Really a “Frenemy”of the Banks?

In the last 15 years, PayPal has enjoyed ameteoric rise and has gained an enormous consumer followingworldwide.

Consumers use PayPal for its trusted and reliable service indelivering secure online payments. But as PayPal has grown andmoved beyond e-commerce, it has developed tools and features thatremarkably resemble many of the traditional hallmarks of checkingaccounts found at banks and other financial institutions. WhilePayPal remains steadfast in its cooperation with banks worldwide,the services it now offers have the potential to sour the ongoingfriendship by siphoning both consumers and their debit transactionsaway from banks and other financial institutions.

PayPal can represent a credible threat to traditional financialinstitutions if it accomplishes three main tasks. First, build andmaintain a strong consumer base; second, get consumers to use theirPayPal accounts frequently; and third, maintain enough features ofmodern checking accounts that would encourage people to use PayPalas their primary checking account.

In Mercator Advisory Group’s analysis of both our own data andPayPal publically available data, it would appear that for thepresent and in the near future, PayPal and banks are likely tocontinue enjoying their symbiotic relationship. PayPal does notappear to be a potential “frenemy.” Mercator came to thisconclusion by reviewing PayPal’s progress in accomplishing thethree tasks highlighted above.

PayPal’s appeal to consumers is an international phenomenon andhas showed no signs of slowing down with 5 million new “active”accounts added in the first quarter of 2013 alone, bringing thetotal to 128 million overall. While these figures are commendable,they likely only represent less than 40% of all accounts ever made,according to Mercator estimates. That suggests PayPal has to holdon to their customers more effectively.

PayPal users also make transactions less often than cardholdersusing cards issued by traditional financial institutions, a keymetric that needs to improve if PayPal is to be a bank competitor.Though PayPal trails in accomplishing the first two of the requiredtasks, it already offers some banking unique features that couldhave broad appeal to certain demographics such as the unbanked andunderbanked, as well customers frustrated with their currentbank.

While PayPal’s moves to expand and enhance its direct-to-consumerservices have probably ruffled a few feathers at traditionalinstitutions, it will remain a friend of the banks for theforeseeable. This debate, however might need to be revisited ifPayPal improves account retention while consumers use the servicemore.

For a full review of the analysis of PayPal and more, see MercatorAdvisory Group’s research note, PayPal: Lessthan a Friend?