PayPal’s Platform Strategy Brings It Closer to Banking Services

PayPal wants to be the world’s largest open payments platform, according to CEO Dan Schulman. At the heart of this aspiration is PayPal’s ongoing technological evolution, which also enables the payments giant to expand into banking services.

“We are just beginning to scratch the surface of the opportunity in front of us,” Schulman said yesterday at PayPal’s Investor Day Conference. “We have the assets and talent… to take advantage of that, we obviously have a tremendous scale right now with 19 million merchants and 220 million consumers on our platform, but really importantly the scope of the services we are beginning to offer… has expanded dramatically as we’ve moved from being a product company to being a platform company…. And why that’s so important is that every incremental service we add to a consumer or to a merchant their COV or lifetime value doubles.”

When PayPal started out in 1998, it did so with a “monolithic tech stack,” Schulman pointed out, while today the company has spent a lot of time and resources restructuring itself to have a service-oriented platform architecture. This is important because it enables PayPal to expand its two-sided network of consumers and merchants. But it also allows PayPal additional possibilities in the financial services sector.

“Many of the frenemies we had at the time are now are very strong allies,” Schulman said. Those “frenemies” would be banks and FI institutions.

Through PayPal’s digital wallet, the company is pushing forward in the financial services area, racking up banking partnerships, but also being able to take advantage of a specific market features while inking these deals. For example, with its partnership with Barclays in the U.K., PayPal was able to take advantage of PSD2, providing Barclays SMB customers all their transactional data within PayPal in their Barclays account dashboard.

Schulman also sees potential for strengthening PayPal’s partnerships with banks in digital wallets. Although he didn’t name names, he said that during this year, PayPal will be announcing partnerships with various banks across the world regarding its digital wallet. One area specifically that these partnerships will focus on is points and rewards. PayPal’s platform solution will allow its digital wallet to consolidate various rewards points and card incentives in one place, enabling bank customers to get more value from those reward programs. This, of course, will benefit the bank too. These partnerships with banks will allow PayPal to provide the consumer several other services and products beyond just money movement.

But PayPal also has its eyes set on the underbanked population, Schulman said. Last month, a Wall Street Journal report unveiled PayPal’s plans to use its digital wallet to offer banking features including a Federal Deposit Insurance Corp. insurance for balances, a debit card for cash withdrawals at ATMs as well as the option to direct-deposit their paychecks. These services would be offered in partnership with banks. At the investor day conference yesterday, Schulman didn’t get into the specificity of these offerings but on multiple occasions spoke about PayPay’s desire to serve the underbanked.

But perhaps the most prominent area where PayPal’s platform-based strategy comes in handy is in its core commerce business.

Here, PayPal’s platform serves as an end-to-end commerce solution for its merchant customers. This means merchants can write their applications on top of the PayPal platform and connect to it. This lets PayPal provide the merchant with different services such omnichannel offerings and marketing solutions.

Schulman said that one of the reasons behind its $2.2 billion acquisition of iZettle was to build more of such capabilities on its platform.

On the consumer side, the platform allows PayPal to provide the user an “end-to-end value proposition,” he said. That means PayPal oversees a consumer’s entire transaction from start to end, from onboarding to data-gathering to approving or halting a transaction.

Apple Pay, for example, relies on banks for approving or halting a transaction. PayPal does not need to do that. This flexibility, thanks to PayPal’s open platform, allows it to offer features like price protection, for instance.

So far, PayPal has about 218 million active consumers on its platform and 19 million merchants. PayPal defines the term “active user,” as someone that transacts via PayPal two to three times per month. Schulman wants to bring that number up to one or two times per day. This does not include the use of consumers on PayPal-owned P2P platform Venmo or Xoom.

PayPal, which trades on Nasdaq under the ticker symbol PYPL, is trading at $81.03 per share as of Friday, 1 PM ET. It has a market capitalization of $99 billion.

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