PayPal wants to be more than just a last resort for 170m users

Last month PayPal held its first investor day since it spun off from eBay, its slower-growing parent, just under a year ago.

It was a key occasion for the company, giving it a platform to tell shareholders how it plans to compete in the payments industry following the entrance of rival Apple in the field.

Dan Schulman, chief executive, said PayPal was “focused on where the world is going”, adding: “We think this is going to be a mobile-first world — you are going to see us moving directly into that world.” The question is whether the customer base of 170m users PayPal has built over the past 17 years — and the 15m-20m they add each year — will automatically follow.

PayPal occupies an unusual position in the financial services industry: it is a tech company valued at $48bn that both competes with, and works alongside, credit card issuers. Its revenue streams come from diverse sources including merchants, customers and its software.

Mr Schulman stressed that the company has plenty of room to grow alongside other competitors in the market that processes $100 trillion in digital commerce and money a year. “I am not going for 100 per cent share,” he said.

But as PayPal moves towards the mobile-first world its managers envision, analysts say the company must find a way to make its customers eager to press that PayPal button — whether on a retailer’s website or on its own mobile app — rather than using it as a last resort, which tends to be the case.

“They have a loyalty problem,” says Lisa Ellis, analyst at Bernstein. “They have very, very high adoption among users — 60 per cent of online US users use PayPal, which is astonishingly high — but most of those users only use it once or twice a year, when they have to — not because they want to.”

In his speech to investors, Mr Schulman alluded to that problem.

“What we really aspire to is to go from a PayPal customer using PayPal twice a month to a PayPal customer using us twice a week,” he said. “But my own personal ambition is that a PayPal user should use PayPal every single day.” One way the company hopes to increase loyalty, he said, was by letting retailers set up their own private-label rewards programmes using its system.

However, Moshe Katri, analyst at Sterne Agee CRT, questions whether that would be effective. “If I’m getting points from using Visa, I can use them in many different places — but here it maybe limits me because I can only use them at the retailer’s website or stores,” he says.

Some PayPal customers already use the company’s services every day — they just do not use PayPal. Rather, they use Venmo, the peer-to-peer payments app that it acquired through its $800m purchase of Braintree in 2013.

The service is popular with millennials who want to split bills or pay each other back, and processes $1bn in transactions every month.

Bill Ready, head of product and engineering, noted that young people have even started using the app’s name as a verb, as in: “I’ll Venmo you.”

What makes Venmo unique is its embedded social media feed, which allows users to see which of their friends is paying who for what, and to comment on the transactions. It is part, Mr Ready told investors, of PayPal’s “multi-app strategy”, which also includes Xoom, a remittances platform with 1.6m users. He compared it to the way in which users of Facebook can also use Instagram, or Google users can use its maps, mail or docs apps. “You have slices of experiences that are separate apps, but you have a common network across these things.”

The goal, he said, is to increase the ways consumers can put money into, and withdraw it from, the PayPal system: “Previously you thought of PayPal and you had just a few ways to get money into PayPal and you had really only one way to get it out. If you only had one way to get it out you are probably not going to put as much money in because it is harder to get it out.”

Monetising a service like Venmo, however, may be difficult. Consumers are used to the free service. But PayPal is testing a scheme under which about 1m users can pay at select retailers using Venmo, which would allow it to charge a transaction fee to the merchant.