PayPal (PYPL) – Data, Regulation & Rule Breaking – December 15, 2023
Morgan Stanley published some data on PayPal this past week. Acceptance among the top 500 U.S. merchants reached 83% this past quarter vs. 76% in 2019. Apple Pay is the 2nd closest at 48% with that number quickly rising. Klarna at 19%, Google at 16% and Affirm at 15% round out the top 5. It rightfully called out the slow pace of Venmo adoption for checkout. It’s only accepted by 7% of the 500 largest merchants vs. 3% in 2022. That progress needs to ramp and ending the Amazon relationship, though likely due to cash-burning incentives, does not help. It also pointed out that just 45% of Venmo’s users were between 18-24 in 2022 vs. 58% in 2019. It needs to better cater to younger generations if it wants to keep dominating in settings like college campuses.
It called out Braintree’s rapid growth and margin impact which we’ve documented in detail already. It shared data that points to PayPal Branded Checkout growth lagging e-commerce by 180 bps in 2022, matching the sector’s growth in Q1 and Q3 2023 and lagging it by 120 bps in Q2 2023. This underperformance in 2022 basically means old CEO Dan Schulman was either misleading or just wrong when saying they were taking or holding branded share through 2022. There are many data sources on industry e-commerce growth, but this one doesn’t paint PayPal’s old team in a positive light.
Apple is reportedly considering opening its near-field communication (NFC) technology to competition to avoid antitrust battles. This would be great news for everyone in the payment space including PayPal. It would drive down user friction, enhance interoperability and make all competitors more viable in the vital mobile format. It could open the door for PayPal and Venmo to offer mobile tap-to-pay without requiring users to link their cards to their Apple Wallets. This will free PayPal to compete for volume without directly supporting its fiercest North American competitor.
I broke a rule this week. I added a bit to my PayPal stake before the transaction margin trough. I said I would wait for it to come. I didn’t. What changed? The change in mindset is two-fold. First, I have really liked the new CEO’s tone and decisions thus far. His sale of Happy Returns and rumored sale of Xoom point to sharper focus on its massive core initiatives. Its rumored “quantum leap” initiative to rapidly modernize PayPal checkout is also dearly needed.
Schulman couldn’t deliver this and struggled to painfully migrate one large merchant at a time onto PayPal’s latest flow. That just doesn’t work in a world where Shopify can onboard merchants with the click of a button. As an aside, Schulman will leave PayPal’s board this year. He’s a very nice person, and this is a very needed change.
Chriss has direct experience with successful innovation and nurturing of relevant products at Intuit. I think he can match that success here. PayPal doesn’t even need to have a superior branded checkout product. It just needs to be on par with the rest. Why? Its brand consideration and trust levels are second to none. Product is the only thing holding this former disruptor back, yet consumers flock to it anyway. Per Builtwith, it’s #1 in Europe and Asia and #3 in North America. Per Pymnts, it was the top branded checkout option in the USA in 2023. Imagine what this special brand can do with a great product. It once did have a great product. It needs to recapture that. Chriss is the man to pull it off.
The second reason, and why the purchase happened Wednesday afternoon, was related to the Fed statement. It was the final piece of proof I needed to be confident in the Fed being 100% done with hikes and confident in QT ending in 2024. Easy monetary policy without a coinciding severe recession should be great for monetary velocity. This will surely benefit a company like this one doing well over a trillion in annual volume. This company’s footprint is macro in nature and macro headwinds are now set to fade.
This is why I broke my rule.