Money in your purse
PayPal is thriving by defying conventional wisdom
The company’s “refounder” boss saved it from conflict and possible irrelevance
IN SILICON VALLEY people are besotted by the latest thing, which is why techies rarely give a thought to PayPal, a digital-payments firm that turns 20 this month. If its name comes up, it usually has to do with the “PayPal mafia”, a group of entrepreneurs, including Tesla’s Elon Musk and Peter Thiel, a venture capitalist, who made their first fortunes when eBay bought their firm for $1.5bn in 2002. Ask tech employees about the Valley’s largest, high-flying firm and PayPal is unlikely to make their list.
What PayPal lacks in terms of its profile, it has made up for in performance. After languishing under eBay’s control, in 2015 it broke away and re-listed. Today PayPal has a market capitalisation of $101bn and is one of Silicon Valley’s most valuable technology firms, larger than either Goldman Sachs or Morgan Stanley by value.
This year it is expected to facilitate digital payments worth around $582bn, roughly four times more than in 2012. PayPal acts as a digital wallet and profits by charging merchants a fee when consumers use it for their online transactions. In 2018 the firm is expected to bring in $3.4bn in operating income.
That offers a counterpoint to Silicon Valley’s conventional wisdom about how to build and run companies. One credo is that founders are the best bosses, which explains why they get so much leeway and are brought back to run companies (as Jack Dorsey was at Twitter).
For PayPal’s boss, Dan Schulman, who ran the telecoms firm Virgin Mobile and worked at American Express before taking over in 2014, being an outsider appears to have helped. PayPal had previously embraced a strategy of clashing with rivals, including credit-card firms, as it gets higher fees if people link their bank accounts to PayPal instead of credit cards. According to Lisa Ellis of MoffettNathanson, a research firm, “Everyone hated them. They had a culture of disruption and fought with everyone.” Had Mr Schulman not changed tack, “PayPal could have been dead by now.”
Instead Mr Schulman brokered around 40 partnerships with would-be rivals, including Visa, MasterCard and Google Pay, to extend PayPal’s reach. For example, shoppers who use Google Pay to check out can link their PayPal accounts. For such openness the firm should partly thank Krav Maga, a form of martial arts developed by Israel’s army, of which Mr Schulman is a devotee—he sometimes shows up to the office with a black eye and cuts. “I’m a big believer because of martial arts that the best way to win a fight is to avoid a fight,” he says. This strategy has given investors confidence that credit-card firms and other tech firms would not try to stamp out PayPal, a concern that had hurt sentiment.
Mr Schulman is part of a cohort of little-known chief executives who did not found their firms but have lifted performance at stagnating companies. Dan Rosensweig, who is not a founder but is the longtime boss of the education-technology firm Chegg, calls this group “re-founders”. Satya Nadella of Microsoft is probably the best-known boss to fit the label; others include Shantanu Narayen of the software firm Adobe and Chuck Robbins of Cisco. As outsiders they have been able to embrace new strategies without being beholden to what founders had envisioned.
Another piece of accepted wisdom in Silicon Valley is that only one company in an area can win. “Network effects” which make a service more useful as more people join, helped Google conquer search and Facebook reign over social networking. PayPal also has network effects—around 60% of Americans shopping online have used it in the past year, reckons Ms Ellis, and around 80% of the top 500 online retailers offer customers the option of paying with PayPal.
But the firm is proof that in certain online sectors, the pie is big enough to feed many. As e-commerce continues to grow, many firms that help with digital payments will thrive, including Square in America and Ant Financial in China. “The real war is the war on cash,” argues Mr Schulman. About 40% of transactions in America are paid for in cash so there is room to grow.
PayPal has grown through deals; in 2018 it has spent $2.9bn. The largest transaction has been its purchase of iZettle for $2.2bn in May. It offers software solutions to merchants and helps PayPal expand in Europe (although the deal is facing scrutiny from Britain’s competition authority and has not been approved). A smaller but still significant acquisition was Braintree, a firm that helps firms accept payment within their mobile apps, for $800m in 2013. With it came Venmo, an app that lets mobile-phone users transfer money to each other. Venmo is popular with youngsters, which has helped extend PayPal’s appeal for a new generation. Venmo is not yet profitable, having been deliberately slow in starting to introduce fees and other moneymaking features. Venmo represents an opportunity, but there are others too. There are whispers that Facebook will integrate PayPal into WhatsApp, its messaging app.
There are still rivals to face down. The most unsettling is Amazon, which does not allow PayPal on its site and has a competing payments product, “Amazon Pay”. It is still significantly smaller than PayPal, handling around one-tenth of PayPal’s total payments, but is growing briskly. PayPal does have the advantage that retailers fear Amazon, so are unlikely to want to help it expand by making its payment service available on their websites. When Amazon bought the grocer Whole Foods in 2017, it “was the Pearl Harbour of the retail industry. It woke everyone up that things are fundamentally changing,” says Mr Schulman. The news probably helped PayPal win more partnerships with retailers. Should the e-commerce goliath invest more heavily in the area of payments, however, that could spell bad news for PayPal. Wars are long and gruelling affairs.
This article appeared in the Business section of the print edition under the headline "Money in your purse" (Dec 15th 2018)
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