Given its collaborative approach to working with banks and issuers, it makes sense to deepen the connections offered by PayPal and not view them as a competitive threat.
PayPal’s New Super-App: Turning Up the Heat
The launch last week of PayPal’s much-anticipated super-app may end up being seen as a critical step in the movement toward a more connected economy representing a most direct and compelling market challenge to traditional banks. The app is designed for customers to manage financial relationships and payments in a single location and currently offers a variety of financial tools including bill pay, direct deposit, peer-to-peer payments, a digital wallet, cryptocurrency capabilities, buy now-pay later, and charitable giving.
The support for paycheck direct deposits and early access to funds through bank partners is critical as this should appeal to many of PayPal’s 380 million global customers considering moving to digital banking instead of using traditional banks. Once paychecks have been deposited, customers use PayPal funds for shopping and bill pay. PayPal’s enhanced bill pay feature allows customers to view and make payments to over 17,000 payees – up from just a few thousand when it was introduced last Spring.
PayPal Savings, through a partnership with Synchrony, will launch in the coming months enabling customers to grow balances through connected savings accounts paying a 0.4% annual yield with no minimum balance. While still lower than the rates paid by large rivals such as Chime, Varo, Ally, and others, it still dwarfs the national average yield of 0.06%.
PayPal also announced plans to add investment capabilities beyond crypto to rival mobile investment apps such as Robinhood and Revolut. This is an important step as it provides consumers with a way to grow balances and spend the funds with merchants, all in one ecosystem.
Importantly, the 2-way messaging built into the heart of the payments tab gives users the ability to request payments or say thank you after receiving one whether between friends and family or with a merchant.
Messaging is also at the center of the new Shopping Hub where PayPal’s 2019 acquisition of Honey is now paying off. Honey’s core capabilities are part of the mobile experience including personalized deals and rewards. Users will be able to browse promotions and discounts inside the app then shop and transact from the same point. By joining the loyalty program, customers will earn cashback and PayPal shopping credit on purchases.
PayPal’s rollout of the super-app will certainly speed up similar announcements by other major payments players seeking to capture the hearts, wallets, and payments activity of customers. Apple, Google, and Walmart (through Hazel) keep expanding their capabilities but expect other players in the U.S. and Europe to accelerate their own announcements in the race to offer ever more integrated approaches to managing our daily life.
Meanwhile in China – where super-apps Alipay and WeChat were born and dominate– regulators are not pleased by the data aggregation capabilities of apps in general. Last month the Chinese government announced 43 apps - including Tencent’s WeChat which has over 1.2 billion users – were found to have illegally transferred user data. The long-term impact is hard to discern but the Chinese government’s focus on privacy and data could lead regulators in other markets to follow.
Competitor or Partner to Banks?
Among the companies eyeing the massive American market, PayPal was the first to articulate publicly a comprehensive vision of its banking plans. PayPal’s road map — especially when considered in the context of its recent growth — shows Big Tech firms are capable of disrupting retail banking - even without banking charters. Banks are clearly on notice and should be concerned about the immense competition from Tech firms.
But after splitting from eBay and becoming an independent company in 2015, PayPal elected to grow not by competing with Visa and Mastercard and the banks which issued their cards but by partnering with them through an agreement not to steer shoppers away from paying with credit cards. As the volume of digital payments has exploded this has generated increased value for both parties.
Large card issuers including JPMorgan Chase, Citigroup, Discover, Capital One, US Bancorp, and American Express allow their customers to redeem card rewards by making purchases at millions of retailers accepting PayPal. Meanwhile, thousands of smaller financial institutions have a comparable arrangement through a deal PayPal has with bank tech titan, FIS. A benefit for card-issuing banks is by incenting consumers to add a bank-issued card as a payment option within the PayPal digital wallet creating further intertwining of ecosystems. It is also possible as PayPal contends, more card transactions routed over PayPal’s rails will be approved instead of being mistakenly flagged as fraudulent due to the company’s access to data and analytics capability.
What remains to be seen is if PayPal seeks direct access to the U.S. payment system which has exclusively been available to banks. Last year, the acting Comptroller of the Currency Brian Brooks suggested the government could support a payments charter that would not require deposit insurance. This structure was never formally announced but banks will certainly fight to keep tech companies from obtaining direct access to the payment system. With digital currencies growing and governments considering issuance, this access will become even more critical.
Given its collaborative approach to working with banks and public support of driving future growth through partnerships, organizations will be wise to continue to deepen the connections offered by PayPal. For many large financial institutions, PayPal is their largest digital distribution partner according to a company spokesperson, and says further banks should not view them as a competitive threat.
PayPal’s staggering market capitalization dwarfs all of its primary banking partners other than JPMorgan Chase and Bank of America. And its 380 million clients represent nearly 7 times JPMorgan Chase’s 56 million digitally active users. The path forward seems clear: work together to drive more volume which will enhance the financial performance of all parties.