PayPal Holdings, Inc. (PYPL) Earnings Call Transcript & Summary

Welcome, everyone, to the afternoon session here at day 3 of our 24th Annual Credit Suisse Technology Conference. It's a 4-day event, running Monday through Thursday. We're very happy to be hosting this session here with PayPal and specifically Jim Magats. Jim is SVP of Omni Payments at PayPal. We'll talk a little bit about his role and all the businesses that he oversees in just a bit. But for now, a quick intro. Jim has been with the company since 2004. And as mentioned, he's got lots of oversight over various core businesses. So with that, I'd like to welcome Jim and thank PayPal for being here at the conference. Jim, glad to see you this afternoon.

Thanks, Tim. Great to be here.

All right. Great. So as I alluded to, you have leadership and oversight responsibilities for many of the core businesses at PayPal. Maybe we could start with a little bit of a background on your time at PayPal and the businesses that you oversee.

Yes. So I've been with PayPal since 2004, early 2004 as we were coming into the eBay ownership. And during that time, joined a team of 4 people that were looking at our payment functionality in terms of how people pay into the PayPal Wallet, take money out. And then looked at how PayPal would effectively be an advanced scout, if you want to use that analogy, for eBay, as eBay was going into different parts of the world within Europe and Asia and LATAM. And during that time, I've worked within Europe, within Luxembourg, back here in San Jose. And now we -- what you refer to as our Omni Payments team. So it basically looks after our merchant-facing product experiences for the purposes of this group, in things like Braintree, iZettle, Hyperwallet, our GoPay entity and product capabilities in China as well as our payment services. So how people pay into the PayPal ecosystem, take money out our payment systems, our relationships that we have with the payment ecosystem, Visa, Mastercard issuers and then also responsible for transaction expense for the company.

All right. Excellent. It's definitely a lot of core parts of PayPal's ecosystem. So we're lucky to dig into a lot of those here today. So let's start with something that's very core to the platform, which is users and user growth. So clearly, 2020 has been a very different year. And some of the impacts that we've seen have been temporary, but some of them have been permanent and very lasting. Part of that's been a pull forward of digital penetration across the entire ecosystem. And clearly, that's benefited PayPal. One of the items that really stands out is in terms of your new user additions, you were tracking at, let's call it, 9 million to 10 million per quarter pre-COVID. And more recently, more in the 15 million range and even higher during Q2. Maybe you could just put a little context around those users, where they're coming from, the demographics, their engagement, any other factors along those lines.

Yes. Thanks, Tim. Obviously, an amazing time here at PayPal in terms of new users on our platform. And I'll break it down between consumer actives and activations between merchants, I think there's a bit of a different story between the 2. I think invariably, there is a huge cyclical tailwind to digital that I think we all see in the numbers. We all see from the amount of recycled boxes that we probably have next to our garbage in terms of the amount of things that get shipped to our home. And the demographics that we see in terms of our new consumer base is quite interesting in terms of the biggest growth area for us are 50-plus year olds. And so think of it as people that have been laggards in terms of embracing digital technology that have now come on and using different ways of paying with PayPal to get what they need. And so that's been our biggest growth area associated with that. We also just see, across the board, new users is coming through Honey, through Venmo, through our core product in terms of people just finding more reasons to use our product as well as to use it on a daily basis. And so what excites me the most about our numbers is the daily active user base because it's great to have net new actives, but the daily active user is up, I think, over 30% year-over-year is, to me, probably the best indicator of our -- health of our business and the viability of us and from a long-term perspective in terms of being relevant on things like P2P, being relevant in things like bill payment that I'm sure we'll talk about, being relevant in just terms of everyday spend for our customers. On the merchant side, again, those numbers have been amazing, right? If you look at what we typically will have done, I think we are at sort of order of magnitude of about 1.5 million net new merchants in the last quarter. And it's about double what we would normally see. And I think that's really a function of a few things. Number one, if you just look at the addressable market, we have predominantly played in the online space. That's where we play. And if you look at small merchants, in particular, about half of small merchants don't play in the digital space. And so just half of them are physically first, half of them are online. And so what we've seen, and we think it's a huge opportunity for us, is the shift from those physical-first merchants now wanting to get into digital. And we'll talk about iZettle, we'll talk about some of the QR code pieces that we have focused on those particular merchants. But for us, it's really exciting to see that emergence of that other half of the merchant population that we can now go after and penetrate. And it's as simple as things like our local barber here now basically takes appointments and payments online. So if you want the barber to come to your house, you basically go on and create an appointment, you pay with PayPal and they come to your house and it's all taken care of. And so we think there's a huge opportunity in that physical-first area that we think is amazing for us.

Jim, that's excellent. Thank you for all those real-life examples, the barber one, that really helps to bring things to life. All right. You mentioned -- let's move on here in the interest of time to -- you mentioned something in your intro around partnerships and how that's part of your purview as well. You've signed a ton of these over the last few years in terms of whether it be networks or issuers or technology platforms. Maybe you can give us a brief update around some of these partnerships. And then as a drill down, maybe we could touch a little bit on Pay with Rewards and how that's progressing.

Yes. And so as many of you are aware of, we were a bit of a persona non grata with the issuing in the payment network ecosystem about 5 years ago, and we made the conscious decision to partner with the ecosystem. And I think we made, I think, a very wise decision in really operating as an open platform. And I think that cascades not only to financial institutions, but also cascades into our partnerships with organizations like Google and Facebook and in other tech platforms that we see as our capabilities being compatible with their interests. And that, for us, is an amazingly important strategic pillar for us, is being an open platform, working with the ecosystem. We firmly believe that by working together, the digitization of payments at scale can happen. And if we work in separate silos, that's not going to happen. So we firmly believe that's in everyone's best interest. And so we've seen -- if I double click on the bank partnership side and what we've done with the networks, it -- really, a whole slew of benefits to our customers. It starts with better experiences to onboard funding instruments. And so one of the things that we've seen over the course of the last year in particular, and you see it in the benefits around transaction expense, is the influx of people adding their debit cards to our ecosystem. And so as simple as we have built with Bank of America or Chase or Wells and others the capacity for -- basically to add your debit card directly from your bank's app as one example. I mean these are just basic blocking-and-tackle experiences that we've optimized with our partners. We've also done an amazing amount of work on our auth rates, so the approval rate by which a customer when they utilize PayPal, the percentage of time that their transaction will actually approve. And we've -- actually, for the PayPal wallet, we've improved that by over 300 basis points over the course of the last 3 years. So think about it, every 100 transactions, 3 more are getting approved because of our auth rate work. And a lot of that is through partnerships that we've done with the issuers and networks and getting access to tokens and also sharing risk scores. That's another thing that we're doing with them, we're sharing risk information back and forth. In particular, the other area that you mentioned, Tim, is on Pay with Rewards. And we're really encouraged and excited about where we're at with that right now. We just launched, within the last quarter, U.S. Bank. We also have launched Cap One. We've launched FIS, who many of you are aware of, do the banking infrastructure for about 1,500 different banks. And so we're up to now about 13 million active users in the U.S. that have a reward-eligible funding instrument. And we continue to see really good uptick of a little less than 10% of the time that someone sees a Pay with Reward as a funding option because they have reward points to spend that they're utilizing that within our ecosystem. And so it's helping with our funding cost. It's helping with our ASP. You see it a lot used in terms of higher ticket items. People are using a split pay capability for us. And next year, anticipate a few more large U.S. banks that we'll be bringing on to that capability as well as expanding that internationally for us.

Jim, that's great context. And you alluded to a topic that, absolutely, I do want to get to later, which is around the transaction expense. And we can talk about how Pay with Rewards plays into that, as you mentioned. But for now, let's move on to another topic that you alluded to, which is online bill pay. So when we think about PayPal's TAM, we often think about a number somewhere in the $4 trillion to $5 trillion range ex China, but that's not including some pretty big areas of TAM, such as online bill pay and which we'll talk on later, in-store payments. But in terms of online bill pay, maybe you could give us a sense of how large that opportunity is, how big it could be for PayPal and then, of course, we'll dig into some of the specifics around the relationship with Paymentus.

Yes. So think of it -- again, we operate a 2-sided network, so my answers are often going to be one from a merchant side and then one from a consumer side. So let me start by saying a lot of our focus on the bill payment side has been enabling our processing capabilities. So for context, a Braintree to process the transactions for Paymentus. And so similarly, we have a series of other large bill payment organizations that we're in the process of taking live. And so the actual processing of those transactions, ACH transactions, card transactions, using Braintree and our enterprise payment acceptance as well as our Hyperwallet payout capabilities, how we've enabled a -- we feel, a very robust bill payment processing solution. And just for context, bill payment is a very complicated area in terms of you're supporting multiple sub billers, you're supporting multiple payouts, multiple payment options associated with this. And we see this as a huge option for us. I think you referenced addressable market. I think our calculation is that bill payments is somewhere in the order of magnitude of another $5 trillion of addressable market in the U.S. for PayPal. And we're just scratching the surface with Paymentus. And as I mentioned, we have a few more coming. And I think what that also allows us to do is that on the consumer side, curates really good experiences around bill payments. And what we anticipate being able to do, and you'll see this come to fruition over the course of the next several months, is enabling through the app the -- a bill payment capability. So you see one of the Paymentus billers, you see one of our partner billers associated with that and you can manage all your bill payment through the PayPal app or eventually the Venmo app as we take that forward. And this is where you start to see not just my experience that I normally do for my own bill payment, where I could go on my Citibank portal and remember to pay every 15 for the mortgage or whatever it is, a much more curated bill payment experience with reminders, with -- thinking through some of our other capabilities that we have around cash flow management that you can anticipate. And so think of PayPal being a destination for you to go, curate your bill payment and your financial obligations. And then think of the other services that we have and you see that we brought to fruition for in-store payments, bringing those to a bill payment environment. And so that's really what excites us as we're going through this.

All right. Excellent. That's really helpful. So the points around bringing into the app and engagement in the app as well. Let's move on to in-store payments, which we also alluded to earlier in this discussion. But this year, you've launched QR codes, both for small and large merchants. And maybe we could just talk a little bit about the in-store opportunity more broadly, the strategy there and how it might differ for the smaller merchants versus the larger merchants, meaning direct and through partners and what that means for some of -- both the mechanics, but also the economics.

Yes. And so if you think -- again, I'll start on the merchant side. So for us, we're enabling, I'll call, payment processing or full stack processing for SMBs as well as enterprise merchants. What we see is that there is an extremely important need that merchants are now facing to bring together, what we call, omnichannel payments acceptance. So the idea of having both the capacity to do physical acceptance in-store and marrying that with their online systems. And so a lot of effort that we're going through, one for our larger merchants that we predominantly support from an online perspective, we're building the functionality and we'll have merchants live next year that we'll be supporting their in-store acceptance as well as their online acceptance. The other area that you're probably aware of, but have not seen probably locally and something that we'll be launching next year, is bringing iZettle to the U.S. And so again, what that will be, and then going back to my reference point where I started, we will now be able to go to the 52% of SMBs that do not have an online presence and show up with a viable product offering to go to market with them and enable their order management, their inventory management capabilities. And I think as Dan and John have alluded to, there's a cyclical nature of in-store hardware that goes on. And we're about to go through another cycle with cloud computing coming in and more tablet capabilities. And we believe what we have with iZettle is going to be extremely competitive in the U.S., and it's going to give us an entree into that 52% of the merchants that don't have an online presence. And then if you marry together the online capability -- and I'm sure we can all appreciate there's a gravitational force of those physical-first merchants needing digital capabilities. So I just mentioned the barber example. That's a great example of, we believe, by starting with iZettle, for those merchants and then marrying their online capabilities, we're going to have a full omni solution for them. And so that's how we're thinking on the merchant side. The other piece that, obviously, we are working through, and you alluded to, is really trying to bring ubiquity for our consumers. And so here, we have 3 main focus areas. One, you've seen around QR code, and we've launched that with CVS. And we've got Nike. We have Tumi. We have a whole set of merchants that we're looking to bring to fruition. And then we have our card solution, some of you will have seen our Venmo debit card. We have PayPal debit card. We have a whole card solutions. And then what we're also doing is the tap-and-pay type solution through Samsung Pay and Google Pay. So we believe we will have a whole host of ways for our customers to pay at any point that they want to do. And so we're excited about that opportunity. We're also excited about how you take some of these capabilities, like Pay with Rewards. And next year, one of the things that we'll have in early part of the year is embedding Pay with Rewards in the QR code. So not only can I take my Pay with Rewards solution and use it on any one of our 28 million PayPal merchants, I now can take that solution and utilize it anywhere that PayPal is accepted in the physical world. You're probably very familiar with what we're doing on Honey, so some of our offer capability and deal capability. So again, that will be embedded into our in-store capabilities as we take that forward. And so we firmly believe that the blurring of the lines with technology of QR code and phone, we can take the best of those online curated experiences of giving offers, contextualizing the checkout experience and bring it to someone who's in a physical world and a physical store as we go forward.

Excellent. Jim, if we have time at the end, maybe we'll circle back on some of that, but you covered a lot of ground there, thank you for that. I want to move to a really exciting topic around China, which is sometimes one that's a little bit harder to get our heads around in terms of quantifying, but maybe we could put some context around it. You acquired GoPay last year and signed a partnership with UnionPay. Maybe you could just give us a broader update on China and how the plans are for that business more broadly.

Yes. So think of China for 3 dimensions for us. I think it is an extremely competitive advantage for us to have one of a few at this point, we think a few for the foreseeable future, license entities to operate payment acceptance within China. And so you can imagine that there is a host of large merchants, small merchants that want to set up operations within China, and they want to leverage our capabilities. And so from a global reach point of view, one of the competitive things that we feel really strongly about is our presence in China will be something that will differentiate ourselves versus anyone else that's sort of playing in our space on the acceptance side. And so our focus is, first and foremost, standing up sort of the full suite of PayPal capabilities in the market with the GoPay entity. And so the GoPay entity is our vehicle to operate compliantly within -- in China as we go forward. We're in the process right now. And literally, within the course of about 10 months, we stood up our China product company, and we're currently migrating merchants onto that entity. And what this will really allow us to do is to, from my perspective, put the foot on the accelerator as we go forward in terms of really scaling our solutions for cross-border merchants predominantly in China. And again, as we have been operating from a regulatory point of view, we've had to, like many, operate very thoughtfully. And so with this license engine, we can now operate in a much more aggressive manner for us to really scale our business there. And as I said, think of PayPal often as a stew. It's a little bit of everything that comes together. And so things like Hyperwallet become quite interesting, right? If you're a merchant that has to do payouts, you now have a situation where we can leverage Hyperwallet and bolt that on to payment acceptance for merchants that are operated in China. Think of what we can do on risk management and Braintree. I mean these are all capabilities that we're really excited about. And so that's really the merchant acceptance side of things. The partnership with China UnionPay is really twofold as we take this forward. One, we will be working with them and their partner banks on cross-border buying. So where the first focus is on export selling, this is really predominantly focused on this area on the buy side. And so what we're excited about is leveraging China UnionPay's reach. Their scale is massive. Within China, they have literally, I think, over 1 billion cards within their network. And they have relationships with all the large banks within China. And so very similar to what you saw in the U.S. where we partnered with American Express and Bank of America and Discover and others as we've gone through that, that similar playbook will manifest itself through our relationship with China UnionPay as really the technology platform to bring that to fruition. And so we'll be working with them will be basically driving PayPal accounts to those -- through those -- through China UnionPay to those banks as really a way to stimulate net new users and benefits to them. And then the last one to tie the last question together is we're building the capability for anyone who has a Venmo account or PayPal account when they go to China to pay at any point-of-sale location that accepts the China UnionPay QR code as a way of paying. And again, for those of you who can remember traveling, when I traveled to China as recent as the early part of this year, your cards often do not work, your Visa, Mastercard cards do not work. Their payment networks are not constructed to have full ubiquity. And so, as I often tell this story, my first place that I go to as a digital payments executive when I arrive within China is a cash machine because that's the only way that I can pay at most locations in China. And so the QR technology is something that we're really excited about bringing in scaling for us.

That's great, Jim. There's many prongs to the China strategy, so thank you for going through all of those. This next topic is one that I'm definitely excited about, which is Braintree and global expansion. So we very much consider Braintree to be a leading e-commerce merchant acquirer in the U.S., but you've recently begun to expand this business more into Brazil, Europe, parts of India. And some of that has to do with the Uber partnership and going more global with them. But specifically, maybe we could talk about the local acquiring markets that Braintree has or perhaps plans to add longer term. Also, the extent of APMs and LPMs that you have and realize that you have the investment that you've made in TPro and then also the potential for Braintree to become slightly more omnichannel. So with that as context, we'd love to talk about the globalization, if you will, of Braintree.

Yes. And I think one market -- I'll just start with this, where we ended, China. I think that's a market that we feel pretty excited of taking the Braintree assets and bringing that to China as we go forward. That in itself is the world's second largest e-comm market -- or first or second, however you're counting it. And so we think there's a competitive advantage and competitive opportunity there that's unprecedented versus our peers. And so you're right, Tim, in terms of saying, we have strength today in the U.S. If you look at the book of business that we have, it's predominantly on the Braintree side, U.S.-oriented merchants that are going global and then U.S. as we work through this. And so one area for us, as I mentioned before, is blurring that omnichannel line. And so what you would hope to see over the course of the next several months is us offering through Braintree an in-store solution. So many of these merchants, as I mentioned, physical merchants wanting to go online. You have online merchants that now have a physical presence or a need for a physical presence, and they want one service provider. And so you can start to create some very contextual experiences because we have a vault of billion plus cards on file, we're able to also use some of the identity that we have from your experience online. So when you show up in store -- so if you say, "Hi, I'm Tim," we're able to pull up your information and basically render a payment experience seamlessly for you in-store by bringing those together. The other piece, as you rightly point out, is we're looking to go geographically. And for us right now, we have been following some of our larger customers. So it could be Uber, Airbnb, others that are trying to go to different markets. Much like PayPal was following eBay back in the day, Braintree has been following them. And so you see us starting to scale in markets like Brazil, with Uber as we take that forward. And so we will continue that. And what we want to be able to do is bring out local payment options, local clearing networks and add them on to our network. And in doing so, we see a real, fantastic opportunity within Europe, in particular, that we'll be going after with speed next year. And so I think between core Europe, outside of the U.K., I think we already have a pretty good solution for the U.K., in Germany, in France and plugging into things like [ card bank care ]. I think we're going to put ourselves in an amazingly competitive position and really take on some of our competitors head on in their backyard. What we think is the differentiator for us, and this is a differentiator elsewhere, are things that I talked about on auth rates. I think we have, with our machine learning capability, our AI capability, a lot of the partnerships we have within the ecosystem, we feel that we can be extremely competitive. And in many cases, in most cases, be the presumptive winner on auth rates. We think our scale in terms of processing now about $1 trillion of transactions, allows us to come at a cost advantage to others. And then if you think about what we've done on risk management, I think the 3 of those together puts us in a really powerful position in any part of the geography. And so we're excited to take the show on the road and go to those markets and win.

Excellent. That's a great point on scale in terms of the total volumes versus some of the competitors, that really resonates. Great. In the 2 minutes we have left or so -- we didn't have much time. I apologize for this, Jim. But you also mentioned transaction expenses and losses. Maybe we could touch briefly -- in terms of the transaction expenses, maybe we could talk a little bit about how we see that evolving over the short to maybe medium term. Clearly, there's balance, there's ACH, but maybe any changes on the card side. And then lastly, maybe we could touch briefly on the losses, the transaction losses portion, which have been very impressive relative to your volume growth. And I think part of that might have to do with the Simility acquisition back in Q4 2018, maybe a less discussed acquisition, but it certainly seems to have done its job. And maybe talk about those loss rates, but also to your prior point there, around auth rates being very high.

Yes. There's a lot there, and so I'll try to synthesize down to a couple of minutes. So on the transaction expense side, as you know, that's a weighted average of a lot of different factors. But I think what excites us is that, one, as I mentioned before, we're seeing a lot of debit cards added to our ecosystem. So if you look at sort of a run rate of what we would normally see around debit cards being added, and during 2020, we've seen probably about a 30% to 35% increase in the number of debit cards that have come into our ecosystem. That's a function of consumer preference. It's a function of our bank partnerships. It's a function of a lot of different things. People have a preference to use debit, and we've enabled it in a very seamless and easy way for folks to utilize that. And we expect that cyclical trend to continue, especially if you look at our merchant base, it is basically touching on all the different industries. And so the more you're seeing us get into mainstream groceries, household goods, things that you would normally expect people to pay with debit, those are things that are just adding to our ecosystem in terms of people paying with debit as they go through this. The other thing that's important to think about, and I use this analogy, we are a lot of little things coming together. And our product experiences, Pay with Rewards, you can even think of crypto as an example, you can think in terms of P2P experiences, those are driving more owned funds. And we sort of use this term "owned funds" versus owed funds, owned funds within our ecosystem. And in doing so, driving our transaction expense down. Now obviously, there will be mix changes as people travel, as they go forward, but all those things really excite us. On the risk loss side, again, see that as a real benefit of, one, all the AI and machine learning pieces that we do as well as our capacity to continue to get good users onto our ecosystem. So that stat I told you about, 50-plus year olds coming on, they tend and -- demographically to be more trustworthy people as you go through this. And so the more good users that you're getting onto our platform, the better that we're seeing from a loss number, which I think is like 13 basis points, which is absolutely fantastic.

Very nice. Jim, we covered almost everything. Thank you for squeezing those questions in there at the end. This was a great presentation. We're very grateful that you and Gabrielle and Akila were kind enough to join our conference today. Very nice to have you. And hope you guys have a great rest of the day and meeting schedule.

Thanks, Tim. Really appreciate the opportunity. Have a great day.