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

Next on our agenda, we're pleased to be joined by PayPal's SVP and GM of Credit, Doug Bland. Doug has been Global Head of Credit at PayPal since, I believe, March 2020 and has been with the company since 2017. Doug, obviously, heads up the segment CEO, Dan Schulman, was most positively surprised by last year. So congratulations, Doug.

Thank you.

And this year is the first time he's joining us at this conference. So welcome, Doug, and thank you for taking some time to spend with us today.

Maybe at a high level, you could talk about PayPal's philosophy on why you chose to be in the credit business and why it's core to your value proposition?

Absolutely, Sanjay, and thank you again for inviting us to the conference. We really appreciate the opportunity. If you step back and look at the global value proposition at PayPal, it centers around democratizing financial services, providing fast, safe, open platform and products that provides opportunities for all. And our credit products really support this value for both the buyers and sellers on PayPal's network. And it has the additional benefit of fueling the PayPal payments flywheel. So for example, on the buyer side, if you look at our consumer revolving and installment products, it provides customers with the flexibility to manage purchases. An example in the U.S. is our PayPal Credit product, which gives customers the ability to transact and pay us back over 6 months with no interest for purchases above $99. So really a strong value proposition. Likewise, the new Pay in 4 product that we recently launched, which is a short-term installment product, allows our customers to transact and pay us back in biweekly installments and that lines up with many people's paycheck cadence. So again, we're really focused on trying to think through budgeting and how can we provide our customers with more flexibility, democratization to financial services. On the merchant lending side, when we think about the seller side of our network, the products that we offer for PayPal Working Capital and PayPal Business Loans really focuses on providing short-term working capital to allow businesses to fund and grow their businesses. The challenge of small businesses access to capital is well documented. And through responsible lending, through proprietary data, we're able to provide an incredible value to merchants that are on our network.

Great. Maybe, just for the benefit of the audience, maybe you could just outline all the different areas of credit that PayPal touches today, both on the commercial side, consumer side and across some of the geographies that you're in.

Yes, of course. Well, let's start on the commercial, the seller side of our network. We have a flagship product, which we call PayPal Working Capital. And that product has been around for several years, which is leveraging the proprietary data that I just talked about, the processing data to make credit risk decisions and provide merchants with short-term working capital. We currently offer this in the U.S., the U.K., Germany and Australia. And we also, within the U.S., we offer a product called PayPal Business Loan. And that product came about as part of the acquisition we did in 2017, which is why I'm at PayPal, which was part of the Swift Financial acquisition. And it's similar to PayPal Working Capital, it's a short-term working capital product. But it's more like a traditional term loan, but it does have weekly repayments over a short time period. And then internationally, on the seller side, we do have partnerships with leading fintechs in Brazil, India and Mexico, where we are also making credit available to our merchants. On the consumer side or the buyer side of our network, we offer PayPal Credit in the U.S. and the U.K. The PayPal Credit product is a digital line of credit that we offer. I've mentioned the value proposition of -- in the U.S., where it's 6 months with no interest type payments. And this product gives buyers an always-on promotional offer for transactions at certain sizes, $99 in the U.S., for example. And it allows them to spread out the payments without paying interest over a certain time period. Obviously, we offer credit cards as well in the U.S. through our Synchrony Bank relationship. And Venmo credit card is a good example. Hopefully, we can find time to talk about that a little bit later. We also offer installment loans in Germany. And then the final thing that we've been aggressively rolling out recently is our pay later short-term installments in France, the U.K. and the U.S. Pay in 4 is the product name here in the U.S., and we're incredibly excited about the success of those products.

So yes, let's talk about Pay in 4. I mean, buy now pay later, is a really popular topic. It's quite hot right now. Maybe you can sort of compare your product to those out in the market in terms of how it's structured and the consumer and merchant propositions.

Sure, sure. Well, the Pay in 4 product that we offer in the U.S. is a biweekly product that we're offering. We have a similar Pay in 4 product in France as well as a Pay in 3 product in the U.K. We do look at local market differences to determine product construct. So for example, in the U.S., the payment is done on a every 2-week basis, which aligns with most people's cadence of their paychecks. Whereas, for example, in the U.K., where a lot of consumers are getting paid on a monthly basis, we've made it a monthly payment. But this product, I think what is unique about PayPal's short-term installment, maybe if you were to compare us against some of the competition with buy now pay later, we're making this available in the wallet. And so we're opening it up to millions and millions of consumers as well as to be able to purchase anywhere, any of the merchants that use PayPal for processing. So certainly, the ubiquity of what we offer is really unparalleled. The pay later product also has an incredible user experience. Hopefully, you've had a chance to try it out. The demand for this product has just been incredible. It's something you mentioned earlier that Dan talked about in the last earnings call, and it truly has beat all of our expectations in terms of the demand. We don't charge our consumers a fee to use this product in the U.K. or in the U.S. There is a small fee that we charge in France, but that will soon be going away. We're making a product modification for the product in France within the next couple of months. And then on the seller side, if you think about it from a merchant standpoint, this is a great way for merchants to drive greater loyalty. It creates more flexibility to make purchases. We do see average order values go up whenever merchants are using our pay later products. But it's all done at the same PayPal take rate. So we're not charging a premium for our merchants to offer buy now pay later, which, again, I think, is another distinction when you look at what the product offering is that we have in the marketplace. And then finally, we do offer upstream presentment as well to merchants. So we have the ability to help do the messaging throughout the shopping experience not just at the point of checkout, and that's something that we feel is really important and that we're working with merchants on as well.

It's really interesting. I guess you guys are coming in as a relatively newer player, even though you've been doing it in other geographies in the U.S. And I had an opportunity to meet with the Synchrony team, too, and they were definitely saying, buy now pay later is definitely something that's going to be here to stay, and they might enter in some capacity. So you're going to have a lot of different players coming in and out of the market. How do you view that from a competitive standpoint for PayPal? And then maybe you can even tie in the fact that the regulatory backdrop is changing with the new administration and sort of how you feel that, that might weigh in on the industry.

Yes. Great questions. We operate in a competitive environment across all of our products. So we're going to continue to focus on doing what we always do, which is serving our buyers and sellers to the best of our abilities within the network. We're going to focus on delivering great products, great experiences. And a commitment to doing what is right for our customers through transparency, to make sure people understand what these products are, which is a form of a credit product, which brings me to the question that you have around regulation. And we think regulators are rightfully working to ensure that buyers and sellers are protected with the rise of BNPL products and ensure that they are informed regarding the risks of an installment transaction. So we will continue to work with regulators to ensure our products are responsibly used, that they're serving the purpose to provide buyers with increased flexibility and control. And as you've heard me talk earlier, it's all about flexibility and choice and the ability to better manage how they're able to make purchases.

Right. And I guess maybe just on a related topic to regulation, I've seen some of your competitors or other fintechs pursue banking licenses. Could you maybe just lay out sort of how you guys are thinking about banking license or not -- or no banking license?

Yes, sure. In the U.S., at this time, we don't see the need to pursue a banking license. PayPal is a fintech company. We're able to achieve product goals with money transmitter licenses through our relationships with our bank partners, like Synchrony Bank. In the EU, though, it did make sense for us to have a bank license, which we have. And we're able to offer our products through that license. But it's something that we're constantly going to evaluate and monitor. But at this time, we feel pretty satisfied with the approach that we are taking.

Great. So just for the audience sake, if you guys have questions, there is a link on the upper right-hand side of your screen where you can click on it and type in some questions. And I'll take a look and try to ask your question, so just FYI. Please type in your questions. And then maybe we can, Doug, kind of move on to credit quality, which has been a bright spot, quite frankly, for the industry. It's obviously -- 2020 was a challenging year given the pandemic, but you wouldn't know if you looked at the credit metrics. Maybe you could just talk about sort of how the portfolio has behaved through the pandemic, through 2020 and sort of what your learnings are through this period.

Yes. It truly was a remarkable period for the lending industry and certainly for PayPal for many reasons. I've been doing this, Sanjay, for over 25 years in lending. And if you'd ask me this question at the beginning of the pandemic, I don't think I would be giving you the answers that I'm about to give you right now. I thought it would turn out very differently than what we're seeing . But when you think about what happened to PayPal, which I think is especially interesting, being a lending -- having lending products inside of PayPal, which payment processing is what we focus on, and we use our credit products as to support our customers to drive additional value, to drive the flywheel of processing. And so if you think about what happened to PayPal through the pandemic, we saw this incredible growth of everyone moving to online transactions. So we actually -- from a credit standpoint, we actually benefited from that as well. And so we saw even more demand from the credit products, both on the consumer side as well as the merchant side. And a little bit different stories, and I'll talk about consumer versus merchant. But as we went into COVID, we took several steps to prudently position our portfolios as well as to help our customers, just given the unknowns out there. So for example, we offer payment holidays to both our consumer customers and merchant borrowers. In the U.S., we were able to launch the SBA PPP product. So the Paycheck Protection Program on the merchant lending side, which we were not an SBA lender going into this. Within a matter of weeks, it was just -- we called it a moonshot internally just because it was such an incredible cross-functional effort for our company in conjunction working with our partnership with Web Bank on the merchant lending side to stand up the capability to offer this. And we ended up providing over $1.2 billion in PPP loans through that first round. But we also adjusted our underwriting strategies, just like most lenders did, to ensure that we could continue to lend responsibly throughout the pandemic, which I'm really proud to say we did. Both on the merchant side as well as the consumer side, we were able to continue to help customers throughout. But what we didn't see necessarily is the delinquencies start rising. We actually saw payment rates increase. We continue to see higher-than-expected payment rates. And I think part of what benefited PayPal maybe even more than traditional lenders who aren't as focused on e-commerce as we are, we really saw stronger demand, and we saw a little bit even a growth from a receivables standpoint, even [ feel ] refining who we were underwriting during that time period. But we haven't seen the increased losses materialize. We attribute this to, frankly, all the quick action of governments in the U.S. and the U.K., which is primarily where a lot of our receivables are on balance sheet, with our small business lending portfolio and then the U.K. PPC portfolios. And on the merchant lending side, which I think was really interesting to watch. Because we could clearly see through processing data, there were -- there was a population or is a population of merchants that really ended up thriving through the pandemic. They had products or services that were catering to consumers going online and using a digital platform for purchases. But we were also quickly to see merchants perhaps that weren't able to react as quickly. Restaurant industry is a good example of that. But then ultimately, they started pivoting their value propositions and their capabilities to do more takeout and provide services that way. So it's been a really incredible past year to watch the portfolios, to pivot, to ensure that we're helping both our consumer customers as well as our merchant customers to work through this. We see certainly some green shoots, but I would like to see the trends continue before we declare any type of victory. I know that people are getting more and more optimistic with vaccines, and we certainly are as well. But a lot of people are still -- and a lot of businesses are still out there hurting. And we're doing everything we can day and night to try to help these customers.

So I'm curious, Doug, so like, obviously, you guys were being defensive in the face of a pandemic, but things have, obviously, played out significantly better on the credit side. As we look towards the growth this year, have the standards shifted for you guys in terms of how you're underwriting your loans? And maybe you could just talk also about how CECL plays into how you're considering growth. Because it's, obviously, a big penalty to grow in this backdrop when you're making some Draconian -- not Draconian, but harsh assumptions.