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

All right. Thank you very much, everyone, for joining us today here on day 3 of the Baird Conference, and we're very pleased to have with us Darrell Esch, who currently leads Venmo and is Head of Checkout at PayPal. And if you haven't checked him out on Spotify, he's also quite the musician. So welcome to Baird and welcome to day 3 of our conference, Darrell.

Thank you very much, Colin. It's great to be here. And thanks for the music plug.

So for those I haven't met, I'm Colin Sebastian. I follow Internet here at Baird. And for those of you tuning in, feel free to submit questions, and as time allows, I can ask those on your behalf anonymously at the end. So with that, Darrell, maybe to start off, could you talk about your background, how you got to PayPal and maybe how your role at the company has evolved to this point where you're leading one of the most important and exciting growth drivers of the company?

Sure. Yes. I spent about 20 years in banking before joining PayPal. And most recently, before coming over, I spent 15 years at Bank of America. Over that course of those 20 years, my focus was really credit cards, debit cards and business lending, and I joined PayPal back in 2010 when a former colleague who was the then CTO invited me just to come in and meet some people. And I really fell in love with the spirit and culture of PayPal. It was clearly a business that even back then in 2010, it had a great run of success. But what got me all excited -- and it's still true today, 11 years later, in particular for Venmo, is that it's still a young company with a lot of growth, and you could see a lot of opportunity of how the business could keep growing, and it was that adolescent turning into a full-fledged adult. And it's been a really fun experience. In the 11 years at PayPal, most of that time was spent in credit. And I did a start-up in the company called PayPal Working Capital, which became our merchant financing program and really loved that, and then of course, our Pay Later products on the consumer side. So I was running the global credit business when I got my first taste of Venmo, and that was when the planning and negotiations with partners took place to -- for what would become the Venmo credit card. So I was still leading the credit business when that started, and that's what really gave me my introduction to Venmo. And I just -- I loved the spirit. It felt to me like PayPal did 10 years earlier when I joined. And so I've been in this role at Venmo ever since, and that was, I guess, about March of 2020, that I took the role.

Great. So you're really important in terms of linking Venmo and how that fits into PayPal, where you came from. So let's talk about Venmo's fit within PayPal. And what -- first off, what distinguishes Venmo from core PayPal? And also, what capabilities and infrastructure from the core PayPal business does Venmo leverage?

Yes. I think when I came in, one of the things that the company probably valued with me coming over after being in the -- as part of the enterprise for 10 years is that respect for what the enterprise could bring to Venmo, and I think on day 1, when I had my first all hands with the team, the one thing that I proclaimed out of the gate was we will be Venmo as we go forward, but we will also be part of PayPal. And by that, I really meant we're going to respect the Venmo brand and user base and what the customers expect from Venmo and what that really is. And where it's a little different than PayPal, it is clearly app-based. Whereas PayPal started on the web, Venmo started as an app-based solution. So it is purely digital-native, kind of app-powered play. It is very community in nature and local. So Venmo is a community of communities. And then, of course, it also has a social nature to it that's different than PayPal. So we're going to respect those attributes for Venmo that is app-based use of money. It is a very community-oriented and social and fun in nature. So we're going to respect those things. But at the same time, we are going to leverage -- and we're doing it already now, leverage the expertise that we get from the enterprise, things like risk management and compliance, regulatory interactions, and then some of the infrastructure as well, as we've recently done with crypto and even the credit card. And of course, as we move towards commerce, it would be silly to not leverage all of those e-commerce and payment capabilities that PayPal, the mother ship, brings to us. So we are going to respect, again, the brand of Venmo and have use cases that honor that, but more and more leveraged, common, at scale, war-tested experiences and services from PayPal.

And how do you think about marketing of brand awareness today? Have there been any changes to the strategy? And how much of that is organic versus targeted investments?

There have been. We're at a turning point, and we've come a long way. Just in the last -- just in the last 5 or 6 months even, we've come a long way here with our marketing. So Venmo has grown and continues to grow in a very organic way in that community members bring other community members into the family, into the Venmo infrastructure and ecosystem. But what's different now, additive to that is because our services are expanding so much, we have so many new services and capabilities coming into Venmo beyond what was initially primarily P2P. We are now -- the marketing is more directed into the base to help our customers understand the expanded new capabilities and services. So you're starting to see now in the app things like a tile that you wouldn't have seen in the past. So at the top of the app when you go into the feed, you'll see a marketing tile that's intended to educate customers on a new service or capability, something they're probably not yet using and a lot more educational videos and the like inside of the app. So our marketing on top of what has been very successful organically is now really emphasizing engagement within the community.

Turning to the core business for a moment. It seems like P2P still grew very fast during the pandemic even though a lot of the social use cases, like when you eat with friends, were quite limited. So could you review the key growth drivers there and how the pandemic has changed the opportunity for P2P?

Yes, yes. And I came in kind of right at the beginning. So I literally still haven't been into the Venmo offices. So I took the job on March 1. And then as we all know, the world changed. And there was a very short-term pullback in March when shelter-in-place started. So it was very short-lived that we only experienced that for about a month or so. And then probably to everybody's surprise a little bit, but the power of the community really shined, and this was a great -- it was great for me coming in at that time as a reinforcement of the power of what the community really means to the brand. It really shined through the pandemic, where people started helping people and whether that was maybe helping an unemployed family member make ends meet or tipping your hairstylist even though you weren't getting the haircut because they're part of your community and people want to actually do good in the community. And then we saw other new use cases pop up, things like -- and I think these are here to stay, things like the online instructions, like yoga or fitness classes where you're taking it now a more digital class instead of maybe going to the studio, and you pay or tip your instructor. Same thing for visual arts, performing arts, concerts, people would do virtual concerts. You're tipping the musicians. So those are the kind of use cases that I think are new. But yes, after that 1-month lull in March, we got right back to normal and actually accelerated a little bit through the pandemic.

And then historically, it seems that Venmo has had a lot of penetration on the coasts as well as major cities. How's the user base been changing over the year? And have you seen more user growth and activity in new geographies?

That's a great question, and you're right. We had been historically strong on the coasts. And in the pandemic -- and I don't know that we attribute it just to the pandemic, but certainly, we've seen more of that organic use spread to other parts of the market. So we started doing better in the Midwest and in the South more lately. And then on top of that, we've seen older customers start to take to the app. It's still, on average, younger than the PayPal customer base, and it's younger relative to an index of Americans at large. But we definitely saw sort of the age bands expand a little, as did the geographies during the pandemic. So it's a wider audience using. And it's hard -- when we talk about more than 70 million active customers on the network at this point, you can talk about generalizations. But once you get to a number of 70 million in the U.S., the reality is you're serving slices of every pocket of the population.

Great. And then turning to some of the recent product innovations, you're investing heavily in e-commerce -- commerce, I should say. So can you update us on Pay with Venmo and if there are certain elements of the strategy that you're most excited about?

Yes. This is probably the most obvious extension for Venmo. So customers have told us for years that they want to pay businesses with Venmo and not just people. And in fact, I love it when they use the verb. They want to Venmo businesses and not just Venmo people. It's really probably the most obvious place for us also, obviously, to leverage the PayPal enterprise. Like this is where PayPal's expertise really lies in commerce, e-commerce and even in app-powered commerce. So we're going to really leverage the enterprise strengths here. For Checkout -- and it comes really in a couple of flavors. So when we think about commerce, there's the Checkout version, e-commerce. And while we've been at that since -- in earnest since about 2017, we've really leaned in recently with new experiences. We've really streamlined the mobile experiences we've introduced recently. We're still rolling it out. We have it on the Braintree platform today. It's coming to PayPal soon, a desktop experience. So we're moving away from just pure mobile transactions. We've got a great base of customers that fit the Venmo mobile, social kind of lifestyle, so clients like Uber, Grubhub, Ticketmaster, Fandango and the like and a lot more great brands coming soon. So we're excited about what's going on there on the Checkout front, but maybe even more exciting to me and more natural is this extension of sort of the app-powered commerce and that -- so back to that when a customer says they want to Venmo a business, moving from P2P to also P2B, and so things like our business profiles, where we're effectively just expanding the community to include those businesses in your neighborhood. And so that's kind of what's going on in commerce. We're off to a great start. The curves are really looking good.

And then maybe drilling in there, how do you feel about the off-line opportunity given the in-person shared experience and social use cases for Venmo? And how will you measure success for what you're trying to accomplish off-line?

It's starting out really strong. So -- and off-line will be primarily driven through what we're referring to as our business profile, where a business can now create a profile on Venmo. And then you can either do a P2B Venmo transaction either requested by the seller or initiated by the sender in the same way you do between people. Or you can use a QR code. So I'm wearing -- I don't know how well you can see it, but like my business, my dongle or my little fob here that I wear with my Venmo QR on it for businesses to go portable. And so that's going to appeal to those neighborhoods, places in your business, be it the food truck, the hairstylists and the like. So it will be community-oriented, and it's really just -- and it fits so perfectly with Venmo, this off-line move, because it's very consistent with what customers already do with Venmo, and you use it the same. The app experience is the same. It's just an extension of your community to include those businesses in your neighborhood or those probably the kinds of businesses who know your name or face when you come in the door.

Maybe you want to drill down a little bit more on business profile. It sounds like the initial traction there is pretty positive. But what are the most important parts of the value proposition for small businesses? What's the pitch there?

Yes. There -- I think there are 3 things, ultimately. One is just if you're going to be remote as your business or you want to get out and take a payment, a mobile kind of payment, it's really easy, low-friction way to get started because we're already carrying these phones, these things around as our computer, and then you just flip it over on the back, and that's my terminal. Like it's a QR sticker on it. So it's super simple to get rolling. It's incredibly affordable. Our price on this -- we've gone out to market with a price of 1.9% plus $0.10 per transaction, so from a digital payment perspective acceptance, out in the off-line world, incredibly attractive and competitive price. And then probably the most important thing though is a new way to reach new customers for small businesses. This is that way to effectively interact with your customers' friend. And so on the social feed, if I go to the bakery down the street and I end up paying with Venmo, now my friends and my friend's feed and my social feed can see this, effectively a billboard or a little advertisement even ultimately from that business. And so it's a new spin on word-of-mouth advertising. It's a word-of-Venmo advertising instead of traditional word-of-mouth, but that's probably the single greatest value prop that we see.

I know PayPal talks about some of the improvements in conversion rates as well as the law is integrated, adopted by merchants. Do you have any similar experience with Pay with Venmo or with small businesses? Do you share any data around that?

We're not sharing it yet, but I would say that -- so in this P2B, it performs very similar to a P2P. So from a conversion perspective, these transactions are flowing. Given that it's using the same infrastructure and processes, it's converting on par with what we would see for P2P.

So maybe...

Profiles in particular, that app-powered payment in particular.

Right, right. So maybe turning then to the user side, some of the -- more functionality in the app. So curious what you'd see as some of the bigger changes to the user experience. And when PayPal talks about ambitions to be the next-gen digital wallet and to democratize payments, do you see the same type of opportunity for Venmo?

We definitely see similar opportunities to expand the use cases in utilities. So we're still going to again stay true to that community-oriented brand. But again, it's app-powered use of money, and so we will explore and take advantage of those opportunities. I think the biggest things that we're seeing though, what's going to happen in the user experience is as these new features like the credit card and crypto, which are already embedded into the app, we've got really beautiful experiences. And designers did a great job staying true to Venmo brand and utility that's important to our customers. But what we'll see in the near-term change in the app is really discoverability around these new features because we've got a really beautiful credit card experience in the app now, a beautiful crypto experience with some educational videos. But it's not necessarily intuitive yet on how to get there. You find a way there through the menu button, and so we're going to make things more discoverable in the near term again, knowing that Venmo is now expanding from what was primarily overwhelming P2P into a much more diversified set of financially related services.

So then following up on the card strategies. How's the credit card differentiated from other cards in the market? And as we see more spending shift to debit, are there opportunities to enhance debit card and increase penetration and usage there as well?

Yes. The credit card, I couldn't be more proud of. There have been a couple of times in the last year or so that I've literally gotten goose bumps when I interacted with a new product. And when my card was mailed to me, that was one of those moments. It came in a beautiful package. When I opened it, the design is so unique. And I pointed my phone at it. Initially, I was going to actually take a picture of it to send it to a work colleague to say, "Hey, my card arrived." And as soon as I hovered the phone over the card, the activation process began because the card has this QR code on the face of it that actually has utility. It's your Venmo profile code. And so right from that moment, I knew this thing is special and unique. It sounds a little hokey maybe, but the most prominent difference to this program or the credit card program is while other credit cards have an app generally associated with them, Venmo is an app that has a card. And it doesn't seem like a profound statement till you dissect it a little bit and you think about it like that at -- the Venmo user interacts with Venmo purely through the app. And so where -- you probably have some other cards in your pocket right now. You probably have an app with them. I'm guessing you don't -- if you're a normal card user, you probably don't use all those apps to keep track of what's going on in your credit card day in, day out. But because the Venmo user interacts with us through the app, now all of a sudden, you have this beautiful set of card experiences in the app that show you where you are in your spending, categorizes your spending, something that in a traditional credit card, maybe you'd get a year-end statement and you see where all your spending is. Our customers are seeing this day-to-day in real time of where is my spend going? How much rewards have I accumulated? When I get to a cycle and it's time for those -- that cycle to happen when I make my payment, the rewards go straight into my Venmo account. So it becomes balanced in my Venmo account, so synergistic with the app. And then even a simple thing playing on this common transaction type of Venmo sharing or splitting transactions or bills, the card has functionality with the design itself. And I used this just 2 nights ago with a friend out to dinner. You go out to dinner, and when the waiter or waitress comes and you have that awkward moment of how do I pay, who's going to pay, do I make this person split it up, I just use my Venmo card and my friend points their phone at my card, which activates the QR, and they send money to me through Venmo. So it's really designed as a Venmo for inside the app experience, so very differentiated and one of a kind, for sure. The debit card, we've got a long road ahead of us of opportunity. I think as we get more adjacent functionality in the app like we've launched -- it wasn't that long ago that we launched direct deposit and the ability to cash a check into your Venmo account. So more money-in capabilities as well as more shopping rewards kind of values, things that make the money-out more rewarding to the customer, it can be scaled much more. It's not near to potential yet, I think it's fair to say.

So I guess given that, among all the recent product innovations, which ones would you expect to have the biggest near-term impact on the business? And which have the biggest long-term opportunity? And those can include some of the innovations that we haven't talked about yet.

The great news is we have a lot of diversification happening at once and a lot of new functionality coming at once. So I'd probably get -- if I try to put a thumbtack on it, I might get it wrong, which is great, high-quality problem. So the credit card, the P2B activity through like business profiles and crypto are all off to great starts. And credit card has been out a little longer. So it's out in the lead right now. But these are going to be close races, and I'm happy to be wrong on which one ends up being the ultimate short-term winner. But all 3 of those credit card business profiles and crypto are at great starts. Those are the things in the near term. I think from a longer term, again -- and we'll have new things coming that we haven't talked about yet that I can't talk about yet today. But of the things that we've already kind of put out in the market, I think e-commerce, over time, that paying with Venmo, checking out with Venmo is going to be hard to beat from a longer-term scalability. And as I mentioned, we launched that in earnest in 2017, but we've really started the overhaul now here just in the last year. There's a lot more that can be done with the experiences on this front. And I think it'll be a relatively long road of frequent improvements, but I think that shopping, checking out with Venmo probably has the most longer-term upside potential.

And then looking at the road map ahead as well, Darrell, can you talk about the value proposition for Venmo outside of the U.S.? And in terms of the go-to-market strategy, which markets make the most sense for the app, at least initially?

Yes. I think the value prop outside of the U.S. is going to largely be the same as inside of the U.S., and I don't want to kind of mess with the formula too much. And I think -- and any time we're working on a new product or feature enhancement, we really try to stay true to these things. Is it community-oriented? Is it serving the community? Is it clearly a great app-powered experience? And then is there a social nature of it? And social sometimes means how do we do things in the feed, where like with crypto, you can share when you -- if you make a crypto purchase in Venmo, you can choose to share it. You don't have to, of course, but you can choose to share that you've bought Bitcoin or Ethereum or something, one of the other coins. You can do that. But what social really means though, it's -- we're acknowledging that within the community, people generally do use Venmo for social experiences as you kind of let in on the pandemic question that people -- the original use cases for Venmo are about like going to a show or tipping a musician or sharing the cost of a pizza or something. And so we recognize that people are interacting with each other as the core, sort of the thing that leads to the Venmo transaction in the first place. It's about people doing things together. So we're going to honor those. And I think the value prop then stays similar. That is it's a very efficient, effective, fun way to power your money with an app in a community-oriented social setting. The brand awareness is actually surprisingly high in some places already, double-digit in a lot of markets even though we haven't gone outside of the U.S. yet. I saw a number just this past -- in the past couple of weeks relative to product awareness in the U.K. and it's comfortably double-digit, and it had a [ 3 handle ] on it, like brand awareness for Venmo, which to me was sort of shocking and exciting. Our path there is going to involve ultimately leveraging enterprise capabilities, where we're already out at wrapping the globe with app and P2P capabilities. I don't -- what I don't want to do is build a stand-alone Venmo in the U.K., for example. I want to leverage the services and that regulatory experience and risk management experience that already exists in the enterprise, where we have a gigantic business in the U.K. and put those to work in a way that we take that collection of services and really reproduce a Venmo-like experience, Venmo-branded, Venmo-like experience, that really plays back to that younger digital-native who's going out with their friends and wants a great way -- P2P will still be a core of it but I think will bring -- more likely to bring kind of the full product suite to a country as opposed to just starting with P2P the way we did in the U.S.

Okay. Well, we've had a bunch of questions come in, Darrell. We're not going to get to all of them, but we have a couple of minutes here. So I'll try to avoid too much of a lightning round. But the first one was, what's the role of Venmo in the PayPal super app? Will they remain distinct experiences? Or will elements of Venmo also be integrated with the new app?

I think we will very likely see a number of services in common, like crypto, for example, and we have the same coins available right now in the PayPal app and the Venmo app. That's an example. I don't think we'll -- I wouldn't expect we find our way to a moment where we have all of the same features in one app or the other. We'll definitely provide different user experiences where -- again, recognizing Venmo is more community-oriented compared to PayPal, which just tends to be a little more personal still. PayPal is global in reach and universal. Venmo is more local. And so we'll honor those differences of who the customers are and how they choose to use and the designs. But we -- over time, we should get to a place where we are overwhelmingly using common services. That doesn't mean the way we bring the product to the customer will look or feel the same or even that all the features will end up being the same. But the real goal is to get to a place where we're leveraging a common set of services. It becomes obviously not only much more efficient to do that but much more predictable from an operating environment. Again, like we're in regulated space. And so let's not -- we don't want to invent how we have to deal with compliance and regulators for each of the brands separately.

Great. Second question was, what have you seen with P2P trends as economies are reopened?

We're early, of course, but I can't say too much, but volumes are strong right now. I just -- I'd leave it at that, probably, that we're noticing reopening. And it doesn't appear that those past behaviors, like the pandemic behaviors, have gone away. It doesn't feel substitutive.

Okay. And then I'll -- there are 3 more. I'll pick 1 of the 3. Competitively, are you seeing anything with competing apps that you think Venmo could also do well? Or are you seeing an impact from these on Venmo?

Look, I wanted to play our game because I think we have a good one. I think we have a good road map ahead of us -- journey ahead of us. There are brands that, of course, people know, and I get to hear about them every day when they have traction and new things released. We're not going to be ostrich in the sand. So -- with our head in the sand, so definitely watch what's going on out there. But I think we've got the road map that we really want to play now, and we're bringing a great set of services to our customers. And it's just about making sure we keep the urgency on quality and speed as we move forward. I don't think it necessarily -- I'm not nervous about it, I guess, is -- I'm as nervous as somebody would want me to be, but I'm not going to sort of live in fear of it or bend our strategy or agenda for it. And I do think more and more -- and we see more customers who have more than one service in the same way you have more than one credit card in your pocket probably. There are customers who are using more than one P2P kind of wallet. And that's true even between PayPal and Venmo, by the way. If it weren't for the fact that we were part of the same enterprise, one of my fiercest competitors would be PayPal. And so I think this is a case where the behavior breeds the behavior and that tide raises all ships. Of course, I want more than our fair share of it though.

Well, Darrell, I'm afraid we'll have to leave it there. This has been great. I appreciate your time. For those of you who do want to check Darrell out, Living the Dream and I think it's called I Got to Go, those are 2 tracks that I really enjoyed on Spotify. So -- but I appreciate your perspective on Venmo and PayPal. Have a great day, and thanks, everyone, for joining us today.

Cheers. So long.