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

Okay. I guess that means we can start it up here, having a nice sort of conversation. So I'm happy today to be joined by Dan Schulman, who you all know has been the President and CEO of PayPal since 2014. Dan joined PayPal following the announcement of its separation from eBay. And since then, he's continued to focus on growing the business, democratizing and transforming financial services and e-commerce. And he's a good friend. And I appreciate always that we get to do these things.

Me too, David.

I appreciate you being together again. So let's just kind of strategically, let's start up at a high level. PayPal was founded back in 1998, and you've added half of your 400-plus million total active accounts in just the last 4.5 years. What have been some of the things that have really accelerated the growth of the platform. What's really been the inflection point with digital payments, et cetera, that's really changed the trajectory of PayPal?

We're actually putting on 110 million net new actives in 7 quarters, so January 2020 to end of last quarter. And if you look at other metrics, I think it took us 20 years to get to $600 billion of TPV going through the platform. So here we are 2 years later, and I think we'll do somewhere around $1.25 trillion through the platform, so doubled in 2 years. But I think if you take a step back, David, clearly, the world had been moving towards digital, slowly and steadily, each and every year, you would add another point or 2 of overall retail moving to digital to e-commerce. But during the pandemic, I mean that accelerated 3 to 5 years. And so I think this year, you'll probably have about 25% of retail sales being online. That's up from like 18% or so a couple of years ago. And so all things are moving digital. I mean I think all of us during the pandemic changed the way we work, whether we like it or not, the way we live, how we access entertainment, how we access our health care, how we access education. And that's happened clearly in digital payments as well, clearly in all forms of retail. I talk to the CEOs of almost every major retailer around the world. They are thinking full omni now. Like how do we engage with consumers digitally, not how do we attract them to our store but how do we engage with them digitally. And there's really a seamless nature between online and offline. And all of those things clearly benefit our growth, they're huge tailwinds for us, and they will probably be in place for many years to come.

Yes, huge secular tailwinds. You've talked about your ambition to be a super app on mobile in an all-encompassing way, embracing all aspects of personal and commercial life, kind of 1 of 5 to 10 platforms that people use on their phone. Talk a little bit about why it's been difficult for these super app ecosystems to develop in the United States versus China. And what is it going to take for PayPal to really evolve into that place?

Yes. I think there's a little bit of confusion over kind of what I think like a financial services, super app will look like and what is a super app in China. First of all, China developed out of social media, WeChat Pay. Every aspect of somebody's online life goes through those platforms. And as you know, there is no real POS systems in China, no real credit, and QR codes exploded there and people started using their phone for every transaction. I mean I'm sure everybody here has been to China numerous times as we have. I mean you go into -- into a store or a pushcart, it's all done digitally. Every single thing is done digitally. It's very different than how the system evolved here in the States. But I think it's very clear that in the States right now and in other developing parts of the world, that previously disparate parts of our economy are becoming much more connected. And I believe that payments, basic financial services, like sort of commoditized like banking services sort of things like high-yield savings, checking, bill pay, those kinds of things, we could talk a little bit more about why I think those become white labeled, et cetera; and basic shopping tools, commerce tools, like creating wish lists, finding best deals, having budgeting tools around, those things are all combining into a single app for sure. And people don't want to have 25 different passwords, 25 different NAV systems. They want to live their financial lives on an integrated app across those 3 disciplines, maybe more disciplines going forward. And I think the key is that they need to trust that brand. And we -- PayPal is one of the most trusted brands in the world. It doesn't matter what survey you look at. Morning Consult just did a survey of 300,000 consumers around the world. PayPal is the #2 most trusted brand in the world. I think it was Time Magazine just came out with the most trusted brands. PayPal was one of those brands on their list as well. And so why do people trust us? Because, one, we're secure. And when you log in, you know you're secure, we protect you. We protect your privacy. We don't sell your information. And I think that, that trust and our, obviously, strengths in payments, extending to other disciplines now gives us a leg up as we move into this super app where you can live your financial life from inspiration in terms of what inspires you to make a purchase, to the purchase to post purchase throughout that. And that's where we want to become a super app around those disciplines.

You talked a little bit just a couple of minutes ago about what's going on and all the changes in the world and how it's affected all these businesses and all these platforms. Can you talk a little bit about what you've learned because of all that during this period of time, that has affected the way you're choosing to run PayPal and the way you're choosing to serve your customers?

Well, clearly, I think there's more change going on in our industry today and over the next 3 to 5 years, and we will have seen in the past 10 or 20 years that not only are payments evolving rapidly. I mean think about the phenomenon of buy now pay later. The phenomenon of buy now pay later is the first time that probably you and I both have seen in our careers where you had 2 things that were inextricably linked, a transaction and a payment that happens simultaneously and those have now broken apart. You have a transaction and then the consumer figures out how they want to pay for it later on. Do they want to pay in 4 over time? Do they want to pay in 4 and then hit a snooze button and pay a little bit later? Do they want to split that transaction into a combination of paying with it with rewards points that are translated into fiat and fiat currency. Payments itself is radically changing, and we're investing a lot in that. We think that checkout is not just a payment, it's also at the same time searching for the very best deal on that. Like we now, through our acquisition of Honey, can look through millions upon millions of SKUs instantaneously around the Internet to make sure that when somebody is buying on PayPal, they're getting the very best deal. And so it's a combination of investments that really go from, as I mentioned, inspiration, like creating your wish list and having people, retailers come in and try and satisfy that to the purchase and then really all the post purchase, like returns, charge-backs, all of that. And we want to do that both on the consumer side and the merchant side. And there's so much opportunity on both of those sides. I mean we're operating today in a $100 trillion TAM. Not all of that is available to us but it's increasingly opening up. Yes, as I mentioned, we'll do $1.25 trillion this year. I mean it's -- I mean we have such little market share and at huge scale already. We have 416 million-plus people on our platform. We're going to grow that, I think, close to 55 million this year alone, while engagement is going up double digit. It's just investing around the pain points and where the industry is going. And the other thing we're doing a lot of investing in is looking at modernization of the infrastructure. As you and I have talked about crypto 20x, 30x. And I think the really interesting thing about that is if you think about what the future of the rails look like, it's very different 5 or 10 years from now than it is today. Eventually, let's call it, 5 years, 10 years to take time out of the equation, all credit cards will be subsumed in mobile, right? You're not going to have a separate form factor. Yes. You're just going to have your mobile phone. When you have a mobile phone and then you have POS point-of-sale that's turning into a cloud-based device that's not hardwired into the networks, for instance, you can start to have transactions that instead of P2P or P2M, person to merchant, that are radically different rails, and then even the way the infrastructure, the system works, we use potentially DLT technology underneath. We can make things faster. People can instantaneously access their money. We can take out a lot of intermediaries, make it a lot less cost...

A lot of friction.

Absolutely. And it's just -- I think we're working hard with regulators and central banks and FI partners to figure out what that future looks like and to help shape it.

Yes. So there's a lot that you said there that obviously should contribute to allowing the growth to continue. But are there 1 or 2 factors you'd call out that you think are most important in allowing kind of the pace of growth that you've had to continue?

For us, Well, I think we never want to abandon our lead in checkout. Now I remember Sundar telling me that their moonshot inside Google was improving search. It was not all these different things that they were going on. It was just making sure that nobody was ever better than they were in search. And I feel the same way in terms of checkout for PayPal. We are continually investing in that to make it best in class. Like today, probably not many people realize this, when you do a transaction on PayPal, we look obviously at your user name and your password. But that's kind of Jacks-or-Better to sort of like open sort things. We look at 200-plus different indicators to decide instantaneously is it you or not. We don't need user name and password. Eventually, that will probably go away to take a lot of friction out of the system, and we'll use all the different data points we have to create a frictionless checkout experience. Right now, our checkout, as best we can tell, is about 34% more efficient than anyone else's checkout. That obviously matters a ton. We power a ton of different checkout options as well. One out of every 4 transactions that go through like platforms like a Shopify are powered by PayPal. And we power a lot of like Facebook and Insta and other realms as well. Most of what goes through an Uber or an Airbnb comes through our platform, even though they're checking out. So that's going to be a big element for us. We also have a ton of opportunity to expand internationally. I mean we did this Paidy acquisition in Japan. Most people thought it was because we're buying -- buy now pay later player, the leading one in Japan. Yes, they have great buy now pay later capabilities. But what I love about Paidy is that they are wired into all the convenience stores in Japan, and 70% of all online transactions in Japan are still paid for in cash, right? People go to the convenience store, they pay like in monthly installments and Paidy's got that connectivity. And it enables us to not just do cross-border in Japan but really go hard and heavy into the Japanese domestic market, which is the third or fourth largest e-commerce market in the world. And it gives us -- we're in the top 10 marketplaces. Japan has 700,000 merchants, 6 million registered users, and you combine it with our PayPal assets in Japan. It's a very compelling proposition. We're working with a lot of now financial institutions inside Japan to see how we can create an ecosystem to really drive growth. And so I think for me, the big thing that I spend a lot of time on is what are we not going to do because I want to do 4 or 5 things extraordinarily well and do a great job at those and then take on the next things that come. I mean our cup runneth over in terms of opportunities but we need to be very focused. We have a set of 4 or 5 priorities and we're laser focused on executing on those.

Yes. So shift gears, talk a little bit about the business and partnerships. You've gotten a lot of questions over the years about your relationship with Amazon given their size in the e-commerce world. And on your last earnings call, you announced a significant partnership to integrate Pay with Venmo into Amazon Checkout that we've just been talking about. Talk a little bit about what it took to get to this point and what you expect -- how do you expect this or what impact do you expect this will have both directly on your business as well as the competitive positioning of PayPal and Venmo.

Yes. I think the first thing that had to happen on the Amazon side is we had to run out the operating agreement with eBay. We had several large competitors at eBay that we were prohibited from kind of doing the most advanced integrations in terms of payments with. And so we always knew that there was the possibility of working with Amazon once that happened. Certainly, the scale of Venmo, 80 million-plus people just here in the States, that will expand as we move that internationally as well. and just the overall scale of PayPal, opened up a lot of conversations. And just to give you an idea, like we -- when we integrate with Amazon on Venmo, Amazon is something like 40% of the market here in the U.S. So that means there's like 60% of the market outside of them. It would have taken us something like 80% integration with all other merchants that were outside of Amazon for us to get the same coverage with Pay with Venmo that we did partnering with Amazon. So it's obviously a meaningful, very meaningful thing in terms of the monetization of Venmo, which is already going extremely well. Going to be transaction margin positive this year, which is a major step forward for the amount of money that we've been investing into Venmo. But there are a lot of other things here like beyond the Amazon. I mean one of the things that we spoke about it kind of briefly on our earnings call, but, yes, we've developed a much more integrated partnership with Walmart. We used to be on just parts of their different services. We're now much more integrated into their groceries and another branch of their marketplaces. And you look at the integration with DoorDash and a bunch of other -- of the leading players out there. That's kind of what happens when you start to have scale that we do have a lot of services drive incremental sales for merchants because of the conversion rate of our checkout. And so I think I'm really pleased with the partnerships that we've done. And if you think about FIs because we've had a lot of partnerships with financial institutions around the world, we're probably the largest digital distribution channel for most banks. If you remember, like pre choice, pre Dan Schulman and Charlie Scharf a company to [ de tonte ], we had the banks that were wondering like were we friend or enemy. Once we declare choice, something happened that you would never have imagined, banks started paying their customers, incenting their customers to put their cards on PayPal because we drive tremendous amount of traffic, I mean, $1.25 trillion because we will be probably the largest customer of the networks by quite a bit. And that's a very different place than we were 5 years ago.

Yes. So 2 pieces of the business that have gotten a lot of attention over the year have been buy now pay later and also the cryptocurrency integration. So talk about the value proposition of buy now, pay later, talked about Paidy. And I'm also curious about the opportunity for cryptocurrency and the integration of crypto going into the PayPal app. Talk about how you thought about that.

Yes. Well, buy now, pay later is exploding. I think I talked about this, I think, on -- with Jim Cramer last week or something. We did over $1 billion of TPV on buy now pay later in November. First time we've crossed $1 billion in a month. We did over 1 million first-time users coming on to buy now, pay later in November. Honestly, it wouldn't surprise me if we're close to or over $1 billion in December as well. It's just continuing to take off. We just launched in Italy and Spain, really pleasantly surprised how quickly those are taking off as well. And so I think our value proposition is probably second to no one in buy now pay later. It's why our growth, we grew 4x Black Friday versus Black Friday a year ago. And that's great growth at quite big volumes. And it's because we have a great proposition for consumers, no late fee and a very high approval level. We have 400 million-plus people. We know the people who are coming on. By the way, the difference between approval rate for somebody you've never seen and for somebody you've seen quite a bit, it's a massive difference. And so our approval rates are much higher, which, by the way, is very attractive to retailers as well because the average cart size of the retailer was up by 37% when somebody does buy now pay later. It's a massive change for them. And so no late fee, which is very different than a lot of the competitors out there, where some of the original players have 60% to 65% of their revenue is coming from late fees. And I feel like late fees are not consumer-friendly, and may eventually be regulated out anyway as we look forward. And then on the merchant side, we have no incremental fee for merchants to implement a buy now pay later. We basically take all of our money on the halo effect. There's, on average, a 21% increase in TPV for us, of which 90% plus is incremental for us. So buy now pay later, exploding -- and I really do think that, the gist of that is going to continue. Like we'll put longer-term installment plans in place so people can do larger purchases using buy now pay later. And really our history of extending loans in credit really and knowing customers and having all that data and information gives us a tremendous leg forward on that. Crypto. What I think about crypto in 4 different ways. I think of crypto as an asset, which is buy, hold, sell crypto, and that's obviously exploding on our platform. I mean when you have as many customers as we do, when you add a new feature and service, you just get a lot of scale. You just get a lot of scale, and we're fortunate in that and we're fortunate that we created really a beautiful experience if somebody wants to try to purchase crypto for the first time, and it well exceeds our expectations probably 2 or 3x what we were expecting when we went into it. But I think about -- and we'll expand. We'll expand it to the U.K. We're expanding limits. We'll expand to other countries. We'll work hand in hand with regulators in every one of those countries before we expand it there. But I think of that, truthfully, as the least interesting part of crypto. It's the fascination of whether Bitcoin will be 100,000 or 50,000. I really don't engage in that.

And it was on television this morning. I said the same thing, I really don't care.

Yes. No exactly. It's kind of interesting. What I think is interesting is can crypto add utility to payments. And I think programmable money is actually quite interesting. I think being able to digitize assets is quite interesting as well. And so I think there's incremental utility that the underlying technology can provide to payments. And I find that to be interesting as do a lot of other FIs and central banks and other payments companies. The third thing is CBDCs, Central Bank-issued digital currencies and stablecoins, 2 different forms of currencies. I tend to think they'll coexist with each other to some extent. 80% of the world's central banks are looking very carefully at Central Bank-issued digital currencies. We are in conversations with most of them. We're in deep conversations with most of the think tanks that are working with the central banks. We pulled together a full business unit to think about the underlying infrastructure. And then the fourth thing is can we modernize the infrastructure, can we put in DLT technology to create a more inclusive financial system because right now, the financial system is pretty exclusive like the take rate is about 2.8% around the world. But if you don't have a lot of money, where you're outside the system, take rates for -- can be 1,000 basis points, not 280. And it can take too long to get your money. It's still here in the U.S. If I cash a check, it'd take me 3 to 5 days to get my money. If I send an international remittance, it can take a week. If you do that digital wallet to digital wallet, then international remittance, you do that transaction in seconds. And instead of that transaction costing 800 basis points, it costs 200 basis points or less. And that's kind of the promise of digital technologies, digital wallets. You can do things faster, take friction out of the system and have it be more efficient and maybe even add a modicum of financial health to those who most need it.

So when I listen to all that, the natural question I've got to ask about that we've talked about a bunch is just financial services and regulation. They obviously go hand in hand. Talk about your approach to working with regulators and how you think the regulatory landscape looks for the fintechs and for new products like buy now pay later and crypto.

Yes. Well, I think first of all, the landscape is moving extraordinarily quickly, which puts pressure on regulators and governments and all of us as we think about all of the responsible innovation that we need to do as we look forward. I don't really understand any fintech that can say we're going to like kind of look at the regulatory things and innovate. It's all financial services will be regulated and are regulated. And there is not a thing you can do without having regulatory approval. It's as simple as that. I think all of the crypto, there's no way that governments give up control of that, no way whatsoever. And so...

It's amazing that argument has any meaningful airtime.

It's just not -- it's a fantasy. And so -- like when I came into PayPal, we had 120 people focused on risk and compliance. Today, we have over 4,000 people focused on risk and compliance. To me, being best-in-class or attempting to be best-in-class at risk and compliance, having a great relationship with the regulators and law enforcement around the world is foundational. Without that, you will not expand as a player in the financial services arena. But to me, that is a -- the reason I've invested so much in that, and we've talked about this, like the number of people we have, like we work under 67 different regulatory frameworks across the world. We have to be excellent at it. We both know we try to be perfect at it. We're not always perfect at it. But that is like the expectation, and so you have to constantly be upping your game on it, but we will never skimp on being compliant, working hand-in-hand with regulators also pushing them to be sure that you can do responsible innovation. I mean that is our jobs, you and me, to think about where is the world going and how do we help shape that future hand-in-hand with regulators. We can't do it outside of that. That's for sure.

Yes. Yes. That's a good answer. And just a lot more evolution coming with all that's going on.

No question there.

So just we're getting to the point to where we're going to wrap up, but I just thought the last thing I want to ask you, broadly, you're doing so much innovation with technology and really trying to use technology to influence consumer behavior, adapt to consumer behavior, to take friction out, et cetera. What advice do you have for financial services companies broadly, for the industry broadly at a high level that are trying to become leaders in utilizing technology in business and anticipating how technology is going to change consumer behavior? What's the big picture advice around this broad shift that we've been talking about? Try to end on something big and...

I see what you're doing here. I think the hardest part for all of us is consumer needs are evolving quite rapidly and they're changing quite rapidly. And none of us, you can't and I can't, do it by ourselves. So the question is how do we take the best of our respective platforms and bring them together to satisfy both merchant and consumer needs. For instance, I'm of the opinion that there are commoditized sorts of services inside banks, and there are some very differentiated areas. When something becomes commoditized, then distribution, like massive distribution is important because your margins are low, so you want the maximum amount of distribution. And platforms like PayPal can be massive distribution mechanisms for commoditized basic financial services. But that means we need to figure out kind of what are the interfaces between our platforms, what does the financial models look like for our platforms, how do we think about customer interactions. I think before there were digital wallets, there were leather wallets, right? Leather wallets like there wasn't a Bank of America leather wallet, right? I remember talking to Brian Moynihan about this. He was like -- I love being inside of your digital wallet. I never thought I needed to control the leather wallet. And the digital wallet needs to be a container that allows the customer to choose between any FI that they want and any service they want. And so that means that we have to work with banks and financial institutions around the world, and banks need to think about what platforms are they going to create and who are they going to partner with as well on different things and where is their differentiation. In terms of like the tech, we are all going to be moving much more into machine learning worlds and creating unique experiences for every customer based on data and information. There's no question as we move into 5 or 10 years from now, you're going to be in the beginnings of a quantum world. That is going to radically change the processing power. We live in a world where our exhaust in terms of data is unbelievable. When we go into a 5G world and we go into an IoT world because you don't need the battery life anymore, the IoT's [indiscernible] processing is pushed to the edge. It's going to release a tremendous amount of data. You'll have refrigerators ordering payments for empty things. So that's going to change the world as well. And so it's really exciting to think about it. I think the biggest thing is how do we partner together and how do we serve consumers and merchants in ways that they expect from the 2 of us and others.

Well, it's exciting times, a lot of good stuff ahead. As always, thank you, Dan, for spending time with us.

You bet, David. Thank you.

Thank you. Thank you, everybody.

Thank you.