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

Okay. We're going to go ahead and get started. So just as we get started here, Dan was asking me how many people are here. And I'm very excited to say that we definitely feel back. Dan, you were one of the last conversations that I had in person...

Yes.

2 years ago at this same event. So yes, we're at full flight. So here we are. Appreciate you joining us today. Just as a matter of introduction, I'm James Faucette, senior payments analyst for Morgan Stanley here in the U.S. Before we kind of get started, just for any disclosures, please see morganstanley.com/researchdisclosures. Now very excited this afternoon to have CEO of PayPal, Dan Schulman. Thank you for joining us. Dan, you have your boots on.

Yes.

I've got my boots on. We're going to -- I think we're ready to wade into the muck, if you will, a little there right now.

So maybe I'll start with kind of the topic of the week that people are asking every company about. Can you just run through for us quickly your Russian and Ukrainian exposure, just so people are aware of what that's at as a starting point?

Yes. Well, first of all, thanks for having me. This actually is the room where I gave my first speech as the CEO-elect of PayPal in here 7-plus years ago now. So our exposure to Russia and Ukraine is about 0.5% of revenues. We decided to leave the domestic market in Russia several years ago. So it's just cross-border in there right now. And basically, we suspended services over the weekend. We really were looking at kind of making sure our employees were okay in Moscow, making sure we could satisfy our obligations to customers, our legal obligations, compliance obligations. But given what's happening on the ground, we felt that it was absolutely the right moral decision to suspend our services in Russia.

Got it. Got it. Okay. So 1/2 of 1% for both the countries combined.

Yes.

So that's kind of a good level set. Like I said, virtually everybody brings that up in every meeting, so we just get that out of the way. So let's talk about kind of the more important things and looking forward. But to do that, let's look backwards to when we were here 2 years ago, just as things were starting to ramp up around the pandemic itself. When you look back on what has happened between then and now, can you share your reflections on what you've learned, what your thoughts are? And what will prove to be lasting changes versus what was transitory in that period?

It's a good question. I think there are probably 3 things that I think are probably secular tailwinds and are lasting. I mean, clearly, the divide between online and off-line is dissipating, if not disappearing. So you have retailers now that are just thinking about commerce, not online or off-line commerce, and really, in a digital fashion, how do they connect with their customers digitally in new spaces, what does that mean for them? So I think clearly, the secular growth of e-commerce is going to continue to accelerate going forward. It obviously is lapping extraordinarily high growth rates. But if I look at just a year-over-2-year there's real growth, and I expect that will continue. Second thing is, clearly, payments are digitizing across the world. You're seeing the use of cash dissipate all forms of faster payments. Central banks around the world right now are having discussions with us about what -- do they move into Central Bank-issued digital currencies? What form does that take? How do they interact directly with us? But clearly, digital payments is accelerating. And the third thing is the ascendancy of digital wallets in Checkout. Clearly, digital wallets are taking share. There are much less people entering their credit cards for an off-line -- or an online transaction, and we're seeing all forms of digital wallets, including PayPal, take quite a bit of share in the Checkout space. So I think those are lasting trends. Clearly, it's been difficult to look at the behavior of all the like 120 million customers that we brought on in the last 2 years. Some segments are continuing on at very high levels. You've got other segments of the market that were in for a specific transaction and are now churning off from that. So I would say, in general, you've got on all, it doesn't matter the segment, they're all up substantially from several years ago if you look year-over-year and index it to one, they're all significantly above that index level, but some are dropping off a little bit more, some are a little more stable, some are growing. So it's been difficult to predict. We clearly got a little bit ahead of ourselves in looking at what was happening early on in the pandemic. But if you look at the underlying strength of our business, you look at fourth quarter, I think ex eBay, our growth was 22%. You look at year-over-2-year in fourth quarter, ex eBay, our growth was 25%. So we have a really strong underlying growth. We have a number of things that we're lapping eBay and our highest growth quarters. But everything I see right now points to good strength in the core business.

So I want to -- so I think that like those trends of what's sustained and permanent or interesting, I think the hardest thing for, at least us in the investment community, is to parse out maybe what we thought was going to be permanent, that's proving to be more transitory. You mentioned some of the churn in different segments, et cetera. So can you just talk a little bit about areas where either you anticipated it would be transitory, it's proving to be transitory? Or where you thought maybe it'd be more permanent, but it is more transitory? And how do we reconcile or when does that stabilize? And then now we know kind of what our real base is?

Yes. Well, that's why I keep pointing to kind of like what is the core business doing underneath all of this. And that's been relatively stable for the last 3, 4 quarters in a row. There's a lot of noise in the system because you are, one, lapping eBay. eBay last year put -- and that's their movement to managed payments. That put $1.4 billion of incremental revenue pressure on us. This year, it's about $600 million, almost the entirety of that in the first half of the year. So $400 million-ish in Q1, $200 million in Q2. And then basically, that lapping of eBay, which I can't wait for to say like no more ex eBay, just here are our results will -- that will appear in the third quarter. Second thing is we're having really strong growth from a year ago. Our revenues a year ago were 31% growth in the kind of height of the pandemic. I think it was 38% ex eBay. Next quarter -- second quarter, it's 32% growth ex eBay. But then you normalize in the back half of the year as well. And again, and then you start to see kind of what the like true revenue growth rates will be. And then we have a whole host of initiatives that we launched last year from Buy Now, Pay Later to our digital wallet, to our launch of crypto. And those are all beginning to gain traction as well. And so when I look at the shape of the year, clearly Q1, because of eBay, because of the growth is our lowest quarter of the year. But as we mentioned, I expect to see that accelerate every single quarter, and then we exit the year at 20% revenue growth.

So on that point, and when we look, at least when I look back on the Q4 results, it sounded like some of the macro dynamics may be impacting e-commerce more broadly. And we saw that with a lot of the e-commerce-related companies, et cetera. But more importantly, if we're looking forward, you mentioned initiatives. What types of investments are you making right now to bring the business back to that 20% growth by year-end? I mean, are there -- I mean, are these initiatives critical that they have impact this now? Or are these longer horizon than that?

Well, I think in the fourth quarter, the entire industry kind of underestimated the growth of e-commerce, especially as you went into the Cyber 5 and then into December. That was much lower than industry expectations, lower than our expectations, even though we were taking share. I mean as best we can tell and we try to extrapolate from all of the different e-commerce studies that are out there, there are like 4 or 5. But here in the U.S., I think we grew at about 2x the rate of e-commerce. So we were clearly taking share, clearly growing well, but overall, lower than expectations. And then on top of that, there were what I think are transitory things that were affecting -- you had inflation rising to a 40-year high that was clearly impacting our lower income levels in our segment. We have 425 million people in our base. So we mirror the population pretty much of every country that we're in. And then you clearly had supply chain shortages affecting small businesses. Some of the larger businesses were able to commandeer their own boats and could really do their own logistics. But a lot of small businesses were really hit hard by supply chain and cross-border as well. I believe those will ease. Now you've got, obviously, the atrocities happening in Ukraine. We'll see how that impacts, but -- supply chains overall, but clearly, we were seeing that beginning to improve. And so I think there’s some transitory things and then I think it was a lapping of e-commerce. For us, you’ll see the math kind of play out in our numbers over the course of the year, but our initiatives that we put in place last year are really driving huge benefits for us already. For instance, the digital wallet, which was probably the first big massive innovation we’ve done in the last 5 years on the consumer side, kind of combining all forms of payments, basic financial services and basic shopping tools all in one app. What we’re seeing on that is people who use the digital wallet have 2x the average revenue per active user than those who just do Checkout only. And our digital wallet, which was rolled out fully in October, is already 50% penetrated in our consumer base around the world. But that means there's another 50% for us to go after, and we're clearly focused on that. By the way, anytime somebody adds 1 additional service in the digital wallet, their average revenue per active user goes up, on average, by about 25%. So you're seeing like real significant lifts in the products and services we put out. Buy Now, Pay Later, I'm sure we'll talk about that later. A 21% halo effect on the core business when somebody uses Buy Now, Pay Later. And Buy Now, Pay Later, we could have bought a Buy Now, Pay Later player for $5 billion, $10 billion, $20 billion. We opted to do it organically. And now we're exiting Q4, depending on what metric you look, whether it's customers or GMV or growth rates, we’re either the #2, 3 or 4 player in any country around the world where we offer Buy Now, Pay Later. So I think there's a lot of encouraging signs of our underlying initiatives that, on top of eBay lapping, COVID lapping, give us confidence in exiting the year at 20% plus revenues.

So I want to ask on the digital wallet really quickly and then as you talk about driving increased engagement and that kind of thing. Are there any things that we can base ourself off of is like how is the actual downloading or when people download the digital wallet that was introduced last October. Is that directly impacting usage at all in a meaningful way? And by how much? And then if you look at that other 50%, is it reasonable to think that you could have a similar impact as you get those people to actually download the digital wallet?

Yes. Well, it really depends on what part of the digital wallet. For instance, our shopping section, we've seen a 700% increase from people who are using our app to now go to merchants to do shopping. And when they go from our app to do shopping, it's automatic Checkout with PayPal. There's no other option that goes on with that. And you can load deals, discounts right into the wallet to use them now or later. By the way, in many cases, both online and off-line as well, we're seeing people who are now linking their card to the wallet. We're seeing things like a 5x increase in ARPA. Crypto, any time somebody sells their crypto balance, within 1 week, they're doing transactions on PayPal. And so people who use the wallet are 25% less likely to churn right now. And as I mentioned, every time they add a service on average, ARPA goes up by 25%. So I'm quite encouraged by what we're seeing on the digital wallet. It's still reasonably early days, right? We've been doing this now for like 5.5 months. We're seeing every single month an uptick of people moving to the digital wallet. We track that quite carefully. We've got marketing programs, moving people into the digital wallet. So I think the combination of the services themselves being quite compelling, and every time somebody does -- adds a service, there's a halo effect as well. So it's the experience in the wallet, new people coming into the wallet. And then by the way, it's clear we're putting a ton of investment in Checkout right now. Checkout is a very competitive part of the industry. It's the legacy of PayPal, but it's also the future of PayPal. And when you have 30 million-plus merchants and 400 million-or-so consumers using your platform, little things make a huge difference in revenues. We took down the latency by several seconds last year. Every half a second makes a difference.

Huge difference.

We have, I think, what is probably the largest vault of financial instruments in the world. We have billions of financial instruments in our vault. We now work with FIs to proactively update. When your card expires, we proactively update so you never have a transaction that's turned down because your card has expired. And little things like that increase authorization rates by 10 bps, 20 bps. And when you're at the scale that we are, those things matter dramatically. We're also working on making more and more of PayPal native in applications, so you don't bounce from the merchant to PayPal and then back because that makes it a one-click Checkout, much faster. And so I think you'll see pretty dramatic improvements in Checkout, improvements in digital wallet. And then obviously, things like Braintree, which we never really talked that much about, Braintree is growing at leaps and bounds right now. We are bringing on some of the world's largest merchants onto Braintree. DoorDash, Live Nation are 2 good examples of that. If you look at Uber, Airbnb, we are either the primary or exclusive provider for full stack around that. And that business is growing at very impressive rates, right?

So on like on Braintree and that, to your point, is it's not often talked about, but can you talk a little bit about how you manage that relationship? Because ultimately, I always -- the way I always characterize is PayPal and that e-commerce checkout, that's the golden goose for the company. And for Braintree, a lot of times, I'm not really sure how that fits, especially since you are dependent on Braintree competitors to help funnel volume to PayPal or at least facilitate the transaction. So in some ways, there's like a cooperative element, particularly in full Braintree. And so what is the strategy for Braintree? Where do you see that being -- having opportunity in such a way that it doesn't impair all the golden goose of PayPal itself, if that makes sense?

Yes. In fact, I think Braintree and our Checkout are kind of linked quite nicely. Really, Braintree today is the only full stack processing platform where you can fully integrate in PayPal and Venmo. And if you think about one of the big advantages that Braintree has is we have a 2-sided network. The competitors to Braintree are supplying just 1 side of it, full stack processing. We provide a full set of services and the ability to seamlessly tap into the PayPal and Venmo base. They are native integrations. You can seamlessly put Buy Now, Pay Later, Buy Now, Pay Later. We've integrated upstream. That means upstream on product pages, not on Checkout. Over 93,000 merchants have done that. But when somebody comes into our Braintree platform for full stack processing, all of the PayPal stuff is beautifully integrated into that. That is not the case with any of the competitive offerings.

Interesting, interesting. So I want to talk about growth strategy and kind of how that's evolved over the last couple of years. And this kind of goes back to our -- one of our initial questions. Can you talk to us a little bit more about what led you to decide to change your emphasis on to engagement rather than net active accounts and that kind of thing? I mean, because for me, once again, maybe a little too much of a confessional, but when I heard the active account number, my response was, well, that's nice, but just from an incremental standpoint, it feels like increasing engagement with the existing 400 million or whatever it is, could be as important. And so I was never quite sure like how I should think about the impact on the P&L from lots of accounts. And now it seems like engagement is kind of where your focus is. So can you talk about the evolution and consumer behavior during the pandemic that played into that? And where -- how is your confidence? How do you feel about your confidence now in terms of where your focus is?

Yes. Well, I'd say 2 things to that. One, James, we've always been focused on engagement, just to be clear. Like when I came into PayPal 7.5 years ago, the average PayPal customer was transacting with PayPal 17 times a year.

Right.

Today, that's 45 times a year. And so you could argue that the growth in net new actives and our growth and engagement have both been incredibly important as we have grown the business since we've been a public company for like 6.5 years. We're not pivoting away from net new actives. We're still going to put on this year, 15 million to 20 million because we're letting those that are not active in the base roll off. I'll talk about that in a second. But we'll go back to pre-pandemic levels in terms of adding net new actives. I mean, we'll add 30 million plus a year in the out years. That could be 30 million to 40 million, depending on where we are. There are very few companies that add that many net new actives to a base that's already 425 million going forward. So we're still going to go after net new actives. We're going after -- we're being -- what we're not going to do is throw away money to try and engage somebody in our base that clearly came in for 1 or 2 transactions and us trying to incent them to stay with us by offering them $5, $10, $20 does not meet our ROI criteria. And what we learned -- and by the way, we've done on 120 million people during the pandemic. Again, a lot of behavioral changes. We constantly do test and learn types of promotions out there. What's working? What's not working? What's the ROI on that? What's the ROI versus, for instance, trying to engage a medium-engaged user to become a high-engaged user? There, we were seeing very high ROI. So we're very different than a subscription business, to your point. If a low-engaged customer used us 1 time in the year leaves us, that has basically no impact on revenues. It's basically allowing us to shed some costs associated with keeping that customer. But it's no impact on our revenue potential going forward. And so what we are doing clearly is putting out products that incent more engagement, more average revenue per active account and the digital wallet is beginning to fulfill on that promise. But it's going to be a combination of new actives coming in because the top of the funnel is obviously very strong. We're letting nonengaged roll off, not trying to incent them to stay on, which is our decision to go do it. And I think if anybody was sitting in our seat, they would make the same decision. You don't want to incent somebody just to have a hollow net new active on your base that's not adding revenue or bottom line impact. What you want to do is take your marketing resources and make sure they're engaged in the highest ROI activities. And that combination of bringing on high-value net new actives and we'll still bring on 100 million plus over the next several years and increasing engagement is a tried-and-true methodology that we've had over the past few years, and it's -- and I think it's absolutely the right one for us.

So how should we then benchmark specifically those KPIs around active users? I mean, should we be looking at gross? Or churn? Net? What about country-by-country? Like I mean one thing that sticks out to me is you bought this interesting little business in Buy Now, Pay Later business in Japan. And Japan is like kind of starting to go through its own metamorphosis of customer behavior. So like where should we be looking? And what should we be tracking on at least consumer or account KPIs?

Yes. Where we measure engagement right now is through what we call TPA, transaction per active account. And that's at 45, number that I gave you, an all-time high for us last quarter. Also, very importantly, grew by 11% year-over-year. That was one of the highest growth rates we've had in the last 2 or 3 years for engagement. By the way, again, I hate to say ex eBay, but it's important to do it. Ex eBay, that engagement, that TPA grew by 18% year-over-year in Q4. And I feel like that double-digit increases in engagement are going to continue and accelerate through the year for us. So I think one way to measure the engagement is on TPA. We'll probably supplement that with other metrics for people to have a better look at how we're growing and engaging our accounts. And then clearly, even in our core markets, we have room for growth in net new actives. I've heard some people say like, are you running out of room to grow in your core markets? Absolutely not. We're probably 1/3 penetrated in our core markets of the digital users. And we're very focused now on the opportunity in China now that we have our license there, now that we’ve finally got our infrastructure in place that's fully compliant and legal inside the country. Japan is a great example. Paidy. We did not buy Paidy because it's a leading Buy Now, Pay Later player in Japan. Although it is. We bought it because Paidy has connections, wired connections, to all the convenience stores in Japan. And Japan is a very different market. It's the third largest e-commerce market in the world. We did not play domestically at all because it's predominantly paid for in cash, not by credit cards. And the cash is paid at those convenience stores. And that would have taken us years to be able to integrate into that. And so now the combination of Paidy and PayPal enables us to have both a domestic business in Japan. We're talking to a lot of the FIs in Japan now as a result of that as well as a cross-border business. And so I think there's a lot of opportunity internationally for us. We're very focused on China, Japan, Mexico and our core markets, Western Europe and a couple of others right now where we think there's a large amount of opportunity for net new actives to come in.

Got it. So talking about products, and you've already touched on this a couple of times, but you guys launched a lot of new products in 2021, certainly more than in a single year than I can remember. Which are the ones or at least the groupings that you're most excited about? And how does that match up to where you're seeing with traction with customers?

Yes. Well, the example I would like to use is Buy Now, Pay Later. That's being used at 1.2 million merchants now in 7 countries, 8 with Paidy in Japan. Over 12 million consumers have adopted it. I think our growth rate in Q4 was 200% or 300% year-over-year. The industry is at about 70%, and that's at a run rate of about $13 billion of TPV coming out of that. So it's not small anymore. And what it really said to me is if we can put out a beautiful value proposition that is best-in-class, and I think our Buy Now, Pay Later is best-in-class. It is no fees to the merchant. So it only adds 21% halo effect to the merchant. When somebody uses Buy Now Pay Later, our service, their sales go up by 21%. We make incremental margin on all of that halo. 90% plus is incremental to us. We have no late fees for consumers. So we have a beautiful proposition there. And the other thing is we've been doing credit for 10 years inside PayPal. We know when to responsibly lend and when not to. And by the way, when you have 400 million consumers, it gives you a big advantage because you know that population. And when you know somebody coming in, your approval rates are in the 90%-plus rate. When you don't know somebody, your approval rates are in the 75% plus. So for merchants and for consumers, using us gives them a much better customer experience than anybody else. And we have the lowest -- as best we can tell, lowest loss rates in the industry, 50% of our Buy Now, Pay Later customers have come back and used us twice more already. So it's a product that is simple, easy, fully integrated into the wallet, integrated across any merchant, they're now beginning to install that upfront. And when we see us moving into product pages, we see a double-digit percentage lift in Checkout as well. And as I mentioned, that's at about 93,000-or-so merchants and a big focus of our sales force. So that's like 1 example of a product when you do it really well, integrate it into your wallet, have it just surface automatically, that leads to a tremendous lift in average revenue per active user and engagement. Crypto was another great example. We put out a very simple, easy-to-use buy and hold, sell on crypto, simple to buy it, simple to sell it, simple to use your crypto balance at merchants as well. And by the way, that was like step 1 of a multipart road map all around digital assets, digital currencies, which will likely you'll see a lot more of that as the year rolls out. So I think there are a lot of things that we've done. As you mentioned, we put out probably more product than we've ever put out. A ton of it making a real impact in the market. And also, remember, the wallet was version 1.0. I mean like our investments are improve Checkout, improve the digital wallet and ensure that we continue to consolidate all of our platforms together.

So back on Buy Now, Pay Later, the way it's presently structured is interesting. But how do you see that evolving? And you also have the PayPal credit product and the credit card. But with Pay In 4, as you start to go to longer durations, bigger ticket sizes, et cetera, can you keep that still no incremental fees to the merchant? Or how do you balance that with using interest rates as an incentive to consumers? And how is that absorbed? And I guess a big question for a lot of investors in the market today is what about funding those, right, especially when you've got a changing environment that the consumers are operating in?

Yes. All good questions. We launched Pay in 4, which is longer-term installments, a higher AOV in Germany, at the end of last year. And it just took off, took off. And so we are working on that for here in the U.S. to launch as well because right now, you max out at about $1,500…

$1,500.

For Buy Now, Pay Later, for our service, but we're working to do longer installments that will significantly up that so that people can use Buy Now, Pay Later for any purchase that they want any amount. In terms of our balance sheet, we've always said and we always will be asset light. We are never going to become heavy in our balance sheet on credit. We have a portfolio that we can -- can and will sell, so that our balance sheet is always asset-light.

And so -- and I guess as durations lengthen, that opens up or grows the amount that you'd look to sell? And is that to existing partners? New partners? How are you thinking about that?

Well, there's always a lot of inquiry in it. So it could be any one of a number of different ones. But here's the beautiful thing about selling that part of the portfolio is, remember, our revenues come from the halo effect of that, not from the credit part, which I've always said that I think Buy Now, Pay Later is a really good service and product. It's not -- like it's not just a -- it's not an end in and of itself. It's not like a company in and of itself. It's part of a portfolio approach. And so I think one of the things that I really like about the breadth of product that we have, the breadth of services we can offer, both to consumers and merchants, is that where and how we make money really is kind of where are we competitive, where do we have value and there's a lot of different ways that we can adjust pricing and also be extraordinarily competitive in certain areas that those who have a single product would find it much more difficult to do.

Right. So let's turn to Venmo. Like the announcement of getting Venmo's acceptance at Amazon, to me, it was huge, like watershed moment for PayPal in a lot of ways. And how should -- like I guess a few questions there. What's the latest update you can give us on Amazon integration? And more importantly, how does this bring benefit to PayPal? And ultimately, how are you bringing benefit to Amazon? And is this something where you can start to extend credit via Venmo so people can take advantage of that when they're making Amazon purchases? Like what's the vision there? And where are we at in kind of the initial stages?

Yes. Well, first of all, Venmo last year, I think it was $230 billion of TPV, approaching $0.25 trillion of TPV growing at 44%. Just to put that in context, in 2017, PayPal in the U.S. was $200 billion, growing at 25%. And so it's 83 million accounts on Venmo only here in the U.S., right? And so if you think about the number of people in the U.S. and the number of people using Venmo, it's pretty extraordinary in terms of the potential. It exited Q4 growing into revenues at about 80%, approximately about $0.25 billion of revenues this year. We've said it will grow an incremental 50% plus on top of that on the revenue side. The Venmo team has done a real nice job putting a number of commerce-based services on that. And my analogy has always been like PayPal was a P2P service starting off, then it went into eBay and then it went into every merchant, 85% of all merchants in the U.S. or so. And Venmo is going to follow that same track. Amazon was obviously a very significant announcement. It's the first really kind of incremental sort of wallet type of service that Amazon is going to integrate. We are both quite excited about the possibility of what it can do. There will be some incremental functionality that you can do on Amazon, they're excited about, we're excited about. And we are -- teams are actively engaged. But what we have both said to each other is when we put it out, it has to be beautiful. And like both of us are exactly in that same camp. Like let's make sure that it splashes when it goes out, and it's a beautiful experience. And if we're going to go out 1 or 2 months earlier, and it's not perfect, like wait for 1 or 2 months. All focused on getting it out later this year. And as soon as we're ready to announce that...

You will.

We will.

All right. But coming this year I guess?

Yes, yes.

So let's talk about the space generally. From our perspective, we've taken note of the increasing levels of competition in the fintech space generally, particularly if we measure it by things like capital raise and capital flows and venture capital, et cetera. A lot of talk, and it seems like it's died down in the last 6 months, but there was this period where everything was like super app, everything is going to be a super app. Everything is going to be combined together. PayPal, clearly, with your customer position, has you in a pull position. But what is the status of a super -- does it make sense? Where does it make sense? We've seen the regulators in the U.S., like the CFPB, voice some concerns around at least some aspects of what could be considered super app-type services, et cetera. So what is -- how should we think about super app conceptually? Where PayPal wants to go? And then where you may run into limitations from either a competitive or, in particular, regulatory standpoint?

Well, first of all, the image of a super app typically is like a WeChat or an Ali where people live their entire life on that app. That isn't what we're talking about here. It's more of like a financial services super app, where -- and this, I think, is clearly happening, and you're seeing it everywhere, and we were talking about it early on, and I don't know what they say, imitation is a serious form of something. But shopping tools like enabling merchants to expose customized deals, offers to consumers is clearly something that's happening as merchants think about where do we engage consumers in a fully digital world. And it's not just on their websites or in store. It's in marketplaces, it's in contextual commerce. And so that is clearly exploding on all of the digital wallets, including on ours. I mentioned a 700% increase in people moving to merchants to purchase coming right off of the digital app. Basic financial services like high-yield savings, direct deposit capabilities, early access to direct deposit, bill pay, budgeting tools is all clearly coming into consumer platforms. And I do think a lot of the FIs that we partner with to provide those services or thinking about like where is their value add. What is commoditized when things become commoditized? The -- typically, the strategy is to introduce that service to a wider range of people as possible. And many of these basic services are going to become like APIs. Like big consumer platforms will draw from an FI, like we're working with Synchrony to provide high-yield savings. We're not providing ourselves, but it's fully integrated into our platform. Bill Pay, having that capability, allows us to have more data and information, honestly, to help inform a consumer whether they can get credit or -- so these things all play together. And then when you have basic financial service, shopping tools and then any way you want to pay for something. So it's credit cards, debit cards, cash, rewards points, crypto currencies and not only any way in splitting those, if you wish to do so, but do you want to pay now? Or do you want to pay later? Like do you want to hit a snooze bar and delay your payment for a week? There are so many things you can do in the digital wallet, and you do those both online and off-line seamlessly as well. And so I clearly think that those of us -- and digital wallets, as I mentioned before, are ascendant in Checkout right now. There's no question about that. We're seeing those trends and those trends are just quarter-over-quarter-over-quarter. So I think that will be a really important part of everybody's moving into this. And I think digital wallet or financial super apps will depend on kind of your scale. Scales are very important because the more data and information you have, the more you can opt the best things for consumers and for merchants. And the second thing is you need a trusted brand. PayPal is one of the most trusted brands in the world. Now there are a couple of studies that had us #2 most trusted brand in the world. 54% of consumers will shop more at a merchant if PayPal is present. And so there are big advantages we have from both a scale perspective, from a breadth of services perspective, from a really close relationship with FIs around the world. Remember, numerous years ago, we were competing with them. Right now, we're probably the largest digital distribution channel for most of them. And we're in deep partnerships with a lot of them. And then you've got your brand. And so all of those things lead towards us feeling a lot of conviction that we can be, if not the leading digital wallet player, one of the leading digital wallet players.

So in the last section here, let's -- you've touched on a lot of these things, but I want to kind of come back to them, hit them quickly. So we're going to kind of go rapid fire as we run through these. So you mentioned digital wallet. A key component of that is Checkout. You mentioned that we should expect continuing improvement around Checkout this year. What are the things we should be looking at? Like when? You just mentioned taking a second out last year or so. What’s that look like this year?

Yes. Latency will continue to come down. More and more integrations will become native. You'll have higher auth rates, higher availability. Just kind of people don't realize when you put through, I think we put through $1.25 trillion of volume through our platform. We're doing 5 billion-plus transactions a quarter right now. When you increase availability from 99.99 to 99.99 -- 4 9s, and now we're approaching 5 9s of availability, that is gigantic for our merchants and for our consumers. And every little bit of availability improvement translates into more revenues and sales as well. And so you're going to have a lot of basic infrastructure and then a ton of just better integrations with merchants. And the other thing, James, Walmart’s a great example of this, is presentment, like where are you presented? 2 years ago, we were buried in pages of checkout options at Walmart. We've been working with them over the course of the last year on a number of different things post the eBay OA. And now we're front and center as a Checkout option. And as a result, our Checkout percentage, our revenues, all of that are up substantially. The reason a company like Walmart or Amazon work with PayPal is because we drive incremental sales because we are so trusted by consumers and our conversion rates are higher. And those are 2 of the most demanding retailers in the world on that. And so Checkout, we will continually invest in that. I want that to be best-in-class. We should be able to take advantage of scale, vaulted instruments. I mean, there are competitors out there and say, we've got 11 million vaulted instruments. We've got billions of vaulted instruments. That should be a gigantic advantage for us if we integrate all of that the right way. So Checkout will be a big investment area as well as digital wallet on the consumer side.

So looking at the business then as a whole, this year, you're projecting to grow mid- to high-ish teens. That implies exiting this year something around 20%, and that certainly is your medium-term outlook. How much of getting to those objectives is just basic normalization of the underlying e-commerce? And then how much is PayPal on top of that?

Yes. As I mentioned, I think there are those 3 secular trends that we talked about now: The ascendancy of digital wallets; digitization of payments; and e-commerce. In e-commerce, I forget exactly what the numbers were during the Cyber 5, but e-commerce grew like negative 1% or negative 2%. But year-over-2-year was up 40%. And like people forget about like just how incredible the ascendancy of e-commerce has been. And as -- unfortunately, we're going to have like signed waves here, right? As we lap, you're going to see e-commerce normalize at much higher growth rates than what you saw in the fourth quarter of last year. So e-commerce is going to be one of these trends that will continue. We, though, fully believe that the initiatives we put on top of that, besides the math of eBay lapping and all that kind of thing, the initiatives we're putting on top of that will be the key part that drives our business going forward.

Got it. Last couple of minutes here, capital allocation. Look, we could spend another hour or 2 hours talking about recent acquisitions and strategic impact, like Honey, iZettle, Paidy, we mentioned earlier, and how those are contributing to long-term vision. And like I think that they all kind of fill their piece, as you said, to start to fill the wallet, add capability, et cetera. But how central to your long-term strategy are acquisitions? And how should we think about acquisitions contribution? Is there a basic algorithm that you're using? Like what percentage of free cash flow or what percentage of revenue you want to come from acquisitions, et cetera? Because when I look at it, and we mentioned earlier like there's a massive amount of new capital coming into the space, it's hard to know what to invest in when there's so much happening around you and acquisitions can be a good way to say, oh, this is something that's in the ascendancy that we should take advantage of or creates an opportunity. So what is that role for you? And how does that fit into your growth algorithm and capital allocation algorithm?

Yes. First of all, I'm not sure that acquisitions are the smartest way to learn about things. Like we have a venture fund.

Okay. That’s great.

We look at several hundred opportunities a quarter that we're invested in, I don't know, about 60-plus companies right now. And we have Board seats, we have observer rights. And because we get to see that, we get to integrate and do different things. The returns from that. We're not doing it for returns. We're doing for sensing mechanisms, our top quartile of that. But that's what we learn and we can do sensing types of things. We obviously have a very strong balance sheet, $16 billion, $18 billion cash like on our balance sheet. We did $5.5 billion of free cash flow last year. We're going to be somewhere close to $6 billion of free cash flow this year. We're a very profitable, very -- a growth-oriented company. As I mentioned, we believe we'll exit the year at 20% plus revenue, generating huge amounts of free cash flow. And we will be acquisitive for sure. But our capital allocation strategy remains very consistent with what we've laid out to investors over the course of the last couple of years. Our organic development is better than it's ever been before, right? We didn't buy a Buy Now, Pay Later company. We did it organically, and that is doing quite well, and I'm really happy that we did it that way. We've bought predominantly smaller acquisitions. Paidy, being several billion, Paidy though was right down the middle of the fairway for us. But what Paidy did is it got us into a market that we couldn't have gotten into before. Honey got us into shopping tool sets that we couldn't have done. And it is the engine for the PayPal app for all of our shopping. And iZettle, for instance, iZettle is growing at leaps and bounds this year coming out of COVID and really is how we will integrate online and offline into small businesses. It's got new terminals in U.K., Sweden, Germany, U.S. And so I'm pleased with the run rates of our acquisitions. And we'll just be very, very disciplined in our acquisitions. It's got to strategically make sense. It's got to financially make sense, and I'm like not into very big dilutive deals that are dilutive for years and years and years. It's just too high a beta for me. And the integration has to be something that doesn't complicate things further, but that we can fully integrate it into our platform. So we'll continue to be acquisitive, predominantly down the middle of the fairway. And we will continue to buy back stock, and we're buying back a lot of stock because we think our stock is inexpensive right now.

Well, Dan, that's a great place to leave it. Thank you very much for joining us. Thanks to everybody here in the audience for coming.

Thank you, everyone. Appreciate it.

And during your lunch. Thank you.