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

So thanks, everybody, for joining us today. Again, Dan Perlin. I run the fintech practice here at RBC, and we are delighted to have PayPal joining us today. And really a unique visitor as it turns out. Doug Bland is the Senior Vice President and Head of Consumer. Now Doug, you've worn lots of hats over the years at PayPal, and as I was reading through what kind of rolls up under this, and I'm going to let you explain this, not me, but it's a lot.

It is.

It's almost the entirety of what needs to kind of ultimately turn around. So there's a lot of burden, obviously, on your shoulders. But what I thought we would start with is maybe give some perspective about your background here so people know who they're talking with or listening to. And then secondly, if you could just put some context around the consumer aspect of the business and what you're really responsible for, which is very broad.

No. Thank you, Dan, for the opportunity to be here. We really appreciate it, and good afternoon, everyone. So I've been in financial services for a little over 25 years doing everything from running start-ups. I came to PayPal through an exit of a small commercial lending company, Swift Financial, to also spending almost a decade at one of the major financial institutions here in the U.S. So I've seen the -- sort of seen the gamut of culture, experience. Lived through the financial crisis, and most of this -- most of the time period, I've had the privilege to run P&Ls as well. So as I came to PayPal as part of an acquisition in September of 2017, I was asked to run the merchant lending business. Very quickly after, they asked me to take over the global credit side of PayPal, which is both the consumer as well as the merchant. Fairly quickly after that, we did close into -- when the pandemic started, they also asked me to run some of the financial services, products, debit cards. We recently launched a savings account, those type of products, in addition to shopping, our shopping business, which included the asset that we acquired, Honey. And so have continued since the 4.5 years of joining of taking on incremental responsibility, I think the reason for that is just given my background of a disciplined, operational-driven management structure, very heavily focused from a P&L standpoint. But looking at the customer always as the center of our focus and how we drive engagement. As you guys probably heard from Dan Schulman at our last quarterly earnings, we're hyper focused on driving engagement on a go-forward basis. But more recently, Dan, to your point, the role has expanded beyond that. And we've gone through a bit of a reorganization within the company to really line ourselves up against customer segments. So if you think about PayPal as a 2-sided network, we have the consumer side, which is what I have responsibility over as well as the merchant side. And within the merchant side, we have large enterprise, middle market and SMB as our customer base. And so we've done this to really try to drive efficiency and effectiveness. We feel like lining ourselves up and creating an end-to-end holistic view of the customer. And running a business from that aspect is something very different than what -- the way we've been organized in the past. And what we believe that's going to do is it's going to streamline decisions. We're going to be able to make quicker decisions, drive product velocity out the door and really allow us to focus on execution in a significant way, and part of that is prioritization. One of the things about PayPal, you mentioned, have a burden on my shoulder with a lot of things to do, I see it as opportunity. But that's also -- but it's interesting that you said that because the thing about PayPal is when you have 2 incredible brands like PayPal and Venmo, and you have this incredible scale of over 400 million accounts, 35 million merchants, there are so many things that you can do, especially because of the trust that they have, but we really have to focus. We really have to drive prioritization, and that's really what I'm going to do in this new role.

Well, you kind of almost dovetailed into my next question because he, your fearless leader, Dan, has been talking about this point, which is to say, we need to do fewer things better. And that's kind of a very broad statement. But what does that mean to your organization that you're running, right? What does that mean to you? What are some of the things you're actually going to have to do in order to have that reprioritization occur and be successful? Like what do we expect out of that?

Look, if you step back and think about where do we operate as an organization, we operate at the intersection of commerce, payments and financial services. And if you can envision these spaces as sort of concentric circles that are intersecting, at the center of that is our checkout business. And so we have to really focus on reinforcing our checkout business. We have to ensure that we are driving beautiful experiences. We're streamlining that process, making it easy, making it very fast. There's a lot of work that's happening on the merchant side that we're doing. And on the consumer side, we have to ensure that we're providing relevant value proposition to our consumers holistically. On a product level, I think we've done a pretty good job of that. We have some products like buy now, pay later that have had incredible success. But we have to thread this all the way through all of our products and enhance our consumer value proposition beyond just being a safe, secure and convenient way to pay but also how do we make it rewarding for our customers to pay with us. And we have these incredible assets, things like the acquisition of the Honey business that we did to drive savings and offers where we can provide discounts to our customers, especially in today's times with inflation at 40-year highs. I think we have a really unique opportunity here.

Yes. Speaking of Honey, I was -- the price engagement and discovery and all of that stuff, you brought up a good point, and I was -- I wasn't really going to go down this path. But in an environment where you have such rapid inflation, are there going to -- are you able to pivot the product? Are you nimble enough to pivot the product to actually take advantage of what may prove to be a generational opportunity for PayPal?

Yes. I think it's a unique opportunity for us to stand up, and we've spent a lot of time talking about this and looking at how do we position our products right now to truly help the consumer in the market. I think this is almost like a -- whether you say the pandemic is over or not, this is like as we were going into the pandemic. This is a huge moment in time that a lot of our customer base, a lot of the world have never seen inflation rates, runaway-type inflation at 40-year highs, and that's probably going to persist for a while. And are there ways that we can work across this vast merchant network, 35 million merchants that we have, and put offers in front of consumers, in front of the 400 million customer accounts that we have in a way that really drives value because it's not just our consumers, our customers on that side that need help, but it's also going to be the merchant side. And so most of it, to get to your question, is what we do is focus more on the discretionary side, but there's absolutely nondiscretionary opportunities for us to help.

Yes. Now in the digital wallet space, I mean it's a pretty competitive space. right? And so -- and PayPal has been there for a very long time and you have some really fantastic assets, and you also have a lot of scale. But the question really is what do you think you have to do better in order to be more successful? Engagement is obviously the answer, but like there's a lot of things that feed into being able to do that. And I just wonder, given all of the new competition that's out there, how quickly you can be successful.

Yes. We have a very focused but robust road map around what we're doing with our PayPal digital wallet as well as Venmo. P2P is certainly core. It's what starts the flywheel on the Venmo side. It's very critical from a PayPal perspective as well. But we have to continue to refine that. We have to continue to make it easy and simplify how people are moving money. We have to make it fast and seamless, create these beautiful experiences. Things like improving search capabilities is a good example. It may not make all the headline news in terms of being the sexy innovation, but these are the types of things that we're rolling up our sleeves and really getting after and listening to our customers, what do they need and what do they want. But digital wallet, we have a lot of exciting innovation that is happening, constant optimization that's happening, both on the PayPal side and the Venmo side, and it's important to us. We see consumers who adopt our digital wallet have 2x the average revenue per account versus those that do checkout only. So from a monetization standpoint, this is very important to us. And certainly, from an engagement, we also see 25% less attrition when consumers adopt the digital wallet. So it is -- as Dan Schulman talks about things that we have to really focus on and do less but do it better, it's things like the digital wallet that he's talking about.

What were some of the things maybe you were spending time on that you realized we shouldn't have been? Like that was a lot of false positives coming back to us, and we've now learned from that, and so we're going to move on.

Yes. I'll give you an example that we spent a lot of time as we went into the pandemic thinking about QR as a form factor. And while we still believe that, over a long period of time, this is something that we need to continue to invest in but not at the same pace that maybe as we were going into the pandemic and look at a shift of allocation of resource and energy back to sort of the core of what we do, but omnichannel is important to us. And while the core of what we do is that PayPal button, it's the online checkout, we also want to make sure we're serving our customer base in a way that -- everywhere and any way that they want to pay, we want to do that. Cards is a good example. So instead of QR, we're doubling down on our cards activity. We recently launched a new credit card through our Synchrony Bank partnership, which is part of our asset-light strategy that we do, but it's a very compelling value proposition with 3% unlimited cash back when you shop using PayPal within the digital wallet and 2% for everything else. That's a very compelling value proposition that we offer. And we're also looking at how do we further revitalize and enhance our debit card. So you're going to see some things over the next few weeks and months. And I'm probably not supposed to say that because it hasn't been announced, but that you'll be seeing that is going to be a really good experience.

So guys, make sure you got that down.

That's right.

Of all the things. And they pointed out, you know you better take that note. So you talked about asset light. So it harkens back to a long time ago when you kind of made a big pivot and you sold the portfolio to Synchrony. And here we sit today with a product like buy now, pay later, which is enormously successful. And yes, there's a lot of talk about credit losses and what all those things mean. But what I want to ask you, as the person who that falls under, is do you envision a world where you would need to maybe have a bigger partnership with someone to push off the balance sheet risk like Synchrony or some others?

Yes, absolutely. We're constantly exploring what -- how we're allocating capital within our company. The reality is we're not a bank, we're not a lender. We're a payments technology company. However, this is a very important product that we serve up to our customers, and it drives the flywheel. So we launched Buy Now, Pay Later a little over 18 months ago. So we relate to the game with some of the competition. If you want to look at it that way, in some respects, when we bought Bill Me Later back in 2008, people would say that was the original buy now, pay later value proposition. So we've been at it for a long time. And frankly, even before 2008, PayPal has been offering credit to its customers since 2004. So we have a ton of experience of doing this. We do both on balance sheet as well as off balance sheet type strategies. And we have significant subject matter expertise and understanding from a credit risk standpoint. But in particular to Buy Now, Pay Later, which is really interesting, and we see all of the articles that are coming out around credit delinquencies and compression of margins with some of the players, we're a bit unique. We're not immune to a downturn. Everybody in the credit -- there's no credit business out there that's immune to a downturn. However, we feel really good about our position. And the reason is we've done over 100 million loans in that roughly 18-month period with Buy Now, Pay Later. So that's at scale. And we've done it across 7 different markets that we operate, but all of those markets are markets that we are deep in. We have dense customer data, proprietary information, and that's how we make our decisions. So almost the majority, the vast majority of all of our Buy Now, Pay Later is with existing PayPal customers. And that is a very different position than if you were a stand-alone buy now, pay later company, trying to learn your way on a one-off type transaction basis. And we're really pleased with performance and the results, and we think that there is additional growth, but we're not going to grow at all costs. We're going to be responsible. Buy Now, Pay Later is a lending product. Make no mistake. We said that from day 1 even when it wasn't in vogue to say that. But it is a credit product, and we take it responsibly, and we want to make sure that we treat it with care.

Yes. Understood. Let's spend a moment on Venmo, right? Clearly, a fantastic brand that you've been able to continue to grow rapidly. I guess a couple of things that come to mind. One is any kind of recent trend data? Or just what are you seeing? Have there been certain levels of engagement that have changed? And are people utilizing the product differently in the current environment that we're in? Again, going back to inflation, higher rates, bifurcation of consumers, affluent versus lower income? Any insight around that would be appreciated.

Yes. It's an incredible brand. We -- as you probably know, we have over 85 million customers using our Venmo brand. And we certainly saw an acceleration through the pandemic, and we've seen somewhat of a dropoff in that. But more recently, we've seen a bit of a rebound as we're lapping some of the numbers as we would have expected. And again, I think there's so much opportunity from product enhancement, focusing on some of the core fundamentals of that product and how we can monetize it. Things like Pay with Venmo. We're on pace in the second half of this year to launch our relationship with Amazon, which is very exciting. But even some of the other large enterprise merchants that is doing Pay with Venmo, we're actually seeing trends that are better than our expectations with that, doing some things around business profiles with some of those smaller businesses, also highly, highly attractive to that casual seller customer base. Venmo is, I think, such a -- there's just so much value there that we need to unlock. There's just an incredible -- and I'm putting my P&L hat on and less than my customer hat, but just incredible value that I think we can still -- we're still early, early innings in terms of what we can do from a monetization standpoint with that brand.

Yes. Speaking of that, how much of some of the new innovations that you're trying to bring into PayPal's digital wallet ultimately is going to find its way into Venmo's wallet?

It has to. I mean we have to create synergies that make sense. Obviously, we serve different segments of customers, but there is overlap. There's about a 50% overlap between the 2 customer bases. But the way that we message, the way that we position is very unique with that community feel of the Venmo brand. But in terms of the backroom stuff, the infrastructure, the synergies, whether it's through debit card or things that we're doing of improving, enhancing search capabilities from P2P can apply both to PayPal as well as Venmo. And we're doing that constantly, trying to ensure that we create the efficiencies between the 2 brands.

Yes. Within Venmo, this is true of PayPal as well, are you finding that the behavioral mechanics of the individual who was historically using Instant Deposit is gradually moving more towards higher frequency use around debit and, again, maybe Pay with Venmo? Like are you starting to see those statistics play on?

We absolutely are. I mean if you look at average revenue per account and some of the other engagement metrics that we look at, it's a very, very nice trajectory that we're seeing and that we have very specific tactical motions in place to drive that type of behavior as well. And this is -- it's all aligned with what our customers are asking us to deliver to them. So it's really an exciting time for the Venmo brand.

Yes. What do you think have been some of the gating factors that have, I guess, not allowed you to maybe fulfill what you think that brand ultimately will be able to achieve?

I think, for so many years, if you look back on the history of Venmo, we've operated just as a pure P2P play. And we really haven't focused. It's all about this virality that created this enormous 85 million-plus customer base that is highly loyal to it. And so we've been incredibly sensitive to ensure that we don't misplace the trust of the brand that the customers have. And I would say that we've been very cautious in ensuring, when we do go into different monetizations, whether it's with debit card, Pay with Venmo, that we're doing in our way that resonates with our customers. And frankly, we have permission to do so because the last thing we want to see is customers start attriting from the platform, and we're just not seeing that.

Yes. How do you -- and through this whole redevelopment, how do you think about the financial services aspect of the business more broadly? You mentioned early on kind of savings. You've also got bill payment. So maybe tease that out a little bit in terms of the engagement strategy.

Yes. I see financial services as an adjacency to drive everyday usage of our digital wallet. We want people to come in and look at their digital wallet every day, which habituates into doing things like buying with PayPal, hitting the checkout button with online shopping or using our debit card or using one of our 3/2 credit card. But things like savings, which we recently launched with Synchrony Bank, is a good example where I think we have partnership-type opportunities where they're more subject matter expertise, but we can still control the user experience in a way. So we do it as sort of a fraction of a cost in terms of bringing that product and service as a platform to our customers. And it's a good example where that particular product is -- were high-yield savings at 12x the national average rate. Granted, it's 85 basis points, but still, it's 12x. We'll take it, right? And same thing with crypto, we partner with Paxos in delivering crypto. And absent what's happening in the markets right now, it has been a successful run for us in that product. And I think there's further innovations that we need to look at with other financial services products, but we're going to do it in a very selective way. We're going to talk to our customers. We're going to listen to the needs that they have, understand what do we have permission to actually serve up to them and do prioritization that way. And ultimately, look, we want to drive engagement. It's all about engagement. It's all about driving that average revenue per user.

Well, you bring up a really fantastic point, which is just what are the merchants, who are your partners, asking for maybe in the current context? And what do you think the consumers need? By way of their transacting, they're probably telling you what they want you to do in a lot of ways.

Yes. Look, I think it's a lot of what we're doing today, especially in light of what's happening, how can we help people save money. From a consumer standpoint, they want the ease, they want the convenience. Certainly, they have the safety, security of PayPal. It's what we've stood for, for 2 decades now. And it's a -- we have a level of trust with our customers, which has allowed this incredible scale over time, but they want more. They want us, how can we leverage this broad merchant network of 35 million merchants and drive more savings. And on the merchant side, it's how do they get access to these 400 million customer accounts. And can we drive -- Buy Now, Pay Later is a good example, can we drive higher AOV with each purchase and higher conversion rates, and we've demonstrated that time and time again. And I think these are the things, just fundamentally, we're going to continue to refine and focus on and make the lives of our customers, both the consumer and the merchant, better.

Yes. Now when you're making the pitch to say, look, this is my strategy to drive engagement, what are the investments that you feel like you have to make now versus investments that you can kind of make later?

Yes. Yes. Thinking about the things that we're hyper-focused on is checkout. We have to continue to refine and drive checkout, I think, an omnichannel approach, like giving our consumers the ability to pay anywhere and however they want to pay, whether it's online or off-line is very important. And we'll do that primarily through card-type strategies. And the reward side of it, even making sure people understand, if you want to use PayPal to purchase things online and use your Chase Sapphire card, you're going to get your reward points for that as well, and just continuously educating our customers of how rewarding it is to pay, but also the safety and security. And so it's really focusing back on the core of what we do.

Yes. In the last 30 seconds, as it turns out, that we have here, the company is doing a pretty meaningful pivot, and this is all -- revolves around engagement. And if you get it right, it's going to be a super successful story. As you think about this audience and myself as an outsider looking in, and knowing what you know about some of the products and initiatives and areas that you can kind of pull to drive that, what should we be mindful of as we look to proof points to say, they are being successful, at least within your product portfolio?

Yes. Yes. Look, I think you can look at our individual products, Buy Now, Pay Later, as an example, where we've scaled over 100 million users. We have a really solid approach in terms of how we were able to do that. We need to take that same approach to other products and weave together a more cohesive consumer value proposition. I think it's important to always -- and this is one thing, Dan, we always ask ourselves is why PayPal. Why PayPal? We do it at the product level and then we step back and say, just holistically from a consumer standpoint. So it's going to be things like engagement. It's going to be how many users do we have in the platform? How are we monetizing those users? What kind of attrition? And granted, I mean, we're going through some incredible times of lapping what happened through the pandemic, but we're still growing. We still have significant headroom in terms of new gross, new active accounts that we have to acquire and then engaging all of these customers in a more meaningful way. Like it's -- I've been doing this for a long time, and I've never been more excited about -- and I've had an incredible career, I've enjoyed every facet of it. But at PayPal, with the brands we have with this scale that we have as well, there's such an opportunity here to unlock value, and that's exactly what we'll do.

Awesome. All right. Well, Doug, thank you so much for your time. Good luck to you.

Thank you. Appreciate it.

Looking forward to it. Thank you very much.

Appreciate it. It was good.