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

All right. We're going to get started here. So we're happy to welcome Doug Bland, who is the Head of the Consumer business at PayPal. He's been at PayPal for more than 5 years and came over as part of the acquisition of Swift Financial. Doug has more than 25 years of financial services experience, which is great.

So maybe we start with a little bit about of your background. Maybe some people aren't as familiar with you. So maybe you could just talk about your background and specifically your responsibilities today at PayPal.

Yes. Well, first of all, Sanjay, thank you so much for having PayPal here. It's such a great privilege and opportunity to speak to everyone. And we're really excited to talk about the momentum and the opportunity that we have, in particular on the consumer side of the business. As Sanjay mentioned, I'm responsible for the consumer side of PayPal. And maybe to step back, about a year ago, it was May of last year, we went through a bit of an operating model change where we created more structure around our two-sided network that we have. So we created a consumer business unit. We consolidated all of our consumer products together, which now I have end-to-end accountability around. And the purpose for that was to streamline our decision-making to create greater focus and to also think about customer journeys holistically and not just from a product lens. So we wanted to break down the silos of thinking about from a customer standpoint just from a product but across holistically all of our products. We also did something similar on the merchant side. So there's a corresponding team on the merchant side that is driving all of the relationships, all of the integration and products that we have. And obviously, the consumer and merchant teams were hand-in-hand with each other. And so that is my role since May of last year as we reorganized ourselves internally. Also, as you mentioned, I've been doing this for over 25 years. I've been in financial services now for a long time. Helping customers, helping consumers, helping small businesses is what I've made my career about. And I've worked in different sized companies. I've spent a decade at one of the largest financial institutions within the U.S. I worked at a super-regional bank for a while, but I've also done startups as well. So I was part of a VC-backed startup, which we ended up selling to PayPal just in September of 2017. And 5 years later, here I am. And I'll just say that it's been an incredible journey. I've seen so many economic cycles. I've seen so many ups and downs and different company cultures. And PayPal's culture, I would say the mission that we have around democratizing financial services is very inspiring. And when you look at just the opportunity we have, it's really exciting.

That's great. And maybe you could talk about some of those opportunities as you've stepped into your role and maybe also some of the areas that you think could use some improvement. Maybe just talk about that.

Yes, absolutely. Thinking about opportunities of PayPal in general, our brand has been around for 2 decades now. We separated from eBay just a little over 8 years ago, and everyone knows the growth story that has been created here and, frankly has created one of the world's largest open digital payments platform. We have over 400 million consumer accounts. We have over 35 million merchant relationships. And with that -- that's our two-sided network that we talk about is bringing our consumers and our merchants together and creating value for each other. And so when we step back and think about from a strategic standpoint as a company, we like to think about the spaces that we operate, and we think about commerce, payments and financial services. And if you can envision these spaces as concentric circles and those concentric circles converge and intersect with each other, commerce, payments and financial services, at the center of that, we think about our branded Checkout business. That is core to what we do. And everything that we're doing from a strategic standpoint is really how do we reinforce our branded Checkout business, how do we create value for our consumers to want to select PayPal at the point of checkout. And that is our hyper-focus. And when we think about what we're looking at, especially as you shift from a consumer standpoint, it's all about supporting that branded Checkout. And again, I mentioned we have a merchant team. We have a consumer team, and it's really us working together to drive that. From a consumer standpoint, to get very specific, it's around driving customer engagement. We are hyper-focused, and those are -- that's the improvements we can make. We have to drive more customer engagement. We're hyper-focused on that. How we're doing that is through optimizing existing products, hardening our process and capabilities that we have as well as enhancing value propositions. And there's so much growth that's left in front of us when we think about customer engagement, and that's really the focus of the consumer business.

Great. Maybe we start with the digital wallet. Obviously, you guys have the leadership position, but there's a number of different entrants to the field. What do you think you guys are doing effectively today to stay in front of that so that you would become -- that you stay relevant? And then how do you see the experience evolving over time as there's more competition?

Yes. Well, our digital wallet is so critical to our strategy, especially from a customer engagement. And I will talk about our mobile app quite a bit today and why it's so important that we get our customers to adopt the mobile app for PayPal. But maybe just stepping back a moment and thinking about competition, thinking about our position in this space. Foundationally, if you really think about the value proposition that we can offer to consumers, it's -- we're playing from a position of strength that has been built over 20 years, and we've created this global reputation around trust, around security that we provide to consumers. And that is so foundational to what we can offer. Especially as more and more consumers are moving to digital wallets, they have to be able to trust, they have to be able to feel secure when they're adding things, adding funding instruments into their digital wallet that their information is going to be safe. Or another example is if you're making a purchase in a cross-border trade transaction, you're buying from someone that you don't know. Can we provide the buyer protection to make sure you're getting what you're looking for? And these are things that PayPal has been building for over 20 years, and we continue to invest in that. We continue to reinforce that. So things like risk and identity is a real competitive advantage that we have. And I -- we believe that there is incremental opportunity to further enhance the value proposition around trust and security. So we have several hypotheses that we are building experiments around to further improve this value proposition around trust and security. So when we think about where we sit from a competitive position standpoint, we feel really good, and the data supports it. If you look at all of the surveys on a global basis around trust and digital payments, PayPal is always at the top of those lists. So we feel real good. From a mobile app standpoint, thinking about digital wallet, Sanjay, to your question, what we are looking to do is to make it easy for customers to send, receive, spend and manage money. So it's really as simple as that. We want to make it seamless. We want to make it delightful. But we want to do it in context of relevancy to those customers. So we're thinking about where are those customers in their life cycle, how do we position products in a way that really adds value to what they do? And we are uniquely positioned, just given the scale of our platform, is to bring that value to customers. And that's something that we are hyper-focused on delivering as we look into this year. And our operating model that we have shifted to is all about driving experimentation, rapid experimentation to test and learn and to drive that further value for customers, which then drives engagement, which then is going to create the financial outcomes that we are looking for. So maybe to end on the mobile app, let me give you a few stats of why it's so important to us. From a value standpoint, we see those who adopt the mobile app, they produce 30% more average revenue per user than those who do not adopt the mobile app. We see about half the amount of churn. So it's very sticky. It's very valuable for us. Over two -- the mobile app users are 2x more likely to use PayPal at checkout. And then we also see 60% more transactions per user who adopt the mobile app. So this is very important to us, and we're hyper-focused on driving that penetration. Today, over half of our users have adopted the mobile app. So it's in the mid-50% today, and we're going to grow that double-digit percentage-wise this year. We have some very specific things that we're doing to further drive that.

How do you get -- how do you do that? Like what are some of the initiatives?

A lot of it is -- a lot of hygiene things, a lot of optimizations that we're doing around product flows, around the onboarding experience. There's enhancements to value propositions that we're looking at. So for example, we're ramping package tracking. So one thing that we know that customers do when they open their mobile app as they go to their activity feed, and there -- that's the most common place that our customers go to is looking at, well, what transactions have I made? And so we are introducing the ability to track packages within the app as well. So it's just an example of where we want to move customers and away from even a monthly active user but weekly and even daily. What reasons can we give customers? What value can we provide consumers to actually want to open their app on a daily basis?

Great. You talked about initiatives to drive engagement. Over the past several years, I guess, you guys introduced crypto, savings account with Synchrony, Honey acquisition, Bill Pay. Maybe you can just talk about the relevant -- or the relative importance of each of these initiatives and where you've seen the most success.

Yes. We're constantly trying to drive relevancy for our customers. And again, going back to the purpose of the mobile app is to make it easy and relevant for consumers to send, receive, to spend, to manage money. When we think about things like spend, we acquired Honey a few years ago as an example and bringing in savings to customers as they go through the shopping journey, as they go through commerce. Last year, for example, through deals and coupons, we saved over $200 million for our consumers who were using the PayPal Honey browser extension. So that's a -- it's a good example of some of these capabilities that we're bringing to our customers. Savings account, you mentioned, is another example where we partnered with Synchrony Bank to bring forward a high-yield savings account. And what we are seeing, I would say, that both us and Synchrony are very pleased with the results that we're seeing in the adoption and the overall performance of that product. But we're seeing on the PayPal side, too, about a 20% lift in average revenue per user as they're making more transactions across the platform, as they're bringing in money. So it's really trying to find relevant value propositions that we can offer up and extend through the mobile app that matches the life cycle of each of our customers' journey. And obviously, over 400 million accounts, obviously, we're thinking about this from a segmented way as well.

So you recently rolled out a rewards program. I think that's a great idea. I'm just curious like how you feel it's done so far in terms of driving engagement and developing habits.

Yes. Well, last quarter, at the end of last year, we announced PayPal Rewards program. And we really view this as a key engagement driver for us. And we're testing many different variants of how this will work. But what PayPal Rewards is today is putting together some disparate rewards programs that we had previously. So we had something through our Honey acquisition called Honey Gold. We had a PayPal Gold, and it's really acquiring points based on activity and purchases, and we rebranded that into a single currency, which we call PayPal Rewards. And so we are looking at this really as a driver of engagement. And how can we do this in an ROI-positive way that is creating value for our customers as well as creating value, obviously, for us as well and drive that engagement? An interesting test, I will tell you about -- and we've got multiple tests running right now to understand how we scale this over time. We have some really fascinating hypotheses. And I think that there's a lot of optimism on what it can do overall. Our customers tell us that we have the right to offer PayPal Rewards. And one of the tests that we performed last quarter was what we call a stretch test. And it's basically going out to low-engaged customers, so selecting a specific cohort, doing test and control around it and seeing what the lift is. But it was saying, if you do three or more transaction, you get $5 or 5 points, which translates into a $5 cashback. And the lift that we saw out of that was very strong, and we see it sustaining as well, so positive ROI. And these are the type of testing that we're going to be doing throughout the first half of this year and really scaling into the ones that make sense. But we think that PayPal Rewards is really going to be a key driver of engagement.

It makes sense.

Yes.

Maybe we move to P2P. Obviously, that's an area you're looking to reinvigorate growth. What are the -- what are some of the things that you could do to really achieve that?

Yes. It's a great question. And P2P is a foundational capability to both our PayPal and Venmo brands. It is so important to customer -- driving customer engagement, so sending and receiving money. Obviously, the fact that, that we need customers to fill the trust and the security of sending and receiving money is critical. And the other importance about P2P, both on PayPal and Venmo, it is a very solid on-ramp to driving new customers onto these platforms. And so we are investing heavily on ensuring that we have seamless experience flows that we're investing in risk and identity to ensure that the security there is that we're driving the right amount of conversion from a P2P standpoint on both of these products -- I'm sorry, both of these platforms. An example recently that we rolled out on the Venmo platform for P2P is we changed the overall user experience on the paysheet. So as you are -- it's ramped to 100%. And hopefully, a lot of you are Venmo users, and you'll see a very different user experience from a paysheet standpoint. But this is -- we labeled this as part of our optimization efforts, the hygiene efforts of just driving these products. But that single improvement will drive an incremental few billion dollars in TPV this year. And so we just see these lists as we continue to improve experience flows, as we continue to think about the risk side, the identity side of our business and how do we make it seamless to send P2P. In addition, we have to enhance value proposition as well. And so there are several initiatives going on that tie our P2P businesses between PayPal and Venmo is how do you further integrate value propositions across different products. One of the -- an example of a test that we did in one of our European markets on the PayPal brand side is we introduced instant messaging within the P2P flow. So why is this important? And we actually saw a nice lift in conversion and retention within that market that we tested this, and we're looking to potentially roll this out more broadly. But if you're wanting to send a P2P transaction, and let's say you're buying some type of product from someone you don't know, the ability to do that secure instant messaging back and forth and what we see was a bigger lift in conversion. And we see both from our consumers as well as the merchants, the small businesses and side hustlers who are using P2P for transacting activity, they really like this feature. So it's not only looking at optimizations of flows, but also how do we improve and uniquely create value propositions that are greater than what exists today.

In the background, does PayPal and the Venmo platforms talk to each other?

Today, we are separate. But we've been going through a multiyear journey of creating convergence from a platform standpoint. We're still another year or so away from creating all of that capability to come together. But for example, identity this year is a big focus for us, and it is driving some significant results. But also when you think about the teams who are working on it, when we made the change of consolidating all of the consumer businesses together, that was a big synergistic benefit as well because as teams, we're now all sitting together and talking about the things that we're doing on the PayPal brand side, the things that we're doing on the Venmo brand side. And in the background from an engineering standpoint, same thing, how do we build it once and then leverage it across the two different brands.

Right. So maybe we dig in a little bit on Venmo. Could you just remind us what the key monetization drivers are and how you expect that to evolve over time?

Yes. We have very specific strategic focus around continuing to grow this successful platform that has been built up over the past few years. As a reminder, we have over 90 million 12-month actives on the Venmo platform as of the end of this 2022. We have approximately 58 million monthly active users. It's a highly engaged platform. Arguably, it's the largest P2P platform in the U.S. in terms of monthly active users. So very engaged, and we've been on this journey of driving incremental adoption of our products and -- which turns into this monetization play for us as well. And it's really based on what we're hearing from our customers. And what our customers tell us is they want to spend more of their financial lives on the Venmo platform. So what are the products and the capabilities that we can provide to those customers to do that? And over the past couple of years, you've seen us launch things like a Venmo credit card. With our Synchrony Bank partners, we launched Venmo debit cards, a direct deposit capability, and we're continuously refining those capabilities as well as thinking about how do we tie that back into P2P as well. And so we have a three-pronged approach of doing this. The first is enhancing our P2P business. P2P is that consumer flywheel that really drives all of the engagement for Venmo. So we have to continuously invest in that and improve that overall experience. The second piece of this strategy is everyday spend. So it's, again, trying to answer the request that our customers have around how can I do more on the Venmo platform? And these are the products that I'm talking about. But I'll give you another example of maybe how we are tying together everyday spend in P2P with each other from an integrated value proposition. And that's something that we are testing right now. It's a new enhancement that we're bringing to the Venmo platform. And it also increases our total addressable market within the U.S. for Venmo, and that's a teen account. So as a father of a 15-year-old who has constantly asked me, "Dad, when can I get a Venmo account?" I'm really excited to say very, very soon. In fact, we're testing this internally right now. But this is the capability of creating parental controls to be able to allow teens to learn how to P2P their friends, to give teens access to a debit card in a very responsible and controlled way. And it gives us an opportunity as well to help around just the financial responsibility of how you spend and manage money from a Venmo brand standpoint. From a total addressable market, when you look at 13- to 17-year-olds within the U.S., that's 25 million new potential customers for us. So it's significantly increasing what we can go after. We do know about 9 million of those teens today, their parents are already Venmo customers. So think about the opportunity to now go to those existing Venmo customers and talk about providing this teen capability. But that's -- it's an example of what we're doing when I talk about the three-pronged strategy of enhancing P2P and everyday spend. The last piece of that strategy is around driving commerce. And so driving commerce is really -- think about that in two parts. One is our Pay with Venmo capability. And the second one is Venmo business profiles. Pay with Venmo. Everybody should have heard about late last year we announced a partnership with Amazon to launch Pay with Venmo. And we're really pleased with the progress that we're seeing. Both teams are meeting on a daily and weekly basis, continuing to ramp the capabilities of that. And that's something we think, long term, is going to be such an important strategic partnership for us, and we feel really good. But there are also -- when you look across the 35 million merchants that we do business with on the PayPal side, they all want to get access to the Venmo customer base. Our customer base tends to skew younger. It tends to skew higher income as well. So it's very attractive for our customers. So that's the reason we launched Pay with Venmo because our customers also say we would like to do more on the Venmo platform. We would like to be able to pay merchants through this. What we do recognize is we have to further improve the consumer value proposition. We have to give our customers more reasons why to choose Venmo. And so when we step back and think about the strengths of our business between risk, identity, credit, there are some natural enhancements that we can make to further improve the value proposition that, Sanjay, hopefully, you'll invite us back in a few months, and we can talk more about that. But we're really excited about the future of Pay with Venmo. And then finally, Venmo business profiles. This is a capability we launched a couple of years ago. And we think that there's significant growth opportunity for Venmo business profiles. This is the ability for small businesses and side hustlers. And the side hustler segment is so important as we're seeing through all of the economies, in particular, in the U.S., so many consumers also now have a side hustle. But this allows small businesses and side hustlers to actually open a digital storefront within their consumer Venmo app. It just -- it separates the spending -- the sending and receiving of payments between your consumer and your business. So it is a separate ledger, but it's all integrated into a single app. It's a very elegant solution, and we think that there are quite a few opportunities for us to further enhance that by bundling additional payment methods, by creating like invoicing-type capabilities for these businesses within the app as well as creating discoverability through the activity feed of Venmo, especially on a local basis. Our customers are constantly talking to us about, we would like to know more about how I can use Venmo, especially in my local communities. And so Venmo business profiles is not just about online shopping but also in-store. So it's truly an omnichannel type play for us. So just to summarize, enhance P2P, everyday spend and driving commerce is the focus that we're doing to really drive the next level of growth for our company.

That's great. That was very thorough. Obviously, the Amazon partnership is an exciting one. Could you just talk about the rollout and what some of the goalposts are?

Yes. It's -- I think that the rollout went very good in terms of late -- it was late October, early November when we first started ramping the product. And as we got into the full breadth of the holiday season around Thanksgiving time frame, we got closer to 100%. And we are being very deliberate around how we are positioning this. We're seeing strong demand about customers wanting to link their account. We're working through some of the authorization strategies that we're putting in place and hardening the process between that. But I think that the success that we saw through the first 2 months through the end of 2022, Amazon and PayPal met the objectives that we both laid out in terms of what we were trying to achieve in the number of linked accounts, the number of activity that we were looking to pull through. And I think with the enhancements that I'm talking about in some of the consumer value propositions that we'll be bringing later in 2023 is just going to further drive some of the volume that we see. But we have an incredibly robust road map with the Amazon team and further improvements that we're going to be making in capabilities.

Right. I want to shift gears, talk about Buy Now, Pay Later. Obviously, that's been growing quite nicely, and you're seeing a little bit of a dislocation in the market relative to your competitors. So maybe you could just talk about how Buy Now, Pay Later has done relative to your expectations, how you see the growth trajectory evolving over the course of the next couple of years, given what's happening in the environment?

Yes. Great question. It's something that we are extremely proud of in terms of the rollout of our Buy Now, Pay Later products. And we did this just 2.5 years ago. So you could say that we were a late entrant to the game. Several of the major players had more than a decade head-start on us. But we're very pleased with how we are serving our customer needs, how we're serving merchant needs with this product together and the results that we are -- what we are seeing. In 2.5 years, we've had over 30 million unique consumers use Buy Now, Pay Later. We are in seven different markets around the world. We also are seeing of those 30 million users, we've produced over 200 million loans. So they've used it 200 million times. So it's created a quiet scale. We also -- most of these users are existing clients, existing customers of ours as well. And so we have a rich set of proprietary data that we can use to do this in a very responsible way from a lending perspective. And we've always focused on that. In fact, if you back up, PayPal has been in partnerships around lending since 2004. So even though we're a new entrant 2.5 years into the Buy Now, Pay Later space, we were doing offering lending services through our platform since 2004. In 2008, we acquired Bill Me Later, and we actually have organic risk and underwriting capabilities, but we also partner appropriately with different banks around the world where it makes sense as well as being very focused on regulatory requirements on this product. The other thing that we're really proud of is those 200 million loans that we've issued has come across 2 million different merchants. So -- and of those 2 million merchants, over 300,000 of those actually do upstream presentment of Buy Now, Pay Later for PayPal. And that's really important. It's a win-win for our customers. It's a win for, obviously, our merchants because what we see is our merchants actually purchase about 30% more on PayPal when they adopt Buy Now, Pay Later. And when we look at the performance of our credit book, we feel very good about that. And again, it's based on the proprietary data and the prudence that we are taking and making these yes/no decisions. Also, the model that we've created on the short-term loans that we offer is interest-free for our customers, and we don't charge late fees. We felt that, that was really important in terms of how we structure these products. And how we are benefiting as a company is because of some of the figures that I just quoted. This drives incremental halo for our branded Checkout business. It's becoming such an important part of reinforcing, going back to what is the core of our strategy? The core of our strategy is reinforcing that branded Checkout business and Buy Now, Pay Later is doing that. So when you think about the product suite that we've developed over the past 2.5 years, we have short-term Buy Now, Pay Later product. So within the U.S. market, if you want to make a purchase, you can divide it into four payments. It's a down payment, and then three payments every 2 weeks is how it works. And then late last year, we also created a long-term installment product as well. So if someone is wanting to purchase, let's say, a treadmill that may cost $1,500, instead of paying for it over a 6-week period, they want to be budgeted out on very fixed payments over a 12- or 24-month basis, then we'll allow customers to do that. So from a merchant standpoint, we're covering the spectrum of goods that customers can buy from them. And from a customer perspective, they really value the budgeting aspect of this capability. We are also just -- maybe if I could add just an enhancement that we're making to Buy Now, Pay Later is thinking about taking this in-store as well. You may remember, we announced late last year the agreement with Apple to be able to bring our PayPal-branded and Venmo-branded credit cards and debit cards into Apple Pay. And so we are working through that ability to provision those cards and be able to go in store and use your PayPal-branded, Venmo-branded card products in store. But we are also looking at creating a digital token through Apple Pay for a onetime single use for Buy Now, Pay Later transaction. So Sanjay, if you wanted to go in store and use a Pay in 4 capability, you would just go through a simple process or perhaps we would even preapprove you for an amount that you can use and then you go in store and use it through Apple Pay. So we're really excited about expanding the ability to offer this value to our customers, both online as well as in store.

So I'm going to see if the audience has any questions. There's a hand raised over here. We've got a couple of minutes left, 1 minute.

Just quick question I have and really the only barrier I see PayPal still hasn't overcome yet, how do you adapt to the fact that commerce -- for e-commerce at least, is moving more away from traditional desktop and more towards a mobile environment? Because if you're shopping on like an iPhone, for example, when you're going through the checkout flow, Apple Pay is always the default method of payment that presents itself first. So as more and more consumers stop using their computer and more use their phone to shop, how is PayPal addressing that?

Yes. I would go back to a lot of the comments that I made previously around -- one of our primary focuses from a strategic standpoint is driving mobile app adoption and go back to the trust and security value proposition that we have such an advantage around of this 20 years of experience. And looking at the penetration that we've already made into our user base as well as further driving that as going forward. We think that we, frankly, are well positioned as we see consumers move from desktop into mobile app, especially from a commerce standpoint. We also know that, as I mentioned, on an in-store capability, by creating this agreement with Apple, we will also have PayPal value propositions as part of this solution from an in-store capability, but there are numerous things that we're doing around creating a seamless experience from a risk and identity standpoint, even shopping online and how you can use your mobile app. So I think it's a great question and one that we are hyper-focused on, ensuring that we have the competitive strength to continue to grow in this space. And we are seeing some good things happen.

All right. I'm sorry. We're going to have to end it right there. Thank you so much, Doug. Appreciate it.

Thank you, Sanjay.