PayPal is building a ‘super app.’ Should banks be worried?

For years, bankers agonized over the day when Big Tech firms would finally set their sights squarely on financial services. Mainly they worried about four companies: Amazon, Apple, Facebook and Google.

Meanwhile, a fifth tech powerhouse, somewhat smaller but growing fast, was adding products traditionally offered by retail banks. This company built a huge customer base, but it didn’t position itself as a head-on competitor to the nation’s largest banks. Instead, it sought to partner with insured depositories. By early this year, it had a bigger market capitalization than all but two American banks.

The company in question, PayPal Holdings, recently sketched out strategic plans that summon the industry’s long-held fears about the tech giants. At the firm’s investor day in February, PayPal executives promised to build a mobile app that will allow consumers to shop at millions of merchants, while also accomplishing most of what they currently do at banks. Already, the app’s users can transact with debit cards, borrow to make purchases, pay their bills, get paid by their employers, cash checks, make investments, send money to relatives overseas and more.

PayPal wants to weave consumer financial services into an ecosystem that draws strength from its existing relationships with merchants. Consumers will come to PayPal to make purchases, either in physical stores or, more likely, online; they’ll receive personalized offers and rewards based on their purchase history, which will encourage them to return more frequently; and eventually, they may treat their PayPal digital wallet like it’s their primary bank account.

“Basic financial services are just going to be a part of any platform that has hundreds of millions of consumers, because it’s all tied in to the everyday transactions that we’re going to see,” PayPal President and CEO Dan Schulman said in a Feb. 11 presentation. “Our digital wallet can bring together previously disparate capabilities that range from payments, to shopping, to financial services, and even new forms of digital identification into one super app.”

San Jose, Calif.-based PayPal is not the only U.S. company that is positioned to pursue this vision. Apple, Google and Walmart could all go down a similar path, which was blazed in China by Alipay and WeChat.

But among the companies eyeing the massive American market, PayPal is the first to articulate publicly a comprehensive vision of its banking plans. PayPal’s roadmap — especially when considered in the context of its recent growth — shows that Big Tech firms are capable of disrupting retail banking even without banking charters.

Banks are taking notice. In January, JPMorgan Chase Chairman CEO Jamie Dimon declared that banks “absolutely should be scared shitless” about competition from Big Tech and payments firms. PayPal was one of the firms he cited.

Daniela Hawkins, a consultant at Capco, said that banks tend to move more slowly than their new competitors from the tech industry, and they have good reason to be wary of PayPal in particular.

“I think PayPal is the threat,” she said. “They’re in the catbird’s seat.”

‘The pandemic has accelerated everything’

After PayPal split off from eBay and became an independent company in 2015, it faced a choice about how to pursue growth. It could either compete with Visa and Mastercard, and by extension the banks that issued cards in conjunction with the two big payment networks, or it could partner with them.

PayPal chose the collaborative path, agreeing in 2016 not to steer shoppers away from paying with cards bearing the Visa and Mastercard logos. Those deals, which included certain economic incentives for PayPal, aligned the company’s interests more closely with those of large incumbent firms. As digital payments soared in popularity, a bigger pie meant a bigger piece for everyone.

“It’s pretty clear that the outcome was one that reflected a desire to cooperate rather than fight,” said Mark Palmer, an analyst at BTIG. “It was a neat trick.”

In more recent years, PayPal has extended its collaborative strategy through partnerships with banks. “We firmly believe that digitization is a team sport,” Jim Magats, senior vice president for omni payments, said at the company’s recent investor day.

Large credit card issuers — including JPMorgan Chase, Citigroup, Discover Financial Services, Capital One, U.S. Bancorp. and American Express — now allow their customers to redeem their card rewards by making purchases at millions of retailers that accept PayPal. Thousands of smaller financial institutions have similar arrangements with PayPal through a deal the payments giant struck with the bank tech provider FIS.

New York-based Amex has taken its partnership with PayPal further. In a limited-time offer, users of its Platinum and Centurion cards can get up to $30 in statement credit each month for eligible purchases made with PayPal.

One benefit of these deals for card-issuing banks is that they incentivize consumers to add a bank-issued credit card as a payment option inside the PayPal digital wallet, which has been enjoying strong volume growth.

Banks also reap another benefit when their card transactions get routed over PayPal’s rails, according to executives at the Silicon Valley payments firm. They contend that the company’s prowess in data and number-crunching enables more transactions to get approved, rather than being erroneously flagged as potentially fraudulent.

PayPal added 72.7 million net new active accounts in 2020. Those numbers include accounts at Venmo, the popular payments app Paypal acquired in 2013.

PayPal added 72.7 million net new active accounts in 2020. Those numbers include accounts at Venmo, the popular payments app Paypal acquired in 2013.


PayPal’s collaborative approach combined with the rapid growth of ecommerce have helped boost the ubiquity of its digital wallet.Globally, the number of active PayPal accounts grew from 179 million at the end of 2015 to 305 million four years later.

Then came the pandemic, which further turbo-charged PayPal’s growth. Last year, PayPal added 72.7 million net new active accounts — a nearly 25{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} increase in just 12 months. Those numbers include accounts at PayPal-owned brands such as Venmo, which Paypal acquired in 2013, and Honey, which finds coupon codes for online shoppers and was bought by PayPal in 2019.

“The pandemic has accelerated everything,” Jonathan Auerbach, the company’s chief strategy, growth and data officer, said at PayPal’s investor day. “In particular, it’s accelerated the migration of commerce and financial services to digital. And PayPal has benefited from these tailwinds.”

The tremendous growth in ecommerce last year appears to have boosted the value of PayPal’s consumer brand. In 2019, a survey of U.S. consumers found that only 5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of respondents would trust PayPal most to handle their finances. Just one year later, 19{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of respondents said the same, according to the survey, which was conducted by the nonprofit research firm BAI.

Over the same one-year period, the percentage of consumers who said they would trust their primary bank the most fell from 83{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} to 52{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. “There was just a mass shift to online transactions,” said Karl Dahlgren, managing director at BAI. “And I think people just started getting used to using PayPal.”

From installment loans to cryptocurrencies

On a cool February morning in northern California, CEO Dan Schulman stood inside a glassy building that was staged to double as a TV studio. Dressed comfortably in jeans and a layer of collarless shirts, Schulman looked the part of a tech mogul. The 63-year-old Schulman, who came to PayPal from Amex in 2014, was presenting at the company’s first-ever virtual investor day. “I wish we could all be in person, but obviously that’s not doable,” he began.

Schulman’s remarks focused on the future of commerce. He argued that online and in-person shopping channels are in the midst of converging, amid the rising popularity of QR codes and in-store pickup. Retailers are looking for ways to market their wares to shoppers who are no longer browsing in their physical stores. But consumers are buried in promotional emails from merchants, and overwhelmed by the number of passwords they need to access their many online accounts.

CEO Dan Schulman envisions a day when "hundreds and hundreds of millions of consumers" will use PayPal's digital wallet to shop for goods and services and build "their own personalized wish lists.”

CEO Dan Schulman envisions a day when “hundreds and hundreds of millions of consumers” will use PayPal’s digital wallet to shop for goods and services and build “their own personalized wish lists.”


“And this is where we’re so excited about the shopping component of our digital wallet,” Schulman said, “where we will have hundreds and hundreds of millions of consumers building up their own personalized wish lists.”

A diverse array of services — including shopping, payments and banking — gives PayPal access to more customer data that it can use throughout its entire business. “One feeds into another,” Schulman explained.

Banking services figure to make PayPal’s platform more engaging for both merchants and consumers. The company offers a suite of financial products for small businesses, including loans and a debit card, that make it possible for merchants to bypass banks altogether. It also has a growing array of consumer banking products, which figure to increase the amount of time that PayPal users spend on the company’s app, in turn yielding more revenue for both PayPal and its retail partners.
One of the firm’s newest products is the Venmo credit card, which encourages consumers to interact with Venmo more frequently. In fact, the only way to apply for the card is by downloading the most recent version of the peer-to-peer payments app.

PayPal also offers consumer loans at the point of sale, debit cards, direct deposit capabilities, and the ability to buy, sell, hold and pay with cryptocurrencies. High-yield savings accounts, enhanced bill payment services and stock trading are all under discussion.

Last year, PayPal launched Pay in 4, its version of the Buy Now Pay Later loan that has soared in popularity among online shoppers, and is seen by some industry observers as presenting a competitive challenge to the credit card industry. The eight-week, four-payment loans are available at merchants that accept PayPal, allowing customers to finance purchases of up to $600. Borrowers don’t pay any interest, but those who miss payments may owe late fees.

The Buy Now, Pay Later product shows PayPal as a fast follower that can use its existing scale to quickly become a big player in a new category. In the first three months after the product’s launch, PayPal reported total volume of $750 million in the U.S. and three European countries.

Like its competitors, PayPal says that shoppers spend more money at merchants when they use its installment loan product. But PayPal appears to have a pricing advantage over smaller competitors, bragging that merchants do not pay any more money on Pay in 4 purchases beyond what they would normally pay on a PayPal transaction.

“There’s no incremental costs,” Chief Financial Officer John Rainey said at the company’s investor day.

In a recent presentation, PayPal suggested that it wants its digital wallet to become the central touchpoint in its customers’ financial lives. The company’s new financial products are clearly making that goal more realistic. Half of all PayPal users who bought and held cryptocurrency are logging in to the PayPal app on a daily basis, according to Rainey. “This is precisely the type of engagement that we want to see as we add these additional financial services to our wallet,” he said.

‘There’s going to be tension’

Though several fintechs are seeking to become traditional banks in the United States, PayPal seems unlikely to follow suit. The company’s lofty valuation is due in part to its model as a tech company rather than a lender. In 2018, PayPal sold a $6.8 billion consumer credit portfolio to Synchrony Financial in an effort to maintain its asset-light strategy. The company has recently suggested that it could take a similar path as its portfolio of Buy Now Pay Later loans grows.

PayPal’s collaborative approach has served it well over the last half-decade, and the company continues to characterize banks as partners, rather than competitors. At the firm’s investor day in February, Schulman said that a lot of the company’s expansion into financial services will be done through partnerships.

He also suggested that PayPal’s interests are well aligned with those of incumbent banks. “We’re going to generate a ton of volume,” he said, “and a ton of that volume is going to accrue to our partners as well.”

For many financial institutions, PayPal is their largest digital distribution partner, according to PayPal spokeswoman Taylor Watson. “I guess we would fundamentally disagree with the thesis that banks are seeing us as a competitive threat,” she said. A tech industry official who spoke on condition of anonymity said that PayPal consistently seeks not to antagonize banks in its lobbying activities. “Don’t rip their face off” is typically the company’s attitude, according to this source.

I think PayPal is the threat [to banks]. They’re in the catbird’s seat.

Daniela Hawkins, Capco consultant

Still, banks have reason to eye PayPal more warily than they did five years ago.

In early April, PayPal’s $307 billion market capitalization was about 35{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} less than JPMorgan Chase’s. But the Silicon Valley company, which operates globally, reported 377 million active accounts at the end of 2020, compared with 56.3 million digitally active customers at Chase.

Meanwhile, the stock market was valuing PayPal as worth in excess of 45{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} more than both Citigroup and Wells Fargo.

Last fall, when a big bank-owned payments company wrote to the Federal Reserve Board to complain that tech companies are collecting more revenue from debit card swipe fees than large banks are allowed to receive, and are doing so by partnering with small banks that are exempt from the Fed’s price caps, the PayPal Cash Mastercard was the first example mentioned.

“I think there’s going to be tension there — or there could be tension — between banks and PayPal,” said Christopher Donat, an analyst at Piper Sandler.

One potential flashpoint involves direct access to the U.S. payment system, which has traditionally been the exclusive province of banks. Last year, then-acting Comptroller of the Currency Brian Brooks floated the idea of a payments charter that would not require deposit insurance, an idea that would appear to be a good fit for PayPal’s business model. A regulatory gambi by the fintech lender Figure Technologies, if it’s successful, might offer similar benefits.

Brooks left his job before a payments charter was unveiled, but Washington lobbyists say that a fight is coming in the next few years over whether tech companies should be granted direct access to the payment system.

Such access could become even more important as discussions about government-issued digital currencies progress. Fed Chair Jerome Powell indicated in March that the U.S. central bank plans to study the potential costs and benefits of a Fed-backed digital currency.

PayPal executives have recently floated the idea that the company’s digital wallet could be used to distribute government-backed digital currencies. “If you think about how many digital wallets we’re going to have over the next two, three, five years,” Schulman said in February, “we’re a perfect complement to central banks, to governments, to distribute those digitized fiat forms of currency in a very modern way.”

More immediately, PayPal could opt to pursue an industrial bank charter, following the path taken by Square, a competitor in payment processing. “We’re watching PayPal very closely,” one banking industry source said. “If they were able to get a Fed account, that would be huge, because then they could disintermediate banks from a lot of the payments activity.”

PayPal declined to answer questions about the company’s thinking regarding its U.S. regulatory status. “Our focus is on creating a platform that delivers great user experiences for our consumers and merchants,” the company said in a written statement. “By partnering with financial institutions, we’re able to focus on what we do best, while also creating opportunities for the banks we partner with.”

Race to build a ‘super app’

PayPal is by no means the only big U.S. company trying to build a super app that combines shopping, payments and banking services. Walmart appears to be making a similar play. The retail giant recently announced the creation of a fintech startup, filed for a trademark on the name Hazel by Walmart, and hired the head of consumer banking at Goldman Sachs to run the unit.

John Furner, Walmart’s U.S. president and CEO, said in February that having an omni-channel platform where consumers can pay opens the door to providing products and services that are beneficial to their financial well-being.

“Over time, if Walmart is able to get a critical mass of customers to effectively bank with them,” analysts at Keefe, Bruyette & Woods wrote earlier this year, “there is potential risk that they are able to roll out a bank-to-bank payment offering that could disrupt debit cards.”

The tech giants are also candidates to build super apps that include banking services. Google already enables users to make payments and find offers from retailers through Google Pay. The addition of Google Plex accounts — which are expected to launch this year in partnership with a slate of banks and credit unions — figures to make the search giant’s payments app more viable as consumers’ primary financial relationship.

These apps will not make banks obsolete. But by taking ownership of the customer relationship, they do have the potential to relegate traditional financial institutions to a secondary role that is less remunerative.

“It’s up to the incumbent banks to provide a value proposition to the customers to make them want to stay,” said Sanjay Sakhrani, an analyst at KBW. “Customers have more choices with modern technology.”

One challenge that the companies building super apps face is changing entrenched consumer behavior. In China, WeChat adoption closely followed Internet penetration, so Chinese consumers’ online habits were not as well established as is now the case in the U.S., according to a recent KBW report.

“We think the fundamental question is whether or not it’s too late to change consumer behaviors in the developed markets,” Sakhrani and two other analysts wrote, “given most have already decided how and where they will consume their preferred products and services.”

The KBW analysts argued that Apple and Google are well positioned to change consumer behavior in wealthy nations, since those tech giants control the operating systems on most mobile phones. But PayPal is also in an enviable spot because of its strength in the payments business.

“This may give a leg up to PayPal in certain ways given its leadership position in both customer and merchant adoption, which we believe is head and shoulders above the next largest digital wallet,” the analysts wrote.