At is investor day last week PayPal laid bare its strategy, and it’s clear that consumer banking is squarely in its sights. It has been a long journey for PayPal from a simple button on a website to a full suite of consumer products targeting the underbanked (individuals or families who have a bank account but often rely on alternative financial services) delivering its vision to democratise financial services to ensure every individual can thrive in the global economy.
Over the years PayPal has expanded its offering through a combination of organic growth and acquisition. The acquisitions have been used to fill gaps in its product offering and include peer to peer payments (P2P), mobile wallet technology, money remittance, small business loans, point of sale services, and more recently consumer rewards. A suite of smaller acquisitions enhanced its merchant services deepening PayPal’s relationship with retailers through AI powered prediction (Jetlore – May 2018), global payout capability (Hyperwallet – June 2018) and fraud protection (Simility – June 2018).
Consumer enhancements have featured strongly with One Touch purchasing, P2P payments, credit extension, crypto services and pay with QR codes powering growth, with PayPal’s active accounts more than doubling from 181 million in 2015 to 377 million by 2020 while engagement has increased more than 1.5x. As PayPal rolls out these products and services globally, we expect user growth to expand meaningfully. PayPal’s management cite an addressable market of $110 trillion as the business expands from online retail, P2P/remittances, and digital services into adjacent verticals of instore retail (QR codes), bill payments, in person services (savings accounts, cash withdrawal, cheque processing), business to consumer and emerging market payments.
If these products sound familiar to you, you’re probably using a main street bank. We cross reference a slide from PayPal’s 2021 Investor Day with CBA’s consumer offering. PayPal also provides a number of unique services like the ability to receive and make payments in crypto (Bitcoin), low cost money remittance across borders and consumer rewards from within the PayPal wallet.
An interesting case study is the buy now pay later (BNPL) space where competitors are nibbling away at credit card receivables. BNPL providers have been successful with a product that resonates with millennials leveraging insights and consumer data not available to traditional banks. This gives them lower losses, lower fraud and higher approval rates compared to traditional underwriting models. US BNPL company Affirm boasts more than one billion data points from 7.5 million loans over the last six years of repayments. Tellingly, consumers like these new providers, as you can see in their app store reviews: Afterpay 4.9 stars 397,000, Zip co. 4.9 stars 149,000. On the other hand CBA’s 2.9 stars and 6,000 reviews demonstrates significantly lower app satisfaction scores. CBA’s challenge is highlighted in this app store review. One user wants more innovation, the very next user wants less innovation, therein lies their problem. The bank’s clients span a wide range of ages and technological prowess, a problem not encountered by its fintech peers with predominantly younger clientele.
Westpac appears to be acutely aware of the fintech threat and has established a new banking platform with UK technology provider 10x Future Technologies.
“Fintech innovation is changing banking in important ways and our new digital banking platform is part of our long-term strategy to support this trend and better respond to changing customer needs. The platform allows us to combine our banking experience with the innovation of our partners to support new customer experiences.”
Westpac has already snared its first substantial client win, signing Afterpay in October last year. The partnership with Westpac will allow Afterpay to provide Westpac transaction and savings accounts and other cash management tools to its customers, further pressuring traditional banks. Afterpay CEO, Anthony Eisen commenting below.
“Afterpay is in a unique position to extend and deepen the relationship with our customers and help them to manage their money more seamlessly through savings and budgeting tools. For Afterpay, this is clearly just the beginning as we explore this opportunity globally.”
It is very hard to get excited about fintech and traditional banks at the same time. The challenge facing traditional banks is the classic innovators dilemma. Disrupt large profitable products like credit cards and loans with competitive products to meet the new fintech competition or progressively cede market share while hanging onto legacy products. In addition, large legacy IT infrastructure reduces their ability to respond quickly to competition. For us, there are too many concerns to invest in the traditional banks, accordingly, we will stay with PayPal, the disruptor rather than the incumbent.