PayPal Holdings, Inc. (NASDAQ:PYPL) Goldman Sachs US Financial Services Conference 2018 December 4, 2018 2:00 PM ET
Dan Schulman - President and CEO
Heath Terry - Goldman Sachs
David Solomon - Goldman Sachs
President and CEO of PayPal. Dan has been recognized as One of the Top 10 CEOs in the World by Fortune and one of the Top 100 Most Creative People in the World by Fast Company, creativity that certainly marked his four years leading PayPal. Dan's joined in discussion by Goldman Sachs' CEO, David Solomon. David?
Thanks Heath. Good afternoon, everybody. Dan thanks for being here. Always good to be with you.
Thank you. Good afternoon David.
Q - David Solomon
So, I'll just start in kind of putting PayPal into a broader financial services landscape. This conference is mainly made up of banks, financial institutions that have been doing business in some way, shape, or form for decades and decades and decades. PayPal obviously is a younger company, established at this point with a very, very big platform. But as you look at what you're building at PayPal, how do talk about the way you'd frame it and it fits into the broader sort of financial services landscape?
First of all, thanks for having me.
And thanks everyone for being here as well. So, PayPal today has about 254 million people who use our platform on a regular basis. A little over 20 million merchants use the platform. So -- and it's fully global obviously in 200 different countries or territories.
In general, the way that I think about PayPal is, we are a digital payments platform. I mean I think if you think about the earliest days of PayPal, it was jumping on to very early days of the e-commerce movement, figuring out a way of assuring consumers and merchants that they could do transactions in a safe, secure manner.
We basically invented tokenization, so that you could shop without sharing your information. And that's grown obviously tremendously since those early days. We're now a full digital payments platform. We're a partner to probably most of you in the room. We have a suite of digital capabilities. But the great thing about digital payments -- and I think all of us in the room can agree on, is that the war right now is not really with each other. The war is on cash. It is how do we move what are 85% of the world's transactions to digital platforms where you can do things at a lower cost, more efficiently, more rapidly, easier to understand for consumers and for merchants.
And my perspective is it's a great industry. I mean, ex-China, as we were discussing early on, the e-commerce industry is growing at 17%, and that's ex-China. I mean if you look at PayPal, if you look at us ex-eBay, we're growing at about two times that rate. We're probably one of the largest digital distribution channels for most of the financial institutions here. And so I think the world is clearly moving towards mobile. It's clearly moving towards digital and we're an important player in that.
Yes. I mean can you talk about the growth? I mean, I saw you posted a record quarter in terms of new active users with 8 million -- with 9 million new users in the quarter. I understand the macro, but that growth is really kind of extraordinary. And so talk a little bit about kind of the use case for these customers because they've got a lot of options. When it comes for paying things online, they have a lot of options. Why are they choosing PayPal? And why is that growth and that continuing onboarding of new customers still high?
Yes. I think it was second quarter two years ago that we put on -- I think it was 3.6 million net new actives in that quarter. And as you mentioned, last quarter, we put on 9.1 million net new actives. So two and a half times where we were and that growth has been accelerating. And the nice part about that growth that I feel really good about is that there's not just one place that, that's coming from right now.
I'd say, at the end of the day, we have fundamentally improved the experience in terms of using PayPal. I think the biggest thing we did strategically as a company was fully open our platform to choice. We used to steer consumers to low cost instruments for us. And that put us -- one, it confused consumers. So we had a ton of calls coming into customer service, a ton of people churning because they wanted to use maybe their credit card for rewards and we were kind of defaulting them more to debit and to balance, cash, low cost for us.
And so we've fundamentally changed that model. Every single transaction that a consumer does, now they have a full choice, just like you pull out your physical wallet and you figure out what credit card or debit card or cash that you're going to use, exactly the same now online. Once we did that that turned us from being a frenemy within the ecosystem to actually being an ally.
You being a partner or something like that?
And that, all of a sudden, our partner companies, whether they'd be networks or FIs, the major tech companies, whether it be Google, Ali, Facebook, Microsoft, any of those, they started actually incenting their customers to sign up for PayPal. You would never have imagined that two and a half years ago.
Why do people incent their customers to sign up for PayPal is because when they use PayPal, they have two times the conversion rate when they use mobile devices for digital commerce and so we can drive a tremendous amount of volume.
The other thing is that we're now beginning to expand internationally. We're in India domestically. We're in a number of other countries. And we have maybe of the e-commerce market 10% market share. So, we have a tremendous amount of room to grow internationally. And then of course, you have Venmo and I'm sure we'll talk about Venmo later.
I'm going to ask you about Venmo.
Yes, Venmo is on fire right now. And you've got kind of a network effect that's going on with our whole business right now. The more consumers we have, the more merchants want to have us. And the more merchants we have, the more consumers that want to come on. And so it's a combination of just a better user experience, international expansion, scale effects and then of Venmo.
Yes. Well, since you raised Venmo, I'll jump around, although I was going to do it later, but I'll go now to Venmo. I mean it's nothing short of a phenomenon in terms of its popularity, especially with younger customers. I look at my kids who are in their 20s and you know how it's become a real instrument, the center of what they're doing. Talk a little bit about Venmo's appeal to that segment of customers. And why has this had kind of the momentum it's had?
Well, it's more of a social payments experience than a payment transaction. So, close to 94% of all transactions on Venmo are tagged in some way either with a comment or emoji. They're shared with friends. People check their Venmo feed three to five times a week, not necessary to do a transaction, just to see what friends are doing.
[Indiscernible] checking in on the platform.
Right exactly. And so -- and the bigger it's gotten, the more important it is that you're on it too because your friends are on it and you start sharing. And so I think last quarter, we had 78% growth rate in terms of volume on Venmo. It is now at a run rate of some $70 billion of transaction volume processed through it and as I mentioned, growing at close to 80%.
And every single quarter for the last three quarters, which is amazing, the net new actives to Venmo have been an all-time record. So, three quarters ago, we hit an all-time record; a quarter before that, we hit an all-time record that beat that other quarter, and then we just announced another record. So, it's actually accelerating as it's getting larger.
And Venmo, Venmo is the only product I've ever seen that has an inverse decay curve. So, most products, when they start-off, they start here and then over time, the usage and the actives drop down. Venmo starts here, it comes down, and then it goes back above where it started. So, it is -- it's the only product I've seen that actually, it increases in terms of its -- it doesn't decay, so you don't have new cohorts decaying. You actually have new cohorts accelerating on it.
And of course, what I talked a lot about last quarter on the earnings call is we finally have reached a tipping point and a turning point in the monetization of Venmo. So, Venmo was predominantly or really exclusively a peer-to-peer application. And we've now started introducing a number of new features that allow us to monetize Venmo.
Can you talk a little bit more about where you think this goes and how you lever it into something even bigger?
Yes. So, the best analog I think for Venmo is PayPal. PayPal started off as a peer-to-peer service and then it expanded into e-commerce. We've now allowed people to use their Venmo instrument that they signed up or their bank account to pay with Venmo at any merchant that accepts PayPal in the U.S.
We are seeing, I forget if we've said triple-digit or high double-digit increases month-over-month in terms of that acceleration. We're allowing people to instantly transfer cash out of their Venmo balance into their bank account. We did over $1 billion of that in the last month and that's accelerating.
And so when we talk about monetizing Venmo, Venmo users don't come up to us and go, I just did a monetizable event on you. What they think about is more functionality for Venmo. The fact that it's monetizable has nothing to do with it for them.
Instead of it taking three days to get their money off the platform, it now takes minutes to take their money off the platform. Instead of only being able to pay back your friends for something you can now buy using your Venmo account, you now have Venmo debit card where people can use Venmo both online and offline and once you use your card, it instantaneously shows up on your phone. You can share it in your feed. You can split it right away. It is a phenomenal kind of product that allows for Venmo now to be used in everyday use cases, both online and offline. And we'll continue to expand that out because this generation is fully mobile and Venmo, all of that is 100% mobile.
Yes, that's really interesting. Shifting just a little bit, we've seen companies like Square, Stripe, Adyen, get a lot of traction servicing business customers, particularly smaller business customers with in-store payment processing or different credit offerings. How do you think about opportunities for PayPal in those areas? And how are you approaching -- how is PayPal approaching in-store?
Yes. So, those are two different questions. Let me get to the first one first. So, I don't mean to sound flip at all, but -- and I'll explain why. But I think of competition a little like I think of gravity. I don't get out of bed every morning and go, if gravity wasn't pulling me down, I'd be able to jump 40 feet today. And like I get it if there's no competition, we'd have 100% market share. But that's not the way that the world works or that's not the way that business works.
My view of this is I don't want to over focus on what our competitor is doing. What I want to over focus on are what are the pain points that our customers are experiencing and how do we solve those.
I keep an eye out on what competitors are doing to make sure that there's no competitive disadvantage. But if a competitor does something, that doesn't mean necessarily that I want to go do that.
What I want to do is to be the ultimate customer champion, whether that be to merchants or to consumers, understand where are they going, what are their pain points and how do I solve for that better than anybody else.
And if I have a weakness, I'll either internally develop it or I'll buy a company to fill that gap like we have a little bit of a gap on payouts. Like we had a good payout started, but I didn't think we were best-in-class. So, we went out, we bought a smaller company called Hyperwallet. Hyperwallet, I think, is best-in-class in terms of payout. You put that, combined with PayPal, and I now think we have the best solution for payouts -- digital payouts into marketplaces and the gig economy of any solution out there. And so I don't worry necessarily about what others are doing. What I worry about is how can we solve things better.
The other thing we have that nobody else has is we have two-sided network at scale. So, when we talk about bringing consumers and merchants together in unique ways, somebody may do a point solution and a back office, but it doesn't help a merchant to drive sales. If I can figure out how to bring 240 million consumers to take advantage of that back office experience that I'm providing to a merchant like through One Touch and One Touch is our solution that enables 89% conversion with mobile. 89% conversion, that's basically two times the industry average.
If somebody uses our back office systems, they automatically are enrolled in One Touch. We have 110 million consumers that use One Touch right now. And it enables them, during like this holiday season where the vast majority of the sales started coming in over mobile, we had two $1 billion mobile days; Cyber Monday and Black Friday were 2 $1 billion plus mobile days for us. We've never had a $1 billion mobile day ever.
And so having that -- anybody else? Having that two-sided network is very important for that. And so I think that's how we -- and by the way, small businesses are our bread and butter, right. We have 20 million merchants. They're almost all small merchants. And like there are hundreds of millions of small merchants out there. I think this is not a pie that any one player will own. It is a gigantic...
--opportunity. In terms of offline, I think that's an important question, a very different one. And you can expect us to move more aggressively in the offline market. Two things are happening. One, mobile is blurring the distinction between online and offline.
You saw that in this shopping season that's happening right now. People order on their mobile, they go in store and they pick up. And they don't wait in line, they just have their stuff. I was meeting with the CEO of a Fortune 20 retailer yesterday. And they are sinking billions of dollars into their commerce -- e-commerce capabilities to really take advantage of that blurring caused by mobile and we obviously benefit tremendously from that.
At the same time, the advent of both NFC and QR codes gives us a tremendous advantage to much more simply move into the offline world. The network deals that we did with Visa, with MasterCard, with American Express, with Discover all gave us industry standard tokenization capabilities. All of the deals that we've done with the largest FIs across the world allow us access to that and we can now very simply and easily move into the offline environment, the in-store through like a PayPal pay through NFC without doing bespoke customization of software integration and to point-of-sale.
And if you go into our Venmo app, when you go into our PayPal app, for those of you who use it and you go -- show it to you easily -- I know you want to see it, but we have a place where you can tap on your name and a QR code that comes up right away, then you can scan it instead of me putting in your e-mail or whatever I can just scan your QR code.
Think about that for a merchant, right. Like the merchant just has to print that out. This doesn't have to be high tech. If you're a small micro-merchant, you print out that QR code. We just scan it with Venmo or PayPal, there's a charge that we had pre-agreed to and we're off to the races on the offline side of it. So, not that complicated to get into and I think we will start to make strides into it this coming year.
That's interesting. Now, shift focus a little bit. You and I will be -- you've talked a lot about kind of the on or underbanked and how you offer products to really expand access. How do you think about the size and the complexity of that challenge and that opportunity?
Well, first, that's a huge opportunity. There are 1.7 billion people in the world that are unbanked. You start to add underbanked into that, and that number jumps up dramatically. Here in the U.S., there's 70 million adults that are underserved today. And think about it. They spend an inordinate amount of time waiting in line to do a transaction, cash a check, send money to somebody they love, pay a bill. It's kind of ridiculous in this day and age where you've got a smartphone in your hand. And by the way, smartphones are more disproportionately populated in lower-income populations because it's their only device they use for Internet connectivity.
And you really have all the power of a bank branch in the palm of your hand. You can do basic consumer transactions at maybe almost 80% less cost. We should be able to serve that segment of the population in a way that brings them into the digital economy.
Our mission at PayPal is what we call democratizing financial services. And it's a fancy way of saying that managing and moving money should just be a right for every citizen. It shouldn't be a privilege for just the affluent and technology should enable that.
Now, the great thing is we can, I think -- the way that I think about the future and the way that I think all of us in this room starts to serve consumers is that this quaint old idea about who owns the customer has to start to fade a little bit. Like we all own the customer. We all do. There's no primacy necessarily in owning a customer. But what's…
Certainly much, much less.
Yes. What's happening though, I think, is we're all building platforms today. Like we've got an open platform, we do both branded and unbranded services. We have open APIs. People can consume those services. And we have some really great assets on our platform. We also have a huge amount of assets that we don't have, but you do or many of you and your companies have them.
And so the question really is how do we create value propositions together that are -- that we -- neither of us can do alone but are fantastic for the consumer? And I think serving the underserved is like something like the moon shot of our industry. Like imagine if we could do that.
And by the way, you can do this profitably. This isn't like a -- some like charitable event that we're trying to go do. This is a real distinct opportunity to bring all citizens into the digital economy. And imagine like if you and I could say to our kids, like we were a part of making that happen. Because I think financial health is fundamental to strong economies, strong economies are fundamental to our democracies. And so I think we've got an obligation to go and do them. I think we have a real opportunity to go and do them.
Yes, I agree with that. The -- it's not just the services that bring people in. Ultimately, it's the financial wellness integrated with transactional capabilities. And that's going to be increasingly important--
Yes, exactly, and we should be able to do that. And we should do at scale like, we don't want to do savings accounts, we don't want to do a lot of things, but how do we combine stuff together that we can provide these value props.
Yes. Well, mobile obviously has an enormous impact on that. It's a driving force in everything we're doing and certainly in this discussion. Talk a little bit about how you're approaching mobile broadly and what your relationship is with mobile platforms like Apple or Alphabet, Google, Android?
Yes. Well, first of all--
Yes, yes, definitely, yes. The first one, the mobile front, we develop mobile-only. So, not mobile-first, mobile-only. So yes, some people use desktops still, but like our mobile is growing at like 40% and 50% year-over-year. I think over the holidays, that Cyber 5 or what everyone call it, Thanksgiving 5, mobile was like 43% of our total. Last quarter, it was 40%. If you go back two years ago, it was 20% of our total. It's just -- it's soon going to overtake desktop and desktop will be left far behind. So, we only really think about mobile. That is what we develop in and it is what our platform is optimized for.
And then you've got a number of other tech companies, whether it be Facebook, Google, Apple, Samsung, Microsoft in which we -- depending on which of the company is, we either do a tremendous amount of the underlying platform work for them. So, Uber is a good example. We basically do -- 99% of all Uber transactions come through our platform, 99%. Like a huge percentage, 90%-plus of Airbnbs come through our platform.
Facebook predominantly uses our platform for their payment vehicles. Some of it's branded, some of it's unbranded. Apple Pay, probably over 50% of Apple Pay's volumes come through our platform through our Braintree integrations into merchants. We work very, very closely with Google on Android Pay where they use our platform and our capabilities as well. We're natively integrated into Chrome, for instance.
So, once we made the decision to not try to be a disruptor, but to be an enabler in the industry and what that means is to have an open platform, not to say, you and I are competing, but here's an open platform. How do we figure out how do we work together? Like a lot of those tech companies, they do not necessarily want to be in payments. Payments isn't a means to an end for them. They don't want people to leave their platform.
So, with Facebook, like if you're on Messenger and you need to do a transaction and you're doing it over the PayPal platform, you never were native in the Messenger, you'll never leave the Messenger platform that you don't need to click on something, deep link into another website, go over there and then all of a sudden, you're on a different website and you're out of your Messenger conversation. We do very sophisticated contextual commerce capabilities so that we can be native because it's a mobile experience.
And so really, for us, this idea of partnering is -- that is who we are as a company going forward and I think it's gained tremendous benefits for our mutual customers. That's the most important thing.
Obviously, it's helping all of our business models, et cetera. But the reason that's helping our business models and our financials and our net new actives and all of that and our churn is because customers are being served better than ever before.
We talked -- when we were talking earlier, we talked a little bit about China. There's obviously incredible innovation there. In particular, around payments, you don't have legacy systems. Regulation hasn't played the same role as these financial technologies and business models have been developed. How are you thinking about China for PayPal? And what are the learnings in that market that can affect the way we implement in the U.S. on a go-forward basis?
Yes. So, first of all, China is not a developing market when it comes to digital payments. They are the developed market. It amuses me if somebody says to me like, are you worried if you go into China that they may take your trade secrets, like I want to take their trade secrets. So, they're quite developed.
[Indiscernible] there's a lot of differences.
I understand. But they -- and for those of you who haven't been there, I mean it really is the future of retail, how retail will look. Like most retail stores or many retailers, everyone accepts digital payments; nobody accepts cash at all, predominantly through QR codes. And a lot of retail stores are like Hollywood sets. You see all the product, but the vast majority of it is a warehouse distribution facility behind it, where everything is being packed and shipped and out to your apartment or home within an hour, not next day, not two hours, within an hour.
But let's also remember that every country is different in their payments and how they use. Like I would not automatically extrapolate the Chinese experience back into the U.S. The U.S. is a very, you mentioned it, a very different point of sale infrastructure. We have a very different credit type of -- very sophisticated credit infrastructure that China did not have.
Regulation was quite different when Ali and Tencent began. There's no real commonality of standards. Ali and Tencent are at each other's throats to get the next merchant and -- because their QR codes are proprietary. They make no money in payments. They make no money in payments. They make their money on -- or want to make their money on other things that they're doing.
So, I don't think we can take that model necessarily and export it into the U.S. I mean, even Germany, as you know, totally different ways of wanting to pay than what we have in the U.S.
You go to the Nordics, it's different, Japan is different. Each country is different. I think we can learn from those [Indiscernible]. I do think that combining payments with a number of other apps is a very powerful mechanism for engagement. But I don't know if there's going to be company here in the U.S. that is the -- that replicates Tencent with WeChat Pay.
I think we'll be an open platform that will enable Facebook and other apps to utilize payments. But I'm not sure that there's going to be necessarily an instance of what is popular in China in another country.
I think we'll put more and more services and capabilities because we're clearly moving to being a full services suite of capabilities for all forms of digital payments, whether that be full stack processing to working capital, to contextual commerce tool sets, to marketing services, to payouts, to omnichannel solutions, we'll have a full suite of services targeted at different solutions, at different segments of the market. But I'm not sure whether we'll fully copy what the Chinese have done here in the U.S. It may not make sense.
Yes, makes sense. Got a couple of minutes left to take a couple of questions from the audience?
Questions from the audience? Yes.
God bless you again before -- softening you up. Yes.
Regarding your offline [Indiscernible]
QR? Did everyone hear their question? No? Yes, yes. Do we think that the Yankees will win next year's series? It's a good question, sir. It really is. Not privy to it. So, great to have the mic up here. So, the question was Apple hasn't opened up its Near Field Communications capabilities. What's that mean? And what about QR codes? Is that a viable solution, et cetera?
So, I think in general, in-store payments have been quite slow to pick up steam here in the U.S., quite slow. And it's why we really haven't jumped on it because we could have before, because it's been going quite slowly.
The reason for that, in my view, is if digital payments is only a form factor change, instead of swiping my credit card, I'm tapping my phone, that's going to take a long time. Like I have a credit card in my pocket right now, it's a PayPal one, you'll be glad to know. But it's not exactly weighing me down. And I'm not really feeling the bulk of that in my pocket. And it works pretty well when I tap it on an NFC terminal right now.
However, if you can start to think about retailers creating value propositions that incents you to do certain things and the digital payments is actually just part and parcel of that solution, be that in Uber today, you see that with Starbucks today in terms of their app, then I think you start to see digital payments start to take off. And I think there, we can be an embedded solution for merchants as well.
I think QR codes are -- we will see more and more of their popularity here in the U.S. just because it's a very easy, simple solution to go through. And I think retail will drive digital payments, not necessarily having a digital payments capability on your phone, but driving it.
We work very closely with Apple on a number of different fronts. They started using PayPal before they started even doing Apple Pay inside their application in their App Store. So, we're quite close partners with them. We'll see where that goes.
We already are fully integrated into all of Android. And as you know, through the world, Android is about 90% of the world's population in terms of smartphones. So, that one capability, right now, everybody's prevented from using and we'll see what direction that goes in.
Other questions? Yes, over there.
Hi, thank you. A question about buy now pay later, as far as response to Afterpay and where can you tell us [Indiscernible]?
Yes. Well, we've had a buy now, pay later option for eight years. So, it's not exactly a new phenomenon for us. And I think one of the interesting things that to those of us who work in the digital online area, is our ability to use non-traditional data to make a risk decisioning.
I think like our models here in the U.S., we've look at this pretty carefully against FICO. We think at the same risk level, we can go like 30% lower in the candidate pool for exactly the same risk there, which enables us to make buy now, pay later decisions more rapidly and extend it to more individuals at no increase in risk.
It also really depends on the country as well. Germany, huge in buy now, pay later. Other countries don't like it at all. So, I think we're pretty bullish on, in general, the ability to provide innovative ways of using credit if somebody doesn't already have a credit card.
One of the things we are just about to do, we're in employee testing right now, we'll roll out next year, is the ability -- for those of you who have registered your credit card from any FI, to use your rewards points at any PayPal merchant.
So, if you have a Citi card and you have rewards points, you can use those rewards points at any 20 million of our merchants. Same with Chase, Amex agreement that we just did, will enable that as well. And that really opens up that ability to use points in a different way than ever before. We're working with a number of different companies that utilize rewards points to offer more value to their consumers and using rewards points as a currency on our platform.
And we're probably, right now, one of the top five lenders of working capital to small businesses in the United States. And here is an interesting fact, the one that I'm most proud of: 25% of our loans go to the 3% of counties where 10 or more banks have closed branches. So, we're providing loans in places that are really lower income level neighborhoods. And on average when somebody gets our loan, that small business, their sales go up on average by 22%, whereas the control group goes up 1% to 2%.
And the reason we're able do that is just through the proprietary data that we have. We never look at a FICO score. We just use our own scoring methodologies to go and do that at very low default rates on that. So, I think data and information is a very powerful tool that I think all of us are going to be using more and more.
Great. Well, that's it. We're out of time. But thank you. Appreciate you being here.
Great. Thank you very much, David. Always a pleasure.
Thanks for your time. Appreciate it. Thanks.