Paypal’s financial performance highlighted in the Q4 has been nothing short of extraordinary. Revenues for 2020 are up 22% to $21.5Bn – Paypal reached $6.12 Bn revenue for Q4 alone, the first time the company’s history. Total payment volume for the year was up 31% reaching $936Bn for the year. In 2020 alone the company added 72.7 million new accounts up a staggering 95% from 2018 with total account numbers reaching 377 million active users.
The company strategy has been key to the success of the business. They have pursued an active inorganic strategy with over 10 acquisitions over the last 8 years but the company has seen positive effects from recent organic efforts including the creation of ‘Buy Now Pay Later’ feature as well as now supporting the buying and selling of cryptocurrencies on their platform. The largest driver for business success however has been not due to a strategic decision but rather an external shock – COVID 19. The coronavirus pandemic has seen many businesses succumb to failure but it has had a positive impact on companies such as PayPal.
The pandemic has accelerated the move to digital technologies – especially digital payments. The current CEO of Paypal stated in an earnings call for Q4 results that “Digital-first world is no longer out future but it’s the current reality”. Digital payments are defined as payments made through a browser, app or a checking out using an app or a QR code or a P2P payment. A McKinsey article states that in the United States digital payments penetration is up to 78% in 2020 (was 72% in 2016) and there has been a strong increase in consumers who use two or more digital payment methods – increasing from 45% in 2019 to 58% in 2020. The benefit of digital payments has not been fully realised due to consumers not fully trusting digital payments and security being a significant barrier to new adoption. A 6% increase in penetration over 5 years indicates that consumers who are currently not using any form on digital payments are tougher to convert and that the largest driver of digital payment volumes has rather been the ‘repeat users’ who are using digital payments for more types of payments.
The coronavirus pandemic seems to have shifted more consumers to using digital payments but with revenue and volume growth rates of 20% and 30% respectively for Paypal, it seems that the company has been able to capture more than its fair share of the digital payments market. The key to Paypal’s success is not only that they found themselves in the digital payments business but that they also had the trust factor from consumers and merchants. The size of users with Paypal accounts reaching 377 million active users and the fact the company has been around for over 20 years shows that the company has finally reached a maturation stage. Consumers are trusting Paypal to the same level as they would trust their own banks or the payment network providers like Visa and Mastercard. Payment volume for Paypal rose 31% to $936Bn in 2020 which means that it is processing payment close to VISA and Mastercard levels.
Paypal’s current businesses performance was also driven by the Venmo which had strong growth numbers. The company has also said that it will be creating a Venmo credit card which will then capture more of the Card network revenues. The launch of the ‘Buy Now and Pay Later’ product is said to the company’s most successful product entry in the company’s history. This feature allows for merchant’s to give consumers the option to pay with 4 equal instalments that would be overseen by Paypal. This will only be available on selected merchant’s websites and apps. Just after one-quarter of the product being launched it already had over 3 million customers use it (40% repeat) and it reached over $850 in total payment volumes.
Going forward, even after the pandemic ends, I believe that Paypal will continue on its strong growth trajectory due to its current ecosystem continuing to strengthen and network economies of using the site also becoming stronger over time. The overall driver here is that Paypal is already a very international company that is currently operating all over the world and accepting over 25 currencies. Paypal also just launched in China and will be one of the first foreign-controlled operators in the country.