For PayPal Holdings Inc., the financial services and payment system company, it’s been a heady period of portfolio growth.
Additional checkout choices including buy now, pay later and pay monthly; the ability to transfer cryptocurrencies to other wallets and exchanges and send crypto to family and friends in seconds; a business credit card, and a cash-back credit card with larger rewards have all been launched.
There’s also been a string of investments. Happy Returns, which operates return “bars” enabling consumers to return products from multiple brands and stores at a central location, was acquired, and PayPal invested in Jetty, which provides renters with security deposit and rent payment options.
The $26 billion San Jose, California-based PayPal also created PayPal Savings, offering a 1.09 percent interest rate, which is about 15 times the national average.
And PayPal sponsored Made, the two-day celebration held in Brooklyn this month spotlighting emerging designers, creatives and small businesses.
The degree of innovation in the past 12 months or so, acknowledged Dan Schulman, the president and chief executive officer of PayPal, “has been unprecedented. It really started in the middle of the pandemic, responding to consumer demand to do everything online.
“We put in place a whole slew of enhancements on how to pay for products. Flexibility became so important. Flexibility in today’s macro-economic climate is even more important because people need to make their money stretch further.”
Last week, Schulman, a native of Newark, New Jersey, sat for an interview at the company’s offices in Manhattan’s West Village, dressed in a PayPal logo-ed zippered sweatshirt, Levi’s jeans, and flip-flops. “Almost every day, I wear the same thing — Levi’s jeans and a black sweater, and usually I do cowboy boots.”
In the following Q&A, PayPal’s CEO covers a range of topics from the growth strategy, to inflation, the supply chain and other macro issues impacting business and consumers.
WWD: What have been some of PayPal’s recent key innovations and advancements?
Dan Schulman: We provided the ability to pay for your purchases with rewards points anywhere. You could use your points. You could split a purchase between flat currency and/or rewards points. You could determine do you want to pay now, or over time. Our buy now, pay later service has rapidly grown to one of the top three. Klarna would be number one. Afterpay would be the other.
WWD: Why has buy now, pay later taken off?
D.S.: It’s now quite an easy thing to be able to do. Right in the purchase flow you can determine how you want to pay for something. With PayPal, you can determine do I want to put it on a credit card, on my debit card. Do I want to pay with rewards. Do I want to pay with installment. So there is flexibility now. That flexibility is very simple and easy to choose, and therefore people who are thinking about making a larger purchase may decide to pay that over equal installments, and so you are seeing basket size for the average retailer go up 20 to 30 percent when they offer buy now, pay later. It’s great for the consumer. It’s great for the retailer.
WWD: What’s your feeling about the emerging regulatory issue?
D.S.: We always think of buy now, pay later as a credit product. We treat it as such. We’ve had 10 years of experience offering credit to consumers. We take every buy now, pay later decision (into consideration) as we would any other credit decision we offer to the consumer.
One of the advantages for us is that we have 400 million consumer accounts on our platform, so we know these consumers. They’ve shopped with us before. When you know somebody, you can extend credit to them more responsibly, and so where we know somebody, we have approval rates in the 90 percent-plus range. Typically, when others are deciding to extend credit and don’t know somebody, approval rates are in the 70 percent range. Our approval rates are much higher. Our losses are much lower than industry averages. And if you are a merchant you pay nothing extra for our buy now, pay later service. There are no incremental fees, and for a consumer there are no late fees. The way we make our money is just based on the incremental spend by a consumer at a merchant.
WWD: What attracted PayPal to Happy Returns?
D.S.: It makes returns simple and easy. You don’t have to put it into packaging or in a return box. It’s more environmentally friendly. You can just drop it off. We scan it in and there is an automatic refund to you. It’s really consumer and merchant-friendly. Consumers have the ability to do returns at Happy Returns through the PayPal app. There are now over 5,000 Happy Returns locations.
WWD: What’s your take on how the retail industry is changing?
D.S.: One of the big trends in retail is how do retailers and consumers meet digitally, instead of a consumer just walking into a store and buying something with a credit card or cash, and that’s the extent of the relationship. Now when you do things digitally, there is an ongoing relationship. Merchants can send you personalized offers and deals. They can surface new brands for you that match brands you are buying, and the retailer and the consumer have a digital relationship, as opposed to just a one-and-done relationship. It’s been extremely important to retailers to be able to hyper serve consumers in much more personalized ways than they have been able to do before, with there being tremendous economic pressures on consumers and retailers right now, both on the demand side and the supply side.
WWD: Is the supply chain easing?
D.S.: Not really. The supply side has been really choked up based on the China lockdown and COVID[-19]. In general now, China has gone out of strict lockdown. But they are part of a global supply chain that is reorienting itself right now. You are seeing supply chains move more near shore than offshore, but there is still a tremendous amount of dislocation in the supply chain and with the war in Europe, energy prices, gasoline prices, food prices are all going to have upward pressure on them.
WWD: What are the implications for retailers?
D.S.: Retailers need to adjust to longer lead times, therefore getting the right product in front of the right consumer at the right time is more important than ever so consumers aren’t frustrated in terms of wanting something and not being able to get it. It’s much more difficult. It’s longer lead times. You need to plan further out in advance. That means you may misjudge what consumers want. You may see stockouts that cannot be refilled. You may see excess inventory, which we have already seen quite a bit of. That’s why this ability to surface what you have in front of consumers and figure out, dynamically, price points that would move (products) are very important. You can do that in a digital manner, much more than in store.
I think the issue we face is that the magnitude of uncertainty around your base case for your demand, what your forecast is, the magnitude of uncertainty around that is as great as we’ve seen in a long, long time. It’s very difficult. Markets don’t like uncertainty as well.
Consumer confidence is at multiyear lows, even lower than right after the pandemic began. You’ve got a number of balls up in the air, for retailers, for policy makers, for central banks and for businesses in general. And consumers are trying to navigate that environment.
WWD: What’s the rationale for getting into the exchange of cryptocurrency?
D.S.: When people typically think about cryptocurrency, they think about what is the price of bitcoin going to be, next week or tomorrow. That’s probably the least interesting thing about cryptocurrency, how it trades. That’s kind of thinking about crypto as an asset class, not really a payment utility. The promise of crypto is that you can create money flows that are determined by a software program. It’s software programmable money. That could mean I will only buy this if the following conditions are met, if I get this kind of discount. My payment can flow this way versus a different way. So there is real utility in software programmable money. That is one of the promises of crypto.
The other promise of crypto that’s really important is its underlying blockchain architecture. It can dramatically speed the receipt of money to individuals or merchants so their cash flow can improve quite dramatically and it can reduce the number of intermediaries in that flow and therefore reduce the cost of transactions as well. To me, the real promise of cryptocurrency is how do we create a system that is more efficient, less expensive and more inclusive. Too many people in cryptocurrency wonder when will bitcoin go to a million dollars or not. That is missing the point of what crypto currencies are about. They can have a fundamental change in the very rails, the foundation, of the financial system.
WWD: Is there an information aspect to it?
D.S.: Sure, you can embed identity, you can embed the sourcing, (how) it’s sourced ethically in some way, and define what that is. And the retailer can actually show proof of that in the purchase. So some really interesting things can happen with programmable money.
WWD: What is your perspective on inflation and the impact on your company?
D.S.: If I had to look out into the future, which is always a dangerous place to look out into, I see inflation staying with us for the foreseeable future. You’ve got the underlying conditions of it. There’s still a lot of demand to work through. The Fed is trying to dampen that with interest rate increases. But you have the supply side issue as well. A lot of that is driven by the second order effects of the war in Ukraine. I think we will see inflation for awhile. Lower income groups are spending through their savings and are therefore beginning to cut back. There is less money available to spend on discretionary items, whether it’s fashion or dining, than non-discretionary items. Gasoline is $5 a gallon. You’ve got to pay your rent, which has gone up. Food prices have gone up. That’s all non-discretionary therefore there is less left for discretionary.
WWD: Wouldn’t PayPal be cushioned by shifts in spending behaviors, such as spending more on experiences and less on buying stuff?
D.S.: Clearly the tailwinds of e-commerce growth and the move to more and more digital payments are persistent over time. That obviously plays into some of the strengths of PayPal but we are not immune from the economic and geopolitical trends that sweep through the world. We have 429 million accounts on our platform, so we see a wide swathe of consumer spend and merchant spend across the world. We are not immune from slowdowns as well.
WWD: How is your vision changing for the company? What do you see going forward?
D.S.: In the last eight years we basically tripled in size on almost any metric — revenue, number of consumers, number of transactions per consumer. It’s been predominantly organic, although we have done our fair share of acquisitions as well, and so I am really pleased with what we have been able to accomplish over the last eight years. But we are now moving into the digital economy in which the separation between online and in-store has begun to blur and in many places become erased, as people order online and pick up in store. We are really becoming fully omni, which is an overused term, but it just means small businesses no longer can rely on their local community and on one shop to sustain their business. They actually need to come online and expand (its) market throughout the state, throughout the country. Over 80 percent of PayPal merchants — we have about 35 million merchants on our platform, predominantly small businesses — do cross border trade. You just open your market seamlessly when it’s online. During the pandemic while most small businesses shrank, those using PayPal grew. All of that was really just expanding market access.
WWD: How is PayPal doing?
D.S.: We are doing great. This is a year where everyone is slowing down, us included, but PayPal is one of these strong, high-quality companies. We will generate in the area of $5 billion of free cash flow this year, while many of our competitors are still negative free cash flow. We are very solidly profitable and free cash positive. More importantly we offer the best availability, best authorization rates, the lowest loss rates to our merchants. When small businesses use PayPal typically consumers are two times as likely to shop when they see the PayPal button.
So we have developed over the years a brand trust. The financial services industry is always one of the top two or three in terms of brand trust. Last year, Morning Consult interviewed tens of thousands of consumers around the world and PayPal was one of the number-two most trusted brands in the world. Trust is so important for a lot of small businesses. A lot of small businesses use PayPal because consumers who don’t know that retailer, actually know PayPal will cover that transaction.
WWD: Tell me about PayPal’s sponsorship of Made. It’s an interesting partnership.
D.S.: One of the things we noticed during the pandemic is that Black-owned small businesses were shutting down at two times the rate of the national average, predominantly because of (lacking) access to capital. We committed $535 million (in 2020) to help address what we call the racial wealth gap. By giving to the community banks so they could lend more in lower income neighborhoods. By giving to venture firms that could lend to Black and Latinx owned entrepreneurs. We felt this was a critical moment for our communities and our country and Made is an extension of that, working with Black and minority creators and designers who need a chance to show their wares. What we are finding now is that two-thirds of Americans want to shop where their values are expressed and want to support the local community and diverse creators. We think Made is a great way to showcase this talent, to make sure that we stay true to our values as a company.
WWD: Do you see a strategy at PayPal for NFTs?
D.S.: Clearly we can help facilitate the payment from what I would call a fiat world, that’s the regular currency world, into a crypto world. We can be that bridge.
A lot of sneakers are being bought for resale by people thinking they are going to go up in value so there is a trend now with these valuable resale items to buy an NFT, your digital ownership of that time, so the owner doesn’t have to ship the sneakers to you. They’re kept in a centralized warehouse because you don’t want to have the sneakers, you just want to resell them. So then you can resell and give your NFT token to someone else who also doesn’t want the sneakers. So this NFT is a digital representation in ownership of a sneaker that can be freely traded on marketplaces without all the logistics of shipping the sneakers. They are all held in a warehouse. You can get them anytime you want, to redeem them anytime you want but you don’t have to.
There is some fad to it for sure, but there is also some real value. NFTS will be an interesting way of expanding asset classes to a much wider population.