PayPal is facing a bright but uncertain future as an independent financial services company. The question that investors and many others are asking is what exactly will an independent PayPal do to distinguish itself in a growing and increasingly brutally competitive payment marketplace?
After all, PayPal now faces competition from Google Wallet, Apple Pay, Square, and a host of other solutions. It also faces the prospect of banks, credit card providers and others offering apps or other solutions that will compete directly with its products.
If it wants to survive and grow its highly profitable business, PayPal is going to have to be highly innovative. PayPal has a history of bold innovation; the company’s alumni, the so-called PayPal Mafia, includes Elon Musk; Peter Thiel; David Sacks, the man behind Yammer; Chad Hurley and Steve Chen, the creators of YouTube; and Reid Hoffman, the man behind LinkedIn (NYSE: LNKD).
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More recently, PayPal has been at the cutting edge of financial innovation with bold ventures like Venmo, Bill Me Later, PayPal Working Capital and the acceptance of Bitcoin. Such moves are not without risk; Bloomberg News is reporting that the U.S. Consumer Financial Protection Bureau is thinking of suing PayPal over Bill Me Later for reasons that are not quite clear.
PayPal will undoubtedly face similar attention from banking regulators that might be spurred on by traditional banks. After all, PayPal is behaving more and more like a bank and less like an app.
So what steps will PayPal take to establish itself as a viable independent brand and financial services provider and escape too much regulatory attention. Some of the moves that PayPal would be free to make on its own include:
- Start or purchase a bank. Owning a bank would enable PayPal to offer a wide variety of financial products it currently lacks, including FDIC-insured savings and checking accounts, mortgages, car loans and certificates of deposit. Owning a bank would also enable PayPal to create a next generation financial product that combines an app with a checking or savings account. A good way to get a bank would be for PayPal to purchase a company that owns one, such as the privately held, AccountNow Inc., which owns MegaBank, or Green Dot (NYSE: GDOT), which owns a bank. Another possibility would be to buy or merge with Bank of Internet, or BofI Holding (NASDAQ: BOFI). There are also a host of other smaller banks PayPal could easily buy, including EverBank Financial (NYSE: EVER) and Capital Bank Financial (NYSE: CBF). EverBank, which operates online, could be a good fit for PayPal.
- Offer financial services directly to retail customers. Green Dot has seen some success offering prepaid cards and checking services through retailers, including Walmart (NYSE: WMT). One solution might be a PayPal card that could be sold through a retailer like Walmart or Kroger (NYSE: KR). Getting into a cozy relationship with a giant brick and mortar retailer would drive a lot more business PayPal’s way and help it establish itself as an independent financial services company. PayPal’s Bill Me Later could help drive more business to Walmart’s fast-growing online operations. PayPal could also help Walmart in its efforts to sell products like insurance.
- Create an app similar to Apple Pay. PayPal already has a similar product to Apple Pay in the form of Venmo, which it has not commercialized yet. If PayPal could create something like Venmo that offers credit as well as access to cash, it could become the market leader.
- Form a direct alliance with a major credit card company. PayPal already has a cozy relationship with Discover Financial (NYSE: DFS), but it might be in a position to do better. One intriguing possibility is an alliance with American Express (NYSE: AXP), which has a similar business model. American Express offers banking services and credit cards and often ignores industry norms much like PayPal does. PayPal’s current president and designated CEO, Dan Schulman, is a veteran of American Express, which makes such a relationship quite probable. Other companies that might be interested in an alliance could include Capital One Financial (NYSE: COF). One attraction at Capital One would be its direct relationship with Costco.
- Set up or purchase an online lending platform like Prosper or Lending Club (NYSE: LC). Such platforms have been doing well in recent months, and such a business could be easily integrated with PayPal’s lending program, greatly increasing the amount of capital available to it. Obviously, this would attract the attention of regulators, who have not been very friendly to PayPal in recent months.
Something else that is also obvious is that PayPal would be an acquisition target; purchasing it would give a large bank, retailer or credit card company access to a vast financial network and tens of millions of potential customers.
Banks might be interested in offering hybrid financial products that combine the attributes of a payment app and a checking account for example. Credit card providers might want to offer additional lines of credit similar to Prosper or Lending Club Loans. That, of course, would raise a host of regulatory questions and opportunities.
No matter what happens, PayPal is still the cutting edge of financial services. Now it has to demonstrate if it is the industry’s future or not.
Disclosure your blogger proudly owns shares of eBay and Kroger.