What are PayPal’s main strategic objectives?

Summary (tl;dr)

To become dual entity: PayPal is already a Licensed Money Transmitter and it will eventually become Licensed Bank in the coming years (with Federal Charter as issued by the OCC - Office of the Comptroller of the Currency).

The Long Read...

This is a great question and a tough one to answer without any insider information. I'll give it a shot nonetheless!

One of the questions most frequently asked is What is PayPal? not so much for the wallet angle, but the company on the whole.

• Is it a payment systems operator?
• It is a payment network?
• Is it a bank?
• Is it a payment service provider?
• Is it a payment gateway?
• Is it an issuer?
• Is it a Payments Facilitator?
• Is it a Depository Institution?
• Is it an FX Broker?
• Is it a Credit issuing Institution?
• Is it a Money Transfer Company?
• Is it a Money Services Business?
• Is it a Financial Services Company?

The simple answer is - it is everything listed above. PayPal's operations are huge. This comes from its progressive growth and its association with Ebay.

Some key points regarding PayPal today:

• PayPal operates in many territories & countries (202 at last count). It has a 47 US Money Transmitter Licenses and also for District of Columbia, Puerto Rico and US Virgin Islands (See PayPal State Licenses).

• PayPal Europe S.à r.l. & Cie, S.C.A., is a Luxembourg bank licensed by the Commission de surveillance du secteur financier (Source: Luxembourg for Business - Proud to promote ICT)
• PayPal has the equivalent of a European Payments Institution license (that is what the Luxembourg bank license allows it to do)
• PayPal is a licensed in Australia as a Restricted Authorized Deposit Taking Institution (See: List of Authorised Deposit-taking Institutions)
• It has procured the necessary licensure in all the other countries and territories it is operating in. Barring the money-transfer giants like Western Union and MoneyGram and the Card Schemes (VISA, MasterCard), PayPal is the only other institution that has amassed all MSB license and/or a valid operating business license in the places it is doing business.

The five change factors that PayPal is going after are:

1. eCommerce
2. Choice
3. Mobile Commerce
4. New Form Factors
5. The Digital Wallet.

The key drivers for the future for PayPal hinges on many factors, but the important ones are:

1. Flexibility
2. Integration with Point-of-Sales
3. Reach

PayPal it seems is doing a bit of everything. In some instances the bit of everything may be small in scale (volume/value) when compared to other incumbents, in some instances, PayPal is the incumbent.

My bet is PayPal will aim at acquiring a Bank, possibly a credit union, etc. and then turn it around and obtain Federal Charter from OCC for nationwide banking.

Banking provides PayPal with access to deposits and utilization of money, that otherwise it cannot touch/invest, due to the current money transmission laws. If you are looking at a parallel example, look no further than GreenDot. Many people may not realize, but GreenDot is both a Bank and a Money Transmitter License holder. (See disclaimer statement screenshot on Greendot website).


Here is a snapshot on one of the States where GreenDot does have a Money Transmitter License (Texas):



Each has its advantages. For example a Federal Banking license by OCC, exempts the bank from obtaining Money Transmitter Licenses. The funds/money (or unused credit) under the Banking Umbrella can be utilized and invest further, a restriction that does not apply to banks but does apply to money transmitter license holders (like PayPal has at present).

Before I conclude, in the paragraphs ahead, it is very interesting to note, that Ebay does not have any money transmitter licenses.

Search for Ebay in Texas for MSB Licenses yields nothing...


Same scenario in California, where Ebay does not have an MSB.

The Independent PayPal

The independent PayPal would definitely seek to become a Bank in the US. It is sitting on access to approximately US$ 20 Billion in unused credit (last quarterly filing by Ebay, numbers specific to PayPal (Source: Note 8 - Commitment & Contingencies - eBay Inc. - Quarterly Report)

Also from the SEC filing, the following paragraphs are of prime importance - it very clearly outlines what areas of business PayPal is (via reference to the threats it perceives from the market):

PayPal
The markets for PayPal’s products and services are intensely competitive and are subject to rapid technological change, including but not limited to: mobile payments, electronic funds transfer networks allowing Internet access, cross-border access to payment networks, creation of new payment networks and new technologies for enabling merchants, both online and offline, to process payments more simply. In addition, the payments industry is rapidly changing, highly innovative and increasingly subject to regulatory scrutiny, which may negatively affect the competitive landscape. PayPal faces competition and potential competition from existing online, mobile and offline payment methods, including, among others:

• providers of traditional payment methods, particularly credit and debit cards, checks, money orders and Automated Clearing House transactions (these providers are primarily well-established banks);
• providers of “digital wallets” which offer customers the ability to pay online and/or on mobile devices, including with mobile applications, through a variety of payment methods, including Visa’s Online Shopping Made Easier by Visa Checkout | Visa USA, MasterCard’s MasterPass, American Express’s Serve, Google Wallet and the Merchant Customer Exchange (MCX) initiative supported by Walmart, Target and other major U.S. retailers;
• providers of mobile payments solutions that use Visa, American Express and Mastercard's tokenized card data approaches and Near Fields Communication (NFC) functionality, such as Apple's mobile Apple Pay, and Google's Android solution, that uses Host Based Card Emulation (HCE) functionality to eliminate the need for a physical NFC card in the device;
• payment-card processors that offer their services to merchants, including Chase Paymentech, First Data, Bank of America Merchant Services, Elavon, Vantiv, WorldPay, Barclays Merchant Services, Global Payments, Inc., Stripe and Balanced, and payment gateways, including CyberSource and Home - Authorize.Net (both owned by Visa), SimplifyCommerce by MasterCard and First Data;
• Amazon Payments, which offers merchants the ability to accept payment card- and bank-funded payments from Amazon’s base of online and mobile customers on the merchant’s own website. Amazon has recently launched a new payment service for online merchants under the name Log in and Pay with Amazon;
• providers of "person-to-person" payments, that facilitate individuals sending money with an email address, such as Facebook messaging payments;
• providers of mobile payments, including Softcard in the U.S., Buyster in France, Mpass in Germany, Paym in the U.K., Boku and Crandy, many of which are owned by or supported by major mobile carriers; and
• providers of card readers for mobile devices and of other new point of sale and multi-channel technologies, including Square (which has also begun to offer a marketplace service to sellers), Chase Paymentech, Bank of America, AT&T (in association with Vantiv), Capital One, Shopify, iZettle, WorldPay, Payleven, Groupon, SumUp and others.

PayPal also faces competition and potential competition from:

• money remitters such as MoneyGram, Western Union, Global Payments, Inc., Xoom and Euronet;
• bill payment services, including CheckFree, a subsidiary of Fiserv;
• services that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account or paying on credit, including Western Union’s WU Pay, Dwolla, Acculynk, TeleCheck (a subsidiary of First Data), iDEAL in the Netherlands, Klarna in several European countries with announced plans to enter the U.S. market, Sofortueberweisung (which recently merged with Klarna) in Germany, PayLib in France and the MyBank pan-European initiative;
• issuers of stored value targeted at online payments, including NetSpend, Green Dot, PayNearMe, UKash and Qiwi in Russia;
• other international online payment-services providers such as AliPay, the PayU group of companies (owned by Naspers), PagSeguro and Bcash (owned by Naspers);
• other providers of online account-based payments, such as Skrill, ClickandBuy (owned by Deutsche Telekom), Barclays Pingit in the U.K., Kwixo in France and Paymate and Visa PayClick in Australia;
• payment services targeting users of social networks and online gaming, often through billing to the consumer’s mobile phone account, including PlaySpan (owned by Visa), Boku, Bango and Payfone;
• payment services enabling banks to offer their online banking customers the ability to send and receive payments through their bank account, including PopMoney from Fiserv, which has a collaboration agreement with Visa, and ClearXchange (a joint venture among Wells Fargo, Bank of America and JP Morgan Chase);
• online shopping services that provide special offers linked to a specific payment provider, such as Visa’s RightCliq, MasterCard MarketPlace, TrialPay and Tapjoy;
• services such as Coinbase and Bitpay that help merchants accept and manage virtual currencies such as Bitcoin; and
• cash.

Some of these competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater brand recognition or a larger base of customers than PayPal, and may be also be able to leverage other affiliated businesses for competitive advantage or to attempt to prohibit or prevent competition from PayPal. PayPal’s competitors may be able to innovate and respond to new or emerging technologies and changes in customer requirements faster and more effectively than PayPal. Some of these competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing and other regulatory requirements than PayPal, which is subject to additional regulations based on, among other factors, its licensure as a bank in Luxembourg. They may devote greater resources to the development, promotion and sale of products and services than PayPal, and they may offer lower prices. For example, Google previously has offered free payments processing on transactions in amounts proportionate to certain advertising spending with Google. We also expect new entrants to offer competitive products and services. In addition, some merchants provide such services to themselves. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services than PayPal. In addition, in certain countries, such as Germany, Netherlands and Australia, electronic funds transfer is a leading method of payment for both online and offline transactions. In the U.K., the Payments Council has announced that mobile payments between bank accounts will be broadly available beginning in 2014. As in the U.S., established banks and other financial institutions that do not currently offer online payments could quickly and easily develop such a service.

The principal competitive factors for PayPal include the following:

• ability to attract, retain and engage both buyers and sellers with relatively low marketing expense;
• ability to show that sellers will achieve incremental sales by offering PayPal;
• security of transactions and the ability for buyers to use PayPal without sharing their financial information with the seller;
• low fees and simplicity of fee structure;
• ability to develop services across multiple commerce channels, including mobile payments and payments at the retail point of sale;
• trust in PayPal’s dispute resolution and buyer and seller protection programs;
• customer service; and
• brand recognition.

With respect to our online and mobile competition, additional competitive factors include:

• website and mobile platform and application onboarding, ease-of-use and accessibility;
• system reliability;
• data security;
• ease and quality of integration into third-party mobile applications; and
• quality of developer tools such as our application programming interfaces and software development kits.

Some of PayPal’s competitors, such as Wells Fargo, First Data, American Express, WorldPay (The Royal Bank of Scotland) and Synchrony Financial (formerly, GE Capital Retail Bank), also provide processing services to PayPal. If PayPal were to seek to expand the financial products that it offers, either alone or through a commercial alliance or an acquisition, these processing relationships could be negatively affected, or these competitors and other processors could make it more difficult for PayPal to deliver its services.

Source: Page 81/82: eBay Inc. - Quarterly Report

Conclusion

PayPal is not a singular product or services company anymore. It is a global player, with vested payments and banking related services interest in multiple areas. From wallets, to bitcoins, to money-transfer services, to banking to issuing, to acquiring, etc. PayPal is doing all these things in one form or the other.

In order for PayPal to compete in the global marketplace of financial services for payments, acquiring, issuance and processing, it needs to cement itself in its primary market as an established bank, and this is the path (in my opinion) that PayPal will most likely follow.

PayPal's cost of financial management via the current banking partners it has is quite high, not to mention the banks are also privy to the deep transaction analytics of payments that are being processed through them. PayPal would like to take this away from the banks, who also are in some way, shape or form, becoming competitors.

If PayPal is able to acquire a license (which would take about two years), they would position themselves much better from lower costs of processing and escrowing the transactions on behalf of their customers as well as be able to compete head-on with what PayPal has most correctly identified their true threats, i.e. the very banks PayPal is working with.




Source for MSB Searches:

• California: California Department of Business Oversight
• Texas: Texas Department of Banking