Reinvention of Spending
No one wants to touch cash anymore. People are flocking to PayPal.
PayPal SVP Jim Magats on what the pandemic says about the future of payments.
The pandemic has forced many people to get creative just to survive.
Countless plumbers, gardeners, trainers, builders, tutors and everything in between, who would've liked to be paid in cash pre-pandemic, have had to go digital, whether they wanted to or not. And one of the companies that has been reaping all the conversions to digital payments, whether on Venmo, Xoom or other services, is PayPal.
Despite everything else going on this year, "it's been an amazing year" for PayPal, according to Jim Magats, the company's senior vice president of omni payments. Usage and signups are up, even in older, more tech-averse demographics. And the indications the company is seeing suggest those groups will stick around on digital platforms after the pandemic recedes.
But what is the future of your wallet? Is it an all-digital affair, with your cash existing primarily in balances on services like Venmo and PayPal, instead of in traditional bank accounts? Protocol spoke with Magats about what the pandemic has taught PayPal about building for an increasingly large-scale user base, how younger generations are thinking about their spending and whether the bank account really is on the outs.
This interview has been edited for length and clarity.
How has the pandemic been for PayPal?
It's been an amazing year, in terms of what we have seen within our ecosystem around digital payments and the acceleration of that. We just had a forum where we had a couple of leaders from other companies talking to us, and the leader of this one company said, "The pandemic didn't change things — it just accelerated the change that was already there."
I think for us, what we have seen over the course of the last nine months, is just a massive acceleration of people wanting to use digital payments, wanting to accept digital payments. And it's been an amazing year in terms of the resiliency of our organization, like every organization, to go work from home and then just see this amazing surge of new customers and new demand for new contexts for us. What resonates with me are things like McKinsey saying "10 years of advancement in digital and ecommerce within the first three to four months [of the pandemic]." You look at just the behavioral changes: As I literally went to get water [before this interview], I saw a food delivery coming to our house. I use the recycle bin "litmus test" of just walking down the street here on Wednesday, when we put out our recycling, [seeing] the number of cardboard boxes that now everybody has.
For us, what excites us is the number of new products that we have that we put out into market, the number of net new users that we have across all of our different areas, and that we've been able to scale and support that. A couple years ago, our ability to scale probably wouldn't have been there, and so we're excited about what's happened and excited about the transformation that's going on. I think a lot of the trends that we've seen, we expect to continue to see just from our own behavioral changes that we have.
Has the pandemic shifted PayPal's roadmap at all?
To some degree: Let me break it down into scale changes and product changes. From a scale point of view, one of the things that we've had to accommodate is just the surge of new users on our platforms. We were seeing about 9 [million] to 10 million new users, on the consumer side, per quarter coming into our platform. And that number reached 15 million in our last quarter. And so you're almost seeing a 50% increase in the number of new consumers on our platform.
With that, you're seeing different demographics coming out. Our largest net new user group are those over 50, which I thought was very fascinating in terms of people who hadn't used ecommerce before are now finding a need to and finding convenience. We had seen the amount of small businesses that are coming onto our platform grow almost by 2x — what we typically see is about 700,000 or so per month of net new merchants, and in the last quarter, we had about 1.5 million. So it's really, how do you scale your onboarding processes, your vetting processes, customer service? We've gone completely remote on all of our customer service agents. In a matter of a couple months, we moved everyone remotely, and to be able to handle that surge has been pretty amazing for us.
I think on the product side, what we have reacted to is, we believe, a continuing trend for touchless payments. Visa has a survey that says that 63% of the population wants contactless payments, and we've got lots of data that shows people want to use QR codes and would not go into a physical environment if they didn't have those touchless environments. QR codes have been something that we had talked about launching for years. And with the pandemic, we really put in a lot of combined effort organizationally, and that was something that typically would have taken years to launch, and we did it within months. And that's now a great service for your small businesses, your farmers markets, your Christmas markets — places that don't typically have card acceptance — as well as in mainstream stores. It's now live in 8,000 CVS stores; we've got Nike, Tumi, Samsonite and others that are lining up for Q1 of next year.
That's probably one of the best examples of things that we've done reacting to the pandemic. The other is an acceleration of our product called Pay in 4. A lot of our customers were really wanting to have some sort of installment-based payment, and I think for a lot of millennials who lived through the financial crisis in 2008, there's a pretty strong aversion to credit, but they liked the idea of cash-flow management. So the idea of being able to go and check out for an item that's a couple hundred dollars and to pay it off over a six-week period with four payments is something that they really like, and the pandemic unfortunately exacerbated a lot of the economic crisis that we have, from an individual point of view. We've done some studies: The 17% of those PayPal users that we've done studies on do not have any savings. From an unemployment point of view, as we talked to some of our users, nearly half of the unemployed population had less than $2,500 in savings. And so the idea of being able to create more predictive behavior around how and when you can pay has been another thing that we've accelerated.
Installment paying seems so popular all of a sudden, not just with PayPal, but also the likes of Affirm and Klarna and others. Is this a result of people who grew up during the financial crisis looking for new ways of financing their lives, or the pandemic — or both?
Well, I think we always have had the product capabilities around deferred payments. We bought a company in 2008 called Bill Me Later: Basically, you would have either an installment or a deferred pay after six months, those types of things. We also had another product experience called Pay After Delivery, which was more geared towards people having trust issues or concern about paying for something [where] "I don't know who the seller is until I get it."
If I remember, Pay After Delivery had significant impact: 10% of our users were using that product experience. In geographies like Mexico, in Brazil, where when you talk to the average Brazilian or Mexican, they hate credit, but they love cash-flow management installments, which is basically a euphemism for credit. I can tell you stories of being in Brazil where people pounded on the table and said, "I do not use credit." I'm like, "Well, OK, I have seven monthly payments of 100 real — sounds like credit to me."
But in their mind, having lived through a lot of inflationary periods, devaluation of credit becomes a very challenging thing. And that's why I think, for folks especially in the Venmo demographic, a high-level likelihood that that user base would be very much attracted to a more installment-based product solution. And so I think that the demand has always been there. It's just never been really curated and offered in a ubiquitous manner, because for many people, the credit card was their only way of doing it.
How has usage for Venmo been during this time?
Actually it's gone up now significantly. In Q3, we've seen about a 60% increase in usage, quarter over quarter. If you look between PayPal, Venmo and Xoom, that's another person-to-person flavor, [there's been] nearly 50% year-over-year growth, in usage of [P2P payments]. A lot of it is cash replacement, check replacement.
Two real examples in my life: If you were here in the morning, my wife would be doing her daily workout with her trainer in our bedroom, and she pays the trainer who used to come to the house with PayPal or Venmo. I have an Italian teacher that I used to meet in person that I would go and meet and pay in cash, I now do it over Skype and I PayPal her the money. So the use cases have really gone after cash and check replacement. We just had a gate built, and the person who wanted payment didn't want a check, they wanted Venmo.
It's these everyday use cases. Probably you will have traditionally used Venmo as a way to split payment: You go out to a restaurant and pay each other back. This has absolutely been surging for us. It's how we pay our gardener, our babysitter, dog walkers. It used to be cash and check, and now it's through one of these platforms.
What's the rationale of keeping the Venmo brand separate?
What we have found is that the Venmo user is more aligned to their community — or in current nomenclature, their bubble — in terms of the people that they interact with. And that group, in particular, has an affinity to the UI, and they will view things in terms of what we do in a collective manner. To the extent that people are planning a vacation, collectively, people would chip in for those things and use Venmo, and all the activity would be within that pod or network that would be brought together.
A lot of the Venmo view is around community. We've just launched something called business profiles that allows a dog walker or a craftsperson or an artist to basically create a business account and within their community, to be able to then say, "Hey, I have a business profile, pay me with Venmo." In essence, it starts to be more of where Yelp meets Venmo — it's an opportunity for them to use the social feed and community scoring to be able to say, "Hey, this is someone that's within our ecosystem that I would recommend." You see some of your friends using that dog walker, people within your social sphere, it creates more of an endorsement of that business.
While PayPal has a tremendous amount of person-to-person activity, it tends to be more affiliated, from a consumer point of view, with shopping experiences. And the PayPal brand is a trusted brand; if you see PayPal at this merchant, you're going to get a convenient, easy checkout. And so you see things now with PayPal, in our acquisition of Honey, in embedding Honey Offer and Honey Gold around those [types] of things. The integration of that is more around a buying experience versus Venmo is more of a sharing experience.
What do you think the future of payments is? Is there a future where younger generations don't even consider opening a traditional checking account, but rely on products like Venmo or PayPal's?
I have a 15-year-old, and we've had multiple conversations like, "Dad, I need some way to pay someone, I need some way for people to pay me." I'm not really sure what he's doing in his room all day, but I agree with you that the juxtaposition of what we're seeing in crypto, in Venmo stored balances, a PayPal account, obviates the need for someone to have sort of a traditional bank account associated with it.
And really, the functionality at its essence, is similar — storing balance — but there was a time in our lives that interest rates were actually high, or they were at least about 5%. So you would keep your money in a bank account because you would earn interest until you actually needed the money. Especially in a period of low interest, which I think [we] will be in for the foreseeable future, the utility of a bank account becomes relatively smaller, meaning that I think you get a lot more utility in terms of the interoperability of that money, by being able to get a Venmo account and send it to my friend or I can pay now my Italian teacher and I'm not going into her bank account or her bank account details — it all can be managed within our own ecosystem.
And we are launching a credit card around the Venmo account; Pay in 4 is another flavor of credit that we're offering; crypto is another example where, again, you're driving people to utilize our platforms and mobile technology and our interoperable network of 380-ish million customers around the world, that you're creating an ecosystem that puts a convenience layer on what has traditionally been the banking ecosystem.
Will a bank account go away? I don't think so, people need somewhere to store their balance; how they access it is what has changed.
Do you think the current regulatory landscape for banking products in the U.S., especially around what those who have banking charters and those who don't can do, needs to change at all?
I think regulators are starting to see alternative financial services, for lack of a better term, as a viable way forward. I think politicians see it when they look at their fundraising and how they're getting money through these applications. And so it's not lost on them, the importance of those things from a financial and a customer preference point of view.
I do see a world where I think the regulatory regime will become more permissive. But I also think that there are many established players in the banking ecosystem that are willing to be in essence a supplier or service provider of balance sheets, of regulatory compliance and those [types] of things, to other providers. And I'm relatively confident for the foreseeable future, there's enough of those out there to allow innovation to work on top of that.
Mike Murphy ( @mcwm) is the director of special projects at Protocol, focusing on the industries being rapidly upended by technology and the companies disrupting incumbents. Previously, Mike was the technology editor at Quartz, where he frequently wrote on robotics, artificial intelligence, and consumer electronics.