PayPal is one of the world’s oldest online payment companies. It connects more than 150 million users globally to a virtual payment platform that allows them to purchase goods and services online.1 The American company supports online money transfers between customers and merchants in a model that substitutes physical monetary transactions that customers would traditionally make using cash, checks, or other instruments of physical money exchanges with virtual payments.2
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Based on this service model, the company prides itself as one of the world’s most formidable payment processing firms for virtual corporations, auctioneers and other businesses operating in the online marketplace. Typically, it charges a small fee for processing payments for these entities. Over the years, the company has been strategically positioning itself in the retail sector by offering to be the bridge between virtual businesses and brick-and-mortar organizations. This strategy has been part of the company’s quest to become the digital wallet for customers in the physical and virtual worlds.3
PayPal’s story started in 1998 when five friends, Max Levchin, Elon Musk, Peter Thiel, Luke Nosek, and Ken Howery, developed the company as a digital wallet organization, which allowed its users to store money in digital accounts because it was safer and more convenient to do so.4 However, they changed their business model and chose to concentrate on the online money payments service. In 2000, PayPal saw an opportunity to merge with eBay in processing online payments for its customers.
It was a watershed moment for the organization because its user numbers increased to 100,000.5 In 2002, it started trading publicly, where it raised more than $70 million during the Initial Public Offering.6 In 2002, eBay acquired it in a deal worth $1.5 billion.7 Twelve years later the two entities separated in a spinoff plan, which allowed PayPal to operate independently. Today, PayPal has a market presence in more than 200 countries around the world, and it manages more than 15 merchant accounts, with a market capitalization of $18 billion.8 Experts also estimate that the company has more than 200 million active users today.
Key Activities and Events, Which Have Occurred in the Company between September 2017 and December 2017
In recent months, PayPal has restructured its credit business by selling off this aspect of its operations to a third party – Synchrony Financial. In November 2017, the company did so in a deal that was worth $6.8 billion.9 This money represented all credit receivables of the company. About 5.8 billion of the purchase price represented American consumer credit receivables, while the balance ($1 billion) was the value of interests associated with the debtors. Investors and participating financial institutions held this money. PayPal projects that its partnership with Synchrony Bank will be complete in the third quarter of 2018.10
The partnership with Synchrony Bank stems from an old relationship between PayPal and the financial institution because, since 2004, the Bank has been the sole issuer of PayPal-branded consumer credit cards that allowed the company’s users to make purchases online and on in-store platforms, provided they did not exceed their credit limits. The expanded partnership between Synchrony Bank and PayPal will now include the PayPal credit online, which has in the past only been available to American consumers. This strategy implies that Synchrony Bank will soon be the primary issuer of credit to PayPal’s customers.
In a related event, PayPal’s stocks have also significantly increased in the last few weeks presumably because of the company’s announcement of its partnership with Synchrony Bank.11 The company’s shares have increased in value by more than 4% to close at 76.68 on 16 November 2017.12 Based on the increase in its share price, experts project that the company’s fourth-quarter revenue would increase to a possible $3.64 billion. In line with these positive developments, the company has reported that it would increase its per-share earnings to 59 cents. Analysts have raised their price targets for the company’s shares because such a deal is expected to improve PayPal’s public image.13
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Although many factors, including the credit market restructuring process, could be possible reasons for the positive financial projections of PayPal, recent weeks have also seen the company make bolder efforts to change its business framework further by launching the money pool program.
The money pool program is a recent move by PayPal to develop a peer-to-peer service, which allows users to fundraise whenever there is a need to do so.14 Usually, the service works by helping people who come from the same social circle to contribute towards financing shared events or buying shared items. Using this service, users can customize their pages to accept payments to attain a specific goal.
They have the option of publicly displaying the collected amount or keeping this information private. The users also have the power to determine whether the contributing partners would remain anonymous or not. PayPal has launched the service only in specific countries, including America, United Kingdom, and Germany. There are plans to expand it to other markets if it increases in popularity. Nonetheless, the goal of developing the money pool program is to grow the company’s financial ecosystem. Already, the company boasts of having an annual payment volume of $114 billion.15 It expects this number to increase with the launch of the money pool program.
Key Decisions the Company Managers Have Made Regarding Recent Activities and Events
The move by PayPal to restructure its credit business is part of a larger plan by the company to increase its sales numbers and expand its business outreach program to new areas of financial management in a calculated move to reach out to new customers.
A chief motivator for most of the company’s managers to stretch the limits of what the company could do is to make it more efficient. The decision to sell its credit business is one such move because it helps the company to focus more on its core business (online money payments) and leave the credit segment to a partner who is more competent in the space. The justification for following such a strategy is to improve the company’s efficiency by capitalizing on its key competencies.
Another decision that seems to be informing the actions of PayPal’s managers is the quest to expand the company’s value to its customers and shareholders. The managers seem to be uncomfortable with maintaining the traditional business model of solely processing online retail financial payments; instead, it is exploring other ways it could be of value to its customers by venturing into other aspects of financing activities that have a social, economic and political value to users.
The money pool campaign is proof of this approach because, although it does not necessarily fit into PayPal’s business model of processing financial payments, it is a move to expand the company’s boundaries of value creation, in financial management terms.16 Therefore, the critical decisions that the company’s managers have made in light of recent events aim to make PayPal more efficient and responsive to market needs.
Venturing out of the company’s traditional business model does not seem to be a distraction for the managers because their focus is on making sure PayPal remains relevant to online users, regardless of the changing nature of online business transactions. If these managerial decisions succeed, PayPal could significantly increase its global outreach by increasing its shareholder value and maximizing its business potential.
Do You Agree or Disagree with the Manager’s Decisions?
I agree with the decision by PayPal’s managers to restructure its credit business because, although it would deny the company revenues that come from the loans offered to customers, the process would give it an expanded access to cash reserves, which it could use to grow its business further. Indeed, by selling off its business to Synchrony Bank, the financial institution would be the only entity mandated to profit from the loans.
However, the interest currently received from its credit business is only a fraction of what the company could get to invest it frees up its cash reserves. Therefore, the inclusion of Synchrony Bank as a strategic partner means that instead of PayPal using its money to finance credit purchases, the bank would come in as an independent body to provide the cash that customers would use to make the same credit purchases. The implication of pursuing this strategy is that it would enhance the company’s strategic and financial goals.
I also support the management’s decision to restructure its credit business because doing so would not affect its customers directly. Furthermore, the process would build on a growing partnership between the online payment company and Synchrony Bank. The connection is instrumental in enhancing PayPal’s dominance in the online payment market because it would expand its capabilities within the merchant space.
The launch of the money pool program is also a welcomed decision by PayPal’s managers because it would increase the volume of payments the company gets, thereby enhancing its global online visibility. However, it is important to point out that the expansion of its financial markets strategy represents the company’s willingness to venture into the crowd-funding front.17 This strategy makes sense for the company because it is already one of the most established online payment companies in the world.
In fact, I believe its entry into this market segment should have occurred earlier because other online platforms, such as “gofundme.com” have been in this space for too long and yet they do not have the same competence and experience of PayPal. The unlimited control the company has given its customers in the program means that people could use it to fund various social, political and economic agendas. Since PayPal already has millions of people signed up to its platform, it could make it convenient for users to log into their PayPal accounts and fund whatever cause they want.
This approach could have a positive impact on the company’s revenues because it would be controlling a more significant part of the payment value chain that most businesses often exploit, especially considering they collaborate with PayPal to process their crowd-funding transactions. Therefore, the launch of the money pool program means that PayPal is keen on pursuing a vertical integration strategy that would have a positive impact on its global financial positioning and revenues.18
Autry likens a vertical integration strategy to that which firms use to add value to their processes upstream (through suppliers) and downstream (by acquiring channels of distribution).19 This strategy is what the managers of PayPal seem to be pursuing. It is justified because the online business marketplace is volatile, while critical partnerships are instrumental in maintaining a dominant position.
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For example, the growth and popularity of Bitcoin and other crypto-currencies in the past few years poses a threat to the company’s operations.20 PayPal has to rise to such challenges by consolidating the market through collaborating with other players in the industry. Notably, it is essential for it to work with brick-and-mortar financial institutions, such as Synchrony Bank, because this strategy is the only way of bridging the virtual and physical gap in the retail business. The pursuit of this approach and the attempts to create the money pool program are deliberate steps taken by the company to maintain its position in the industry because the failure to do so could have a significant impact on the business unit’s place in the industry.
Concisely, the failure to adopt the vertical integration strategy could significantly influence its operating costs, differentiation strategies and other strategic issues of performance. PayPal’s partnership with Synchrony Bank is an example of forward integration, while its launch of the money pool program is an example of backward integration, both of which are essential in advancing the company’s position in the market.21 These examples demonstrate that the decisions taken by PayPal’s managers are well informed.
Autry, C. et al., Managing the Global Supply Chain (Collection), New York, NY, FT Press, 2017.
Bakker, D., Vertical Brand Portfolio Management: Strategies for Integrated Brand Management between Manufacturers and Retailers, New York, NY, Springer, 2014.
Bostic, M., 2016 Photographer’s Market, New York, NY, F+W Media, Inc., 2015.
Carlen, J., A Brief History of Entrepreneurship: The Pioneers, Profiteers, and Racketeers Who Shaped Our World, New York, NY, Columbia University Press, 2016.
Cherney, M., PayPal Sells U.S. Credit Assets, Stock Hits Record High, San Francisco, CA, Market Watch. Web.
Chon, K, The Growth Strategies of Hotel Chains: Best Business Practices by Leading Companies, London, UK, Routledge, 2012.
Euromonitor., PayPal Inc in Consumer Finance, London, UK, Euromonitor International. Web.
Green, R., PayPal Launches P2P Funding Platform, New York, NY, Business Insider. Web.
Hassan, S., Short Cases for Business Studies, New York, NY, Educreation Publishing, 2017.
Hurst, S., PayPal Opens Domestic Operations in India & Launches Money Pool Fundraising Feature, Beachwood, OH, Crowdfund Insider. Web.
Kass, D., Doug Kass on the Market: A Life on the Street, London, UK, John Wiley & Sons, 2014.
Krause, R., PayPal Bolsters Acquisition War Chest with This Move, New York, NY, IBDI. Web.
Kulkarni, T., PayPal Sells Consumer Loans to Long-Time Partner Synchrony Financial, New York, NY, Bank Innovation. Web.
Kumar, A., Short Selling: Finding Uncommon Short Ideas, New York, NY, Columbia University Press, 2015.
Liebowitz, J., Beyond Knowledge Management: What Every Leader Should Know, New York, NY, CRC Press, 2016.
Moss, A., Paypal Stocks Record New High as It Sells US Credit Assets, London, UK, Born 2 Invest. Web.
Mullan, P., The Digital Currency Challenge: Shaping Online Payment Systems through US Financial Regulations, New York, NY, Springer, 2014.
Nasdaq., PayPal to Sell U.S. Credit Assets, Raises Q4 Forecasts, London, UK, Reuters. Web.
Pucci, R., PayPal’s Money Pools Targets Group Payments, Shrewsbury, MA, Payments Journal. Web.
PYMNTS., Paypal Restructures PayPal Credit, Sells Receivables to Synchrony Financial, New York, NY, PYMNTS. Web.
Xiaoge, X., Handbook of Research on Human Social Interaction in the Age of Mobile Devices, New York, NY, IGI Global, 2016.
- Euromonitor, PayPal Inc in Consumer Finance, London, UK, Euromonitor International. Web.
- X. Xiaoge, Handbook of Research on Human Social Interaction in the Age of Mobile Devices, New York, NY, IGI Global, 2016, p. 272.
- M. Bostic, 2016 Photographer’s Market, New York, NY, F+W Media, Inc., 2015, pp. 83-84.
- J. Carlen, A Brief History of Entrepreneurship: The Pioneers, Profiteers, and Racketeers Who Shaped Our World, New York, NY, Columbia University Press, 2016, p. 208.
- J. Liebowitz, Beyond Knowledge Management: What Every Leader Should Know, New York, NY, CRC Press, 2016, p. 74.
- S. Hassan, Short Cases for Business Studies, New York, NY, Educreation Publishing, 2017, p. 28.
- A. Kumar, Short Selling: Finding Uncommon Short Ideas, New York, NY, Columbia University Press, 2015, p. 198.
- D. Kass, Doug Kass on the Market: A Life on The Street, London, UK: John Wiley & Sons, 2014, p. 477.
- PYMNTS. Paypal Restructures PayPal Credit, Sells Receivables To Synchrony Financial, New York, NY, PYMNTS. Web.
- R. Krause, PayPal Bolsters Acquisition War Chest with This Move, New York, NY, IBDI. Web.
- Nasdaq, PayPal to sell U.S. credit assets, raises Q4 forecasts, London, UK, Reuters. Web.
- M. Cherney, PayPal Sells U.S. Credit Assets, Stock Hits Record High, San Francisco, CA, Market Watch. Web.
- T. Kulkarni, PayPal Sells Consumer Loans to Long-Time Partner Synchrony Financial, New York, NY, Bank Innovation. Web.
- A. Moss, Paypal Stocks Record New High as It Sells US Credit Assets, London, UK, Born 2 Invest. Web.
- R. Pucci, PayPal’s Money Pools Targets Group Payments, Shrewsbury, MA, Payments Journal. Web.
- R. Green, PayPal Launches P2P Funding Platform, New York, NY, Business Insider. Web.
- S. Hurst, PayPal Opens Domestic Operations in India & Launches Money Pool Fundraising Feature, Beachwood, OH, Crowdfund Insider. Web.
- D. Bakker, Vertical Brand Portfolio Management: Strategies for Integrated Brand Management between Manufacturers and Retailers, New York, NY, Springer, 2014, p. 8.
- C. Autry et al., Managing the Global Supply Chain (Collection), New York, NY, FT Press, 2017, pp. 111-112.
- P. Mullan, The Digital Currency Challenge: Shaping Online Payment Systems through US Financial Regulations, New York, NY, Springer, 2014, p. 159.
- K. Chon, The Growth Strategies of Hotel Chains: Best Business Practices by Leading Companies, London, UK, Routledge, 2012, p. 39.