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IN1862

Case Study

PayPal:
Maintaining Market Leadership in Digital Payments

Source: Thomas, Marques, "PayPal Loading Screen", 2022, https://unsplash.com/photos/gs9uci8JvGw.

10/2022-6772
This case study was written by Alessandro Pappalardo and Carina Vogel, under the supervision of
Afonso Almeida Costa, Assistant Professor at Nova School of Business and Economics, Portugal, and
Luís Almeida Costa, Visiting Professor at INSEAD and Professor at Nova School of Business and
Economics, Portugal. It is intended to be used as a basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation.
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The Beginning of a New Era for PayPal

“2020 was a uniquely challenging and transformative year.” 1

The opening words of PayPal CEO Dan Schulman’s speech echoed in Rich Hagen’s mind as he
boarded the flight to San José, returning from a three-day conference with other PayPal executives
in preparation for the 2021 Investor Day. He had recently been appointed as Strategic Director for
the US market. Prior to this, he had co-founded online retail investment platform TradeKing, where
he had been CEO for 11 years until it was acquired in 2016 for $275 million by Ally Financial.
Hagen had then presided over the new brokerage and wealth unit, Ally Invest.2

When Hagen joined PayPal in 2021, it was the dominant force in the digital payments industry. Its
success was attributed to a two-sided platform that offered convenient and secure payments on a
global scale for consumers and merchants. In 2020, amidst the turmoil caused by the Covid-19
pandemic, PayPal achieved new records across a range of key performance indicators (KPIs)
where the highlights were a 24% year-over-year (YoY) user base growth to 377 million and a 31%
YoY total payment volume (TPV) rise to $936 billion (Exhibit 1). 3

Hagen took the job due to the company’s continued commitment to innovation and pursuit of new
opportunities. He was particularly eager to work with Dan Schulman, PayPal’s CEO and president,
as he led the company into what he called the “new digital paradigm”. Schulman had reinforced
PayPal’s value proposition by expanding its offering of complementary products to digital
payments. At the leadership conference, he had asked for Hagen’s input to define the next chapter
of PayPal’s innovation strategy.

Disrupting the Payments Industry

Payments Pre-Digitalisation

Before the internet, the payments industry was dominated by banks and licensed institutions that
facilitated cash transactions and cleared cheques. Cheques were a first step toward non-cash
transactions by enabling the payer to hand over a piece of paper to the payee that was then
presented to a bank. The displacement of cash was reinforced with the launch of the first US credit
card in 1958 by BankAmericard (later renamed Visa), which established a foothold in payments
by building a system based on working with competitors to achieve mutual benefits. Visa’s ‘four-
party scheme’ would be the underlying payments processing structure for decades (Exhibit 2). It
was based on intermediation between the two main customer groups, consumers (payers) and
merchants (payees), each backed by a bank that transmitted financial and transactional data
through the credit network (Visa). The issuer provided consumers with credit or debit cards and
authenticated the exchange. Checks required for authorisation included the validity of transaction
data, trustworthiness of the cardholder, and sufficiency of the funds. The response was sent to
the merchant’s bank, the acquirer, which supplied the means to accept card payments and

1 PayPal, “2021 Notice of Annual Meeting of Stockholders and Proxy Statement” (San José, 2021).
2 Ally Financial Inc., “Ally Financial Announces Acquisition of TradeKing Group,” MediaRoom, April 5, 2016,
https://media.ally.com/2016-04-05-Ally-Financial-Announces-Acquisition-of-TradeKing-Group
3 PayPal, “2021 Notice of Annual Meeting of Stockholders and Proxy Statement - 10-K” (San José, 2021).

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forwarded transaction information to the issuer through the credit network. After the transaction
was approved, the acquirer collected the payment and settled the amount in the merchant
account, usually within two business days.

To run its payment-processing system efficiently, Visa signed up as many qualified institutions as
possible to fill different roles in the value chain. They cooperated on key aspects such as shared
participation in cost and income structures, while simultaneously competing on others. Visa’s main
task was the communciation of transaction information, hence its main costs were related to data
transmission. The logistical costs from the actual transfer of funds were left to the issuing and
acquiring banks. Each participant fought to increase transaction revenue by attracting more
customers to its solution through product innovation and pricing.

In exchange for their services, each player in the payments processing value chain received a
small fraction of the transaction amount as fees, which amounted to 2.3% on average (Exhibit 3).
Since processing was paper-based, the linking mechanisms between the participants were often
time consuming. For example, point-of-sale (POS) purchases required a customer to swipe a
credit card in a shop and the embossed data was manually imprinted onto a paper slip that was
then presented to the banks. When Visa began to automate key processes like authentication in
the 1970s, it emerged as the dominant payment card system worldwide. In 1979, it introduced the
credit card terminal, which enabled fully electronic payments for the first time by digitising the
capturing of card information at POS.4

The Arrival of the Internet Economy and PayPal

Visa led the industry for decades but the rise of the internet in the 1990s ushered in fundamental
changes to payment processing. This was mainly driven by the growing usage of e-commerce
websites popularised by Amazon and eBay.5 Handling large sales volumes required online
retailers to adopt payment systems that processed transactions directly through their websites. In
response to this technical challenge, emerging players developed specialised digital solutions to
refine key processes of the value chain. This included payment ‘gateways’ (e.g., Authorize.net)
that collected merchants’ credentials and sent them to acquirers, and ‘digital wallets’, software-
based systems that stored user data for multiple payments methods (e.g., PayPal).

PayPal was launched in 1998 by Max Levchin and Peter Thiel – under the name Confinity – as a
security software provider for electronic devices. The original business model had limited success
and in 1999 the company pivoted to connecting individuals and small businesses via a digital
wallet. For this purpose, the company adapted its security software to encrypt financial data. It
pioneered fast and secure online transactions by enabling consumers to send money to merchants
as payment or make peer-to-peer transfers to friends and family.

For its business model revamp, PayPal adopted a modified version of Visa’s four-party scheme
that included user accounts and a built-in payments processor, a technical layer that
communicated authorisation and settlement messages between the acquirer and card network.
Despite these differences the underlying mechanics were similar. After consumers checked out

4 Visa, “History of Visa Credit Cards | Our Business,” accessed April 12, 2022,
https://www.visa.co.uk/about-visa/our_business/history-of-visa.html
5 adyen, “Evolution of Payments: The Payment Industry Explained,” 2018,
https://www.adyen.com/en_GB/blog/how-the-payment-industry-evolved

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using one of the payment methods stored in their account, the information was encrypted and
authenticated by the gateway and processor (Exhibit 4). This occurred within a few seconds and
did not involve PayPal transmitting consumers’ personal financial data to merchants. Next, the
information was forwarded to the issuer for authorisation. If the sale was approved, the issuer sent
the funds to the acquirer who settled the amount in the merchant account, typically within a few
days. To enhance customer security, the platform introduced extensive buyer and seller protection
programmes that prevented unjust payments, complaints, or chargebacks. For its services,
PayPal charged transaction fees to merchants ranging from 1.9% to 3.5% of the total transaction
value, depending on the product and the level of protection.

During the transformation, the company merged with X.com, an early online bank founded by Elon
Musk, and changed its name to PayPal. In 2000, the user base grew from 12,000 to 2.2 million
thanks to the increasing popularity of e-commerce and the rising acceptance of digital payment
from consumers and merchants. 6 Additional reasons were PayPal’s high security standards, the
free sign-up process, and aggressive marketing actions like gifting $10 to new users. Growth was
crucial since the platform’s value creation depended on network effects, which were enabled by
large user bases on both sides of the market: PayPal’s utility to the consumer rose with the number
of merchants that accepted its digital wallet at checkout, and vice versa.

Acquisition by eBay and Changes in the Competitive Landscape

Since banks and credit card networks traditionally catered to the payment needs of large retailers,
PayPal’s focus on individual consumers and smaller online merchants addressed a significant gap
in the market. As a result, it reached $3 billion in TPV and 13 million registered accounts only three
years after the business model revamp. PayPal checkout was particularly popular with eBay users,
who generated 60% of its TPV. This led eBay to acquire PayPal for $1.5 billion in 2002 to provide
a seamless user experience.

The global e-commerce spurt over the following years benefitted both companies. Online sales
reached 2.9% of total US retail volumes in 2006 (up from 1.4% in 2002). eBay’s revenue doubled
and PayPal reached 100 million users. By 2009, PayPal was the most used global payments
platform and served 190 markets. The company confirmed its digital payments supremacy one
year later with a daily processing volume of $315 million, or 18% of global e-commerce sales. 7 By
2012, PayPal contributed 40% of eBay’s revenue.

Meanwhile, other innovations were reshaping the competition in the payments market.
Incumbents such as American Express focused on product innovation, which led to the launch of
prepaid retail gift cards and a digital payments platform. New players entered the industry –
Google launched a digital wallet in 2012, followed by Apple in 2014.

Amid the changing environment, PayPal shareholders grew concerned that the ties to eBay had
become a liability. The main issue was eBay dictating that PayPal focused on serving its
marketplace, while disincentivising PayPal’s independent business development, e.g., with e-
commerce platforms that competed with eBay such as Amazon or Alibaba. Believing that PayPal

6 Brian O’Connell, “History of PayPal: Timeline and Facts,” TheStreet, February 1, 2020,
https://www.thestreet.com/technology/history-of-paypal-15062744
7 Leena Rao, “PayPal Now Processing $315 Million In Payments Per Day,” TechCrunch (blog), 2011,
https://techcrunch.com/2011/09/25/paypal-now-processing-315-million-in-payments-per-day/?guccounter=1

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had failed to build a strong payments ecosystem and innovate sufficiently – leaving the door open
for the likes of Google and Apple – shareholders demanded independence from eBay for greater
strategic focus, managerial autonomy, and flexibility. With the activist investor Carl Icahn leading
the charge, the pressure on eBay led to a split in June 2015 into separate entities; each
shareholder received one PayPal share for each eBay share owned. After the deal, PayPal
became an independent publicly traded company again and was free to grow the business on its
own terms.

PayPal under Dan Schulman

The separation entailed a leadership change. Schulman, former President of American Express,
became the new CEO in 2015. At the time of his first PayPal investors meeting, the product
portfolio mainly consisted of the payment processor and the digital wallet. He reshaped PayPal’s
strategy to emphasise innovation, raising the R&D budget by 20% during his first two years in
office to boost in-house development.8

Schulman’s push for innovation transformed PayPal’s product portfolio. Starting out as a checkout
option, the company extended its offering to include a comprehensive range of digital payments
solutions and value-added services in 200 markets and 100 currencies by 2020 (Exhibit 5). On
the consumer side, key innovations were debit and credit cards delivered through partnerships
with Mastercard and Visa, financial services (e.g., direct deposits, remittances) and shopping tools
(e.g., deals, offers, rewards). On the other side of the market, the payment processor was
complemented with merchant services (e.g., business loans, inventory management) and
marketing tools (e.g., business profiles, shopper insights) built on data collected from PayPal’s
millions of consumers (about preferences and shopping habits).

Internal innovation initiatives were reinforced with the continuation of high-profile acquisitions
(Exhibit 6). In 2018, PayPal purchased POS-focused fintech iZettle for $2.2 billion to gain an in-
store presence in 11 markets across Europe and Latin America.9 One year later, the company
acquired coupon-provider Honey for $4 billion to offer money-saving tools such as price tracking
and loyalty-based discounts. This enhanced the platform’s value creation for both user groups:
allowing consumers to save money and merchants to sell more.

To manage the broader product suite on a global scale, PayPal’s organization was structured into
functional and regional teams. The goal was to facilitate communication and decision-making
efficiency across 30 offices in 20 countries, led by the global HQ in San José. The geographical
dispersion was important to stay close to external partners who were integral to PayPal’s business
model. Another key pillar was the highly skilled workforce, which amounted to 27,000 employees
in 2020. Since the platform was essentially self-service, 30% worked in customer service. Other
support activities included technical work focused on the platform’s underlying systems, such as
data processing, fraud analysis, algorithm development, and R&D.

8 PayPal, “Combined 2017 Annual Report and 2018 Proxy Statement,” 2018,
https://s1.q4cdn.com/633035571/files/doc_financials/2017/ar/Combined_2017_Annual_Report_and_2018_Proxy_State
ment.pdf.
9 Briony Richter, “PayPal History: Looking Back at the Milestones,” Electronic Payments International (blog), July 18, 2018,
https://www.electronicpaymentsinternational.com/news/paypal-history-milestones/.

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Since PayPal transactions involved multiple parties, Schulman instilled a shared governance
system. Key activities were left to the responsibility of external partners, which allowed PayPal to
scale more efficiently and amplify its reach. To build stable relationships, PayPal ran a
comprehensive partnership programme with banks, credit networks, cloud providers, local
payment solutions and developers. Issuing and acquiring banks were particularly important due
to their central role in the payments value chain. Partnerships with credit networks like Visa and
Mastercard were critical to broaden the range of funding options for PayPal’s consumer accounts
by connecting their networks to the digital wallet. PayPal’s branded credit card was issued by
Mastercard, while Visa operated Venmo’s (PayPal’s subsidiary).

Shareholders were pleased with the company’s direction under Schulman. Since his arrival in
2015, market capitalisation had risen by a factor of seven and it ranked 134 on the Fortune 500.
Schulman was rated as one of the top 50 CEOs worldwide in 2019.10 Refusing to rest on his
laurels, he believed that the ongoing digital payments industry developments promised an even
brighter future: “As great as the past five years have been, the next five years offer even more
opportunity.”11 For Hagen, this outlook was the reason he had been hired.

Competitive Situation in 2020

Leading the Dynamic Industry

At the leadership conference, Schulman had stated that PayPal was aiming for sustainable growth
to maintain its leadership position in digital payments. In 2020, PayPal held a 54% market share
in payment processing, followed by Stripe with 19%, and Amazon Pay with 4% (Exhibit 7). 15.4
billion payments transactions were processed annually by PayPal. Since the company generated
93% of net revenues from transaction fees, it enjoyed record-breaking financial performance in
2020: 12 transaction-based revenues grew 24% YoY to reach $19.9 billion thanks to rising TPV
from online retail, gaming, and food delivery (Exhibit 8). This offset the 8% YoY decrease in
revenues from value-added services. The loss resulted from declining interest earnings and fee
reductions, granted as part of PayPal’s Covid-19 payment relief initiative.

Despite lower revenue from value-added services, Schulman was optimistic thanks to the
increasing popularity of digital payments. In 2020, the usage rate among American consumers
was 78%, driven by broad acceptance, high transaction speeds, low costs, and strong security.
This elevated the global transaction value to $5.4 trillion, with an expectation that it would surpass
$10 trillion by 2025.13 The demand growth for e-commerce and digital payments was further
accelerated by the pandemic.

PayPal management was aware that double-digit demand growth affected industry dynamics and
that various trends could influence competitiveness in the upcoming years (Exhibit 9). One was
evolving customer needs, especially those of the mobile generation, characterised by a digital-

10 PayPal, “PayPal - Who We Are - Executive Leadership - Dan Schulman,” 2022, https://about.pypl.com/who-we-
are/executive-leadership/dan-schulman/default.aspx.
11 PayPal, “Investor Day 2021” (San José, February 11, 2021).
12 Statista, “PayPal Statista Dossier 2021,” Statista, 2021,
https://de.statista.com/statistik/studie/id/33654/dokument/paypal-statista-dossier/.
13 Business Wire, “Digital Payments Market Report 2021,” June 4, 2021.

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first mentality, a focus on convenience, and a willingness to switch to (better) services. 14

Regulatory developments would also play an important role in digital payments, particularly
regulatory scrutiny to ensure customer protection, crime prevention, and a level competitive
playing field. For example, the EU Payment Service Directive II from 2015 granted open access
to specific customer data to non-bank licensed providers of payments and account information
services. The constant evolution of regulations required costly policy adaptations – such as
modifications to firewall configurations – to pass compliance tests.

Given the rapid pace of technological progress, competitors in the payments domain were
constantly innovating by introducing different digital currencies, cloud-based services, and internet
application programming interfaces (APIs). APIs were particularly impactful for payment
processors since they facilitated communication and data sharing between different apps and
companies. This enabled fintechs to access financial customer information that could be used to
develop new products and processes. Banks collaborated with these fintechs to expand their
customer offerings and improve the efficiency of internal processes. For example, APIs allowed
70% of US banks to adopt cloud-based core banking systems between 2019 and 2020. Since
these were the essential back-end systems that connected different bank branches, the digital
transformation reduced operating costs and accelerated time-to-market for new products. This
boosted the banks’ competitiveness while generating income for their innovative partners.

Competition in the Digital Payments Industry

Despite its popularity, PayPal felt the effects of increasing competition in digital payments as
incumbents and new entrants ramped up their efforts: PayPal lost almost 8% of payments
processing market share between its peak in Q2 2020 and Q1 2021, the biggest threat coming
from fintechs, bigtech, and banks.

The closest competition arguably came from fintechs – technologically advanced start-ups that
developed specialised software to improve financial processes. Prominent examples in digital
payments were Revolut, Stripe, and Square. The latter was a direct rival due to the similar
functionalities of the Square Cash App, which specialised in mobile and in-person transfers. Given
its convenience, efficiency and low fees, Square’s TPV grew 6% YoY in 2020 to reach $112
billion. 15 Stripe represented an increasing threat, with various payment flow and checkout
customisation options that allowed better integration of shopping carts in merchant websites’
brand aesthetics, as well as lower fees. According to estimates, its TPV rose 73% YoY to $350
billion, more than double PayPal’s growth. 16

The second major competitor group were bigtechs – the world’s largest technology companies.
With a combined market capitalisation representing 46% of the Nasdaq 100 index, 17 the five
largest bigtechs were collectively dubbed by the acronym FAMGA. This acronym derived from the
initials of Facebook (social media), Apple (software and mobile technology), Microsoft (operating

14 OECD, “Digital Disruption in Banking and Its Impact on Competition,” 2020, https://www.oecd.org/competition/digital-
disruption-in-banking-and-its-impact-on-competition-2020.pdf
15 Square, “Q4 2020 Shareholder Letter,” February 23, 2021.
16 SeekingAlpha, “Stripe: The Internet’s Most Undervalued Company,” September 1, 2020,
https://www.nasdaq.com/articles/stripe%3A-the-internets-most-undervalued-company-2020-09-01.
17 Jennifer Vallarautto, “FAMGA in Fintech: Why the ‘Big Five’ Players Are All In on Digital Payments,” Panduit
Connections (blog), April 28, 2021, https://panduitblog.com/2021/04/28/datacenter/famga-in-fintech-why-the-big-five-
players-are-all-in-on-digital-payments/.

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systems and cloud), Google/Alphabet (web search and services) and Amazon (e-commerce and
web services). Since 2012 these bigtechs had shown interest in the digital payments industry,
either launching their own platforms or acquiring smaller players. Their vast resources and
established ecosystems allowed them to garner large user bases. The most popular bigtech
payments platforms were Google Pay, with a usage rate of 22% among American consumers,
Apple Pay with 21%, and Amazon Pay with 20%. They trailed only PayPal with 89%, and Venmo,
the separate app of its subsidiary, with 30%.

Innovative tech companies threatened traditional payments industry players such as banks and
credit card companies. Fintech valuations grew at 27% CAGR between 2016 and 2020, while
banks experienced stagnation,18 sparking concerns among banking executives. A survey revealed
that 81% of CEOs feared they could not keep up with technological progress. In response, 61%
of US banks invested in digital projects in 2020, such as mobile banking applications, digital
account opening, and real-time financial management dashboards.19 Visa and Mastercard faced
similar issues. When Visa’s TPV declined by 3% YoY in 2020,20 the company tried to reinforce its
value proposition by providing rewards and perks such as airport lounge access and travel
insurance. Most notably, it launched Visa Direct, a direct response to PayPal, which allowed users
to transact in real time with other accounts using their card credentials.

PayPal’s Ongoing Innovation Initiatives and Future Options

To stay ahead of the competition, PayPal’s innovation strategy for 2020 sought to drive growth by
increasing usage rates and global reach. It was built on four pillars: compliance and risk
management, value proposition expansion, strategic partnerships, and new growth areas.

• Investing in compliance and risk management: Increasing regulatory pressures forced

PayPal to work closely with local government and invest in compliance teams. By 2020, it had
4,000 employees focused on protecting users from financal crime.
• Expanding value propositions for the whole ecosystem: Embracing the rise in e-
commerce and the cash displacement trend, PayPal implemented more tech-based products
and value-added services at scale. In 2020, it introduced more new products and features than
in any other year. Prime examples included a short-term financing service “Buy Now, Pay
Later” and the Enhanced Giving Platform that allowed users to create customised fundraising
campaigns with proprietary software to match fundraisers with donors (Exhibit 10).
• Increasing strategic partnerships: Since PayPal’s primary role was intermediation, its ability
to retain users depended on how fast it adapted to evolving demand. Rolling out new
innovations efficiently often required involving different partners due to the networked industry
structure. For example, a partnership with Visa Direct to create a gateway with PayPal’s Instant
transfer platform extended the reach of both real-time payment platforms to support users
amidst the financial hardship caused by Covid-19.

18 Natalie Michel, “Payments Market Overview: What’s Happening?,” Galitt (blog), January 27, 2022,
https://www.galitt.com/en/2022/01/27/payments-market-overview-whats-happening/.
19 BDO, “2021 Financial Services Digital Transformation Survey,” 2021, https://www.bdo.com/BDO/media/Report-
PDFs/Digital%20Transformation/2021-Financial-Services-Digital-Transformation-Survey_web.pdf
20 Visa, “Visa Inc. - Annual Report,” 2021, https://annualreport.visa.com/home/default.aspx

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• Exploring new growth areas: The bold pursuit of new opportunities was at the heart of
PayPal’s innovation strategy. A key example was the introduction of cryptocurrency buying,
selling, and holding in 2020. By allowing crypto payment at checkout for millions of online
stores, PayPal boosted its credibility as an alternative currency while increasing revenues from
transaction fees.

Option 1: Capitalising on the Trading Boom with Retail Investing

After the successful cryptocurrency launch, PayPal executives began eyeing retail investing as a
potential innovation option to take advantage of the popularity of online trading in 2020. Retail
investing services enabled individual consumers to buy and sell financial securities through a
private account, typically in smaller volumes than institutional investors. Consumer interest in the
securities markets was boosted by the time and monetary savings generated by Covid-19
lockdown measures and stimulus cheques. Daily average trading volumes in the US increased by
56% YoY in 2020 and the user base of online brokerage platforms ballooned: 10 million new online
brokerage accounts were opened in the US in 2020.21 Forecasts predicted a 5.9% CAGR to reach
$14 billion by 2021.22

As of 2021, the market leaders (based on user base) were brokerages Fidelity, with 33 million
accounts, and Charles Schwab with 14 million (Exhibit 11). Robinhood, an American fintech, was
the third largest online broker, with 12.5 million accounts. The latter had launched in 2013 with the
goal of democratising finance, specifically by enabling broad participation in public financial
markets and eliminating barriers such as commissions. Whereas traditional brokers had previously
charged $5 to $10 commission per trade, Robinhood introduced zero-commissions trading and
no-minimum accounts. This prompted the largest industry shake-up since 1975, when the SEC
had deregulated commissions and the first discount brokerages (like Charles Schwab) had
appeared. In addition, Robinhood’s platform was optimised for smartphones and offered a
gamified experience to induce high trading volumes.

Robinhood’s revenues grew 250% YoY in 2020 to reach $700 million. The business model was
built on payment for order flow (PFOF), which was responsible for over 50% of its revenues. The
PFOF process was driven by four types of actors, starting with the investor who submitted an
order to the broker (Robinhood) to buy a certain number of shares at a specified price (Exhibit 12).
The broker requested the shares from a market maker, which was normally part of a large bank
or financial institution. Its job was to purchase the requested security from a stock exchange at
the best possible price – typically less than the buyer paid. The market maker delivered the shares
to the broker, keeping part of the profit, and the broker delivered the order to the investor and
received the rest of the profit as commission.

The PFOF model was controversial because it implied that Robinhood shared customer data with
market makers and did not offer the lowest prices to investors.23 Consequently, the company was
fined numerous times by the Financial Industry Regulatory Authority, including a $65 million

21 Michael Tattersall, “PayPal Rumored to Be Rolling Out Individual Stock Trading,” 2021,
https://www.businessinsider.com/paypal-rumored-to-be-rolling-out-individual-stock-trading-2021-9
22 IBISWorld, “IBISWorld - Industry Market Research, Reports, and Statistics,” 2021,
https://www.ibisworld.com/default.aspx.
23 Julia Boorstin, “Robinhood’s Disruptive Force: The Good, the Bad and the Controversy,” CNBC, May 25, 2021,
https://www.cnbc.com/2021/05/25/robinhoods-disruptive-trade-the-good-the-bad-and-the-controversy.html

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settlement with the SEC in 2019 for failing to disclose that it was selling clients’ orders to high-
speed trading firms. The controversy surrounding Robinhood and the rising demand for retail
investing elicited interest in this segment by digital payment providers such as PayPal’s rival,
Square. The latter added online trading to the Square Cash App in 2020, contributing to the 50%
YoY growth in its user base.

The implications for PayPal were clear. Firstly, the introduction of retail investing presented an
opportunity to increase customer engagement and interact with new user groups in a high-growth
market; indeed, a survey showed that 81% of online traders were open to trying new services.24
Secondly, the presence of popular options meant PayPal would have to compete with strong
fintechs on novel territory. And it would need to respect strict regulations regarding investment
recommendations and license requirements to avoid legal controversies. Further challenges were
related to finding adequate partners to execute orders, such as market makers and stock
exchanges, and building the technological infrastructure to communicate with them.

Hagen was under the impression that overseeing the development of a PayPal retail investing
service was the reason for his hiring, based on his track record with TradeKing and Ally Invest.
He knew the competition would be tough, but PayPal’s strong brand and customer trust were
valuable assets when entering the fray. This could be the chance to shine in his new position.

Option 2: Building the First Western Super App

Therefore, Hagen was surprised when Schulman approached him at the conference and proposed
a different innovation path: Schulman pitched the idea of turning PayPal into a super app, a one-
stop shop with seamlessly integrated functionalities. This idea had been inspired by a dinner with
Martin Lau, President of Tencent Holdings, and was based on the success of Tencent’s subsidiary
WeChat, which had evolved from a messaging service into an all-in-one app – substantially
increasing user engagement. 25 Besides various communication options (texts, voice messages,
walkie talkie, stickers), WeChat’s most popular features included public accounts for broadcasting
content to subscribers, social media, and payments. The app became an integral part of everyday
life in China, with 1.2 billion users in 2020, of which 54% were active for at least two hours per
day. Based on strong customer engagement, WeChat had established multiple reliable revenue
streams. A large share of income was generated through value-added services, such as stickers
for texting and advertising through the WeChat Moments social media feed.

Transaction-based revenues were another major stream that was mainly derived from WeChat’s
mini programs (MPs) – apps that automatically ran inside WeChat without the need for separate
installation. As of 2020, there were 3.2 million MPs available on the WeChat app. Due to the 70%
usage rate, the company’s transaction-based revenue grew by 56% YoY in 2020 to $250 billion.
Their popularity with consumers largely stemmed from their versatility, as they could be used for
anything from paying bills and gaming, to ordering a taxi. 26 On the merchant side, they were
attractive by allowing the integration of online stores into WeChat’s ecosystem (Exhibit 13) –
enabling merchants to transact with consumers directly without intermediaries. As a result, MPs

24 Hortz, “Survey on the 2021 State of the Independent Retail Investor,” 2021, https://www.nasdaq.com/articles/survey-
on-the-2021-state-of-the-independent-retail-investor-2021-05-25.
25 Ron Shevlin, “PayPal Wants To Be A Super App,” Forbes, May 26, 2021,
https://www.forbes.com/sites/ronshevlin/2021/05/26/paypal-wants-to-be-a-super-app/.
26 “WeChat Mini-Programs 2020: What Your Brand Should Know,” Daxue Consulting - Market Research China,
September 22, 2020, https://daxueconsulting.com/wechat-mini-programs-2020-report/.

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became crucial retail channels during Covid-19 lockdowns. Furthermore, they could be rolled out
quickly due to WeChat’s programming framework that allowed external developers to create new
MPs within days.

Since MPs for daily services were particularly popular among Gen Z consumers, Schulman
believed that the super app could help PayPal match contemporary customer preferences. This
was supported by a survey finding that 81% of Americans were interested in all-in-one solutions.27
For Schulman, integrating payments, finance, and shopping was particularly attractive for
transforming PayPal’s core platform and expanding its potential user base. The total addressable
market for the super app was estimated at $110 trillion worldwide.28 In addition, it offered the
possibility to streamline data collection and treatment as users remained within the ecosystem for
all offered services. This could lead to more precise customer insights, which could be leveraged
to optimise the user experience and the monetisation of PayPal’s platform. Moreover, Western
markets did not yet have an established super app, while competition in digital payments was
heating up.

However, PayPal would need to overcome two main obstacles to replicate WeChat’s success: the
more heterogeneous needs of Western consumers (especially in the US) and the perceived loss
of choice. Furthermore, the share of powerful mobile devices that could manage 40 to 50 separate
applications was higher in Western countries, and arguably reduced the technological need for a
multi-functional app compared to Asia. Another drawback was the reluctance among users to give
a single company access to all their personal data, a concern driven by data leaks such as the
Cambridge Analytica scandal where data from millions of American Facebook users was utilised
for political advertising without their consent.

Nevertheless, Schulman saw an opportunity to increase PayPal’s global appeal and was
convinced that past innovations had created a strong basis for a compelling super app.

Which Way Forward for PayPal?

Based on his expertise, Hagen leant towards retail investing as his preferred choice. Yet
Schulman’s enthusiasm for the super app was contagious and his arguments were strong. Could
it be the gateway to an even bigger market opportunity and solidify PayPal’s position at the top of
digital payments? Whatever the case, Hagen needed a solid answer to the question of which
option PayPal should choose before his next meeting with Schulman. His team would need to
analyse both options thoroughly to make an informed recommendation.

27 strategy&, “Super App,” December 2020.

28 PayPal, “Investor Day 2021.”

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Exhibit 1
PayPal Key Performance Indicators 2020

Source (adapted): PayPal, “2021 Notice of Annual Meeting of Stockholders and Proxy Statement - 10-K” (San
José, 2021).

Exhibit 2
Visa’s Four-Party Scheme

Source (adapted): Switch, “Who’s Who: The Players in the Card Payments Industry,” 2022,
https://switchpayments.com/learn/609ceb4366cfb30013d58cdb.

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Exhibit 3
Payments Industry Revenue Breakdown

Source (adapted): Clearlypayments, “Credit Card and Payment Processing Industry Overview,” February 23, 2020,
https://www.clearlypayments.com/blog/credit-card-and-payment-processing-industry-overview/.

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Exhibit 4
PayPal’s Digital Payments Processing (based on Four-Party Scheme)

Source: PayPal, “Payment Processing 101: Learn How Your Money Gets to You. | PayPal,” 2021,
https://www.paypal.com/us/brc/article/how-online-payments-processing-works.

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Exhibit 5
PayPal’s Product Portfolio in 2020

Source (adapted): PayPal, “Investor Day 2021” (San José, February 11, 2021).

Exhibit 6
PayPal’s Acquisition History

Source (adapted): Wikipedia, “PayPal,” https://en.wikipedia.org/w/index.php?title=PayPal&oldid=1086820610.

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Exhibit 7
Payments Processing Market Shares 2020

Source (adapted): Douglas Karr, “PayPal Market Share Statistics and Its History of Dominating Online Payment Processing |
Martech Zone,” August 3, 2020, https://martech.zone/paypal-statistics-online-payments/.

Exhibit 8
PayPal Net Revenue Evolution 2012 – 2020 (in millions)

Source (adapted): Statista, “PayPal Statista Dossier 2021,” Statista, 2021,

https://de.statista.com/statistik/studie/id/33654/dokument/paypal-statista-dossier/.

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Exhibit 9
Digital Payments Industry Trends

Source (adapted): PayPal, “2021 Notice of Annual Meeting of Stockholders and Proxy Statement” (San José, 2021).

Exhibit 10
Innovation at PayPal in 2020

Source: PayPal, “2021 Notice of Annual Meeting of Stockholders and Proxy Statement” (San José, 2021).
Exhibit 11

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Largest US Online Stockbroker User Bases in 2021 (in Millions)

Source (adapted): “Full-Service Vs Online Brokers: Which Is Better For You?,” The Smart Investor (blog), 2020,
https://infoforinvestors.com/investing/beginners/full-service-vs-online-brokers/.

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Exhibit 12
The Payment for Order Flow (PFOF) Business Model

Source (adapted): The Measure of a Plan, “How Robinhood Misled the Poor and Rewarded the Rich,” January 31, 2021,
https://themeasureofaplan.com/robinhood/.

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Exhibit 13
WeChat Super App Business Model

Source (adapted): Infopulse, “Introducing Super App: A New Approach to All-in-One Experience,” Medium (blog),
December 24, 2019, https://medium.com/@infopulseglobal_9037/introducing-super-app-a-new-approach-to-all-in-one-
experience-8a7894e8ddd4.

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