Paypal

Question 1

What sector/space does PayPal operate in?

Answer 1

digital financial services (FinTech)

Question 2

what is a trend with digital payments

Answer 2

they’ve been growing

Question 3

Part of general environment: Technology

Answer 3

• Paypal relies on internet connection and adoption of it
• devices needed
• data plays a huge role
• ->investment, marketing (can tailor recommendations, services)
• ->can detect fraud, other criminal activity
• ->can also predict credit worthiness of borrowers
• security is important

Question 4

Part of general environment: Global

Answer 4

• covid-19
• ->caused FinTech to expand (favourable conditions for this sector)
• ->e-commerce grew, online payments also grew
• increased globalization,
• ->more international transactions (they are growing)

Question 5

Part of general environment: Political/Legal

Answer 5

• regulations are important with money stuff

- -> heavily regulated sector

Question 6

Part of general environment: Sociocultural

Answer 6

• women and POC tend to have less access to financial services –> have to pay 40% more
• ->redlining, stopped people from buying houses (couldn’t get loans), etc.
• SMEs also have less access to financial services
• some population segments are underserved financially
• entrepreneurs of colour charged higher interest rates (32% higher)
• only 1% of venture capital funding went to black-led businesses
• consumer adoption of digital pay

Question 7

Part of general environment: Economic

Answer 7

• economic recession in 2008/9
• ->banks had to close less profitable branches, especially in lower income neighbourhoods
• ->had to raise credit requirements for individuals and small businesses
• growth in e-commerce

Question 8

5 Forces: Rivalry

Answer 8

HIGH

• person-to-person,
• ->not very profitable since transactions can’t be monetized
• ->Venmo (but was acquired by PayPal)
• Remittances
• ->Xoom, Western Union, and Money Gram
• Loans, deposits
• ->Shopify, traditional banks, square

Point of sale agreements

• *this is where there is there majority of the competition
• number of competitors is high
• undifferentiated services –> services have become a commodity
• also compete on marketing –> costs here
• –>distribution is key
• Competitors
• ->Apple, Samsung, Google, Amazon, AT&T, T-Mobile, Verion, AmEx, Mastercard, Chase, Bank of America, Walmart, Target
• ->Fintech start-ups: Shopify, Stripe, Square

Question 9

5 Forces: Threat of new entrants

Answer 9

• growth in industry attracts new customers
• well-funded startups, major internet players, cell phone providers all entering
• ->can collect data
• entry barriers:
• ->need brand name a bit–> for customer trust reasons
• ->transparency
• ->regulations –>not as important for startups

Remains high despite entry barriers

Question 10

5 Forces: Threat of substitutes

Answer 10

• traditional banks, financial services
• Paypal found a niche
• brick-and-mortar traditional banks aren’t going anywhere
• -> threat is still significant for the average customer
• –>middle-class with constant strategy
• banks need a lot to be profitable (e. $25 000 minimum loan)
• ->only makes sense for them to target large companies

Medium threat

Question 11

5 Forces: Bargaining Power of buyers

Answer 11

*varies based on consumer –> depends on profile of consumer

• businesses
• ->depends on size of the business
• ->some have higher credit, borrowing history, etc.
• these will have higher bargaining power

Overall still high

Question 12

5 Forces: Bargaining power of suppliers

Answer 12

• small banks could be suppliers
• pretty low and insignificant –> threat is benign
• *this really helps profitability

Question 13

summary of 5 forces

Answer 13

• main pressure comes from competitors and buyers
• -> in specific parts of industry/company may be stronger
• 19.6% profit margins for PayPal
• -> they’re making money, so five forces aren’t overwhelming

Question 14

Key success factors

Answer 14

• strong marketing and distribution channels
• –>want market share
• brand trust –> security is needed (fraud detection)
• technological innovation, investments
• data
• compliance (to regulatory authorities/with regulations)

Question 15

Opportunities for PayPal (these have tendency to go into alternatives/recommendations)

Answer 15

• growth of e-commerce
• financially underserved people
• ->can generate $100 trillion in financial assets over next 50 years
• ->in US $144 billion (6.5% are unbanked, 18.7% are underbanked)
• emerging markets
• ->cross-border sales

Question 16

Threats

can typically look at competition to find threats

Answer 16

• potential new regulations
• chinese giants
• ->follow citizens as they travel abroad, aggressively buying fintech startups
• security, fraud

Question 17

What are the 6 characteristics of stakeholder capitalism? (ie what does PayPal need to consider when thinking about each different stakeholder group)

Answer 17

1. Needs of each stakeholder group
2. importance of each stakeholder to success
3. consequences if a group is overlooked
4. What PayPal does to address the needs of each group
5. Impact on shareholder value
6. Covid-19

Question 18

Paypal Strengths

Answer 18

• brand recognition and trust
• ->PayPal customers are 57% more likely to complete their purchases when there is a PayPal check-out button since they trust it
• -> Paypal is a leader in customer trust
• costs are 80% lower than brick-and-mortar banks
• biggest two-sided platform outside of China
• loyal employees (strong HR abilities)
• ->retention, less turnover
• ->customer service
• ->attract top talent
• strong international presence (operate in more than 200 markets around the world)
• diversified into different financial services
• strong financial resources
• ->access to funding (publicly traded)
• ->profitable
• data
• tap into unbanked market
• network effect
• ->the two-sided platform
• -> the more buyers there are, the more merchants want to participate and vie versa (mutually reinforcing)
• through cooperative strategy, was able to increase it’s reach
• ->38 partnerships agreement
• ->partnered with credit card companies (their competition), financial institutions, retailers, and telecom and tech companies
• kills threat of fraud through investment in fraud detection

Question 19

Weaknesses

Answer 19

• compared to banks, maybe lack some financial services
• compared to other fintech/competition, not very diversified
• ->more vulnerable since only dependent on Fintech space
• ->ex. Apple has more than just Apple Pay
• can’t monetize Venmo –> unused opportunity
• Paypal is behind Apple Pay in number of users
• weak in China

Question 20

competitive advantage for PayPal

Answer 20

• ability to bring buyers and merchants –> mutually reinforcing two-sided platform
• ->scale leads to scale
• relationships with regulators
• Schulman also saw blocking hate groups as a source of competitive advantage even though it takes work
• ->builds employee pride, increases trust with regulators and avoids the hate group controversies that had engulfed companies with Facebook and Twitter

-Paypal also argues that neglecting other stakeholders, hurts shareholders compared to just focusing on them

Question 21

Who are PayPal’s stakeholders (5 primary and 2 secondary)

Answer 21

Primary

• consumers
• employees
• regulators
• merchants
• shareholders

Secondary

• communities
• competitors

Question 22

Employees

Answer 22

• want to retain them
• attracting top talent is crucial to success
• more retention

Consequences if overlooked

• a lot more turnover, unionization, walk-outs
• ->raises costs and bureaucracy

What they do

• emergency relief fund
• ->fixed one of the best call centre employees’ car
• goal for every employee to have 20% disposable income
• ->lowered health care costs, reviewed and raised wages where needed, offered stock ownership to every full-time PayPal employee, enhanced benefits, provided free tools and resources to teach long-term financial planning
• conscious-inclusion training program
• broke off new operations centre in North Carolina due to a transphobic bill that was passed

Benefit for shareholder value

• less turnover = less costs
• more employee motivation
• these give PayPal competitive strength since they have loyal and talented workforce

Covid-19

• didn’t lay off employees, payments for those who had to stay home
• ->but covid-19 generally did have favourable impact for PayPal

Question 23

Regulators/Law enforcement

Answer 23

• Paypal proactively approaches them
• ->take time to share tech developments with regulators
• an important stakeholder
• ->critical to success, especially in terms of geographic diversification
• fraud detection with law enforcement
• ->to detect fraud, illegal firearm sales, human trafficking, child predators, terrorists, and other crimes

covid
–>approached regulators to see if they could help

-dedicated significant resources to actively block those raising funds to promote hatred or racial intolerance

Question 24

Consumers

Answer 24

• keeping them loyal is critical because of low switching costs
• want to acquire 1 billion users in next 5 years
• -> low and middle-income consumers
• ->bigger chunk of population + have more needs for PayPal (underserved from traditional banks)
• target also corresponds to cost leadership (eliminate some fees)
• data critical –> achieved through volume (makes it important)

To satisfy consumers:

• acquired Xoom (cheaper remittances)
• acquired Honey (discounts on online stores)
• interview consumers in homes

Covid-19

• helped consumers get gov checks faster
• used Venmo to facilitate others helping each other
• discounted fee for charitable contributions

Question 25

Merchants

Answer 25

- part of the two-sided network, needs for customer base - PayPal Working Capital (PPWC) - ->flat fee fixed repayment percentage of sales (flexible payment terms) - ->if sales decline, debt service automatically decreases - ->merchants prefer simplicity even if rates may be higher (25% which is equivalent to a credit card rate) - cost - ->risk since they don't take collateral - works with POC businesses, women-run businesses - one of top 5 lenders to small businesses in the US(PPWC is really helpful for this) - ->lending $1 billion each quarter - a money-making strategy despite the risk - -> keeps shareholders Covid - waived fees for transferring money out of a PayPal business account - Paypal customers could defer repayment on business loans and cash advances with no cost - helped distribution of US gov's Paycheck Protection program (PPP) - committed $530 M to support black businesses - ->10 million in grants of up to $10 000 for black-owned businesses impacted by covid, $5 million in grants to non-profits providing technical assistance to Black-owned businesses, and a $500 million economic opportunity fund to invest in POC businesses

Question 26

problem of the case (and potential other strategies)

Answer 26

Will this strategy permit PayPal to grow to reach their target of 1B consumers? (closing gap from 350M) -->in a highly competitive environment - hard to expand into China because of gov regulations and tough competitors - could diversify more - -> ex. mortgages - more partnerships and acquisitions (buy competitors) - go after large customers