PayPal is an American multinational technology company operating a worldwide online payments system. The system supports online money transfers and serves as an electronic alternative to traditional paper methods like checks and money orders. Founded in 1998, PayPal has its headquarters in San Jose, California. It went public in 2002 and trades on the NASDAQ stock exchange under the ticker PYPL.
PayPal operates in the highly competitive global payments industry. According to Research and Markets, this industry is worth an estimated $511.87 billion and is forecast to grow to $870.09 billion by 2026. PayPal competes against well-established companies such as Visa, MasterCard, and American Express, as well as other digital payment providers like Apple Pay, Google Pay, and Square.
Given the competitive landscape, it’s no surprise that PayPal is always looking for new ways to grow its business and generate revenue. Fees on transactions are the primary source of revenue for the company. However, PayPal also derives income from other sources such as investments, interest on customer balances, and foreign exchange gains. Here’s a more detailed look at how does PayPal make money.
Bottom Line Up Front
PayPal is a two-sided marketplace connecting merchants and customers to over 429 million accounts in 200 countries and regions. The company earns mainly through transaction fees associated with certain transactions and merchant services. However, PayPal also makes money through various other methods such as subscription fees, business loans, interchange fees, referral fees, and interest on cash advances.
Brief History of PayPal
The original PayPal was founded in December 1998 by Max Levchin, Peter Thiel, Luke Nosek, and Ken Howery as Confinity. The company initially focused on developing security software for mobile devices but later pivoted to become a digital payments company. In March 2000, Confinity merged with Elon Musk’s X.com, an online banking company.
The merger created a company with over $10 million in combined funding, and the new entity was called PayPal. In October 2002, PayPal went public with an initial public offering (IPO) that raised $61 million. Shortly after the IPO, eBay acquired PayPal for $1.5 billion in stock. At the time, PayPal had over 20 million active user accounts and was available in 55 countries.
eBay played a crucial role in the growth of PayPal. First, the auction site waived all PayPal transaction fees to encourage its adoption. Second, it integrated PayPal into its checkout process, making it the exclusive payment method on eBay. This helped PayPal become the de facto standard for online payments and gave it a huge user base to build off its early success.
While under eBay, PayPal acquired several other companies, including VeriSign’s payment gateway, Braintree, and Xoom. In 2015, eBay announced it would spin off PayPal into a separate publicly-traded company. In July 2015, PayPal completed its separation from eBay and became an independent company.
With over 20 years of experience in the payments industry, PayPal has built a strong brand and reputation. The company now offers financial products and services beyond online payments, including business loans, merchant services, working capital, and more. As technology continues to evolve, PayPal is in a strong position to capitalize on new opportunities and maintain its position as a leading digital payments company.
PayPal Business Model: How PayPal Makes Money
PayPal Holding, Inc. is a Fintech company that uses technology to make financial services more efficient. The company operates a two-sided network at scale, connecting consumers and merchants through its flagship product, PayPal, and other brands and subsidiaries under the PayPal Holdings, Inc umbrella.
Back when sending money required going to the bank, PayPal developed a digital alternative that was faster and more convenient. Today, PayPal is one of the leading digital payment providers in the world, with 429 accounts as of Q1 2022. By connecting buyers and sellers through its online platform, PayPal facilitates transactions in more than 200 countries.
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PayPal’s Business Segments
PayPal operates as a standalone company and isn’t part of a larger financial institution. It operates a single segment and doesn’t break out its financials by product or geography. While this makes it difficult to get a granular view of the company’s financial performance, it does provide a clear picture of how PayPal generates revenue.
The company generates revenues in two main buckets:
- Transactional revenues
- Revenue for other value-added services
Transaction Revenues
About 92% of PayPal’s total revenues come from transaction fees. PayPal charges net transaction fees to individuals and merchants based on the Total Payment Volume (TPV) processed through the company’s payments platform. TPV is the total amount of all transactions processed in a given period, including successful and unsuccessful payments.
The company also earns additional revenues from foreign exchange rate differences in international payment processing. When a transaction PayPal processes in a currency other than the account holder’s home currency, PayPal uses the real-time market exchange rate to convert the currency. The company earns a small spread on these transactions.
Revenue from Other Value-Added Services
The remaining 8% of PayPal’s revenues come from other value-added services. These are net revenues derived from revenues earned through the following:
- Partnerships: PayPal earns revenue from its partnerships with other companies. For instance, it recently partnered with DoorDash and will now process payments for the food delivery service. These partnerships are typically in the form of revenue-sharing arrangements. However, the companies don’t disclose the terms of their agreements.
- Referral fees: PayPal charges referral fees on cash back rewards and other incentives it provides to customers. For example, if you use PayPal to pay for a purchase through Ebates, you’ll get 2% cash back. PayPal keeps a portion of this cash back as a referral fee.
- Interest on cash loans: PayPal’s working capital program provides cash loans to businesses. The company charges a fee for this service and earns interest on the cash it gives to companies. Businesses such as banks typically make interest on the deposits they hold. However, because PayPal isn’t a bank, it doesn’t earn interest on customer balances.
- Investment gains: PayPal also earns revenue from its investments. The company invests any excess cash not needed to run its business in various asset classes such as government bonds, corporate bonds, and equities.
- Interest on assets underlying certain customer balances: PayPal earns interest on the assets it holds to back the customer balances in certain PayPal accounts. The company invests this money in low-risk investments such as government bonds.
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How PayPal Makes Money from Its Subsidiaries
PayPal has several brands operating under the PayPal Holdings umbrella. The diversified nature of PayPal’s subsidiary companies allows it to mitigate some risks associated with being a payment processor. Below is a brief overview of each subsidiary and how it contributes to PayPal’s overall business:
Venmo
Venmo is a peer-to-peer payments platform that allows users to transfer money to friends and family without using a credit or debit card. The company doesn’t charge transaction fees for regular bank account transfers.
Instead, it makes money through interchange fees, affiliate partnerships, check cashing, and withdrawal fees. Venmo estimates its total user base to grow from 76 million in Q2 2021 to 120 million in 2023. PayPal expects a positive operating income by the end of 2022.
Xoom
Xoom is an international money transfer platform that allows users to send and receive money internationally. The company makes money through transaction fees and foreign exchange rate differences. While it competes with PayPal’s international money transfer business, Xoom complements PayPal’s domestic payment processing business.
PayPal Credit
PayPal Credit is a financing solution that allows users to finance their PayPal purchases over time. The company earns revenue through interest on the outstanding balances and late fees charged to users. While PayPal Credit does add another revenue stream for the company, it also increases the risk associated with being a payment processor. If more customers default on their payments, PayPal could see an increase in bad debt expenses, negatively impacting its bottom line.
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Swift Financial
Swift Financial is a small business lending platform offering short-term working capital loans. The company charges fees for its lending services and earns interest on the cash it loans to businesses. It can provide loans for up to 500,000 with terms ranging from 3 to 18 months.
Braintree
Braintree is a payment processing platform that allows businesses to accept and process payments online. The company charges transaction fees for its services. It also offers a merchant account management service, which enables businesses to accept credit and debit card payments.
While Braintree is a PayPal subsidiary, it also competes with PayPal’s core payment processing business. However, because Braintree offers a more comprehensive suite of payment processing solutions, it can command higher transaction fees.
Zettle
Zettle is a mobile point-of-sale system that allows businesses to accept credit and debit card payments. Given that Zettle is a mobile point-of-sale system, it can compete with Square (SQ). The company makes money through transaction fees charged to businesses.
While Zettle does compete with PayPal’s core payment processing business, it also complements PayPal’s merchant account management service. By offering both services, PayPal can better compete with Square, which provides a mobile point-of-sale system and a merchant account management service.
Other subsidiaries and brands under PayPal include Simility, Chargehound, Happy Returns, Honey, Hyper Wallet, and Paidy.
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PayPal Financial Overview
PayPal went public in 2002 through an IPO that saw it raise $61 million. eBay acquired the company in 2002 for $1.5 billion in stock. In 2015, eBay spun off PayPal into a separate publicly-traded company. Since then, PayPal’s stock has gone from strength to strength. As of August 4, 2022, the company had a market capitalization of $113.395 billion, with shares trading at a 52-week range of $67.58 to $296.791.
The company’s stock has seen strong growth in recent years, driven by robust growth in its payments business. For instance, in its FY2021 results, the company announced a 31% increase in total payments volume (TPV). The company processed $1.25 trillion in TPV, up from $0.94 trillion in 2020. TPV is a crucial metric for PayPal, as it drives the company’s transactional revenues.
Apart from strong growth in TPV, PayPal also benefited from an increase in the number of transactions per active account. In 2021, the average PayPal account holder made 45 transactions, up 12.5% from the previous year. The company has been able to grow the number of transactions per account by expanding its merchant base and launching new products and services.
As more and more people use PayPal for their transactions, the company’s revenues and profits have grown. In 2021, PayPal reported $25.4 billion in net revenues, up 17% from the previous year. Its net income came in at $4.169 billion, down 0.79% from 2020. While its profits reduced, it didn’t significantly impact the company’s bottom line. 2021 was a year characterized by slow economic growth partially due to the pandemic. Despite the fading government stimulus and pandemic-induced economic slowdown, PayPal still delivered strong growth.
Looking ahead, PayPal is in a position to continue growing its business. It has a strong balance sheet, with $9.5 billion in cash. The company expects its TPV to grow 19%–22% on the current spot rate and about 21%–23% on an FXNominal basis in 2022. It also projects that its non-GAAP EPS will be between $4.06 to $4.75%, and its revenue will surpass $29 billion.
PayPal SWOT Analysis
Below is a SWOT analysis analyzing PayPal’s Strengths, Weaknesses, Opportunities, and Threats.
Strengths
- PayPal has a strong brand name synonymous with online payments. The company has over 429 million active accounts and is available in 202 countries.
- Its diversified revenue stream and growing customer base make it one of the most valuable fintech companies.
- The company has strong growth prospects, with analysts projecting a 15% to 17% revenue growth by 2022.
- Its strong international presence gives it a competitive advantage over other fintech companies.
Weaknesses
- Fraudulent activities are a constant threat to PayPal’s business. The company has to continuously invest in security measures to protect its customers and their money.
- High transaction costs are a deterrent for some users, particularly small businesses.
- PayPal restrictions on certain types of transactions, such as gaming and gambling, limit its growth potential.
Opportunities
- Technological advancements offer PayPal opportunities to grow its business. For instance, the company can develop new products and services using blockchain technology.
- The growth of mobile commerce and the rise of mobile payments offer PayPal growth opportunities.
- The company can expand its merchant base by partnering with more businesses.
Threats
- Competition with other Fintech companies like Stripe is a significant threat to PayPal’s business.
- The company faces regulatory scrutiny in different markets. For instance, in the European Union, PayPal is classified as a ‘payment institution’ and is subject to strict regulations.
- A global economic downturn could negatively impact PayPal’s growth prospects.
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How Does PayPal Make Money? (FAQs)
Question: Is PayPal a profitable company?
Answer: PayPal is a profitable company. In 2021, PayPal reported $25.4 billion in net revenues, up 17% from the previous year. Its net income came in at $4.169 billion, down 0.79% from 2020. The company’s strong performance is attributable to its diversified revenue stream and growing customer base.
Question: What does PayPal do with your money?
Answer: PayPal holds your money in a segregated bank account. This account earns interest on the money, and PayPal uses this interest to cover its operating expenses. PayPal keeps the money in this account until it’s ready for withdrawal or transfer.
Question: Who are PayPal’s biggest customers?
Answer: The retail sector is PayPal’s biggest customer, accounting for about 10% of its total payment volume. Other major customers include non-profit organizations, civil and social organizations, religious institutions, education management, restaurants, computer software, and e-commerce businesses.
Conclusion
PayPal is one of the most valuable fintech companies in the world. The company’s primary source of revenue is transaction fees which make up 92% of its total revenue. It also generates revenue from other value-added services such as subscription fees, business loans, interchange fees, referral fees, and interest on cash advances.
PayPal’s strong brand name, diversified revenue stream, and growing customer base make it a profitable company with strong growth prospects. Given the competitive threat of other fintech companies, PayPal needs to continuously invest in new products and services to maintain its market position. It can also look to expand its customer base by partnering with other companies and expanding into new geographies.
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