The day before the end of the first quarter, PayPal reports its earnings. Most insiders aren’t expecting anything spectacular, but everyone is expecting big news. On Wednesday we’ll hear what CEO Dan Schulman has to say about Walmart’s decision to begin accepting PayPal as well as some other items that may interest us. To get a sense of the thinking behind the big bets PayPal is making, I wrote a feature for the Times that I’m publishing today. If you’d like a better sense of the underlying implications of that piece, please read my recent Facebook post.
PayPal is an interesting company for reasons that actually aren’t that remarkable. At the moment, it does some clever things, and offers a whole lot of convenient services. But it has yet to take advantage of the vast expansion in mobile, which is exactly where the future is going. The shift to an era of digital payments is not just happening among the affluent and far-off digital wallets, or those of a handful of big companies. It’s happening everywhere. As a result, the winners of this explosion will be those who use innovative technology to meet consumers where they are, not the ones who end up with the hottest fads. That’s not good news for online payment processing companies or, to a much bigger extent, financial institutions.
PayPal, it seems, is not alone in believing that the winners will be those who take that approach. But let’s set aside the obvious, which is that they’re probably wrong.
The pivot point for the company came, of course, last November, when it was bought by the EBay spinoff, Square. But while the deal showed that PayPal was prepared to rethink its strategy, it also sent an important signal to investors. Whatever excitement there was surrounding its marriage with eBay, it seems that Schulman was willing to do something that even that company would have resisted: focus squarely on what the future of payments will look like — and take calculated risks about the pace at which the technology is evolving.
That approach, I’d argue, was a huge mistake. Its origins were in a more or less backward merger with Bill Me Later, a company that had lagged behind PayPal in payments processing in a lot of ways. This particular merger was doomed to failure for the simple reason that nobody could agree what to do with it. Did EBay want to keep it? What if it were shut down? Did PayPal want to be in the online payments processing business? And what about the large bank partners, which might or might not become part of the biggest online payment service in the world?
That’s not to say the big banks would have been stupid partners. In fact, at that time, they were willing to subsidize a horse race to see who could build the biggest electronic payments service in the United States. To some extent, this explains why the bull case for all the non-traditional financial firms has been so hard to make: First, many of them had become overly generous, squandering their early leadership positions in the industry. Then, one or more of them would go bust, or get bought up. Finally, they’d lose their most lucrative customer.
So Schulman took a risk, announcing a pivot to a new, more speculative path. But it was a big risk, not only because it put his career on the line but also because the industry around him was in a state of upheaval and change, which was likely to continue.
So we’ll see what Schulman has to say about PayPal’s progress. But in the meantime, you can watch for what he does and doesn’t say in the conference call following the earnings release.