PayPal: Cashing in on Latin America
By: Rahul Guggali & Kayla Pandza
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
PayPal & eBay: The Romance of the Millennium
Founded in 1998, PayPal is a transactions processor that revolutionized the online payments industry, allowing users to make online purchases without credit cards. Immediately following its launch, the service was met with skyrocketing demand and grew from thousands of users to a million within months. Online e-commerce company eBay attempted to directly compete with PayPal through Billpoint, an acquired payments processor, but struggled to gain market share. As a result, PayPal was acquired by eBay in 2002 for $1.5 billion and the two became mutually dependent. At that time, around a quarter of closed eBay auctions used PayPal, and about two thirds of PayPal’s revenues came from eBay and other trading sites.
Despite their strong start, PayPal and eBay split in 2014 primarily due to an increasingly competitive payments landscape and a divergence in strategy. However, they maintained a close partnership with an Operating Agreement, enabling transactions on eBay to continue accounting for a large portion of PayPal’s revenues. In January 2018, eBay announced its intent to discontinue this Operating Agreement. Under the terms of this deal, PayPal would continue to offer comprehensive solutions to eBay until July 2020 and the PayPal checkout option would remain available to eBay customers at checkout until July 2023. Taking PayPal’s place is Dutch competitor Adyen, who currently handles payments for a host of impressive clientele including Uber, Spotify and Netflix.
When questioned on the rationale for discontinuation, PayPal CEO Dan Schulman announced that the company would now be able to engage with marketplaces that had previously been prohibited under the Operating Agreement. Schulman also suggested that partnerships with global merchants like Amazon were not impossible. As eBay continues to decline in importance, shrinking from 13 per cent of PayPal’s business in volume to an expected four per cent by 2020, PayPal should look to other opportunities given its newfound freedom.
Paypal Cash
PayPal Cash is a service in the U.S. that allows customers to deposit and withdraw money from their PayPal accounts at ATMs, cash registers, and service desks. This includes the ability to load their Paypal Cash accounts at partnered brick-and-mortar stores. In October 2018, the payments provider started offering withdrawal services at Walmart, marking the first time customers were given the option of withdrawing cash from their PayPal account through a retail location. This move effectively makes all the traditional features of a chequing account available at retail stores, best serving customers with limited or no access to banking services.
The Latin American Opportunity
Latin America’s digital presence is growing rapidly, with 59 per cent of its total population expected to be online by 2020, up from 45 per cent in 2015. In addition, over 73 per cent of the population is expected to access the Internet through a mobile phone by 2020. The number of online shoppers has also seen a drastic increase from 40 million in 2015 to a projected 155 million in 2019. For an e-commerce based service like PayPal, this rapid digitalization offers a significant growth opportunity since certain products like PayPal Cash are accessed most easily through a mobile app. Latin American consumers also have a different relationship with banks compared to consumers in North America and elsewhere in the world. These regional differences in banking and payment preferences will facilitate rapid adoption of PayPal Cash.
Around half of the population in Latin America is unbanked. Contributing factors to the high unbanked population include distance to financial institutions, inadequate credentials to open an account, and distrust in the banking system.
Individuals who do have bank accounts can obtain three types of credit cards: local, which only allow domestic transactions; regional, which restrict transactions to neighboring countries where the issuing bank has a presence; and international, which can be used anywhere globally but are the hardest to obtain. Credit card access poses a huge barrier to purchasing international goods for the average consumer. For online purchases, high interest rates and inability to obtain credit have resulted in only about 30 per cent of Brazilians having a credit card. Without proper financial tools, many consumers currently use unconventional methods to pay for online products.
Depending on the region in which the consumer is located, there are many unorthodox payment solutions. For example, in Brazil, 25 per cent of all online transactions are done using boleto bancário, an invoice that can be issued online and paid for at an ATM or retail store at a later date. Due to the wide variety of regional payment methods, processors find it difficult to handle multiple payments, opening an opportunity for PayPal to use its existing technologies to solve this problem.
PayPal currently offers services in several Latin American countries, including Brazil, Argentina, Mexico, and Colombia. However, online payments using PayPal could only be made using international credit cards thus far, hindering the service’s success.
New Customer Journey
Expansion Strategy
In order to capitalize on the Latin American e-commerce market and the unique regional factors at play, PayPal should bring PayPal Cash to Latin America. On a mobile application, consumers would select the amount of PayPal money they would like to deposit or withdraw and complete the transaction in-person at partner retailers. This would give individuals a method to pay for goods and services online without needing access to a bank account. Given that 87 per cent of PayPal’s revenue came from transaction fees in 2017, the firm should focus its operations on the four countries with the highest projected total e-commerce revenues: Mexico, Colombia, Brazil, and Argentina.
PayPal should partner with popular and frequently visited retailers in each country, including Walmart in Mexico, Exito in Colombia, Coto Supermarkets in Argentina, and Carrefour in Brazil. Unbanked customers, many of whom live in urban areas and shop at these retailers, would be able to make deposits and withdrawals to their PayPal accounts at a participating retail outlet. These types of partnerships are not unfamiliar to PayPal, as PayPal Cash has already been implemented in Walmart, 7/11, CVS, and Rite Aid stores in the United States. By introducing PayPal Cash to Latin America, the company would attract a customer base who seeks the security of an e-wallet but lacks the credentials to create their own bank account.
To enable Latin American consumers to shop online, PayPal should also partner with e-commerce retailers to handle payments processing. Large Latin American e-commerce retailers like B2W Digital, which had approximately 16.1 million unique monthly visitors in May 2018, would procure a sizeable customer base for the company. For each purchase, PayPal would charge its normal 2.6 per cent plus a fixed fee to the retailer.
This strategy benefits both the consumer and partner businesses. PayPal Cash allows customers to manage their finances and purchase international goods online without being banked or having to navigate complex payment methods. Conversely, PayPal would allow partner firms to accept e-commerce purchases from a large segment of the population that may not have previously purchased online. By facilitating this process, PayPal would be able to capitalize on Latin America’s projected 2019 B2C e-commerce market value of $79.7 billion and embark on profitable partnerships in the region.
Target Market
With over 650 million people in Latin America and significant development in its constituent countries, this is the most compelling growth opportunity available to PayPal. To build a specific target market, PayPal should focus on the unbanked population which makes up approximately half of the Latin American population. This group is a primary area of focus since much of the unbanked population faces difficulty purchasing items online.
Unbanked Population Concentrations in Latin America
Source: World Bank Group
A secondary target market is the portion of the banked population with access to only local and regional credit cards. With PayPal, this segment could access a widely supported payment service that could be used to make international e-commerce purchases. Credit card issuers will also incentivize users to link their card to PayPal as is currently done in North America, further encouraging consumers to make a PayPal account and use it. Consumers benefit from the ability to purchase goods internationally with local credit cards while PayPal benefits from higher transaction volumes.
Banking on Success
As a result of this expansion, PayPal could realize $550 million in additional revenue in its first year. Over the next five years, this revenue is expected to grow 8 to 10 per cent year over year, largely driven by a rapid increase in e-commerce spending in the four selected countries.
The immediate monetary opportunity aside, the partnerships the company creates from a Latin American expansion can lead to a promising future. Given the prevalence of unbanked populations, a successful foothold in the four countries with PayPal Cash could open the door to a myriad of other banking services in the future. Breaking up with eBay marks the end of a chapter for PayPal, but a sea of new opportunities lies ahead for the company.