PayPal Holdings Inc. has “no aspirations to be a bank,” Chief Operating Officer Bill Ready says, but the company sees room to offer banklike products to customers who don’t have a nearby branch.
In recent weeks, PayPal PYPL, +0.25% has taken steps to expand its offerings for those without traditional bank accounts. Users can now deposit money directly into their PayPal accounts or onto a new, FDIC-insured prepaid debit card.
There’s a noble goal behind PayPal’s efforts. Dealing with finances is expensive for those who don’t have bank accounts and need to fork over a hefty portion of their paycheck every time they want to cash that check or pay a bill. Ready said that those without bank accounts in the U.S. may spend 9.5% of their income on financial services.
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“It’s crazy that those who have the least money pay the most for financial services,” Ready said. “We think we can provide services at a lower cost and much more efficiently” since the company is working at scale and has an all-digital enterprise.
Of course, there’s also a business case to be made. People without bank accounts are often shut out of the digital economy, but if they can get their paychecks direct deposited to a debit card for free, they can participate more easily in e-commerce and mobile payments. PayPal doesn’t charge for the cards or for direct deposits, but it earns a cut every time one of its debit-card customers makes a purchase.
PayPal also sees opportunities to expand its services internationally. A recently announced partnership with Kenyan mobile-payments company M-PESA will let customers in Kenya transfer money between accounts at both providers and buy items from PayPal merchants. It’s another worthwhile endeavor that has the potential to pay off from a financial perspective as well.
PayPal’s management has been talking about efforts to “democratize finance” for years, though the most recent actions came in early April and are unlikely to have much impact on the company’s financials in the immediate future. Still, the company is preparing for a time when they will. PayPal announced earlier in April that it would be adjusting the way it reports active accounts and total payment volume, mainly to include card usage in these figures. (PayPal has other cards besides the one it announced earlier this month.)
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The company said in a filing that its new method for calculating both metrics would have boosted last year’s account and total-payment-volume numbers by 1%, and PayPal plans to adjust past metrics in its next quarterly report.
When PayPal reports quarterly earnings Wednesday, it will be worth paying attention to the company’s comments on initial reception to the new products for “unbanked” customers, as well as the business opportunities that PayPal sees as a result of its new initiatives.
What to expect
Earnings: Analysts expect that PayPal earned 54 cents a share on an adjusted basis in the March quarter, up from 44 cents a share a year earlier, according to FactSet. The company has a perfect record when it comes to beating earnings expectations, coming in ahead of the FactSet consensus in all 11 quarters since its 2015 split from eBay Inc. EBAY, -0.76% . According to Estimize, which crowdsources estimates from hedge funds, academics and others, the average projection calls for 56 cents a share in adjusted earnings.
Revenue: Both the FactSet and Estimize consensus numbers call for revenue of $3.6 billion for the March quarter, up from $3 billion a year earlier.
Stock movement: PayPal shares have risen after seven of the company’s 11 earnings reports as a standalone company. The stock is up 79.7% in the past 12 months, compared with a 13.7% rise in that time for the S&P 500 index
SPX, +0.05%
. Of the 43 analysts who cover the stock, 30 rate the stock the equivalent of a buy while the other 13 rate it a hold. The average price target on PayPal shares is $84.86, 7.8% above Friday’s closing price.
What else to watch for
One area of interest for investors is the company’s relationship with eBay. Following PayPal’s split from eBay in 2015, the two companies agreed that PayPal would serve as the merchant of record for eBay transactions for five years and that it would also be the preferred payments provider. The two companies said on their respective earnings calls last quarter that eBay would take on the merchant-of-record role when the deal expires and also make one of PayPal’s rivals the preferred provider, news that sent PayPal shares plunging 8.1% in the next day’s session.
PayPal’s leadership didn’t do a great job on the last call of reassuring investors that the eBay breakup would be manageable. It will be up to the company to give that another try during Wednesday’s call.
EBay and PayPal moved their earnings calls to the same day last time around, which prompted some careful observers to predict that they’d issue an update on their relationship. For the current quarter, some are reading into the fact that PayPal’s call will take place at the same time as Visa Inc.’s V, +0.21% , whereas it usually occurs a week or so later.
“We suspect PayPal’s overlapping call with Visa next week is related to this week’s news of a new standard (EMVCo Secure Remote Commerce, SRC) that has the potential to create a universal button for online purchases that would consolidate the various network-branded buttons (i.e. Visa Checkout, Masterpass, Amex Express Checkout) into a ‘universal button,’ which could be viewed as a threat to PayPal,” Mizuho analyst Thomas McCrohan wrote. He rates PayPal’s stock at neutral with a $70 price target.
Read more about plans for a universal payments button
Also notable will be any updates on uptake for Pay with Venmo, the company’s attempt to monetize its loyal Venmo user base by giving folks the option to pay with their Venmo balances at PayPal merchants. The program kicked off in earnest late last year, so PayPal may be able to share information about user reception.
“Pay with Venmo awareness was robust with the younger audience,” KeyBanc Capital Markets analyst Josh Beck wrote about the results of a recent consumer survey conducted by his firm. Of course, key for PayPal is whether Venmo users are actually paying for e-commerce items with the service. Beck rates the stock at overweight with a $90 target price.
As far as metrics, PayPal has conditioned investors to expect significant growth in the number of new active accounts on its platform. Account additions have accelerated in recent quarters, reaching 8.7 million in the December quarter, so it’s worth paying attention to PayPal’s ability to keep up this momentum. Management has said that efforts to let users more easily choose which funding method they use for their transactions have helped fuel strong growth here. International expansion is also important.