How PayPal is targeting the ‘underserved’ market

PayPal wants to be the one-stop financial shop for underserved customers. The company rolled out a Mastercard debit card in April issued by the Bancorp bank, with no monthly fee or minimum balance on which customers can load funds onto at stores or online. Previous prepaid cards the company rolled out had monthly fees. It's an early step toward a suite of services it's developing for underserved customers. "Our goal is to look at the people who are outside of the financial system and give them a full platform to manage and move their money, and that we call democratizing financial services," CEO Dan Schulman said at the company's investor day conference in late May. "We think we have a tremendous competitive advantage to bring those citizens into the digital economy to afford them of the opportunities all of us have as we move into the digital world." A company spokesperson told Tearsheet that PayPal is aiming for customers who use alternative financial services outside of the banking ecosystem. For industry watchers, it's a land grab for PayPal among the underserved and a basis to offer them more products. The market is big -- accounting for 2 billion people globally, according to the company, and nearly 34 million U.S. households, a recent FDIC survey suggests. Banks traditionally haven't seen these customers as a profitable enough segment to invest in, but PayPal is jumping to gain their loyalty as digital challenger banks and retailers like Walmart and Amazon vie for market share and push prices down. "The products typically delivered to the underserved were prepaid cards; they had pretty significant costs associated with them, and now you see these challenger banks delivering services that are free and this market has different choices with regard to who they want to work with," said Jason Gardner, CEO of Marqeta, an API platform that powers prepaid debit and credit cards. Challenger banks, along with Amazon and Walmart, are making their offerings known to customers who want low-fee or fee-free financial services. Within the last week, two major players in the space made growth announcements: U.S.-based neobank Chime, with 1 million U.S.-based customers, raised 70 million to grow its product set, and U.K.-based Revolut announced its intentions to apply for a U.S. banking license. Square Cash now also takes direct deposits -- a nod to its role as an almost-bank account for the underserved. "It's a way for [PayPal] to lock up this market, and grab a big market share," said Brendan Miller, principal analyst at Forrester. "PayPal sees itself as a platform, and as they onboard these customers, it is an acquisition play; PayPal is offering more traditional products and is starting to offer more services just like Amazon does." Source: PayPal  By offering a physical card, PayPal is bridging the gap between the physical and digital financial worlds, letting customers load paychecks through mobile deposit or at the physical point of sale at partner retailers, and customers have free reign to use it wherever Mastercard is accepted. Despite the absence of a monthly fee or minimum balance requirements and free direct deposits, it's not free -- loading cash using the app still costs $3.95, and loading cash in person at the point of sale costs $4.95. Despite the fees, the objective is to offer transparency and build trust for customers who may be used to losing part of their paycheck due to hefty fees at payday lenders, check cashers or other prepaid cards. "It becomes very emotional [for customers] when you hear horror stories about prepaid cards and the fees they charge to withdraw funds, monthly and service fees -- PayPal has eliminated a lot of those fees because they realize they can lock these customers in long term by connecting with them emotionally, and they can be a one-stop shop," Miller said. The emotional link with the customer is an important way to build brand affinity, and it goes beyond a low-fee card that has transparent fees. Customers using the app also have access to personal finance management tools like savings goals; they also can link their PayPal accounts to Acorns to invest, creating a full-stack financial platform for customers who often aren't target segments for big banks. "They store cash in secret places because they want to immunize themselves from unwisely spending that cash. ... We have these things called goals or digital places to put money to help people from unwisely spending," John Kunze, PayPal's vp of global consumer product, said at PayPal's May investor conference. Although PayPal can gain interchange revenue from debit card transactions, the profit potential of underserved customers can be realized in the future. Of money that goes on PayPal debit card, a third of that money is spent on the PayPal platform, either at checkout or for peer-to-peer payments, acknowledged Kunze. As PayPal acquires these customers, it gets valuable data and insights on them, a springboard to offer additional products like credit. It's a long game, part of a strategy that challenger banks and digital upstarts are pursuing to grow loyalty and lifetime customer value. "This is all about the long haul, in five, seven and 10 years -- that's how they see it strategically -- the opportunity is if that customer becomes attached early on as they move through different stages of their lives," said Daniel Ives, chief strategy officer at GBH Insights. "It's a new paradigm and a new world with next-generation e-commerce and finance companies looking at the world in much different ways than traditional banks."