PayPal’s merger strategy has long been focused on digital offerings. Reaching the physical world, however, has been a real challenge for the payments giant.
Now PayPal is trying to change that. The recently announced acquisition of Canadian bill pay service TIO Networks for $233 million would not just give them greater reach but a greater opportunity to work more with people who are excluded from the banking system.
“It’s been clear for a while that PayPal has a vision to democratize financial services,” said Anuj Nayar, head of global initiatives at PayPal. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”
About 15 percent of U.S. consumers don’t have a bank account, according to Pew Charitable Trusts. For many of them, digital financial services seem ill-suited to their needs since they deal mostly in paper checks or cash. And while targeting people off the financial grid is laudable, the deal, which is scheduled to close in the second half of 2017, is as much about the transaction volumes PayPal would acquire, if not more, as servicing the unbanked.
When the company announced its quarterly earnings at the end of January it highlighted the successful growth of PayPal-owned Venmo, which processed $5.6 billion over the quarter, up 126 percent from the previous quarter. But Venmo transfers are free for users and PayPal doesn’t make much from them. Similarly, people making cash payments to billers are probably doing so through a kiosk or 7Eleven, Family Dollar or other retailer, said Michael Moeser, Javelin Strategy & Research’s director of payments.
“PayPal makes [revenue] when you use its wallet at a merchant,” he said. So by bringing billers into its network PayPal argues that it’s creating more opportunities to generate fee revenue.
If PayPal can get data on people who are outside the mainstream financial system, and as a result, aren’t on the radars of credit bureaus, it could potentially help build and maintain records of the volumes of data that show people’s financial integrity and responsibility, said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm.
As important as it is to bring attention to and target these customers, this deal, for PayPal, is still all about adding more ways to get volume into its business that wasn’t previously there. TIO processed $7 billion in bill payments in 2016. It boasts 14 million customers, 10,000 biller partners and 65,000 retail locations.
In the long term, PayPal could use the TIO network to bring more utility to the Venmo app, Moeser suggested. PayPal declined to comment.
“Say you and your three roommates get a collective utility bill, and one person is getting the funds from the other roommates so he or she can pay that utility bill,” he said. “When you get money from your roommates you don’t have to go to a separate function or log into your mobile or online banking, you could do it all from your Venmo wallet and there’s an opportunity for Venmo to get some sort of interchange [fee] from that biller.”
Nayar did not comment on the company’s future plans beyond the deal, which has still not been completed. For now, he said, PayPal is focused on serving customer needs, and finding a way to bring people with limited financial access into its business and into the mainstream financial system is on deck.
“Across the board we’re focusing on needs of customers,” Nayar said. “PayPal’s are two fold: merchants and consumers. For both of them there is a massive unmet need and PayPal is sort of the only global third party payments network that does it all at scale — we have three digital wallets in total,” he added, referring to the PayPal digital wallet, Venmo and Xoom.
For the last five to 10 years, the conversation around financial inclusion has drawn attention to the exorbitant fees people end up paying just to cash a check or send money to family in a different country. In that time, technology developers have built software that allows them to perform these basic functions for little to no fee, and more quickly.
Adopting these technologies aren’t as easy as it sounds though, said David Sica, a principal at venture capital firm Nyca partners. There’s a huge financial literacy component that could be addressed through great marketing and product design.
“What often gets missed is the consumers trust that check casher, they trust the service that for the last 20 times they’ve used it does what it’s supposed to do,” he said. “If I’m a check cashing customer, I’m not going to rock the boat. I’m going to go where I know I can cash the check and remit and I’m fine paying the fees because it’s more important to get it done. It’s unrealistic to think the unbanked, underserved population will start acting and behaving like a Venmo customer on day one.”