PayPal raises $4B as coronavirus tips the scales toward digital

PayPal would have never asked for a pandemic, but the rush from brick and mortar to digital that accompanied the coronavirus outbreak has played directly into PayPal’s digital core while making in-store physical payments less of a competitive factor.

PayPal’s $4 billion bond market raise on Monday was not only worthy for its size and price, but it also follows record volume for the company and shows how the virus has accelerated trends that play well with PayPal’s digital model.

“PayPal is in the perfect position to benefit from the migration to digital payments, and their limitations related to physical-world payments are much less important than they were a couple of months ago,” said Thad Peterson, a senior analyst at Aite Group.

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PayPal reportedly raised the $4 billion in 10-year bonds that priced at 160 basis points over Treasury, yielding about 2.3%, according to MarketWatch. That would be less than what PayPal charges merchants in the U.S. PayPal did not return a request for comment by deadline.

Those terms are partly due to the staggering growth in volume for PayPal as payments have shifted online, a multiyear trend that accelerated in recent weeks due to brick-and-mortar store closings.

April was PayPal’s strongest month for new enrollments since its IPO, said Dan Shulman, PayPal’s president and CEO, during the company’s most recent earnings call. PayPal added 7.4 million new accounts and expects to add up to 20 million new accounts by the end of the second quarter. Revenue for April was up 20%, though PayPal did miss analysts' overall earnings expectations for the first quarter, which ended in March.

PayPal has built an in-store presence over the years, but its brand has always been more associated with digital payments, both during and after its status as part of eBay. PayPal partnered with Discover as early as 2012 to push payments in stores, and later added a plastic card for in-store payments, forging deals with financial institutions such as JPMorgan Chase and technology companies like Apple. PayPal ended a pair of in-store payment services in 2018, one using a phone number and PIN, and another using payment codes in stores.

These brick-and-mortar moves aside, PayPal is the dominant payment alternative for online purchases in the U.S. with over 280 million customers, so it’s only logical that their transaction volume would take off in this period, said Tim Sloane, vice president of payments innovation and director of the emerging technologies advisory service at Mercator.

That large consumer base, which is now spiking, gives PayPal a population of consumers accustomed to shopping and making payments online or through mobile apps.

“But the real opportunity is after the pandemic abates,” Sloane said. “It’s highly likely that use of digital commerce and payments will remain at higher levels than pre-pandemic, as consumers become comfortable with the process and habituated to the convenience of delivery.”

On the e-commerce side, PayPal has made deals with FIS, Chase, Citi, Discover and others to use incentive marketing points as a payment option at PayPal’s e-commerce merchants. The growth of Venmo, PayPal’s popular P2P app, has given it another channel to expand digital payment by tying Venmo to its merchant acquiring strategies.

PayPal is competing with Square and Stripe to capture digital merchant payments business as the pandemic ebbs. Stripe recently raised $600 million to accelerate coronavirus-era digital services for merchants, including credit. Stripe's funding came shortly after PayPal announced approval to participate in the government's Paycheck Protection Program.

Square recently received a bank license to directly make loans to its small-business base, though many of those businesses are gyms, bars and other categories shut during the stay-at-home orders. Square's most recent earnings report showed card-present volumes down 60%, with losses rising to $106 million. Like PayPal, Square also reported jumps in digital payments volume.

PayPal’s merchant lending program uses future payment flows to pay off the loans. PayPal’s online-heavy merchant base is more likely to have payments coming in than a brick-and-mortar business that has been closed or is slowly reopening under new guidance.

Onboarding for most physical locations will be “way down,” as will the use of tools to detect fraud at the point of sale, while online and mobile shopping onboarding will be up substantially, Sloane said.

“Smaller businesses that can invest in this area are likely to try and develop these solutions as soon as possible, which means onboarding is still needed, as are updated fraud models,” Sloane said. “Demand for credit will likely increase, but issuers will need to be careful how far they go.”