Life after eBay: Why PayPal cannot ‘pivot to the blockchain’

PayPal hasn’t started 2018 well. After 15 years together, eBay announced that it would not be renewing PayPal’s contract to be its back-end services provider. From 2020, PayPal will continue to be an option at the checkout, but it will no longer be prominently featured ahead of debit and credit card options.

The online auction website will now work with Adyen, a Dutch payments company focused solely on providing back-end payments services. Users will barely notice the difference — there will be no ‘Adyen’ button to pay. The key difference is that eBay will now start charging users a fee for card transactions — something PayPal currently does.

Although widely expected to happen at some point, the loss of the eBay contract concerned investors. PayPal’s stock price plunged 12%.

So why are investors concerned?

PayPal has been pivoting away from eBay for some time and business has remained strong. Since PayPal was spun-off from eBay in 2015, the company has seen its revenues from the auction website grow just 4%, compared with revenue growth of 23% from other sources. In fact, eBay accounts for only 13% of PayPal’s total payments volume.

PayPal has also delivered strong results as of late. Profit growth of 59% in Q4 2017 and the announcement of deals with Disney, Dillard’s Inc and QVC mean that the company is well-placed going forward.

But it’s easy to see where investors’ concern is coming from.

Firstly, Adyen winning the contract demonstrates that barriers to entry in the payments space are significantly lower than before. The shift continues the trend of fintechs entering the digital payments market and eroding fees.

Secondly, eBay’s confidence that customers will still transact without a platform-agnostic payment provider sitting between them and the customer is a worry for PayPal; providing trust in transactions is why they have prospered thus far.

So what next for PayPal? Clearly the firm must innovate and continue to provide a top quality service. Product offerings like Venmo (explained later in the article) are good examples of this.

But should it “pivot to the blockchain”?

Blockchain

Now this is 2018, and yes blockchain is thrown around willy-nilly as the solution to all tech-related problems. But make no mistake about it — blockchain innovation is a big threat to PayPal’s business model.

One of the reasons PayPal makes money is because individuals don’t trust one another when it comes to making payments anonymously. The company sits as a trusted intermediary between two transacting parties and essentially provides insurance to both parties if the deal goes sour. If either the buyer or seller have been unfairly treated then PayPal is there to provide compensation (in the form of a refund). To provide this insurance, PayPal charges a fee.

Transacting parties like this because they have an easy-to-use payments platform on which to transact and both parties fully trust the intermediary. PayPal stores all the data, and consumers have been happy with this arrangement for some time.

But now blockchain has come along.

For the unfamiliar, blockchain technology is a unique method of storing data amongst multiple users in a network. ‘A’ blockchain is a database with set rules about how data can be added and removed. The database is not stored at just one node in the network (the way PayPal does it) — rather, its constantly duplicated at each node. So each user simultaneously has a copy of the data and it’s almost impossible to fabricate a data entry into this shared database.

The rules of this database typically include:

- Criteria that must be fulfilled for any data to be added

- Multiple user authorisation for data being added (for example 6 different users must approve a piece of data being added)

- Majority authorisation for any data/rules being changed (for example over half of users must approve a change)

This is how bitcoin works! The data being added is the record of payment transactions between two people. Each transaction is approved by six users on the network. That payment is then recorded in the database stored at each node in the network. For someone to fabricate a transaction and steal money, you would need over half the users to be complicit and approve a change to the database. It works well!

The difference here is that no central authority (like PayPal) sits as the trusted intermediary — the binding rules of the network provide the trust element. And this is a worry for PayPal — that’s how they make money.

PayPal cannot ‘pivot to the blockchain’ because being a central authority that looks after all the data and charges a fee for doing so is completely orthogonal to the decentralisation that blockchain stands for.

But what, no blockchain, no decentralization?!

No. Instead, PayPal must ensure that it continues to provide a top quality user experience and brings something else to the table. Venmo is a great example of that.

Venmo’s ease of use is great for consumers, who can pay easier, share their experiences and even split bills. Merchants therefore want to work with Venmo as they are more likely to get custom if they offer Venmo payment, and merchants also get advertising when users share their split bill online for example.

This is how PayPal’s strategy must evolve — by reaching out to more consumers who previously did not transact digitally, and by providing a top quality payments service for both the consumer and merchant. If the service is good enough, then consumers and merchants will not mind paying a small fee.