PayPal, the online payment company that started life as a way for bargain-hunters to pay for goods on the auction portal eBay, has now grown into a formidable financial institution in its own right. Four years ago the firm began offering small business loans in the United States and has now expanded globally. By last summer, PayPal Working Capital had lent $2 billion (€2.1 billion) to 90,000 companies.
PayPal's chief executive Dan Schulman tells Handelsblatt about his plans to bring the service to Germany, and why he thinks more people will turn away from cash.
Handelsblatt: Mr Schulman, you have once spent 24 hours on the street as a beggar. Why did you do this?
Mr. Schulman: I try to run my business and personal life not just intellectually. If you want to be very powerful in your conviction, you have to experience things first hand, you have to feel it in your heart as well as in your brain.
OK, but why did you have to spend a day on the streets?
I was CEO at Virgin Mobile at the time, and we started giving parts of our profits to the homeless youth. We were about to decide what organization to work with and the executive director of one of them said, before you do anything you should understand what it is really like to be homeless. So I did that. I am not saying that this is the world's greatest hardship, it was only 24 hours. But I can tell you my empathy went up dramatically.
Is there a similar experience that you have gone through since you started at PayPal?
Yes. I have spent 24 hours trying to run my financial life without a checking account or credit card. It was very painful.
The things that we take for granted, such as paying a bill, getting credit or sending money to loved ones, suddenly involved a tremendous amount of time and cost. It is almost like a part-time job to pay your bills or to get cash. You are driving, you are waiting in line, it is a terrible experience. But it is the daily reality for those 2 billion people in the world that are not well served by traditional financial institutions.
Beggars and other very poor people are still very reliant on cash. Presumably the rise of mobile and electronic payments excludes them even more from financial life?
Quite the opposite. By 2020, around 90 per cent of the world will have a cell phone. We are moving towards a world where even the poorest people somewhere in rural India will have a mobile phone. In other words: Most people will soon have all the power of a bank branch in the palm of their hand.
But cash does not cost anything, whereas there are fees for mobile banking.
Again, this is not quite true. If you move to digital you can save consumers 5 to 10 per cent of their disposable income. One example is international remittances, which mostly consists of immigrants sending money home to their loved ones. This is a $600 billion business. The average cost of a remittance today is 8 per cent. Electronically, you could do it for half the amount. That is the equivalent of saving $28 billion. That is the power of fintech: To give money back to those people who are most in need of it.
How long will it take for cash to be truly marginalized?
Cash has been around for thousands of years in some form, and it is going to be around for a long time to come. Roughly 85 per cent of the transaction volume worldwide is still done in cash. So there is a tremendous way to go in terms of digitizing this. But we are beginning to see the signs of a tipping point.
In what sense?
Take retail sales in the U.S. During the last Christmas holidays, sales in stores dropped, whereas online and mobile sales were up 18 per cent. More and more people use their mobile phones not just to order something, but to buy it online and then pick it up at the store. Mobile blurs the line between what used to be online and offline.
Smart phones will be the future of basic consumer transactions.
In Germany, many people do not like mobile and cashless payments as they are worried about data protection. Can you understand this?
Of course. All individuals need to feel that their data is protected, secure and theirs. But there is a difference between generations. The so-called GenTechs or Millennials have a much more fluid definition of public and private than people in their 50s or 60s. Take Venmo, our mobile service in the U.S. It allows people to share payments with friends and comment on them. Over 90 per cent of our users actually do that. They turn a transaction into an experience.
Will our smart phones in five to ten years replace bank branches?
Smart phones will be the future of basic consumer transactions. Some of the larger transactions such as mortgages and financial wealth management will probably stay within the domain of bank branches.
Will many banks become irrelevant in this scenario?
No. In the future banks and fintech companies will collaborate more. I do not think any of us could do it alone. The war is not against each other, the war is against cash and waste.
Your market capitalization is almost twice that of Deutsche Bank. Have you ever considered buying one of the larger banks?
Companies have long tried to own and buy everything. But today the most nimble and successful firms think about ways of collaborating and taking the best of each. Deutsche Bank for example has some great assets that could be plugged into our platform, and vice versa.
Are you in talks about cooperating with Deutsche Bank?
We are having discussions with financial institutions around the world. But there is nothing to announce at this stage.
In Germany, you are predominantly a platform for online purchases. But in the U.S., you offer a lot more than that. Do you have plans to bring any of those products to Germany soon?
We want to offer our basic platform capabilities worldwide. Just as we are working with U.S. financial institutions, our desire would be to do the same thing in Europe as well.
Will you bring Venmo to Germany?
We already offer person to person payment services in Germany and other European countries, which are very popular. Our focus for Venmo remains building on the current success in the United States.
You have also got a lending business called Paypal Working Capital. Are you planning to bring that to Germany?
Yes, our intent is to roll that out to multiple countries including Germany. In Europe, we have already started in the UK.
Have you ever heard of the German online payment system Paydirekt?
Yes, I have.
How seriously do you take them as a competitor?
I typically do not comment on any rival. My focus is less on the competition but on what the customer needs. If we are able to best satisfy that, we will always stay a couple of steps ahead of our competitors.
Daniel Schäfer is head of Handelsblatt's finance pages and based in Frankfurt. To contact the author: [email protected]