Along with companies like Peloton and Facebook that are losing momentum as the pandemic recedes, PayPal is entering a critical phase of reinvention after two years of stellar earnings.
PayPal's user growth has slowed to a crawl after unprecedented activity following the pandemic-powered e-commerce boom, and the company’s performance was further hampered by the recent eradication of 4.5 million accounts it deemed illegitimate.
The San Jose, California-based company now expects its user base will expand by only 5% this year, with 15 to 20 million new users over the next 12 months — a far cry from the 120 million total new accounts the company added between 2020 and 2021, when year-over-year account growth rose 24% and 13%, respectively.
As a result, PayPal has abandoned its earlier ambitions of reaching 750 million global users by 2025, and instead will focus on generating more revenue from its 426 million existing customers, CEO Dan Schulman
The dramatic scale-back doesn’t bode well for PayPal achieving its other lofty goal of gaining broad acceptance in stores, at least in the near future.
“The company has been pretty unsuccessful in the past at getting PayPal to become a ubiquitous acceptance option at the point of sale, and they’re better off now digging into their super users and creating more solutions for them,” said Patricia Hewitt, a principal with PG Research & Advisory Services LLC.
PayPal’s top priority must be getting the bulk of its users to download its new
Discovering millions of bogus users in the mix didn’t help its cause, but PayPal said it’s corrected the problem.
“We identified 4.5 million accounts that we believe were illegitimately created,” John Rainey, PayPal’s chief financial officer, told investors when announcing fourth-quarter earnings earlier this month.
PayPal declined to provide details of how the scams were perpetrated, but in most cases fraudsters were prevented from collecting the cash rewards, a PayPal spokesperson said.
Experts suggest that synthetic account fraud — where criminals create fictitious accounts by combining real and fake ID credentials — is responsible for what PayPal experienced.
“The synthetic accounts were likely driven through a combination of automated bot attacks and less sophisticated hand-to-hand [fraud],” said Armen Najarian, chief identity officer at Outseer, a subsidiary of data-security giant RSA specializing in payments identity verification and fraud detection.
But PayPal has not stopped using cash rewards to drive users to its super app. Existing PayPal customers who download the app receive a cash reward of about $8 per customer, depending on the offer, a PayPal spokesperson confirmed.
Within the app, users can see a stream of promoted cash-back deals at merchants including Macy’s and Walgreens, along with credit offers plus PayPal’s Pay in 4 buy now/pay later loans. Users can also buy, store and spend cryptocurrency through the app, pay bills, send donations to charities, exchange funds with peers or send payments overseas via Xoom, for the first time through a single consolidated feature.
PayPal has been rolling out a savings account offered through Synchrony Bank to super-app users since late last month, and plans to make the account available to all users by the end of the second quarter.
PayPal's super-app users generate more activity than its other users do, more than doubling the average transaction value per customer, the company said.
PayPal has also hinted at expanding more of its super app's features to the 80 million users of Venmo’s app, which currently supports P2P payments along with the ability to shop online at some merchants, make payments at some stores that accept the Venmo QR code, and manage cryptocurrencies.
Venmo will gain further utility as a shopping tool when
“PayPal needs to create reasons for consumers to habitually transact through the PayPal and Venmo apps with very legitimate offers and down the road, use that to expand its retail footprint,” said Daniel Perlman, managing direct with RBC Capital Markets, an Annapolis, Maryland-based equity research firm, in an interview.
Currently it’s unclear whether PayPal and Venmo can achieve the kind of repeat usage and acquire enough new customers organically to regain the momentum the company had during the pandemic, but this quarter will go a long way toward determining PayPal's future, Perlman said.
“PayPal is floating a buoy to see what’s out there. If they can successfully drive transaction growth with existing customers by deepening engagement over the next couple of quarters, those users will pay the bills and they can take the lessons they learn and go find more customers like them,” he said.
