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Only a few years ago PayPal was owned by eBay and mainly used by the website’s buyers and sellers. However in 2015, PayPal became an independent company and started a journey towards rapid growth outside of the eBay domain. But this original long-standing relationship with eBay was the key to the success of PayPal.
PayPal and eBay were synonymous in its early years as PayPal, like many great businesses, offered a solution that greatly reduced anxiety for its customers. In the early days of the internet, eBay had established itself at the forefront of e-commerce. Its big problem, however, was payment. As the peer-to-peer element of eBay’s business meant that often merchants were unable to take card payment, people were forced into having to send money by cheque, bank transfer or even postal orders – means that were both insecure and inconvenient. When PayPal came along it offered a secure, simple service that allowed direct payment online.
This relationship with eBay in its early years allowed PayPal to build a massive base of customers. Fast forward to 2017 and this critical mass of customers has led to PayPal becoming a necessary option for merchants wanting to sell goods through almost any online shop.
PayPal, having spun off from eBay in 2015 after more than 10 years, is still using this critical mass of customers and merchants to push its competitive advantage as it seeks growth. The large number of customers has led to more merchants offering PayPal as a means of payment, which has in turn caused more people to sign up for a PayPal account – a highly beneficial positive feedback loop for the company.
This has created a difficult barrier to entry for potential new-comers to breach. Why would a new system with few customers be offered by merchants, and why would a system offered by very few merchants be used by new customers?
So how does PayPal grow the number of users now it has left eBay? First is the general growth of e-commerce globally – as the largest online-based payments system, PayPal is in a strong position to benefit from this structural change. The ability for PayPal to expand geographically is also very compelling – of its nearly 200m users, over half of them are from the US. It is easy to see how expansion into the Emerging Markets and greater saturation within Europe and South America could see the number of users grow quickly over the medium-term. Thirdly, PayPal has moved into the mobile payments space through their acquisitions of Braintree and Venmo which is an area seeing rapid growth.
Another important area of growth will come by increasing the amount customers are spending through PayPal’s service. PayPal has launched PayPal Credit which allows consumers to “buy now, pay later” and works much like a traditional credit card. PayPal’s own statistics show a 20% increase in the conversion of consumer purchases online when PayPal credit is offered. In addition, PayPal earns additional fees for providing the credit facility.
PayPal was founded on the basis that it offered a simple, secure solution for people to buy things. E-commerce is undoubtedly the retail story of the 21st century so far, and with PayPal positioned nicely at the forefront of the online payments industry, we believe PayPal can achieve sustained high levels of growth in the medium term.