How Does Paypal Make Money?

What Is Paypal?

PayPal Holdings (PYPL) is a payments processing company that has now expanded into several other related services and niches as well. The company was founded in 1998 and went public via an IPO in 2002. However, eBay (EBAY) soon acquired PayPal and operated it as a subsidiary until 2015.

In 2015, eBay spun PayPal off, making it an independent publicly-traded company once again; it’s now listed on the NASDAQ exchange under the “PYPL” ticker symbol. PayPal’s main office is located in the Silicon Valley hub of San Jose, California.

PayPal is primarily known for its payment-processing service of the same name. However, it has several other sizable consumer-facing businesses as well. These include its mobile wallet and payments unit Venmo, money transfer service Xoom, and its Honey rewards platform.

PayPal’s Financial Results

PayPal had a highly successful 2021. Driven by strong e-commerce adoption during the pandemic, PayPal posted 33% growth in total payments volumes on the year to an impressive $1.25 trillion. PayPal powered 19.3 billion payments in 2021, which was up 25% from the prior year. And the company’s number of active accounts also grew 13% to 426 million for the year.

As far as financial results go, the company posted $25.4 billion of revenues in 2021, which was up 18% year-over-year. Earnings per share were flat, however, at $3.52 per share. In terms of composition of revenues, transaction revenues account for the lion’s share of total revenues for PayPal. The company generated $23.4 billion of transaction revenues in 2021, and $2.0 billion from other value-added services.

Takeaway: While PayPal earns money in a variety of ways, transaction revenues are still the company’s dominant source of income.

PayPal’s Business Model

PayPal operates a two-sided payments network around the globe. Two-sided is a key piece of the equation, PayPal has done extensive work to attract a vast number of both merchants and consumers to the platform, creating a network effect that fosters more transactions. As both vendors and buyers already have their information there, it makes it easier to connect them for future transactions as well.

PayPal’s network has incredible reach, operating in more than 200 markets and serving more than 400 million active accounts. PayPal does connect to third party payments networks such as the traditional banking system. However, it also has its own proprietary solutions for merchants which enable it to earn higher profit margins and offer features unique to PayPal’s platform..

PayPal has numerous competitors. In the digital wallet space, Block (SQ) has a strong rival to Venmo with its Cash App offering. For money transfers, PayPal competes against services such as Western Union (WU) along with traditional bank wire transfers. In payment processing, PayPal competes against Square again, along with merchant acquirers and credit card companies.

4 Main Ways PayPal Makes Money

1. Transaction Fees

PayPal’s largest source of income comes from its various transaction fees. These can come in various forms, such as a percentage of an e-commerce purchase, money transfer, or a fee on an exchange of foreign currency.

In general, merchants pay transaction fees when they receive cash from a customer for a purchase. However, in some cases, such as foreign currency transfers, the end customer may be the person directly generating revenue for PayPal.

PayPal does not disclose revenues by product category aside from transaction fees and other services. However, it is known that PayPal’s transaction business is generally a high-volume lower-margin sort of operation. Normally, customers or merchants won’t pay more than a few percent for each transaction. This is necessary, given the highly competitive nature of the transaction market, where PayPal is competing against credit cards, banks, and other FinTech firms.

2. Lending

PayPal offers some of its merchants financing options. Since PayPal has high visibility into a merchant’s revenue stream, it can lend to these merchants with a high degree of confidence as to their ability to repay. These loans can help merchants during slow periods of the year, cover working capital needed for inventory ahead of the holidays, or other such short-term financing needs. In addition to these sales-backed loans, PayPal also offers more traditional small business loans.

There’s not a lot of publicly-available information about PayPal’s lending programs, such as average annual percentage rates (APRs) on these arrangements. However, from what is known, it appears that this is not a large piece of PayPal’s earnings but rather a supplemental service for merchants to help them prosper and remain loyal to the PayPal platform.

3. Venmo Fees

PayPal’s digital wallet service Venmo at least eight different ways that it generates revenue. Monetization has been an interesting balancing act for Venmo, as PayPal gives away the main money transfer service for free but charges for a variety of perks and additional features.

For example, Venmo offers associated credit cards which come with double digit APRs. If customers want to withdraw cash from their account, there’s a fee for that. Venmo also offers instant transfers; in exchange for skipping the wait, users pay a fee. The wallet service is also adding newer functions such as cryptocurrency trading and payroll check cashing for which it can earn a reasonable amount of revenue.

4. Partner Fees

PayPal earns some money from working with retailers and other e-commerce sites. It made a big push into this arena with its $4 billion acquisition of the shopping and rewards app Honey in 2020.

Honey is a free web app that shoppers can use to find discounts and special offers at more than 30,000 different online retailers. Frequently, these retailers give incentives to PayPal’s Honey and similar third parties, for driving traffic to their website.

This shows the power of PayPal’s platform and network effects. It can encourage its payments customers and Venmo users to try Honey, save some money, and at the same time generate affiliate referral fees for PayPal. And, in this case, the retailer pays for the incentive, so the customer doesn’t face any additional charge for using this service.

Bottom Line

PayPal has built a tremendous business spanning the vast majority of the world. While it started out primarily to empower e-commerce transactions, PayPal has now broadened its product offering to create a much more robust and all-encompassing platform. As Venmo continues to gain more adoption and PayPal adds on other services such as Honey, it should continue to grow its business and find new ways to generate revenue.