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Finance

The Payment Revolution Continues to Roar

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

There is a received wisdom about how, and at what stage, companies grow. The kind of neck-snapping, five-figure annual growth I used to oversee with the Inc. 5000 is almost exclusively the province of very new, and privately held, companies. Once a company goes public and reaches a certain maturity and multibillion-dollar size—think Bank of America, think ExxonMobil—its executives and shareholders are usually tickled to see annual-growth projections in the single digits.

For better or worse, fintech has tossed those assumptions out the Overton window. A little less than a month ago, FIN wrote about PayPal’s stunning pandemic-fueled growth; the item was prompted in part by BTIG issuing a “buy” recommendation and setting a $300 target on its stock price. At the time, PayPal stock was trading at $244, so $300 seemed like an aggressive but plausible prediction; PYPL took exactly 18 trading sessions to close above the $300 target.

This week, to less fanfare, BTIG put out a new research note, forecasting that the stock will rise to $345 a share. And it’s not just PayPal; while Square is a smaller company, it has been on an incredible tear, with its stock more than tripling in the last twelve months (see chart).

As previously discussed, pandemic lockdowns have given contact-free payments a huge boost. But it’s also true that a lot of very small businesses (including “solopreneurs”) are migrating to apps like PayPal’s Venmo, Square’s CashApp, and Zelle for a wide variety of transactions. As Seema Amble of Andreessen Horowitz pointed out this week:

They include everyone from eyebrow threaders to freelance web designers to pop-up bakers at local farmer’s markets. Not only are these business owners getting paid for goods and services via P2P money transfer apps, but many also pay suppliers and contractors this way.

BTIG managing director and financials analyst Mark Palmer explained to FIN why he thinks PayPal will continue to explode. One leading factor is the booming Buy Now, Pay Later trend that FIN has almost obsessively covered recently. January’s BTIG research note didn’t even mention BNPL, while the new one gives it star status. Explains Palmer: “We didn’t have any statistics then; now we do.”

And here is what the statistics reveal: In the fourth quarter of 2020, about 2.8 million PayPal customers worldwide used its BNPL service for transactions worth more than $750 million, with 250,000 unique merchants. PayPal says that the debut of its BNPL offering “represented the best start for any product it has ever released.” While the service is free to PayPal users who repay on time, the company charges merchants a fixed fee plus 2.9% of every BNPL transaction. Getting those customers hooked is valuable; the global BNPL market is projected to grow to $166 billion by 2023.

Palmer is also closely following PayPal’s cryptocurrency offerings. He projects that cryptocurrency will add more than $1 billion in PayPal revenue, but perhaps more important is the stickiness of PayPal’s crypto traders. According to Palmer, the average PayPal user logs in two to three times a month; more than 50% of PayPal’s crypto holders log in every day. Moreover, the company should be enabling its 29 million merchants to accept cryptocurrency as payment some time in the next few months.

A third PayPal tailwind is Venmo. For most of its history, Venmo has been used primarily for peer-to-peer transactions, and has lost money. But Palmer notes that Venmo continues to grow—its fourth quarter transaction volume was about $47 billion, up 60% from the previous year—and the company has said Venmo will make a profit this year or next. Finally, Palmer told FIN he “would not be surprised” to see PayPal grow via a major acquisition, given that the company is now sitting on $19.2 billion in cash.

By the way, I began this item using Bank of America and ExxonMobil as examples of corporate behemoths. Measured by market capitalization, PayPal is already bigger than both of those. If PYPL stock hits the $345 target, its market cap will be bigger than Walmart’s.

Central Bank Digital Currency Is Live (No, It’s Not China)

While much of the world awaits China’s next moves in developing a nationwide digital yuan, The Bahamas already has a live central bank digital currency (CBDC), nicknamed the Sand Dollar. (The Bahamian dollar is pegged to the US dollar at 1:1). Although the Sand Dollar initially went live in October, it took a big leap this week when Mastercard and the payments firm Island Pay made available a prepaid card that can be loaded with Sand Dollars. In creating the digital currency, the Bahamas’ central bank stressed the need to bring banking services to its 400,000 citizens, many of whom are spread widely across islands with few or no banks. According to the International Monetary Fund, 20 percent of the adult population in The Bahamas does not have access to a bank account.

The problem, of course, is: what can you do with a Sand Dollar? For now, the biggest commercial banks in The Bahamas won’t accept the currency, and neither will the vast majority of merchants (many of whom don’t even accept credit cards). The nation’s economy relies heavily on tourism; that’s obviously been curtailed during the pandemic, but when tourists return, some might buy a Sand Dollar Mastercard, if only for the novelty.

In the past, low consumer adoption has doomed government-backed digital currencies (in Canada, Finland and elsewhere); however, some of those systems charged fees, and consumers are far more comfortable with digital payments than even a few years ago. Even if adoption in The Bahamas is slow, that won’t halt the demand for CBDC in other countries; Island Pay CEO Richard Douglas told FIN it is already working with the Eastern Caribbean Central Bank to roll out “DCash,” and Barbados and Jamaica have signed on, too.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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