The 2022 McKinsey Global Payments Report

McKinsey just released a long yet insightful report on global payments. If you haven’t decided whether to spend time on reading it fully, here are my notes

Asia’s payment revenue is half of the global payment revenue

In 2021, payment revenue in Asia reached $1.1 trillion and was as large as that of the rest of the world combined. North America has the highest revenue per capita at $1,424. The composition of payment revenues varies from region to region. Half of North America’s revenue came from Consumer and credit card made up 50% of all Consumer, the same trend observed in Latin America. Meanwhile, Consumer was only 37% of all Asia’s revenue. McKinsey predicted that global payment revenue would grow by 9% every year between now and 2026, with most of the growth stemming from Asia and North America.

Global Payment Revenue in 2021
Figure 1 – Global Payments Revenues in 2021
Global Payments Revenue - 2012-2026F
Figure 2 – Global Payments Revenue – 2012-2026F

Cash usage varies, depending on where you look

Cash is not a popular payment method in Europe and especially some countries like Norway, where the usage dropped to 3%. The pandemic accelerated the process to move away from cash in Czech Republic and Greece, where the use of cash dropped by 12 and 15 percentage points between 2019 and 2021. On the other hand, hard cold cash is still the most popular in other areas. In Africa, 95% of all transactions in 2021 involved cash. Cash still dominated in-person point-of-sale (POS) transactions in Southeast Asian markets. It made up 63%, 54%, 51% and 48% of POS transaction value in Thailand, Vietnam, Indonesia and Philippines respectively. In Latin America, the figure was 36%.

This presents a huge opportunity for growth to the likes of Visa or Mastercard and future fintechs.

Central Bank Digital Currency

Roughly 90 percent of the world’s central banks are pursuing central bank digital currency (CBDC) projects. Some, including those in the United States and South Africa, are at the exploratory phase; others are development projects (the European Union) and pilots (China). In some locations, including Nigeria and the Bahamas, solutions are already operable, and central banks are looking to expand. Despite the high level of activity, most CBDC initiatives today remain in the nascent stages of market development and, in many cases, even technical design.

CBDCs differ fundamentally from other forms of digital coins in that they are directly backed by central bank deposits or a government pledge. Therefore, they offer stable value and can aim to combine benefits in the areas of trust, regulatory stability, and audit transparency. CBDCs can be deployed under a variety of technology models, depending on a central bank’s desired objectives and use cases. CBDCs do not necessarily rely on decentralized technologies, as they can be administered by central bank agents as well as distributed via digital-ledger technologies. They can be held on physical devices such as cards or phone wallets or exist as a purely digital book entry. They can be issued as stand-alone tokens (stored at any of multiple carriers) or as account-based assets held directly at the central bank.

Wholesale CBDCs mostly target financial institutions (banks and nonbanks) and large corporate treasury centers as their primary users, and they aim to improve the efficiency of settlements—both payments and securities, domestic and cross-border. This may or may not involve providing nonbanks with direct access to central-bank accounts.

Retail CBDCs target consumers and local businesses as end users, with possible use cases including disbursement of social benefits, an alternative to cash for e-commerce point-of-service and bill payments, and enabling of seamless peer- to-peer transactions for banked and unbanked users. In more complex initiatives, CBDCs combined with smart contracts,6 such as the Bank of Israel’s initiative, aim to improve payments convenience. Examples include payment of sales tax directly to tax authorities at point of sale and automated distribution of social benefits for economic relief conditioned on the recipients meeting defined requirements.

Nigeria became the first African country to introduce a digital currency with the October 2021 launch of retail CBDC eNaira. Its intended bene- fits include faster and more equitable distribution of cash assistance to households and communities participating in social welfare programs, lower transaction costs and faster settlement, efficient cross-border transaction capabilities, and traceability and security to limit fraud. The eNaira app garnered almost 800,000 downloads in the first seven months following its launch. According to some reports, half of those downloads have not been activated. Merchant adoption of digital currency has been similarly limited, with fewer than 100 active retailers accepting eNaira payments as of May 2022—a small number, given Nigeria’s status as Africa’s largest economy.

The low initial uptake of eNaira has been attributed to limited knowledge of the CBDC and how it functions, fear of exposure to security breaches, and poor internet access in some regions. In response to these challenges, the Nigerian government recently announced that eNaira will be made available on feature phones via Unstructured Supplementary Service Data (USSD), which will expand the potential market by 100 million citizens on top of the current 25 million to 40 million smartphone holders.1 The government also recently sponsored a hackathon to promote visibility and identify key feature and technology improvements.

Instant Payments

Instant payments are inching towards the inflection point of mass adoption. Usage doubles annually in countries like India, Spain and Thailand, increases by 50% every year in Australia and Singapore, and grows at double-digit rates in China and the UK. In India, UPI has 260 million users, 300 registered banks and 6 billion transactions a month. In Brazil, Pix has reached half of the population and more than 775 registered institutional participants, including banks, government agencies and others. In the US, instant payments’ growth rates have exceeded 60%, but the volume is relatively small.


Digital wallets play an important role in consumer life and payment landscapes in several markets across the globe. In the Philippines, Vietnam and Indonesia, wallets account for 31%, 25% and 39% of transaction value respectively. In the Philippines, the majority of adults in the country are users of the top two wallets, GCash and Maya. In Brazil, 70% of the respondents to a recent survey said they use digital wallets, even though the transaction value and frequency still remain low.

To offer more utility to users and find revenue, wallets look to partnerships and other areas beyond just payment. Ride-hailing apps like Gojek and Grab go into groceries and other categories with higher ticket size. In Africa, M-Pesa forms partnerships to offer services in e-Commerce, travel, health, agriculture and other areas in order to become a Super App. In Latin America, Rappi, which is a Colombia-based Uber-like service with more than 30 million users, adopts the same approach and offers e-Commerce, insurance and loyalty points. In Vietnam, Momo is a formidable and popular wallet. Shortly after launch, Momo partnered with every telecommunications network in the country to enable airtime top-ups as the strategy to acquire users and grow. Since then, the partnerships and Momo’s business have expanded. Nowadays, Momo is everywhere in major cities like Hanoi or Ho Chi Minh City. You can pay for a bowl of soup on the street by asking the merchant for their QR code. Plus, users can buy a lot of things such as online-gaming credits, airline tickets or movie passes.

In the Philippines, in order to provide more utility to users, GCash launched GSave and GInvest to enable savings and investments on its app. The recently launched Maya app follows the same playbook. In India, Paytm is now a functional bank which can broaden its offerings to lending products.

We will undoubtedly continue to see the growth of wallets everywhere in the world. But they are all under pressure to deliver profitability, not just growth. The question then becomes: can they become profitable like incumbent banks faster than banks can gain feature parity?

Other observations

Debit cards have extended their lead as the most used card product, with 94 transactions per capita globally, versus 49 for credit. The share of debit card among overall electronic transactions is highest in Russia (84 percent), followed by Norway, Ireland, and Romania (each roughly two-thirds).

The digitization of commerce and business management has massively expanded opportunities to embed finance in nonfinancial customer experiences. As much as 33 percent of global card spending—50 percent in the US—now takes place online, with a large portion of small and midsize companies in the US relying on software solutions for managing their business.

10 percent of UK adults reported holding, or having held, a crypto asset. The European Central Bank (ECB) has indicated that as many as 10 percent of households in six large EU countries owned digital assets. And roughly one-fifth of respondents to a McKinsey survey—22 percent in India, 20 percent in Brazil, and 14 percent in the US—reported that they held digital assets as part of their financial portfolios 

Globally, between 2018 and 2021, the number of noncash retail payment transactions have increased at a compound annual growth rate of 13 percent; while in emerging markets, that figure is 25 percent. Some of the fastest growth occurred in emerging markets in Africa (Morocco, Nigeria, and South Africa) and Asia. Strong growth is expected to continue in some emerging markets over the next few years, with projected CAGRs of 15 percent between 2021 and 2026. 

Weekly reading – 5th March 2022

What I wrote last week

QR Codes’ popularity in Vietnam


Car Dealerships Don’t Want Your Cash—They Want to Give You a Loan. I am supportive of point-of-sale lending if and only if consumers want that option and aren’t coerced into it. That car buyers are forced into taking a loan to avoid paying a premium is just simply outrageous. Every oversight agency should look into this practice and punish dealers accordingly.

Tinder’s Opaque, Unfair Pricing Algorithm Can Charge Users Up to Five-Times More For Same Service. The research — which spanned five continents — reveals that within a single country, consumers can be quoted up to 31 unique price points for a Tinder Plus subscription. Further, some people are charged up to five times more for the exact same service: In the Netherlands, prices ranged from $4.45 to $25.95. In the U.S., they ranged from $4.99 to $26.99. Consumers International and Mozilla also determined that Tinder’s personalized pricing algorithm can charge older users more money. On average across the six countries investigated, 30-49 year-olds were charged 65.3% more than 18-29 year-olds.

As online grocery surges, brick-and-mortar still resonates with shoppers. Online grocery shopping is still a bit novel, even to a young guy who is supposed to be the prime audience for eCommerce like myself. What stops me from buying groceries online includes retailer websites’ frustrating user experience, the fear that groceries aren’t fresh, the concern about the actual quantity without real visibility and the higher prices. I haven’t been able to find a grocer that addresses these concerns of mine and believe that many have the same.

As GrabFood, ShopeeFood hit Covid wall in Vietnam, smaller apps take aim. “Like most markets in the region, Vietnam’s food delivery space is dominated by two players. One of them is GrabFood, the food delivery arm of Singapore-headquartered super app Grab. GrabFood is dominant across the region, with a GMV of US$7.6 billion in 2021. In Vietnam, it has a 41% market share, according to the Momentum Works report. Matching GrabFood’s 41% is the food delivery arm of another Singapore-based giant—Sea Group’s ShopeeFood. Again, Vietnam is an outlier here, since ShopeeFood is barely present in the rest of Southeast Asia, where foodpanda and Indonesian super app Gojek’s GoFood are the other major players. GrabFood and ShopeeFood still have a significant lead in Vietnam, but conversations with restaurant owners point to a growing disaffection with them. Several owners told The Ken that Grab and Shopee’s commission fee of 25-30% is too high for them to break even. They’re also unhappy with the giants’ heavy discounting strategy—a common tool used to acquire customers. “When they offer promotions to customers, we have to pay 50% of the promotion, and Grab pays the other 50%,” said Diep Nguyen, who runs two cafes in Ho Chi Minh City. “If we want to be featured on a Grab promotion, that costs up to US$38 per week.”

Disney+ Adding Cheaper Ad-Supported Tier. “The value of advertising is significant. Disney’s other major streaming service, Hulu, offers an ad-supported tier for $6.99 per month, and brings in about as much ad revenue from those users as it does subscription revenue. With its wider reach (Hulu only has 45 million subscribers), Disney+ has the potential to generate significantly more ad revenue“. You need to ask Disney’s management for the rationale and substantiating data behind this move. If I can venture my thoughts, this will be a good move for the iconic company. An ads-supported tier of Disney+ with a growing and appealing library of content will expand the company’s reach. The key here is whether Disney can strike the balance between customer experience and profitability. With Hulu, Disney seems to have a decent record. So I give the company the benefit of the doubt.

Hybrid offline/online transactions. An awesome post on the voucher payment system in Japan. If you are interested in payments, Patrick’s blog is a great resource

Stuff that I find interesting

Periods, polycystic ovarian syndrome, and heart health by Harvard University. “Long menstrual cycles and heavy periods3 can be symptoms of a condition called “polycystic ovarian syndrome”, “polycystic ovary syndrome”, or “PCOS”. People with PCOS can have higher levels of androgen hormones. This hormonal imbalance can cause acne, excess facial or body hair, or scalp hair loss. Our preliminary analyses showed that in comparison to participants without PCOS, participants with PCOS were more likely to have a family history of PCOS, have abnormal menstrual cycles, and have a higher prevalence of conditions that can negatively impact heart health. These conditions include pre-diabetic conditions, Type 2 diabetes, high cholesterol, high blood pressure, and obesity.”

‘Yes, He Would’: Fiona Hill on Putin and Nukes. “Ukraine was the country that got away. And what Putin is saying now is that Ukraine doesn’t belong to Ukrainians. It belongs to him and the past. He is going to wipe Ukraine off the map, literally, because it doesn’t belong on his map of the “Russian world.” He’s basically told us that. He might leave behind some rump statelets. When we look at old maps of Europe — probably the maps he’s been looking at — you find all kinds of strange entities, like the Sanjak of Novi Pazar in the Balkans. I used to think, what the hell is that? These are all little places that have dependency on a bigger power and were created to prevent the formation of larger viable states in contested regions. Basically, if Vladimir Putin has his way, Ukraine is not going to exist as the modern-day Ukraine of the last 30 years.”

Hikikomori, which describes folks shutting themselves in their rooms in Japan from society. Inclusiveness doesn’t just mean sexual orientation or race. It also includes different profiles and personalities. As our societies advance, we should strive to make folks who have trouble blending in feel accepted and included. What the mother in this article did was admirable. And I hope there are more like her.


“Long-term, established online grocery customers collectively generated more than 3.5 times the revenue for conventional grocers than new customers did”

“Weekly online grocery sales for stores that offered both pickup and delivery were 44% higher than stores offering only delivery and 55% higher than stores offering only pickup”

Russia and Ukraine contributed 4% and 1% respectively to Visa’s total FY2021 revenue

“Russian and Ukrainian seafarers make up 14.5 percent of the global shipping workforce, according to the International Chamber of Shipping”

QR Codes’ popularity in Vietnam

The perks of living in the States as a Vietnam is that I get to see the differences between the two countries in several aspects. One of them is payments. If contactless and tap-to-pay is more common and popular in the US, QR Codes are much more ubiquitous in Vietnam, at least in the big cities. What you see below is in Ho Chi Minh City, the biggest economic hub in Vietnam. When you venture out to smaller and poorer provinces, things may change significantly.

This is how we paid at a convenience store. The cashier scanned the QR code on a phone to process payments.

In the below clip, we were at a local bakery named Tous Les Jours. You can see different QR Codes for different mobile wallets. Consumers can just scan one and make payments. The nature of the transaction requires immediate confirmation since nobody is going to wait 5′ for a payment to go through.

Even mom-and-pop stores like a sugar cane shop and a photocopy shop below allow payments via QR Codes

A sugar cane shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes
A local photocopy shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes

Mobile wallets like Momo strive to acquire and retain users. When we paid for our drinks at the sugar cane shop, we got 50% discount out of nowhere even though the transaction amount was only $1.2.

Momo gives users 50% discount on transactions out of nowhere

Real-time Payments

I did a little bit of research on real-time payments and want to share here. It’s a big topic so I’ll likely add more in the next few weeks. In this post, I just cover why we need real-time payments, what it means and what it does. Let’s go!


Before we talk about real-time payments (RTP), we must first talk about ACH. Automated Clearing House (ACH) is a method that moves money digitally from one bank account to another in the U.S. Before ACH was born in the 1970s, consumers and businesses sent and received money using checks that required a lot of human input. As the number of checks increased, along with the payment volume, and payment preferences evolved, the banks realized that they needed a more efficient way to automate and speed up the sending and receiving of money. That’s how ACH came about.

What does ACH do exactly? It acts as a financial postal office that handles transactions between financial institutions. Every day, there are thousands of transactions initiated in the U.S. ACH operators sort these transactions, bundle by recipient and deliver them accordingly in several batches every day. Each of the batches includes instructions telling the recipient financial institution whether it is to make a debit or credit to accounts under its purview. At no point do any two banks exchange real money to settle transactions. Settlement is processed through the Federal Reserve.

There are two ACH operators: EPN and FedACH. The Electronic Payment Network (EPC) handles the fund transfer for the private sector while FedACH serves the same function for the federal government. The National Automated Clearing House Association (NACHA), a non-profit, serves as a trustee and a rule-making body of ACH. Collaborating with the government agencies, NACHA sets up rules that dictate how EPN and FedACH deliver messages.

Even if this is the first time you have ever heard of ACH, you must have already used it. ACH is how employers deposit salary to employees’ accounts, a customer pays a service provider every month, a customer pays a credit card, a business makes a payment to a supplier or IRS deposits tax refund to a taxpayer’s account. Compared to credit cards or wire transfers, ACH has its strengths. Credit cards aren’t available to many consumers, especially those with a bad credit history. Meanwhile, it’s far easier to open a checking or saving account which one can use to initiate an ACH transaction. For businesses, credit cards can mean a few percentage points in revenue losses due to interchange fees. ACH, on the other hand, is significantly cheaper. Wire transfers can enable a big transaction safely and quickly; however, they are usually pricey at $15 per transaction. Because of its accessibility and cost-effectiveness, ACH is very popular with 27 billion payments worth about $62 trillion in the U.S in 2020.

But ACH isn’t perfect. Because it is batch-based, ACH can take several hours, if not days, to confirm and settle funds. The delay can have ramifications. For instance, small businesses can run into cash-flow problems with delay in fund availability. The pending transactions and, as a result, the uncertainty regarding balance can put some consumers at risk of overdrafts. Consumers that pay bills on the last day of the grace period may incur late fess or even face stoppage of services because their payments won’t be cleared fast enough.

Real-time Payments

According to the Payments Innovation Alliance, a real-time payment (RTP) is “an immediate, irrevocable, interbank account-to- account transfer that utilizes a real-time messaging system connected to every end-user through a financial institution, third party, or another real-time system. Funds are available for use by the receiver and real-time confirmation is provided to both the sender and receiver in seconds. While the requirement of immediate confirmation and fund availability is undebatable, there are conflicting opinions on whether settlement of RTP should be immediate. NACHA said that RTP settlement doesn’t need to take place real time. The majority of RTP systems today use a deferred net settlement method which offers a lower liquidity risk than a gross settlement method (settle transactions individually). On the contrary, The Clearing House claims that RTP network payments “clear and settle individually in real time with immediate finality”.

Essential characteristics of RTP include:

  • 24/7/365 availability
  • Authorization or rejection of payment is within seconds 
  • Fund posting and availability are within seconds
  • “Push” payments only
  • Use of ISO 20022 message standard. This will enable the transfer of richer data
  • Irrevocability. Funds are only transferred after sufficient funds are confirmed and when payments are sent, they are irrevocable
  • Availability of a proxy database that allows end users to send and receive payments without knowledge of the receiver’s bank account information 

RTP benefits consumers and businesses in several ways. The constant availability and the immediacy of funds increase consumers’ convenience and help them manage budgets better. Thanks to RTP, some consumers may no longer have to live in anxiety with last-minute bill payments not clearing fast enough. With a proxy database, RTP can allow consumers to receive and send money without offering bank account details, a practice that makes me nervous every single time. All they need is a phone number or an email.

For businesses, there are multiple benefits that RTP can bring. They can refund customers and pay off suppliers right away, rather than a few-day delay. Who doesn’t want to get their hard-earned cash faster? Hence, customers and suppliers will field fewer anxious calls and be ultimately happier. Happy customers and happy suppliers mean happy life, I guess. In some urgent circumstances, the value of RTP will be even more highlighted. For instance, sometimes businesses are required to make unexpected same-day payments to authorities. They can use ACH and hold their breath that their payment makes it to one of the earlier batches. Or RTP can solve that problem instantly and hence, reduce regulatory and compliance risks. As receivers, the finality and irrevocability of payments will be a boon to businesses. Once they receive payments through RTP, they don’t have to worry about whether the senders have enough funds or will recall transactions. Plus, payments are cleared and settled right away. These two factors will help improve their cash flow management tremendously.

Another benefit of RTP is the use of ISO 20022 payment messages. The new standard is an improve over the old ones in the amount of data it can transmit and its structure. With the old standards, businesses can’t extract insights from the messages. In some cases, that can send false positive compliance issues leading to delays and higher expenses. According to SWIFT, poor data results in 1 out of 10 international payments being held up. The ISO 20022 payment messaging standard enables parties involved to attach a richer and more structured data to a payment. Data can include details of the remittance, the purpose of the payment, the original source and other relevant information. With this new data that can be processed more easily, businesses can reduce fewer errors, avoid delays, decrease unwanted reconciliation expenses, and gain valuable insights. 

A practical example of ISO 20022
Source: SWIFT

What are the RTP or faster payment services in the U.S?

First, let’s talk about the RTP network. It is the first core infrastructure in the U.S in more than 40 years. It was built and launched in November 2017 by The Clearing House, whose owner banks include arguably the biggest in the country. The RTP network is available to all federally insured U.S depository institutions and already reaches 61% of U.S demand deposit accounts (DDA). 

Next is FedNow. It is owned by the Federal Reserve and is expected to launch in 2023. Once live, it will be available to all depository institutions in the U.S. The Federal Reserve said that FedNow will process messages and settle payments within 20 seconds. In the beginning, FedNow’s initial transaction limit will be $25,000, lower than the current limit imposed on the RTP network by The Clearing House. 

Clearing House's owner banks
Source: The Clearing House

Mastercard Send is Mastercard’s native method that enables instant payments between governments, businesses, and consumers. Mastercard Send supports disbursements – non P2P payments to consumers, domestic P2P payments and cross-border P2P transfers originating from the U.S. As of this writing, Mastercard Send is available in the U.S only and all domestic debit cards, including non-Mastercard cards. Interested issuers can tap into the Mastercard Send API to enable this capability. 

Visa Direct is Visa’s equivalent of Mastercard Send with two major differences. The first difference is that while Mastercard Send is currently available in the U.S only, Visa Direct can be used in more than 100 countries. Secondly, its requirement for fund availability varies from one financial institution to another. In the U.S, Visa Direct mandates that all participating issuers make funds available within 30 minutes, a more relaxed approach than Mastercard Send, which claims that funds are available and settled within seconds

Zelle is a mobile payment application developed by Early Warning Services, which is owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S Bank and Wells Fargo. The application enables users to transfer funds from one to another without the need for account details. All it requires to initiate a transfer is an email address or phone number. Formerly confirming transactions within minutes, Early Warning Services announced in February 2021 that Zelle transactions can now be cleared and settled in real time, officially making it an RTP network. Zelle users need to note that several banks place restrictions in terms of the number of transactions and transfer volume that a user can initiate in a month. 

In December 2017, NACHA announced the launch of Same Day ACH, which enables the ACH payments to be processed faster and potentially settle in the same day, if a payment is submitted early enough. Despite this improvement, Same Day ACH isn’t an RTP method because transactions are still processed in batches and revocable. 

Wire Transfers offer instant payment confirmation and settlement. However, unlike RTP, Wire Transfers are more suited for low-volume high-ticket transactions, limiting its value and accessibility to consumers and businesses. Compared to a few cents per RTP transaction that The Clearing House charges, a wire transfer usually costs at least $15. 

Mobile payment apps such as CashApp, Venmo or PayPal allow instant transfers between users. Users can use their Venmo balance for purchases. What makes me unclear about whether these apps are RTP are 1/ they require users to use another payment rail to retrieve money. Customers who want instant transfers from these apps to their checking accounts will have to pay a small fee. 2/ will refunds go to bank accounts or Venmo accounts? If they go to bank accounts, how long will it take? 3/ Since not every merchant supports checkout with these apps, will it still be RTP?

PayPal reportedly in talks to buy Pinterest

A couple of days ago, media outlets reported that PayPal was in talks to buy Pinterest for what could be a $40 billion deal. Per WSJ, “the talks are at an early stage and may not lead to a deal, some of the people cautioned.” If that went through, this acquisition would be PayPal’s biggest ever. But what does it mean for the iconic PayPal? Below are my thoughts.

Overview of PayPal & Pinterest

Before we go further, let’s recap quickly what PayPal and Pinterest do, how they make money and how their businesses are at the moment.

Formerly known as a check-out and Person-to-Person (P2P) function, PayPal has grown leaps and bounds in the last few years with grandiose ambition to be THE Super App for payments, consumer financial services and eCommerce. PayPal’s services now include almost all the things that consumers need such as debit card, credit card, BNPL, online & offline payment, P2P or remittance, just to name a few. On the merchant side, PayPal has added a plethora of Merchant Services and Marketing Tools in addition to its well-known payment processing. As a two-sided platform, PayPal needs to deliver value to consumers in as many ways as possible, including enhanced and seamless shopping at merchants, while appealing to merchants with tools to grow their business from both marketing and operations standpoints. Last month, the company took a big step towards their grand vision with the new PayPal mobile app.

There are several revenue streams for PayPal. First, a bulk of its revenue is from transaction processing. For each transaction that goes through PayPal, the company takes a cut. Hence, the bigger the volume, the bigger PayPal’s top and bottom lines. Second, PayPal also charges merchants on value-added services such as loans, inventory management or point of sale. Then, it also generates fees from other services such as remittance or credit card-related fees.

The transformation of the business is also evident in the numbers. PayPal’s number of active accounts grew from 244 to 403 million from 2018 to 2021, including 76 million Venmo accounts, while the merchant base expanded from 19 to 32 million. Its quarterly Transaction Volume exploded from $139 to $311 billion, more than $1.2 trillion in annualized volume. In Investor Day 2021, PayPal disclosed their target of $2.8 trillion in annual volume, 750 million active accounts and $50 billion in annual revenue at the end of FY2025. Quite an ambitious target.

PayPal's consumer and merchant services
Figure 1 – PayPal’s consumer and merchant services. Source: PayPal

The other side of the rumored deal, Pinterest, is a visual-centric social platform whose mission is to bring inspiration to people’s lives. “A photo is worth a thousand words” is essentially their value proposition. Every day, thousands of users & brands, called Pinners, post their ideas in the form of images or videos, called Pins, to the platform. Pins can be grouped together in personalized Boards that are accessible to others. Similar to other social media platforms, Pinterest deploys machine learning algorithm to personalize suggestions of new ideas to users, based on their previous activities. Meanwhile, advertisers can take advantage of the visual-centric experience, the global audience as well as data on consumer preferences calledTaste Graph on Pinterest to optimize advertising dollars and grow their business. Over the last couple of years, Pinterest has invested in features and partnerships to enable commerce on its properties. For instance, it launched Shop from Boards, Shop from Search and Shop from Pins in April 2020. The month after, it announced a partnership with Shopify that allows Shopify merchants to upload their catalogue to Pinterest seamlessly. Earlier this month, the company introduced a few new features to help merchants and creators showcase their hard work and generate more revenue/income.

Pinners saved nearly 300 billion Pins across more than six billion boards. We call this body of data the Pinterest taste graph. Machine learning and computer vision help us find patterns in the data. We then understand each individual Pin’s relationship not just to the Pinner who saved it, but also to the ideas and aesthetics reflected by the names and content of the boards where it’s been pinned. We believe we can better predict what content will be helpful and relevant because Pinners tell us how they organize ideas. The Pinterest taste graph is the first-party data asset we use to power our visual recommendations.

Source: Pinterest

According to the latest filings, there are 454 million Monthly Active Users on the platform, 2/3 of which are female and 80% of which are outside the U.S. Even though it makes up only 20% of the MAU base, the U.S generates 78-80% of Pinterest’s revenue which came in at $485 million and $613 million in Q1 and Q2 2021 respectively. Pinterest was operationally unprofitable in the last three years, but has turned in some profit in the first 6 months of 2021. As a result, their free cash flow (FCF) has improved markedly. The company had negative FCF in 2018 and 2019 before turning in an FCF margin (FCF over revenue) of 0.73% in 2020. Their FCF margin for Q1 and Q2 2021 was 55% and 17% respectively. To put it in perspective, PayPal’s FCF margin in the last two quarters was 25% and 17% respectively.

Pinterest quarterly revenue
Figure 2 – Pinterest’s quarterly revenue. Source: Pinterest

Would the acquisition be about increasing active accounts for PayPal?

I doubt it is the primary reason why PayPal entertained this move. At the moment, these two are completely separate apps. Having Pinterest under PayPal would provide absolutely no incentive for Pinterest users to become PayPal users. Merchants that are already on Pinterest have no extra incentive to work with PayPal just because of this alleged acquisition. If PayPal decided to force the issue and fold the red app into the blue app, it would be catastrophic for both and a value killer for shareholders.

Would the acquisition be about improving free cash flow for PayPal and padding the sheets?

While Pinterest indeed posted higher FCF margin in the last two quarters than PayPal, I don’t think improving FCF margin is the driver of this move either. Competitively, PayPal is in a far stronger position than Pinterest. The former is one of the most iconic brands globally with millions of users and merchants in its network and in the leading position in its field whereas the latter is no match in terms of advertising capabilities with the likes of Facebook, Instagram or Google. The remarkable turnaround in FCF margin only happened in the last two quarters; hence there is no telling what the future would be, given the lack of strong competitive advantages. Plus, the price tag is more than $40 billion. It’s unfathomable to think that PayPal’s board would authorize such a gigantic splash for this reason alone.

Would the acquisition be about the upper marketing funnel and closing the loop for PayPal?

At the bottom of the customer experience, aka the checkout page, is where PayPal excels with its breadth of both consumer and merchant services. What it doesn’t excel at, yet, is at the upper funnel where the interest seed is planted and where reach is generated. In other words, PayPal doesn’t have the capability or expertise yet to help merchants expand the customer pool. Last year, the company paid $4 billion for Honey, a browser extension that finds online deals and presents them to shoppers. To some extent, Honey helps PayPal address the issue of lead generation, but as a browser extension, there is only so much that Honey can do, especially on a global scale. At the time of the acquisition, Honey had 17 million active users. Not everyone who uses PayPal installs Honey on their browsers. Yours truly is one of those people.

With more than 450 million users across the globe, theoretically Pinterest could be the solution to this problem. However, the question is what the customer experience of PayPal + Pinterest would look like. The ramifications may have significant impact.

At the time of this writing, users can browse for ideas on Pinterest and be directed to merchant websites for further actions without even having to leave the red app if they choose to click on the hyperlinks that come with the Pins. The problem for PayPal is that this whole journey has nothing to do with them. Merchants choose which payment processor offers the best value, not which one owns Pinterest. If PayPal forced merchants to use their own product to use the social platform, it would backfire. In this scenario, there is no strategic value add for PayPal.

One possibility floated on the Net is that Pinterest could be PayPal’s eBay. Ironically, eBay owned PayPal from the early 2000s till their divorce in 2015 and since then PayPal has gradually reduced their reliance on eBay for transaction volume. I am not sure that PayPal wants to pay a mountain of money for something that they want nothing to do with any more. Even if PayPal wanted Pinterest to become their own eBay, running a two-sided global marketplace is a resource-consuming endeavor. After pouring $40+ billion in acquiring Pinterest, PayPal would have to spare valuable resources to help the acquired firm. Given the intense competition that PayPal faces and the head start in terms of marketplace that Facebook and Instagram have, this possibility, while not too wild, doesn’t sound appealing.

What I suspect is the crown jewel that might interest PayPal is the Taste Graph mentioned above. While the new PayPal app is definitely an improvement over its predecessor, the Shop tab is underwhelming. There are a bunch of offers on the tab, but there is little personalization. Hence, I don’t think at the current state, it helps merchants drive a lot of sale. In theory, PayPal could do a lot more personalization given the data on shopping behavior that it possesses. By mining transaction data, PayPal could know which merchants are one’s favorite, how often one shops at those merchants, which product categories (using Merchant Category Codes) are popular and even what items (SKU data) are shopped the most. By working with bureau agencies like Experian, PayPal could learn about financial status of its users such as how many trades are open, the total balance of all trades, the delinquency history and all that.

The Shop tab on PayPal's app
Figure 3 – The Shop tab on PayPal’s app

What PayPal doesn’t have is the interest data outside of the transactions processed on its platform. Let me give you an example. I am a huge fan of Manchester United and Scuderia Ferrari F1 team. But you wouldn’t know it if you merely looked at the transactions on all my credit cards, let alone only my PayPal account. PayPal could work with another company to acquire this data; however, this presents two challenges. If the data is not 1st-party data, it’s usually very unreliable. The Taste Graph is Pinterest’s intellectual property and 1st data. The reliability is certain. The other problem is that who has the global footprint that Pinterest has and available for an acquisition. Facebook, Google, LinkedIn, Twitter or even Snapchat isn’t available. I am sure PayPal could find another company with 1st party interest graph for the U.S market, but it’s not easy to find it for the global audience. If PayPal is serious about meeting their 4-year target, the U.S market alone wouldn’t cut it.

For good measure, PayPal likely doesn’t have the top of wallet share for its users. In other words, if an average person spends $1,000 a month, I don’t think that user will spend everything through PayPal. If I have to guess, PayPal only sees less than 30% of the wallet share. The implication is that they have no idea about the spending pattern and interest that lies in the other 70-80% of the wallet. So if they wanted to operate a serious deal-recommending engine on the PayPal app, they would want as much data as possible. As PayPal already strives to get users to spend as much as possible through their platform, increasing the wallet share organically takes time.

PayPal offers consumers all possible checkout options: BNPL, its mobile wallet, debit card, credit card and line of credit. It definitely wants the app to be the ultimate shopping app for consumers. Right now, a PayPal user like me doesn’t open the app unless I need to send somebody money. I figure that PayPal wants users to actually open the app and spend time there every day. To do that, they need to incentivize shoppers to visit and the best way is personalized deals. To grow its merchant base, the best way is to generate sales and leads for merchants. In my mind, the alleged acquisition of Pinterest could help with these two objectives. With that being said, $40+ billion is a huge price tag and acquisitions are generally challenging to pull off, especially expensive ones. I am also concerned about how much overlap there is between the two user bases. There is also a question of engagement of international users. Despite making up 80% of Pinterest MAUs, users outside the U.S bring only 20% of revenue. Is it because Pinterest isn’t popular among international advertisers? (I know there are Pinterest users in Vietnam, but I doubt there are brands and advertisers that actually use the platform) Or is it because user engagement isn’t high? While I can try to see the logic, I am not too comfortable with this major move.


Shopping intent on Pinterest stats
Figure 4 – Shopping intent on Pinterest stats. Source: Jareau Wade
Consumer register preferences at the start of the shopping journey
Figure 5 – Consumer register preferences at the start of the shopping journey. Source: Thomas Paulson

Cardless – The fintech startup behind Celtics, Cleveland Cavaliers and Manchester United credit cards

If you support Celtics, Cleveland Cavaliers, Manchester United or Miami Marlins, you can show your love to the teams with the branded credit cards powered by Cardless. Even if these teams aren’t usually on your TV or device every week but you still want to take advantage of great benefits, check out their cards.

Take the Manchester United card for example (Figure 1). The card offers 10% off Manchester United merchandise on select channels, 5x points on dining every time the club has an official match, 5x on ride sharing and streaming services and 1x on everything else. During the first year, the points are doubled to a mouth-watering rate of 10x on dining, ride sharing & streaming services and 2x on everything else. Said another way, if you use Netflix, Spotify, if you eat out a lot and if you shop at Walmart, this card will give you almost unbeatable rewards during the first year. Reward points can be redeemed for statement credits or Manchester United gift cards at a slightly higher rate.

Manchester United credit card powered by Cardless
Figure 1 – Manchester United Credit Card. Source: Cardless

The card also reimburses users up to $5/month for a Peacock subscription provided that users have at least $500 in spend the month before. To sweeten the deal, Cardless waives all the fees, including annual fee, late fee, foreign transaction fee and overlimit fee. However, the APR is quite high at 29.99%. So, you do not want to revolve your balance with this card.

As mentioned above, these cards offer great benefits that are popular to consumers in all walks of life. If you are looking for a new credit card, you may as well give it a try. From a perspective of somebody who works in the card industry, here are my thoughts.

Cardless is a San-Francisco-based fintech startup that helps brands launch a credit card in “a matter of weeks, instead of months or a year”. Costco credit card is issued by Citi Bank. Cardless offers the same function essentially as Citi in this card-issuing process. Started in 2019, the startup has raised $50 million so far to date.

The partnership with sports teams is a great idea to increase the stickiness. It’s likely that a lot of these clubs’ loyal fans will want to sign up for card to use on match days or whenever they go to a stadium. Some will get a card for the sake of supporting their club or as a memento. Plus, these brands can help Cardless push the marketing side of the equation. One press release or one email may lead to many sign-ups. Hence, Cardless likely won’t need to spend much on acquisition. Traditional issuers spend a lot of money on direct mails. An issuer like Capital One easily sends out 60 million mail pieces a month to prospects. If a mail piece costs only $0.5, we are still talking about $30 million/month in direct mail expense that Cardless doesn’t have to worry about. That’s a significant advantage.

It’s intriguing to me how Cardless will make money. To attract prospects, they decide not to charge fees, leaving their revenue and profit dependent on interests on revolving balance and interchange. The problem is that any reward scheme that is higher than 3x is almost a loss-maker as interchange rates for consumer credit cards are less than 3%. In Cardless’ case, losing out on interchange is almost a given. Therefore, Cardless’ hope of profitability for a card program hinges on customers paying interests. If their portfolio consists of only transactors – the term we use in the industry to describe folks that pay balance dutifully – Cardless will keep subsidizing users with their own money.

For good measure, in addition to operational expenses, Cardless has others to worry about. Partnering with prestigious sport brands means that the startup has to pay these brands a finder’s fee whenever a new card is issued. Plus, the company has to pay their technology partners as well, including the card networks (Visa, Mastercard), their issuer – First Electronic Bank and their card management system provider CoreCard. That’s quite a lot to handle for a company that relies almost entirely on one source of revenue.

Cardless was started in 2019, only two years ago. The challenge for a young credit-card issuing startup like Cardless is that it doesn’t have the historical data to strengthen underwriting and minimize losses. Even the firm admitted it itself: “The incumbent issuers have a major advantage in this area: they can use their mountains of data and gigantic teams of analysts, engineers and scientists to make very educated and precise credit decisions”. Cardless has to find the perfect group of customers who use the card regularly (in order for them to acquire new partners), don’t charge off but don’t pay full balance so that Cardless can have interest income which, as I articulated above, is likely their only revenue source. Unfortunately, those who usually revolve have a low credit score and are more likely to charge off, making this a delicate & difficult challenge to solve. The startup can be better at underwriting by signing up more partners quickly and using the incremental data to feed their algorithms. But if their early model doesn’t predict losses well, they will lose a lot of money in the beginning. I, for one, really love to know how they are handling this issue.

My best guess is that Cardless keeps the lights on with VC money. That’s totally fine. Nonetheless, I don’t think they can keep introducing card programs with rich benefits that are limited in their capability to make money forever. Venture capitalists will push the company to improve profitability or won’t invest further if this model persists long in the future. It’s possible that Cardless may have a plan to pivot to other adjacent products or services in the future.

Boston Celtics credit card powered by Cardless
Figure 2 – Boston Celtics Credit Card. Source: Cardless

My notes from 2021 Debit Issuer Study

Every year, Pulse, a Discover company, publishes a Debit Issuer Study, which covers the debit card landscape in the U.S. This year’s version is the 16th annual edition of the study and comprises of data from 48 financial institutions of different sizes in the country. If you are interested in the payments as well as financial services world, you should have a look at this study. Below are a few things that stood out the most to me, accompanied by some of my own comments

Debit spend per active account increased as growth in ticket size more than offset the decline in transactions

Unsurprisingly, stay-at-home orders last year curtailed debit transactions as stores were closed and folks were forced to remain at home. As a result, 2020 saw a decline of 2.5% in the number of debit transactions, the first contraction of the industry ever. Most of the damage took place in Q1 and especially Q2 before the use of debit cards recovered in the back half of the year. Compared to 2019, last year saw an increase in debit spend per active account, from $12,407 to $13,550. The increase resulted from 10.5% growth in ticket size despite the drop of 1.3% in the number of monthly transactions per active card.

Annual Spend Per Active Debit Card Increased In 2020 By 9.2%
Figure 1 – Annual Spend Per Active Debit Card Increased In 2020 By 9.2%. Source: Pulse

Whether issuers are subject to the regulated interchange cap determines their unit economics

For issuers with $10 billion in assets or more, they are subject to regulations that cap debit interchange rates. Before we move forward, let’s take a step back to revisit what interchange rate is. Every time a transaction takes place, the merchant involved has to pay a small fee to the bank that issues a debit/credit card that the consumer in question uses. The fee is calculated as % of the transaction value and usually determined by networks like Visa, Mastercard, American Express or Discover. In this case, the Federal Government caps the interchange rate for big issuers that have $10 billion+ in assets. According to the 2021 Debit Issuer Study, exempt issuers earned 42.5 cents every transaction, compared to 23.7 cents for regulated issuers. Due to this difference, exempt issuers generated almost twice as big as regulated issuers in annual gross revenue per active debit account ($132 vs $71).

Exempt issuers earn much higher interchange revenue for debit transactions than regulated issuers
Figure 2 – Exempt Issuers Earn 42.5 Cents Per Every Debit Transaction. Source: Pulse

This is one of the reasons why neobanks can offer debit cards with rewards and no fees. Neobanks or challenger banks are usually technology startups working with exempt issuers to offer banking services. The startup in this partnership takes care of the marketing and the product development while the exempt issuer rents out its banking license and deals with all the banking activities such as underwriting, regulatory compliance or settlement. Because the exempt issuer earns higher interchange rates, it can afford to share part of that interchange revenue with its startup partner which, in turn, uses that revenue to fund operations and generate profit. However, I wonder if it’s really fair when a neobank or a financial service company becomes so big while still taking advantage of this “loophole”. Take Square as an example. It’s a $120 billion publicly traded company. It works with Marqeta and by extension Sutton Bank, which is exempted from the regulations over interchange rates, to offer Cash App. Is it truly fair for Square to be able to leverage this loophole when it has a much bigger valuation than many banks with more than $10 billion in assets?

The rise of Card-Not-Present transactions means the rise of fraud threats

When stay-at-home restrictions were in effect, consumers didn’t shop at the stores and instead switched to digital transactions. Consequently, Card-Present (CP) transactions per active card fell by 10% last year. On the other hand, Card-Not-Present (CNP) per active card increased by 23% and made up for one-third of all debit transactions.

Because CNP transactions are less secure than CP ones (due to lack of customer verification), the growth of CNP during the pandemic led to more fraud incidents. CNP and CP with PIN transactions both made up 34% of debit transactions in 2020. However, while the latter made up only 5% of the total fraud claims, the former were responsible for 81% of the claims. Among the CNP fraud claims, 47% were successfully recovered, meaning that consumers had their money back and merchants lost some revenue.

CNP Saw Many More Fraud Incidents Than CP
Figure 3 – CNP Saw Many More Fraud Incidents Than CP. Source: Pulse

Whenever a fraud claim happens, it brings an unpleasant experience to both the cardholder and the merchant in question. Hence, issuers may want to focus on ensuring that fraudulent transactions don’t even happen in the first place, especially with CNP.

Contactless and mobile wallet transactions are on the rise

According to the study, contactless is projected to be available on 64% of all debit cards by the end of 2021, up from 30% in 2020, and 94% by 2023. Even though contactless volume grew by 6 times in 2020, it still made up only 1.6% of total debit volume. As consumers become increasingly familiar with contactless and the feature is available on more cards, I expect the share of contactless volume to keep that impressive growth pace for at least a couple of years.

Meanwhile, mobile wallet transactions funded debit cards through three major wallets (Apple Pay, Samsung Pay & Google Pay) reached 2 billion in 2020, around 2.6% of the total debit volume, with the average ticket of $23, up 55% YoY. 57% of this mobile wallet volume were made in-app and the rest took place in stores. If we look at the competition between the aforementioned wallets, Apple Pay is the outstanding performer in every metric. In fact, Apple Pay had an overwhelming 92% share of all mobile wallet transactions using debit cards.

Starting 2022, Visa will put in place new interchange rules that are aimed to encourage more tokenized transactions such as mobile wallets. Hence, I expect that when we read the 2023 edition of this study or beyond, we’ll see a more prominent role of mobile wallet transactions in our society.

Contactless Volume Grew 6x But Still Made Up 1.6% of Debit Volume
Figure 4 – Contactless Volume Grew 6x But Still Made Up 1.6% of Debit Volume. Source: Pulse

Consumers’ Digital Wallets – Where Card Issuers Need To Be

In this post, I will touch upon digital wallets & checkouts as well as some market movements that make me believe that it will be strategically important for issuers to occupy consumers’ digital wallets.

Fast checkouts and payments are on the rise

Consumers love convenience. Instead of spending time to fill out addresses and credit card credentials, shoppers can finish the job with just a couple clicks. The same goes for in-store check-outs. It’s a far more convenient experience for consumers to hover the phone or a smart watch over a card reader than to drop whatever they are doing with their phone, reach for a wallet and pick out a card. Granted, even though they may not appeal to less tech-savvy shoppers, these fast checkouts, when absent, may be a deal breaker to the more technologically shrewd crowd. I mean, there has to be a reason why many stores accept the likes of Apple Pay or PayPal, despite losing a bit more revenue. Businesses know that by not enabling convenient payments and checkouts, they risk losing a whole lot more.

The more these payment applications are accepted at stores, the more they become useful to consumers and the more consumers they can acquire. The more consumers these wallets acquire, the more they can appeal to stores. The virtuous cycle keeps going. As they become popular, the mobile wallets become something like downtown Manhattan to card issuers. While it doesn’t guarantee success, being present in consumers’ phone and wallets suddenly becomes more critical. Furthermore, there are developments on the market that highlight the importance of this point, starting with Visa.

A new rule from Visa

Per JP Morgan:

In April 2022, Visa will introduce updates to existing domestic interchange programs with categories and rates for card not present Visa EMV token transactions. This includes both network tokenized transactions and digital wallets. With this update, a roughly 10 basis point reduction will apply for many card not present transactions that are Visa EMV tokenized in most segments.

In some cases, interchange rates for non-token transactions will go up, so while the net benefit may not reach 10 basis points, merchants that do not take advantage of the digital wallet incentive will undoubtedly be leaving money on the table. As ecommerce continues to grow, shifts like these to the overall cost of payments will have significant cost implications and influence a merchant’s product development roadmap.

The gist of this news is that Visa will allow merchants to keep more money from mobile wallet transactions but make them pay more whenever customers have to type in their information and card credentials. A few basis points may not sound much, but if your online sales is $1 million/year, the savings can be up to $10,000. Visa is the biggest network out there, accepted in virtually every store around the world. When the new rule comes into effect in 2022, its impact will be wide-ranging. I expect Mastercard to follow suit soon. The question for issuers now becomes: can they sit idly and let their rivals occupy the valuable real estate on our phones?

Apple Pay

Apple Pay is a proprietary mobile wallet by Apple that enables convenient payments by just a phone tap in stores or one click online. The feature is compatible on iPhone 6, all the models that came after and all Apple Watch. That should cover pretty much every iPhone user in the U.S, which makes up 60% of the mobile market domestically. Since its debut in 2014, Apple Pay has grown increasingly popular over the years. As of January 2021, Apple Pay is available in 90% of stores in the U.S and hundreds of websites, including those of major brands. According to the 2020 Debit Issuer report by Pulse, mobile wallet debit payments in the U.S in 2019 by Apple Pay, Samsung Pay and Google Pay totaled $1.3 billion, of which $1.1 billion came from Apple Pay. As of this writing, major cities such as Chicago, Los Angeles, New York City, Portland, San Francisco & Washington D.C already allow passengers to ride transit with Apple Pay. This kind of integration will only boost its popularity more in the future.

Figure 1 – Apply Pay facilitated most of the mobile payment transactions funded by debit in the U.S in 2019. Source: Pulse

Almost all issuers in the US enable integration of their cards into Apple Pay. American Express lets users who are instantly approved add their cards to Apple Pay immediately. In July 2021, it’s reported that Apple is working on a BNPL service for Apple Pay transactions. Historically, Apple offers a payment plan for its select products & services via Apple Card. Apple Pay Later will allow approved customers to make four interest-free payments due every two weeks or monthly payments at an undisclosed yet interest. Customers can connect their Apple Pay with any card that they want and it’s not required to own an Apple Card. This service will make this mobile wallet even more attractive to customers, though right now whether or when it goes to market remains to be seen.


Many people know PayPal as the known P2P platform or that payment option that used to be on eBay. Over the years, PayPal has transformed itself into something much bigger. It now provides a lot of services for both consumers and merchants. No longer restricted to online purchases, consumers can now use PayPal online and in stores with services such as QR Code, mobile wallets, contactless, debit card, credit cards, PayPal Credit and PayPal in 4.

Figure 2 – Discover’s communication to ask customers to link accounts to PayPal

The brand and the scale of PayPal are not to be underestimated. In Q2 FY2021, PayPal processed $311 billion in transactions, almost twice as much as $170 billion in the same quarter two years ago. The company’s YoY growth in transaction volume topped 40% in the last two quarters despite operating at an incredible scale. If you take out eBay, the growth rate was never lower than 45% in 2021. Additionally, there were 403 million active accounts, including 76 million Venmo and 32 million merchant accounts. Venmo’s transaction volume doubled in the last 18 months from $29 billion in Q4 FY2019 to $58 billion in Q2 FY2021. The scale of PayPal is also reflected on how fast they roll out new features. PayPal in 4 was launched in August 2020. Since launch, the service generated $3.5 billion in transaction volume, of which $1.5 billion alone took place in the last three months. Meanwhile, the number of merchants that enabled payments by QR codes leaped from 500,000 in Q3 FY2020 to 1.3 million in the most recent quarter.

On the earning call, the CEO of PayPal highlighted its imminent push into the in-store space.

Clearly, on the branded side, we think we add a tremendous amount of value, things that John talked about, buyer and seller protection, Buy Now, Pay Later at no incremental cost, fraud protection, highest checkout conversion, etc. But we took down rates for basic full-stack processing. That also was reduced somewhat substantially from the 2.9%, plus $0.30 to 2.59%, plus $0.49. And that is going to enable us to aggressively compete for all of the payment processing of the merchants that do business with us.

And you’ve heard us say time and time again, David, that we were going to move into the in-store space. We’re going to move so aggressively in there. We rolled out Zettle in the U.S., is a really beautiful full package. It doesn’t just include card reader but inventory management, sales reads out and allows a merchant to seamlessly load inventory in both their online and in-store locations and then, across multiple channels as well.

And so we’re, obviously, gonna be very aggressive on moving into in-store, and it’s always been part of our strategy. And by the way, if a small merchant does all of their business with us, they can actually see their overall costs come down. And we wanna encourage them to do all of their business with us because we are a trusted platform. They do turn to us, and we price, we think, the right way.


If PayPal successfully becomes one of the de facto checkout methods in stores, given it’s already a popular checkout option online, how would smart issuers ignore the need to get into consumers’ PayPal wallet?

Shop Pay

Shop Pay is the native checkout feature by Shopify. Shopify is an eCommerce platform from Canada. It provides businesses with the tools necessary to build a customized online presence. When merchants list their products on Amazon or Walmart, they just rent a space and have little flexibility for their own branding. Plus, these merchants have to pay numerous fees to the likes of Amazon and Walmart. With Shopify, they pay a monthly subscription and a usage-based fee for some paid services. But stores can keep their own branding and gain more control over their destiny.

Shop Pay works similarly to Apple Pay, PayPal or Visa SRC. Once a credential is stored, customers can use Shop Pay across all stores powered by Shopify. In February 2021, Shopify expanded their checkout feature for the first time to all Shopify-powered stores on Facebook and Instagram. The collaboration was successful that a few months later, they decided to roll out Shop Pay to all merchants on Facebook and Google. This move can bear significant ramifications. Facebook owns the most popular social networks in the world like Facebook, Instagram, WhatsApp and Messenger. Their access to billions of consumers is what retailers want. Google has the dominant market share in search and as a result, a unique access to consumers globally. As these tech giants make a push into eCommerce, Shop Pay will benefit from this partnership and grow even more.

Figure 3 – Shopify’s GMV in Q2 2021 was higher than that of the entire year of 2018. Source: Shopify

Between its launch in 2017 and the end of 2020, Shop Pay facilitated $20 billion in transactions. The cumulative figure increased to $24 billion as of Q1 FY2021 and $30 billion as of Q2 FY2021. As you can see, Shop Pay is growing increasingly fast. The growth of Shop Pay coincides with the growth of Shopify. In the last quarter, Shopify processed more volume than it did in the entire year of 2018. As this company continues to expand and by extension, so does Shop Pay, how long can issuers be absent from this checkout option?

In summary

Engaged customers will add their favorite card to their mobile wallets. The challenge is for issuers that don’t occupy the top-of-wallet position yet. Customers can still rotate cards and choose a certain one at the time of purchase. Hence, being in a customer’s wallet doesn’t mean a card will be used often. Card issuers still need to offer values and work hard to increase engagement. But as the saying goes, you have to be in it to win it.

Let’s talk Paypal. No longer merely a P2P player

The story of Paypal started in 1998 when Max Levchin, Peter Thiel and Luke Nosek founded Confinity, a digital wallet company. They later merged Confinity with, launched by Elon Musk, and altogether rebranded the new entity as Paypal. In 2002, the company went public under the ticket $PYPL. Later in the same year oof its IPO, it was acquired by eBay and became the prominent payment option on the famous marketplace. In 2015, Paypal left the eBay family to become a separate and independent entity. Six years later, it is now one of the most trusted brands in the world, available in more than 200 countries and valued at almost $300 billion.

At the core, Paypal provides payment and financial services to both consumers and merchants. Originally, it used to be one of the primary methods of person-to-person (P2P) transactions. Over the years, Paypal has transformed itself into a more expansive platform. Consumers can now use Paypal to send and receive money from others as well as to pay merchants, whether the transactions are online or in stores with debit cards, credit cards, tap to pay and QR Codes. On the merchant side, Paypal offers a host of solutions, including payment processing, marketing tools and financing options.

Paypal's breadth of services
Figure 1 – Paypal’s services. Source: Paypal

As a two-sided platform, Paypal needs one side to feed the other. From the consumer perspective, they only find Paypal useful when they have friends and families on Paypal network. Additionally, Paypal must be accepted at various merchants, whether transactions take place in physical stores or on websites. Otherwise, what would be the point of having a Paypal account? From the merchant perspective, Paypal’s value propositions lie in their payment solution and the brand name as well as trust cultivated with consumers. If consumers didn’t trust or use Paypal, there would be plenty of other alternatives. But that’s also one of their three moats. It’s super hard to be a two-sided platform because of the chicken-and-egg problem. Not only did Paypal have to solve that problem between consumers and merchants, but they also had to deal with it within the consumer space.

Another moat of Paypal is that the company has cultivated trust in consumers and merchants alike with its track record of security. Even though security breaches are almost inevitable to any company, so far Paypal hasn’t recorded too many incidents. When it comes to handling people’s money, security should be at the top of any company’s agenda. I mean, anyone can boast that they can exercise two hours in a row. I don’t doubt it. But it’s a completely different challenge to exercise two hours a day for 30 days in a row, let alone for years. To replicate such a track record, a competitor needs to invest in security and more importantly, it needs time. No matter what a newcomer says about its own security, only time can seed the trust in the constituents of its network. Unfortunately, time isn’t something that human brains or money can buy. And while a newcomer or existing player builds up its track record, Paypal is not likely to stand still. Just look at their M&A activities in the last few years: Venmo & Braintree (2013), Xoom (2015), iZettle (2018), Honey (2019), GoPay & Happy Returns (2021).

Finally, Paypal is operating at an enormous scale. In Q1 FY2021, it processed $285 billion in transactions, growing at 49% YoY. That annualizes to more than $1 trillion. As you may know, scale is the magic in business. Paypal’s gigantic scale should give the company a cost advantage over competitors. Plus, the breadth of Paypal offerings poses a daunting challenge to anyone wishing to match them. Just look at Figure 1 to see how many services are available, not to mention the acquisition of Happy Returns. It’s hard to spread resources and make investments on multiple fronts when you are on the back foot in terms of unit costs. Just to give you an example of what the scale of Paypal’s existing active account base and its brand name can do, let’s take a look at the rollout of Buy Now Pay Later and QR Code. Paypal introduced its Buy Now Pay Later only in August 2020. As of Q1 2021, its Pay in 4 already had over $2 billion in TPV globally, of which $1 billion came from the US. Pay in 4 also had 5 million unique customers. In addition to its popularity and reach, Paypal offers the service to merchants without charge. Normally, merchants have to pay BNPL providers several times the normal interchange, but Paypal is willing to subsidize merchants to gain market share. Also, the company enabled pay by QR Code some time in the latter half of 2020, but it already amassed 1 million merchants as of Q1 2021 that used the service, up from 500,000 two quarters prior.

How Paypal benefits merchants
Figure 2 – Value propositions of Paypal to merchants. Source: Paypal

How does Paypal make money?

We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services.

We generate revenue from consumers on fees charged for foreign currency conversion, optional instant transfers from their PayPal or Venmo account to their debit card or bank account, interest and fees from our PayPal Credit products, and other miscellaneous fees.

Source: Paypal’s latest Annual Report

In short, Paypal charges merchants on every processed transaction and for other additional services. On the consumer side, P2P transactions don’t yield much revenue, but if consumers want to have instant deposits or have an outstanding unpaid balance on their credit cards with Paypal or Venmo, then the company earns additional fees and interest on the balance.

Take-rates which indicate what Paypal gets in revenue over the transaction volume depend on the kinds of transactions. Normally, bill payments and P2P transactions have low take-rates. Transactions funded using debit or credit cards are more expensive to process than those funded using bank accounts or balance within Paypal or Venmo. Commercial transactions such as those on eBay or cross-border transactions that require a foreign exchange are more lucrative. Obviously, Paypal would love to maximize revenue and profits, but there is necessarily a balancing act to be had here. Although bill payments and P2P have a low yield, they are sticky. They are what keeps users engaged and in the network. Payments is a highly contested industry. Any transactions processed by legacy banks, other providers such as Square or Apple Pay and fintechs are transactions that Paypal loses. Hence, I think for the time being, it’s better for the company’s future that they are prioritizing the growth of the active account base and engagement.

Venmo and Paypal TPV
Figure 3 – Paypal and Venmo TPV
Paypal's active account base
Figure 4 – Paypal’s active account base
Paypal and Venmo YoY Growth in TPV
Figure 5 – Paypal & Venmo YoY Growth in TPV
Transactions per active accounts from Paypal
Figure 6 – Transactions Per Account

In short, I am bullish on Paypal. The company has a brand name known and trusted in many countries around the globe. It has the expertise after spending more than two decades in the industry and the ability to transform itself into a more expansive and competitive entity. It has a nice track record of acquiring other businesses to add needed capabilities. Currently, Paypal is the only Western company with 100% ownership of a Chinese payments company after it acquired 100% stake in GoPay. Additionally, it announced the acquisition of Happy Returns with the aim of offering merchants as well as shoppers convenient return services. As payments are pretty fragmented, I believe Paypal will not have any trouble from regulators with regard to future M&A. Yes, competition is plenty and stiff, but as you may already see at this point, there are reasons to like Paypal and what they are doing.

Disclosure: I have a position on Paypal.

Look for books to read? Check out those I have read lately

The Anatomy of The Swipe: Making Money Move

We are so accustomed to having quick card-based transactions that if a transaction takes more than a couple of seconds, it will be a terrible customer experience. What many folks don’t know is that there are a lot of things that happen behind every transaction. It involves several parties, including but not limited to a cardholder, an issuing bank, an issuer processor, a network, a merchant processor, a merchant bank and a merchant. During the brief couple of seconds when a cardholder waits at a cashier, information goes from a card reader all the way back to at least an issuer processor through a card network (Visa, Mastercard) and a merchant processor, and back to the card reader. But it’s not finished yet. The process continues at least a couple of days after the transaction when the involved parties go through the clearing and settlement steps.

The payment world is so complex that there are startups that decouple individual steps of the whole process and carve out a niche market for themselves by specializing in such steps and improved efficiency. Take neobanks for example. They offer checking accounts with virtually no fees because they aren’t regulated and can operate without fixed costs such as branches.

I tried in the past to learn about payment systems, but not until this book did I find a reliable source that can break down abstract concepts in a digestible manner. If you are interested in payments or fintech, do yourself a favor and read this book

The reason why you can take money out of just about any ATM is because of the Durbin Amendment and its requirement that every debit card must have a secondary unaffiliated network. This law was put in to give consumers more choice in finding an ATM network. For example, if you have a debit card from Visa and the ATM doesn’t support Visa’s ATM networks, then it can run on Mastercard’s ATM network, Cirrus.

The term “Clearing” is used primarily by Issuers, but can also be referred to as “Capture” by Merchant Acquirers. Clearing happens toward the end of the day for most Merchants and will factor in tips, transaction reversals, and returns. This is basically the Merchant confirming these transactions are valid and that these funds are ready to be moved or “settled.”

Settlement is the actual movement of money from the cardholder’s bank account, the Issuing Bank, to the Merchant’s bank account, the Acquiring Bank. This movement of money typically happens via Fedwire as instructed by the payment networks.

Key term: 3D Secure

This is a standard for offering cardholders one more layer of security for online transactions. When card numbers are entered into a website to pay for something, 3D Secure will require the cardholder to enter one more form of authentication, such as a one-time-use PIN or passcode, similar to how two-factor authentication works for websites. More recently, the card networks are requiring Merchants and card Issuers to roll out a service called 3D Secure. The technology is standard in Europe but not yet in the US.

More recently, the card networks are requiring Merchants and card Issuers to roll out a service called 3D Secure. The technology is standard in Europe but not yet in the US.

The main reason is that these new “neo-banks” aren’t actually banks but rather tech companies that partner with regional banks such as Sutton Bank, Bancorp, or Meta Bank. These regional banks have less than $10 billion in assets and are able to charge a higher Interchange rate because they are considered exempt from the Interchange rules set forth in the Durbin Amendment and are considered “unregulated.”

TAPE SUCKS: Inside Data Domain, A Silicon Valley Growth Story

This book was written by Frank Slootman, former CEO of Data Domain. Frank took the company public and was the CEO when it was sold to EMC. He then went on to take the rein at ServiceNow and is currently assuming the top job at Snowflake. This book is his account of his time as CEO at Data Domain. It is a pretty short book, but it includes an honest and crisp account of how he scaled the company and dealt with startup issues. I like this book because it isn’t lengthy. I think it’s because of his direct nature as a Dutchman. Frank wrote about the lessons he learned along the way with little “fat” or lengthy unrelated anecdotes. He was straight to the point. His lessons outlined in the book should be helpful to aspirational entrepreneurs and CEOs.

Snowflake is expected to go public next week. If you are interested in that company and its CEO, you should give it a read.

My morning routine

The author interviewed a plethora of celebrities and successful folks to learn about their productivity hacks in the morning. Humans are creatures of habits. We all have our habits and routines and these successful men and women aren’t any exception. I don’t think what this book offers is unique in a sense that you can find these hacks on Google at any time. What it does is perhaps to catalogue all these hacks in one place so that you can choose to look at the routines of the folks you like. Plus, if you already studied about productivity tips before, it’s very likely you’d know what to do in general. What is missing is just our determination and discipline.

With that being said, if you are new to the productivity improvement game, this book may be of value. However, it’s pretty pricey compared to the two books I listed above, given the value and satisfaction in return. I’d try to Google the topic before I book this book

7 Powers: The Foundations of Business Strategy

This is a classic book about business strategy. It covers 7 aspects of a successful strategy framework developed by Hamilton Helmer. The aspects include Economies of Scale, Network Effect, Counter Positioning, Switching Costs, Branding, Cornered Resource and Process Power. I think it’s a valuable read to anyone who is interested in analyzing businesses and companies. Of course, the book would be more valuable to newcomers than those who already studied strategy before. For instance, if you are familiar with the concept of Network Effect, Porter’s Five Forces and Switching Costs, this book will serve more as a reminder than a revelation. Nonetheless, it costs only $9 for a Kindle version from which you can take great notes on business strategy.

The Motley Fool Investment Guide

Even though this book costs $15 for a Kindle version, I actually think if you are new to investing and you want to grow your net worth, you should start reading this book. This book covers very important topics of investing. It talks about why you should invest in or avoid mutual funds. It also discusses the appeal of blue chips and small-cap stocks. If you haven’t learned much about the main financial statements (income statement, cash flow or balance sheet), the book provides an overview of these statements and what they mean in general. In my personal experience, although news outlets have coverage of companies’ financials, as an investor, you should do your own homework and practice reading reports as well as financial statements. Additionally, this book touches upon options such as shorting and longing a stock. They aren’t my preferences, but it doesn’t hurt to know what they are and what they do. Of course, the book has to talk about the power of compound interest, which is why we need to invest early and be patient.

I really recommend this book if you want to venture into investment.