PayPal: A Digital Money Marketplace - [Business Breakdowns, EP.113]

25:09And they were going to do everything they could to try to blow up PayPal's economics and destroy their presence with customers. Because under eBay, historically, the company had steered users to check out with ACH. They had a vision and a mission under eBay to drive transaction economics. So the pivot in mission to drive digitization of money helped align with Visa and change the strategy from empowering consumer choice. And this was part of the neutrality where they could then say, hey, we could work with all the issuers in the ecosystem to say, give incentives to your users to add their Chase credit card, their Citibank credit card as top of wallet in PayPal, and will help you drive more economics to your credit card, will help make credit card a bigger piece of the ecosystem.

26:02Their business strategy is geared toward getting people comfortable using digital money. Working with regulators to do so, that's one of the things that they've said they've done really well over the last few years. They've built a lot of trust with regulators that helped them do more in crypto. So early on, they took a slow but measured approach to crypto, and they now feel a little more comfortable. They were the first way where you could use Bitcoin as an actual funding instrument for a transaction through the traditional financial ecosystem, if you will. And so anything that leads to money taking digital form is what their strategy is geared toward, in a nutshell.

26:41I guess engagement then is key. You want people to be using your services as much as possible. And obviously, that's how you're earning money. Do they have any interesting ways that you could share that they drive customers to using PayPal? I'm really thinking on the customer's side here rather than the merchant side. This has been in some ways my biggest frustration. And I do think they lost their way a bit during the pandemic, where instead of trying to drive engagement, they tried to grow the scale of the network. And so they have two nice levers they can pull on, which is how many people are transacting with PayPal and how frequently each user transacts with PayPal.

27:15And I view engagement as one of the most critical elements to this business. The way I've summarized it is that the more people engage, the more value they're getting out of PayPal and the more other people will want to use PayPal. It also is critical for bringing merchants in because the more people use PayPal, the more valuable it is to merchants and the more merchants just have to accept it. Now, strategically, what they've done in terms of driving engagement, I think is somewhat lacking. We are trained through our credit cards to expect some degree of reward for use. Early on, PayPal had a problem whereby if I bought something at Home Depot through my credit card, the rewards didn't transfer peri passu to what it was like using my credit card.

28:00That's no longer a problem. So you do get your rewards using your credit card through PayPal. And they've done really interesting things with rewards. And this is one way to drive engagement where they created liquidity. So I could use my Chase Rewards as currency through PayPal to buy on a merchant who might not accept, you know, how through your credit card, you could typically get a gift card to buy something out of place. Well, you can get true financial liquidity for it through PayPal. So they've tried to do things to create currency in ways where you would have not. creating a way for merchants to be able to accept PayPal creates ways for users to create opportunity to spend.

28:38And so in some ways, it's hard to talk about opportunities for users without adding in this merchant overlay. But now that they're driving engagement as a strategy, they're starting to do more stuff on rewards. I think they should go much further. If you think about it, the average user is doing it 50 times a year. The average person has three to five subscriptions. If you get four subscriptions on PayPal alone, there's your engagement per active user. So if you get any incremental transactions, that's huge. And from a subscription perspective, there's major value as a user to have your subscriptions done through PayPal.

29:12And I'll give one big example. I subscribed to the New York Times. To cancel the New York Times, you have to pick up your freaking phone and call a person and wait on hold and be like, I want to cancel. And then you have to deal with their whole spiel of, well, if we offer you this, will you stay? And if we offer you that, and you're like, God, what a pain. In the PayPal app, you could go to manage your wallet and cancel your subscription with the tap of your finger. I think they should be a little more vocal about the ways in which they make things simpler for people. They're starting to do it.

29:40They're starting to get religion. I think buying Honey was something that was very important. Honey has built a rewards ecosystem on PayPal. It's something that's valuable for merchants because they're able to exchange funnel visibility for rewards for their customers. So they're trying to leverage both sides of their network. The problem is they probably severely overpaid for Honey, and it's taken a lot longer to build out these capabilities. But now that they're focused on engagement, I do think you'll see some creativity. I think Venmo is a really interesting wrinkle on this, where you could add in a social overlay.

30:12So I paid for Chipotle with Venmo, and it should share with my friends that I went to Chipotle. And that's valuable from a merchant's perspective. And it's fun and quirky from a user's perspective, engagement is going to be the key piece going forward. And I want to add one more piece on engagement that I think is really important, because when you think about engagement, in contrast to adding one transit action from a new user, one transaction from an existing user has one and a half times to two times the value because you have no customer acquisition costs against it. So driving engagement is way more valuable from a bottom line perspective, and it should be the focus of the business because of how it ties into the mode.

30:51You mentioned they've got a big pool of cash sitting within the PayPal ecosystem of customers that are just holding funds there. Do they do anything with that? And do they earn interest on it? Or do they pass any of that back to the user? A lot of that is frictional insofar as they've said it has an average duration of 9 to 12 months to that money. And they're able to invest it in short -term treasury. So when you think about it from the perspective of we had 0 % interest rates for most of its newly public existence, they will actually be able to drive a decent amount of earnings. And it won't show up in EBITDA because the I piece is not there, but that's pure cashflow to the business.

31:30And it's something that's pretty damn valuable. They actually have started to do, I think, some pretty smart things. So at Chase Bank, sorry to keep picking on Chase, I could say Citibank also, but they're still paying me next to 0 % on even my money market account there. But PayPal has started offering 4 % savings accounts. They work with a financial partner as well on it. So Synchrony Bank is their financial partner for that. But because short -term rates are higher, they're able to start offering stuff like savings accounts and try to capture a bigger piece of anyone's digital banking needs.

32:02And I think that's pretty interesting when you think about what's gone on with some of these banks over the last month and a half. So we're recording this at the end of April, but a lot of these banks are facing some significant stresses because they're not able to pay enough interest because they're encumbered by having invested in assets at much lower rates, PayPal could say, hey, we will indeed pay you 4%. Just move more of your banking to us. Yeah, it keeps people in the ecosystem. I think it's probably right now that we look at their acquisition strategy. You've already mentioned a bunch of them, Venmo, Honey, Braintree.

32:33And it seems to be that's the path that Dan Schulman's been on in terms of building out the service for consumers and merchants. Maybe we can go deep on one of them. Braintree seems like the right one. Maybe first, what is Braintree? What do they do? Why were they bought? And then just talk a bit more broadly about the acquisition strategy at PayPal. One of the interesting things I should point out is that Braintree was an acquisition before Shulman was there. It was something that was not part of their public equity acquisition strategy, but it does fit the template of what they've looked for since then.

33:05But Braintree has just been a resounding success in a way that nothing they've done since has come close. And I think a key part of the reason is that Braintree helped move PayPal from a purely desktop presence to a mobile presence. And it brought in a great leader in Bill Reddy, who's now the CEO of Pinterest. But Braintree competes with Stripe and Adyen. So they are originally just a gateway. So they were capturing a very small piece, helping merchants be able to accept transactions in mobile form while working with an incumbent acquirer. So some of their earliest customers that put Braintree on the map were Uber and Airbnb.

33:45Braintree was the way that helped get those companies' capabilities to accept payments through your mobile device. So it's about $400 billion in TPV right now that compares with Stripe and Adyen, both at around $800 billion level. And it's growing at 40 -plus percent. It is faster than Adyen because Adyen's 40 % was in euros and they benefited from FX translation. And it's almost double that of Stripes in the last year. The company is a little reluctant to shed light on because the economics of a Braintree transaction are not as good as a PayPal button transaction. But I think it's going to be increasingly important going forward and they shouldn't shy away from that.

34:25Also, one of the critical pieces of Braintree was that their tech stack solved the tech debt problem that PayPal had accumulated during eBay. And one of the more important early initiatives that Shulman spearheaded was taking this big monolithic tech stack and building something modern. And they used the guts of Braintree in order to do that. And that helped the company far more rapidly develop and deploy new innovations and new features like they were able to take Buy Now Pay Later and roll it out to their entire network within a couple of weeks. They were able to launch crypto, roll it out almost instantly.

34:58Formerly, they were not able to do something like that. And one of the really beautiful pieces that came with Braintree, which at the time no one really knew would be much of anything, Braintree had bought Venmo one year before PayPal bought Braintree. So Venmo came in. It was not an acquisition. It was something that they got through Braintree, and it gradually took on a life of its own. So Venmo is no longer thought of as a piece of Braintree, though it very much was. and it was part of Reddy's vision to be able to say to their merchants, hey, we do have a customer side. Though it's taken, I think, a lot longer than any of us have hoped to see the merchant services come through with it.

35:36And I think one of the wrinkles of that is in the early days of PayPal, you had the marketplace transactions and it was quite easy to say like, oh, I know this transfer of money was not peer to peer and happened on eBay. So I will therefore charge for that. Now it's more like I take a tennis lesson and I pay someone with Venmo. How do they know that is or is not a transaction? Well, they do have really good data and they are starting to force that into the transaction flow. But Braintree is the tech stack that now underlies just about all of PayPal, except for the prowess in fraud detection. PayPal was able to take their secret sauce in fraud detection and overlay that on top of Braintree's really strong elements and was able to make Braintree that much better.

36:20And in the conversations I've had with merchants, the reason why Braintree has won a lot of share in the last couple of years is they have much higher approval rates and much lower instances of fraud. And so they're able to work together in that. One of the questions I ask myself is, should Braintree even be part of PayPal anymore, though? What's the value of Braintree being part of PayPal? Why can't they find a way to split these businesses and make Braintree a stand -up entity on its own? Have Braintree compete with Stripe and Adyen? And in some ways, neutrality, I've said, is the moat for PayPal, but maybe giving Braintree a degree of neutrality where they're not part of PayPal, where some merchants might not think of them as part of PayPal could be advantageous.

36:58So that's the question I'd leave hanging out there. If you've spoken to the company, what have they said with regards to that? Or if you haven't, what would you anticipate them saying in regards to that question? They give an example of Venmo, whereby Braintree merchants are able to get Venmo first. And that's a way they're able to drive adoption of Braintree from a merchant who might not be on Braintree, but badly wants to accept Venmo and get access to that demographic. And it's a way to push out Venmo, which I theoretically keep with PayPal rather than Braintree and give it a much bigger merchant installed base.

37:33So having both sides of the network, increasingly, Braintree is taking the merchant side of PayPal. So even PayPal's merchant services that they formerly had a lot of the long tail of the internet with, they're increasingly moving that to Braintree. So in some ways, you could say this mode of having both sides would go away a little bit if they were two separate companies. But I think there are ways in which you could keep a lot of the benefits without having them under the same financial umbrella. Just to finish off the financial model before we move on to some other points, you mentioned the 198 take rate.

38:07How does that flow through to the bottom line? Just finish off the financial model for us. How does revenue split down into cash flow and profits? The biggest investments that PayPal makes beneath their revenue line are customer service and R &D. And I think customer service is one of the really interesting ones because that went from well into the double digit percents of revenue to now the single digits. And that was enabled by that initiative from Shulman to facilitate customer choice, no longer steering to ACH. A lot of people would call in and be like, I wanted to pay with my credit card.

38:42Why did this go through ACH? And so giving people choice, that removed one of the foremost reasons people had a call. R &D is going to continue to take a pretty big piece of the economics beneath revenue for PayPal, because they do need to keep innovating. They do need to keep developing. It's where they invest in their fraud capabilities. I should have said fraud is something that comes above take rates. That's something that flows through into their revenue. And S &M is one where they went a little crazy in the last few years. They drove it up as a bigger piece of their revenue. They started acquiring more people.

39:15They did brand development. They bought stadium rights in Arizona, for example. But S &M should take on less prominence as things go on. One of the big questions about PayPal in general is so that $1 .88 out of $100 transaction they take, that had been closer to $2 .80 when they started their split from eBay. And there are two big forces of that. The rise of Venmo is predominantly peer -to -peer, so peer -to -peer flows through to that take rate. But also at the same time, you have a general narrowing of transaction take rates from any merchant acquirer. It's happening across the ecosystem. Merchants don't like that someone has to take a piece of their hard -earned revenue.

39:54So the idea for PayPal and for any payments company, one of the examples I like using is that American Express started with over a 5 % take rate, and they're down to nearly a 2%. And every year that they've existed, this number's gone down. It's that you make it up with engagement. So the more you can pull people into digitizing their payments, the more you're able to do that. So PayPal has been in this mid -teens margin range. They had been driving that margin steadily upward every single year of their newly public existence until last year. And things took a big step backwards because they made this massive investment.

40:30And rather than saying, hey, we love being a digital wallet, they were like, let's become a super app. So they started investing even more into R &D, and they expected to increase that investment. And suddenly they're like, whoa, e -commerce growth is stalled. and our revenue is not going up, but we just committed to growing our expense base by our expected nearly 20 % growth in revenue. And so you're stuck with a delevering of margins. So they're now committed to significant cost cuts. They're laying off, I think it was a high single digit percent of their employee base and they're cutting back on certain kinds of experimental spend and they're cutting back on customer acquisition.

41:08So they should get back to the high teens. I've always felt their incremental margins in the mid twenties to 30 % range should be where margins go longer term. And they should have even more upside to that because when you think about what drives this business, it's predominantly a fixed cost structure. The costs are largely a choice, much like a lot of other Silicon Valley companies. They do have to fight that headwind of getting less and less from a transaction every year, but they are making it up with volume. So they should be able to easily get back to this recipe. So this year, they expect another point of margin improvement at least.

41:44So that should be able to play out over the next five years, where they're able to squeeze out most of top line floating through the bottom line. Yeah. They're not alone in walking back some exuberant spending from the last few years, there's a few other companies in that list. Exactly right. As you think about this business from an overall perspective, what differentiates PayPal from its competitors? What enables them to earn excess returns? They've grown really nicely since they split off. What is the moat here? They have a frequently transacting digital wallet user base. And every platform's been trying to build that out.

42:18And they have a large merchant population as well. So there's a chicken or egg problem for anyone who's trying to get anything like that going. In order for your users to transact, you need merchants. In order for your merchants to want to accept you, you need users. No one else has really been able to ignite this to the same degree as PayPal. Apple gets a lot of attention for adoption, but its merchant side pales in comparison to PayPal. Then there's the peer -to -peer network. Basically, anyone who's handing money to their friends digitally, it's going to be PayPal or Venmo. To a lesser degree, there's Square's cash app.

42:55I think that's something that's critically important. And it's something that's really valuable to leverage the neutrality of PayPal. So I'm green, which means I have an Android phone, for those of you who don't know. And if I wanted to send money to my friend who has an Apple phone, I'm not going to be able to do that with Apple Pay. So there's no way that Apple Pay could ever get to the same degree of relevance as a truly open peer -to -peer platform could have. Now, the banks are trying to build something with Zelle. Anyone who's banked is able to use Zelle and transfer with anyone else and do it through an app.

43:26But Venmo and PayPal are much earlier adopters in getting out there have network effects on both sides. And then I think their fraud detection. It's a true differentiator. People don't like saying first mover is an advantage, but every year you've worked on fraud detection puts you, if not one year, perhaps even more ahead of what others are able to do. So anyone who's starting from scratch will have an incredibly tough time to keep up with you. And that's what enables stuff like one touch checkout. There's no other wallet that's able to do one touch checkout in the same way and do it across the open internet where it's not just in pieces of their ecosystem where you're using their platform at the time.

44:08They're able to do passwordless login now. So if you're able to see that for yourself, you don't have to use your password at all anymore to use PayPal because they have such a long history of how consumers transact with it and how you yourself might transact with it that they could trust putting you on without a password. And by the way, the cost of fraud in that would be to them. And they're able to roll out products like buy now, pay later, because they know fraud better. They know consumer behavior better. So they know how to handle the allocation of credit. So people that have used PayPal for longer than others get more credit than those who just signed on to do one BNPL transaction.

44:48And they're able to offer that as a service to their merchants at the same cost as traditional merchant acquisition for someone like Afterpay who needs to charge more in order to account for the cost of fraud in their standard transaction rate. So that's really advantageous for merchants and consumers alike. So everything that I'd say is unique about PayPal is something that they can simultaneously advantage their merchant base and their customer base at the same time. And they're a big business now and older than most of the competitors that we've discussed to this point. What are the frontiers of competition for them today?

45:20And who really are the big competitors that they would point to. I know that eBay is swapping PayPal for Adyen. So is Adyen a competitor? We've got firms like Stripe and Block that we've talked about. And Apple and Apple Wallet is something that you often read when you read about PayPal, their digital wallet as well. It goes back to my point on PayPal being a chameleon, but they compete with everyone and they're partnered with everyone in various ways. It goes back to Visa, who the nicest word they'd say about them was they were a frenemy to now Visa is actually partnering with them to build their own peer -to -peer capabilities because they see the value of PayPal's network there.

45:56So Addy and Stripe directly compete with Braintree in order to get merchants to accept their services. Square on the merchant side is not a competitor insofar as they predominantly have a brick and mortar presence, but they are a competitor insofar as Square is trying to move to more online. And PayPal made an acquisition of this asset, iZettle and is trying to do more of what Square does. It's a dongle, in theory, works the same way. Then there are competitors with Block on the digital wallet side. Cash App is absolutely competing more with Venmo than traditional PayPal, but in some ways, both Apple and Google are both competitors, but also partners.

46:34Google was one of the first to start a way to pay with funds stored at PayPal at brick and mortar merchants. They've done things together to help one another, and they've done things that compete. When you think about a company like Facebook, it's really interesting as well because PayPal powers payments on Instagram. At times, they've been trying to build some of their own vertical capabilities on the payment side. So they're a little bit friend and enemy with everyone. They've partnered with everyone in various different ways. Zelle from the banks is a competitor, but they work with banks in so many different ways that are advantageous to both.

47:09Merchant acquirers, they get to accept the PayPal button, but they also at the same time have to compete with them for some of the business. So they're a little bit of everything. They have a remittance service, which was the first acquisition Shulman made as CEO, which competes with the likes of Western Union, Remitly. I think one of the areas where they face the least competition is in cross -border transactions. So for a merchant who wants to sit in a foreign country, but sell to the US, PayPal is probably the best way to do that. And that's very complicated, as I understand it as well. What's the relationship like with Apple?

47:44Because they partner in some areas, but I have to imagine they would love to be part of Apple's wallet. But I can also imagine that Apple would be keen to keep them off that page. Yeah, it's an area that's tough for PayPal because they, I think in an ideal world, start calling antitrust attention. And it is coming to how Apple will not open up their near -field chip to anyone other than Apple Pay. And they're using their position of dominance in order to keep others out. and they say it's in the interest of protecting their consumers. But hey, consumer choice is a big piece of what antitrust law was built around.

48:19And Europe is the first to move on this. So it seems a little more keen on trying to find ways to force Apple to open things up. That's something in the next five years. I'd expect it to happen in some way. But Apple also, one of the most used payment sources for Apple products is PayPal. And I mean that if you're buying a new computer, or if you're buying a new phone, you're more likely to pay with PayPal than just about any other instrument. And those are big ticket items. And so PayPal has an important role to play. But everywhere you go, there's this blurring of lines. And I think that's where PayPal has to, on the one hand, they really want to get into NFC, but they have to play nice because you don't want to have Apple turn on you in another arena.

49:04NFC being? Near Phil Chip. Before we start to record, and we talked a bit about management in general, and Dan Schulman is leaving at the end of this year, and you said they've got an interim CFO. And so there's some open questions in terms of the board and what management looks like going forwards. Before we get to that specific question, just on capital allocation, they've often bought versus built. How much innovation comes from within the business? What's the strategy going forward? And how else do they use their cash flow? One of the frustrating things I'd say is that they've spent 13 plus billion dollars on acquisitions and partnerships in their newly public state.

49:40And I'd say the vast majority of their growth and value has come not from these acquisitions, but from actually innovating, creating new product. Like Buy Now, Pay Later took no capital allocation, it took R &D and initiative. So something like Zoom added nominal revenue, but in the grand scheme of things, who knows how much value they got for that $800 million of spend. They bought something called TO Networks, which they had to write down 100 % of the value of. It was supposed to find a way for people to put cash into PayPal and had a big store presence, but they found critical failings in their capabilities to detect fraud and not be defrauded.

50:18So they wrote that down. Something like iZettle gave them point of sale capabilities and gave them a little bit of scale in a couple of countries in Europe. And they are using it to roll out that product in the US, but it got throttled a bit by antitrust settlements they had to make in the UK in particular. HyperWallet maybe is one of their more valuable acquisition pieces. They had been really good at accepting payments for merchants in marketplaces. They had not been good at payouts in three -sided networks. So for example, I could pay Uber, but can Uber pay the driver with PayPal? They could not until they had a hyper wallet.

50:55So Uber had to build two separate systems. And that's really important for the likes of Airbnb. There are many of these kinds of networks that are emerging now. Honey was the biggest acquisition they made, $4 billion. It's TBD. Really hard to say whether they do or don't get value of it. More recently, their second biggest acquisition was PayD, which is a BNPL service in Japan. And I think it's interesting because they'd say it wasn't about getting buy now, pay later. It's the fact that Japan of the developed economies is the least penetrated with digital payments. And it's the largest installed base of any piece there.

51:26They bought these stakes in Uber and Mercado Libre, Uber at their IPO, Mercado Libre, during one of their big fundraisers to expand more into payments because Mally started as an eBay marketplace. One of the things that I laugh about is eBay had the same size stake in MercadoLibre that PayPal ended up buying, but eBay took that stake in the split and ended up selling it in the market. And PayPal bought that at higher prices a few years later, which they could have reversed that decision because it had tax consequences for eBay too. So the net of that was kind of goofy. Now, also netting against this $13 billion in spend, they received $7 billion in proceeds from creating a capital light consumer -facing credit partnership with Synchrony.

52:10They sold their credit book, so they didn't have to have that in their balance sheet. That was something that was very helpful for investors early on. So they got this $7 billion and it entered a long -term partnership with Synchrony, whereby if I, as a consumer, use one of the credit products from PayPal, PayPal gets a revenue piece off that loan, but Synchrony is the one who is using their balance sheet to support that loan. So it helps PayPal keep very high returns on their own invested capital at the same time. Capital allocation, I'd argue they should be selling these stakes in Uber and MercadoLibre.

52:46MercadoLibre was supposed to have come with a partnership within a year. We're like five years later and there's still no partnership in any way that we can see. What's the value in having either of these pieces? That's nearly $2 billion. I think there's opportunity to say, hey, Zoom was supposed to have created more scale. Zoom is the remittance service. It was supposed to theoretically be a situation where if I send money to relatives in Brazil, then my relatives would keep that money in PayPal and spend. That hasn't really taken off for a variety of reasons. So why not maybe combine Zoom with Remitly and do something interesting there?

53:22Who knows? But there are a lot of different potential opportunities. And then the other big pillar of their capital allocation, it took even more than their M &A strategy, was $16 billion of share repurchases. And I think that shows it's a really capital lean business. So the fact that they're able to do all this while driving really impressive growth since their spin shows just how little cash they need to drive this growth and how much they're able to spit off every year. So of the $5 billion in free cash flow this year, basically all of it's going to go to share repurchases now. They're going to focus a little less on acquisitions.

53:58And I think that's partly due to things really started turning down for them when it was speculated that they might acquire Pinterest. So having this activist presence with Elliott Management, Elliott with two Ts, not one like me, they're way better investors than me. Having them in there in order to steward the business and make sure that the company does right by shareholders, they're going to refrain from some of this acquisition activity. Can you just talk a little bit about Elliott's involvement and what they've been asking the business to do or what they're calling for and whether it's coming to fruition or not?

54:30They've been pretty tight to the vest about it, but you could guess some of the pieces. So after Elliot came in, there were very strong commitments to reducing some of the excess expenses that were put on during the COVID period. And I draw this contrast with someone like Amazon who built too much fulfillment capacity versus PayPal who invested in a super app. With Amazon fulfillment capacity, Sure, they spent too much in the near term, but one day they'll grow into it and find utility out of that. PayPal's investments in the super app are literally worthless. So it's not investment they'll grow into.

55:08And I'm being a little facetious. There's some things they will have learned along the way, and maybe they'll stumble into something, but it doesn't have the same value as over -investing and fulfillment. So expense reduction, really big one. You know, the quarter after Elliott's involvement was made public to the market, that's when PayPal went about this strategy of discipline, capital allocation. They were very public in their commitment, no big M &A. They had not done that before Elliott's involvement. And if I had to speculate, I'd say Shulman's retirement can directly be traced to Elliott's involvement.

55:43And I expect them to play an important role in identifying, interviewing, and appointing a successor to Shulman. Well, let's talk about that. What does the decision -making team look like now? When does Shulman leave? Or when is he supposed to leave? And then if they found a replacement yet? Or what does that bench look like? Yeah. So that's one of the harder questions in some ways. For years, after spinoff from eBay, I thought Bill Reddy would be the natural successor to Shulman. And he left to go to Google because Shulman wasn't ready to retire at that time. John Rainey, as CFO, he was an airline guy who came in as CFO and brought a lot of discipline of PayPal.

56:23And one of the pieces that I could have mentioned earlier is PayPal still has a lot of pricing levers because of all these different ways in which transactions are run through the system. So Rainey was really smart in building out a team in understanding pricing and developing better strategies for where they add value and what they could charge people. And Rainey left for Walmart last year at about this time. They hired a successor who never really took over. So Gabrielle Ravinovich, who has run IR very competently, has been their interim CFO for the better part of a year now. So now you basically have unclear leadership at the top.

57:00It's not clear who an internal candidate would be to take the role. I have my stocking horse bet. And my bet is Cameron Zaki, who is the COO of Adyen, who really was critical in building the US business for Adyen. And one of the interesting things about Zaki is literally the day before PayPal released Q4 earnings, in which they announced Shulman would be stepping down and retiring. The day before that, Adyen in their Q4 report announced that Cameron Zaki, who is COO for basically their whole public assistance, would be stepping down and retiring. And he was a PayPal guy for a decade before he actually went to Adyen.

57:40So he knows the business through and through. And he also competed with them. And further, as Braintree has taken prominence as a growth factor, he has a much better sense of how Braintree needs to fend off perhaps its most formidable competitor in Adyen. If I had to make a bet right now, I'd make him Cameron Zaki, the odds -on favorite. Though this is purely speculation on my part. Well, full circle, we'll see where that comes true. And if you think about whoever this person may or may not be, what are the opportunities for them as they take the helm into the next phase of this business? There's almost a nice line in the sand this year as their eBay partnership winds down.

58:16That's the end of one chapter, I guess, and the beginning of a new one. What does growth look like going forward and where are the opportunities lie? One of the things that came following the Elliott announcement was trying to make a better vision for what their growth algorithm looks like to investors. So coming out of the spin, they'd formerly had this, we expect high teens TPV growth that flows through to mid to high teens revenue growth. More recently, they've had to revisit that after COVID. It's a debate whether COVID pulled forward growth or how that looks. And I think everyone who's listening to this has probably seen that chart of e -commerce penetration in the U .S.

58:55That went parabolic during COVID. And we're now almost back to what formerly would have been trend growth to e -commerce. And what PayPal has said is they expect to grow at or above the rate of e -commerce in revenue terms. And they expect, given they have bloat in their cost structure, and given that there's natural operating leverage to any payments platform, that bottom line should grow in excess of top line. So more near term, they've only been willing to put out one year at a time right now. they expect 18 % bottom line growth, but this comes with an expectation of mid to upper single digit revenue growth.

59:35There's going to be a pulling forward of some of that operating leverage. But I think e -commerce growth is a very fair way to put it. They're heavily levered to e -commerce growth. And there's incredible optionality if they could get anything that gives them more relevance to brick and mortar. And I think that comes from a combination of this blurring of the line. So if I buy something from Home Depot online, but for store pickup, that might look like e -commerce, but that's brick and mortar. So as more of those kinds of transactions start taking shape, there's upside to their growth algorithm.

1:00:05And then there's upside if they're able to get the near field presence from Apple. There's incremental upside if they're able to take some of the Venmo transactions that are like, I pay my babysitter and make it into a commercial transaction of sorts to create liquidity to new markets in digital form. Things that paying for a babysitter very much was a cash transaction historically. Now it's very much a digital transaction. And that's just one example. But you could do dozens. I know people who split their rent or pay rent through stuff like Venmo. That's all incremental opportunity above and beyond the core growth rate of e -commerce.

1:00:40So I think they haven't exactly done enough to highlight the degree of optionality and what they expect their core growth driver to be. But I think it's very much there. And on the flip side, we talk about risks on this show. And what keeps you up at night as a shareholder? What are you worrying about? Is it execution, competition, just that constant decline of the take rate? Where would you focus people's minds? Take rate is one of the ones I worry about least. I have studied the history of payments platforms. Every single one of them is that take rates fall over time. The problem and where it falls into what keeps me up at night is if you're not able to make it up with volume, with adding new use cases, new utility, then you're not gonna be able to maintain your margins.

1:01:22You're not gonna be able to keep driving profitable growth and profitable growth is more important than merely growth. So when you think about it, competition is the biggest headwind to increasing engagement and adoption. So someone who might transact with PayPal 50 times through their desktop, if every time they then go for in -store transactions and that's where the biggest opportunity is, it happens on Apple or Google Pay, you're not gonna be able to drive incremental adoption in the same way. Competition for Braintree coming from Adyen and Stripe, offering different kinds of value. Stripe is just a lot easier for a long -tail merchant to take on.

1:01:57And long -tail merchants have better margins than really large merchants. Adyen's done a phenomenal job building the most robust global capabilities for multinational merchants. So they have a very unique value prop for a merchant who might be situated in 100 different countries. That's challenging for Braintree to compete with, but they should be able to do that because PayPal is such a global business. But competition is definitely a big part of what keeps me up at night with this, as is, I'd say, a vacuum of leadership. They've had a bit of churn at the top, and it's unclear who's going to be the next leader of PayPal, and leadership will play a critical role in what the vision for this business is going forward.

1:02:38So I do think that's part of what's kept investors sidelined, despite better than expected financial performance early this year. And I think the board of directors, there are no real payments people on the board. They need better stewardship in that sense. The last thing I'd add to that list, and I know it's a bit long, but value destructive M &A, because I really don't feel great about the M &A they've done thus far. I don't think they should be engaged in large M &A that takes them in a different direction than being a digital wallet at the end of the day. You don't have to be a super rep. Do more to become someone's central online bank than being something that's like a social platform or whatever else it may be.

1:03:19Yeah, often less is more. On that point, we could close these conversations out with the same question, which is what have you learned? And what could you share with both investors and operators from your studying of PayPal? I've learned so much about sentiment, about emotion and about myself through this experience. The first time I was ever mentioned in the Wall Street Journal was the day after the Visa deal was struck in 2016. And I'm sure it's because I was the only person who was dumb enough willing to make a positive spin on it. But I was right in that sense, in that time, insofar as there were a ton of specialists who felt Visa would kill PayPal.

1:03:59Specifically, PayPal as a chameleon, no one was sure whether it should be technology analysts or payments analysts who cover the company. So one of the things I think I got right was that it was a big advantage being a generalist and not having to wear the specialist hat and view it through the prism of one or the other and appreciate where and how it fit into the ecosystem and what drives value. On the flip side, I really did not handle my own investment in this very well. And so far as the stock went parabolic during the pandemic, and it would take a whole lot more growth to sustain the values that they were sitting at during the most euphoric days of the COVID bubble.

1:04:42It led to, I think, and I didn't like it at the time, to the company veering from what I thought was its most important driver of value engagement. I joked about how this tweet out there that every time Shulman in PayPal's investor day in early 2021 said, super app. I should just drink because it's so stupid. It was what I thought was a company that was moving a little too far from its core mission. So be critically focused to what the core drivers of value are and be focused to whether management is sharing the same North Star that you are. I've been very vocal. I've spoken about PayPal now publicly at least a handful of times.

1:05:20And each time I've said engagement, engagement, engagement. So long as engagement is going up, that's what's important. Even if engagement's going up, management doesn't view that as important, that's a problem. So make sure I'm aligned with the direction the company's being steered in. And I'm happy to say it's back on track. I've joked that when I first bought the stock, I wanted to get a double within 5 to 10 years. I'm there, but the path has sucked. So be disciplined. Stay true to yourself. Don't get caught up on things when they're going really well. Make sure your vision's aligned. Excellent.

1:05:50Well, Elliot, thank you so much for breaking down PayPal with us as a business, which has ripple effects throughout the economy, both in what it does and the people that launched it and what they've gone on to do. It's a fascinating business. So thank you very much for explaining it to us. Thank you for having me, Dom. I love the podcast. I'm really excited to be a part of it. Thank you. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com. Thank you.