Recently PayPal announced a „strategic investment“ into Germany-based Raisin. Raisin is a savings deposit marketplace for savings interest rates. Whereas PayPal is known to be „the button“ for online payments, it has gone beyond being just a payment provider. In fact, when looking at their goals one could even go so far and question whether they are still a payment provider or rather a FinTech platform focusing on personal finance management. For instance, PayPal’s vision is:

to democratize financial services, as we believe that managing and moving money is a right for all people, not just the affluent. Our goal is to increase our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device. [3]

In regards to Acorns, the micro-investing service they have integrated into their app, they communicate their goal as:

help consumers take better control of their financial lives. Part of this mission is to ensure we’re also helping people build financial wellness.

And whereas one could shrug that off as marketing talk their product line-up suggests otherwise, namely that PayPal is indeed becoming a FinTech platform for personal finance management applications beyond payments:

Online payments: e. g. the „traditional“ PayPal Augmented payment-oriented product features: Functions that make paying with PayPal more compelling. Example include Purchase Protection, Instant Transfer or vouchers and other discounts. PoS payments: PayPal offers a range of PoS payment solutions P2P money transactions: send and receive money between users through PayPal Providing money: e. g. PayPal credit Investing money: e. g. Acorns or now Raisin Insurance: PayPal offers a free travel insurance

Now, although PayPal’s investment into Raisin was mostly — and rightly so — seen as a threat to incumbent (German) banks, there is also legitimacy in seeing PayPal’s move as a response to their competition by adding yet another product to their platform (under the assumption that Raisin will be integrated into the PayPal app).

Payment-commoditization: payment as a feature and not product

Besides traditional competitors (alternative payment providers such as paydirekt) several companies are making PayPal redundant by making PayPal’s product (“transfer money”) a feature of their own product. Among them:

Vertical (i. e. company-specific) payment apps like Starbucks, or Target Vertical payment systems (tokenized businesses) Mobile wallets like Apple’s Apple Pay

One trait they share is that they are competing against PayPal’s core strengths:

Scale: huge network of buyers and sellers Augmented payment-oriented product features: being more than just a payment provider Frictionless payments: quick and easy paying

Additionally, Apple Pay in specific is powerful because it has the platform (the OS).

Scale and distribution before innovation

Distribution before innovation refers to the problem that startups have when introducing a new product [2]. Whereas startups lack customers („distribution“), incumbents lack the product („innovation“). Because having a customer base matters, a startup’s success then depends on its ability to reach customers before incumbents build the product. Apple Pay is one such example in regards to PayPal. For a long time, PayPal had the innovation (payments) and Apple the distribution. However, by introducing Apple Pay, Apple „overnight“ brought their own version of PayPal to at least 700 million users [1] and has now innovation and distribution.

One way for startups to combat innovating incumbents is to keep innovating. They can do that either through product diversification or expansion of their core offering by adding new features. getsafe, initially a contract management tool, diversified by adding an insurance to their portfolio (see simplesurance, getsafe, Coya, and ONE — convergence, emotions, and power of customer base in FinTech). Furthermore, Clark, also a contract management tool, expanded their core offering by adding a tool for retirement management (see Verivox, Outbank, and Clark: some disruption, FinTech-stack, and fighting incumbents). Finally, PayPal applied the same strategy by adding features like PayPal Credit or diversifying into PoS payments.

Augmented payment-oriented product features

As mentioned in the introduction, PayPal has diversified into other areas beyond payment. One of these areas are vouchers and other discounts. For instance, they offer discounts on certain purchases made with PayPal. This product augmentation doesn’t come out of thin air. Rather it is a way to combat vertical payment apps such as Target who provide that very same features to their customers for their own products. For instance, Target’s shopping app contains several vouchers and coupons to be redeemed directly when paying with their app. By adding such features to their own payment solutions vertical payment apps are becoming more attractive to customers than PayPal and as a consequence are shutting PayPal out.

Tokenized business models

As I have hinted at in NAGA, savedroid, and useful ICOs, there is the chance that everything will be tokenized in the future. This means that each offering could have its own payment method in the form of app-specific cryptocoins. At this point it is still unclear how everything around coins will play out but they have the potential to make PayPal redundant (or at least for repeated purchase because PayPal might be used for an initial purchase of coins).

Frictionless payments and platforms

One interesting thing about Apple Pay is their user experience, in particular, friction which they reduce to almost zero. It is essentially:

Touch (the pay button) or hold (the iPhone to the PoS terminal) and Press (the Touch ID-button)

Although PayPal could theoretically do the same (and they are to some extent), Apple is nevertheless better positioned because they control the platform and consequently everything (e. g. apps) below it. This makes them extremely powerful as they decide which apps enter their platform and what these apps can do. Theoretically, they could remove PayPal from the app store. Although that might be associated with legal issues, it is worth noting that it is, for instance, impossible to purchase audiobooks through Amazon’s Audible app on the iPhone because Apple requires certain digital goods to be purchased through iTunes. (Amazon’s failed attempt at building phones was one way to combat that, Alexa might be another). Furthermore, I believe that Apple could find smart ways to make Apple Pay within Apple devices more useful than PayPal. Consider analogously how Apple’s credentials saving feature can — in contrast to, for instance, LastPass — be accessed from websites as well as apps. Accessing credentials from desktop websites within newly installed apps is unexpectedly pleasant. PayPal’s friction-reduction feature One Touch™ is one example how they are combating this UX challenge.

Similar to how Apple has the iOS-platform, PayPal has the PayPal platform. They are different in many ways (e. g. open vs. closed), but conceptually they are both a platform combining several other applications. These platforms provide an interesting way to look at platform-oriented, re-unbundling FinTechs (see ING-DiBa, N26, revolut: fairly good incumbents and FinTech re-unbundling for more on re-unbundling).

Platform FinTechs and re-unbundling

Platform-oriented FinTechs are FinTechs which build upon existing companies in the FinTech-stack and either unify them (re-unbundle) in one application or build their offering based on them. The FinTech-stack can be categorized based on their degree of end consumer-facingness and width of re-unbundling (i. e. how many B2C offerings from below them they combine). Whereas companies at the bottom have the lowest degree of consumer-facingness, companies at the top the highest. Similarly, companies at the bottom bundle hardly any offerings and products at the top a lot.

Bottom of the FinTech stack: infrastructure providers and “fund processors”. At the very bottom are infrastructure providers such as solarisBank (see ING-DiBa, N26, revolut: fairly good incumbents and FinTech re-unbundling for a short discussion on solarisBank) and “fund processors” such as banks. They are neither consumer-facing nor do they bundle any B2C offerings.

At the very bottom are infrastructure providers such as solarisBank (see ING-DiBa, N26, revolut: fairly good incumbents and FinTech re-unbundling for a short discussion on solarisBank) and “fund processors” such as banks. They are neither consumer-facing nor do they bundle any B2C offerings. Utilizers: Companies relying on the bottom for fund processing: Above infrastructure providers and “fund processors” are payment cards (credit and debit cards) and other payment methods such as gift cards which rely upon banks and infrastructure providers to process funds. Whereas they are very consumer-facing, they do not bundle anything.

Above infrastructure providers and “fund processors” are payment cards (credit and debit cards) and other payment methods such as gift cards which rely upon banks and infrastructure providers to process funds. Whereas they are very consumer-facing, they do not bundle anything. Platforms: Unifying services or products: Building atop offerings from below, platforms are very consumer-facing and bundle multiple services of products. For instance, aggregators like Raisin combine products (saving accounts) from several banks. In contrast, PFMs and digital wallets combine several banks’ products with such abstraction that they turn them into services. With PFMs like Zuper or Outbank (see Verivox, Outbank, and Clark: some disruption, FinTech-stack, and fighting incumbents) people can send money from across multiple banks. As a consequence, each of these banks has a low degree of consumer-facigness and is thus abstracted to the service “fund processing”. Similarly, digital wallets such as PayPal combine multiple payment methods (e. g. credit cards). Consequently, each payment method has a low degree of consumer-facingness (one might not even know which payment method is used) and payment providers are, therefore, also abstracted to the service “fund processing”. Finally, “marketplace banks” like N26 fall into this platform category as well.

Thus, the same principles that make Apple Pay so interesting, apply to these platforms (digital wallets and PFMs) as well. Similarly, how Apple dictates which apps enter their platform and what they can do, platforms become gatekeepers and dictate which products and services are integrated and thus reach the end user. Consequently, how Apple and other platforms such as Facebook have become very powerful, I do believe that we could see a similar monopolistic situation with extremely powerful FinTech platforms in the future. Whereas this puts a lot of FinTechs under pressure, it could also create an exponential value-increase for FinTechs that get integrated into the platforms and, of course, for the platforms itself and users.

Exponential value-increase for platforms, integrated FinTechs, and users through platforms

Such platform solutions could yield better outcomes for all involved parties (platforms, the integrated FinTechs, and users). The integrated FinTechs get an additional marketing channel, platforms increase their value (because they offer more) and users profit more from integrated solutions than separate offerings. For instance, if a user wants to save money and is unaware of startups like Raisin (which is very likely the case) she will use her existing banking app. Even if she knew about Raisin she might still avoid it because Raisin might not be significantly better to justify the switch (sign-up, doing the research…). However, if her existing platform (e. g. PayPal) has Raisin built-in, using it might be as complicated as clicking one button. As a consequence, this reduction of friction (no sign-up, research…) could make Raising overall more valuable although it is still the same product.

Admittedly, in this scenario integrated FinTechs are somewhat degraded because their product becomes a feature. However, they could combat this „degradation problem“ by offering only certain services with the platform and additional features only in their core app.

Notes

[1] Approximated iPhone install base: http://fortune.com/2017/03/06/apple-iphone-use-worldwide/

[2] Based on https://a16z.com/2015/11/05/distribution-v-innovation/

[3] See Annual Report and Proxy Statement