PayPal has focused in recent years on expanding its franchise through acquisitions and account accumulation, but a new management team is more focused now on pricing power.

CEO Alex Chriss, who took the company’s top role last year, has said he’s seeking profitable growth, especially on the unbranded side of the business. In recent conference presentations, he and his new chief financial officer, Jamie Miller, have made clear that may include asking merchant clients to pay higher prices for what PayPal deems as services worth more than what it has been charging.

While payments volume for the company’s PayPal branded business continues to grow there is “more room for us to continue to expand” on margins, based on recent innovations added to the service, Chriss said last month during the Morgan Stanley Technology, Media and Telecom investor conference. As for the unbranded business, including Braintree, “I think we have an opportunity to price to value,” he said.

Under Chriss’ CEO predecessor, Dan Schulman, PayPal strove to accumulate merchant and consumer accounts, often falling short of goals in recent years. The company also pursued expansion through acquisitions, buying the Japanese payments company Paidy for $2.7 billion in 2021 and scooping up Happy Returns that same year before selling it this year for $465 million.

Now, the improved pricing campaign is especially focused on better selling the company’s unbranded Braintree services to retailers and other merchants because that segment has been less profitable than PayPal’s branded business. With Braintree services, the PayPal brand is invisible to consumers, operating in the background to process payments for transactions.

Profits are lacking despite significant growth of the unbranded business. Payments volume for the unbranded business jumped 30% last year, over 2022, while volume for PayPal’s branded segment climbed 6%, according to the company’s fourth-quarter earnings report.

While the San Jose, California-based digital payments company’s services are now often available in-store, via its branded button, PayPal originally made its mark as an e-commerce payments option.

The drive for better pricing will be particularly focused on small and mid-sized merchants where the company’s suite of services can command a higher price than for larger merchants.

“It's an opportunity for us to play in a different way as we think about profitable growth, as we think about pricing to value, not just pricing to win,” Miller said last month during the Wolfe Fintech Forum conference. Braintree is more reliable, has increased its availability and offers better authorization rates than in the past, she contended.

That can “make a meaningful difference in a competitive bid situation, where we can price to value — often that can be higher than what our competitors can do because we have a more holistic value prop to bring,” she said. 

Miller, who took her role in November, explained that it was the company’s brand, its global reach and scale that drew her to the job. “At the same time, it's a company that, in my view, had probably a series of self-inflicted wounds, and there was a lot of opportunity for self-help.”

She noted more than once during her Wolfe conference appearance that focusing on margin and pricing improvement requires a change in thinking at PayPal. “Our emphasis over the last couple of years has been perhaps more on top line and operating leverage, and we are really squarely focused on repositioning the sights of the team on that gross margin line,” Miller said. “We're over-emphasizing that right now.”

With a majority of PayPal’s 35 million merchant clients being SMBs, that means those smaller merchants are likely to be disproportionately subject to the higher prices, partly because larger companies are better able to negotiate lower rates. PayPal Complete Payments is the unbranded platform for SMBs while Braintree is geared to larger merchant clients.

A large e-commerce site processing a consumer card payment through Braintree might pay five to ten basis points on a transaction, but a smaller one would pay multiples of that, closer to 50 to 60 basis points, Wolfe Research analyst Darrin Peller said in explaining the difference during an interview, noting the basis points were guesses.

PayPal executives are “saying they're going to price for value, not price to win,” Peller said in the interview last month. “Said another way, they're not just trying to take in any volume at any cost. They believe they have a better value to provide and, therefore they can charge more.”

In the past, that wasn’t necessarily the case. “I think what happened to some degree is that Braintree’s prices, in some regard got lower, too low, to the degree that it was actually so low that they have room to raise their price, and still be at parity with other companies.”

Smaller businesses benefit more from PayPal’s services than larger merchants because PayPal offers them fraud protection, payments analytics and other features that larger merchants may already have in-house, Peller said. Ultimately, the potential pricing benefit for PayPal is higher with the smaller merchant clientele.

“It is very clear in our organization, that we're looking at price differently,” Miller said. “Having said that, you know, we're a highly customer-centric company and this is something where we really believe in having the right value prop and the right value equation and partnership with our merchants over time.”

With a new emphasis on improving the profitability of the company’s unbranded business, some investors have told Peller they’re worried about PayPal not giving enough attention to the branded business.

Recently, Apple Pay has been eating into PayPal’s legacy payments business, according to some industry market share metrics. That core business had been growing in the double digits in the past, compared to 5% to 6% in recent years, Peller noted.

There are “still some things they have to solve for,” Peller said. “I think that they're trying to improve it all at once, and I think they will have success on the unbranded side in some regard,” he said. “The branded side: The jury's out – that’s still a bit of an uncertainty in the marketplace.”

By Lynne Marek on April 3, 2024
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