Singapore (Oct 7): Inside the sprawling 728,000 sq ft Silicon Valley headquarters of payments company PayPal Holdings, CEO and president Dan Schulman walks about in a black crewneck sweater and jeans, his feet shod in open-toed sandals. His lightly tanned face and wiry frame belie the keen Krav Maga martial arts practitioner that he is.
During PayPal’s media day event on Sept 11, he told a roomful of international journalists that PayPal’s mission was to “democratise financial services” and drive financial inclusion. He seemed genuine, speaking at length about PayPal’s efforts in small business lending and its always safe, always fast and always free (for consumers, at least) payments service. However, Schulman gave away little about PayPal’s plans for Asia — the world’s fastest-growing e-commerce marketplace.
When asked by The Edge Singapore, John Kunze, PayPal’s senior vice-president of global consumer products, would only say the company wanted to have a much larger customer base than it had in the region. “We aspire to provide so much value to consumers that we can imagine them using our services daily. When it comes to our international markets, especially in Asia, where we know our functionality is more limited than we’d like it to be, the only way we’re going to be able to do this is if we bring our full functionality and replicate it, so customers around the world can take advantage of [our services].”
It was only a few weeks later, on Sept 30, that PayPal announced that it had secured a payments licence in China, after buying a majority stake in Chinese payments group Guofubao (GoPay), a small online payments company.
PayPal’s acquisition of a 70% stake in the company for an undisclosed sum makes it the first foreign company to enter the booming Chinese payments market. The transaction is expected to close in 4Q2019.
The move pits PayPal against China’s giants in the e-payments space — Alipay and WeChat Pay. Is Schulman ignoring the philosophy of Krav Maga — that the best way to win a fight is not to get into one at all — to get a share of China’s RMB277.39 trillion ($53.6 trillion) mobile transactions pie?
Granted, PayPal seems well-positioned to test the waters in China. With Schulman at the helm since 2014, PayPal’s separation from eBay (where it began its life as a way for eBay users to perform payments) has, on many accounts, been extremely profitable.
Today, PayPal boasts total payments volume of US$172 billion ($237.5 billion), a 26% y-o-y increase, and revenue of US$4.31 billion in 2019. It processed US$578 billion in payments in more than 200 markets and 100 currencies in 2018, and says it has a conversion rate of almost 90% — this means that 90% of online transactions done via PayPal result in the completion of sales. For anyone who has ever added to cart but then dropped the transaction just before checking out, this is significant. PayPal credits its high conversion rate to ease-of-use and a high level of trust in its services. As at end-2018, it had cash of US$7.65 billion, up from nearly US$3 billion the year before.
With PayPal’s entry into China, it remains to be seen whether it will expand into Southeast Asia, where private consumption is expected to double to US$2.3 trillion in 2020, according to market research firm Accenture.
In a recent report by Google, Temasek and Bain & Co titled “e-Conomy of Southeast Asia 2019”, it was estimated that the internet economy in the region would be worth US$300 billion in gross merchandise value by 2025. The report also forecast that e-commerce would hit a new high of US$150 billion by 2025, driven by growth in ride-hailing services and food delivery. This is in contrast to just US$5 billion worth of e-commerce in 2015.
Unsurprisingly, digital payments are set for a meteoric rise. They will grow from US$600 billion in 2019 to more than US$1 trillion by 2025, which means that for every two dollars spent in this region, one will be in cash and the other digitally.
Furthermore, with more than 330 million internet users in Southeast Asia, e-commerce in the region is well on track to become a major industry in the coming years, according to studies.
In fact, it is estimated that 3.8 million new users would come online each month in this region, making Southeast Asia the fastest-growing internet market in the world between 2015 and 2020. A growing young population, too, is in the region’s favour. Rising disposable income and increased smartphone ownership among young people will spur the growth of the internet economy, according to experts.
However, it seems cash is still the preferred payment method for most countries in Southeast Asia, unlike in China. Recent reports found that while the average percentage of people who preferred cash was 57%, this number varied widely in the countries surveyed. In Indonesia and the Philippines, 73% and 75% of respondents respectively stated that they preferred to use cash. In Singapore, the number was lower, at 43%.
Furthermore, PayPal faces stiff competition and an uphill battle in a region dominated by players such as Grab and Gojek. And given that Southeast Asia is a highly fragmented and regulatorily complex region, it means PayPal will have to invest a significant amount to establish itself as the leading payments provider in the region.
Despite the challenges, there is evidence that any e-payments player will thrive in Southeast Asia, especially one as established as PayPal. Surely, this “OG of fintech”, as the millennials would call PayPal, will do its utmost to expand its reach beyond its comfort zone of the US.
Thus, PayPal’s seeming reluctance to enter aggressively into this market, for now, with all the force of its capital strength, solid numbers and liquid cash, may baffle the casual observer. It could, after all, do well in a region that seems to be an e-commerce player’s dream.
