PayPal will make money on cryptocurrencies

PayPalis the most popular online payment system in the world. The company follows small players in 2021launches the ability to trade cryptocurrencies in the US, which could significantly increase the company's revenues.

In the article we will see:

like PayPalit implements;

what makes PayPal differentfrom fintech competitors;

how much PayPalwill earn.

PayPal enters the cryptocurrency market

Many central banks of various countries have alreadyhave repeatedly spoken out regarding the recognition of the legality of crypto-transactions. Some note that most of the traffic of cryptocurrencies is the shadow economy, and they should be banned altogether. Other countries, on the contrary, see a potential goldmine and are eager to begin regulating cryptocurrencies.

This attitude of the authorities leads to the fact that more and more sites are starting to work with cryptocurrencies, and PayPal is no exception.

Initially, PayPal decided to launch a system for storing, selling and buying major cryptocurrencies - Bitcoin, Ethereum, Bitcoin Cash and Litecoin. Essentially, PayPal has decided to become the new crypto broker.

PayPal then announced that US residents could notonly to make trades, but also to pay with cryptocurrency in more than 26 million stores. And from mid-2021, the service plans to launch such operations in international markets and expand the list of digital assets using the Venmo service.

But the most important market for PayPal is the United States.

Technical implementation of crypto trading

PayPal is not creating its own crypto trading service, but is partnering with Paxos, a regulated financial institution that already partners with Revolut in the US.

Paxos will supply PayPal with market prices forcryptoassets. The exchange rate is approximately 0.5%, but it can change depending on market conditions. Also, PayPal will not disclose the price spread on every transaction.

Payments in brick-and-mortar stores will be based on an instant crypto-to-dollar conversion, taking into account the above spread.

Make America Great Again!

Many cryptocurrency exchanges and exchangers prohibited access totheir platforms to US clients due to the tight American regulation of money laundering. In this context, the story of Binance is indicative - the top 1 crypto exchanger with an average daily turnover of $ 11 billion.

It all started with the fact that the US Department of Justiceand the Commodity Futures Trading Commission recently accused BitMEX and its founders of violating Know Your Customer (KYC) rules and anti-money laundering, among other things. In light of this incident, BitMEX boosted its KYC (Know Your Customer) program by requiring all customers to undergo fast track verification.

After that, Binance sent a message to its customers, whose IP address was most often located in the United States:

At the same time, the Financial Anti-Laundering GroupMoney (FATF) released a report on how Binance changed the locations of its operations to avoid US regulation. Forbes made a report in the same style.

There is only one conclusion from this story - crypto brokers are experiencing problems with American investors, and with any tightening of regulation in the United States, they block such clients.

All this opens up opportunities for companies that have the right to legally work with investors in the United States.

Fintech won't interfere with PayPal

As of Q3 2020, PayPal has 361 million active customers. Of these, 44% are US citizens or residents, that is, 159 million people.

The early popular fintech company Square has already given access to bitcoin to its customers through the Cash App.

Square in Q3 2020 served a total of$1.6 billion, and in Q2 - $0.85 billion - and that's just in Bitcoin. And this despite the fact that Square has 30 million active users in the US, which is 5 times lower than PayPal:

At the same time, Square, even due to the low base effect and access to bitcoins, has not taken a share from PayPal since 2018. Companies are growing at the same rate, which speaks only in favor of PayPal.

PayPal is more profitable than Square

PayPal has quite high fees for cryptocurrency transactions:

Square, with a volume of $ 1.6 billion in Bitcoin, earned about $ 32 million, which corresponds to a ~ 2% commission level.

Based on the average PayPal transaction$ 57, you can expect that the average commission will just be close to 2%. However, PayPal gives the right to pay customers in 26 million stores using cryptocurrency. In addition, PayPal gives access to other popular cryptocurrencies:

PayPal will increase EBITDA by 27% due to cryptocurrencies

Given the conservative premise that PayPal's turnover per client will be the same as Square's, then in 2021 the annual turnover from Bitcoin transactions alone will be $ 34 billion.

With access to other top 10 cryptocurrencies, PayPal could receive $ 63.7 billion in transactions in 2021, and that's not including access to the international market from mid-2021.

For comparison, in 2019, approximately $712 billion worth of transactions were made through PayPal, meaning cryptocurrency transactions would account for 9% of this value.

With an average PayPal commission of 2%, $ 63.7 billion would have generated an additional $ 1.27 billion in operating profit, representing 27% of the company's EBITDA over the past 12 months.

PayPal May Become Major US Cryptocurrency Player

Thanks to its large current customer base, PayPal has additional monetization opportunities through the introduction of new services:

First, the difficulties of US investors with major crypto brokers will create an influx of these PayPal users.

Secondly, PayPal allows you to pay in traditional stores using cryptocurrencies, which is not allowed by the main competitor - Cash App from Square.

Thirdly, the new service can attract additional customers to PayPal who have not used the service before, which will also increase the income from the company's core activities.

The article was written in collaboration with analyst Dmitry Novichkov