Credit Card and Paypal

On this report, we give attention to all points of the PayPal enterprise. PayPal Fundamentals PayPal is shortly establishing itself as a world cost processor with scale, facilitating almost $60B in Whole Cost Quantity in 2008. It stays the most important participant targeted solely on on-line funds; nevertheless when in comparison with the full quantity of huge international gamers, resembling Visa and MasterCard, PayPal’s quantity stays pretty small: its $60B TPV was simply over 1% of the full quantity of funds processed final 12 months by Visa and MasterCard mixed. Determine 1: PayPal’s Quantity Dwarfed by Incumbents in billions 2,000 1,500 1,757 1,548 969 1,000 500 Zero Visa (Credit score) Visa (Debit) MasterCard (Credit score) Supply: Firm studies, J. P. Morgan estimates. Notice: Elements of PayPal quantity could also be processed utilizing Visa or MasterCard’s community; Visa quantity excludes Visa Europe 406 60 MasterCard (Debit) Pay Pal PayPal is an Established Cost Community and Model – A Uncommon Commodity PayPal is in uncommon firm, efficiently creating itself right into a formidable cost community and model alongside dominant cost manufacturers in Visa, MasterCard, American Categorical and Uncover.Cost networks sit on the prime of the worth chain in funds, accumulating high-margin charges for facilitating funds from individuals in search of entry to a community of trusted retailers and customers. PayPal overcame the basic chicken-and-egg dilemma and now has a important mass of customers in its community, differentiated as a trusted model for facilitating on-line funds with the potential to increase its presence into offline alternatives longer-term.One driver of PayPal’s development is that, in contrast to conventional cost strategies which developed in an offline world and have been overlaid onto eCommerce, PayPal’s platform was constructed with eCommerce in thoughts. As such, PayPal has developed instruments and danger administration measures to handle the distinctive complexities of dealing with card not current funds over the net – one of many quickest development classes in funds. Furthermore, PayPal is elegantly structured to simplify the net of connections required in a standard cost system, making it nicely positioned to penetrate the small enterprise funds market. Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Determine 2: PayPal Simplifies the Cost Course of Conventional cost construction Service provider Cost gateway supplier Service provider financial institution Supply: J. P. Morgan. PayPal cost construction Service provider Shopper Shopper Card issuer processor Card-issuing financial institution Service provider financial institution Shopper financial institution We predict the web market, and sellers specifically, profit from this simplification in a number of methods: • Ease of Use.PayPal provides nearly anybody the capability to simply accept funds, enabling a service provider to function even at an preliminary scale that will in any other case be uneconomical (i. e. , there aren't any minimal necessities for cost quantity to be able to use PayPal. ) Larger degree of belief. The funds system shouldn't be very clear, and never all points have been meant for mass use. A trusted central clearinghouse like PayPal can encourage use of on-line funds by decreasing customers’ security considerations and elevating their willingness to ship cash on-line. •PayPal Is Differentiated past Simply On-line Commerce PayPal is completely different from different cost manufacturers (e. g. MasterCard, Visa) in that it's a vertically built-in cost supplier. In different phrases, PayPal is a single supply supplier of cost companies. By contracting immediately with PayPal Service provider Companies, small retailers can get all of their cost wants, and don't essentially want a separate service provider checking account or cost gateway companies supplier. PayPal is steadily increasing its presence off eBay by selling itself as an built-in cost providing alongside facet different cost manufacturers (e. . MasterCard, Visa), supported by PayPal’s personal service provider companies providing and alliances with cost distributors like CyberSource (cost gateway) and Chase Paymentech (largest service provider acquirer within the U. S. ). PayPal’s Product Choices for On-line Sellers PayPal affords a number of completely different merchandise for cost acceptance, primarily based on the scale and desires of the service provider: • E-mail product. That is the providing used largely by smaller eBay retailers, who obtain funds solely by way of e-mail, with no web site of their very own on which they should combine PayPal. Web site Funds Normal.This product permits retailers to position a PayPal button on their web site, and when a consumer is prepared to take a look at, the consumer hits the button and is taken to the PayPal web site the place the precise checkout happens. • Four Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 • Web site Funds Professional. With an incremental $30 month-to-month charge, the Professional product is healthier built-in right into a vendor’s web site. The product is meant for small- to medium-size sellers, and requires the vendor to be utilizing a appropriate hopping cart vendor (most are appropriate). Categorical Checkout. Supposed for bigger retailers (these already accepting embrace Dell and Barnes & Noble). Categorical Checkout is incremental to the cost acceptance service utilized by a vendor – it provides customers a further checkout choice. When a consumer makes use of Categorical Checkout, s/he logs into PayPal, and PayPal then forwards tackle and different data to the service provider. This enables an current PayPal consumer to bypass coming into private and transport info once more, even when it's the consumer’s first time utilizing the precise service provider. • Robust Progress in Lively UsersBy persevering with so as to add customers throughout a number of platforms, PayPal has been capable of put up robust consumer development in current quarters, even regardless of the slowdown in on-eBay development and low-single-digit consumer development on the eBay web site itself: Determine Three: PayPal Lively Person Progress Robust in Latest Quarters Customers in Tens of millions 150 100 50 26. 7% 23. 7% 20. 7% 19. 6% 18. 6% 19. 2% 17. 7% 16. Three% 16. 1% 16. Zero% 17. Three% 22. 9% 21. Four% 30% 20% 10% 73 70 65 63 60 57 53 55 51 47 49 45 44 Zero Zero% 1Q'06 2Q'06 3Q'06 4Q'06 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08 1Q'09 Pay Pal Activ e Accounts Y/Y Develop th Supply: Firm studies, J.P. Morgan Cost Enterprise Fundamentals For a primer on the funds trade, please see Cost Processing: Funds Market Share Handbook printed on June 5, 2009 by J. P. Morgan's Laptop Companies & IT Consulting analyst, Tien-tsin Huang When a purchaser fingers money to a vendor, the transaction is self-contained. If a credit score (or debit) card is concerned, nevertheless, a number of different events grow to be concerned within the transaction, which we describe under: • Issuer (Cardholder’s Financial institution). Card transactions begin with a card issued by an issuing financial institution (e. g. Financial institution of America, Chase, and many others. ) to a client.By way of economics, the financial institution that issued the patron’s bank card takes the acquisition worth, collects its interchange charge (within the US, ~170 -225 bps relying on the kind of card), and passes the rest to the… Acquirer (Generally the Service provider’s Financial institution). The acquirer supplies service provider companies to the service provider, dealing with all the cardboard and/or digital cost acceptance wants of the service provider. The service provider’s buying financial institution 5 • Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 ccepts the cost, collects a service provider low cost (usually within the 30-50 bps vary within the US), and forwards the stability to the vendor/service provider. Each the Issuer and the Acquirer pay a small (~7-9 bps every) charge to the Cost Community (see subsequent entry). Service provider acquirer capabilities embrace: • • • • • • Join retailers to allow them to simply accept card funds. Allow retailers to authorize card funds by way of the community. Pay all community and related charges for a service provider’s transactions Facilitate clearing and settlement of card funds Present incremental companies, e. g. , sending out statements, and many others. Cost community (e. g.Visa, MasterCard). Because the spine to the funds trade, networks join numerous banks that have to course of bank card funds with retailers and supply authorization, clearing and settlement companies. Networks additionally set guidelines and interchange charges (earned by the issuing financial institution). Cost gateway. Within the offline world, the cost gateway is the equal of a point-of-sale terminal that accepts the cost kind (e. g. credit score, debit card) and interprets it right into a format that may be accepted by the service provider acquirer. Within the on-line world, the gateway usually connects an eCommerce web site with the service provider acquirer.PayPal already capabilities as a Cost Gateway, largely on account of its acquisition of VeriSign’s cost enterprise, which had 144,000 prospects when acquired in 4Q’05. • 6 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Determine Four: Instance of a Credit score Card Cost Processing Cycle Supply: J. P. Morgan. How Does PayPal slot in? Typically, when a PayPal consumer pays with a credit score or debit card, PayPal capabilities because the Service provider (in Fig. Four).PayPal depends upon its service provider acquirer (normally Wells Fargo) to facilitate the transaction. PayPal the costs the service provider its charges, which on common signify a ramification over what the acquirer prices PayPal. As well as, if retailers need, PayPal affords sure service provider buying companies such because the means to authorize legitimate card transactions and facilitating the clearing and settlement of the transaction by the cost community. At this level, we estimate that PayPal’s service provider buying enterprise includes lower than 5% of PayPal’s TPV. 7 Imran Khan (1-212) 622-6693 imran. t. [email protected] om Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 PayPal Income Mannequin Transactional Income PayPal’s enterprise mannequin includes accumulating a proportion of income from every cost made on the system; this proportion has remained within the Three. 75%-Four. Zero% vary since F’05. In F’08, PayPal collected Three. 86% of TPV as income. The next desk summarizes the contributors to take charge: Desk 1: Contributors to PayPal’s Transactional Income Take Fee Sort Cross-border transactions (“CBT”) US sellers, non-CBT Int'l sellers, non-CBT Cost Gateway Web site Funds Professional Supply: J.P. Morgan estimates % of income ~35% ~33% ~25% ~Three-5% ~2-5% Remark PayPal prices as much as 100 bps increased charges for CB transactions; prices a further 250 bps for forex conversion Sliding scale from 1. 9% primarily based on quantity Nation-specific pricing; usually increased charges than US Acquired from Verisign in 4Q'05; restricted development since Month-to-month $30 charge for WPP product Determine 5: Our Estimates of Contributors to PayPal’s Transactional Income Int'l rev enue Pay ment Gatew ay Web site Pay ments Professional Month-to-month Charges Cross-border rev enue US rev enue Supply: J. P. Morgan estimatesMarketing Companies and Different Income A number of objects are counted as part of Advertising and marketing Companies and Different income. These embrace: • Curiosity earned on some buyer balances. PayPal earns income because it receives curiosity on the balances of some non-US account holders. Notice that US buyer balances are held in FDIC-insured accounts or in a cash market account; PayPal doesn't obtain curiosity on these accounts. BillMeLater curiosity and charges. Curiosity and charges earned on current BML shopper balances are categorised as Advertising and marketing Companies and Different income. • Evaluating PayPal Charges to On-line CompetitorsPayPal’s charge construction is much like these of its online-only rivals; each Google Checkout and Checkout by Amazon supply an analogous bundle of charges relying on a service provider’s month-to-month gross sales quantity; Amazon differs in charging a barely completely different charge degree for transactions below $10 in addition to minimal cross-border assist: each purchaser and vendor should have a US-based monetary instrument to make use of the service. Each Google eight Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 nd PayPal cost roughly (in Google’s case, precisely) 1% extra for cross-border transactions. See Desk 2 for a abstract. As a degree of reference, we consider offline charges for accepting playing cards (aka service provider low cost charge) common round 1. 9-2. Zero% within the U. S. In March of 2009, Google introduced that it could now not supply a reduction on cost processing on Google Checkout for Google AdWords advertisers. Desk 2: Charges for PayPal, Google, Amazon Stay Comparable Transaction Sort/Quantity Transactions below $10 As much as $Three,000 / month Between $3K-$10Okay Between $10Okay-$100Okay $100Okay and above Cross-border PayPal Similar as under 2. % of transaction + 30 cents 2. 5% of transaction + 30 cents 2. 2% of transaction + 30 cents 1. 9% of transaction + 30 cents Varies by forex however ~1% further; funds with forex conversion add 2. 5% cost Google Checkout Similar as under 2. 9% of transaction + 30 cents 2. 5% of transaction + 30 cents 2. 2% of transaction + 30 cents 1. 9% of transaction + 30 cents 1% of transaction Checkout by Amazon 5. Zero% of transaction + 5 cents 2. 9% of transaction + 30 cents 2. 5% of transaction + 30 cents 2. 2% of transaction + 30 cents 1. 9% of transaction + 30 cents US solely (vendor and purchaser should have US-based account)Supply: Firm web sites PayPal’s Transaction Prices Set towards the ~Three. 9% income take charge, the enterprise faces two key expense strains that drive its transactional margins: transaction processing price and fraud losses: Determine 6: F’08 Income and Expense Drivers for Combination PayPal Cost Quantity % of Whole Cost Quantity, Aggregated throughout all TPV and Funding Strategies Four% Three% 2% 1% Zero% 100% of PP rev enue 30. 9% of rev enue 1. 19% 7. Four% of rev enue Zero. 28% 61. eight% of rev enue Three. 86% 2. 67% 2. 38% 2. 38% Rev enue Take Fee - Processing Ex pense - Transaction Losses = Transaction ProfitSource: Firm studies, J. P. Morgan estimates Processing expense is pushed by funding combine PayPal’s profitability is pushed largely by the combination of sources from which prospects draw funds to be able to pay on PayPal. Specifically, when prospects pay utilizing a bank card, PayPal incurs a considerably increased price of funds than when prospects fund a purchase order utilizing their PayPal stability or an ACH switch. 9 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009Particularly, PayPal, much like any service provider that accepts bank cards, is charged a wide range of charges (the most important of those is interchange, which is the charge charged by the cardholder’s financial institution). For PayPal, we consider these charges quantity to ~220-250 bps of funds funded with a bank card, with the vary representing various kinds of playing cards and completely different geographies (interchange charges are usually increased within the US than throughout elements of the world, together with Europe and Australia). Charges are barely decrease, however nonetheless within the 150200 bps vary, if customers select a debit card slightly than a bank card.By comparability, a cost funded from cash already in a consumer’s PayPal account carries nearly no price to PayPal. A cost funded although ACH carries a flat processing charge, normally lower than 25c; this represents lower than 40 bps on a median PayPal transaction of $62. Determine 7: PayPal’s Funding Combine Service provider PayPal collects take charge (~1. 9% to as a lot as 5%), primarily based on service provider quantity and site (considerably increased if currencies transformed) PayPal If funded by way of If funded from consumer’s PayPal stability, price to PayPal is negligible Bank card, price to PayPal is ~220-250 bps; PayPal then capabilities as Service provider in Fig. above. If funded by way of If funded by way of ACH, price to PayPal is ~$Zero. 10-$Zero. 25 Debit card, price to PayPal is ~150-200 bps PayPal’s price of funds turns into extra favorable Supply: J. P. Morgan 10 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Drivers of Funding Combine PayPal permits customers to pay with each a credit score/debit card and ACH; nevertheless, PayPal defaults to utilizing an current stability or ACH, and customers should actively choose to pay by way of a credit score/debit card each time they use the service.The corporate has famous that prospects usually shift towards a extra favorable funding combine over time. Moreover, as PayPal provides new service provider websites, customers of these websites start with a heavier mixture of bank card use. The combination for a service provider web site begins to resemble that for PayPal total as customers’ familiarity with PayPal grows – usually, 12-18 months. Moreover, we consider BillMeLater, which is funded solely by checks and ACH, will help enhance funding combine for PayPal down the street. Different Margin Drivers PayPal margins have traditionally been within the 20% vary, excluding company bills.We consider a number of components drive the variance between the 60%+ transaction margins and the high-teens total profitability. Major amongst these are: • Customer support prices. Name facilities in addition to a wide range of staff wanted to handle any issues that come up within the funds course of. We don't anticipate these bills to point out significant economies of scale because the enterprise continues to develop. Gross sales and Advertising and marketing. As PayPal has invested in rising its Service provider Companies enterprise, we consider that phase’s development has been fueled by increased Gross sales spend. When the enterprise matures, we consider there must be some scale economies in Gross sales. BillMeLater Fundamentals PayPal acquired BillMeLater in 4Q’08. The service permits customers to request transactional credit score, slightly than a revolving credit score line as is the case with a bank card. BML affords customers fast credit score decisioning on the idea of much less detailed info (date of delivery and final 4 digits of a Social Safety Quantity) than vital for extra conventional financing. Nearly all of BML’s income is derived from client curiosity funds and charges, as proven under: 11 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Determine eight: BillMeLater Economics as of Time of Acquisition % of TPV 12% 10% eight% 6% Four% 2% Zero% 2. Four% Service provider Charges + 6. 5% Three. 6% 2. 9% Three. Four% 2. 1% Four. 1% Cust. Curiosity Cust. Charges - Acquisition ; Revenue + Credit score ; Value of Funds = Transaction Revenue Serv icing - Fraud Loss - Supply: Firm presentation, J. P. Morgan estimates Notice: Value of funds contains an implied price of financing client receivables; transaction expense for processing funds is minimal because of funds being sourced primarily by way of ACHAt this level, BillMeLater’s presence on the eBay web site itself stays minimal; the corporate has positioned a 3Q’09 goal for higher integration of the enterprise with PayPal, and we consider that, after fuller integration, eBay might select to drive increased BML penetration on the Marketplaces enterprise by, e. g. , promotional or interest-free financing. Full integration of BML into all points of the PayPal answer is anticipated in 1Q’10. Cost-offs BillMeLater studies its web charge-offs as a proportion of the typical receivables stability over the course of the quarter; in Q1’09 web charge-offs rose to eight. 95%, in comparison with eight. 5% through the a part of the fourth quarter after the acquisition. Because of the transactional nature of the enterprise, we consider BML has the capability to proceed maintaining mortgage losses at an inexpensive degree; moreover, the corporate has expressed that it plans to give attention to being extra conservative with affords of credit score within the close to time period, even on the expense of TPV development. However, we anticipate charge-offs to proceed rising considerably. Traditionally, bank card charge-offs have been correlated with the unemployment charge, as seen under. 12 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Determine 9: Traditionally, Credit score Card Cost-offs Rise when Unemployment Rises 10% eight% 6% Four% 2% Zero% Q1'95 Q1'96 Q1'97 Q1'98 Q1'99 Q1'00 Q1'01 Q1'02 Q1'03 Q1'04 Q1'05 Q1'06 Q1'07 Q1'08 Q1'09 Unemploy ment Fee Supply: Federal Reserve, J. P. Morgan Credit score Card Internet Cost-off Ratio Whereas we consider charge-offs at BML will be managed higher, because of the transactional nature of BML’s publicity, we expect rising unemployment is unlikely to depart the enterprise untouched. Thus, if unemployment retains going up, we might anticipate continued upward drift in charge-offs. PayPal’s Progress Technique PayPal’s unique development engine was the wedding between PayPal and eBay, and the power to drive increased penetration on the eBay web site. We consider the low-hanging fruit on this regard has largely been gathered, however room for development nonetheless exists alongside a number of areas of alternative. 1. Progress Alternatives for PayPal on eBay Continued Geographic Enlargement Can Drive Progress One of many greatest components driving increased PayPal penetration on eBay has been geographic growth in territories the place the enterprise is much less mature than within the US.PayPal has had roughly 5 years of working historical past in a lot of continental Europe, in comparison with almost a decade in america. Desk Three: PayPal Penetration as % of Addressable TPV continues to Develop % of addressable TPV Nation US Canada United Kingdom Australia France Spain Italy Germany 2004 64% 60% 49% 7% eight% 5% 7% 2% 2008 80% 79% 74% 47% 43% 37% 36% 15% 2011(E) 84% 82% 81% 72% 61% 57% 56% 39% Remark May see add’l enhance from BML Penetration already almost 60%; see under By way of on-line exercise, a lot of continental Europe is following within the footsteps of the UK, however a number of years behind.Penetration almost doubled in F’08 alone Supply: eBay Presentation, J. P. Morgan estimates We consider the 2008 expertise in Australia, the place PayPal penetration went from below 40% to just about 60% over the course of a 12 months, is reflective of eBay’s capability to develop penetration by way of rule modifications: the corporate rolled out guidelines mandating most sellers to supply PayPal as an choice in 2008, and penetration grew by greater than half over the course of the 12 months. 13 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009Determine 10: Australia Demonstrates PayPal’s Capability to Shortly Increase Penetration 60% 50% 40% 30% Q1'08 Q2'08 Q3'08 This fall'08 Supply: Firm presentation, J. P. Morgan estimates Moreover, a number of continental European nations have seen development roughly in parallel because the rollout of PayPal in a lot of continental Europe in summer season 2004. We See Restricted Alternative for Home on-eBay Progress Having already achieved notable ranges of penetration on established websites, we don’t assume PayPal will see vital further will increase in on-eBay penetration from present ranges, particularly within the US.Nonetheless, as eBay will increase the quantity of purchaser protections and begins to supply credit score by BML, we expect the share of GMV that's addressable by PayPal can rise. Determine 11: PayPal quantity as a % of Addressable GMV, 2008 GMV in $B 30 20 $29B $24B 10 Zero 79% 41% US Supply: Firm studies, J. P. Morgan Pay Pal Non-Pay Pal Worldwide One further method to enhance penetration on the location is for the corporate to supply elevated incentives for sellers and consumers to decide on PayPal because the cost technique.These incentives can take the type of carrots (coupons, increased ranges of safety) or sticks (e. g. , guidelines making different types of cost tougher to simply accept). PayPal has regularly elevated purchaser protections on eBay for makes use of who pay with PayPal, with the degrees rising from $1,000 to $2,000 in January 2007 and going up once more to supply limitless protection in June 2008. We predict providing increased ranges of purchaser safety – however solely when paying with PayPal – stays a helpful lever for rising the penetration of PayPal on the eBay web site. 14Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 PayPal on eBay: Challenges Weak Marketplaces Progress Will Negatively Affect TPV Progress Consistent with current declines in GMV, the share of PayPal’s TPV that's pushed by on-eBay exercise has been steadily declining in current quarters, with 3Q’08 having represented the primary quarter in PayPal’s historical past that noticed a majority of TPV come from the Service provider Companies a part of the Funds enterprise.Determine 12: On-eBay TPV Continues to Decline as a Proportion of Whole 70% 60% 50% 40% 30% 20% 10% Zero% 62% 58% 56% 56% 54% 51% 49% 49% 46% Q1'07 Q2'07 Q3'07 This fall'07 Q1'08 Q2'08 Q3'08 This fall'08 Q1'09 Proportion of TPV deriv ed on eBay Supply: Firm studies, J. P. Morgan estimates As eBay has struggled to enhance GMV development and confronted headwinds from FX, the on-eBay portion of TPV has seen nominal development flip unfavorable in current quarters, as proven within the chart under; adjusted for FX the final two quarters have seen on-eBay TPV develop 5% and three%, respectively.Determine 13: On-eBay TPV Progress Continues to Lag Off-eBay TPV Y/Y change 80% 60% 40% 20% Zero% -20% 1Q'07 50% 19% 57% 62% 66% 61% 57% 49% 35% 26% -7% 18% 18% 17% 17% 19% 12% -Three% 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08 1Q'09 On-eBay TPV, Y/Y Supply: Firm studies, J. P. Morgan estimates Off-eBay TPV, Y/Y We're at present modeling GMV to shrink by 14% in F’09, returning to slight development in F’10 with a 1% rise. Even when trying solely at non-Automobiles GMV, our mannequin requires an 11% decline this 12 months, adopted by a 1% development within the subsequent 12 months.Whereas we expect eBay has taken many appropriate steps in enhancing the competitiveness of its Marketplaces phase, we stay involved that the aggressive atmosphere 15 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 will make it troublesome for eBay to reaccelerate development and reclaim market share in future years. Moreover, we consider the shift to a frictionless eCommerce mannequin is driving consumers to decide on fixed-price codecs over an public sale strategy.As this has the impact of transferring from an area eBay controls into a way more aggressive, multi-channel atmosphere, we expect it creates a further headwind to development. Cultural Headwinds in Some Geographies Along with the above, two particular geographic areas have offered challenges for rising PayPal penetration: • In Germany (and Austria, mixed, estimated at ~15% of GMV), the vast majority of on-line funds are made utilizing financial institution transfers, and PayPal has had restricted success displacing this method. Nonetheless, as Desk Three (above) signifies, PayPal’s penetration in Germany has been rising.In Korea (we estimate ~5% of GMV), the place eBay lately introduced plans to accumulate GMarket and mix it with its present public sale. co. kr web site, the predominant mode of funds is utilizing escrow accounts. As in Germany, we consider penetration can rise over time as customers grow to be extra snug with PayPal. • Given the challenges in these two areas, which comprise roughly one fifth of eBay’s GMV, we consider it could possibly be troublesome for eBay to go considerably previous the ~70% penetration threshold within the subsequent 5 years. Backside Line: We see ~$36B in F’11 on-eBay TPVBased on our present mannequin of F’10 GMV (excluding Automobiles) of $43B, and an assumption of accelerating GMV development to 10% Y/Y in F’11, we expect PayPal’s oneBay TPV might hit $36B in F’11 (implying a 6% Three-year CAGR), with a spread of $33B-$40B relying on kind of favorable assumptions. Determine 14: On present traits, on-eBay portion of PayPal would contribute ~$36B in F’11 TPV On-eBay TPV, $ in billions 40 35 30 25 2008 2009E Optimistic Present Mannequin 2010E Pessimistic 2011E Supply: Firm studies, J. P. Morgan estimates 16 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 2. Progress Alternatives for PayPal off eBay PayPal’s development by rising penetration of off-eBay on-line commerce has been a key part of the enterprise’s development lately. We predict the corporate retains vital runway so as to add prospects. Traditionally, Give attention to Smaller Sellers As a result of its roots as an answer for funds on the eBay platform, PayPal has usually seen a better penetration amongst smaller and mid-size sellers.That is partly because of the truth that PayPal has no fastened prices to a service provider, whereas accepting bank cards carries fastened prices. For a vendor producing $100Okay in annual income, a $60$70/month price for accepting bank cards quantities to just about 1% of gross sales. Desk Four: Economics of PayPal compelling for SMB market PayPal Setup charges Month-to-month Service Price Month-to-month Gateway Price Transaction charge Month-to-month Minimums $Zero $Zero $Zero 1. 9%-2. 9% + $Zero. 30 None Service provider Processor $Zero-$300 $20-$50 $10-$30 2. Zero%-Three. Zero% + $Zero. 10-$Zero. 50/transaction $Zero-$30Supply: Firm studies, processor web sites and J. P. Morgan estimates Determine 15: Cost Options P a y m e nt s o lu tion s • • • D is a d va n ta ge s re la tiv e to P ay P al Purchaser S eller C an n ot b e tra cked L im ite d p rote ction ag a in st lo ss/th eft R estricte d to virtu a l w orld • • L im ite d p ro te ction a g a in st lo ss/th eft R e stricte d to virtu a l w orld • • S lo w se ttle m en t/fu lfillm e n t tim e C ost/tim e of w ritin g che cks • • S lo w se ttle m en t tim e F ra ud riskC pink it C ard Joh n Q Pu b lic 5012 345 6 7890 1234 • • • • • • S eu rity unce rta in ty of sm a ll b usin e ss web site C re d it lim its In te re st co sts • • • • • H ig h tra n sa ctio n charge s – p ro hib itive fo r sm a ll m erch a n ts R e qu ire s m e rcha n t b ank a ccoun t F ra ud danger (card no t p rese n t) P ro ce ssin g tim e /co st S e tup co sts W ire (e . g. , W e ste rn U n io n ) F ee s U su a lly re qu ire s p h ysica l go to to ve n do r L im ite d a cce p ta n ce Supply: J. P. MorganPenetration amongst Massive Companies Small, however Rising Whereas smaller sellers have been PayPal’s bread-and-butter within the early days, the higher a part of on-line commerce now happens at bigger sellers. That is very true when one contains on-line journey, a class PayPal has pursued aggressively: whereas eCommerce has a reasonably lengthy tail of web sites, the nice majority of on-line journey is transacted on the giant suppliers and OTAs. 17 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009Desk 5: Penetration at prime 50 on-line retailers, by geography As of March 2009 Nation USA UK Germany France Australia Penetration 42% 28% 16% 36% 60% Supply: Firm presentation and J. P. Morgan estimates Web Retailer Knowledge: PayPal’s Penetration Larger with Smaller Retailers Primarily based on information from Web Retailer, we estimate that 26% of the full gross sales quantity on the highest 50 on-line retailers in F’08 got here on websites that settle for PayPal. In step with PayPal’s previous give attention to smaller sellers, PayPal penetration amongst websites exterior the highest 50 is 39%, almost 1. x the penetration among the many prime 50. Determine 16: Smaller Retailers Extra Prone to Settle for PayPal % of web retailers accepting PayPal, weighted by 2008 on-line gross sales Web Retailer High 50 I. R. High 50, ex cluding Amazon Remainder of I. R. High 500 (##51-500) Zero% Supply: Web Retailer, J. P. Morgan estimates 26% 33% 39% 10% 20% 30% 40% Notice: Web Retailer doesn't embrace journey websites in its rankings The next desk summarizes PayPal’s presence (together with beforehand current BillMeLater relationships) on the highest 50 retail websites as ranked by Web Retailer. eight Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Desk 6: 26% of Income at prime 50 US eCommerce Websites is Addressable by PayPal 2008 Gross sales in $ thousands and thousands Website Amazon. com Inc. Staples Inc. Dell Inc. Workplace Depot Inc. Apple Inc. OfficeMax Inc. Sears Holdings Corp. CDW Corp. Newegg Inc. Finest Purchase Co. QVC Inc. SonyStyle. com Walmart. com Costco Wholesale Corp. J. C. Penney Co. Inc. HP Residence & Residence Workplace Retailer Circuit Metropolis Shops Inc. Netflix Inc. Victoria's Secret Goal Corp. Systemax Inc. L. L. Bean Inc. Macy’s Inc. Williams-Sonoma Inc. Hole Inc. Direct HSN Inc. Zappos. com Inc. Amway World Overstock. com Inc. Avon Merchandise Inc. 1-800-Flowers. com Inc. Nordstrom Inc. Purchase. com Inc. Redcats USA The Neiman Marcus Group Inc. Musician's Buddy Inc. Blockbuster Inc. PC Connection Inc. Toys 'R' Us Inc. Cabela's Inc. BarnesandNoble. com Inc. Scholastic Inc. The Residence Depot Inc. VistaPrint Ltd. Saks Direct Nutrisystem Inc. Peapod LLC drugstore. com Inc. Nike Inc. Kohl's Corp.Verticals A number of Workplace Provides Computer systems Workplace Provides Computer systems, Digital Gross sales Workplace Provides Division Retailer Computer systems Computer systems Electronics A number of Electronics A number of A number of Division Retailer Electronics Electronics Video Rental Attire A number of Electronics Attire Division Retailer Residence Attire A number of Attire A number of A number of Well being & Magnificence Flowers Attire A number of A number of Division Retailer Musical Gear Video Rental Computer systems Toys Sporting Items Media Media Residence Workplace Provides Division Retailer Meals Groceries Well being & Magnificence Attire Division Retailer 2008 On-line Gross sales $19,170 $7,700 $Four,830 $Four,800 $Three,642 $Three,084 $2,693 $2,600 $2,100 $2,Zero15 $1,993 $1,828 $1,740 $1,700 $1,500 $1,497 $1,414 $1,365 $1,333 $1,209 $1,Zero72 $1,044 $1,Zero40 $1,Zero33 $1,Zero30 $1,Zero16 $1,Zero14 $904 $834 $754 $750 $686 $657 $617 $565 $531 $526 $516 $500 $497 $466 $455 $437 $401 $381 $376 $373 $367 $366 $356 PayPal? No No Sure No No Sure No No Sure No No Sure Sure No No Sure No No No No Sure No No No No No Sure Sure Sure Sure Sure No Sure No No Sure No No Sure No Sure No No No No No No Sure No No BML?No No No No Sure Sure No Sure Sure No Sure No Sure No No No No No No No Sure No No No No No Sure Sure Sure No Sure No Sure Sure No Sure No No Sure Sure No Sure No No No Sure No Sure No No Remark Ended BML relationship after PayPal Acquisition May leverage BML relationship May leverage BML relationship Website now owned by Systemax, a PayPal buyer May leverage BML relationship May leverage BML relationship May leverage BML relationship May leverage BML relationship Supply: Web Retailer, J. P. Morgan estimates 19 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Off-eBay market share of Four. % in F’08 We estimate that PayPal’s $29. 5B Service provider Companies TPV in F’08 (excluding BML) represented Four. 2% of the mixed quantity of eCommerce and Journey spend in that 12 months. Our present estimates name for that quantity to rise to just about Four. 9% of the full in F’09. Desk 7: J. P. Morgan eCommerce and Journey Market estimates $ in billions Class Off-eBay eCommerce Journey Whole off-eBay quantity PayPal off-eBay TPV PayPal penetration F’07 311. Four 271. 9 583. Three 19. 9 Three. Four% F’08 379. Zero 329. 2 708. 2 29. 5 Four. 2% F’09E 412. Zero 342. 2 754. 2 37. Zero Four. 9% F’10E 490. eight 405. 1 895. 9 50. 2 5. 6% F’11E 561. Four 458. Zero 1019. Three 64. 2 6. Three% Supply: Firm studies and J. P.Morgan estimates We estimate that mixed international on-line spend on eCommerce and Journey will exceed $1 trillion in F’11. By our estimate, PayPal’s Service provider companies would want to entry over 6. Zero% of this quantity to be able to hit the low finish of the goal $4B-$5B PayPal income vary indicated by the corporate. Three. Progress by BillMeLater We see a number of key results on PayPal of the 4Q’08 acquisition of BillMeLater. Within the close to time period, we expect the addition might harm profitability, whereas longer-term, we consider it might grow to be a contributor to PayPal development each on- and off-eBay. • Minimal near-term TPV affect. BML accounted for 1. 2% of whole 1Q’09 TPV.As such, we expect it is very important observe that the present affect of BML on PayPal outcomes is prone to be considerably small. Close to-term development probably sluggish. The corporate has acknowledged that it intends to be very conservative in its strategy to the tradeoff between rising BML quantity and sustaining wholesome credit score metrics. Given the present atmosphere, we consider this may considerably dampen development in BML TPV by a minimum of the tip of F’09. Integration, portfolio losses to affect earnings. PayPal’s phase margin within the final two quarters was 500 bps decrease than in the identical two quarters a 12 months in the past. The corporate has attributed this decline to the affect of integrating BML in addition to charge-offs associated to the unit’s mortgage portfolio.Medium-term, synergies grow to be potential. As soon as client credit score regains a measure of well being, we expect the corporate will start to make use of BML as a further software to develop enterprise, e. g. , by providing financing to incentivize customers to pay with PayPal each on and off eBay. Goal is comfort consumers, not the underbanked. We consider eBay sees BML as a further characteristic (or comfort) to draw higher-quality prospects, slightly than as a software to broaden its attain amongst prospects who don't in any other case have entry to credit score. This strategy seems in step with the tradeoff famous above of slower development in alternate for higher credit score metrics. • • • • 20Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 • Auto financing unlikely to be precedence. As famous above, Automobiles offered on eBay have been largely past PayPal’s attain so far. We predict eBay sees BML’s core experience in transactional credit score for smaller quantities than concerned in a automobile buy. A major growth of the enterprise to incorporate auto financing appears unlikely within the close to to medium time period. Affect on margins short-term. eBay expects phase margins to revert to historic traits as BML is integrated into PayPal extra fully (e. g. the corporate expects BML to be built-in into the PayPal pockets by 3Q; moreover gross sales groups for BML and for Service provider Companies are being merged to present purchasers a single contact level). • BillMeLater Can Enhance Funding Combine We predict the affect of BillMeLater in the long run will likely be felt most strongly on PayPal’s funding combine: BML doesn't settle for bank cards, and as such faces a decrease transaction funding price than the PayPal enterprise as an entire. As such, any portion of TPV that shifts from the historic mixture of funding sources to BML will assist decrease PayPal’s price of funds. Assuming, conservatively, that PayPal manages the enterprise to have an analogous take to the remainder of PayPal, we estimate that every 1% shift of TPV onto BillMeLater would drive ~2 bps enchancment in funding price.Thus, if BML have been to develop to Four% penetration of our mid-point F’11 situation of $100B in TPV, it could drive ~eight bps enchancment in funding price: an incremental $80M contribution to the underside line, or 5c of EPS. Desk eight: Sensitivity Evaluation: EPS Increase from Decrease Transaction Value as BML Penetration Rises TPV in $B, BML as a % of TPV, EPS affect in $ TPV BML % 87. 1 100. 5 113. eight Supply: J. P. Morgan estimates 1% $Zero. 01 $Zero. 01 $Zero. 01 2% $Zero. 02 $Zero. 02 $Zero. 03 Three% $Zero. 03 $Zero. 04 $Zero. 04 Four% $Zero. 04 $Zero. 05 $Zero. 05 5% $Zero. 05 $Zero. 06 $Zero. 07 Credit score Playing cards’ Ache May Be PayPal’s Acquire Lately, the Home and Senate handed payments limiting sure practices within the bank card trade. We consider that such steps might have a number of factors of affect on PayPal. Crucially, if these rule modifications make bank card issuers much less beneficiant towards customers (e. g. , decrease profitability drives issuers to decrease the degrees of rewards for bank card use), PayPal may gain advantage from funding combine enchancment, because the incentives for patrons to fund their accounts with bank cards, vs. debit or ACH, could be decreased. Additional, we consider that, ought to bank card issuers attempt to recapture profitability with much less consumer-friendly guidelines in addition to extra frequent charges, the standard of the consumer expertise for bank cards will erode, making customers incrementally extra probably to make use of PayPal. 21 Imran Khan (1-212) 622-6693 imran. t. [email protected] om Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Four. Progress Alternative: Increasing Service provider Buying Enterprise We consider PayPal at present has two strategic development alternatives going ahead. The corporate can drive higher adoption of the PayPal answer by persevering with to ascertain PayPal as a model for on-line cost, alongside incumbent gamers resembling Visa and MasterCard. Alternatively, PayPal can try to enhance its cost economics by turning into a scale service provider acquirer. This might permit PayPal to seize the ~30 bps on card transactions that we estimate it at present provides as much as its acquirer.Lastly, PayPal might try and skate alongside the knife-edge between the 2 above methods, sustaining relationships with giant acquirers resembling Chase Paymentech whereas on the identical time functioning as an acquirer for its smaller shopper base. PayPal as a Model Chase Paymentech, the most important service provider acquirer within the U. S. and the most important processor of e-Commerce transactions, affords PayPal as an built-in cost choice alongside well-known names like Visa and MasterCard. As such, Chase Paymentech purchasers have the choice to promote acceptance of PayPal as a cost kind. In keeping with Chase Paymentech, purchasers that settle for PayPal (along with bank cards) generally see a rise in gross sales. We view this as an necessary indication that PayPal has potential to be a robust model off eBay.We consider PayPal’s current acknowledged give attention to bigger retailers suggests that is the extra probably strategic course for the corporate, as PayPal might not wish to jeopardize its standing as a accomplice to the big acquirers, which make it simpler for enterprise-scale companies to incorporate PayPal as one among a number of cost decisions. Can PayPal Turn into a Scale Service provider Acquirer? In our view, PayPal additionally has the potential to grow to be a scale service provider acquirer, which might improve its off-eBay presence, particularly amongst smaller and mid-size retailers. As a service provider acquirer, PayPal would deal with all the card processing wants of a service provider, together with immediately processing different manufacturers like Visa and MasterCard.We consider PayPal can supply very aggressive charges to small retailers (who typically pay heavy miscellaneous charges to acquirers), given its scale, permitting it to deepen relationships with retailers and doubtlessly deal with offline transactions as nicely. Smaller retailers (particularly the ~87% of US retailers with annual card acceptances below $100Okay) are likely to pay a a lot increased unfold to their acquirer. Whereas such retailers account for ~10% of bank card quantity, we consider they signify as a lot as $2. 5B in service provider acquirer income: greater than 1/Three of the full income within the US service provider acquirer enterprise. We predict PayPal’s historic energy amongst smaller sellers will be a bonus in accessing this market. Chase Paymentech affords PayPal as an built-in cost choice for its purchasers.Chase Paymentech was the most important service provider acquirer within the U. S. in 2008 with 22. 5% market share 22 Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Desk 9: High Ten US Service provider Acquirers, 2008 $ in billions Service provider Acquirer Chase Paymentech First Knowledge BofA Service provider Svcs Elavon Fifth Third Processing Options World Funds Wells Fargo Service provider Companies Heartland Cost Methods First Nationwide Service provider Options RBS WorldPay Supply: The Nilson Report. V/MA quantity $567 $293 $283 $181 $165 $93 $91 $75 $51 $48 Market share 22. % 16. 9% 11. 2% 7. 2% 6. 5% Three. 7% Three. 6% Three. Zero% 2. Zero% 1. 9% As famous above, PayPal at present companions with Wells Fargo in the case of dealing with non-PayPal branded transactions. One concern a couple of PayPal entry into the acquirer market could be whether or not it might efficiently preserve its relationships with the opposite acquirers who at present supply PayPal as an choice, and who would come to view PayPal as a extra direct competitor. How A lot is PayPal Price? Combining the outlook outlined above, we consider PayPal TPV will attain $100. 5B in F’11; although considerably extra pessimistic or optimistic projections for the unit’s development yield a spread of $87B-$114B.On the midpoint, our estimate is for a 19% Three-year CAGR in Whole Cost Quantity. Determine 17: On present traits, TPV on tempo for simply over $100B in F’11 Whole PayPal TPV, $ in billions 125 100 75 50 2008 2009E Optimistic New Mannequin 2010E Pessimistic 2011E Supply: Firm studies, J. P. Morgan estimates Assuming the PayPal take charge stays just under Three. 9% (and assuming wholesome development in PayPal Advertising and marketing Companies and Different income in F’11), our TPV estimate would lead to $Four. 1B in PayPal income. On the profitability facet, we consider PayPal is prone to see phase margins shrink to 17. 2% for F’09 because of the persevering with integration of BML; by comparability, phase 23 Imran Khan (1-212) 622-6693 imran. t. [email protected] omTien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 working margin as reported by the corporate was 20. Zero% in F’08. We predict PayPal phase margins can broaden again to above 18% by F’11. Determine 18: Section earnings might attain $785M in F’11 PayPal phase working earnings, $ in thousands and thousands 1000 800 600 400 2008 2009E Optimistic New Mannequin 2010E Pessimistic 2011E Supply: Firm studies, J. P. Morgan estimates Primarily based on our situations for PayPal F’11 outcomes, we consider the unit is prone to obtain roughly $450M in Internet earnings. At a 20x a number of, this may yield a $9B valuation. Desk 10: State of affairs Evaluation to Get to a PayPal Worth in billions besides the place indicated On-eBay TPV Off-eBay TPV Whole TPV Income Section Margin [Unallocated Corporate Costs] Professional Forma Working Revenue ($M) Tax Fee Internet Revenue F'11 Earnings A number of PayPal Worth Supply: Firm studies, J. P. Morgan estimates Worse Case 33. Zero 54. 2 87. 1 Three. 57 17. 5% Four% 482 25% 361 16 5. eight Common Case 36. Three 64. 2 100. 5 Four. 09 18. eight% Four% 603 25% 452 20 9. Zero Higher Case 39. 6 74. Three 113. eight Four. 61 20. Zero% Four% 737 25% 553 24 13. Three Comparative Valuation of PayPal Unit We consider it's instructive to have a look at a number of comparables in the case of valuing PayPal. Particularly, Visa and MasterCard present cost networks, whereas World 24Imran Khan (1-212) 622-6693 imran. t. [email protected] com Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin. [email protected] com North America Fairness Analysis 26 June 2009 Funds is a pure-play service provider acquirer, functioning in a lot the identical approach as PayPal does by offering an on-ramp for retailers into the cost system. Desk 11: Comparative Valuation for PayPal $ in billions PayPal $67B 11% 1% $2. 70B 13% 17. 2% Some credit score danger because of BML Visa $2,702B -1% 60% $6. 94B 6% 52. 9% None 20. eight 17. 1 15. Four MasterCard $1,759B -9% 34% $Four. 97B Zero% 43. 2% None 15. 7 13. Four 11. 7 World Funds N/A ($93B in F’08) N/A Four% $1. 59B 10% 19. 2% None 18. Four 15. eight 12. 5 CyberSource N/A N/A
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