PayPal Dumps 4.5 Million Users – Copies eBay Strategy

Something strange happened the other day, PayPal’s management sounded like eBay’s management trying to explain away active account losses.

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So what happened?

After PayPal announced its fourth-quarter and full-year 2021 earnings reports, the stock cratered and became one of the biggest big-name losers on the stock market for the week.

While the earnings report was positive, the company had to admit that many new users may not be sticking around as much as expected and that it was downgrading its guidance on new user growth significantly.

For the fourth quarter, PayPal’s revenue was actually up 14% and the company’s total payment volume (TPV) for the year also increased 33%. But PayPal’s operating income was flat and earnings per share sank 49% Year-over-Year.

It’s the flat operating income that became a worry because one would normally expect when a company grows its user base, it would also result in higher operating income at a similar rate. But that didn’t happen.

Over the past few years, PayPal has been aggressively adding users and even suggested that by 2025 it could reach 750 million active users. But during the earnings call, PayPal CFO John Rainey said, “[W]e no longer believe that the 750 million medium-term account aspiration we set last year is appropriate.”

Furthermore, Rainey predicted the company will only add 15 to 20 million new accounts in 2022 as it evolves its customer acquisition and engagement strategy. Wall Street gurus anticipated that based PayPal would add 53 million new accounts in 2022.

PayPal management said that it found that many new user accounts were simply opened to collect a marketing incentive and were not being used thereafter.

Why the change?

The company identified 4.5 million “illegitimately” opened user accounts last quarter alone and already removed them from the active user list.

PayPal didn’t say how many more “inactive” accounts it believed might be buried in its numbers, but the fact that the company is changing its marketing strategy seems to suggest there are more.

But instead of purging the rolls more, it is embarking on the strategy that they will see these users eventually fall off. PayPal counts active users as those that used the service at least one time over the past 12 months, a typical standard used by others like eBay and Etsy as well.

The 53 million number for 2022 already was a slight reduction from the pandemic years as PayPal added 122 million net new active accounts to its platform over the past two years.

But now it has more than halved its expectations for 2022, which means they had to find some way to explain this away. And it looks like they chose the eBay excuse. 

PayPal Banking on High-Value Users

If you followed us last year you may recall that eBay had to explain away a similar problem. During 2020, the company’s number of active and reactivated users rose quickly but started to slow rapidly as well.

Once the 12-month cycle ended that counted an active user on the platform, eBay’s numbers started to slide to a point where it also had to explain away this problem. In some ways, eBay’s problem was actually worse than they admitted, because when one expanded the active user number to include the initial three months of the pandemic, the company really didn’t hang on to new buyers at all.

And so in the second-quarter financial results. eBay pulled out of thin air a new strategy that would focus on acquiring more high-value buyers as they are better for the long term of the company versus those low-value buyers. In other words, quality versus quantity.

The irony of this strategy is that it was announced after eBay nixed eBay Bucks, its user loyalty program in lieu of a credit card rewards program, which is a good idea, but not the same as a true buyer loyalty program.

Airlines, which are the Kings of loyalty program schemes, all have credit cards. But they are part of a program that “marries” the flyer to the core business, flying the airline by offering perks that include free flights, early boarding, seat and class upgrades, access to airport lounges, etc.

In any case, eBay trots out this new strategy claiming the company will now focus on growing high-value buyers and enthusiast buyers as those buyers are more important to eBay financially.

Well, it seems PayPal has been paying attention to eBay earnings calls because that is how they are spinning their active user problem now as well with a new focus on “high-value” customers.

PayPal CFO Rainey said in the earnings call, “[s]imilar to a lot of businesses, we have a Pareto dynamic in ours where the vast majority of our volume comes from about a third of our customer base.”

“We strongly believe that we are making the right decisions in redirecting our spend toward high-value customer acquisition and engagement channels. That said, over the next 12 months as these less engaged customers naturally roll off, it will materially reduce our quarterly net adds,” he added.

Imitation is the sincerest form of flattery!