This breakdown analyzes PayPal. Host Elliot Turner says PayPal's biggest advantage is having direct relationships with 435 million users and 35 million merchants while staying neutral (works on any device, unlike Apple Pay). That's its moat. But he criticizes management for overspending on a 'super app' strategy during the pandemic, hurting profits. Three key holdings: PayPal itself (users now transact 51 times a year vs 21 before, but profit margins fell); Braintree (a payment processor PayPal bought, now processing $400 billion in transactions, growing faster than rivals Stripe and Adyen); Venmo (social payment app with 90 million active users, but not yet profitable).
At a Glance This edition of Business Breakdowns provides an in-depth analysis of PayPal’s business model as a digital payments marketplace platform. Founded by Peter Thiel, Elon Musk, and others, PayPal was spun off from eBay in 2015 and listed independently. It now serves 435 million consumers and
Elliot Turner (Managing Partner and CIO of RGA Investment Advisors) deconstructs PayPal’s business model and competitive landscape. Core judgment: PayPal’s most unique advantage lies in its direct relationships with both global merchants and consumers, while maintaining platform neutrality—this is its deepest moat. However, management deviated from the core value driver of "user engagement" during the pandemic, pivoting to a "super app" strategy that led to cost overruns.
Elliot Turner argues that PayPal's creation was a product of serendipity, not a carefully planned strategic outcome.
Turner outlines PayPal's current scale with a set of data points:
| Metric | At Spin-off in 2015 | 2022 |
|---|---|---|
| Total Users | — | 435M (400M consumers + 35M merchants) |
| Monthly Active Users | — | 190M |
| Annual Total Payment Volume (TPV) | $288B | $1.4T |
| Annual Revenue | $9B | $28B |
| Free Cash Flow | $1.8B | $5B |
| Average Transactions per User per Year | 21 | 51.4 |
| User Retained Balance | $12B | $40B |
| eBay Share of TPV | 17% | 2% |
| Braintree Share of TPV | Near Zero | ~30% ($400B) |
Key Structural Changes: eBay's share of profit dropped from 40% at spin-off to below 2%; Braintree grew from zero to a $400B TPV business; user retained balance increased from $12B to $40B, with an average holding period of 9–12 months.
Turner emphasizes that PayPal's business model is far more complex than it appears on the surface—the economics of different transaction types vary significantly.
Economics breakdown for a typical $100 transaction:
| Transaction Type | Fee Rate | Revenue per $100 Transaction | Network Cost | PayPal Net |
|---|---|---|---|---|
| Branded Checkout (PayPal Button) | 3.49%+$0.49 | ~$4.00 | Depends on funding source | $0.05-$4.00 |
| Payment via PayPal Balance | Same as above | ~$4.00 | $0 | $4.00 |
| Payment via ACH | Same as above | ~$4.00 | ~$0.05 | ~$3.95 |
| Payment via Visa Card | Same as above | ~$4.00 | ~$1.33 (allocated to issuing bank) | ~$2.67 |
| Braintree Full Stack | 2.59%+$0.49 | ~$3.08 | Similar structure | Similar structure |
| Braintree Gateway Only | $0.10/transaction | $0.10 | — | $0.10 |
Overall average take rate is approximately 1.9% (2.8% when broken down; the decline is mainly due to the rising share of Venmo's P2P transactions and industry-wide fee compression).
Turner highlights a key dynamic: "Take rates across all payment platforms are declining—American Express has dropped from over 5% to nearly 2%. The key is to compensate with transaction volume and usage frequency. PayPal's incremental profit margin should be around 25-30%."
Turner argues that PayPal's moat consists of three layers:
1. Two-sided network effects: 400 million consumers and 35 million merchants create a "chicken-and-egg" barrier. 83% of the top 475 global digital merchants accept PayPal, compared to just 48% for second-place Apple Pay.
2. Fraud detection capabilities: This is a core competency PayPal has built since its inception. "Every additional year of fraud detection data means one more year ahead of competitors." This enables PayPal to achieve:
3. Platform neutrality: Unlike Apple, Google, and Shopify, PayPal is not tied to any hardware or operating system. "If you use an iPhone but a Windows computer, the PayPal experience is identical on both—Apple Pay cannot do that."
Turner particularly emphasizes the value of neutrality: "This is the core of Dan Schulman's strategy. PayPal both competes and cooperates with everyone—Visa once threatened a 'nuclear option' against PayPal, but now partners with PayPal to build P2P capabilities."
Turner believes Braintree is PayPal's most successful acquisition ($800 million, 2013), with its value far exceeding expectations:
Turner's open-ended question: "Should Braintree be spun off from PayPal? Neutrality is a moat for PayPal, but Braintree being part of PayPal may make some merchants hesitant. After a spin-off, Braintree could compete more purely with Stripe and Adyen."
Turner describes PayPal as a "chameleon" — competing and cooperating with different rivals across every dimension:
| Area | Competitors | Collaboration |
|---|---|---|
| Online Acquiring (Braintree) | Stripe, Adyen | — |
| Digital Wallet | Apple Pay, Google Pay, Cash App | Provides payment for Apple product purchases; Google supports PayPal usage in physical stores |
| P2P Payments | Cash App, Zelle | — |
| Cross-Border Remittances | Western Union, Remitly | — |
| In-Store Payments | Square | Competes via iZettle |
| Social Payments | Facebook (Instagram payments powered by PayPal) | Both collaboration and potential competition |
The relationship with Apple is particularly complex: "What PayPal wants most is for Apple to open up the NFC chip — Europe is pushing for this. At the same time, one of the most commonly used payment methods for Apple product purchases is PayPal. PayPal must tread carefully, not wanting to provoke Apple in another area."
Turner is critical of PayPal's acquisition track record:
Positive factors: Sold consumer credit portfolio to Synchrony for $7 billion, transitioning to a capital-light partnership model; $16 billion in share buybacks, reflecting capital efficiency.
Turner's assessment: "They should sell their stakes in Uber and MercadoLibre. Five years in, no partnership results. $2 billion in capital could be better deployed."
Turner’s Analysis of CEO Succession:
Future Growth Opportunities:
Risks Turner Worries About Most:
1. Competition hindering engagement growth—if offline payments are dominated by Apple/Google Pay, PayPal will lose its largest incremental market
2. Leadership vacuum—the board lacks members with payment industry backgrounds
3. Value-destructive acquisitions—"Don’t try to become a super app; being a good digital wallet is enough."
| Position | Guest View | Key Data |
|---|---|---|
| PayPal | Bullish on long-term value, but critical of short-term execution | 435M users, $1.4T TPV, $28B revenue, $5B FCF |
| Braintree | Highly bullish, believes it should be considered as a separate entity | $400B TPV, 40%+ growth rate |
| Venmo | Bullish on its social payment potential | 90M active accounts |
| Honey | Neutral to slightly negative, believes it may be overvalued | $4B acquisition price |
| Adyen | Competitor | ~$800B TPV |
| Stripe | Competitor | ~$800B TPV |
| Apple Pay | Both a competitor and a partner | 48% large merchant coverage (vs PayPal 83%) |
| Square/Cash App | Competitor (Venmo vs Cash App) | — |
| Visa | Shifted from "nuclear option" threat to partner | — |
| eBay | Historical relationship, currently being divested | From 17% TPV down to 2% |
| Uber | Equity investment, recommends selling | — |
| MercadoLibre | Equity investment, recommends selling | — |
| Synchrony | Partner | Consumer credit partnership |
| iZettle | Neutral | In-store payment capability |
| TIO Networks | Failed acquisition | Fully written down |
1. Elliot Turner: "PayPal's most unique advantage is its direct relationship with both merchants and consumers while remaining neutral—this is its deepest moat." (Support: 83% large merchant coverage vs. Apple Pay's 48%; cross-platform consistent experience)
2. Elliot Turner: "Braintree is PayPal's most successful acquisition, but an open question remains—spinning off Braintree could create greater value, as neutrality is also an advantage for Braintree itself." (Support: Braintree's $400 billion TPV, growing faster than Adyen and Stripe)
3. Elliot Turner: "PayPal's fraud detection capability is its true differentiator—every additional year of data gives it one more year of lead over competitors. This enables it to offer the highest approval rates, passwordless login, and BNPL at traditional acquiring costs." (Support: Fraud costs are borne by merchants; PayPal's highest approval rate means lower total payment costs for merchants)
4. Elliot Turner: "During the pandemic, PayPal deviated from its core value driver—user engagement—toward a 'super app' strategy, leading to cost overruns. This is like Amazon overbuilding fulfillment capacity—but Amazon grows into those investments, while PayPal's super app investments are nearly worthless." (Support: Margins declined for the first time in 2022, and the company subsequently laid off a high single-digit percentage of its workforce)
5. Elliot Turner: "Take rates across all payment platforms are declining—American Express has fallen from over 5% to nearly 2%. The key is to compensate with transaction volume and usage frequency. PayPal's incremental profit margin should be 25-30%." (Support: Overall take rate fell from 2.8% to 1.9%, but annual transactions per user rose from 21 to 51.4)
6. Elliot Turner: "PayPal's next CEO is most likely to be former Adyen COO Cameron Zaki—he worked at PayPal for ten years and then led the U.S. business of one of its biggest competitors. This is too much of a coincidence." (Support: Zaki 'retired' from Adyen the day before PayPal announced Schulman's retirement)
7. Elliot Turner: "PayPal should sell its stakes in Uber and MercadoLibre—after five years, there have been no collaboration results. $2 billion in capital could be better allocated to share buybacks." (Support: PayPal has already executed $16 billion in buybacks, reflecting capital efficiency)
8. Elliot Turner: "PayPal's relationship with Apple is a classic case of 'co-opetition'—one of the most commonly used payment methods for Apple product purchases is PayPal, but Apple refuses to open the NFC chip to any other payment method. Europe is pushing to change this." (Support: PayPal most wants to enter offline NFC payments but is blocked by Apple Pay)