PayPal Has Plenty of Dancing Partners and Investors Should Be Thrilled

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Investors have come to expect consistent growth from PayPal Holdings Inc (NASDAQ: PYPL) and it did not disappoint when it recently reported its third quarter results. Not only did the company surpass analyst expectations and raise guidance for the remainder of the year, it also crossed a couple of major company milestones for good measure.

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Revenue increased 18% to $3.14 billion and non-GAAP earnings per share increased 27% to $0.46. The company reported 210 million active accounts, up seven million from just last quarter and a 12% increase year over year. Total payment volume increased to more than $106 billion, a 26% increase year over year once. The results marked the first time PayPal ever recorded at least $3 billion in revenue and more than $100 billion in total payment volume in a single quarter.

After reviewing the conference call transcript provided by S&P Global Market Intelligence, one overriding theme stands out: PayPal is offering its customers more choices than ever before and consumers are responding. It's a simple formula that might drive growth for the company's core payment platform for years to come.

The multiple choice payment platform

PayPal CEO Dan Schulman informed investors and analysts on the earnings call that the company has finalized 24 major partnerships in the past 18 months. These range from major tech companies and big banks to wireless carrier networks and have enabled the choices PayPal is now offering its account holders. While answering the same question, CEO Schulman stated:

We are an open platform and a suite of services, both branded and unbranded, that's operating system- and device- and technology-agnostic. And so ... very importantly, we're a neutral third-party platform. So we don't compete with any of our merchants or partners. We are allies in advancing digital payments.

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As Shulman said, one of the most attractive features about using PayPal as a digital gateway to making payments online or via a mobile device is that it is not tied to a particular device, operating system, or bank. That makes it unique among its digital wallet competitors.

Want to use Apple's Apple Pay? Better have an iPhone or iPad. Ditto for Samsung's Samsung Pay. Want to use Zelle, a new P2P service jointly backed by big banks like JPMorgan Chase, Bank of America, and Wells Fargo? Better have an account at a participating bank. We could keep going. Want to use Alphabet's Android Pay or Google Wallet? Better have a Gmail account or phone that works on the Android operating system. It is little wonder, then, that the aforementioned big tech companies and banks have come to the table to make a deal with PayPal in recent months.

What PayPal gets out of it

PayPal reaps many advantages from these deals including new accounts, less churn, lower costs, higher customer satisfaction, and greater user engagement across its platforms.

New accounts. This quarter, PayPal increased its active accounts to 210 million, a 12% increase year over year. But the new account growth story doesn't end there as new accounts are now growing at an ever accelerating pace. This quarter the number of active accounts increased by seven million over the prior quarter, the highest number of new accounts added in a single quarter since July 2015, when PayPal was spun off from eBay.

Schulman also pointed out an underappreciated way that choice is driving new accounts: the streamlined application process. Now, if a customer just wants to have a credit or debit card linked to a PayPal account, they are not required to add additional information or sign up for PayPal Credit.

Less churn. Schulman said that choice is driving a "significant reduction" in churn. Customers have more places, both physical and digital, to use their PayPal accounts, and so they are finding fewer reasons to abandon the platform.

Lower costs. PayPal has already seen some of its new partners (Wells Fargo and HSBC Holdings were specifically mentioned) actively market PayPal to their customer bases. New partners doing some of the heavy lifting for marketing means that PayPal can spend less to attract new customers, meaning that net new active accounts will come at overall lower acquisition costs. Schulman said, "it's really kind of sort of a 1, 2 punch that's positive for us now, but especially as we look forward."

Higher customer satisfaction. Schulman discussed "meaningful increases in overall satisfaction" on the earnings call. One way PayPal measures this metric is by the number of calls into its customer service centers. Management noted that even though PayPal's transaction volume increased to almost 1.8 billion transactions this quarter, a 23% year over year increase, the volume of calls to its service centers was "meaningfully reduced."

Greater user engagement. PayPal management said the added choice provided a "meaningful lift" in overall engagement. This quarter, active accounts averaged 32.3 transactions over the trailing twelve months, good for a 10% increase year over year. But Schulman believes this will move much higher once its new partnerships and Pay with Venmo kick in (P2P payments are not included in this metric). He estimated PayPal can ultimately get its customers using the platform two times a week in the next few years.

PayPal is beautifully leveraging partnerships across several industries to drive growth. This is leading to happier, more engaged customers. With the initial results being so positive, it shouldn't surprise us to see more partnerships in the near future. In fact, Schulman promised as much saying, "There are a number of other partnerships that are on the horizon, and I think the more we partner, the more people see that the benefit of doing that can be quite substantial." On that, investors should agree. Shares in the company are up almost 50% year to date and I wouldn't bet that they're done going up yet.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Alphabet (A shares) and PayPal Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.