PayPal is one of the most ubiquitous names in online financial services. The company has grown from a scrappy online payments startup to a massive public company with a market capitalization of over $300 billion as of 2021. PayPal‘s platform is now used by over 426 million active accounts worldwide to send and receive money, pay for online purchases, and even manage business finances.
But with the ever-expanding array of financial services PayPal now offers, many consumers are left wondering: is PayPal actually a bank? The answer is not as straightforward as you might think. While PayPal is not technically a chartered bank, it has steadily encroached into the banking realm and now provides many of the core functions of a bank—but with some key differences. Let‘s dive into exactly what kind of financial institution PayPal is and what that means for you as a retail consumer.
How PayPal Makes Money
To understand PayPal‘s relationship to banking, it‘s helpful to first look at how the company makes money. Unlike traditional banks that primarily generate revenue from interest income on loans and fees on deposit accounts, PayPal‘s business model is more diversified.
PayPal‘s primary revenue stream is transaction fees charged to merchants for processing payments. Whenever a customer makes a purchase from a merchant using PayPal, the company takes a cut (around 3% for online transactions). With PayPal‘s checkout button integrated into millions of online stores and accepted by 75% of the top 1500 retailers in North America and Europe, this adds up to a massive volume of transactions. In 2022, PayPal processed $1.36 trillion in total payment volume.
PayPal also generates revenue from:
- Instant transfer fees (1% to move money instantly from PayPal to a bank account)
- Currency conversion spreads on international transactions
- Interest earned on customer balances
- Interchange fees and interest on PayPal-branded credit products
- Referral fees for connecting users to partner services like bank accounts and loans
- Venmo (a PayPal subsidiary) revenue from things like Venmo Credit Card, crypto fees, and instant transfers
So while PayPal increasingly offers bank-like products, its revenue mix is quite different from a traditional bank. Payment processing remains the core profit driver, while banking services are more of a complementary offering to drive user engagement and ecosystem lock-in. This allows PayPal to selectively cherry pick the most profitable banking activities without the full regulatory burden of being a chartered bank.
PayPal‘s Expanding Banking Footprint
Even though PayPal is not technically a bank, it has aggressively expanded into banking territory in recent years. The company now provides a suite of products and services that replicate many core functions of a checking account. These include:
Direct deposit: PayPal customers can now receive their paycheck or government benefits (like Social Security) deposited directly into their PayPal account via ACH transfer. Funds are FDIC-insured through PayPal‘s partner banks and available up to 2 days early compared to a traditional bank. No fees or minimum balance. Over 1 million PayPal customers used direct deposit as of Q3 2022.
PayPal Cash Card: This is a debit Mastercard that allows customers to spend their PayPal balance anywhere Mastercard is accepted (online and in-store). Customers can also withdraw cash fee-free at any ATM in the Mastercard network worldwide. No monthly fee or minimum balance. The Cash Card has seen strong adoption, with approximately 20% of PayPal‘s monthly transacting users holding one as of Q3 2022.
Bill pay: Customers can use their PayPal balance to pay a wide range of billers, including utilities, credit cards, mortgage/rent, and more. Payments can be scheduled as one-time or recurring transactions.
Check cashing: Using the PayPal app, customers can cash payroll and government checks by taking a photo. Funds are credited to their PayPal balance instantly with no fees (1% fee for payroll/gov checks over $5,000).
Savings account: PayPal offers an FDIC-insured savings account provided through partner banks with a 0.40% APY (as of June 2023). Customers can transfer funds between their primary PayPal balance and the savings account.
Crypto: PayPal users can buy, hold, and sell cryptocurrencies like Bitcoin, Ethereum, and Litecoin directly through the PayPal interface. Users can start with as little as $1 and don‘t have to deal with setting up a separate crypto wallet.
Tax prep: In 2022, PayPal began offering free tax preparation services to customers through the Credit Karma platform it acquired in 2020. Over 8 million people filed with Credit Karma Tax in the 2022 tax season according to PayPal.
When you add it all up, it‘s an impressive banking bundle that could theoretically allow someone to receive income, pay bills, save, and manage daily spending entirely within the PayPal ecosystem without a traditional bank account. All with no monthly fees and relatively high liquidity thanks to the linked debit card.
However, there are some notable banking functions PayPal does not provide. The company does not offer checkbooks, does not make personal or auto loans (only provides the PayPal Credit line of credit), and does not issue credit cards directly (it previously issued a co-branded card with Synchrony Bank). Customers also can‘t make cash deposits into their account or send domestic wires from their balance.
Is PayPal a Neobank?
PayPal‘s strategic moves into banking territory have led some industry observers to categorize the company as a "neobank." Neobanks, also known as "challenger banks," are fintech companies that provide mobile-first, digital banking services without the overhead of physical branches.
Prominent U.S. neobanks include Chime, Current, Varo, and SoFi, which offer fee-free checking/savings accounts and slick mobile apps. Like PayPal, most neobanks are not technically banks themselves, but partner with chartered banks behind the scenes to provide FDIC insurance and issue debit cards.
So in this sense, PayPal does fit some of the characteristics of a neobank by leveraging its tech capabilities to offer a more accessible and low-cost digital banking experience. However, there are some key differences between PayPal and a typical neobank:
-
Diversified revenue: Neobanks primarily make money from debit card interchange fees and interest earned on deposits. PayPal has a more diversified model anchored around payment processing.
-
Massive scale: PayPal has 432 million active users globally as of Q1 2023. Chime, the largest U.S. neobank, has around 28 million accounts. This gives PayPal more resources and negotiating leverage with partner banks.
-
Commerce focus: PayPal‘s banking features are ultimately in service of its core commerce mission (making online and mobile payments as seamless as possible). It‘s not trying to be a full-service banking provider.
A more accurate characterization may be that PayPal is a hybrid between a neobank and a payment facilitator. The company uses digital banking features to remove friction from its payment flows and drive customer engagement. But it stops short of being a full-fledged bank replacement and still generates most of its revenue from payment processing rather than traditional banking activities.
The PayPal Customer Experience
So what‘s in it for the average retail consumer? Is it worth using PayPal‘s expanded financial services in addition to (or even instead of) a traditional bank account? Let‘s break down some of the key pros and cons:
Pros:
- Integrated suite of financial services in a single app
- Potential to receive direct deposits up to 2 days early
- No monthly fees or minimum balance requirements for banking features
- Instant access to funds via PayPal Cash Card and linked debit/credit cards
- Can use PayPal balance to pay a wide range of bills
- Rewards on the PayPal Cashback Mastercard (2% cash back on all purchases)
- Easy person-to-person payments with other PayPal/Venmo users
- In-app check cashing with instant funds availability
- Extensive merchant acceptance for online and mobile payments
- Buyer protection on eligible purchases
Cons:
- No physical bank branches for in-person support
- Cannot deposit cash or send wires from PayPal balance
- Debit card ATM withdrawals limited to $400/day for unverified accounts
- PayPal may place temporary holds on large or unusual transactions for security review
- Fees for instant transfers from PayPal to linked bank account
- Must have a PayPal account to use banking features (can‘t be standalone)
- Interest rate on savings account lower than some online banks
- Doesn‘t offer the full breadth of products/services of a traditional bank
PayPal also shows some promising indicators on the customer satisfaction front. In a 2022 J.D. Power survey of customer satisfaction with financial service providers‘ mobile apps, PayPal ranked 4th overall (behind Bank of America, Navy Federal Credit Union, and Chase). PayPal scored particularly well on categories like navigation, ease of use, and visual appeal.
Additionally, a 2021 Ipsos survey found that 57% of consumers trust PayPal to keep their money secure, on par with primary banks (59%). This is notable given the general tendency for consumers to place more trust in incumbent banks over fintechs for core financial needs.
The Competitive Landscape
Of course, PayPal is not the only non-bank making forays into the world of consumer financial services. In addition to fellow fintech giants like Square, Stripe, and Adyen, PayPal faces increasing competition on the banking front from:
- Neobanks like Chime, Varo, and Current that offer fee-free, mobile-first banking
- Tech/e-commerce companies embedding financial services (e.g. Apple Card, Amazon Checking, Uber Money)
- Traditional banks and credit unions upping their digital game to fend off fintech insurgents
According to a 2023 report from Cornerstone Advisors, 34% of U.S. consumers now hold a bank account with a digital bank, up from 20% in 2020. Challenger banks like Chime, Current, and Dave are seeing particularly strong growth among younger consumers.
To stay ahead of the curve, PayPal is leaning into its unique assets, including its massive two-sided network of consumers and merchants, extensive payments data, and trusted brand. The company is also not shy about acquisitions to expand its capabilities, as evidenced by its $2.7 billion purchase of Japanese buy now, pay later provider Paidy in 2021.
"We‘re not trying to be a bank, but we believe that we can provide really interesting and innovative financial services…based on our scale, based on the data that we have, based on the brand and the trust that we have with our consumers," PayPal CEO Dan Schulman said in a 2021 earnings call.
The Future of Finance?
As the lines continue to blur between banks, fintechs, and commerce companies, it‘s clear that the old definitions of a "bank" are becoming increasingly outdated. Consumers now have more choices than ever in where they store, access, and manage their money.
PayPal‘s journey from online payments pioneer to quasi-bank is a prime example of this shift. By steadily layering banking features into its platform, PayPal has created a compelling "bank-lite" alternative for online-savvy consumers. The ability to receive direct deposits, get a debit card, and manage bill payments from a single app with no fees is undeniably attractive.
At the same time, PayPal‘s banking products still feel more like an add-on to its core payments business rather than a full-fledged banking solution. Consumers who want a full suite of financial services under one roof—from savings accounts to mortgages to wealth management—will likely still need to turn to a traditional bank or credit union.
But for the growing cohort of consumers comfortable managing their financial lives through apps and online platforms, PayPal‘s expanding array of services makes it an increasingly viable option for everyday banking needs. This is especially true for the 28% of U.S. consumers who are already regular PayPal users.
The elephant in the room is whether PayPal will eventually take the plunge and acquire a full banking charter. This would be a major undertaking that would subject the company to significantly more regulatory oversight and capital requirements. So far, PayPal has seemed content to pursue a partnership model that allows it to offer banking products without the baggage of actually being a bank.
But as the worlds of banking, payments, and commerce continue to collide, the optionality of a charter may become more valuable. It would give PayPal even more flexibility to expand into areas like consumer and business lending.
For now, it seems PayPal is content to play in the gray area between bank and fintech. But one thing is clear: the company‘s banking ambitions are far from over. As CEO Dan Schulman put it in a 2021 interview with CNBC, "We‘re in the midst of a dramatic transformation of how people think about financial services…[and] we‘re going to continue to lean into that."
