PayPal seeks to offer better financial services to the poor
Dan Schulman, PayPal CEO and social idealist, has decided to transform the online payment empire into a lifeline for the lower class: people disregarded by the banks or subject to unreasonable interest rates. The means: small loans, debt management and online tools that will enable savings for people with no money in the bank. 'It's time to democratize the world of finance,' he says in an interview to Calcalist.
Dan Schulman, PayPal's CEO, took an extraordinary measure in the summer of 2007. At the time, he was the CEO of Virgin Mobile, the American cellular company owned by billionaire Richard Branson. Virgin supported Stand Up for Kids, an organization that distributed survival kits to homeless youth. The organization's director suggested that he spend one day as a bona fide homeless person in order to better grasp what these boys and girls are forced to endure. With a week-old beard, filthy jeans, a raggedy T-shirt and blanket around his shoulders – with no cell phone, watch, money or other indication of his comfortable life – Schulman set out on the streets of Manhattan, embarking on an experience that, according to him, changed his life.
"If we wanted to eat, we had to beg for money. There’s a certain amount of deference paid to a CEO, but no one paid attention to me on the street. I consider myself a good communicator and a good salesman. It took me five hours of begging to raise less than a dollar," he wrote in an article later published in the New York Times. "My entire concept of what is important changed… Forget Starbucks and a $4 latte — I walked two miles to find a 25-cent cup of coffee. We slept on concrete in an abandoned skate park."
There is a link between Schulman's childhood, the day he spent as a homeless man and the business strategy and business culture that he is nurturing at PayPal, the world's largest online payment company.
He was born and raised in New Jersey. His grandfather was among the first union organizers in the Manhattan garment industry and his mother, Ruth, was an academic and human rights activist who took him to rallies as a baby. His father, Mel, who worked as a chemist, was concerned that his son would be the youngest person with an FBI record. "I was born with social activism in my DNA," he writes.
Now, it is that DNA that detemines the strategic and business agenda at PayPal – an online empire that enables merchants to receive payments and buyers to make payments on a wide variety of websites; a company that is traded on NASDAQ at over $40 billion and that reported over $9 billion in revenues and $1.2 billion in profits last year.
The company's tagline for every conference, event and ad is "We put people at the center of everything we do." This statement is a popular sugar-coated corporate slogan, but at PayPal, it is accompanied by extraordinary measures.
A prominent example occurred about two months ago, when PayPal scrapped its plan to establish an operations center in Charlotte, North Carolina, which was intended to employ 400 workers. The reason: the government passed a bill that forces transgenders to use restrooms corresponding with their "biological gender."
"The new law perpetuates discrimination, and it is against the values and principles that are at the core of PayPal’s mission,” Schulman said.
The North Carolina law indeed caused extensive discussion and was subject of strong opposition from the Obama administration, but in corporate America, where many live in the closet or keep their personal opinions in them, PayPal CEO's reaction was unusual. He bound himself and his company to an issue that many consider explosive and dangerous. And that action, as evident from a conversation with him, is part of his general world view.
Banks left? PayPal came in
Last year, PayPal reached a strategic business decision considered unusual in the two worlds in which it operates – hi-tech and finance: to market PayPal to the lower class, people who are transparent and undesirables to banks, or people who do not even have a bank account. People whose poor credit (in the US) keeps financial services out of their reach. This measure will not be a donation or altruistic operation, but rather a method of generating profit in a market segment with few competitors. However, despite the obvious cynicism, one cannot help but believe Schulman's determination to spread a bit of good around the world.
According to PayPal's new vision, formulated by Schulman, "We believe that it is time to rethink money and democratize financial services, so that managing and transferring money will be a right enjoyed by all, not just by people of affluence. We believe that every individual has a right to fully participate in the global economy, and we are obligated to empower people to enhance their financial strength."
Schulman wrote similar statements in the first financial report PayPal issued as an independent company since splitting from online shopping giant eBay last year: "Our goal is to provide simple, convenient and reliable financial services and digital payment opportunities that will help fulfill the dreams, hopes and desires of millions of people and businesses around the world, including those that were not served by the traditional system."
"That's what motivated me to work at PayPal", says Schulman, 58, in an interview with Calcalist. "I grew up in a progressive household, with a family that believed in equality for all, and that leaves its mark on you. In the past, I planned to go into politics and never considered Wall Street as an option. But I believe business is committed to being a positive force. One cannot expect our governments to handle all of the issues: we have a great deal of resources and talents, and if we work together with the government and the business regulators, we will have a better chance at solving some of the world's most urgent issues."
One of these issues, says Schulman, is that "a large portion of the population receives poor financial services. In America, there is a saying: 'it is expensive to be poor.' That is true mainly in the field of financial services: 10 percent of people's available income goes toward paying unnecessary commissions and interest fees, and that is the same amount that these people spend on food. It's ridiculous; there must be a solution and I'm showing that technology could play a major role in the solution."
At a time in which more people own mobile phones and have internet access than bank accounts, PayPal wants to be the easy, fast and inexpensive tool for them to manage their financial matters on their own, without begging for favors from traditional institutions.
"Over 2 billion people around the world are left out of the financial system and many others suffer from inferior service," he says. "Think of what these people would be able to do with technology and software: know their balance, income and expenses, manage their money in an easier, simpler and less expensive manner, and save more of it. This vision is relatively new to us, but it is beginning to resonate within the company. Fast Company has recently issued a report by which PayPal is fifth on the list of brands motivated by a good cause, beyond making money. I am very proud of that."
Will you give loans to the poor or, better yet – encourage them to save?
"Yes. Receiving a loan in the US requires a credit rating (known as FICO) derived of credit card usage. But what if, for example, you are an immigrant without enough history? We, on the other hand, know you and know that you are a responsible individual who pays his bills and we can use that information to grant you loans. We are currently focusing on loans for small businesses based on their history with us, and not credit rating. We have already granted $2 billion in such loans and, interestingly enough, 25 percent were granted in geographical areas in which ten banks and more have shut down their branches because their median revenues were lower than the national average.
"To improve your financial stability, we will help you understand how to manage your money to save for your kids' college education or an emergency, instead of taking out an expensive loan. The customer will look at the expenses and say: 'I didn’t know that I spend $400 a month on entertainment. Can you give me a warning when I hit $300, so I can save the remaining $100 in an account for holiday gifts for my kids?'"
PayPal is currently busy developing and enhancing the tools that will enable this, alongside another service that may help the lower and middle classes: debt management. If you own a small business that allows for payment by credit or if you are an individual forced to borrow money from your friends, you can ask PayPal to pay the loan on time or remind customers to repay their debt.
It sounds like you are becoming more like the banks and the banks are trying to be more like PayPal.
"I don’t think that's the case. I think that we and the banks approach the market with what we know and, in some cases, there are many opportunities for us to work together. We have recently acquired Xoom, an international money transfer system using mobile phones. Using this service, the money is immediately transferred to the recipient's bank account, without a 3-day waiting period, without waiting in line and without using mediators – thus the cost is 33-50 percent lower than that of a standard international money transfer. This is an example of a perfect partnership between companies like ours and the traditional banking system. We used to want to do everything ourselves at PayPal, but I think that the financial system's best option consists of collaborations. No one can say that democratizing financial services is bad. It is good for communities, countries, the global economy and educational progress. That is the objective and we are all rallying around it."
Cash will not die
Schulman speaks quietly, almost whispering, and he lacks the mannerisms and ego that are so prevalent among executives of his caliber. He is tall and thin, simply dressed in a black Polo shirt and blue jeans, showing no sign of his tailored past as president of Enterprise Growth at American Express.
PayPal's CEO, a Jew, arrived in Israel early last week for an intense 2.5-day visit during which he visited the company's R&D centers in Israel. "This is my first visit to Israel as part of my job, but it's probably my 15th time in the country," he says and laughs. "As a child, I picked avocado in the Pardess Hannah orchards. After that, any job is easy."
Later, we will discover that he dabbles in Hebrew as well and that he starts every day with a Krav Maga workout. The IDF combat method has become a hit in the US.
But one must not be fooled by Schulman's soft voice or casual demeanor. He joined PayPal in September 2014, when it was still owned by eBay, as the person designated to lead it on a new and independent path.
After more than a decade under eBay's management, the companies decided to part ways and PayPal executed a spinoff and issuance. The starting point was not easy: in a Fortune article, Keith Rabois - among PayPal's first employees and currently a venture capital investor - described the years under eBay as "the lost years." Services like Apple Pay, Android Pay and Square enabled simple and quick digital payment at a press of a Smartphone button and it seemed like PayPal was stuck.
However, about a year after the official split, it seems that Schulman is managing to keep the past behind. PayPal currently generates more money, employs more people and is traded at a value higher than eBay. Last week's Financial Times's global brand rating valued the PayPal brand at $15.9 billion, up 23 spots compared to 2015. It is not only ahead of eBay, but also ahead of established and veteran companies like Ford, Siemens, KFC, Costco and Pepsi.
What has changed at PayPal this year?
"The spinoff and issuance were very important. Our industry is like a chess board with many pieces in motion and it was essential for us to decide when to play and which tools to use. As part of eBay, many merchants, retailers and technology companies felt that although we are their partners, we are actually also competitors. That has completely disappeared. Today, we have affiliations and partnerships that we couldn’t have had before—with Facebook, AliBaba and leading cellular providers around the world. And still, this is just the beginning and there's a lot of work ahead."
Did becoming a public company have an impact?
"Even as part of eBay, we cared about our shareholders. But we do not manage our business on a quarterly basis and do not live from one quarter to the next. We rather think of the medium- and long-term while meeting the commitments to our investors. So far" – he knocks on the wooden table three time – "we've manage."
What should be expect in the long term, in 10 or 20 years from now? Will this be the end of cash money?
Schulman smiles. "Many people are wrong to predict the death of cash and I am not among them. Eighty-five percent of transactions today are made in cash and will continue to be in cash for a long time to come. However, as Smartphone use increases, money will undergo further digitization processes. There are two reasons for this: first, more and more people around the world will use their phone to manage their money. Secondly, a grand revolution is already underway: people use their phone to shop when they are at the store or on their way there, and retailers can offer them much more.
"I can take a bus, order dinner at a restaurant and pick up my order without waiting on line—all using my phone. The restaurant knows which sandwiches I like, sends special offers to my phone so that I'll eat there again, and I save time and money. That is the greatest promise of digital commerce. And we want to be the operating system that provides 100 percent of the checkout solution, a platform that enables simple and easy payment with PayPal, but also with Apple Pay, Android Pay credit cards, benefits, splitting the devices – whatever the customer wants. We want to be part of the next revolution of contextual commerce: the idea is that instead of the customer visiting the seller's site; the seller will find the buyer wherever he is. If you read a blog or e-mail, you can shop directly from there. For us, that is a great opportunity."
Violating privacy? Bad for business
Throughout his entire career, Schulman was a practical person who juggled between the financial and technological worlds. At Princeton High School in New Jersey, he took more of an interest in sports than in studies, making it difficult for him to enroll in college. As such, he worked as a truck driver for Princeton University for six months until he was accepted to Middlebury College to study economics and later studied toward an MBA at the prestigious NYU.
His first "real" job was at AT&T, as an account manager. It was a low ranking position in which he had to wear the same suit for three months before he saved enough money to buy a new one. Eighteen years later, when he left AT&T, he was president of the Consumer Division. That was in 1999, the height of the dot-com hype. Schulman joined the fun with Priceline.com, was appointed CEO, and resigned after two years, when he was recruited to establish Virgin Mobile in the US. In 2010, he left the hi-tech companies behind and took a senior position at American Express.
This career move prepared him for his current position. Like him, PayPal has been navigating between the financial and technological worlds for years. PayPal was founded in 1998 as a button for executing digital payments. It merged with Elon Musk's x.com, survived the 2001 dot-com crisis and became a giant in Fintech—the term currently used to combine technology and finance—even before this term was in use. Fintech is one of the most desirable adjectives that can be applied to a company nowadays: according to an Accenture study published last week, global Fintech investments in the first quarter of 2016 reached a record of $5.3 billion.
Silicon Valley claims that Fintech is a bubble, others say that it is the future. What do you think?
"I think that we are just scratching the surface of digitizing money. We are still at a very early stage of the game. The overall digital payment market generates almost $100 trillion. This industry will peak, and when it does, many will enjoy it. There won't be just a single company holding over 10 percent of the market. Many companies focus only on consumers or merchants, but for a payment system to succeed—it takes both—and that's what we do. We currently have 184 million accounts for consumers who pay with PayPal and another 14.5 million merchants, and we want to offer them all of the services they need."
That is also the vision of other internet giants with deep pockets, like Google, AliBaba and Amazon. Are you concerned by competition from them?
"Every company has competition and if you deny it, you shouldn’t be in business. For me, competition is like gravity: I don’t wake up in the morning thinking about gravity pulling me down as I get out of bed. It's simply part of life. If you focus too much on your competitors, you might be involved in the "Me too" strategy instead of differentiating yourself based on your customers' real needs."
In the process, you—along with all of the internet giants and companies that you serve—collect a great deal of personal information about us. Many are concerned with this power that you have.
"I think that a consumer must be able to feel confident that his information is secure, and a company that violates this principle won't be able to be a leading brand. We always want to create a simpler and friction-free technology and provide more value, but it must be done with the consumer's consent. Our business is offering our customers better services using the information and data that we collect, and not selling it to others."
Global transactions, Israeli security
"Our cyber team in Israel is our most important feature"
With all due respect to innovation, efficiency and special features, the most dramatic issue for PayPal and companies of its sort is security. There is nothing more sensitive than having access to other people's money and the margin for error is zero. One massive error could seal the fate of the company and send it to the graveyard of unreliable companies. PayPal's Israeli branch is responsible for this substantial issue through the cyber division in Be'er Sheva (based on the CyActive startup acquired last year —ed.) and the risk management and fraud prevention center in Tel Aviv.
"We have over 200 employees in Israel—cyber professionals, analysts and scientists—and they are most likely the most important feature that we offer our customers," says Schulman.
According to him, the online payment company's approach to cyber is a bit different than the customary approach in the field. "Most companies focus on fraud prevention, ensuring that no bad things happen. We want to analyze the data that we have to make money transfer easier. For example, we recently launched a service called One Touch, which saves the need for entering a user name and password every time in order to execute payments and money transfers. The algorithms that we developed enable us to identify who the user is without these details."
To what extent can you or any other company really be hacker-proof? After all, no system is 100 percent safe.
"As the world progresses towards software and digital, it becomes more vulnerable to cyber attacks and malware. An average American company is attacked over 4 million times a year and financial services companies are attacked all the time. Good protection can be provided by combining sophisticated firewall systems that prevent access from unwanted people and models that distinguish normal and unusual conduct for those already inside. Our platform processes over 6 billion transactions per year and the data compiled in their regard enables us to identify and prevent a problematic transaction. Algorithms are like weapons for which the ammunition is data and the more ammunition they have, the stronger they are."