Should Venmo buy a bank?

Future of Finance
Future of Finance

At the KBW Cards, Payments & Financial Technology Symposium last month, PayPal CFO John Rainey was asked—twice—about whether or not the payments company, and Venmo parent, would ever buy or become a bank.

Rainey didn’t say no.

We are pretty leery of becoming a bank holding company. I wouldn’t suggest that we are equally as leery of acquiring a bank or an issuer.”

The fact that Rainey kept the door open to at least buying a bank is compelling. With $1.4 billion in cash, PayPal has the war chest to buy a bank. And while it would be an aggressive move, it could help PayPal—or its Venmo money-transfer service—distinguish itself over a growing number of competitors.

Over the past year, Apple, Google, and Samsung have all released their own mobile wallets, and retailers like Walmart, Target, and Kohl’s have confirmed plans of their own as well. Meanwhile, banks like Capital One and Chase are entering the digital wallet space, too.

“There’s a cap on how much PayPal can grow as a company that operates outside of the traditional financial system. Not only that, but there are more competitors outside of the banking system, too,” Bob DeYoung, a banking professor at the University of Kansas School of Business, told Quartz.

For PayPal—which declined to comment—or its Venmo subsidiary, a bank would bring the ability to offer a wider range of financial products to customers. During PayPal’s last earnings call, CEO Dan Schulman hinted that Venmo users would be able to “eventually access a host of other basic financial services.” (A Venmo spokeswoman declined to elaborate.)

Venmo and PayPal met with potential partners to add bank accounts and more functionality a year ago, but talks fell apart, according to sources with knowledge of the discussions. One theory, these sources tell Quartz, is PayPal decided to go it alone.

But if PayPal wants to add financial products, like a Venmo debit card, it would need some sort of relationship with a bank—and an outright purchase of a bank could accelerate those plans.

It also could help PayPal expand its lending program, PayPal Credit, which surpassed $2 billion in volume last quarter.

In fact, a bank could remove several of the caps on PayPal’s growth in the long term:

  • Funding: A bank would offer PayPal a cheap way to acquire a large amount of deposits, which PayPal Credit could lend against.
  • Customer qualifications: The FDIC estimates that as of 2013, there were 10 million US households without basic financial services. These are all potential customers that PayPal is missing out on, since you need traditional banking services (a bank account or a debit or credit card) to use PayPal. Being able to create new accounts for unbanked customers could help PayPal increase its customer base.
  • Regulatory roadblocks: Acquiring a bank would bring to PayPal a regulatory and compliance structure that already meets government requirements instead of leaving PayPal to build that infrastructure itself.

Banks also have access to an internal network to send money cheaply to each other, known as the ACH network. The Federal Reserve is working on real-time payments through that network, and if PayPal acquires a bank, PayPal and Venmo would have access to it. That could help solve a pain point with person-to-person payments: the fact that money sent to you isn’t accessible until a few days later.

Certainly PayPal doesn’t need to buy a bank. But an acquisition would let the firm focus on sustaining the growth that investors expect from a tech company, while shouldering the regulatory burden that banks deal with on a daily basis.

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