PayPal's (PYPL 2.90%) stock closed at its all-time high of $308.53 on July 23, 2021. At the time, the digital payment provider dazzled the bulls with its robust growth rates and its plans to nearly double its number of active accounts from 377 million in 2020 to 750 million in 2025. It also aimed to more than double its annual free cash flow (FCF) and revenue to $10 billion and $50 billion, respectively, by 2025.
Unfortunately, PayPal's stock price subsequently plunged more than 80% as it abandoned those ambitious goals. In 2023, its active accounts actually declined 2% to 426 million, its annual FCF shrank 18% to $4.2 billion, and its revenue rose a mere 8% to $29.8 billion. CEO Dan Schulman, who led PayPal ever since its spin-off from eBay in 2015, also stepped down as its sales growth cooled off.
Image source: PayPal.
That slowdown was caused by stiff competition, macro headwinds for consumer spending, tough comparisons to the temporary surge in digital payments during the pandemic, and its decoupling from eBay, which replaced PayPal with its Dutch rival Adyen as its preferred payments platform in a five-year transition from 2018 to 2023.
All of that pressure also reduced its transaction take rate over the past eight years. Let's take a closer look at that key performance metric and see why investors can't ignore its persistent decline.
Why are PayPal's transaction take rates declining?
PayPal charges a fee for every digital payment made through its platform. Its fees usually range from 1.9% to 3.5% plus a fixed fee for each transaction. After splitting those fees with credit card processors and other payment networks, we get its transaction take rate -- the total revenue it actually retains from each transaction. That metric reflects its overall pricing power in the digital payments market. But as the following chart illustrates, PayPal's annual transaction take rate has declined from 2.89% in 2015 to 1.76% in 2023 and has never expanded year over year.
Data source: PayPal. Chart by author.
PayPal attributed that decline to several major challenges. Its gradual loss of eBay's orders reduced its overall take rates, and that decline drove it to rely more heavily on Venmo's peer-to-peer payments and Braintree's unbranded backend payment services, both of which had lower take rates than its marketplace transactions on eBay.
Its branded payments business also recognized more transactions from higher-volume merchants with lower take rates, and it recognized lower international transaction revenue from its foreign currency hedges. Meanwhile, fierce competition from other platforms like Adyen, Stripe, Block's Square and Cash App, Apple Pay, and Alphabet's Google Pay made it tough to raise its fees and counter those headwinds.
PayPal isn't the only company struggling with declining take rates. Adyen's transaction take rate fell from 3.06% in 2015 to 1.74% in the first half of 2023. Stripe, which is privately held, only had a gross take rate of 1.75% in 2022.
Those shrinking take rates suggest the digital payments market is getting too crowded, and big tech companies like Apple and Google -- which can afford to operate their digital payment platforms as loss-leading extensions of their ecosystems -- can disrupt those stand-alone services. The bears argue that PayPal can't keep pace with that seismic shift.
PayPal needs to spin a lot of plates to keep growing
PayPal has been trying to offset its gradual loss of active accounts by increasing its number of transactions per active account to boost its total revenue. That strategy worked in 2023 when its total transactions per active account grew 14%.
But roughly half of that growth was driven by Braintree, while the rest mainly came from Venmo and its core app. Its high dependence on Braintree and Venmo will likely continue to dilute its transaction take rates for the foreseeable future.
Looking ahead, PayPal needs its growth in transactions per active account to offset its declining take rates as well as its ongoing loss of active accounts. To accomplish that, it needs to add new features to PayPal's core app to squeeze more revenue from its existing users. PayPal's new CEO Alex Chriss plans to achieve that goal by adding new features like its streamlined checkout service FastLane, its Smart Receipts tool, and its Cash Pass rewards program to its core app. But during its latest conference call, Chriss said those new features would only make a "minimal contribution" to its top line in 2024.
Simply put, PayPal needs to spin a lot of plates to keep growing. But as long as it continues to lose active accounts and its take rates keep declining, it will likely stay in the penalty box and look like a value trap instead of a value stock.
