- PayPal inked strategic partnerships over the past three years with more than 40 companies it previously would have considered competitors.
- Jim Magats, PayPal’s senior vice president of payments, product and engineering, told Business Insider the move was meant to offer customers more options and put PayPal at the center of a payments ecosystem.
- As part of the evolution of the network, the payment processor has started sharing its risk score with some large issuers, which has led to an uptick in approval rates. It is also plotting new ways to connect partner companies.
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PayPal’s July 2016 announcement of a strategic partnership with longtime rival Visa didn’t spark an ideal reaction from investors.
The deal was a big one for the payment processor and signaled a pivot towards collaboration. PayPal had previously encouraged users to connect accounts directly to their bank instead of going through credit card issuers. Circumventing cards had meant a larger profit on transactions for PayPal, but also annoyed issuers, who felt they were getting cut out of deals.
The decision to partner gave PayPal customers more payment options, but investors weren’t sold. The day after revealing the partnership with Visa, PayPal shares opened down nearly 8%.
PayPal has since expanded its partnership network, and is even sharing internal data with big issuers to help streamline payments. Now it is looking for even more ways to connect outside companies, Jim Magats, PayPal’s senior vice president of payments, product and engineering, told Business Insider.
But at the time, many seemed uncertain if it was the right play.
“A lot of people thought we were crazy to go out of customer choice,” Magats said. Watching PayPal’s stock tumble in the minutes after the Visa announcement was a “very humbling experience,” he said.
Read more: PayPal’s CFO says its new partnership with Facebook Marketplace could dwarf the business it does with eBay
The stock has more than made up for that dip. Shares in PayPal are up roughly 190% over three years. And while a large part of that is thanks to the general growth of the payments space, PayPal’s strategic partnerships have helped.
According to PayPal’s most recent earnings report, roughly 10% of the payment processor’s net revenue comes from “other value added services”, which includes revenue earned through partnerships. The network of strategic partners now numbers more than 40, all blossoming from that initial Visa deal.
PayPal’s strategic partnership network spans a range of industries, including card issuers such as Visa and MasterCard, big banks like Citi and Bank of America, tech companies like Facebook, and retail stores like Walmart.
Magats said the decision to embrace the competition came from a simple question: What did PayPal want to be?
After its split from eBay in 2015, many wondered where PayPal would sit within the payments ecosystem, Magats said. Offering customers more options, as opposed to limiting them to PayPal, seemed like a growth opportunity, he added.
“We were relatively confident that we had a lot of really good assets, and we had a lot of really good assets that other people would want to collaborate with us,” Magats said. “We also knew that no one themselves could actually really make payments at scale work.”
Sharing risk information has big benefits
PayPal is now laying the groundwork for even more ways it can deepen ties with former rivals. That includes sharing information that can lead to processing more transactions.
PayPal has begun sharing its internal risk score, which Magats said is akin to a FICO score, with a handful of some of the largest issuers. While it’s still early days, the move appears to be improving authorization rates, meaning more payments get the green light.
At one of the biggest issuers, which Magats declined to name, PayPal saw nearly a 3% increase in authorization rates on transactions where it shared risk scores over the past six months. Overall, through partnerships and sharing of PayPal’s internal tools, approval rates on PayPal transactions have risen by 1% over the last 18 months.
“Because PayPal is a two-sided network, we have information on most consumers and merchants that do online and mobile shopping. We have a pretty good idea as to who’s good and who isn’t good,” Magats said. “When they’re making a decision on a customer, they basically embed the PayPal score into it.”
See more: PayPal’s CFO believes AI can save the company $25 million a year by automating one area of customer service
There’s more to come — Magats said PayPal’s work with strategic partners is, to use a sports reference, just wrapping up the first quarter.
Magats said next steps will be focused on making more connections between various members of the network, including expanding how rewards points and cash-back can be redeemed, and growing into other regions, such as Latin America.
“Now it’s about how do you take these things and more integrate the experiences together,” Magats said. “It’s the collection of everything that comes together that creates really great customer experiences.”
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