How Does PayPal Make Money? Business Model Explained!

PayPal Holdings Inc. (PYPL) operates one of the best-known digital payment platforms which enables consumers and merchants to make payments online and via mobile devices globally.

In addition to core PayPal, PayPal Credit, Braintree, Venmo, Xoom, Zettle, Hyperwallet, Honey, and Paidy, the company’s platform offers payment solutions offered by trusted brands. 

Other services and fees it provides to its customers generate revenue for the company.

It competes against both large, dominant companies and smaller, agile competitors in the global payments industry. Industry regulation and scrutiny is increasing as the industry undergoes rapid change.

Among its competitors are Visa Inc. (V), Mastercard Inc. (MA), Alphabet Inc.’s (GOOGL) Google Pay, JPMorgan Chase & Co.’s (JPM) WePay, Square Inc. (SQ), and Stripe Inc.

Overview of PayPal’s Financials

In early February, PayPal announced financial results for the fourth quarter of its fiscal year (FY) 2021, which ended December 31, 2021. A net income of $801 million was reported, down 48.9% from a year ago. 

Revenue increased 13.1% year over year (YOY) to $6.9 billion. Compared to a net other income of $896 million in the previous quarter, PayPal recorded a net other expense of $344 million in the recent quarter. That expense hurt PayPal’s fourth-quarter net profit.

During the quarter, PayPal acquired 3.2 million new accounts from its recently acquired company Paidy, adding 9.8 million new active accounts net. The total payment volume (TPV) increased by 23% year over year to $339.5 billion. 

PayPal said that 2021 was its best year ever, noting that it launched more products and experiences than ever before and that its TPV for the full year was $1.25 trillion.

How PayPal Makes Money

PayPal reports its financial performance data as one segment and does not break it down into subsegments. 

It does, however, provide two types of revenue breakdowns: transaction revenue and revenue from other value-added services. PayPal’s main source of revenue is transaction revenue. We will explore each of these separately below.

1. Transaction Revenues

PayPal charges merchants and consumers net transaction fees for each transaction made through its payments platform. TPV is used to calculate the magnitude of the fee. 

Additionally, customers will be charged fees for currency conversions, cross-border transactions, fund transfers from PayPal or Venmo to their debit cards or bank accounts, cryptocurrency transactions, and other miscellaneous fees. PayPal’s transaction revenue increased 12.2% to $6.4 billion in Q4 FY 2021. More than 92% of the company’s revenue comes from this category.

2. Revenues From Other Added-Value Services

In addition to partnerships, referral fees, subscription fees, gateway fees, and services offered to consumers and merchants, PayPal generates revenue from a variety of sources. 

Aside from its loan portfolio, the company earns interest and fees from certain assets underlying customer balances. Other value-added services generated nearly 8% of PayPal’s total revenue in Q4 FY 2021, up by 24.7%.

PayPal’s Recent Developments

PayPal announced on March 18, 2022, that it was expanding its payment services in Ukraine in response to the ongoing crisis between Ukraine and Russia. 

According to PayPal, it will waive its own fees on funds sent to or received from Ukrainian PayPal accounts. Customers in Ukraine are also able to transfer funds from their PayPal Wallet to Mastercard and Visa credit and debit cards.

Learn more about how Visas makes money.

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