PayPal at Citi's Fintech Conference
The bear case is back, stronger than expected
Alex Chriss, PayPal CEO, spoke wednesday at Citi’s Annual FinTech Conference, to discuss PayPal’s transformation and future.
To be straightforward, the conversation wasn’t particularly bullish and the data shared made me less comfortable than I previously was, for two reasons I’ll detail below:
My originally unique bear case is materializing with a weakening consumer.
PayPal’s transformation and new services are taking longer than expected to ship.
I still intend to hold the stock for now. The bull case remains intact and the risk is low at today’s price. But I may reduce its weight in my portfolio as what I initially thought PayPal would be a two to three quarter transformation post-Q2 now appears to be a much longer transformation, with short term volatility.
The Bull Case Remains.
On the positive, PayPal continues its transformation, improving existing services for merchants and customers and shipping new valuable ones.
The biggest topic and fundamental bear case was Braintree’s unprofitability, which is now behind us as of last quarter.
We’ve turned around almost every part of the business. So our Processing business was negative. We’ve now turned that positive, went through some really good discussions with our merchants to turn that business around.
Those were difficult conversations, renegotiating and pricing to value, but I’m very proud we didn’t lose any merchants. And having done that, we actually reduced the total processing that we were demanding from them, but have made it much healthier margins as we move forward. So now we feel like we’ve inflected on revenue. We see that continuing to grow, and we think transaction margin will continue to grow as well.
The hard part is done. The next quarter should show improvements, with growth and a real profitability inflection expected by 2027.
Venmo is growing well, with massive untapped potential.
We’re on track to eclipse $2 billion in revenue from Venmo in the near term. And we think we’re maybe 1/4 to 1/5 of the ARPA potential that Venmo has. So focused execution, we’re going to continue to lean in there.
Lastly, BNPL is another growth lever that management is pushing to consumers.
So we’re going to move [BNPL] upstream from a presentment perspective. We’re going to move PayPal as a pay later option onto the product page so that consumers can actually see what that [ pay in for ] as an example, price would look like for the good that they’re looking at. And we see I think right now, we’re seeing a 10% lift in conversion when we are up on that product page. And so that’s going to be a strategic shift for us, which we think will actually accelerate.
This will be a key tool in the coming quarters as consumer strength weakens.
In brief, nothing new here since the last quarter, a normal and healthy continuation.
The Bear Concerns Rise.
As mentioned, I have two growing concerns after this interview.
Consumption is slowing.
Not really a surprise. I talked about the dual economy for year now as inevitable and detailed the mechanism in my macro report more than a year ago, and talked about this risk once more on PayPal’s last quarter detailed review.
But we called out sort of mid-Q3 that we started to see a slowdown on consumers, particularly around discretionary spending, retail and really in middle to low income brackets, which we play a significant role in PayPal. That slowdown has persisted into Q4. It really became more pronounced mid-September.
Here what I wrote more than a year ago in my macro report.
From PayPal’s perspective, there’s little they can do. The U.S. government is already discussing stimulus checks, which could help consumption but would fuel inflation further. Those subjects were also already discussed in my macro reports.
PayPal can’t control macroeconomics.
Yes. So obviously, as a business, we are going to control what we can control and continue to execute on our strategy.
On the bright side, we’re entering the year’s peak consumption period. High income households are still spending and BNPL should act as aa major lever for low income households. Very economically unhealthy, no doubts, but that’s how it is.
Western consumers are used to a certain quality of life & will go into debt to maintain it. Don’t even talk about forgetting Christmas. That’s what I expect in Q4 and PayPal’s management is working on pushing this tool so they count on it.
Slow to improve.
Fundamentally, things aren’t bad for PayPal but they’re slower than I - and apparently Alex, expected.
I’m very excited about where the experience is going. But to be transparent, that’s probably the piece I underestimated the most in terms of just how long it would take to get that experience out to customers.
I expected merchant migration to their new experiences to be completed, or close to, by year-end, boosted by a strong demand and motivation from merchants to deploy a better service pushing volume and conversion up. Who wouldn’t want that?
Yet we’re far from it, due to past mistakes.
We did not have discipline over the last 15 years of having and demanding consistent integration patterns. We let every merchant choose their own. So now as we go through and ask them to make a change, there’s not just one set of instructions to go do it. We’ve got to go through their code and help them go through the upgrade.
So we know that this new experience works. So we have started the process. We are 20% plus of the way through. We’ve optimized about half of that, call it, mid-teens of the total transaction volume. It’s now being rolled out in the U.S. and across Europe. It’s just slower than I want. So good news is it works. Bad news is it’s taking some time.
This will be a one-time migration and will bring major improvements but it’ll take time to reflect in PayPal’s data. Only 10% optimized after three quarters is… not good. How long could it take?
We’ll never go through this again because we now have a single common integration pattern, but we’re just going to have to go through the hard work over the next few quarters and maybe even a couple of years to get through our backlog of merchants.
That means at least a year. AT LEAST. The good news, as Alex said, is that it works and as they start with their largest partners, most of the improvements should show before the backlog is cleared.
So we’ve started with some of the largest merchants. Those are growing incredibly well. And again, when we’ve done the upgrade, the conversion rate improves. We’ve gone through some of our platform partners that then can roll it out to millions of their businesses. That’s going really well. But we’ve just got to get through the backlog.
The second hit came with PayPal World, announced for H2-25. It’s a key part of my bull case connecting hundreds of millions of merchants and users, expected to go live early 2026 for Venmo and PayPal at least. But now?
Yes. [PayPal World] is starting now. It will come over the next couple of quarters when we really roll it out. We started to do some early peer-to-peer testing of PayPal and Venmo money, but this is all within the next couple of quarters.
How long “a couple of quarters” is? Phrasing should be “early next year” or “current 2026” but not “couple of quarters”. Allowing Venmo users to pay with PayPal is a huge growth lever and it should be shipped as soon as possible and not be in “early peer-to-peer testing” four months after announcement. I expected it by Q4 or early Q1-26.
Lastly, the final blow: Alex pulled a Duolingo.
Now those investments, if it’s incentives for consumers to make purchases, come at a headwind to transaction margin. And so we will make those investments in the short term to be able to drive long-term habituation and win the market going forward where we think we’ve got a best-in-class product and can take share. If we have to invest now to drive ROI for the next 3, 5, 10 years and set PayPal up for the future, those are the investments we’ll make through ‘26.
This is smart management. Alex and team expect lower consumption, tough macro conditions, a backlog to clear and need to invest. They’re going to tackle it all now, throw all the bad news at once.
We also heard comments on agentic e-commerce. Bottom line: it’s the future, but adoption remains uncertain due to trust and usage concerns.
In terms of scale, I have no idea. I wish I could look and do a crystal ball and tell you how fast commerce is going to move into Agentic. But we’re going to follow where consumers are. For me, I think the experience for many purchases is superior when you actually use an agentic experience, you get right to the right product at the right time, and it can create a really personalized experience. But it’s all going to come down to trust. People aren’t going to make purchases until they feel like they know and they can trust that when they’re allowing their agents to make a purchase on their behalf that the purchase is actually going to show up and that it’s going to be the right product.
That being said, PayPal remains the most logical player to innovate in these new methods.
So one of the reasons you’ve seen us as first to market with wallets and integrations with Google and OpenAI and Perplexity is because they know that PayPal brings a trusted 2-sided ecosystem to bear and enables the confidence of a consumer and a merchant to actually move into this next wave.
These are logical and expected comments. The thesis is bullish, but building habits and trust will take time and that’s outside PayPal’s control. On this, I did not expect more than what they’ve done, although we have no comments on integration and how fast this functions will ship to market.
My Take.
The issue with this presentation isn’t macro weakness, which I anticipated, nor the time needed to build trust around agentic e-commerce, which is understandable. Those are external factors PayPal cannot control.
The real concern is that what management can control isn’t progressing as fast as expected. It’s slow. It’ll take longer. And the benefits of these migrations and new services will be muted by investments during 2026. In short, the slump is likely to continue while I expected these new services to ship quickly and start delivering results slowly through 2026.
Instead of being the bounce year, 2026 will be the trash year where management will put everything on the table to cleam, focus on its long term plans & buy back shares. Which isn’t bad for long term investors who are patient enough!
So, does this change the bull thesis? No. PayPal remains a mispriced stock innovating at in AI and fintech, with a competitive edge and lots of opportunities.
But it does change my expectations for its stock. I thought 2026 would be the year where PayPal could show the market its transformation in the data. But based on this interview… It apparently won’t be.
That’s why I may reduce my exposure to the stock for names with better near-term upside - AsteraLabs comes to mind but no plans yet. I want to maintain exposure to PayPal at least until Q4 and not take rapid decisions on one interview. A year more isn’t much in market time, especially given the potential & low risk at today’s price.
Some liquidity rotation may occur. Some potential derisking on my options. With no immediate plans assuming the market doesn't move violently. I could see myself rotate part of that liquidity if so.