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PayPal's About to Take On Robinhood

By Adam Levy – Sep 2, 2021 at 9:50AM

Key Points

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It's the next step toward becoming a financial super app.

At PayPal's (PYPL -0.63%) investor day earlier this year, CEO Dan Schulman laid out plans for PayPal to become a financial "super app." The plan included investing in bill payment, a high-yield savings account, efforts in cryptocurrency, and enabling investments in securities for its users. 

The company's already taking its first steps toward developing and registering an investment platform within PayPal called Invest at PayPal, and it could launch next year.

The PayPal logo in the courtyard of an office building.

Image source: PayPal.

Investing made as easy as checking out with PayPal

PayPal introduced the ability for U.S. users to buy select cryptocurrencies within its app late last year, and it recently expanded the feature to users in the U.K. It follows in the footsteps of Square, which has been allowing its Cash App users to buy Bitcoin since 2017.

Square added stock trading, including fractional share trading, to its app in 2019, taking on the popular brokerage app Robinhood Markets (HOOD -0.30%). Now, PayPal is ready to follow in Square's footsteps again after hiring brokerage industry veteran Rich Hagen.

PayPal has the advantage of serving over 400 million active accounts, most of which have linked their bank account information to the platform already. By comparison, Robinhood reports having just 21 million active accounts, and Cash App has about 40 million users.

That makes PayPal a significant threat to Robinhood as the former is also looking to attract first-time investors. You're much more likely to use the app already installed on your phone (PayPal) than you are to download and set up a whole new account (Robinhood).

Why PayPal is interested in stock investing

PayPal expects to reach 750 million active accounts within five years with better average engagement than it sees today. While stock investing might not be a huge driver for new user growth -- remember Robinhood only has 21 million users total -- it does have the potential to increase engagement with the rest of PayPal.

Indeed, management notes users who invest in cryptocurrency log in twice as often as they did prior to investing. Every time a user logs in, it's an opportunity to engage them and get them to use PayPal for a purchase or think about using it for a future purchase. Square similarly found people who use its app to buy stocks or Bitcoin, or generally use more than one feature, are more engaged and generate greater gross profits for the company. PayPal is looking to replicate that success but with 10 times the number of users.

Robinhood, meanwhile, is focused almost exclusively on facilitating stock trading. Robinhood only makes money when users enter trades. That can produce some perverse incentives, and it's currently under investigation by the Securities and Exchange Commission for its "gamification" of stock trading.

On the other hand, PayPal won't need to rely on frequent trading to support its business if investors end up using its app for payments and other financial services. That can give it another advantage over Robinhood as it builds the service.

PayPal only needs a modest adoption rate in order to find success with Invest at PayPal, and it could still be a sizable contributor to the fintech company. The smaller Robinhood generated $1.1 billion of revenue through the first six months of 2021. That's just under 10% of PayPal's top line during the same period. Even with half or a quarter of the trading frequency, it could be a meaningful source of revenue, and that's on top of the potential boost to payment volume among Invest at PayPal users.

Adam Levy owns shares of Bitcoin. The Motley Fool owns shares of and recommends Bitcoin, PayPal Holdings, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

Stocks Mentioned

PayPal Stock Quote
PayPal
PYPL
$74.19 (-0.63%) $0.47
Block Stock Quote
Block
SQ
$66.51 (-2.45%) $-1.67
Bitcoin Stock Quote
Bitcoin
BTC
$17,216.80 (1.12%) $190.14
Robinhood Markets Stock Quote
Robinhood Markets
HOOD
$9.96 (-0.30%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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