Why PayPal should buy Pinterest

According to Bloomberg PayPal is interested in buying Pinterest:

PayPal Holdings Inc. is exploring a $45 billion acquisition of social media company Pinterest Inc., in what could be the biggest technology deal of the year and move the payments company closer to its ambitions of becoming a “super app.” San Jose, California-based PayPal recently approached Pinterest about a potential deal, said people with knowledge of the matter, who asked not to be identified because the details are private. The companies have discussed a price of around $70 a share, the people said.

PayPal is under pressure for several reasons. And to solve those, buying Pinterest might be the best option.

Those issues are:

  1. Being commoditized: PayPal has become a commodity in B2C-payments as their competitors have a better UX (Apple/Google Pay) as they are an integral part of the platform
  2. Vertical integration through Embedded Finance: PayPal is losing B2B-business because non-financial companies are building their own solutions (e. g. Amazon Pay)
  3. Shopify’s potential: PayPal is facing competition from Shopify because Shopify’s business model (full-stack and partnerships) is better suited for the current environment
  4. Shift towards social commerce and losing access to social networks: PayPal is being cut out from social commerce (e. g. Facebook or TikTok)

Being commoditized through platforms and vertical integration

As Ben Thompson points out, PayPal will have a hard time winning in the payment-processing space with Apple Pay or Google Pay as competitors because using Apple/Google Pay is significantly easier:

This makes obvious theoretical sense. Simply being a payment processor in 2019 is not only a race towards commoditization, it is also a race where PayPal arguably has a significant disadvantage when it comes to the user experience: why go to the trouble of logging into your PayPal account when you can simply use Apple Pay or Google Pay?

Furthermore, PayPal’s merchant-solutions are made obsolete by integrated vertical solutions. Amazon has Amazon Pay, Facebook has Facebook Pay and on Shopify merchants can use Shopify Payments. The advantage of these vertical solutions is a) the better integration into the shop and b) lower or no transaction fees (see the Shopify example below)

Merchants don’t pay transactions fees when they use Shopify’s payment system instead of a third-party provider

TikTok is another great example for this vertical integration. TikTok is the latest social network embedding commerce more deeply into its platform:

The company said it’s able to work with online merchants in a couple of different ways. One is a direct integration and full-service shopping solution where TikTok manages everything from shipping to fulfillment and point-of-purchase. This is a system TikTok has been testing in Indonesia, as TechCrunch previously reported. It’s also now available in the U.K. The second way involves working with third-party commerce partners, like Shopify, who can provide sellers with essential backend tools and support.

It is worth highlighting that Shopify was mentioned as a third-party and not PayPal. This indicates Shopify’s potential over PayPal.

Shopify’s potential

PayPal is facing competition from Shopify because Shopify has two advantages over PayPal:

  1. Shopify is fully integrated
  2. Shopify partners with Strip

Shopify is fully integrated: When Shopify offers the full range of solutions from online, to POS and from payments to shipping, why would anybody use modular solutions?

Shopify partners with Strip Shopify’s partnership with Stripe gives Shopify another edge because Shopify can offer similar solutions like PayPal but with a fraction of the effort. From the press release:

Stripe is expanding its partnership with Shopify to power the Shopify Balance Account and the Shopify Balance Card, enabled by Evolve Bank & Trust. For independent businesses and entrepreneurs using Shopify, this puts all their finances in one place, and gives them the tools to manage cash flow and business spend so they can grow faster. “At Shopify, we’re focused on reducing the barriers to entrepreneurship. As part of that mission, we will soon launch Shopify Balance to empower our merchants to take control of their finances,” said Tui Allen, Senior Product Lead for Banking at Shopify. “We’re excited to partner with Stripe to provide our merchants with critical financial tools and products for their banking experience, specifically designed for their businesses’ financial needs.”

Shift towards social commerce and losing access to social networks

As the TikTok example above shows, consumers are increasingly shopping on social media sites. This includes Facebook and Instagram, but also is Twitter “starting to explore ways to better support commerce

And PayPal is facing competition on those sites. First, as mentioned above, some sites are working on their own solutions (e. g. Facebook). Secondly, PayPal is facing competition from Shopify on Instagram and Facebook via Shop Pay (Shop Pay is Spotify’s equivalent to PayPal’s pay button). Furthermore, there is also a Pinterest-app for Shopify.

All issues considered, the shift towards social commerce is the most pressing

Considering the issues and the options PayPal has, buying Pinterest seems to be the best option:

Being commoditized: PayPal cannot compete against Apple/Google Pay as their UX is too deeply integrated into the platform (e. g. Chrome or iPhone).

Embedded Finance: Moving into embedded finance could make sense, however, it wouldn’t be the best use of their brand equity.

Becoming Shopify, i. e. going full-stack: PayPal is – albeit slowly – working on becoming a full-stack provider. In 2021 they acquired Chargehound and Happy Returns – companies dealing with chargebacks and returns.

Considering that e-commerce-platforms like Amazon or Shopify are building their own solutions, PayPal is losing more and more potential customers. PayPal can of course try to combat that by going aggressively against Shopify. However, with their “super app” (an app similar to WeChat with financial services, shopping tools, messaging etc.) and the acquisition of Honey (an app to find vouchers and coupons) they have opted for a different strategy. In achieving this “super app”, social commerce constitutes a crucial role as it is by far the biggest behavioral change from the consumers’ perspective. When we now take into account that social networks like Facebook are squeezing PayPal out and that they are losing ground to Google, Shopify, and Co. it makes sense to a) differentiate from other payment providers and b) move as close as possible to the customer to profit from the shift to social commerce.

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