πŸš€ A New Entrant To The Australian Credit Card Market

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Paypal is entering the Australian credit card market in July 2021 with their PayPal Rewards Card.

My initial reaction when I saw this was what on earth are they thinking?! Upon deeper reflection I realised that surely a company like PayPal wouldn’t invest in something like this if it didn’t make sense.

There’s no silver bullet option that’s preferred by all Australians, so we want to ensure that however customers prefer to pay, they can choose to do it with PayPal.

Andrew Todd, General Manager of Payments, PayPal Australia

In the early days of the Internet, PayPal was offering a solution to enable online payments. Fast forward to 2021 and it’s critical that they show show up and bring it at every possible payment moment and channel. Their strategy makes sense.

Consumers have consistently shown that they have different payment needs and preferences at different stages of the payment journey.

Fintechs like Zip Co know this, it’s why their mission is to be the ‘first payment choice, everywhere’. It’s also the reason they’re expanding merchant acceptance, launching business propositions and offering virtual cards.

Consider the following two scenarios.

Scenario 1:

You go to a cafe to buy your morning coffee. You could pay with cash, your card, a mobile wallet or a wearable device. Assume now your preference is card. You pull out your wallet only to discover all your cards have fallen out! That’s ok, you tap your phone instead because your bank has Google & Apple Pay. You get your caffeine fix and now you’ve got the energy to sit on the phone for an hour to report your lost cards.

Scenario 2:

You’re in JB HI-FI and you really want to buy the latest laptop computer so you can design cooler content for your blog. You don’t want to touch your savings account but you don’t get paid for another two weeks. You have a choice: pay it on your credit card and sweep the money across when you get paid; pay it back via instalments when you receive your statement for a fee (if your bank offers this); or buy now and pay over time interest free using Zip or Afterpay. If you go home and buy online you could also opt for PayPal Pay in 4.

In these two examples alone it becomes overwhelming with the amount of choice a customer has on how they pay. It becomes a choice then as to whether these players dominate in their area of competitive advantage or try to play across the entire customer journey from pre through to post purchase and online vs instore to create a holistic payments ecosystem for the customer.

So how are Australians paying for things?

RBA data shows that the share of payments made via debit cards is rapidly increasing as consumer preferences shift away from credit. RBA data also suggests BNPL transactions accounted for 2% of the payments volume, although this data doesn’t account for players like bundll, Humm & Klarna so I don’t think reflects the true volume.

PayPal have referenced the below share of credit card payments and pointed to the fact that in 2019 the share was at the same level as 2013. In the time since 2019 though we’ve had a global pandemic and Australians have been saving more than ever. We can see in the below graph the rapid shift away from cash payments toward debit. According to APRA, credit card spending remains ~20% lower than pre-COVID levels. What am I missing then because this picture unsettles me…

Australian credit card market RBA Share of Payments Data
Australian credit card market RBA Share of Payments Data

If PayPal wants to capture more of the payments market

Why not go for a debit card style of product? Or a digital only card? Something like CBAs no interest Neo credit card?

I guess the answer here lies within the business model. PayPal have expressed that they want to play in the rewards space with the credit card. If you were offering a rewards program on a debit card, it would get expensive pretty quickly. Debit cards alone don’t make the banks money, they are products that build stickier and engaged customers, many of whom will take up more profitable products like home loans.

With a credit card product, you can move the levers to maximise your revenue (merchant fees, interest, other fees etc) to fund as much of your cost as possible (there is a cost to the bank to lend you money, cost of rewards points etc). In this market though, it’s a tough business with rewards rates being increasingly squeezed. Which leads me to my next point…

What will the PayPal Rewards card offer?

  • Uncapped rewards
  • Earn rate of 1 point per $1
  • No annual fee
  • customers can redeem their points online via PayPal Checkout at 750,000 businesses globally, or applied to a recent PayPal Rewards Card purchase
  • 20.99% p.a. purchase rate
  • white label product backed by Citi

Those earn rates are market leading but who is going to fund that? The PayPal card is a white label product, meaning PayPal do the marketing & branding but it will be supported by the credit licence of Citi who will do all of the behind the scenes work. I used to do this for the Macquarie Bank white label credit card products.

Couple it with a $0 annual fee and my mind is blown. I guess this will be a loss leader as they try to penetrate the existing PayPal customer base of 9.1 million.

I’d love to know how the PayPal/Citi contract works. Citi is the provider for the Qantas cards that launched the Premier card with uncapped rewards and 1 point per $1. It doesn’t look like they’ve dropped the earn rates.

The rewards piece is positive. We all saw what happened when COVID swept through and rewards programs heavily skewed toward travel became almost offensive.

It’s a bold move from PayPal in this environment. I’d love to interview one of their Product Managers! I hope this bucking of the trend pays off for them.

I'd love to hear what you think!