PayPal: Riding the Temu Tsunami

Exploring Temu's revenue potential and how PayPal breeds user growth

  • Temu has become highly popular in the U.S., potentially bringing in significant incremental revenue for its gateway, PayPal.
  • PayPal faces competition from established players like Apple, Google, Affirm and Afterpay in the digital payments space.
  • Its progressive user growth is driven by high-value services and integration with platforms like Apple Wallet.
  • The company’s intensifying international presence, cross-border trade, total payment volume growth and peer-to-peer transactions all signify the acceleration of user growth.
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In the online retail landscape, PayPal Inc. (PYPL, Financial) anticipates a promising revenue stream, courting the dazzling rise of Temu—a burgeoning discount e-commerce platform making waves in the market.

Within this intricate tapestry of digital transactions, "The Temu Factor" is unveiled, threading through the potential and challenges entwined with its escalating popularity and consequential impact on PayPal's coffers.

As Temu eclipses behemoths like Inc. (AMZN, Financial) and Walmart Inc. (WMT, Financial) to clinch the most favored shopping app title, its trajectory sketches a fascinating narrative of growth and consumer interest, promising a substantial augmentation in PayPal's revenue over time.

The Temu factor

A positive outlook regarding PayPal's revenue inflow from Temu is valid. On a long-term horizon, the platfomr could bring in significant revenue for the payments giant.

Temu's rapid growth and popularity in the U.S. e-commerce landscape are noteworthy, having become the most popular shopping app. The rise in visits to its website indicates a significant consumer interest in the platform.

The first and most significant concern is the uncertain impact of Temu on PayPal's revenue. While Temu accounted for approximately 2% of incoming website traffic to PayPal in August, it may experience a substantial increase in revenue over time. The conversion rate from Temu's visitors to actual PayPal transactions may be much higher due to the nature of Temu's offerings—ultra-low-priced items, which are often priced at just a few dollars.


Source: Statista

Fundamentally, PayPal's revenue model relies on transaction fees, a percentage of each transaction's value. Therefore, the revenue generated from a typical purchase on Temu would be significantly lower than a higher-value transaction. However, these low-priced purchases may collectively generate significantly higher volumes, especially in the high inflationary environment globally.

Another focus point is the sustainability of platforms like Temu that primarily offer low-cost products. This strategy can lead to rapid user growth and increased website traffic, so strategic optimization may result in sustainable profitability. However, high cash burn rates are typical for e-commerce companies, particularly for platforms focused on gaining market share quickly. If Temu follows this trajectory of rapid user growth, it may not need to adjust its pricing strategy or business model.

Considering the competitive landscape, PayPal faces stiff competition from established players like Apple Inc. (AAPL, Financial), Alphabet Inc.'s (GOOG, Financial) Google, Affirm (AFRM, Financial) and Afterpay in the digital payments and checkout space. These competitors have their own ecosystems and partnerships with various retailers. However, PayPal has a strong presence and a large user base, sustaining user growth in an environment where increasing payment options and checkout solutions can lead to a fragmented market where each provider captures only a small share of the overall volume.



On the downside, it is important to note that incoming website traffic is not a direct measure of checkout share or transaction volume. In adverse economic scenarios, the nature of Temu's offerings, such as ultra-low-priced clothing and knick-knacks, implies PayPal's revenue share from transactions on the platform might be relatively small without rapid user growth.

Temu's customers tend to purchase low-cost items, which could result in thin profit margins for PayPal. Additionally, concerns about the sustainability of platforms like Temu, given their high cash burn and focus on low-cost items, may be validated. If Temu struggles to maintain its growth and profitability, it might not become a substantial source of revenue for PayPal.

Progressive state of PayPal user growth

One of the primary drivers of PayPal's rapid user growth is its commitment to innovation and continuous product development. The company reported conducting 200 tests in the second quarter of 2023, with another 200 planned for the third quarter. These tests cover many areas, from payment processing to user experience enhancements.

The significance of these tests lies in their ability to uncover valuable insights about user behavior and preferences. By analyzing the results, PayPal can fine-tune its services to meet its users' needs better. Successful tests result in tangible improvements to the platform, including increased user engagement and satisfaction.

On the other hand, PayPal's expansion into high-value services has been a significant driver of user growth. For instance, the company offers various value-added services that benefit merchants and users through increased user engagement and transaction volumes.

One such high-value service is foreign exchange. PayPal allows users to conduct currency conversions seamlessly within the platform. This service simplifies international transactions and reduces currency exchange-related costs. As more users engage in cross-border commerce, the demand for these services will grow, bolstering PayPal's user base.

The company also offers risk mitigation services, including early fraud detection and dispute authorization. These services enhance the security of transactions, instilling confidence in users. If users feel secure while using the platform, they are more likely to continue using it for their financial needs.

PayPal's high-margin services, such as merchant services and payment processing, contributed significantly to its user growth. As merchants recognize the value of these services, they are more inclined to partner with PayPal, further expanding its user ecosystem.


For instance, the recent integration of eligible PayPal and Venmo credit or debit cards with Apple Wallet is a prime example of this strategy. This move simplifies and enhances the payment experience for users, making it easy to make secure and convenient in-store, online or in-app purchases.

Users can now add their cards to Apple Wallet and use Apple Pay, a mobile wallet solution gaining immense popularity due to its ease of use and security features. This inclusion of PayPal and Venmo cards into Apple Wallet aligns with consumer preferences for contactless and mobile payments, making it an attractive option for both existing and new users.

Overall, this level of convenience is a powerful driver of user adoption and growth. Looking to attract and retain users, PayPal also offers competitive rewards and cashback programs to those who add their eligible PayPal or Venmo cards to Apple Wallet. This strategy can significantly influence users' decisions and contribute to user growth.

Beyond theory, scanning the numbers may give a clear perspective on the resumption of PayPal's user growth. PayPal's rapid user growth is open to more than just the United States. As of the second quarter, 45% of its active accounts were outside the U.S. Expanding globally allows the company to tap into diverse markets with different needs and preferences, leading to substantial user acquisition.

Also, cross-border trade is vital to PayPal's international growth. Despite some challenges in the European Union-U.K. corridor, CBT volumes grew by 3%, with CBT total payment volume representing 12% of the company's total payment volume. This indicates PayPal's global reach and capabilities in facilitating international transactions attract users engaged in cross-border commerce.

Logically, PayPal's ability to process an increasing TPV strongly indicates user growth. In the second quarter, TPV increased by 11% year over year. The company's TPV continues to rise as users engage with these platforms to send money, pay for goods and services and engage in cross-border transactions.

Further, peer-to-peer transactions have become increasingly popular, and PayPal is capitalizing on this trend. Peer-to-peer TPV, which includes PayPal, Venmo and Xoom, reached $95 billion and represented 25% of TPV. While the growth rate is moderate at 2% year over year, it indicates users continue to actively use these services to send and receive money from friends and family.

The significance of peer-to-peer transactions extends beyond the numbers. These types of transactions often lead to network effects, where users invite others to join the platform to facilitate easier money transfers. This viral growth effect can be a powerful driver of user acquisition. As more users turn to PayPal and Venmo for peer-to-peer transactions, it can lead to a snowball effect, further boosting user growth.


Source: PayPal's second-quarter investor update

Moreover, another critical metric for evaluating user growth is engagement, which is reflected in transaction frequency. As of the second quarter, transactions per active account grew by an impressive 12% year over year, indicating consumers are joining PayPal and actively using the platform to make transactions.

PayPal processed 6.1 billion payment transactions, a 10% year-over-year increase. The significant growth in TPA is predominantly driven by transaction growth from Braintree, a subsidiary of PayPal that provides payment processing solutions for online and mobile businesses. Core PayPal also contributed to this increase.

Lastly, the focus on driving higher activity levels with existing active accounts has resulted in a slight decline in active accounts (0.6% year over year). This decline can be attributed to the strategic decision to remove minimally engaged accounts. PayPal's emphasis on retaining engaged users is crucial for long-term growth, as active and engaged users are more likely to recommend the service to others.


In the rapidly evolving e-commerce space, the alliance between PayPal and Temu signifies a potential paradigm shift in revenue dynamics.

As Temu skyrockets, eclipsing even industry titans, it holds promising implications for PayPal's revenue trajectory. However, the nuanced dance of voluminous low-value transactions, sustainability concerns and cut-throat market competition presents a tapestry of challenges and opportunities.

PayPal's agile strategies, from innovative tests to strategic global expansions, underscore its preparedness to harness these opportunities while navigating potential pitfalls.


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