A recent article from PCMag caught my eye because of the ramifications it could have for the banking industry. Having worked in the industry for over 10 years, I can tell you first hand, the only constant in banking is change. eBay Inc (NASDAQ:EBAY) just struck an alliance that suggests the company has bigger plans for its PayPal unit than the market might realize. In fact, if the company were to expand this relationship, traditional banks might need to sit up and take notice.
This Isn’t A Huge Deal, Or Is It?
The article I saw from PCMag detailed a partnership between PayPal and Coinstar, Inc. (NASDAQ:CSTR), where customers would have PayPal functionality at Coinstar machines. Admittedly this partnership is still in the testing phases, but the potential is huge. Customers in Texas, Northern California and Ohio have the ability to deposit, transfer, or withdraw funds from their PayPal account at the local Coinstar machine.
The initial results were positive. In the, “test in Dallas, 40% of kiosk users who took advantage of the feature went back to use PayPal on the kiosk an average of two times a month.” While customers are limited to adding $500 a month to their PayPal account currently, this has the potential to be a much bigger deal.
What I’m suggesting is, what if this test functionality is the beginning of a PayPal bank?
Unconventional Banking Is Becoming More Common
I’ve made the argument in the past, that eBay Inc (NASDAQ:EBAY) needs to consider separating the eBay and PayPal divisions to let the market more appropriately value the PayPal business. If the company were to consider a bank type offering, this split would be all but guaranteed. Given that PayPal is seeing user growth of between 12% and 15% over the last year, this increase dwarfs the type of new account growth traditional banks are seeing. Using Coinstar as a way to gain access to customers sounds like a brilliant idea that would benefit both PayPal and Coinstar.
Keep in mind, customers aren’t just banking with brick and mortar institutions anymore. The Charles Schwab Corp (NYSE:SCHW) said they added 844,000 new bank accounts in their last quarter alone. The brokerage realizes what banks have known for years, checking accounts are both profitable and a cheap source of funds. With Charles Schwab Corp (NYSE:SCHW) seeing a 28% increase in assets to $75 billion, this is no small offering itself. The company has gained these accounts by offering fee-free ATM usage, and by leveraging their existing brokerage relationships.
Traditional banks like Capital One Financial Corp. (NYSE:COF) have realized they need these profitable online accounts as well. The credit card heavyweight bought ING assets that increased their total deposits by 66% on a year-over-year basis. Capital One Financial Corp. (NYSE:COF) now can offer online checking, savings, and brokerage accounts to their millions of credit card faithful. Since the company’s cost of funds on these accounts is just 0.72%, it makes good business sense for their high-interest credit card portfolio.
By comparison, traditional banks like Bank of America Corp (NYSE:BAC) would seem to be the most at risk. In the last quarter, Bank of America saw deposit growth of just 2%. Though the bank has over 5,500 banking centers, the advent of direct deposit, ATMs, and checkcards is making the traditional branch less relevant.
Why Would PayPal Be Different?
PayPal would hold several advantages over most traditional banks. First, PayPal is already moving into physical stores accepting this form of payment. A PayPal bank would have the opportunity to offer both the PayPal form of payment to a retailer, and could potentially cut a deal on this service if the retailer brought their banking business to PayPal.
Second, if PayPal allowed this Coinstar partnership to become a full ATM-like functionality, the company would immediately have one of the largest ATM networks in the country. Bank of America has about 16,000 ATMs, but there are over 20,000 Coinstar machines. In addition, these Coinstar machines are located mainly in grocery stores, convenience stores, and other places customers are already shopping.
Third, PayPal already is in the money transfer business. The company saw a 24% increase in payment volume in the current quarter. There is no more a popular way to pay and get paid online. The company’s deep understanding of online transactions would be unmatched by any bank trying to talk to other businesses. PayPal’s additional value as a bank would be the ability to offer a solution to individuals and businesses where they can use over 20,000 locations to access their account. They could also deposit electronically through check images, and direct deposit would take care of the rest.
The bottom line is, PayPal has an opportunity that many people might not think about. While investors are wondering what’s next for their bank in light of the challenges of the last few years, PayPal could swoop in and steal market share. Charles Schwab Corp (NYSE:SCHW) is pushing hard to gain deposit dollars, and Capital One Financial Corp. (NYSE:COF) is embracing online savers like never before. Traditional banks are trying to steal business from each other, but PayPal could be the threat that none of them see coming.
The article This Company Might Be Planning Something Big originally appeared on Fool.com and is written by Chad Henage.
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