Digital payments platform PayPal Holdings, Inc. (PYPL) is a longtime leader in this market, with wide acceptance among merchants and consumers alike. A logical extension of PayPal's business model may be to offer securities brokerage services, and a recent report indicates that the company is engaged in studying that possibility, already having set up a division called Invest at PayPal.

While the report that emerged on Aug. 30, 2021 caused some reaction in the markets, it should not have been a surprise. "We announced this feature at our Investor Day in February and we are evolving our app to enable it," PayPal said in a statement released the next day. Moreover, PayPal already supports trading in cryptocurrencies.

Key Takeaways

  • In February 2021, PayPal indicated that it was considering offering stock trading.
  • However, a new report that emerged on Aug. 30 spurred reactions in the market.
  • PayPal already offers cryptocurrency trading.
  • The approval process for stock trading may be lengthy, and the SEC is worried about increased "gamification" with the explosion of trading apps.

What Attracts PayPal

A major factor probably spurring PayPal's interest in this market is a boom in retail investing, with estimates indicating that more than 10 million new investors have entered the market during the first half of 2021, approximately the same number recorded in all of 2020. The best-known beneficiary of this boom, Robinhood Markets, Inc. (HOOD), now has more than 22.5 million net cumulative funded accounts as of the end of Q2 FY 2021, up by 129.6% year over year (YOY). That firm's quarterly revenue was up by 131.5% YOY and beat analysts' estimates.

Additionally, the Cash App payment service offered by a key competitor of PayPal in the payments processing market, Square, Inc. (SQ), already has added features that facilitate the trading of stocks and cryptocurrencies. PayPal reports having more than 400 million active users as of the end of Q2 FY 2021.

"We see stock trading (among other incremental super-app features) as a material engagement driver for PayPal as the company looks to gain more share of the customer's wallet and drive more funds in its ecosystem," analysts at Wolfe Research observed in a note released on Aug. 30.

Square's Cash App as Investing Platform

Meanwhile, Square indicates that its Cash App had 40 million monthly transacting active customers as of the same point in time and that almost 4.5 million of these (or 11.25%) held a stock or exchange traded fund (ETF) in their account, up by more than three times YOY. Total gross profit per monthly transacting active customer was $55 for Q2 FY 2021, up by 2.5 times from the same period in 2019.

The trading of Bitcoin (BTCUSD) alone produced $2.72 billion of revenue and $55 million of gross profit in Q2 FY 2021 for the Square Cash App. Both figures were about three times greater than they were a year ago.

Hurdles Ahead for PayPal

If PayPal intends to set up its own brokerage subsidiary, the regulatory approval process can take at least eight months to complete. Moreover, PayPal would be entering an increasingly crowded competitive field, and the U.S. Securities and Exchange Commission (SEC) already has expressed concerns about increasing "gamification" of the securities markets that is accompanying the app-led explosion of retail investing.

These concerns also may slow down approvals should PayPal choose to partner with an existing brokerage firm instead. Meanwhile, SEC Chairman Gary Gensler has indicated that his agency is considering imposing a ban on payment for order flow (PFOF), which is the main source of revenue for Robinhood and many of its competitors. PFOF allows these brokerages to eliminate visible commissions on trades, which they employ as a key marketing tool.