PayPal (NASDAQ: PYPL) has taken the next step to increase the adoption of cryptocurrency on its platform this week. Users can now “Check Out Using Crypto”. Those with enough cryptocurrency to cover a purchase will see a new payment option when they checkout at any of the 29 million PayPal merchants on the internet.
PayPal has been testing this feature since it introduced the ability to buy cryptocurrency in the digital wallet last year. Now that it’s launched, it could further increase engagement with PayPal and make it a daily utility.
This is how checking out works with Crypto
It is important for investors to understand how PayPal is integrated Bitcoin (CRYPTO: BTC) and other cryptocurrencies into its payment platform. And PayPal made it very clear in its press release announcing the new feature.
Here are the important parts:
- Cryptocurrency is converted to fiat currency on behalf of the customer before the US dollar payment is sent to the merchant.
- PayPal does not charge a transaction fee for paying with crypto, but it does introduce a spread when converting from crypto to US dollars.
By converting to US dollars before transferring the payment to the merchant, PayPal can support Checkout with Crypto for all merchants without the need for additional information on their part. This gives him another chance to win the checkout when customers decide how to pay in an online store.
PayPal followed the same strategy with its “buy now, pay later” product. Merchants don’t have to do anything, but customers who use PayPal now have more choices about how they want to pay. PayPal could then come back to the merchants and show them how advertising can buy now and further up the sales funnel can lead to even more sales for the merchant. The same can be possible with cryptocurrency.
Investors should also keep the second point in mind. PayPal does not charge a transaction fee for purchases with crypto. Instead, it makes money from the spread of its conversion rates. This ultimately gives PayPal better control over its profit margin. It also disguises that fee, for better or for worse.
Increase engagement by adopting cryptocurrencies
Checking out with Crypto gives PayPal a bigger utility for fans of cryptocurrency. While customers could previously sell their inventory before buying and use the resulting cash balance in their account to pay for goods and services, the new feature makes the process quick and seamless. Users only sell as much as they need to pay for the items in their digital shopping cart.
The simpler use of cryptocurrency as a pseudo payment method could lead to a stronger adoption of cryptocurrency on the PayPal platform. It could be the deciding factor for some versus other cryptocurrency trading platforms, including square‘s (NYSE: SQ) Cash app or Coinbase.
Nevertheless, Coinbase is developing a debit card that offers practically the same functionality as PayPal’s checkout with crypto function. It wouldn’t be a surprise if Square Cash Card eventually allowed users to pay with Bitcoin. PayPal’s vast network of existing merchants and customers, however, could make it a preferred platform for buying and spending crypto.
This is important because PayPal has seen a lot more engagement with users who buy cryptocurrency on its platform. During the company’s fourth quarter earnings call, CEO Dan Schulman said that crypto users are logging into the app twice as often as they were before buying crypto through PayPal. Adding the ability to spend crypto could increase engagement even further and allow PayPal to generate a profit from crypto users (via the spread and additional transaction fees).
PayPal is just getting started in the cryptocurrency space. Schulman expects cryptocurrency to completely transform our financial institutions. “We are already working with regulators and central banks to redefine and reshape the next generation of the financial system,” he said during the call for earnings in February.
PayPal has been quick to catch up with competitors like Square in Crypto and is pulling away from them just as quickly. There is no doubt that PayPal wants to invest in cryptocurrency and spend an important facet of its financial super app.
This article represents the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.