Crypto Trading via Payment Gateway

KEY TAKEAWAYS 

  • PayPal to launch direct sales of crypto for more than 300 million active users;
  • Crypto trading is a lucrative business for payment platforms such as PayPal and Cash App.

PayPal plans to introduce direct sales of cryptocurrency to its users and a built-in wallet functionality for storing cryptos, which will be rolled out in three months, if not sooner, according to Coindesk. The article also reports that PayPal will be working with “multiple exchanges to source liquidity”, among which Coinbase is a viable candidate. Venmo, another popular payment service provider in the US, is also rumored to compete with PayPal on the new business initiative.

There are, of course, existing payment service initiatives in the crypto industry. For instance, Cash App, a peer-to-peer (P2P) payment service developed by Square, Inc.. Cash App has been pioneering crypto trading since 17Q4, and its transaction volume rose to almost 40,000 BTC in 20Q1, on par with LocalBitcoins, once the largest peer-to-peer crypto exchange in the world. 

Source: Square, Inc., Bybit Insight

Note that Square’s Bitcoin revenue is in gross transaction value. The real revenue is the gross profit, which is around USD 6.7 million in 20Q1. 

Source: Square, Inc., Bybit Insight

While the gross profit contribution is limited, the net profit contribution of Bitcoin services can be quite significant. Cash App charges 2.2% for Bitcoin transactions, while the costs incurred are negligible. The costs of crypto purchase and sales consist primarily of transaction fees and custody fees. Transaction fees are as low as 0 for maker and 0.04% for taker for large traders on Coinbase. The custody fee on Coinbase is 0.5% per annum.

For simplicity, let’s assume the cost of Bitcoin services is zero. Under this hypothesis, 17% of Square’s total operating income in 20Q1 was generated by Bitcoin purchase and sales. Providing Bitcoin services is an enticing and profitable business model for all fintech giants with a huge customer base.

Source: Square, Inc., Bybit Insight

Cash App’s user base is estimated at slightly under 30 million, whereas Coinbase, the largest crypto exchange by the number of customers, has just over 30 million accounts. What about PayPal?

As of the end of March 2020, PayPal has 332 million active accounts, including 25 million merchant accounts. And it added 7.4 million new active accounts in April. An active account refers to an account registered directly with PayPal or a platform access partner that has completed a transaction on PayPal’s Payments Platform, including PayPal, PayPal Credit, Venmo, Braintree, Xoom, iZettle, Honey, and excluding gateway-exclusive transactions, within the past 12 months.  

Source: 20Q1 Investor Presentation, PayPal

Setting the profitability of crypto services aside, it is not surprising that PayPal has crypto businesses on its horizon. During his time as the President of PayPal, David Marcus has already been a big fan of Bitcoin. Back in 2013, Marcus predicted that Bitcoin “has more potential to revolutionize commerce”.  His thoughts were way ahead of his time, and seven years later, it seems that PayPal is finally ready to link Bitcoin with its accounts. The progress gradually unfolds as PayPal agreed on fiat withdrawal from Coinbase to PayPal accounts in 2018. Recently, PayPal repeatedly demonstrates its interests in blockchain and continues hiring experts in this area. 

If the rumors were true, popular payment gateways venturing into crypto will certainly be a huge game-changer and undoubtedly propel mass adoption.