The Problem With PayPal $PYPL

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Last week David Marcus, who ran PayPal until 2014, broke a 12-year silence about his dissatisfaction with his former company.

And Marcus didn’t hold back.

He described a decade-long erosion of a company that once had every advantage in payments and systematically squandered each one.

I found the whole thing fascinating (source).

So I want to break down what happened to PayPal, because the story is a masterclass in how a dominant company can lose its way, not through a single catastrophic mistake, but through a series of reasonable-sounding decisions that compounded into irrelevance.

Let’s get into it.

The Setup

When Marcus left PayPal in 2014, the company was doing very well. The team had executed what he calls a “silent turnaround,” bringing back engineering talent, shipping good products, and making two successful acquisitions (Braintree and Venmo).

Carl Icahn noticed, and pushed for a PayPal spinoff from eBay.

PayPal became an independent company in 2015.

At that point, it had hundreds of millions of consumer accounts, millions of merchant relationships, global reach, and decades of trust. It was arguably the most important and advantaged payments company in the world.

But, after Marcus left and Dan Schulman took over as CEO, the leadership style shifted from product-led to financially-led.

The momentum from the Marcus era persisted for a little while, then COVID hit, and a massive surge in online shopping masked the company’s growing underinvestment in Product.

The Visa Deal That Changed Everything

One of the most consequential moments in PayPal’s decline happened around 2016.

Visa negotiated a deal that effectively killed PayPal’s economics.

Here’s how PayPal’s economics used to work:

• When you pay with PayPal, the money could come from your bank account (ACH), your debit card, or your credit card.

• Bank-funded transactions were far more profitable for PayPal because they bypassed the card networks entirely.

• PayPal paid a few cents for an ACH transfer versus 2-3% in interchange fees on card transactions.

• So PayPal had a strong incentive to “steer” users toward paying via their bank accounts.

But Visa somehow convinced PayPal gave up the ability to prefer bank-funded payments over Visa cards in checkout flows. (If you know more about how they managed to do this, I’d love to learn more details!).

Visa asserted control over its transaction volume flowing through PayPal.

Visa outmaneuvered PayPal strategically, and PayPal’s leadership didn’t fully appreciate what they were giving up.

This was a structural blow to PayPal’s margin advantage.

Optimizing The Wrong Thing

The company began optimizing for payment volume instead of margin and differentiation.

It leaned into unbranded checkout, where PayPal had the least leverage, instead of branded checkout, where the margin, data, and customer relationship actually lived.

Think about it this way:

• Branded checkout is when you see the PayPal button and choose to pay with PayPal.

• That’s valuable because PayPal owns the customer relationship and can steer the economics.

• Unbranded checkout is when PayPal processes the payment behind the scenes and the consumer doesn’t even know PayPal is involved.

• The volume looks good, but the margin is thin and there’s zero customer loyalty.

The Lending Miss

PayPal had a lending product that offered small business loans based on a merchant’s PayPal sales history.

PayPal could see the business’ revenue in real time and offered them a loan, to be repaid automatically as a percentage of their future sales.

But PayPal treated lending as a cautious side business.

Loans were small, short-term, and designed above all to minimize defaults.

The risk management team, not the product team, was driving the strategy.

The goal was “don’t lose money on this” rather than “make this a reason people choose PayPal.”

What could lending have looked like?

Marcus was describing a much more ambitious vision: “Programmable Lending” or Lending-As-Infrastructure.

Imagine APIs that merchants could embed into their own experiences, dynamic credit offers triggered by real-time behavior, credit lines that flex with business performance, persistent credit profiles powered by PayPal’s unique data on both consumer spending and merchant revenue.

Marcus is saying that this would have created a flywheel, making PayPal stickier for both merchants and consumers. Something that would have made it very hard to leave the ecosystem.

Instead, it was just a loan product. A feature, not a platform.

The BNPL Miss

Klarna, Affirm, and Afterpay, the leading players in the BNPL space, didn’t just offer installment payments, they built consumer finance brands, shopping discovery platforms, and persistent credit identities.

They turned a payment feature into a consumer relationship.

PayPal had every advantage here: hundreds of millions of accounts, massive merchant relationships, years of transaction history, and deep consumer trust. No startup should have been able to out-compete PayPal in BNPL.

But PayPal essentially just added a “Pay in 4 installments” button at checkout.

This was reactive, and a defensive move to match what competitors were doing.

There was no reason for a consumer to think of PayPal differently because of it.

This was another example where PayPal added capabilities but missed the opportunity to turn them into structural advantages.

The Rails They Never Built

“Rails” in payments are the underlying networks that actually move money from point A to point B. Visa and Mastercard own the dominant rails today, and everyone else pays them to move money.

When PayPal became independent in 2015, it had a rare opportunity: massive consumer and merchant bases on both sides of the transaction.

In theory, it could have said: why are we paying Visa and Mastercard to move this money when we could build our own network connecting our consumers directly to our merchants?

Instead, PayPal continued to be a middleman.

When you pay with PayPal, in most cases the money still flows over Visa, Mastercard, or traditional banking infrastructure.

PayPal built a nice interface on top, but it was renting someone else’s tracks.

That means paying their fees, playing by their rules, and ultimately not controlling the most critical layer of the transaction.

PYUSD: The Stablecoin To Nowhere

PayPal’s stablecoin, PYUSD, launched in 2023.

Technically, it works. It’s fully backed, audited, and functional.

But nobody has a reason to use it.

PayPal put PYUSD in front of hundreds of millions of users.

But distribution without demand isn’t that meaningful.

What PYUSD could be?

• A settlement layer that lets merchants get paid instantly at a fraction of card network costs.

• A cross-border rail where money moves between countries on the blockchain instead of through slow, expensive correspondent banking.

• A programmable money primitive that developers could build entirely new financial products on top of.

Instead PYUSD, like BNPL and Lending, exists adjacent to the product instead of inside the core of it.

Acquisitions Added Volume, Not Power

PayPal acquired Honey for roughly $4 billion in 2020. Honey was a browser extension that found coupon codes at checkout. Millions of people used it.

The problem: Honey’s value happened before the payment. It didn’t influence which payment method was used, didn’t process the transaction, and it didn’t deepen PayPal’s relationship with the checkout moment.

Honey monetized affiliate economics (referral fees), not payment economics (transaction fees).

Honey didn’t increase PayPal’s core competitive advantage.

Xoom, another acquisition, was a digital remittance service. It solved a real problem. But once again, it didn’t compound PayPal’s advantage. It moved money internationally using the same traditional banking infrastructure everyone else used.

Neither was a bad company.

But both seem to be a wrong fit for PayPal.

They added surface-level metrics without strengthening PayPal’s structural position in payments.

The Repeating Pattern

If you zoom out, the pattern is clear.

At every juncture, PayPal chose the safe, predictable path over the ambitious, platform-level bet.

Optimize for volume instead of margin.

Add features instead of building platforms.

Rent other people’s rails instead of building their own.

Acquire activity instead of leverage.

No single decision was catastrophic.

Each one was defensible in a “quarterly earnings context.”

But compounded over a decade, the result is a company that had every advantage and could have become the most consequential payments company of our time, and instead watched Apple Pay, Klarna, Affirm, Stripe, and others eat its lunch.

That’s the real lesson from PayPal.

The slow erosion of competitive advantage doesn’t happen because of one bad decision.

It happens because of a thousand reasonable ones.

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