What COVID-19 means for the future of commerce, capitalism and cash

Corey Hajim: Today, our guest
is Dan Schulman, CEO of PayPal.

When most of us think of PayPal,
we think of buying something online

or paying a friend back
for a drink using Venmo.

But PayPal has also become
a major financial services player,

often acting as an alternative
to a traditional bank.

During this pandemic,

PayPal has supported small businesses
around the world by providing loans,

waiving fees,

and increasing cashback programs.

It has also worked with the US Government

on its Paycheck Protection Program,

as well as distributing stimulus checks.

It has enabled an outpouring
of generosity online as well.

The trend towards digital payments,

or what we might now want
to think of as contactless payments,

has massively accelerated,

and it's changing forever
how we think about commerce.

So I'm really excited
to have Dan here with us.

Thank you so much, Dan.

Dan Schulman: Thanks for having me, Corey.
Pleasure to be here with you.

CH: Glad to see you.

So let's dive right in.

Within a few months
of this pandemic's arrival,

more than 30 million people
have filed for unemployment

in the United States alone.

These are certainly unusual circumstances,

but it seems clear we were running
very close to the edge,

and now so many businesses
and their employees

are facing huge financial challenges.

How worried are you?

DS: Well, I think the crisis
has exposed three things.

Obviously, it's a health crisis

for so many people.

Second thing is that health crisis

has ricocheted,

and the world is now
in an economic crisis.

And the third crisis
that we don't talk so much about,

but I think is impacting

the way that we're going
to live our lives going forward,

is this is a psychological crisis as well.

People are reexamining
their place in the world,

what's happening in the world,

how they're going to live their lives,

both in the pandemic and post-pandemic,

and so I think this is something
that each of those phases

will need to be dealt with.

But you said this,

and I completely agree with you:

there was an economic crisis happening

well before the pandemic exposed it.

It's kind of like
the water level came down

and exposed what was already there.

You had, for instance, in the US,

185 million adults in the US

struggling to make ends meet
at the end of the month.

You have over 70 million adults that are
really outside of the financial system,

spending over 140 billion dollars
on high interest rates,

unnecessary fees, and struggling as well.

And so I think
what this has really done --

because you can't ignore 20,
25 percent unemployment rates --

it's exposed this crisis

and forced a lot of people

into maybe actions
that they might not have taken

without this crisis happening.

CH: Yeah, I think that's right.

There are so many challenges
and so many opportunities,

and I think you've spoken
of this opportunity

of digital transactions
being helpful to people,

and obviously the trend, as you've said,

has massive accelerated and pushed us
into this world even further.

So I'm curious,

what does the world
look like without cash?

Or less cash?

What are the advantages
and what are the challenges

of making that transition?

DS: I think some of the trends
that are emerging

coming out of this pandemic
or coming into it and as we look forward

is clearly this has been a discontinuous
change in the trendline,

as we move from physical to digital.

I think we've accelerated
many forms of digital capabilities

by three to five years.

And that can be from digital payments

to telemedicine

to really changing the face of retail

and how we think about retail

and changing the face of entertainment,

even changing the way governments
think about managing and moving money

and really thinking about
digital currencies going forward.

And so I think there are
a tremendous number of changes

that will occur

during this pandemic and coming out of it.

Digital payments is obviously
one of the big ones that will happen.

I mean, cash has been around
for quite some time,

thousands of years.

I would not be so bold
as to predict its full demise.

Many people have been wrong doing that.

But there is no question right now

that you will see an acceleration
of the demise of cash.

Last year, you had
over 18 trillion dollars of cash

spent at retail.

Eighty-five percent
of the world's transactions today

are done in cash still.

But the really big change right now

towards digital payments,

and that's both the advent
and the acceleration

of commerce that's happening,

as well as the shift to in-store
contactless payments, as you said,

and the real impetus for that

is health reasons.

People do not want to hand over money.

They do not want to touch screens.

They don't want to pick up a pen
and sign at the point of sale.

And so there is a demand

for contactless payments
and digital payments

to keep social distancing
requirements in place,

to protect the health of cashiers,

to protect the health of consumers.

And I think we are going to see,
we are already seeing in our business,

a surge in digital payments
across the world.

CH: It seems like a great opportunity,

but how do we make sure
that this transition is inclusive?

I mean, you've talked about
how so many people are underserved

by the traditional banking industry.

How do we make sure that those people

have that opportunity?

And it feels like a smartphone

becomes an essential item.

How do we address that?

DS: Yeah.

I do think that a mobile
is really a key to unlocking this.

I've often said that, really,

one of the big moon shots
for the financial services industry,

is this idea of not just
financial inclusion.

Most people define financial inclusion
by somebody having access to bank account,

but just having access to a bank account
is not nearly enough.

I think what we need to aim for

is how do we think about financial health?

How do we make sure
that people have the ability

to have some wherewithal

to create savings to withstand some kind
of financial shock to the system.

I do think that mobile phones

will be the way that this occurs

and will be very inclusive going forward.

There are going to be something like
six billion smartphones in the world

over the next several years.

The cost of a smartphone is plummeting.

I think in India now you can buy
a smartphone for under 25 dollars.

So you're going to have ubiquity
of smartphones across the world,

and in fact what's very interesting

is in lower income populations

there is a greater penetration
of smartphones than in higher income

because the smartphone
is the only device that somebody has.

Higher income individuals
may have desktops or iPads,

that kind of thing,

but lower income can afford one device,

and they choose it to be a smartphone

because they can get and live their life
through that one device.

And think about that one device.

Really you have all the power
of a bank branch

in the palm of your hands,

and when you can start
to create distribution of services,

financial services,

through a smartphone,

you then are able

to manage and move money

in ways that we couldn't do traditionally.

In the physical world,

if you get a check,

you need to then go
to a cash checking place to cash it.

You stand in line for 30 minutes.

They then charge you anywhere
between two and five percent

to just change the format of currency

from a check to cash.

And then you have cash
and you want to pay a bill.

You need to stand in line again

at a bill pay,

and then you have to pay maybe 10 dollars

for an individual bill as a fee.

If you do that via a smartphone,

I believe that not only do you save
a tremendous amount of time,

because if you're outside
the financial system,

managing and moving money
is practically a part-time job

to go and do that,

so not only do you save time
and return time to individuals,

but you can cut the cost of transactions

by anywhere between 50 and 75 percent.

And remember that $140 billion
number that I gave you?

And that's just in the US.

Imagine if you could cut that in half

and return that to the populations,
the most vulnerable populations

that need it most.

So I think there's tremendous promise

in the use of technology

to help provide both inclusion,

and make sure there aren't
digital haves and have-nots,

but also to start on this journey
towards financial health.

CH: Yeah, I think a lot of people
don't realize that you don't need

a bank account or even a credit card
to open a PayPal account,

which is super-interesting.

I mean, do you see a time
where traditional banks don't exist

or at least play a much smaller role
in the financial services industry?

DS: Well, I think the entire
financial services industry

is evolving right now,

and so I think banks
will always play a role,

or as far into the future as I can see,

but it will evolve.

I mean, think about basic credit cards.

Today, you think about a credit card,

and you think about it
predominantly as a form factor,

something that you pull
out of your pocket.

Sometimes there's status associated with
what you're pulling out of your pocket,

depending on the color
of that credit card.

But really I think those
form factors start to go away

and become embedded in digital wallets.

So credit will always
be an important element.

You know, most people in the world,

it isn't that their cash outlays
exceed their cash intake.

It's just that they're not
evenly distributed.

So there are times where your
cash outflows exceed your cash intake,

and there you need some form of credit
to make up that difference.

And so I think forms of credit
will always be an important element.

But the way that you extend credit
will change going forward,

the way that you think
about scoring people

in terms of can they handle credit.

You know, traditionally,
in more developed countries,

you use what's called
FICA scores or Bureau scores,

but those ignore so many
of the financial transactions

that people who are outside
the financial system do,

like paying rent
or paying their bills on time.

And with data and information
and machine learning around that --

and we need to be careful
that there aren't biases

built into those algorithms --

we can start to do things
that could never be done before.

I'll just give you one quick example.

We're one of the largest providers
of working capital to small businesses

in the world.

We're probably one of the top five
in the United States.

So we've done over 14, 15 billion dollars

of lending of working capital
to small businesses.

Seventy percent of that
goes to the 30 percent of counties

where 10 or more banks
have closed branches.

And where do banks close branches?

Banks close branches in neighborhoods

where the medium income
is below the national average,

which makes sense because
for a branch to be profitable

they need a certain amount of deposits

for that branch to actually be profitable.

And so, in lower income neighborhoods,

branches are starting to close.

So why are 70 percent of our loans
in those lower income neighborhoods?

It's because we do machine learning.

We don't even look at FICA scores
or Bureau scores.

We look at a number
of different data elements.

And so we can lend into
those lower income neighborhoods

where nobody else can,

and when we do that,

the average sale of a small business
goes up by 22 percent.

And imagine the impact that has
on communities and neighborhoods

where they can finally get
the working capital

to expand those small businesses.

And I think that's a perfect example

of the promise of what technology
and financial services

married together can do.

CH: I think it's so interesting.

I'm curious.

The tech industry has been criticized
for amassing power over society,

not that the banking industry
isn't criticized.

But what do you say about people
who might be worried

about tech companies taking on
even more influence and control

over what's happening in their lives?

DS: Yeah.

Well, I think what's so important
for any company, and tech companies,

is to respect the boundaries

in terms of what consumers expect
from a company that serves them.

I think the most important brand attribute
that a company can have is trust,

and trust comes from the understanding

that a company respects your privacy

and will not sell
your data or information,

that it can perform transactions
in a secure manner

so that your transactions are protected.

And I think those
are kind of foundational,

and I think any company

needs to respect that.

They need to assure that consumers

have the privacy that they desire

and the safety and security
that is required

to serve them the right way.

CH: And obviously, you've gained
a lot of trust with the US Government.

Maybe we could talk a little bit
about how you've been working with them

to distribute some money
through the Paycheck Protection Program.

And I was curious,

I've been reading about it
and it sounds like

30 million-ish small businesses
in the United States

are able to get those funds,

but only six million have received loans.

What do you think's happened?

DS: Yep.

Well, I think initially, the government,
and I give them a lot of credit,

they responded quite quickly

with a $3 trillion stimulus package.

These are massive numbers
that were happening

in very condensed timeframes.

We were working with various agencies,

very closely with the Treasury Department,

in terms of distribution of the stimulus.

And they were working literally
night and day on this.

The Small Business Administration
was working night and day.

But these are volumes

that have never been seen before
running through these systems,

and the first tranche of those loans

was very difficult.

There were a lot of technical difficulties
in getting those out to small businesses.

And that first tranche was not enough,

and it was quickly used,

and there are still
a host of small businesses

that needed money.

The second tranche that came out

is still actually in effect.

It has not been used up,

and we are continuing to lend on that.

We've been able to lend
to some 50,000 small businesses.

We've lent out about 1.7 billion dollars,

and our loan size,

which really I'm proud of,

is about 31,000 dollars.

The average that a bank does
is between 100 and 125,000 dollars.

So we are lending
to these true small businesses

on Main Street,

and I'm proud that we've
been able to go do that,

and I think we should give credit

to the US Government
and governments around the world

that are taking this quite seriously

and putting a tremendous amount,
percentage of their GDP,

towards the rescue of small businesses

and towards trying
to take care of consumers

that find themselves
in really difficult straits right now.

And we've been trying to,

instead of people mailing out checks,
which is ridiculous in today's world.

People aren't living where they think
they're going to be living.

They're with their parents or with friends
or in a different location,

and mailing a check

and then having to take a check
and go somewhere,

which you can't even go
if you're sheltered in place,

to cash it,

doing that electronically
just makes a ton more sense,

and we've been working
with the IRS and Treasury

and other government agencies
to distribute that electronically.

CH: Yeah, that makes a lot of sense.

It's a massive, massive project

for all of us.

Whitney is here with some questions
from our community.

DS: Hello, Whitney.

Whitney Pennington Rodgers:
Hello Dan. How are you?

So the community has
some interesting questions

following up on what you
were talking about earlier about security.

We have a question from Marc --

and I apologize in advance
if I mispronounce your name, here, Marc --

Marc Vanlerberghe:

"The move to digital cash
could be one more step

towards creating the perfect
surveillance state.

How do we avoid this from happening?"

DS: Yeah, well this is what
I was talking about, Marc, before.

I mean, I think this idea of trust

is incredibly important.

It is, I think, the only companies
that will [inaudible].

And I think we hold a lot of this
in our own hands as consumers, by the way.

We need to be aware of data
and information that we're giving

and to what companies
we're doing that with,

but I think the companies
that will be successful

are those that have
a high degree of trust,

and trust happens
by protecting your privacy

but also very much assuring
that your transactions in a digital world

are safe and secure.

I mean, the idea of cybersecurity

has always been important,

but is ever more important
as we move from physical to digital,

and that's where
large datasets are important,

because a consumer's identity
is stolen every two seconds.

Every two seconds, some consumer
has their identity stolen.

And so we have to be, for instance,

we have to be sure
that even when you sign in

with your credentials,

they're actually real credentials,

we have to look at 30 to 100
different elements of that transaction

to make sure it's really you

before we let that money
out of your account.

And so there is a combination
of making sure that you have

enough data to protect somebody

but also assure that your privacy
is held sacrosanct,

and I think that is a balancing act
and one that needs to happen

in order for us to do this successfully.

WPP: Great, and actually sort of going
from digital cash to digital currency,

we have another question
from Simone Ross in our community

about the opportunity that exists
for digital currency.

She mentioned that PayPal [?].

What would it take for a truly inclusive
digital currency to take hold here?

DS: Yeah.