Professor ZHANG Xiaoyan, Deputy Chair of Tsinghua National Institute of Financial Research, and professor at PBCSF, warmly welcomed Mr. Schulman’s visit, and hosted the talk.
A: The first of all, there is a tremendous opportunity for us to learn. China is the leading country in the world in the adoption of digital payments, more advanced than any other country. It is erasing the boundary between offline and online purchases. There is a tremendous amount that we can learn from local tech giants here. The opportunity that we have in China is to partner with companies. I have met with the top CEOs and talked with them about how we can partner and work together. What we can bring to the market is the facilitation of cross-border trading. That is a one trillion dollar market, growing at 30% per year in China. We can help bring our 210 million consumers and have them better interact with Chinese merchants, and bring them even further together. It is a tremendous opportunity not just for Chinese merchants but our partners as well.
Q: PayPal has recently announced news about working with Baidu. What exactly are you working on? What is the idea there?
A: PayPal is a relatively unique company that has over 200 million consumers on its platform, but we also have 17 million merchants on the platform. As we think about facilitating cross-border trading, and advancing the Chinese economy through cross-border trading, there are two ways: one is the deal we are doing with Ali Express, where merchants are offering PayPal as the payment option for consumers outside China. The other way we think about it is that we have 17 million merchants outside China. Chinese consumers are looking to shop internationally as well. We are an open, third party platform, working with major players in China to facilitate cross-border trading in a way that makes the transaction, more secure and friction free.
Q: There is a lot of competition in the market, though you have formed some alliances with some of the companies. What is the overall strategy? How does PayPal look at the competition? How does PayPal deal with it? What is the best way of doing it?
A: I do martial arts every morning. One of the big philosophies I learned over the decades is ‘The best way to win a fight is to avoid the fight’. In many ways, we used to think of ourselves as a disruptor or competitor against everybody. But several years ago as we separated from eBay, we started to think ‘why can’t we play as the third party, neutral platform?’ Instead of competing, we can partner with them. We can take the best of our assets to work with tech giants, to advance the war on cash. We are just beginning globally to tackle physical payments. 85% of the transactions in the world are still in cash. No one company can address this issue alone. If we, together with other companies, can bring our powerful assets to the table and work together, it is a much better alternative than to fight on our own.
Q: Can you imagine that PayPal will be using blockchain in the future, and in what way? We do a lot of research on Fintech, but how to make it into profitable business is still a question. What’s your perspective on that?
A：I think we need to separate out cryptocurrencies like bitcoin. I don’t think cryptocurrencies are real currencies. They are more commodities. And people trade them as commodities. Currency is something that is regulated, operates within certain framework, and has consistency in value. It will be a long while before people trade cryptocurrencies as real currencies. There will be a lot of work to do with regulators around the world. Under cryptocurrencies there is the blockchain protocol. There are ways to think about blockchain and distributed ledgers. There is a big potential that blockchain can unleash a tremendous amount of creativity. There are interesting applications that can be done with blockchain. Identity is potentially one of those. Right now, identity theft is a huge problem across the world. A consumer has his identity stolen every two seconds. We need to think about how we can protect identity. And be sure that when someone makes a financial transaction, that they are who say they are.
Fintech companies are part of financial services landscape. Our competitive advantage is compliance, risk management and security. If we want to operate globally, we have to be in compliance with the regulatory environment across the world. We cannot operate in gray area. This is the very serious things that we do. We are a part of the financial system. And people’s transactions depend on us. Facilitating economic value is important to countries and their citizens, and that requires the utmost regulatory compliance and risk management. There is not a trade-off between innovation and regulatory compliance. Regulation is the foundation of innovation. It doesn’t work otherwise.
Q: Since it is one of PayPal’s strategies, can you explain more about financial inclusiveness?
A: Financial inclusion is very important to me. Personally, it is a passion that I am invested in. There is a saying in America that ‘it is expensive to be poor’. If you are excluded from the financial industry, you are often charged financial service fees to cash a check and pay bills. We should make the function of money management easier, and save them from unnecessary fees and charges. We need to work out how we bring them into financial system and drive financial health. We spend so much time thinking about that, working with partners, governments, and regulators around the world, because it is an agenda that we all agree on.
Q: In remote areas in China, people still don’t know they can use their cell-phone to access financial services. Not to mention the credit system. PayPal has many clients both from the merchant side and consumer side. Do you have an internal credit system to value them? Since the merchants and consumers are from different countries, how do you maintain the credit system and size?
A: It depends on the country because each country has its own regulatory framework. But part of what we want to facilitate and enable is the growth of small and mid-sized businesses. Small business is the engine of growth of almost all communities. It is one of the biggest drivers of employment across all countries. We have a product in the US, AU and in the UK called ‘PayPal Working Capital’. PayPal Working Capital provides funding to small businesses, based on their history with PayPal. There are two interesting facts that go hand in hand. 25% of loans in the U.S. (PayPal Working Capital has funded over 3 billion dollars to small businesses globally) are in communities where 10 or more bank branches have closed. We are providing access to funding where the traditional banks are not. For those businesses, their sales go up to 22%, versus those in a control group where their sales go up a little less than 2%. So not only we are helping the small businesses that couldn’t get capital before, but we are growing their businesses, which means they have more financial health for their family and community. So, we work hand in hand with regulators in the US and other countries to think about how can we use data and information to extend financial inclusion beyond what we have today, and how we do that in a responsible way. What are the tests and controls in a compliant way, enforceable way, and in a way that helps either consumers or merchants? Credit is one of these things. In the US, 50% of the population cannot raise 400 dollars in 3 months. They are one step away from being in trouble financially. Is there a way to create a better financial net to help our citizens and to use technology to build up savings? We work country by country with regulatory bodies to do that. We look carefully into the risks and responsibilities. We are very serious about our mission and vision. We are very serious about being a responsible global cooperate citizen. That means working hand in hand with partners and regulators around the world.
Q: To summarize, consumers have repeated sales or loans with PayPal and then PayPal can identify their borrowing habits or credit history. That’s how PayPal adjusts their credit level. How do you decide the first time? Do you go to the borrowers?
A: That’s right. They have a history with us. They do sales through us. We see what their sales volume is. We provide access to funding and they pay back with a percentage of their sales, so they’re able to pay back either faster or slower depending on how their sales volume is going.
Q: What things PayPal can do with PBCSF or Tsinghua University?
A: PayPal has thousands of people based here and Shanghai. We are always looking for really great talent to join the PayPal family. I think the only sustainable competitive advantage that any company has is the caliber of people that work there. You can have a great strategy, but if you don’t have great people, that would be a failure. If you have mediocre strategy but great people, it could be a tremendous success. So, we hope to partner with the university. Hopefully, some of you can join us and help us to figure out how can we drive financial health and use data, information and technology to advance the agenda that all of us share.
Q: How does PayPal deal with compliance in different countries?
A: I think it’s foundational that you have a no-tolerance policy in terms of regulatory and adherence within your company. You can’t be a global fintech player without having world-class compliance. You need to work hand in hand with the regulators. For instance, we have a close working relationship with the PBOC. Since regulations also evolve, we need to be sure that we understand where we are going with requirements and policies and what obligations we have to regulators in different countries. We spend as much time as we need to on compliance and enterprise risk management. I believe a solid foundation and reputation with regulators gives a company its competitive advantage and are important for a company to be successful.