by Mason-Harder
I recently realized that I’d allowed a $3,751 balance build-up in my Venmo account, mostly from reimbursements from friends for shared dinners out. Knowing that PayPal and its Venmo accounts are not FDIC insured, I began to wonder how PayPal invests the money in those accounts and what might happen if all their customers withdraw everything from their accounts. I was also wondering if the loans PayPal has made and if the money in accounts is invested in a way that would be subject to interest rate risk.
From what I could gather, a run on PayPal and Venmo accounts would result in a significant outflow of funds from these platforms, which could harm PayPal’s revenue and, consequently, its stock price. However, the extent would depend on various factors, including the outflow size, the run duration, and the company’s ability to manage the situation.
Also, PayPal’s revenue comes from various sources, including merchant fees, transaction fees, and interest income from its lending and credit products. And I could not seem to find much on how significant a part these balances play among all their revenue streams.
According to PayPal’s website, funds held in PayPal and Venmo accounts may be eligible for the Electronic Fund Transfer Act (EFTA) protections, which include error resolution and limitations on liability for unauthorized transactions. However, these protections are different from FDIC insurance and may not cover all losses.
According to PayPal’s financial reports, the company invests its cash and cash equivalents in a diversified portfolio of high-quality short-term and long-term fixed-income instruments, including US and non-US government and corporate securities, money market funds, and time deposits. Depending on the duration of these instruments, PayPal’s investment portfolio could be subject to interest rate risk. PayPal states that it seeks to maintain liquidity, safety, and yield in its investment portfolio.
For example, if PayPal holds a significant portion of long-term fixed-income securities in its investment portfolio, it could be exposed to declining market value if interest rates rise. On the other hand, if PayPal invests in short-term fixed-income securities, it may be less exposed to interest rate risk but may earn a lower yield.
PayPal’s TOS states it may use these funds for various purposes, including funding its operations, acquisitions, share repurchases, and investing in strategic growth opportunities.
PayPal may also use the funds held in its PayPal and Venmo user accounts to provide credit and lending services to customers, such as PayPal Credit and Working Capital. In such cases, PayPal may use the funds to issue loans or provide credit to customers and earn interest income on these loans – I’m not sure if the rates on these loans are variable or fixed, and if so, for how long.
But, it seems PayPal could be subjected to interest rate risk based on how it invested the cash held in its PayPal and Venmo user accounts and the structure of the loans it made. Interest rate risk refers to the potential impact of changes in interest rates on the value of an investment portfolio. When interest rates rise, the value of fixed-income securities such as bonds typically falls, and vice versa.
The amount of cash users hold in their PayPal and Venmo accounts is likely to fluctuate constantly, and it may not be easy to estimate the exact figure accurately.
Long story short, I moved my $3,751 balance to my checking account, and I feel better now. If any of you have any thoughts, I’d appreciate hearing them.