[dial-up tone] emily: from the earliest days of the online money transfer business, shaped by a successful club of founders who became entrepreneurial titans, paypal's story is a silicon valley legend. now, this payments giant is in the midst of a makeover. >> it is the power of regeneration. emily: preparing for what it believes is a revolution in commerce. >> our adjustable market now could be as large as $25 trillion. emily: what do mobile wallets, cyber attackers, and a growing consumer class that knows no borders mean for the future of this newly independent, publicly traded company? that's all coming up when we take you inside paypal. ♪ emily: i am emily chang, and

welcome to a bloomberg special, "inside paypal." after 13 years, ebay's crown jewel is going out on its own again. we give you an inside look at the payment processor's business to show what the future holds for digital payments and for paypal. even if you have never shopped on ebay, you have probably used paypal without knowing it. i recently went out on a search to find all the different ways you can use paypal in the wild. take a look. in ♪ emily: here at whole foods, an apple pay partner, paypal's braintree technology actually powers every single apple pay transaction.

>> your total is $51.94. emily: ok, thanks. so i just hold my phone up here. input the passcode. and that's it. and there is more. paypal's technology also powers transactions for airbnb. home depot. apps like hotel tonight, munchery, and taskrabbit. you can even use your paypal account to order an uber. speaking of, let me just call my car home now so i can cook dinner. if they're lucky. ♪ paypal is spending big on acquisitions like braintree to make sure it has a presence everywhere payments are made. betting big on the move to mobile. bill ready: mobile is driving one of the most fundamental shifts in human behavior that we have ever seen. emily: that shift to mobile payment is still in its infancy. figuring out how people will spend money in the future may be paypal's biggest challenge yet. these twentysomethings may look like they are just texting. >> how much was it? >> $25. >> $25?

emily: but they're are actually paying each other back for lunch using venmo, a mobile app owned by paypal that allows users to transfer money from one bank account to another. >> got it. emily: separate checks no longer necessary. the expansion of mobile technology has analysts calling for growth in mobile payments a massive opportunity and challenge for a payments giant like paypal. crawford del prete: one of the biggest hurdles that paypal will face going forward is reinventing the brand and reinventing themselves as a company that's at the forefront of the payments space. emily: idc predicts total mobile transaction value will grow 43% annually over the next five years, hitting $4 trillion by 2020, when mobile purchases will make up about 7% of transactions. victor anthony: i think the runway is extremely long and wide for mobile payments, at least over the next 10, 15, 20 years. emily: idc breaks down mobile payments into four categories.

peer-to-peer payments to friends him and using services like him and venmo. mobile commerce, or buying goods online using your mobile device. nfc payments for stuff in stores using apple pay or android pay. and barcode payments, where a barcode is scanned at the point-of-sale. in idc expects all four mobile payment types to post double-digit annual growth through 2020. paypal has invested heavily in mobile, buying startups and building out products that facilitate transactions in all four payments categories. and competition is heating up. paul sweeney: i think investors are really looking for this business to get even more competitive. as we have apple, we have google, coming into the marketplace. and there is always other smaller players. like square and stripe. emily: ceo dan schulman wants paypal's mobile presence to be different. dan schulman: we are working with merchants, like subway and burger king, where a consumer can use their mobile phone to order ahead, to skip the line, to get loyalty. it is not just tap and pay.

it is a value proposition change. >> orbitz. take vacation back. emily: merchants who work with paypal say efforts to simplify mobile transactions are already paying off. bill brand: the strength in working with paypal for hsn really comes down to mobile. mobile now makes up 20% of our total sales at hsn. chris brown: consumers value being able to book travel without typing in lots of credit card information, and they value doing that through secure means. paypal has been extremely popular with our consumers that book travel on mobile. emily: to stay at the forefront, paypal will rely on young developers to innovate new features and create fresh uses for payments technology. cassidt williams: i love the social feed. i know it is one of those things where a lot of people say "why would i share my payments with anyone?" but it is so fun to scroll through the feed and check up on people, see what they're up to. my sister and i kind of communicate through venmo, just sending, like, $.01 to each other just for fun. emily: trading a penny for your thoughts?

it's a brave new world. ♪ just how big and how brave paypal's new world turns out to be depends on its ability to expand into new markets. how does paypal plan to quickly reach consumers in india, the philippines, and mexico? we take a look, coming up. ♪

♪ emily: paypal has long facilitated payments across borders, but now that the company has separated from ebay, international growth is paramount to an independent paypal's bottom line. paul sweeney: the payments business is very tricky to do in some emerging markets. there is a lot of work that has to be done, but that, globally, is where a lot of the growth is for a lot of players. emily: paypal has big plans to expand into the digital remittance industry and its impact on the movement of money around the world. once a week, hong kong's domestic helpers converge upon the city on their day off to run errands, shop, and send money to relatives back home. it is a long observed ritual that could soon be obsolete. dan schulman: if you want to send money to a loved one overseas, you stand in line, you give cash, there is a large percentage of the cash that is taken to send money to somebody overseas, who stands in line to get cash in a high crime area. we think that technology can

fundamentally change that equation. in >> that's your receipt. emily: many companies are working to change the way consumers move money internationally. and paypal is one of them. with operations in 203 countries, the company is expanding and tackling regulatory challenges in markets all over the world. louise pentland: what we do in one country is not necessarily always going to be the same in another. some require you to keep the data in country. so you have to set up servers and data centers within that country in order to operate. so just the operational impact can sometimes be quite extensive. emily: in 2014, paypal expanded into 10 more countries, capitalizing on a potential 80 million internet users, according to euromonitor international. this year, the company leapt into the international remittances business by acquiring san francisco-based money transferring start-up xoom. hill ferguson: xoom has built out a really nice proprietary

remittance back end into a lot of key markets, like india, the philippines, mexico, and others. emily: expansion into developing markets is crucial to paypal's long-term growth. crawford del prete: the xoom acquisition is a great example of the broad reach that payments are making. there are a lot of under-served customers and non-served customers in the payments space. emily: and the idea that consumers could soon have a cheaper, easier, cash-less way to move money around the world is a game-changer. but there are still hurdles. paypal relies on the traditional banking system to complete international transactions, meaning when banks shut down, paypal does too, as one greek startup founder discoveredfirst hand. nasos analogidis: the startup relied 100% on web transactions. so having a block imposed on the digital payment gateways actually prevents our operation.

emily: despite the challenges, schulman's vision of a simpler digital payment system looks achievable. and the opportunities for growth in paypal's international business is limitless. hill ferguson: one of the things that gets us so excited is that for as fast as we have grown, we still think we have 90% of the world's transactions left to digitize. it is a really, really encouraging thing for us. emily: but for all of the optimism about limitless potential for international growth, competition is also on the rise. tim cook: and of course, i am talking about apple pay. paul sweeney: the biggest competitors are just coming into the market now. that would be apple pay and that would be google. i think the marketplace has really been waiting to see what these two big tech giants do in the mobile payment space. emily: how does paypal compete against the flood of startups and tech behemoths like apple, google, and potentially facebook, enter in the market? analysts say the company's long

standing reputation as the most secure digital payments processor is the key. crawford del prete: for sure, security is a significant advantage, differentiator. and i would also say a big part of their brand equity. emily: paypal alone processes more than $235 billion in transactions a year for 165 million customers and 10 million merchants. all of that volume creates an unprecedented security challenges. tomer barel: bottom line, i am not sure that there is anything these days that is keeping me awake. emily: perhaps because paypal has several hundred security experts working in the u.s., asia, europe, and israel. it is that army that has protected paypal from a major cyber security breach since launching in 1999. jordan robertson: the fact that they have not disclosed a major attack and a major breach of consumer information. certainly it is a good sign. emily: that doesn't mean the bad

guys aren't trying. jordan robertson: paypal would be a real prize for any of them. emily: which is why paypal is spending big on making sure no one gets that prize. what are you doing to ensure the security of transactions? james barrese: we invest significantly in security. our goal is to be world-class in being able to protect ourselves. emily: that includes spending $60 million israeli security firm cyactive to help paypal customers predict cyberattacks. another $285 million for cloud payment company paydiant, which brings atms securely to mobile devices. and $800 million for payments will platform braintree, which powers payments for everything from apple pay to airbnb. paypal has been criticized for a innovating through acquisition. max levchin: the jury is out on whether innovating through acquisition is a good thing or a bad thing.

emily: but its deep pockets could be its biggest asset as an independent company. victor anthony: just over a history of this, fraud detection is huge. you have to propel them and at least have them to compete at least in the next decade, i think. emily: and keep paypal relevant. and the men charged with securing paypal's relevance is new ceo, dan schulman. i got a chance to sit down with schulman just minutes after the stocks started trading on the nasdaq and asked about his strategy for emerging payments rivals like apple, google, and potentially facebook, as well as what it is like dealing with activist investor carl icahn, who fought for the split before it happened. ♪

♪ max levchin: i literally just met the guy for the first time. seems great. he was wearing cowboy boots. seems very competent. seems like he is excited to take this company public, lead it forward. emily: the man leading paypal into the future is known for his unique look and for expanding international footprint of companies like american express. john donahoe: dan brings a unique set of background and capability to paypal. he has mobile experience.

technology experience. he understands payment. he is a seasoned, global leader. emily: will that leadership be enough to keep paypal on top in a crowded and ever-changing landscape? i sat down with paypal's new ceo and started by asking what paypal can do now without ebay. dan schulman: being an independent company changes some things but not others. and the thing we will always focus on is how do we innovate for our customers going forward. but being an independent company allows us to be a true neutral third party. we are the largest digital payments platform, maybe in the world. and by being neutral, it allows us to partner with retailers and others that maybe we couldn't have, were we a part of ebay. being truly neutral and focused on customers is a huge advantage. emily: let's talk about that. you work with apple and google, yet you also compete against apple and google. apple is doing apple pay. google has got android pay. what is the biggest value add

for paypal in mobile that these guys don't have? dan: one of the things we have that no other players have is we are truly an agnostic platform. in other words, we integrate for merchants any payment type for them. not just the paypal digital wallet, which has 169 million customers across the world, but we will also integrate apple pay into that or other forms of payment as well. we really want to be a full-services payments partner for merchants, and being technology agnostic, operating system agnostic, gives us a tremendous competitive advantage. emily: apple pay, though, has so many credit cards, so many users, already signed up. they have got all of our information. how do you compete with them? dan: paypal has been around for 15 years, and we have had competition throughout our 15-year period. from the time we were, 12 years ago acquired by ebay. a couple million customers. competition year in and out.

and by focusing on the needs of customers, right, the pain points they have, whether they be consumers or merchants, and innovating around that, we have grown now to be 169 million customers across the world. last year, we processed 4 billion transactions. and we partner with a lot of people, so we don't always compete. we partner. in fact, when apple pay announced, over half of the partners that were part of apple pay integrated through the paypal platform. emily: let's talk about facebook. facebook is sort of a dark horse. the guy who used to run paypal is now running facebook messenger. what about facebook and other messenger services that could try to get a cut of what you are taking now? dan: paypal is the world's largest peer-to-peer platform. one of our services brands is venmo. venmo is growing by leaps and bounds. it is really the way the millennial generation manages and moves money.

and our platform enables people to transfer money seamlessly, easily, and very inexpensively. we can partner with any one of the different platforms out there to help them do that. will him emily: do you think and could you partner with facebook? dan: i think in our future, there will definitely be a lot of partnerships with technology companies going forward. if you think about it, we have 17,000 people across the world, and all we do is focus on digital payments. they have platform advantages, we have platform advantages. potentially bringing those two platforms together in partnership can create very powerful value propositions for consumers. emily: what has it been like working with carl icahn as a shareholder? he is not just any shareholder. dan: no,of course he is not.

but we have shareholders across the world right now, as you can see from our early trading. there is a lot of interest in paypal. what we really want to focus on is creating a great company going forward. focus on customers, focus on what customers need. if we can do that, hopefully it will be a great investment for all shareholders. emily: what about carl specifically? have you guys talked? dan: no, we have not specifically talked yet. i have been out on a roadshow, speaking to just tens and tens of different investors now, getting their feedback, learning what they expect from us, what growth opportunities they have for us. in it has been tremendously valuable, i think, for both parties. him and emily: but are you worried about potential agitation? dan: i'm not. carl and other investors are all the same. they want great value to be delivered for investors and great value to be delivered for customers. as long as we stay focused on that, that is the right thing for us to do. emily: here's the question. a lot of people talk about paypal as an acquisition target now that it is separate from ebay. alibaba would love to buy it,

google would love to buy it. what do you think is going to happen? dan: we were split apart to create two great companies. both ebay and market places. devin will lead a fantastic companythere. we were set up to really capitalize on the changing chessboard that is going on in digital payments right now. and we think we have tremendous opportunity. our adjustable market now could be as large as $25 trillion. and focusing in on that and delivering value to those customers will deliver value as an independent company to shareholders. we are very focused on that. emily: so you see paypal staying as an independent company. dan: i do. emily: let's talk about acquisitions. you are working on an acquisition of xoom. getting into the international market. you bought braintree a few years ago. what other acquisitions might we see? what areas are you guys looking at? dan: we look at opportunities both organically and through potentially using our balance sheet. we have a very strong balance sheet. we launched as an independent

public company with no debt and $6.6 billion of cash on our balance sheet. that is a strong competitive weapon for us. we did our first announcement of an acquisition, xoom, which allows us to get to the international remittancesmarket. that is a $600 billion market that i think is ripe for disruption. we think there are ways to make it easier, simpler, more affordable for consumers to send money back home to people that they love and care. you will see us think about organic, home-grown solutions like one touch, and expanding our buyer protections, and looking across the payments spectrum of potential companies to acquire. emily: now, some of the critics say paypal has innovated by acquisition and there has not been a lot of innovation from within. how do you respond to that? dan: take a look at what we announced on our earnings call a couple days ago.

we announced the expansion of one touch, which is probably the biggest improvement in the checkout experience in the past five years. that was started with our braintree platform but quickly expanded to the rest of the paypal payment flows. we could not have done that if we had not upgraded our payment platform within paypal significantly. we spent the last couple of years upgrading our payments platform, upgrading our technology stack. we can now innovate -- what used to take us maybe months and months, we can do in days and sometimes minutes. emily: most important international markets for you. dan: well, obviously, we have half of our revenues from overseas right now. we are fully a global company. but if you look at every single region across the company for us now, they are all growing strongly. emily: dan schulman has his work cut out for him as he navigates the untamed waters of the

digital payments industry. competition in this nascent business is fierce. but as chairman of the board john donahoe points out, paypal has already laid the groundwork necessary to stay ahead. john donahoe: the thing you have to keep in mind is that payments is a really hard business. paypal guarantees every transaction for both the consumer and the merchant. paypal has proprietary risk models that allow it to process almost $240 billion of volume with less than 3/10 of a loss. while guaranteeing the performance. paypal has got almost 10,000 customer support representatives that are there if you have a problem. that is what is required in payments. i think paypal's real future is to leverage and allow many of these technology partners to build on top of them. emily: the fast, simple, and affordable movement of currency throughout the financial system is at the heart of a thriving and in global economy. and as an independent company, will paypal is in a position to impact consumers and markets worldwide.

it is up to paypal to take in advantage of this position to win consumers and markets around the world. i am emily chang for bloomberg in san francisco. ♪ the only way to get better is to challenge yourself,

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