PayPal CEO Dan Schulman has been working hard on expansion since spinning the popular online payments service off from parent eBay two years ago. Last week’s deal to get consumer loans off PayPal’s own balance sheet was an effort to free up billions of dollars in capital for more productive uses, such as investments and acquisitions that could expand the company beyond the web commerce niche it dominates.
Make no mistake: facilitating e-commerce payments is a great business, still growing quickly and attracting over 200 million users. And the company’s Venmo app popular with millennials is growing its payments volume even faster. But Schulman clearly sees an opportunity to leverage that customer audience to help PayPal crack a variety of new markets.
Now, in perhaps a mobile app-oriented twist on the old financial services upsell pitch, Schulman is integrating a new way for users to move their money around in the PayPal app. In a deal with the startup Acorns, PayPal is adding the ability to put money in Acorns’ low-cost, automatic investing portfolios. After leading a $30 million investment round in the startup last year, PayPal already lets its app users link their accounts to Acorns to use the investment firm’s rounding up savings feature.
Under that existing connection, a PayPal user can have purchase transactions “rounded up” to the nearest whole dollar amount and the extra bit gets deposited in their Acorns account. It’s a forced savings strategy that’s been popularized by some behavioral economists, but it’s also a very slow method of accumulating savings if not supplemented by larger, regular deposits. With the new, deeper integration, PayPal (PYPL) users will be able to use PayPal to fund an investment account with Acorns, view and supplement their Acorns balances, set up recurring investments, and jump over to the startup’s site to manage their balances with one click. There’s no link to Venmo yet, but that’s an obvious expansion that could come in the future.
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The investing side of Acorns is simple and low-cost, and it comes with the imprimatur of Nobel Prize-winning economist Harry Markowitz. The professor got his prize for inventing modern portfolio theory, the idea that an investor will do best by diversifying across various asset classes based on riskiness rather than trying to pick a few winning stocks. Acorns constructs just a handful of portfolios, comprised of low-fee exchange-traded funds, and customers choose based on the level of riskiness they are comfortable with, ranging from a “conservative” mix heavy on government bonds to an “aggressive” set up including far more small and emerging market stocks.
Acorns is not the only well-regarded startup focused on low-cost, simpler investing, and has been criticized over its fee structure for people with low balances.
The company charges a relatively low fee of 0.25% a year, with a minimum of $1 per month. But that minimum can take a larger bite out of small accounts, which are a major part of the company’s focus. For example, $1 a month for a year on an account balance of $500 equates to an annual fee of 2.4%. That’s higher even than most Wall Street banks charge as a service fee. It’s not until an Acorns account hits at least $4,800 that the minimum charge equates to a 0.25% annual fee.
Wealthfront, which claims investing guru Burt Malkiel as its chief investment officer, offers similar low-cost, index-based accounts. But Wealthfront charges no fee at all on a customer’s first $10,000 and then matches Acorns’ 0.25% annual rate on higher amounts. It does require a minimum investment of $500, however. Betterment charges a fixed fee of 0.25% even on small balances and does not have a minimum balance.