The San Jose, Calif.-based company is grappling with a convergence of challenges to its business model that have the potential to curb earnings, starting from the Consumer Financial Protection Bureau's recently released rules on prepaid accounts to the movement of large banks like Citigroup(C) - Get Report and Wells Fargo(WFC) - Get Report into peer-to-peer payment applications that PayPal has dominated.
The consumer rules, released Wednesday, require that prepaid-account providers including digital wallet services like Alphabet's(GOOGL) - Get Report Google Wallet provide similar protections to checking accounts: free, easy access to account information, investigations into errors or fraudulent activity with potential "provisional" credits and limits on consumers' responsibility in the event of a loss or theft.
"Although well-intentioned, the bureau's rule-making sweeps so broadly and encompasses so many new areas that financial innovators are concerned," said Jason Oxman, CEO of Electronic Transactions Association, which represents more than 500 companies offering electronic payment services. "We will work with the bureau to ensure that their consumer protection efforts do not have the untoward impact of deterring the very financial innovation that is most benefiting under-served consumers."
The association is still reviewing the consumer bureau's nearly 2,000-page document, Oxman said in an e-mailed statement. PayPal had opposed the inclusion of digital wallets in the rules, which will be effective on Oct. 1, 2017, but regulators determined that they operate in a manner similar to prepaid accounts.
Regulators aren't "convinced by the argument that digital wallets used in this fashion are fundamentally dissimilar to other types of prepaid accounts," the bureau wrote. "Indeed, to the extent that they are used to access funds the consumer has deposited into the account in advance, the bureau believes digital wallets operate very much like a prepaid account."
The consumer bureau cited a survey showing that 15% of mobile payment-users reported having an account at a non-financial institution such as PayPal.
EXCLUSIVE LOOK INSIDE: Citigroup, Alphabet and Wells Fargoare holdings in Jim Cramer's Action Alerts PLUS charitable trust portfolio.Want to be alerted before Cramer buys or sells C, WFC or GOOGL? Learn more now.
The new regulations will most likely affect "disclosure practices so that they are clearer on fees and product features," Sanjay Sakhrani, an analyst with brokerage Keefe, Bruyette & Woods, said in a note to clients. It isn't yet clear whether that will have a material impact on PayPal, which he rates as "outperform."
"Obviously any type of heightened regulatory oversight is not necessarily positive for innovation and the PayPal story in general," said Sakhrani, who has a price target of $44 on the stock. "Ultimately, we think the impacts are manageable, but admit there is some ambiguity."
At the same time, PayPal is cooperating with the Federal Trade Commission in a probe of whether the company employed unfair business practices, and attempting to fend off competition from large banks such as Citigroup. Those companies have worked through bank-owned network clearXchange to create Zelle, a peer-to-peer mobile banking app that will compete with PayPal's Venmo.
PayPal dropped 0.9% to $39.97 on Friday, trimming its year-to-date gains to 10%. The company is expected to report earnings on Oct. 20.