PayPal's primary profit driver isn't interest on user balances. It's capturing the full transaction fee (e.g., 2.9%) on payments made from a user's PayPal balance. This avoids paying costly credit card interchange fees, dramatically increasing their margin from ~100 bps to nearly 290 bps.
The most critical design question for a digital wallet is whether it can hold actual money. Answering "yes" makes it look like a deposit product to regulators, subjecting it to the same intense consumer protection and safety rules that govern the traditional banking sector.
When a wallet provider like PayPal offers a co-branded credit card, it's more than a marketing deal. They often sign agreements that make them financially liable for credit losses if the portfolio of users they bring to the partner bank underperforms, a risk detailed in their 10-K filings.
Fintechs often promise partner banks that their proprietary user data will lead to better credit underwriting. However, FICO scores are "unreasonably effective," and most alternative data sources that genuinely improve predictions are illegal to use, like zip codes, due to redlining concerns.
Apple successfully charges banks a 15 bps fee for Apple Pay transactions. Their pitch was that users care more about their iPhone than their credit card. The implicit threat was that if banks refused, Apple would build its own payment network that users would eagerly adopt.
By encouraging users to save low-cost payment methods (like bank accounts), Stripe's Link product effectively creates a distributed, techno-social renegotiation of interchange fees. It gives millions of small businesses the collective bargaining power that only giants like Walmart traditionally wield against payment networks.
Surprisingly few businesses, even large ones, dedicate resources to experimentally optimizing their checkout flow for conversion rates. This widespread neglect created a huge opportunity for payment platforms like Stripe to offer dynamic presentation of payment methods as a powerful, built-in feature, significantly boosting sales for their customers.