There is no doubt that PayPal (PYPL, Financial) is one of the fastest growing financial services companies in the world, nearly doubling its revenue from $5.6 billion in 2012 to $9.24 billion in 2015. During the same period, Visa (V, Financial), the world’s largest payments processor, grew from $10.42 billion to $13.88 billion in 2015. Visa added $3.46 billion to their top line in three years while Paypal added $3.58 billion. Not bad for a company that is just 17 years old.
PayPal’s biggest strength has always been ease of use, and it is not really a surprise that their merchant base is the biggest revenue earner for the company, having reported 14.5 million merchant accounts at the end of the second quarter 2016. Merchant services accounted for 83% of the company’s overall Total Payment Volume, or TPV.
In recent years, however, the sudden move by tech majors Apple (AAPL, Financial), Samsung (SSNLF, Financial) and Google (GOOG, Financial) to enter the mobile wallet space has completely transformed the payments market. With consumers in their hands, they can easily force merchants to follow suit, reducing the need for PayPal as a third-party payment processor. PayPal recognized this threat and quickly got into bed with its erstwhile enemy Visa so both would be mutually insulated from the mobile wallet phenomenon, at least partially.
The key arsenal in PayPal’s armory in its fight with the big tech majors will be Venmo, the company’s own mobile payment service that was brought under PayPal’s fold through their $800 million acquisition of Braintree in 2013.
Last year, Venmo handled $7.5 billion in transactions and the company is already allowing merchants to accept Venmo as a payment option. PayPal is now taking it a step further to add an in-store payment option into Venmo. Eventually, you will be able to pay for your groceries with your Venmo app that uses near-field communication technology (NFC), just like you would use Apple Pay or Android Pay. PayPal’s digital wallet will first come to Android devices because of Apple’s wall around its NFC chip that keeps third-party developers out of the loop. PayPal says that it is “in discussions” with Apple to see if they can work together in future. That might be unlikely considering the fact that Apple Pay is just taking off.
This is a significant move for PayPal because they’re moving from the web into mobile payments, while Apple Pay is moving from mobile payments into the web space. But PayPal has an advantage over other mobile wallets in the market because they already have a massive user base on the web. It is just a question of users switching their medium from desktops and laptops to smartphones. Apple Pay, on the other hand, doesn’t have a significant web user base except perhaps for Safari users on iOS devices, which is now integrated with Apple Pay.
“Ever since Apple Pay took to the web, iOS users have been able to make payments on their Mac as well using Apple Pay. On mobile devices such as iPad and iPhone, you can now either use the Apple Pay app itself or access your Apple Pay account directly from the Safari browser. With this feature, Apple is trying to popularize web and mobile payments and make it convenient for you to switch over from using PayPal or other applications.” - 1redDrop.com
So as of now, PayPal does have a bit of a head start, though I expect the lead to vanish very soon. How quick PayPal is able to expand its mobile user base in the next two years will be the deciding factor in keeping the tech majors at bay.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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