Mobile wallets are the payment technology of the future. We are still in the early stages of mobile-based payments as most of our online payments still happen through laptops and desktops, but the transition will happen at some point as more people start spending more time on their mobile devices. The slowdown in PC sales is another factor, which will ensure that in the future, the bulk of online payments will be processed via mobile devices.
Several tech majors have announced their entry into this space, with Apple (AAPL, Financial) taking the lead with Apple Pay, Google following it up with Google Wallet/Android Pay and Samsung (SSNLF, Financial) also jumping into the race. As a financial services operator, PayPal (PYPL, Financial) is the only company outside of the tech circle to have a significant stake in the mobile payments domain. All four companies have decided to work with Visa (V, Financial) and MasterCard (MA, Financial), which means the competition will be between just the four of them while the card companies stay behind the scenes.
Though the deep-pocketed tech majors will have plenty time and adequate resources to build their payments systems, it's an area where they have to build their expertise from scratch. In the case of PayPal, whose popularity can be directly attributed to the ease of use it offers to merchants around the world, the company already has strong levels of knowhow and an existing client base as well as merchant base that it can tap into. There are several reasons why, despite the competition, PayPal’s mobile payments system Venmo could win the race and stay at the top of the heap.
Existing users
One of PayPal’s biggest advantages is the company’s existing user base. PayPal added 6.6 million accounts during the fourth quarter, finishing the year with 179 million active customer accounts. During the quarter, PayPal processed $82 billion as total payment volume (TPV), with Merchant Services accounting for 81% of overall TPV. This is a huge stronghold for PayPal. Merchants are increasingly using PayPal and, as long as merchants remain with them, customers have more reasons to keep flowing toward PayPal.
Strong domain experience
PayPal has been in the payments business for more than 15 years and has built the brand name and reputation as a strong player that can stand on its own in a world of Visas and MasterCards. It's a significant achievement for any company, but more importantly, despite the market conditions, PayPal has grown steadily over the last 10 years, a huge validation for the company’s services.
On the other side, tech majors will have to convince customers that their systems are equally secure, convenient and widely usable. The first two are easy, but it’s the third that’s the biggest challenge. As a services vertical it’s a new line of business for all of them, and as a result they’ll need to keep nurturing merchant relationships and signing deals to make sure they offer their customers the widest possible range of locations to use their mobile wallets. Google and Apple both have massive user bases of their own, but if it were as easy as that, Google Plus would have easily overtaken Facebook (FB, Financial) as the No. 1 social media platform in the world.
People’s aren’t going to immediately start using mobile wallets until these companies make it so appealing that they would rather not go anywhere else. But that’s still a long way from happening. PayPal does have the lead for now. That lead could vanish a few years down the road, but if PayPal doesn’t take its foot off the gas, it could very well be the company to beat for many, many years to come.
Market forecast
According to Business Insider, the mobile payments market is going to witness explosive growth in the next five years, growing at 80% CAGR through 2020.
That's the kind of growth that will make any big company sit up and take notice. This was possibly the single biggest reason why Apple, Google and Samsung all jumped into the fray. All three have large user bases on Android, iOS and even TizenOS. Both Apple and Samsung have large subsets of premium users within the smartphone market, and Google is now getting into it with the upcoming launch of Google Pixel, the new avatar for its Nexus line of premium smartphones.
They’re all in it for the long run, but PayPal has something in Venmo that the others don’t – a head start.
PayPal’s Venmo
Venmo is PayPal’s digital wallet, which allows its users to send money to anyone with a Venmo account linked to their bank accounts or their cards. The mobile payment service came into PayPal’s fold after the company’s acquisition of Braintree for $800 million in 2013.
Venmo has been growing rapidly, processing $2.5 billion TPV in the fourth quarter, a growth of 174% compared to the prior period.
PayPal has taken several initiatives to strengthen its position in the mobile payments space. The company recently bought Xoom Corporation (XOOM, Financial), to help its growth in the global remittance market and has also signed deals with First Data (FDC, Financial), Alibaba (BABA, Financial) and Facebook Messenger.
One key step that PayPal took recently was introducing the ability for Venmo users to make in-app purchases at participating merchants in the U.S. It is still in its early stages with only select merchants offering the facility, but we can expect a wider rollout soon. PayPal is also moving its Venmo brand toward in-store purchases, which can go a long way in expanding PayPal's merchant base.
“Venmo and its parent company, PayPal, are adding in-store payments to their mobile apps in the first half of 2017, a PayPal exec has confirmed to Quartz. The in-store digital wallets will use near field communication (NFC), similar to Apple Pay and Android Pay. The digital wallets will be available first on Android because Apple’s NFC chip is closed to third-party developers. Jim Magats, PayPal’s head of global core payments, tells Quartz that PayPal is in discussions with Apple to see how they can work together in the future but declined to comment further.” – Quartz
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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