PayPal (PYPL, Financial) has shaken up the payments industry so much that instead of talking about the trio of Visa (V, Financial), MasterCard (MA, Financial) and American Express (AXP, Financial), you now have to add PayPal to that list.
In the short span of four years PayPal’s revenue has nearly doubled from $5.66 billion in 2012 to $9.248 billion this year. Visa, the current payments volume leader of the segment, is just $4 billion ahead of PayPal with 2015 revenues of $13.88 billion. Had someone told us that PayPal would get this close to Visa 10 years ago, most of us would have never believed it.
The primary reason PayPal took off was the way the company handled Web-based transactions and made it easier for merchants to cut across borders for safer and more secure transactions. All the card companies kept their eyes on increasing local transactions and how to increase their share of the market by selling more cards.
Granted, there were plenty of countries and users sitting outside a technology-based financial system, and even today there is plenty of room to continue the growth in that direction. But while the plastic card sellers kept their eyes on increasing user base with an eye on local transactions – while also enabling online transactions – PayPal kept its focus on Internet-based transactions, which helped the company build the position it is in today.
Things haven’t changed much despite the payments industry evolving a great deal with the increasing number of mobile-based transactions. All the tech majors in the mobile wallet industry have lined up behind the top card issuers, making sure that the current payments leaders stay in the game for a long time. The internal tussle between tech companies has benefited the card makers in a big way, making sure they have their skin in the game.
Considering the way technology has moved, plastic cards and the technology backbone have remained the same for decades now exceptdd for adding more security features. The industry has resisted change because change is expensive and inconvenient, but the status quo cannot continue indefinitely.
There are two critical factors that will keep PayPal near the top of the web-based payments world. In fact, they could even help PayPal catapult past Visa and the others in the next few years.
Merchant Services
In the third quarter of the current fiscal PayPal processed $87 billion in Total Payment Volume (TPV) for both consumers and merchants; of that, Merchant Services accounted for 84% of overall TPV. Merchant Services TPV grew 34% on a currency neutral basis, and the trend has been going on for quite some time now.
Merchants aren’t going to accept PayPal if their solutions are not good enough for them so the fact merchant services is actually growing at double-digit rates is, in itself, a huge validation for PayPal’s product in the marketplace. The more this segment grows for PayPal, the harder it will get for other players to break PayPal’s control. Down the road, it will also provide a lot of thrust for the consumer segment as well.
Mobile Wallet - Venmo
PayPal’s Venmo, their mobile-based payments system, has been on a roll over the past several years.
As you can clearly see, despite having reached $1 billion in quarterly transactions (in the U.S. alone), Venmo shows no signs of shedding its double-digit growth habit. You can see below that the trend was maintained right up until the first quarter, with a stellar 154% year-over-year growth to $3.19 billion in Venmo’s payment volume. That further grew to $4.9 billion by the third quarter as you can see from the two excerpts below.
“In the third quarter, PayPal gained market share and extended its leadership position. PayPal processed $87 billion in TPV, representing growth of 25%, or 28% on an FX-neutral basis, which was faster than the growth rate of ecommerce. Merchant Services TPV grew 32%, or 34% on an FX-neutral basis, and represented 84% of overall TPV for the quarter. PayPal processed nearly $26 billion in mobile payment volume, up 56%, representing 29% of TPV for the quarter. Venmo, the company's social payments platform, processed $4.9 billion of TPV, up 131%.” – PayPal third-quarter press release
With these two growth drivers putting them on track to reach the top of the payments world, I wouldn’t be surprised if they soon started giving Visa a run for its money. As an investor, you need to look at the market potential, and both merchant services and mobile payments are wide open for growth. Here are Business Insider’s estimates for just in-store mobile payments over the next few years:
While there are still several challenges for PayPal and Venmo to overcome, such as customer loyalty to traditional in-store payment methods, acceptance by merchants and so on, there’s ample room for a major like PayPal to muscle its way into becoming a significant player in this segment.
Together with a growing merchant base, mobile payments could be the straw that breaks Visa’s hold a few years from now. Until then, growth is all that investors have to look forward to where PayPal is concerned.
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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