13 Mar PayPal (PYPL)
Today PayPal is a household name, with many of you reading this having most likely used the service at one time or another. For some, such as myself, I hardly make a purchase without it. But originally, PayPal began as a security software company for mobile phones and tablets. It wasn’t until Tesla founder and owner Elon Musk saw the opportunities in a digital money transfer service and purchased the company to make it his sole focus.
After going public in 2002 it was quickly snapped up by eBay who saw synergies between its own digital marketplace and a digital payment system it needed to complement it. At the time, it’s competitors in the space included eBay’s own Billpoint, Citibank’s c2it, Yahoo’s PayDirect, Google Checkout, and Western Union’s BidPay. Haven’t heard of these payment companies? That’s because PayPal’s superior technology, product, and ease of use sent them all out of business.
In 2014, after agitating by activist investor Carl Icahn, eBay span off the PayPal business into a separately traded company. The move was completed in 2015 and the payments business has never looked back.
According to data analyser, Datanyze, PayPal is the leading payment processing service with a market share of 60.71%. There’s a huge advantage in being the market leader. Their massive customer base entices more and more merchants to use their services, as they hope to attract additional customers who already have PayPal accounts. In turn, the more merchants PayPal has, the more customers they are likely to attract. It’s a wonderful, sticky, cycle that they are taking full advantage of. All they need to do is keep the product offering attractive and the customer base will take care of itself.
They also have the advantage of being the market leader in the ever-increasing mobile payment sector. Sure, there has been a massive increase in customers purchasing products online, but the future is all about buying products on your tablet or phone. It’s been labeled m-commerce and this is where PayPal really shine. The sector is expected to account for 45% of all e-commerce sales by the end of 2020 according to Business Insider. That equates to almost $300 billion in mobile transactions in which PayPal dominates.
They dominate because of their size advantage of course. But also because of their “One Touch” payment system, allowing consumers to simply press a button to pay for their purchase, that puts it ahead of the others. No fiddling about typing in addresses or credit card details – it’s all already set up – you just need to click buy. It simplifies the customer buying process like no one else has.
The value of this set up is clear. Last year a study by ComScore calculated that PayPal’s One Touch system resulted in a sales conversion rate of 87.5%. That’s almost 9 in 10 customers going through with the purchase when confronted with the one-click option. Compare that to the next best conversion rate which was paying with a Visa card. It was a miserly 51.1%. The industry average came in at 45.6%. If you’re a merchant looking for conversions are you going to settle for under half of your potential customer base walking away at the moment that counts, or are you looking for a 9 from 10 confirmed sale? There is no option – you need to have PayPal on your app.
Taking market share is now the main goal. They’ll be constantly looking at new acquisitions in the future to either enhance their existing offerings or to take over competitors. Recent purchases of companies such as Jetlore and iZettle are an example of this strategic spending.
They are already seeing success with a couple of similar purchases in Venmo and Braintree. Venmo is the company’s social payments app, and the younger generation loves it. In the third quarter, $9 billion in payments went through the app, a 93% year on year increase. If you rent a property through Airbnb or order an uber or uber eats you are paying through Venmo. It’s currently free to use but it has the effect of increasing PayPal’s reach and will easily be monetised when required. PayPal’s One Touch comes out of the prior product Venmo Touch – so it’s already adding benefits.
With the chance of new partnerships forming with some of the bigger retailers (there are rumours of a potential deal with Amazon), and strategic deals in place with the likes of Apple, Samsung, Facebook, Google, Visa, Mastercard, Wells Fargo, JPMorgan, and Bank of America, the future looks bright for the market leader to be able to increase its presence in the e-commerce and m-commerce markets. There’s a good chance they can tighten the current stranglehold they possess and make it even tighter.
Most recently, in November 2019 PayPal broadened their deal with Citigroup allowing its institutional clients, including financial institutions, multinational corporations, and public sector organisations, to make payments into PayPal wallets globally. The move will increase the ease and speed in which money can travel across the globe. As someone who used to work in global payments at Citbank, I can assure you there was a lot of room for improvement, and the large clients will get massive benefits from this. It will also be a very lucrative business for both Citi and Paypal. And it won’t be long before all of the banks will be using similar processes – with PayPal the leading provider.
In the last quarter, PayPal beat expectations handily, increasing profit by 25% and revenue by 17%. Weak guidance, however, saw the share price fall before recovering a week later. The latest coronavirus drama has seen the share price fall by more than 20%. That’s a fair discount on a company with a great business and solid fundamentals. It will be one of the stocks I get straight back as the stock market begins to rise again.
The author does not hold an investment in the company mentioned and has not been renumerated for this report