Why PayPal Is Petrified
- By Sangara Narayanan
After spending years and years fighting against each other, PayPal (PYPL) and Visa (NYSE:V) announced a truce last month, signaling a huge tipping point in the payments world. Visa has long treated PayPal as an adversary because it was possibly the only company that came close to breaking Visa's payment network moat.
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The intrinsic value of PYPL
With PayPal's payment volume nearly doubling in three years, the threat the company posed to the world's largest card payment network was a real and clear one, and to top that off, PayPal was actually able to increase in size despite cutting Visa out of its transactions and processing through the much cheaper bank-owned ACH network. Every day that PayPal got bigger, Visa was potentially losing its bread and butter.
But here's the rub: If things were going so well for PayPal, why did the company choose to execute what looks like a meek surrender to the Visa kingdom?
The answer to the question is two-fold: The drop in desktop usage, which caused a decline in web-based engagement and the simultaneous rise of mobile devices that resulted in increasing mobile based engagement.
Death of the desktop
PC sales have been declining all over the globe as we transition into a mobile device based world. Take, for example, the world's largest social network, Facebook (FB), which makes nearly 85% of its revenue from mobile advertisements. The odds are extremely high that mobile is where the bulk of the person-to-person, business-to-business and person-to-business transactions are going to happen in the future. Ad dollars naturally flow only to places where people are present, and if companies are ready to pour that money into mobile advertising, then it's clear that is where the people are. If that's where the people are, then that's where the bulk of transactions are also going to happen.
The tech majors in the mobile wallet space
It's clear that future payment transactions are going to increasingly skew toward mobile devices. Android and iOS are the two operating systems that hold more than 90% of that market. With nine out of 10 smart devices powered by these two companies, both Google (GOOG) and Apple (AAPL) have the ability to keep their digital wallet a click away from their users. With Samsung now in the fray with Samsung Pay, all three companies are piggybacking on the Visa network, making it extremely convenient for users to start using their services.
Now, why on earth would an iPhone or Android user even think of going with PayPal when a transaction is as easy as opening up an app and making a payment? To make things worse, if that same user can also pay for groceries by tapping or swiping their phone, why wouldn't they completely switch to their mobile wallet instead of being encumbered with plastic? And what should really scare PayPal is that Apple is now moving in on web payments -- a domain that PayPal still rules over.
My take on the PayPal-Visa-Apple-Google-Samsung equation
Here's what Bloomberg thinks about this:
"In return for funneling more transactions through Visa's network, PayPal will get help expanding its reach into physical stores, an area it has been struggling with for several years. Most transactions still happen in the real world, rather than online, so it's a big opportunity for PayPal. But Apple Inc.'s Apple Pay and Google's Android Pay have made bigger strides in this area than PayPal lately."
Of course, PayPal users might still be more comfortable continuing with the company, especially if they could also make physical payments using that same account, but it's the new users that PayPal needs to worry about. At the end of the day, new users is what growth is all about. Apple, Google or Samsung can tap into that new user base simply because it's available by default on the devices they sell, so PayPal really has something to worry about for the future.
All three companies have enough money muscle to grow their user bases and give PayPal a run for their money. In fact, even Visa should be scared of what it's doing in the mobile space. That's exactly why I think the two companies have teamed up now. They're looking to join hands and mitigate any future erosion to their respective market shares, while ensuring that they stay relevant in a world that is increasingly depending on their smartphones and tablets to get them through the day.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of PYPL
