eBay's PayPal (EBAY) released its updated version of its iOS and Android mobile application. This release marks the latest attempt for a digital wallet to usurp the importance of the credit/debit card and "simplify" payments.
By no means is this the first attempt for a company to push a digital wallet. Google Wallet (GOOG) has failed to gain much traction, not because it is exclusive to Android, but mostly because it isn't a very intuitive program and awareness isn't high.
Apple's Passbook (AAPL) has sneaked into the marketplace to become the fourth most popular mobile commerce app. Passbook differs from Google Wallet in the sense that it isn't used much for payments, but rather for boarding passes, sports tickets, and company loyalty cards. This is where the app actually adds value: consumers do not have to worry about printing a ticket or cluttering a wallet with a loyalty card.
So What About PayPal?
The new PayPal app has already garnered both positive and negative reviews. Overall, the product is definitely an improvement over previous iterations. New location services allow users to see what businesses nearby accept PayPal payments. A new photo feature lets users upload a photo for merchants to confirm purchases. Transferring money remains relatively straightforward.
As great as the new features are, the usefulness of the new features may be lacking. We tested out 'location services' to find local businesses, but we had a few issues. The most obvious issue was the wild measurement inaccuracy-off by several miles. The subsequent suggestions then became hard to identify. By comparison, Facebook's (FB) check-in feature suggested more relevant (and closer) locations.
Unfortunately, the other issue could do much more damage to the attractiveness of PayPal's digital wallet-acceptance remains low. Although this is likely to change, we think PayPal will still have a difficult time convincing retailers and consumers that a change from the status quo is necessary. This is one reason why we remain bullish on Best Ideas Newsletter portfolio holding Visa's (V) long-term prospects: the current system works exceptionally well, and there is no clamoring for change.
That's not to say change can't occur. No one really thought the CD player was so bad, but the MP3 and iPod quickly changed everyone's mind. The problem, in our view, is that the digital wallet simply isn't an upgrade from the existing payment infrastructure.
Some consumers will flock to the new payment system, and PayPal may even provide retailers with great incentives to accept mobile wallets, but the system simply isn't better than the tried-and-true credit card. Plus, consumers cannot stop carrying wallets since they need identification and (often) cash anyways, so the incremental impact of carrying a credit or debit card is extremely small. We won't dismiss the possibility of digital wallet success, but it may take a new form factor (smartwatch?) to make it a relatively more attractive alternative.
The digital wallet could be the future of payments, but we do not believe the future is now. The existing payment infrastructure remains superior, in our view, so we do not see a mass exodus away from card payments anytime soon. The system isn't perfect (think splitting a check), so there could be opportunity for the digital wallet to compensate for the card's shortcomings. Of course, PayPal payments online continue to grow at a rapid clip, and PayPal seems likely to continue to dominate the space. Because we think the movement away from cash payments remains a powerful trend, we continue to hold shares of both eBay and Visa in the portfolio of our Best Ideas Newsletter.
Additional disclosure: RJ Towner is Director of Research Development at Valuentum. AAPL and V are included in our actively-managed portfolios.