Certain industries are categorized by much higher degrees of innovation and transformation than others. Industries such as utilities provide stable and recurring revenue streams and are classified as stagnant. However, other industries are constantly reinventing themselves and a company can go from a Goliath to bankrupt in a matter of years. The e-commerce industry is incredibly dynamic and the payment segment of this unstable industry is set for a major rehaul.
Competition is mounting in the payment industry as a number of companies with significant user bases have entered. The most obvious change that will result from the acute competition will be a compression in margins. Companies will fight it out to give customers the lowest costs which will commoditize this industry.
Although the reward will not be as lucrative as it once was due to the heightened competition, the company that eventually wins will do so because of two reasons: user base size and customer trust. The company with the largest user base will be at an advantage when negotiating rates with merchants. However, with that being said, customers will only use the service if they have trust that their sensitive information will be secure on the platform.
I will now delve into each player in the industry and give a conclusion on which company has the best opportunity of success.
The payment industry so far has been dominated by eBay through its Paypal segment. As of December of 2013, Paypal had 143 million active registered accounts. Actively registered means the account has successfully sent or received at least one payment or payment reversal through Paypal within the last 12 months.
Paypal revenue accounted for roughly 34% of eBay's total revenue in the most recent quarter. Moreover, this segment represented a staggering 54% of operating income. From these numbers, it is easy to deduce that eBay relies heavily on Paypal.
Yesterday, eBay announced that Paypal's President David Marcus will be leaving to head Facebook's mobile messaging platform. Turnover at the most senior level when competition is mounting should be viewed as a red flag.
Google originally was in the payment industry through its online payment processing service, Google Checkout. The service which was originally launched in late 2006 was discontinued in favor of Google Wallet in 2013.
Google Wallet is a mobile payment system that allows users to store card information as well as redeem sales promotions on their mobile phones. Google Wallet can use near field communication to make secure payments fast by simply tapping the phone on an enabled terminal. Google's business model is slightly different in that it doesn't charge users or merchants for access to Wallet. Google makes money by offering sponsored ads to their users.
However, Google does compete with others in the industry through another aspect. Google recently announced the integration of Google Wallet and Gmail which will allow users to send money through Gmail attachments. Gmail currently has 425 million users.
Interestingly enough, in May, Google added Paypal support to Google Wallet. Paypal's use on the platform is quite restricted, however, and only allows users to pay for apps through Google Play. A customer would have to use Google's payment system in order to may purchases for anything outside of Google Play.
On Monday, Amazon launched a new service that will allow customers to automatically pay recurring charges such as monthly subscription fees or phone bills by using their Amazon log-in credentials. Amazon plans to charge a small fee on each transaction. With more than 244 million active customer accounts, Amazon has quickly thrust itself into the center of the payment industry.
This new service will broaden Amazon's role as a middleman for third-party sellers which currently account for 40% of its sales. The ancillary effect of this service is that it will extend Amazon's influence beyond its website. Amazon tested the service over the last several months and its results were promising. Ting, a mobile phone company reported that customers spent 30% more if they were signed up for recurring payments by Amazon. Fledgling companies without much credibility will be eager to integrate this service to their platforms.
In late April, Facebook entered the payment industry fray when it began seeking regulatory approval from Ireland to store money and make electronic payments through the social network. Facebook has yet to receive approval, but rumors are that it is just weeks away. The process is being held up because it is waiting on Europe's central bank to approve Facebook as an electronic money institution.
Facebook which boasts a massive 1.23 billion user base will be able to allow this diverse network to store and transfer money through the site. The biggest risk to this venture for Facebook could be its perception as being untrustworthy.
So Who Will Come Out On Top?
eBay currently sits atop this industry with its Paypal segment. For that reason, competitors entering this market are playing with the house's money while eBay will be fighting for its livelihood. eBay heavily relies on the revenue from this segment and with the influx of competition, it is set to struggle. This industry will become commoditized as none of the companies can offer much of a differentiated product. In the end, eBay will lose the most from this fight. The winner will depend on user trust and the size of the user base.
With that being said, the winner will not gain much from this battle, but I believe that Amazon has the upper-hand. Although Amazon does not have the largest user base, it is best positioned to win. Tests of the integration for its system have been wildly successful and I expect merchants to readily sign up if that success can be replicated.
Google Wallet has a different business model than the others which I do not believe will work well. Consumers are being exceedingly desensitized to advertising which does not bode well for this strategy.
Although Facebook has the largest user base by a far margin, the area it lacks in is credibility. Many users have already questioned Facebook's security and use of user data. For this reason, Facebook will struggle to gain a foothold in this market.
The payment industry will soon be commoditized which will benefit consumers and will be detrimental for eBay. Amazon is poised to become the new dominant player in this industry although with the commoditized nature, it will not prove to be an enormous victory.
Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.