Amazon (NASDAQ:AMZN) has recently launched the latest of several recent moves into the payments space, all of which appear centrally directed at dethroning PayPal's (NASDAQ:EBAY) incumbency in digital payments. Amazon first made an entry point into payments via Amazon Payments, an initiative directed at enabling Amazon users to pay online merchants with their cards on file. In early August, Amazon announced the release of a mobile point of sale terminal to help small and medium sized business (SMB) accept credit card payments.
Amazon Payments: A strike at the heart of Paypal
In October 2013, Amazon launched a service which allows partner sites to enable a payments button that allows Amazon users to pay with their credit cards on file. Amazon's move to offer a single-click checkout which can be integrated on 3rd-party websites is an interesting development for retail giant. This move leverages many of Amazon's natural assets. Amazon has a solid brand reputation with consumers. Many consumers are already used to doing business with Amazon, and thus will have a high level of trust that Amazon will manage their payment information and transaction data in a more secure and trustworthy way.
The ability for consumers to shop freely with unknown merchants online, secure in the knowledge that their credit card numbers won't be exposed to these merchants is a very valuable service which is in high demand. It makes consumers more likely to complete a purchase, and less likely to abandon a cart at checkout, due to fear of giving credentials to an unknown merchant. Just ask EBAY, whose PayPal unit currently has in excess of 130M+ users and almost universal acceptance by online merchants.
PayPal has been so dominant that it represents close to 45% of eBay's revenue. PayPal earned close to $1.8B in revenue in Q1 2014, which puts it on an annual run rate of close to $8B in 2014 revenue. While "on eBay" transactions are significant (and not likely to be displaced by any other payment system such as Amazon Payments), they only account for close to 30% of all Payment volumes (on-net eBay volume was 29% of Q1 2014 volume). This means several billion dollars in annual PayPal revenue could be displaced by a competitive offering.
PayPal will clearly be concerned about Amazon's entry into the online payments space. The ability for Amazon users to conveniently pay with their existing credentials on file is likely to be something that is embraced by Amazon users. More significantly, Amazon has more than 230M active users today. That's attractive for merchants and something that they won't be able to ignore. It makes the case that much easier for them to do the necessary integration to support Amazon Payments as a checkout option on their website.
The likely driver behind Amazon's actions is better access to the wealth of transaction data that occurs outside Amazon's own portal. While capturing a share of the online payments business can be a nice little earner for Amazon, the bigger carrot will be more granular insights into Amazon users' full online purchasing behaviors, including outside Amazon. Amazon will be able to use these insights to provide better targeting of merchandise to Amazon users on the Amazon portal.
Amazon recently extended the scope of Amazon Payments, offering users the ability to pay recurring bill payments via the Amazon Payments platform. This enhancement to Amazon Payments will increase user stickiness and attachment to Amazon Payments.
Amazon recently announced an entry into the Mobile Point of Sale (MPOS) market, rolling out a credit card reader and associated payment application. The device is primarily intended to allow SMB merchants to accept credit card payments in store, where they otherwise wouldn't be able to. The market is currently dominated by Square, with PayPal having an offering called PayPal Here which also addresses this space.
Amazon has chosen to enter this market as the price leader, offering a 1.75% introductory fee on volume processed via the Amazon platform, significantly undercutting Square and PayPal's rates, both of which are closer to 2.75%. While this is just an introductory deal, I expect Amazon to look to maintain price leadership in this market and maximize volumes to make a mark in this segment.
In my view, the MPOS market is not as attractive as Amazon's online Payments initiative, principally for the reason that there are already a number of players including Square, PayPal and Intuit, and the service doesn't extend Amazon's implicit advantage, which is a base of 230M subscribers who have their credentials on file with Amazon, in the same way that Amazon Payments does.
What Amazon will gain from entry into the MPOS space, is valuable transaction data and analytics, which will help it better bridge the data that it is already collecting from its customers online. With better insight into offline pricing and purchases via MPOS, Amazon can better tweak it's online offering to hit the mark with customers. I expect the eventual evolution of the Amazon MPOS to offer the option for users to simply log in with their Amazon credentials and pay in store with card on file data. This will allow for Amazon to directly associate offline items with an Amazon user's online identity, allowing for complete picture of user spend online and offline and significantly enhanced targeting to individual Amazon users.
In the meantime, Amazon's discount pricing in the MPOS market will further inhibit PayPal's efforts at expansion beyond online payments. PayPal's efforts to expand its in store payment strategy have already been struggling somewhat given the lack of a real value proposition to consumers to pay with PayPal in store.
The in-store payment experience is not broken. Consumers can pay, as they always have paid, with their credit cards in their wallets. As other players who have tried to crack the in-store payments experience have discovered, the magic of just being able pay without your credit card in-store isn't typically enough of a hook to get consumers excited.
Implications and Takeaways
Entry into the payments space is a very smart move from Amazon. Their large consumer base, significant consumer trust and payment credentials already on file provide a set of natural assets which they can leverage to go after online payments. This is a significant, multibillion-dollar annual revenue stream that Amazon can target without too much effort. Beyond even the revenue, Amazon will gain significant user data from user purchases outside Amazon that it can use to better tailor offerings to users.
For PayPal, Amazon's move into Payments is something that should be watched with caution. If Amazon starts to attract significant payment volumes from merchants, PayPal will need to respond.
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