How Will eBay Grow PayPal Organically?

Sep. 3.14 | About: eBay Inc. (EBAY)

Summary

PayPal commerce volume will be driven by mobile devices, in which it is well positioned in.

PayPal’s growth trajectory also is fueled by international expansion, and the offering of various payment-related services in new markets.

The management team thinks that it can execute upon this ambition over the next five to ten years.

By building such enormous scale into the business, it builds a moat around the business.

In a recent interview with McKinsey & Company, PayPal Vice President for EMEA Laurent Le Moal shares the strategic direction of PayPal (NASDAQ:EBAY). While it's difficult to summarize everything that was mentioned in the interview, the key points of PayPal becoming a larger payment services company, paired with further integration into off-line retail channels, helps to flesh out key growth catalysts going forward.

PayPal wants to position itself in the contextual environment

The next generation of the web is likely to be significantly more contextual. However to understand "context" this article may help to explain the topic a little better.

Going forward, more devices will improve information flow, and it will allow consumers to experience e-commerce in the real world. Instead of walking into a shopping store, running around the store to find items to purchase, it's possible that a retail experience will become similar to e-commerce, in which a consumer can pick and choose products from a mobile device, a robot will bring the products to the consumer, and the payment will be processed wirelessly.

However, the enabler of this type of commerce is mobile devices, advanced artificial intelligence, paired with a further abundance of information, along with user specific data. In this up and coming world, mobile commerce solutions like PayPal will become more important as it is an enabler to various commerce models that have yet to exist. However, PayPal mentions the challenges this new retail environment will have on both merchants and retailers.

Laurent Le Moal (PayPal VP of EMEA):

Our key challenge for the next three to five years is accessing the same high levels of information offline and sharing it with the retailer in a nonintrusive way for the consumer-and being nonintrusive is extremely important. How can we find the right balance of soliciting no more information than the customer is comfortable sharing but enough for them to benefit from better service? This must be very explicit in the relationship with consumers and merchants; otherwise, expect a backlash.

However, Laurent Le Moal explains how mobile apps are integrating with PayPal and flourishing in the real world environment:

On the other side of the process, our objective is to address pain points that merchants experience. McDonald's, for example, has an app that is downloaded by millions of people. They wanted to leverage that app to allow customers to order ahead, come to a restaurant, and be served in less than three minutes. We were able to help by embedding the PayPal interface in their app.

Commerce won't necessarily be about purchasing goods and having it shipped via delivery services. The web or the web of things will allow for retail transactions to become much more streamlined, and more personal. In this environment, integration of digital wallets and transfer services like PayPal will drive volume for merchants in ways that wasn't anticipated five years ago.

PayPal has global ambition

PayPal has significant growth potential just by offering payment transfer services in more markets. Which is why, in a different article I penned, the global payment transfer business was discussed in further detail:

PayPal had $50 billion in transaction volume over the first quarter of 2014. Global cash remittance was $550 billion in the previous year alone, and assuming PayPal can gain more of that kind of volume on its current payment network, it could have a very meaningful impact top line and bottom line performance.

Assuming PayPal continues to expand into foreign markets, and offers further support and services unique to PayPal, payment volume has further room to accelerate. Total payment volume accelerated from 27% to 29% between Q1 and Q2 2014.

Laurent Le Moal mentions that the ambition for PayPal is very large:

The objective is to level the playing field and create opportunities for all merchants around the world to connect with consumers all around the world. It's a very bold vision. It means that we need to leverage all of the assets we have - eBay as a marketplace, PayPal for the payments, eBay Enterprise to serve the big brands - and bring them together so that we can serve big multinationals as well as small individual sellers from the US to Russia.

Thankfully, the world is a very large market, and earning a small fee from cross-border transactions is a proven business model that already works for PayPal. However, building further scale into it, so it can improve the process of cash transfers globally, will put PayPal on a compelling growth trajectory when comparable to peers in the space (Visa (NYSE:V), MasterCard (NYSE:MA) and AliPay).

Conclusion

PayPal is well positioned in an environment where commerce will be driven by mobile devices. Mobile will drive commerce volume through PayPal's platform. However, commerce volume will also come in other forms, like further expansion into emerging market economies, which will allow for remittance and other transactions to occur more seamlessly.

Since a payment platform requires significant users to scale effectively, paired with ongoing relationships with merchants, and back-end infrastructure, the business has a solid durable advantage. eBay also trades at a reasonable valuation when compared to peers in its space, and it also has a solid track record of generating growth and returning cash to shareholders, making it a compelling investment opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.