Why Apple's New Mobile Payment Solution Will Not Affect PayPal
Summary
- PayPal processed about $180 billion in transactions in 2013. In the second quarter, PayPal’s net payment volumes grew 29% to $55 billion.
- About $27 billion, or 15%, of PayPal’s payment volumes last year were mobile transactions, largely ecommerce-related. Apple would have the potential to disrupt about 15% of PayPal's revenue source.
- Apple’s upcoming mobile payment solution is unlikely to slow down PayPal, which has continued to grow at a healthy clip over the last several years.
As the launch of Apple's (AAPL) mobile payment solution careens our way, perhaps now is a good time to examine what it really means for PayPal and, by extension, eBay (NASDAQ:EBAY). The first time news that Apple was planning to launch a mobile payment solution hit news feeds, eBay's shares started selling off by a huge margin, a true testament of the kind of fear that Apple instills in its competitors. PayPal is by far eBay's most important cash cow, bringing in about 45% of its overall revenue each year. Anything that threatens PayPal's future growth is, therefore, very likely to have a negative impact on eBay's growth as well. Let's now look at just how serious is Apple's mobile is to PayPal and eBay.
How serious is the threat?
Apple new mobile payments solution will be based on NFC and/or iBeacon. It's very likely that Apple will look to focus more on offline payments rather than online ones where the space looks a bit crowded with the likes of PayPal, ISIS by American Express (AXP), Google Wallet, and other payment solutions by Amazon (AMZN), Visa (V) MasterCard (MA) and so on. PayPal, ISIS and Google have made iterations on their online payment solutions to cover physical payments as well, but their efforts have mainly been hampered by the popularity and ubiquity of credit cards. Square is a large mobile payments player, but has of late run into problems with its high cash burn rate and consequently been forced to delay its much-awaited IPO
PayPal is by and large an online payments platform, with a tiny presence in offline payments (probably 2% or less of PayPal's revenue). The fact that Apple's mobile payment solution is likely to focus on offline payments therefore eliminates a lot of potential trouble for PayPal.
If Apple, however, decides to also launch an online payments solution, it will not automatically mean that PayPal will be backed down to a corner. PayPal's payment volumes have grown phenomenally since 2001. PayPal processed about $180 billion in transactions in 2013. In the second quarter, PayPal's net payment volumes grew 29% to $55 billion. About $27 billion, or 15%, of PayPal's payment volumes last year were mobile transactions, most of which were largely ecommerce-related. This means that Apple would have the potential to disrupt about 15% of PayPal's revenue source.
Source: The Financer
Given Apple's history, however, PayPal would probably have little to worry about. It's not very likely that Apple would be very keen on supporting Android. This would naturally severely limit merchant interest in regions that are Android strongholds such as the EU, China, Latin America and most parts of mainland Asia. About 27% of mobile payment transactions in 2013 were done over an iOS device, with the rest done mainly via Android devices.
Source: GlobalWebIndex
How is PayPal going to cope with the threat?
eBay has really upped its game in the mobile payments platform. The company has PayPal Here, a smartphone POS dongle that is widely used in the U.S., Canada, Japan, Hong Kong and Australia. PayPal Here was recently introduced in Europe as a Chip and PIN version. eBay has also introduced PayPal Beacon, a hands-free easy way to pay that uses Bluetooth.
PayPal's mobile payments have grown even more impressively than its online payments. From less than $1 million in processed transactions in 2006, mobile transactions hit $27 billion last year, with $50 billion in the cross hairs this year.
A survey conducted by Thrive Analytics this year showed that PayPal mobile payments is by far the most popular mobile payments platform in the U.S., with almost twice as many people using it than its closest competitor Google Wallet.
Source: Statista
eBay went ahead and hedged its mobile payments bet by acquiring Braintree last year. Braintree is a global payments processing company with relationships with the likes of Uber, OpenTable, TaskRabbit, LivingSocial, GitHub, Rovio, LevelUp and AirBnB. The company processed $12 billion in payment volumes last year, of which $4 billion were mobile payments. eBay plans to incorporate Braintree directly into PayPal, and will therefore acquire its customers at zero cost
PayPal has forged numerous relationships with retail establishments, and lets them accept payments directly into their networks instead of going through merchant processing systems such as Global Payments. This reduces transaction costs for these merchants considerably, which is one big reason that most prefer online payments done via PayPal.
Difficulty of physical payments
Digital payments, such as iTunes that Apple sells, are much easier to deal in than physical goods, primarily due to the less risk involved in these transactions. For instance, if a customer buys two movies from a merchant and uses the merchant's mobile payment processing system, but the goods get lost along the delivery chain, they can claim a refund from the merchant, who will simply give back the money and suffer almost no marginal cost for delivering the item.
The story is quite different for physical goods. If this time the merchant is selling laptops and they got lost somewhere along the delivery chain, then the merchant will not only be forced to refund the customer's money, but will also be forced to bear the cost of the lost item.
It is this inherent risk involved when selling physical goods that makes mobile payments for physical goods so challenging - and what gives PayPal an edge over its rivals. PayPal has over the years built a comprehensive risk model, and has close to 5,000 employees to handle this, and an equal number to handle the huge customer care needs that come with the business.
Moreover, Apple's accounts are tied to credit cards, which implies that for the company to monetize mobile payments, it would have to support tying customer accounts to their bank accounts and transact via ACH, or Automated Clearing House, the way PayPal does in order for it to bypass credit card processing.
Additionally, Apple also will have to contend with the limited adoption of iBeacon if it decides to use it in its mobile payment platform.
Conclusion
Apple's upcoming mobile payment solution is unlikely to slow down PayPal, which has continued to grow at a healthy clip over the last several years. The overall mobile payments market is expanding at a fast clip too, giving ample room for Apple's new payment solution to thrive as well.
This article was written by
Analyst’s Disclosure: The author is long AAPL. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (32)
2) Apple Pay is primarily geared at offline (i.e., in-store) payments;
3) PayPal uses the ACH system for payment processing;
4) Apple will use Visa, Mastercard and Amex for payment processing.I believe Apple's primary objectives are: 1) sell iPhone 6; 2) strengthen ecosystem and brand; 3) develop core competencies to participate in digital money revolution; and 4) achieve critical mass of merchants accepting Apple Pay offline digital payments. How digital money will play out in coming years is anyone's guess in terms of the winners and losers as there are so many players and the stakes are huge. Banks, credit card processors, merchants, payment providers, central banks, etc. However, I offer this one thought - the approach Apple is taking seems quite similar to the technology used in Bitcoin payments in terms of transferring digitized "tokens" to authenticate and execute transactions.
