PayPal Can Improve After Separating From eBay
Summary
- Since eBay's acquisition of PayPal back in 2001, it has grown at an impressive pace and has not been showing signs of stopping.
- By enacting the right initiatives at the right time, PayPal has positioned itself to capitalize on the upcoming opportunities in the market.
- Splitting off PayPal from eBay would help to maximize shareholders' value. I believe that PayPal has a better future as an independent.
At the end of September 2014, eBay's (NASDAQ:EBAY) management announced it would operate eBay's e-retailing business and PayPal business segment separately. Most of the analysts and investors following eBay were already of the opinion that PayPal could operate better on its own.
Over the years, PayPal has gained significant market share. The company has approximately 152 million registered accounts, strong ties with 15,000 financial institutions, and provides a localized payment experience by accepting payments in 26 different currencies. I think that its presence in 203 countries has allowed PayPal to successfully position itself as the largest and most trusted digital payment service on the back of its mass merchant acceptance, higher security -- contrary to revealing clients' personal information on a third-party platform -- and speedy completion of transactions via just a few clicks.
In this article, I will analyze how PayPal can improve itself after separating from eBay.
PayPal's Performance in the Recently Reported Quarter
During the third quarter of the fiscal year 2014, eBay's payment business generated revenues of $1950 million, reflecting an increase of 20.4% YOY. During the same period, PayPal's total number of active users reached 156.9 million, reflecting an increase of 3% from the previous quarter and 14% YOY. The total number of payments processed was 894.6 million, reflecting an increase of 5% from the previous quarter and 23% YOY. Total payments volume in dollar terms were $56,576, representing an increase of 3% from the previous quarter and 29% YOY. The average takeaway rate (commission percentage on transactions) was 3.45%, reflecting a decline of 2.27%.
Opportunities in the Marketplace
Source: emarketer.
According to the research conducted by emarketer, business to consumer sales is expected to grow at a CAGR of 17.4% and is expected to reach $2.357 trillion by 2017. As increasing numbers of people will shop online, online payment processors will be among the direct beneficiaries of this changing consumer shopping pattern. PayPal's management will be in a better position to concentrate on refining its technology, adding new features, and taking steps to further penetrate the international and domestic markets.
The prospect of digital wallets is quite encouraging. The usage of digital wallets is growing as more and more consumers use their digital wallets to purchase almost everything in the developed word. According to a survey conducted by Statista, 35% of the respondents use digital wallets to purchase coffee, drinks, and snacks followed by retail apparels, groceries, and books.
Source: Statista.
Due to the global reach and inimitable payment experience for users, it seems as if any large market player would welcome an alliance with PayPal -- as can be seen in the case of Alibaba (BABA). Soon after the management's announcement of eBay's split in 2015, Joseph Tsai -- vice chairman of the largest Chinese e-retailer, Alibaba -- intimated that they could partner with PayPal to expand their international operations. Therefore, it is safe to assume that there is a high probability that most of the companies trying to expand their businesses online will select PayPal as their digital payment processor because of its geographically widespread network, and the level of trust online shoppers place on the security and safety provided by PayPal.
Statista predicts global mobile phone transactions will increase by an enormous rate. According to their research, mobile phone payments will reach $721.4 billion in 2017, increasing at a CAGR of 180.5%. Therefore, there is substantial potential in the market on which PayPal can capitalize.
Source: Statista.
The company is actively investing in refining existing features and adding new features to PayPal's iOS and Android applications, thus facilitating the user's ability to check in and pay at thousands of retail outlets in the domestic and international markets. Through the acquisition of Braintree and its one-touch mobile payment experience, enabling easy checkouts, PayPal continues to strengthen its position in the mobile payment processing market. During its most recent quarter, 20% of the total transactions processed were mobile payments.
Moreover, another confirmation of PayPal's leading position is the result of a survey conducted by Thrive Analytics. The survey shows that 79% of the total respondents in the U.S. used PayPal to make payments through their mobile phones for online purchases, followed by Google Wallet, Groupon (GRPN), and Apple Passbook.
Source: Statista.
The company expects to entertain 1 billion mobile transactions in 2014, and it is safe to assume that in the coming periods this number will increase further due to the high penetration rate of smartphones, the increase in average time spent by users accessing the Internet through smartphones, the increasing number of online purchases, and the growing usage of handheld devices to settle payments.
On the other hand, PayPal also faces the challenge of meeting the regulatory requirements in different parts of the world. Thus, it has to invest and update its transaction processing system to ensure financial security is not compromised.
Conclusion
The increasing popularity of online purchases and growing usage of digital wallets to settle transactions is quite alluring, and there will be significant opportunities for companies processing digital transactions. PayPal is already prepared to capitalize on these developing trends and increase its market share on all fronts. Once PayPal becomes independent, it can form alliances with various other large companies like Alibaba, Google (GOOG), Facebook (FB), and others to grow mutually.
Currently, the stock price of eBay is depressed. The dip in the stock price provides an attractive entry point for both short-term gain seekers and those investors looking for long-term value. Short-term gains can be realized by selling off eBay stock during the anticipated price hike at the time of the split announcement, while holding both the companies following the split will provide an opportunity to enjoy capital gains on the account of a better-performing PayPal and eBay.
This article was written by
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Comments (7)
Probably understanding the impact of Apple Pay and Alipay would be a good area to research further.
Its easier to see how an alliance with Alibaba become possible after the split from EBAY, but I don't see how it makes a difference with FB or Google.Since Ebay has fueled the initial growth of Paypal by channeling Ebay users to Paypal, what will fuel that growth post-Ebay ? I'm not sure if that is digital wallets. To be specific, Paypal has succeeded with digital wallets which in turn will help Paypal maintain its competitive advantage, but what will bring Paypal new users or encourage more uses ? I'm just not sure mobile payments changing anything other than allowing the entrance of more competitors.
