- One Touch boasts 10 million consumer subscribers and counting.
- Mobile payments market projected to be worth $140 billion by 2019.
- PayPal vying for share of the $2.6 trillion consumer credit opportunity.
- PayPal is particularly targeting millennials with its lending service, with the most recent update stating that millennials now account for 33% of PayPal Credit users. At the end of 2013, millennials were just 25% of PayPal Credit subscribers.
- Between Thanksgiving and Cyber Monday 2015, over $166 million was transacted through PayPal Credit, indicating an increase of 32% over the same period in the previous year.
- PayPal Credit volumes are also surging, improving 27% by the end of the last quarter compared to the same period a year earlier. PayPal said it processed transactions worth $70 billion through its credit business in 3Q2015.
- On the average PayPal Credit users spend 25% more on purchases than non-users.
PayPal Holdings Inc (O:PYPL) has evolved into an existential threat for legacy payments providers such as Visa Inc (NYSE:N:V) and Mastercard Inc (NYSE:N:MA) and many other traditional lenders. Its simplified payment and credit solutions are making traditional providers of financial services look like bad guys and many people are taking notice. You only have to look at PayPal’s surging subscriber numbers to get the whole picture. PayPal had more than 173 million active users at the end of 3Q2015, compared to 156.9 million a year earlier and 169 million in the previous quarter.
The chart below captures PayPal’s active user count in the last five quarters:
However, PayPal Holdings Inc (NASDAQ:PYPL) is also not very secure. The likes of Apple Inc. (NASDAQ:O:AAPL), Alphabet Inc C (O:GOOG) and Samsung (KS:005930) and aggressively pushing into consumer payments market with digital solutions that directly challenge PayPal’s position.
Dealing with the threats
PayPal thrives in pulling surprises to its opponents. Visa and Mastercard didn’t notice what was coming until PayPal started showing their customers that they could have a much simplified and cheaper way to transfer payments or make purchases. Today, PayPal’s lending business is helping millions of previously stranded borrower obtain cheap loans to pay for items online.
Looking at PayPal’s recent moves, you see a company that is sparing no effort to stay ahead of the competition. What PayPal is currently doing is building more value proposition into its various services with the hope of making them more relevant and central to people’s lives. Through the strategy, the company is hoping to create opportunities for cross-selling existing subscribers, attracting new ones and deepening engagement on its platforms, which can in turn open new monetization opportunities in the future.
PayPal’s potential growth catalysts
One Touch and PayPal.Me services
PayPal Holdings Inc (NASDAQ:PYPL)’s One Touch is specifically designed to simplify mobile payments and allow merchants to close sales faster. As the name suggests, you can complete a purchase through One Touch with only a single tap on your handset. Users of One Touch are promoted to enter their credential the first time they use the service to buy online. In subsequent uses, one is able to complete purchases without entering their PayPal login details.
The idea of One Touch is to speed up the checkout process so that a user can complete more purchases in a short time. The seamless nature of One Touch explains why enrollment to the service is surging. In a recent update, PayPal indicated that more than 10 million people use One Touch in 23 countries. That’s nearly 6% of PayPal’s subscriber population. Additionally, more than 1 million merchants have embraced One Touch to help speed up checkouts in their apps.
The differentiated nature of One Touch should also help PayPal boost subscriber retention rate and also attract more new subscribers to its platform.
PayPal.Me for payment collection
Besides One Touch, PayPal also offers a service known as PayPal.Me. The service simplifies the process of collecting payments. What you do is create a PayPal.Me link that you can share with people you want to collect payment from. When the payer clicks on the link, they are taken to a secure platform where they can directly enter the amount they want to pay you and the payment is immediately credited to your PayPal account.
PayPal reported that more than 1 million PayPal.Me links had been shared by the end of the last quarter.
Mobile payment, which PayPal expanding into with One Touch and other solutions, is expected to be a $140 billion economy by 2019, up from $70 billion in 2015.
PayPal credit business
PayPal Holdings Inc (NASDAQ:PYPL) has figured out that there is money and profits to be made in the consumer lending business. The consumer credit market is more than $2.6 trillion. It is another area that the company is driving a thorn in the flesh of Visa, Mastercard and banks. PayPal Credit allows PayPal subscribers with acceptable credit worthiness to obtain low-cost credit to buy items online.
PayPal Credit metrics:
PayPal Credit is another of PayPal’s innovative services that are generating present benefits but could also open up incremental growth opportunities in the future. The simple and cheap credit through PayPal Credit could also improve subscriber retention in the face of competition from services such as Android Pay, Apple Pay and Google (O:GOOGL) Wallet.
Braintree business
PayPal Holdings Inc (NASDAQ:PYPL)’s Braintree business manages and processes payments on behalf of other companies. Uber is one of the companies that use Braintree to process their transactions. Not only is PayPal adding more partners to Braintree, but the company is also deepening relationship with existing customers to enable it extract maximum value through them. PayPal recently got its Braintree into Facebook Inc (NASDAQ:O:FB)’s Messenger, thus allowing users of the chat service to order and pay for Uber taxi services through Braintree.
Besides the incremental benefit of serving Uber through Messenger, the expansion of the deal alone highlights the relevance of Braintree to vendors.
In addition to adding new partners and deepening ties with existing ones, Braintree also continues to add consumer subscribers. By the end of 3Q, more than 154 million consumer credit cards had been linked with the service, up from 56.4 million in the same period a year earlier.
Transaction volume processed through Braintree was expected to reach $50 billion in 2015, indicating more than double growth from $23 billion at the end of 2014. PayPal’s Braintree competes with Stripe, but Braintree has more advantages over the competition because of PayPal’s strong brand recognition and expanding ecosystem of services. Braintree is currently only available in 46 markets.
Favorable online/mobile commerce trends
Several surveys have shown favorable trends in online and mobile holiday shopping. PayPal’s strong position as a mobile and desktop digital payments provider means that it stands to benefit from the trends.
According to First Data’s holiday spending findings, online sales rose 20.2% in 2015 holiday season compared to 18% in 2014 holiday season. Additionally, First Data found out that average online ticket in 2015 holiday period was $125 per transaction as opposed to average ticket value of $70 in physical stores in the same period. Wal-Mart Store, Inc. (NYSE:N:WMT) on its part revealed that mobile-based purchases on its platform between Thanksgiving and Cyber Monday 2015 doubled from the same period in the prior year. ComScore’s holiday 2015 data also back favorable online/mobile transaction trends.
Bottom line
It won’t be smooth everywhere for PayPal Holdings Inc (NASDAQ:PYPL) as it challenges established rivals and emerging providers in the financial services market. However, the strategy of improving the value proposition of its various services and launching of new solutions should help the company more than offset the competitive pressures, thus allowing for more growth and profitability.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.