The Digital Wallet (PayPal Holdings, Inc.)

Maybe as a continuation of my previous blog post on Mastercard and Visa (read here), I should write a post on Paypal. During the day, I have been pondering about PayPal.

To sidetrack, the US mobile payment volume will reach USD$37 billion this year, and is expected to reach USD$808 billion by 2019 (read here). Coupled with the fact that the extend of the digital wallet is not as prevalent as one might think, hence there is great potential for future expansion and growth (read here and here).

“Digital wallets are still in their infancy, and while major players like Apple, Google and Paypal do their best to disrupt the market with their wallets, there are outliers like Square, LifeLock Wallet (formerly Lemon Wallet) and others that are firmly in the mix.”

So I started surfing the web during lunch and at night, and woah… a lot of articles have been written about online / mobile payment platform, and on Paypal vs Mastercard & Visa.

Maybe to start things off, there is a commentary by Jim Cramer, who mentioned that PayPal will rival Mastercard and Visa (click here). He didn’t really go in depth into explaining why though.

I am sure if you have bought things online (esp. via Ebay), you would have encountered Paypal. In the past, I used to pay via my debit card no. and encountered a lot of issues later (get SMS subsequently notifying me that someone is trying to purchase things using my debit card no. etc). So I subsequently got a PayPal account, and found it really hassle free and worry free -after the purchase online. You don’t need to reveal your card no. and just need to key in your Paypal password to purchase things online.

To perhaps digress a bit here. I just read an article in the recent Sunday Times called “The Rise of the sharing economy” (read here). In the article, it talks about people sharing apartments, cars, meals, workplace and camera etc via online platforms like Airbnb, PandaBed, UberX, GrabCar, PlateCulture, BonAppletour, Woolf Works, The Working Capitol, Rent Tycoons, Leendy etc. The person to person marketplace has become a veritable marketplace today.

All these, point to the rising usage of online payment platforms.

In addition, the rise of the eCommerce can be seen as the ‘creative destruction’ of the old economy. There is nothing ‘original’ created, although perhaps we now have a more democratic system. You are still paying, but doing via another platform & method – could be easier and more efficient. So we have the two dominant companies (Visa and Mastercard) operating in a “well-protected” oligopoly (in the physical retail world), when out of the blue, something like PayPal became the most recognized icon in the digital platform.

Why Credit Cards Are Not the Future of Online Payment (read here)

Consequently, with the growing prevalence of online shopping (so much so that it becomes a threat to the brick and mortar retail shops), shouldn’t one take a look at Paypal instead. After all, it is the one name that dominate online cash payment.

• About seventy two percent of all the online shoppers have a PayPal account. (read here)
• PayPal currently operates in 203 markets and has more than 150 million active user accounts. Imagine the connectivity!
• PayPal is not only the oldest digital wallet around but it is among the most trusted. (read here)

Online payment is just part of the digital wallet. The “digital wallet” refers to services that let you store payment information (i.e. credit or debit card) on your PC, smartphone or tablet to let you make on-or offline purchases without having to re-enter that information or without using your actual wallet.

In gist, three Companies are Leading the Pack in the digital wallet: Apple, Google and Paypal.

Base on this article (which is a bit dated), Paypal seems to leading the pack (read here).

So back to the question, should you buy PayPal instead of Mastercard or Visa stocks? This is not a simple question to answer, because of the following reasons.

• Visa and Mastercard has made the online payment system more secure via 3D Secure (read here)
• Visa Launches PayPal-Like ‘Checkout’ Widget for Third-Party Websites (read here).
• MasterCard fights back against new payments players (eg. PayPal and Google Wallet) with increased transaction fees for digital wallets that don’t share data (read here).
• Even though PayPal appears to the dominant player in the online payment revolution, however, the future seems to lie in the mobile payment platform (it bridges the gap between the digital and physical world) and there are a lot of players – and like I said earlier, adoption in these payment modes is still low and is still at its infancy (read here). There are numerous articles on Apple Pay, Google Pay, Samsung Pay. And not forgetting, Visa and Mastercard have entered the digital wallet arena as well (read here and here). Nevertheless, a 2013 articles state that PayPal is still leading the pack (read here).

To further complicate the matter, the distinction between the digital and physical world seems to be blurred (remind me of the movie Matrix). Mastercard and Visa entering the online / mobile domain while PayPal entering into the physical retail domain.

• PayPal introduces hands-free payments with Beacon device (In a bid to dominate the physical retail experience, PayPal unveils a Bluetooth communicator that takes in-store payments hands-free) – read here.

Also PayPal was only recently ‘relisted’ on Nasdaq (read here). After launching in 1998, PayPal was bought by eBay in 2002. On 20 July 2015, the electronic payments company was spun off from eBay Inc. as a separately traded company (read here). So there is no historical financial records / past performance of PayPal that could be found online. And hence I can’t do a comparison between PayPal with Mastercard / Visa (on their financial performance).

Indeed, it is not easy figuring are who will be the eventual dominate force:

• To quote this article: Nope, no one can name the winner of the Wallet Wars. Right now, we’re watching the AOLs, Netscapes, and Napsters of the mobile payment revolution duke it out.

 

 

Finally…. to quote this article:

The Only Guaranteed Winners are Credit Card Companies

Visa, MasterCard and a handful of others have all begun the process of creating their own payment solutions in an attempt to gain a foothold in the competitive digital wallet space…

So, with confusing inroads to partnerships with third-party wallets, their own digital wallet technologies, and key acquisition of wallet startups, credit card companies have their hands in a lot of cookie jars, and stand to profit handsomely no matter what technology starts to pull ahead in the market.

Remember, an estimated 85-percent of all purchases are still cash-based (globally), so any solution that leads to more credit card transactions is an attractive one for companies like Visa, MasterCard and American Express.