Will eBay’s PayPal Survive the Apple Mobile Payments Threat?

News that tech giant Apple (NASDAQ: AAPL  ) is laying the groundwork to move into the mobile payment business has left eBay (NASDAQ: EBAY  ) investors worried about the implications that this move will have on PayPal. PayPal is eBay's most important cash cow, earning the company a whopping $20 billion in revenue in 2013; this was about 41% of eBay's overall revenue.  PayPal also stands out as eBay's fastest-growing business segment with revenue jumping 20% in fiscal 2013. eBay has been selling off since the new development hit news feeds, and this is hardly surprising given the size of Apple and the mettle it commands in the market today.

How serious is the threat?
At this point in time, it is still unclear whether Apple's mobile payment services will only cover transactions that take place in physical stores, or if it will extend to also cover mobile e-commerce transactions. The latter option would be a much bigger threat to PayPal, since that's its main forte. Although PayPal processed a huge number of mobile transactions worth $27 billion in 2013, these were largely e-commerce related. PayPal has only a small presence in offline payment processing, although eBay is working feverishly to change that.

The good news for eBay shareholders is that given Apple's history, an Apple mobile payment service would be very unlikely to support Google's Android OS. This would quite naturally severely limit merchant interest in Android strongholds where the mobile OS holds the dominant market share such as Latin America, the EU, China and huge parts of mainland Asia.

How is eBay going to cope?
Supposing Apple goes the whole hog and actually launches a mobile payment service sometime in the near future, it would hardly spell doom for PayPal or eBay. Investors should not forget that eBay recently acquired Braintree, a global payments processing company with robust relationships with mobile-only companies such as OpenTable, LevelUp, TaskRabbit, GitHub, LivingSocial, Uber, Rovio and Airbnb.

Braintree is big business and already wildly popular with consumers. The payment processing company processed transactions worth about $12 billion in 2013 alone, with $4 billion being mobile payments. It seems that eBay was prescient on this one and anticipated threats from the likes of Apple, or possibly did it simply to shore up its mobile payments platform. Braintree will be directly incorporated into PayPal, and will therefore acquire many PayPal customers at zero cost.

PayPal is already the world's most popular online payment processing service, with 143 million registered users. Add Braintree's 35 million uniques to that, and it would be fair to say that PayPal will occupy an even bigger moat in the payment processing industry than it currently does.

Apple will of course try to leverage its 575 million iTunes accounts, iBeacon, and fingerprint sensors. Still, it is difficult to see Apple's new mobile payment platform doing any serious damage to a service as popular as PayPal. PayPal offers its users simple-to-use and fairly priced payment processing programs at very competitive prices.

The online payments platform has also forged numerous partnerships with many retail establishments, which let them accept payments directly through their own networks instead of doing it via merchant processing systems such as Global Payments. This cuts costs for merchants, and makes the platform very popular with many of them. And eBay has got other thriving businesses too, other than Paypal.

eBay's Marketplaces
eBay delivered a very solid fourth-quarter 2013 results, powered by both solid PayPal and eBay Marketplaces returns. Although eBay's Marketplaces, such as Shopping.com and Rent.com are not growing at PayPal's blistering pace, they are nevertheless growing at double digits and improved 12% in the last quarter.

Marketplaces are perfectly designed to compete with Amazon's (NASDAQ: AMZN  ) Amazon Prime. Amazon Prime is already wildly popular with Amazon customers, and its users purchase 2.5 times as much as regular Amazon customers. The service is enamored with cutting-edge and utopian concepts such as same day delivery and free shipping.

eBay recently acquired Shutl, a U.K. start-up that has recorded ringing success with same day deliveries. The firm is now taking the game a notch higher by launching not just same-day, but one-hour delivery. The company also announced that it will roll out eBay Now, its same-day delivery service, in 25 cities across the U.S. The eBay Now service has been active in New York and San Francisco for one year now, and the fact that eBay want to introduce the service in other cities is a good sign that it's being well received.

eBay sports a very high gross margin of 57%, more than double Amazon's 26.7%. The healthy margin gives the company ample room to tweak its Marketplaces services and improve them. Chief executive John Donahoe pointed out that eBay is mainly looking to grow its online revenues with these novel services, even if it only ends up breaking even. Of course Amazon has perfected this game of wild revenue growth with razor thin margins.

Foolish bottom line
eBay's PayPal already occupies a huge moat in the global payment processing industry, and the recent acquisition of Braintree will only strengthen that position. Although Apple can leverage its iTunes accounts to build a following, it would be a long time before its mobile payment service can measure up to PayPal or Braintree. The panic by eBay investors is therefore largely unwarranted.

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  • Report this Comment On February 04, 2014, at 6:12 PM, longdoc wrote:

    Apple starts it's own payment platform. Either Google or MSFT buy Paypal. Simple.

  • Report this Comment On February 05, 2014, at 12:03 AM, PhilipCohen wrote:

    Amazon/Apple/Dwolla/Google/Square/Whoever Payments …

    Online or at physical point-of-sale, via plastic or mobile phone—from the merchant’s point of view—all these “non-bank” providers suffer the same severe handicap that eBay’s clunky PayPal suffers: none have interactive access to buyers’ funds in retail banking debit accounts, nor to retail banking credit accounts as do have the MasterCard and Visa “bankcards”; their only reliable access to funds is as retail bank Credit Card Merchant Account operators (which is what “PreyPal” claims to be when it wants to appear not to be operating as a “bank” in its own right) via their own retail banker (Wells Fargo in the case of “PreyPal”). …

    Even if any of these middlemen make use of direct debits via the ACH system (as “PreyPal” prefers to do to more cheaply access buyers’ funds), the access is not interactive: there is no immediate acceptance of the debit by the bank nor any guarantee that, the following day, the bank won’t reverse the debit due to an insufficiency of funds; direct debit via ACH is simply not a suitable medium for physical point-of-sale transaction payments; the only safe route for point-of-sale transactions (credit or debit) is via a retail bank Merchant Account with its interactive linking to the retail banking system …

    These “pretenders” are all parasitic middlemen, a superfluous additional layer that, in the main, rides precariously on the backs of the retail banks’ existing systems; they make their money out of the difference between what the banks/MasterCard/Visa charge them and what they then charge their merchant customers; therefore, their services, invariably, are going to be dearer, or are unlikely to be cheaper; anyone that thinks otherwise has been drinking too liberally of all the disingenuous nonsense that continually flows from the eBay Dept of Spin …

    “PreyPal”, however, is unique in that it operates a “pretend” bank—the unlicensed “bank” they have to hold onto merchants’ receipts, and the bank they don’t have when the banking regulator comes sniffing around. That “PreyPal” manages to skirt wholly around US banking regulation while operating this clunky, unregulated, non-FDIC-insured, “pretend” bank, frankly, defies belief; possibly it’s due to the same bureaucratic laziness/corruption that allows eBay to knowingly and calculatedly facilitate, demonstrable, massive, blatant, auction fraud on the consumers of the world … bit(DOT)ly/11F2eas

    Regardless, if any of these middle-men players think that they are going to take other than micro-fractions, if any, of the payments market away from the MasterCard and Visa “bankcards”, I think that they are dreaming, or possibly they have accompanied Johnny Ho on one too many his many hallucinating trips with Alice down the rabbit hole to Wonderland …

    For buyers, “digital wallets” undoubtedly are the way of the future for payments, and with the recent arrival of the professional digital wallets from MasterCard and Visa, all these pretenders—with the exception of where they are mandated/integrated into an online marketplace—are now effectively redundant …

    And, with respect to physical point-of-sale transactions by such pretenders (Square excepted, as it offers a hardware answer to a particular problem), can I simply invite readers to, next time they visit The Home Depot, ask a cashier how “Pay Here With PayPal” is going—LOL … bit(DOT)ly/UVXx53

    Hello "MasterPass"; goodbye clunky "PreyPal"—it has not been nice knowing you ...

  • Report this Comment On February 05, 2014, at 1:31 PM, motleyLiam wrote:

    How ironic, since eBay and Paypal's apps for smartphones clearly favor Apple devices over Android.

    Perhaps eBay will be getting a small taste of how they treat sellers.

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