Could Apple’s Mobile Payments Disrupt PayPal?

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With a simple click of a button on a smartphone or tablet screen, a mobile payment is made. According to market research firm Forrester, the mobile payment industry was at $12.8 billion in 2012 but is predicted to rise to $90 billion by 2017—and that's one of the lower estimates. The technology is catching like wildfire for its ease, convenience, and speed. Since PayPal got the industry off the ground in 1998, new players have entered the market over the years.

PayPal currently sits atop the mobile payments market. It's the apple of eBay's (NASDAQ: EBAY  ) eye (its parent company and another goliath in online transactions), as it brought in the most revenue of any sector ($20 billion in 2013), a 20% jump for PayPal and 41% of eBay's total revenue for the year. PayPal is also eBay's fastest-growing business.

However, PayPal might not be sitting pretty forever. Another sheriff has come to town: Apple (NASDAQ: AAPL  ) .

Why PayPal might fear Apple's approach

With the right payment system in place, Apple's move toward mobile payments could be a smart strategy for the company—and a scary possibility for PayPal. Presumably, with the push of an Apple-logo button at checkout on websites and mobile devices, users could purchase goods and services easily and conveniently with the payment taken straight from their iTunes accounts.

Seeing as Apple has 575 million users with iTunes accounts—and adds about 500,000 new accounts per day— this could be a worrisome number for PayPal. PayPal itself has a sizable user base with 143 million active accounts in 193 markets and 26 currencies around the world. However, the ease and immediacy of mobile payments' availability for iTunes users could easily overtake PayPal should Apple prove to either provide a better service or offer cheaper fees (or both).

Another drawback for PayPal is Apple's access to the latest technologies. Already, rumors abound that Apple will integrate its Touch ID fingerprint sensor technology with its new mobile payments system—an offer of security and convenience PayPal simply can't (and may never be able to) provide. Apple also has its iBeacon technology, which could potentially determine where a user is in an actual store. These technologies could be a weak point for PayPal, which mostly sticks to its traditional, yet wildly successful, business model as of this point.

E-commerce vs. brick-and-mortar transactions

The industry of mobile payments is two-fold: mobile payments made online and mobile payments performed while inside brick-and-mortar establishments. Brick-and-mortar sales still comprise 85% to 95% of all commercial transactions, so this has become a target market for mobile payments companies.

This includes Apple, which wants to make purchasing its products with its products capable in its own stores as well as in many other retail establishments. In fact, some analysts believe that this may be Apple's chief aim, taking priority over e-commerce transactions.

If that is the case, PayPal can breathe a little easier, as its chief revenue-generator lies in online transactions, which accounted for most of its $27 billion worth of mobile transactions in 2013. PayPal too has made recent progress in securing some of these brick-and-mortar transactions, but its products are still in their infancy and waiting to take hold in the mainstream. Without its majority share of e-commerce transactions, PayPal -- and eBay -- could be in trouble.

If you can't beat 'em, join 'em

PayPal is making a move, perhaps out of fear of what kind of market share Apple could steal, or perhaps simply as a bold business strategy (or both). Instead of lying down and letting Apple become its next big competition—with its alarmingly loyal fan base and premium marketing efforts to boot—PayPal wants to join in on the fun.

Just recently, PayPal pitched to Apple a way to help the company finally make its mobile payments initiative a reality—by using PayPal's very own technology. PayPal has offered to white-label parts of its payment system—including anything from back-end infrastructure and fraud detection to the actual processing of payments—for Apple's own use. This tactic would move PayPal and eBay into a much more favorable position than simply being at odds with Apple with no involvement in its mobile payment growth.

How other competition has fared

Another possible issue for PayPal is that Apple is not the only potentially huge competition threatening to take over its market share. (NASDAQ: AMZN  ) is building a person-to-person payments system that puts it in direct competition to PayPal's own original service.

Similar to PayPal's mounting fears with Apple, Amazon has a staggering user base that could undermine PayPal's system in a heartbeat if Amazon got it right. Amazon is going head-to-head with eBay to offer a seamless online and mobile payments experience, and it likely has PayPal feeling a little uneasy.

However, when competitors like Square, Stripe, and even Google  (NASDAQ: GOOGL  ) Wallet entered the mobile payments industry, PayPal didn't see too much of a drop in market share. In a study, comScore reports that 72% of respondents are aware of PayPal's digital wallet while only 41% are aware of Google Wallet, 13% of MasterCard PayPass Wallet, and 8% of Square Wallet. As for actual users, 48% of respondents have used PayPal's digital wallet while only 8% have used Google's, 3% for MasterCard PayPass Wallet, and 2% for Square Wallet.

As another ray of hope for PayPal, Gmail's massive user base, at 425 million as of summer 2012, also dwarfs PayPal's, just like Apple's and Amazon's—yet its service didn't nearly take the bite out of PayPal Google thought it would.

PayPal is still the clear winner in the mobile payments game, and it will likely continue that reign for years to come. But no king can reign forever, and Apple and Amazon may be just the kind of competition that gives PayPal a run for its money. But then again, Apple and Amazon could both share the fate of Google Wallet and other PayPal competitors and simply eat the dust of the mammoth mobile payments mogul who got it right first—and who won't give up its crown.

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  • Report this Comment On February 15, 2014, at 10:52 AM, notrozer1 wrote:

    Unless Crapple makes a windows phone and an android version they wont get any money out of me. I do have a itunes account (had a work phone with IOS, got rid of it) and the account has been dormant for 3+ years

  • Report this Comment On February 19, 2014, at 8:06 AM, PhilipCohen wrote:

    "Could Apple’s Mobile Payments Disrupt PayPal?"

    No, but ...

    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 serious 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 “bankcards” MasterCard and Visa; 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 an unlicensed “bank”) 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 regulations 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 “bankcards”, MasterCard and Visa, I think that they are delusional, or possibly they have accompanied Johnny Ho on one too many his many hallucinating trips with Alice down the rabbit hole to Wonderland, from whence, probably, he developed his obviously flawed approach to commerce …

    “Off with his head!" many eBay merchants are shouting, but John is unafraid, calling them out as just “noise” … Only time will tell; or, who knows, maybe the slumbering eBay BoD may awaken before the damage the Ho is doing becomes irreversible …

    For buyers, “digital wallets” undoubtedly are the way of the future, particularly for online payments, and with the recent arrival of the professional mobile/plastic POS/online 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 ...

    eBay / PayPal / Donahoe: Dead Men Walking ...

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Carolyn Heneghan

A new addition to the Motley Fool team, Carolyn is an avid writer of all things tech, food, music, media and business. You can follow her on Twitter at @carolynola11.

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