The mobile payment landscape is getting bigger. Major technology companies like Google, Facebook, and Amazon, along with big banks and credit card issuers, are jockeying for position in a fast growing market. As mobile payments adoption expands, the services that are easy to access and easy to use are in the best position to lead the race.
PayPal Holdings (NASDAQ:PYPL) has been leading the race for over ten years. Two competitors that could give PayPal a run for its money is a new peer to peer (P2P) payment service, ClearXchange, and Apple's (NASDAQ:AAPL) own mobile payment service Apple Pay.
Big banks have an answer for Venmo
ClearXchange is owned by Bank of America, BB&T, Capital One Financial, JP Morgan Chase, PNC Financial Services Group, U.S. Bancorp, and Wells Fargo. Some of the top banks in the world are already in the ClearXchange network and reach over 250 million people.
It is the banks' response to the popularity and growth of PayPal's P2P payment service, Venmo, which is growing rapidly and is on pace to process about $20 billion in annual transaction volume over the next four quarters.
ClearXchange offers a very straightforward and convenient service. All you need to send someone money is an email address or mobile phone number. The money is sent directly from the senders' bank account to the recipients'. Even if someone holds a bank account not included in the ClearXchange network, they can still sign up to receive payments.
On top of the convenience of transferring money directly in and out of bank accounts, the service is fee free. However, Venmo is also free for all transaction types except credit cards.
While the ability to directly transfer money to and from bank accounts is attractive, it's not clear whether ClearXchange differentiates itself enough to persuade Venmo's core users, millennials, to use it. One reason for the growth of Venmo is that it is not associated or owned by traditional financial institutions, an aspect that appeals to a younger generation. Both PayPal and Venmo users can still send money or pay for goods even if there is insufficient funds in their account balance, making these services as easy and convenient to use as ClearXchange.
Apple has the numbers
Perhaps a more significant elephant to battle against is Apple Pay. Since Apple Pay's launch in 2014, Apple has been quietly signing up banks and credit unions worldwide to allow credit and debit cards to be enrolled in Apple Pay. Recently, Apple added support for 17 more credit unions and banks bringing the total to over 1,600 worldwide. Although Apple doesn't disclose specific numbers, the service seems to be enjoying growing adoption.
In 2016, CEO Tim Cook reported that 75% of all contactless payments in the U.S. were through Apple Pay. Apple Pay transactions increased nearly 500% year over year in the most recent quarter. More transactions were completed in September 2016 than the entire fiscal 2015. Apple's major partners reported that Apple Pay has the highest conversion rate of any digital wallet, and management expects two-thirds of the top 100 retailers to support Apple Pay in 2017. Apple Pay was launched for the Safari web browser for the first time in September 2016, opening up another avenue for users to engage with the service.
This success is not surprising. Apple is one of the most recognized brands in the world and has sold over one billion iPhones since the launch of the original in 2007, giving Apple a huge installed base. Of course, some of these purchases are upgrades for existing users, and some people may not even use an iPhone anymore.
One analyst estimates the total installed base of Apple's iPhone is around 400 million. By comparison, PayPal had 192 million active customer accounts at the end of September 2016. Whatever the exact number for Apple's installed base, it's reasonable to assume Apple has a potential customer base that rivals PayPal's.
The important distinction for Apple is its control over both hardware and software. Since Apple designs the hardware and software, it can control access to hardware components and software functionality inside an iPhone. Because of this closed system, only Apple can program software to access the Near Field Communication (NFC) chip inside iPhones and Apple Watches. The NFC chip in an iPhone 6 or later model connects wirelessly to a NFC chip reader in a retail store, for example, to share payment data. The NFC chip enables Apple Watch users to simply turn the crown or wave their wrist in the air, wait for a beep, and, voila, payment sent. Third-party app developers, such as PayPal, do not have the luxury of allowing its users to wave their wrists in the air to send payment.
There's no winner-take-all
Although Apple does not disclose specific operating metrics for Apple Pay, the statistics CEO Tim Cook discloses on conference calls are enough to assume Apple's total payment volume (TPV) is growing along with the mobile payments industry. The good news for PayPal is that its own TPV has been growing consistently at 20% or more since the launch of Apple Pay. The parallel growth of these two services along with the continued growth of credit card issuers, Visa and MasterCard, highlights the size of the opportunity for all payment solutions.
PayPal management puts the company's addressable market at $100 trillion. Over the last four quarters, PayPal's TPV is $336 billion, so there is a very long runway of growth, not only for PayPal, but its competitors as well.