When PayPal Holdings (NASDAQ:PYPL) split from eBay (NASDAQ:EBAY) in 2015, it opened the door for the payments processor to partner with a lot more online merchants. Amazon.com (NASDAQ:AMZN) has been at the top of PayPal investors' wish lists ever since. Partnering with the world's largest online retailer would provide a huge growth catalyst.
PayPal CEO Dan Schulman provided some hope to investors in an interview with Bloomberg following the company's fourth-quarter earnings report. "We have been in conversations with Amazon," he said.
The benefits would be huge for PayPal, but it's still not clear what Amazon could get out of PayPal. Even though PayPal has shed eBay -- one of Amazon's biggest competitors -- it still doesn't make sense for the two companies to partner up.
"Your margin is my opportunity"
Amazon famously operates on extremely thin margins. While payment processing represents a small portion of the online retailer's operating costs (falling under its fulfillment expenses), every penny counts. Through the first nine months of 2016, the operating margin for Amazon's retail operations was just 0.7%.
While Amazon uses third-party services to process credit cards, PayPal's take rate is significantly higher than the standard processing fees of traditional back-end payment processors. PayPal's standard fee is 2.9% plus $0.30 for U.S. transactions, and 3.9% plus a fixed fee for international payments. Amazon would surely get a deal from PayPal, but the latter is still in business to make a profit.
Amazon would be sacrificing some profit in a partnership with PayPal. The question then is, would it receive benefits that offset the opportunity cost of sticking exclusively with its existing payment processors?
What does PayPal bring to the table?
PayPal's biggest use is for onboarding new customers. It allows them to skip the step of entering payment information, and it provides an added layer of fraud protection. The only problem is, Amazon already has so many customers.
PayPal has nearly 200 million active accounts, which sounds like a lot until you consider that Amazon surpassed 300 million active customers over a year ago. There aren't many incremental customers for Amazon to gain from the partnership.
In addition, PayPal's strength in recent years has been its mobile-checkout system, which is a place many online retailers struggle. Amazon, however, has significantly outperformed the rest of the industry on mobile.
PayPal does bring valuable data to the table. It holds data from years of partnering with eBay, which is one of Amazon's biggest competitors. It also has data pertaining to many smaller online retailers, which could provide Amazon with new verticals or products to invest in. Whether the retail giant will have access to that data is unclear, and how valuable it really is to Amazon is equally vague.
A lopsided deal
A partnership with PayPal doesn't provide much meaningful value to Amazon, whereas PayPal gets several benefits: access to the largest online retailer, the third-party merchants that use Amazon's marketplace, and at least some of its shopper data. While Amazon wouldn't be feeding valuable data directly to its competitor now that PayPal has split ties with eBay, it's still relinquishing its iron grip on shopper data that provides it a competitive advantage.
PayPal investors should celebrate if there's even a small partnership between the two companies, but Amazon investors won't have much to cheer about.