Earlier this month, Snap (NYSE:SNAP) decided to integrate PayPal (NASDAQ:PYPL) directly into its core Snapchat app by installing the payment processor's software development kit (SDK). The move, which includes both iOS and Android versions of the app, was done quietly with no fanfare, but noticed by Mighty Signal, a mobile analytics firm.

What is Snap up to?

Phone with Snapchat logo

Image source: Pixabay.

Three possibilities

There aren't too many options on what Snap could be doing here, which makes it relatively easy to speculate. The three immediately obvious possibilities for this integration are:

  1. Accepting payments within Snapchat for Snap products. Snap only makes one hardware product right now, Spectacles.
  2. Facilitating third-party e-commerce transactions. Companies could use ads to sell products directly, creating a new e-commerce platform on Snapchat.
  3. Revamping Snapcash for peer-to-peer (P2P) payments. Snapcash currently uses Square (NYSE:SQ) to process P2P payments.

Let's examine these more closely.

Buying Spectacles or any other future products directly within the Snapchat app, and paying with PayPal: This seems like the most unlikely. Spectacles are already essentially a waste of effort since Snap loses money on them, but far more importantly they fail to boost engagement in any meaningful way. The wearable cameras were a successful marketing campaign that fueled hype for Snapchat ahead of the IPO, but not much else. After initially only selling Spectacles through bright yellow vending machines, Snap also sells Spectacles online now. It's possible that the company wants to offer Spectacles through the app to expand distribution further, but it hardly seems worth it.

Creating an e-commerce platform: Snap wouldn't be the first social media company to consider e-commerce opportunities. Both Facebook and Twitter have experimented with "buy" buttons within ads over the years, and both have failed. Twitter officially killed off its "buy" button in January of this year, accepting defeat. Facebook never had much traction either, and is now focusing on turning Messenger into an e-commerce platform with AI chatbots that can even negotiate prices with users by leveraging game theory and deep learning. If Snap has been paying any attention over the past three years, it should realize that building an e-commerce social platform is extremely hard, and it should be focused on building its core ad platform before tackling an initiative as daunting as e-commerce.

Snapcash 2.0: Snapcash was first unveiled in 2014 as a P2P payment service that allowed users to send money to each other. Square currently powers Snapcash, and this isn't something that Snap should be doing in-house considering the regulatory requirements of operating such a service directly. The broader P2P market has been taking off, as evidenced by PayPal subsidiary Venmo's soaring payment volumes. Even Apple is about to jump in, and the big banks have partnered to develop a rival service, Zelle. This is the most plausible route that Snap could be pursuing.

Worth it?

The tricky part is that P2P payment services are perennial money-losers. Users aren't willing to pay fees to send money to friends or family (which is partially why paper checks are still a thing), so P2P payment services do best as an added feature that's essentially subsidized by a core business. Here's how much revenue Snap has recognized from Snapcash to date: $0. But there are still costs associated with processing P2P payments. Revamping Snapcash could add a feature that users are finding increasingly useful, but any traction it gains would just cause Snap to bleed out a bit more.

Evan Niu, CFA owns shares of AAPL and FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends AAPL, FB, PayPal Holdings, and TWTR. The Motley Fool has a disclosure policy.