In the past year, PayPal Holdings Inc (PYPL -1.83%) has completed a number of deals and agreements with other financial institutions and fintech companies. PayPal's management team believes these partnerships best position the company going forward in a fiercely competitive industry. In any industry, of course, competition is inevitable, but it is especially noteworthy when the world's largest publicly traded company, Apple Inc (AAPL -0.57%), formally announces it is planning to launch a platform that will compete with one of your company's core services.
This is exactly the position PayPal found itself in recently when Apple announced at its WWDC 2017 developer conference that it would be integrating a peer-to-peer (P2P) payment option into Messages when iOS 11 is released.
This is simply the latest P2P participant in an already crowded field. In recent months Alphabet announced mobile Android users could now send money to others via Gmail while large banks jointly launched a new P2P platform called Zelle. With all of the deep-pocketed new competition, who could blame PayPal for worrying about competition for its core platform or Venmo, the popular P2P app with millennials? On the surface, however, PayPal does not appear to be fazed by the new entries in the space.
Venmo's P2P payment platform is extremely popular with millennials. Image source: PayPal Holdings Inc.
An agnostic platform
In a recent interview with The Telegraph, PayPal CEO Dan Schulman was asked about Apple's P2P service and stated:
We own the full value proposition, Apple can never do that because they don't do the risk associated with it, they don't do the onboarding, they can only provide what they hope is a good user interface. We try to provide that end to end value proposition and very importantly we do it across operating systems.
Shulman's comments are telling because they directly address the weaknesses of several of the competing payment platforms. However, the main weakness, as I see it, is that Apple's P2P platform cannot work with people who reside outside the Apple ecosystem. One of the unique features about PayPal is that account holders can use its services across devices, operating systems, retailers, or banks. This not only gives it a leg up on competition in the P2P space from Apple and Zelle, but other competitors' payment platforms like Samsung's Samsung Pay, Alphabet's Android Pay, Amazon.com's Pay with Amazon, and Wal-Mart's Walmart Pay as well.
In the P2P payment space, this directly affects how useful the service is. For instance, if a dinner party wants to split a restaurant bill, every person paying would have to have an iPhone to use Apple's service. With Zelle, everyone would need to be a member of a participating bank or credit union. Not so with PayPal. In other words, PayPal is completely agnostic about what phone its account holders use or where they bank and shop; a claim few of its rivals can make.
The more the merrier
Venmo has experienced explosive growth over the past two years. In its most recently reported quarter, Venmo processed $6.8 billion in total payment volume, an approximate 114% increase year-over-year. This growth shows that there is a huge market for this type of service; a market that undoubtedly has room for more than one player. Indeed, the more consumers become accustomed to these types of payments, the more they might stop using cash or checks in such situations. After all, a rising tide lifts all ships. Josh Criscoe, Venmo's head of corporate affairs and communications, echoed a similar sentiment when he recently made the following statement on the launch of Zelle:
We don't see it as a winner-take-all scenario. We welcome any effort to move folks to more digital payments and move toward the smartphone as the central point of financial life. The common enemy is cash.
Room for more than one winner
Apple's new P2P service could drive user engagement for Apple Pay. Image source: Apple Inc.
Apple's new P2P platform and Zelle will almost assuredly accomplish one of their primary goals: Increase customer engagement with their existing products.
For iPhone owners, this means incorporating the use of the smartphone into yet another aspect of their lives. From Apple's perspective, I am sure the company is also hoping the move will give a shot in the arm to Apple Pay, a service still struggling to gain real traction with customers.
For the banks behind Zelle, this means getting account holders to engage with financial services and products through their own bank accounts first and not wander off looking for greener pastures via others' services.
PayPal has good reason for the confidence it shows in its core platform and Venmo. Both have what I believe amounts to a sustainable moat from newcomers in the payments space because of PayPal's agnostic platform, making it accessible to all potential customers in this space. It also has a nice head start in the space with more than 200 million (and growing) active accounts, creating a nice network effect. For PayPal shareholders, there seems to be little reason to worry that the competition is about to steal the company's thunder.
