Earlier this week, PayPal (PYPL 0.13%) announced that it had expanded its existing partnership with Apple (AAPL 0.04%), with the payment processor integrating across Apple's growing services business in 11 new markets (PayPal was already available as a payment option for U.S. users). Users in those additional markets -- the U.K., Canada, Mexico, Australia, Austria, France, Germany, Israel, Italy, the Netherlands, and Spain -- can now select PayPal as their primary payment method across iTunes, the App Store, and iBooks, paying for virtually every category of digital content that Apple offers in its various storefronts, even including subscriptions like Apple Music or iCloud storage.
The deal appears one-sided, with PayPal being the clear winner. As such, it's no surprise that PayPal shares jumped to all-time highs in response to the news.
Apple Pay on the Web. Image source: Apple.
Why is Apple doing this?
Providing international users with additional payment choices is not a bad move, at least for consumers. But granting PayPal this level of integration does appear counterproductive to Apple's own ambitions to grow Apple Pay's international footprint. At a time when Apple is pulling all possible levers to expand Apple Pay and grow adoption of its mobile payment service, it is peculiar to suddenly offer another alternative that seems to undermine those efforts, even if it's consumer-friendly.
Considering the fact that Apple's services segment is now a $25 billion business globally, it's a huge win for PayPal, as it opens up whole new digital markets if PayPal can capture just a piece of those transactions.
However, Apple Pay doesn't really bring a whole lot of added convenience to digital content purchases beyond the long-standing model of storing a credit card on file. Apple Pay's real game-changing potential (and greater threat to PayPal) lies in areas like Apple Pay on the Web, particularly for mobile-optimized sites that have long been a challenging distribution channel for companies trying to sell products or services through smartphones and tablets. Entering credit card information on mobile devices is a persistent hurdle. That could be why Apple is willing to expand PayPal integration: The downside isn't as meaningful as it appears at face value.
Relationship status: It's complicated
This all comes as Apple Pay is preparing to enter the growing peer-to-peer (P2P) payment space later this year with iOS 11, which is a direct threat to PayPal and its popular Venmo subsidiary. PayPal has downplayed those concerns, arguing that it still offers a broader value proposition across all platforms.
You may also recall that Apple was angry at PayPal years ago for partnering with Samsung, using the fingerprint scanner in the Galaxy S5 for authentication. The Mac maker excluded PayPal from Apple Pay as a result. It seems that Apple has forgiven the transgression.
