In the company's first quarter, PayPal Holdings Inc (PYPL +1.36%) continued its winning ways with more solid results: Revenue grew to $3.69 billion, a 24% increase year over year, while non-GAAP earnings per share jumped to $0.57, a 29% increase year over year. This growth was fueled by a 15% increase in active customer accounts and a 25% increase in the number of payment transactions across its platforms. PayPal account holders are also using their accounts more than ever as transactions per active account rose to 34.7, an 8% increase year over year.
It's not hard to see why PayPal is enjoying such success as it emerges as one of the obvious winners in two huge trends: e-commerce and m-commerce, or mobile commerce. While it has always enjoyed success as an online platform, its dominance in mobile commerce is more of a recent phenomenon, largely due to the success of its One Touch feature. Unfortunately for PayPal investors, though, this success has not gone unnoticed, and others in the payment industry are looking to mimic the service's success.
PayPal's One Touch feature allows consumers to easily make online and mobile purchases by skipping the annoying checkout process. Image source: PayPal Holdings Inc.
PayPal's mobile triumphs
PayPal's stunning success in mobile can't be questioned. In the company's first-quarter conference call, CEO Dan Schulman said PayPal processed $49 billion in mobile payment volume -- payments originating from a mobile device -- good for a 52% increase year over year. Mobile payment volume now accounts for 37% of the company's total payment volume.
The company continues to credit One Touch for its mobile success. One Touch is a feature that allows account holders to register a device with PayPal and then enables them to stay logged onto PayPal for all future purchases on that same device. This means no more retrieving credit cards and punching in numbers and expiration dates and billing addresses when trying to make purchases on small smartphone screens. Speaking from personal experience, I now get upset when making an online purchase on a website that doesn't offer this feature.
One Touch's ease of use is delivering results. A new comScore study showed that PayPal checkout conversions had an 88.7% success rate, compared to the average digital wallet's 55.3% sales conversion rate. Sales conversions are defined as how likely consumers are to finalize a purchase once items have been placed in an online shopping cart. Among the consumers who have tried One Touch, 91% have given it a rating of "Very good" or "Excellent"; 99% gave it a rating of "Good" or better. That kind of customer satisfaction is hard to beat.
It is no wonder, then, that 92 million consumers and 8.6 million merchants, up 74% and 72% year over year, respectively, have now opted into the program. That's phenomenal! Yet, it is this very success that has attracted competition from some of the payments industry's biggest players.
The credit card companies strike back
For years, the major credit card companies -- American Express Company (AXP 0.30%), Discover Financial Services (DFS +0.00%), Mastercard Inc (MA +0.05%), and Visa Inc (V +0.06%) -- have supported their own digital wallets with varying degrees of success. The problem is, none of them meaningfully appealed to the average consumer. After all, in my own physical wallet, I have one American Express card, one Mastercard, and one Visa. I have no desire to opt into three individual digital wallets to conveniently use the three cards when making online purchases, especially when PayPal's platform allows me to enter all of my credit cards, across banks and brands, into its own platform.
That is why all four major credit card companies have partnered to create a new e-commerce checkout standard, the goal of which is to rid the need to enter cumbersome data, such as lengthy credit card numbers when making online purchases. In Visa's first-quarter conference call, CEO Al Kelly described the effort:
Our vision is to create a consistent and secure digital shopping experience across browsers and devices that largely eliminates the need to enter card account numbers and passwords. Online shopping should be as simple as it is in the physical world, making the checkout process easy, with a single pay button. We aim to declutter the checkout page, to streamline the checkout process.
Mastercard CEO Ajay Banga said in his company's conference call that the effort is "transformative for the industry as a whole, for the ecosystem." When asked for a timeline, Banga said you might begin to see the first fruits of this effort by the end of the year but to expect to see a "real push" by the beginning of next year.
Destination unknown
It's still not entirely obvious what this new standard will look like, but if it removes friction from the e-commerce process by eliminating the need for consumers to enter lots of information, it sounds an awful lot like PayPal's One Touch feature. While the credit card companies benefit from PayPal's One Touch -- after all, PayPal's platform is just another way to access the payment networks the credit card companies offer -- if they have a chance to take out another middleman in the process, namely PayPal, they will jump at the chance.
Will the credit card companies succeed? In a sense, I believe they will. Any effort to make facilitating online transactions easier and simpler will probably benefit consumers and vendors alike and experience major user growth. I am not entirely convinced, though, that this means PayPal will fail. For starters, the One Touch platform already has significant growth momentum and a budding network effect. Giving One Touch another year to grow virtually unchallenged will only help it solidify its place in the market.
E-commerce is big enough for more than one winner
In fact, this scenario reminds me of when Zelle, the major peer-to-peer (P2P) platform jointly supported by most major banks and financial institutions, first launched. Many wondered at the time if the new competition would derail PayPal's own P2P efforts. While Zelle has already been a success, PayPal's P2P payment volume continues to grow at a phenomenal rate. In the first quarter, P2P payment volume rose 50% year over year across all of the company's platforms to $30 billion.
Much like the P2P payment space, the online market place is enormous -- and growing. There is ample room for more than one digital payment winner. Since being spun off from eBay in the summer of 2015, the digital payment platform has returned 115% to investors, walloping the S&P 500 index's returns of about 32% over the same time period. While competition continues to emerge, eager to copy PayPal's success, I foresee more market-beating returns in PayPal investors' future. After all, imitation is the sincerest form of flattery.
