PayPal Holdings Inc. (PYPL 0.71%) recently launched Funds Now, a feature that allows merchants instant access to funds from sales. While most know PayPal as the digital wallet platform for 250 million consumers, it also serves 19.5 million merchants, most of them small. While the feature itself is hardly ground-breaking -- other payment processing companies offer similar features -- PayPal's move is noteworthy because it will be providing Funds Now at no additional cost to the merchant.
It also includes money from sales disputed by consumers, a process that can take up to 90 days in some cases. Sellers normally do not have access to money from disputed transactions, but with Funds Now, PayPal will still give the merchant instant access to the money. If the consumer ultimately wins the dispute, PayPal will later debit the retailer's account for the disputed amount.
Small-business owners want their money fast and PayPal just found a way to give them instant access to their funds at a cost the competitors will be hard-pressed to match: free. Image source: Getty Images.
In a blog post announcing Funds Now on the company's website, COO Bill Ready said:
Over the past year, we've been meeting with many small businesses around the country ... to better understand their needs. A common pain point we heard from small businesses was that across the payments industry, it's too difficult and too slow to get access to the funds from their completed sales. In the world of payments, funding delays of seven to 21 days for small businesses have been far too common. Those funding delays hinder the ability of small businesses to invest back into their businesses, pay their bills, and serve their customers.
Funds Now has already been rolled out to 1 million qualified merchants belonging to PayPal and the company says the feature will soon be available to more merchants in markets in Australia, the United Kingdom, and the United States. It also promises that businesses in other markets will be given a chance to qualify in "the near future."
To qualify, PayPal says businesses must have had a PayPal account for at least six months and possess a strong selling record, which essentially means a low percentage of claims and disputes. Businesses must also have a legal business model and abide by all applicable laws and PayPal's values.
Why this is a big deal for PayPal
Funds Now is just the latest move taken by PayPal in recent months to focus more on this type of customer. Thus far in 2018, PayPal has made four acquisitions, which includes spending $2.2 billion for iZettle, a European-based company that sells hardware products that enable small merchants to accept card and digital payments at the point of sale, and Simility, a fraud prevention platform that businesses can use to analyze fraud risk in real time.
When cast in this light, this move seems to be the latest indicator that PayPal is focused on capturing more retailers' business in the payment processing market. With iZettle, PayPal can offer sellers true omnichannel capabilities. With Simility, PayPal can offer a fraud prevention program that learns from past transactions and constantly improves. And with Funds Now, PayPal matches the fastest access to funds in the industry and does so at no cost, something that, to my knowledge, is not offered by any other payment processor. With these services and products, PayPal can approach merchants with a very compelling sales pitch.
What this means for the rest of the industry
Merchants typically receive funds from debit and credit card sales 24 to 48 hours after the payment is processed. Of course, for small businesses struggling to get by, this can create the occasional headache. The list of things that can go wrong for businesses is nearly endless, all while staying current on rent, satisfying vendors, and meeting payroll. The ability to access funds immediately after sales are made, including those being disputed, is not something retailers take lightly.
To answer these needs, different payment processing companies have offered varying solutions. For instance, Square Inc. (SQ -1.13%) offers Instant Deposit, part of its rightly vaunted subscription and services-based revenue segment. For this feature, Square charges another 1% of the total amount in addition to its regular fees. In Square's second quarter, its adjusted revenue from this segment rose to $137 million, an incredible 131% increase year over year.
Going back at least four quarters, Instant Deposit has been specifically mentioned as a key catalyst for this category in the company's quarterly shareholder letters. In its Q2, Instant Deposit payment volume was $4 billion. While some of this can be attributed to use of the same feature by consumers on Square's Cash App, it's easy to imagine a great deal of that volume coming from merchants. At a 1% charge, that could be up to $40 million in the segment, or almost one-third of the segment's quarterly revenue, that can be attributed to Instant Deposit.
Other payment processing companies offer alternative solutions. First Data Corp (NYSE: FDC), for instance, points merchants in need of working capital to its cash advance program, a business loan platform based on companies' sales data.
In other words, while other leaders in the industry offer solutions of sorts to meet this need, they don't come cheap and they certainly don't come free.
How PayPal could win the payment wars
By offering a premium payment processing service at no cost, PayPal is probably beginning the slow process of commoditizing instant access to funds. This could mean the margins of payment processing companies such as Square could eventually come under pressure. It also shows, to some extent at least, PayPal's lead in the area, especially as it really begins to extend its advantage. While I am not selling positions in PayPal's competitors on this piece of news, it does make me slightly more cautious. More importantly, however, it shows the very real possibility of PayPal capturing more revenue streams and new customers as it begins to gain more market share in the payment processing industry in earnest.
