The fintech market, which includes companies that use their online services and apps to create better ways for people to pay for goods or transfer money to each other, is booming. Research firm Statista forecasts the total volume of payments made through online payment platforms, mobile apps and similar new technologies will reach $1.2 trillion by 2022.
Among the many good companies making significant moves in this budding market are Square (SQ 1.44%) and PayPal Holdings (PYPL +0.81%). And while both are already benefiting from the rise of new financial tech services, PayPal's early lead in the space gives it an advantage over Square. Here's what both companies are doing in this market right now, and why PayPal still looks like the best bet.
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How Square is growing
Square may be best known for its popular line of simple, point-of-sale (POS) terminals, which allow small business to easily accept electronic payments from customers. Square makes about two-thirds of its revenue by collecting fees each time a transaction occurs through its platform, and recently the company has experienced strong growth. In the third quarter, its gross payment volume (GPV) was up by 29%.
Additionally, Square is making inroads in the person-to-person (P2P) payment market with its Square Cash app, which allows users to split bills easily or share money with friends. As Nomura Instinet analyst Dan Dolev recently noted, Square Cash downloads are outpacing downloads of PayPal's Venmo, which offers the same services.
There's no doubt that Square's business is growing, and it's likely a good company to invest in. But despite all of that momentum, investors shouldn't overlook PayPal's experience and dominance in the fintech space.
Check out the latest earnings call transcript for PayPal.
Why PayPal is the stock to stick with
Some investors weren't happy with PayPal's recently delivered fourth-quarter earnings report, but it'd be wise to zoom out and look at the bigger picture. First of all, the company added 13.8 million new accounts in the quarter, with 2.9 million coming from the company's acquisitions of Hyperwallet and iZettle. The latter gave PayPal not just more users, but a huge opportunity to expand its reach internationally.
Secondly, despite PayPal's size, the company is still growing total payment volume rapidly -- that key metric jumped by 23% year over year to $164 billion. And there's plenty to be excited about when it comes to PayPal's mobile payments: Volume was up by 40% for the full year, and mobile accounted for 41% of the total payments on its platform.
Additionally, though Square Cash is making strides in the P2P space, PayPal's Venmo's opportunities are just getting started. The popular app increased its payment volume by an impressive 79% in 2018 -- with $62 billion processed -- and management believes Venmo payment volume will hit $100 billion this year.
Last year, the company started offering the ability to deposit money shared on Venmo directly to a user's bank account instantly (instead of waiting the usual several days), and it now offers a Venmo debit card. These moves are just the beginning of the ways PayPal will monetize Venmo.
PayPal will likely remain dominant in this space, not just because it has a head start over Square, but because of its focus on innovation. Venmo is the perfect example of this -- the company is only just beginning to tap into its ability to make money from the app's users. PayPal has more than 267 million active accounts on its platform now -- up from 200 million about two years ago.
This ability to embrace new fintech trends while still growing its massive online payments business is a good indicator that the company has what it takes to continue leading the digital payments industry for years to come. While both Square and PayPal are likely to be profitable bets for investors, PayPal's acquisitions, its huge user base, and its growing mobile payments business suggest it could continue to outpace its rivals.
