In November, PayPal Holdings (NASDAQ:PYPL) announced the $4 billion acquisition of Honey Science, an e-commerce tool that helps shoppers find deals. The move puzzled many observers, as it is not only PayPal's largest-ever acquisition, but it's also a very rich price tag for a company that only generated approximately $100 million in sales last year.

That being said, PayPal has had a lot of success making deals. The company purchased Braintree for $800 million in 2013 -- that deal included Venmo, which has become a major source of growth for PayPal.

Could the acquisition of Honey be another game-changing moment for PayPal?

A person holding a credit card with a tablet in their lap showing a shopping page.

Image Source: Getty Images.

What Honey brings to PayPal

To take a step back, it helps to define what Honey offers -- an internet browser extension and mobile app. Shoppers use Honey to search for products, deals, and coupons. It can also be used during online checkout with many retailers to autofill coupon codes, saving shoppers money.

Honey has saved shoppers more than $1 billion since it launched seven years ago. And for that good work, it has amassed a loyal user base of 17 million daily active users.

PayPal can now integrate Honey's features into the PayPal and Venmo apps. Highlighting products and helping shoppers save money will encourage PayPal users to complete transactions, which in turn generate fees for the platform. Adding additional features, such as online product price-tracking, gives shoppers another reason to use PayPal over other credit cards or bank accounts.

The Honey acquisition could also help PayPal add merchants to its platform. PayPal needs merchants to offer PayPal as an accepted form of payment in order to create more opportunities to facilitate transactions. Honey provides tools that help merchants target customers through deals and promotions. This is a good value proposition for merchants looking to increase their sales volumes and move inventory.

Finally, the acquisition is a play for consumer data. The Honey app delivers discounts to shoppers and drives demand for merchants, but it also collects a lot of data in the process. Honey knows what products consumers are interested in, product pricing across different websites, and the discounts merchants are willing to offer to sell goods. All of this data could be extremely useful for PayPal as it looks to monetize Venmo and bring more merchants and consumers into its payments network. For example, PayPal could leverage Honey data to offer discounts on hot items through Venmo or create personalized offers for its merchant partners to attract shoppers.

Honey is clearly an interesting platform. Bringing it into the fold will give PayPal new tools to grow its network and business overall.

Competition increasing in digital payments

The Honey acquisition comes at a time of rising competition in the payments sector. Companies including Apple (NASDAQ:AAPL), Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) Google, and (NASDAQ:AMZN) have all made moves to offer digital payments.

Apple has been the most aggressive entrant into the space. In 2014, it launched Apple Pay, which allows users to make payments online and in person with many merchants. This year, Apple also unveiled a credit card to capture even more of the payments market.

Amazon has its own payments service called Amazon Pay. Launched in 2007, it's a tool for online stores that enables easier checkout for shoppers who already have Amazon Pay accounts. While Amazon is not going after the brick-and-mortar opportunity like Apple, its payment service makes it easier to buy products on other other platforms for shoppers who like to use Alexa or their smartphone to shop.

Finally, Google has made a couple of interesting moves within financial services. First, there is Google Pay, which was launched in 2015 to help people shop on the Google Play store. Google Pay can also be integrated into online stores or used as a peer-to-peer payments network (like PayPal). More recently, Google announced it will launch an online checking account. Details are forthcoming, but the Google checking account could be used to advertise financial products to customers and eventually set the stage for a Google credit card as well.

PayPal's competitive position

With these massive tech companies entering the payments space, it's no wonder that PayPal has looked to acquire innovative companies like Honey to offer differentiated services to customers and merchants.

At the end of the day, PayPal is still in an incredibly strong competitive position. PayPal has competed with banks and credit cards since the beginning, and services like Apple Pay have been around for years. Yet PayPal continues to grow its payments volume at an above-20% rate.

Furthermore, PayPal's independence from large tech platforms like Apple and Amazon could make it more attractive to merchants that compete with the same platforms. For example, PayPal has announced partnerships with companies, including Uber, Booking Holdings, and Etsy to provide payment processing.

Strategic moves like the Honey acquisition will further equip PayPal to fend off the competitive assault, while they enhance the value delivered to customers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.