PayPal (NASDAQ:PYPL), the venerable payment solutions provider, was ahead of its time when it began around the turn of this century. Today, it competes with upstarts in the fintech space such as Square (NYSE:SQ).

Both PayPal and Square are experiencing strong business growth as consumers transition increasingly to digital payments through mobile phone apps and e-commerce. With both PayPal and Square doing well, which one of these fintech players is a better buy? An analysis of each can answer that question.

A dollar sign in the center of circles of binary code representing digital payments.

Image source: Getty Images.

PayPal's strengths

PayPal products and services are used around the world. In fact, international markets make up 47% of the company's revenue.

Despite its ubiquity, PayPal continues to experience double-digit business growth. In its last earnings report, for the 2019 fourth quarter, PayPal reported 18% year-over-year revenue growth on a foreign-exchange-neutral basis to $4.96 billion. The number of active accounts grew 14% year over year to 305 million. The company also had $1.09 billion in free cash flow, a 20% year-over-year increase.

PayPal's key strength is its dual-sided platform. One side enables consumers to perform transactions while the other gives merchants a safe, secure means to collect payments. The company generates revenue by charging fees for its services.

PayPal's current offerings extend beyond the core PayPal platform to encompass peer-to-peer payments through its Venmo and Xoom apps, small-business loans, and even online coupons from its recent acquisition of Honey Science.

Another recent investment includes an online payment provider in China, GoPay, in which PayPal acquired a 70% equity stake. This enables PayPal to offer online payment capabilities in China's multitrillion-dollar digital payments market, making PayPal the first foreign payments platform licensed to do so.

Venmo represents another opportunity. The $29 billion in payments made through Venmo in the fourth quarter was a 56% year-over-year increase. Currently, revenue is confined primarily to fees collected from Venmo's optional instant money transfer feature, resulting in about a $450 million run rate. PayPal's strong business trends mean it will weather the coronavirus storm. 

Square's success

Square was founded in 2009 to give small businesses, referred to as sellers, the ability to accept credit card payments. The company has grown its products to support sellers as well as consumers interested in financial services, the latter delivered through the company's Cash App ecosystem.

Square generates revenue from fees charged for the use of its services. Its latest earnings report, for the 2019 fourth quarter, showed that Square is experiencing strong growth. Total net revenue grew 41% year over year to $1.3 billion. Net income, excluding gains from the sale of its Caviar delivery business, was $17 million compared with a net loss of $28.2 million in Q4 2018.

Square's Cash App business is booming. The number of monthly customers actively using the service rose 60% year over year to 24 million. Cash App's total net revenue increased 147% year over year to $361 million.

The service is primarily used for peer-to-peer payments, but additional capabilities include its debit card equivalent called Cash Card, and the ability to invest in stocks and bitcoin. Cash App is also more resilient to the repercussions of the coronavirus pandemic. In a March update on 2020 first quarter revenue, Square noted "the impact on gross profit growth has been less pronounced" in the Cash App division than on the seller side.

Speaking of the seller business, Square has expanded from its payment-acceptance origins to offer an array of features, including loans to sellers and payroll services. The secret to Square's success with sellers has been its transparent pricing. While payment services from other companies might contain hidden fees, Square is clear about what it charges merchants.

In addition, Square generated only $241 million of its $4.7 billion in 2019 full-year revenue from international markets. So although the company withdrew its full-year 2020 guidance and revised down first quarter estimates due to the pandemic's impact, it has room to grow.

My verdict

Because PayPal and Square are experiencing strong growth, an investment in either is a good choice. So is one clearly a better buy?

That depends on your risk tolerance. Square is not afraid to try new ideas, and some won't work out. Its failure with the Caviar delivery business is an example.

Moreover, Square CEO Jack Dorsey is also CEO of Twitter (NYSE:TWTR). Running two public companies splits Dorsey's time. That was a concern raised by hedge fund Elliott Management, which was taking steps to remove Dorsey as Twitter's CEO before reaching an agreement with Twitter.

For these reasons, the better buy is PayPal. It's established yet continuing to grow, and it generates $0.22 of free cash flow for every $1 of revenue. PayPal's strengths position it to continue its growth for the long term.