PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) saw their payments volumes head in opposite directions in April amid the novel coronavirus pandemic. PayPal saw payment volume increase about 22% last month while the same metric fell about 39% for Square.

There's been a major upheaval in shopping behavior. Consumers are spending online more and going to stores less as they practice social distancing. As a result, Square is accelerating its efforts to offer more digital payment solutions and help its merchants shift online. But PayPal isn't standing still, either. It sees an opportunity to win more in-store payments when consumers start to return to shops and restaurants.

A Square Online Store on a smartphone and laptop next to Square Register and Terminal machines.

Image source: Square.

Moving Square merchants online

With sales moving online, smaller businesses with limited online presence are racing to catch up. Square is, too, and it's accelerating its investments in its Online Store product, which competes with other online storefront creators like Shopify (NYSE:SHOP). Square offers a nice package of services that makes opening an online store easy and it's uniquely positioned to integrate in-store and online inventory.

Last quarter, Square implemented curbside pickup and delivery features for restaurants, as well as e-gift cards. As a result, it saw a more-than-fivefold increase in card-not-present transactions in mid-April compared to January and February. Management says it exited the month at a $3 billion annual run rate.

But to put that number in perspective, it's still very tiny. PayPal's trailing-12-month payment volume totaled $741 billion. Shopify merchants sold over $61 billion in merchandise last year, and the company processed over $25 billion of payments.

Investors can see the established positions of those competitors as a hurdle or an opportunity. Square CEO Jack Dorsey described the pandemic as "a forcing function to show [merchants] all the benefits of being online" during its first-quarter earnings call. That may be Square's biggest opportunity. With the vast majority of commerce still taking place in stores, Square is well-positioned to win merchants' sales where they are and help them expand into online commerce. 

Adapting to the new normal for shopping

"The need for contactless payments is more important than ever before as consumers and merchants move away from handling cash or touching keypads and adhere to strict social-distancing requirements," PayPal CEO Dan Schulman said on the company's first-quarter earnings call. As such, PayPal is accelerating its investments in in-store digital payments.

The simplest way for PayPal to expand its presence in stores is through QR codes. Merchants can print out their codes for customers to scan with the PayPal or Venmo apps and the payment process is completely contactless.

The challenge for PayPal will be integrating those payments with store point-of-sale systems like Square's. It's unlikely Square will partner with PayPal since it mainly monetizes its ecosystem of services through payment processing, but Square still represents a very small portion of in-store retail. PayPal has an opportunity to partner with many stand-alone point-of-sale (POS) system providers, and that could undercut Square's ability to take market share if scan-to-pay gains momentum.

Square has a very popular consumer payments app of its own -- Cash App -- that it could use to facilitate payments in the same way PayPal plans to. It's slowly starting to produce crossover benefits between its seller and consumer ecosystems, and this could be another opportunity. That said, PayPal's been working on in-store digital payments for years, while Square has focused on card payments, so Square has quite a bit of catching up to do if it wants to pursue that route.

Who wins?

Both fintech companies are working to encroach on each other's territories, but they're not playing a zero-sum game. Square's ability to help its merchants move sales online could ultimately benefit both Square and PayPal. Square expects online sales to be additive to in-store sales for most of its merchants. Meanwhile, Square may accelerate the trend of sales moving online, which could benefit everyone in e-commerce, including PayPal.

PayPal's push into in-store payments may be a bigger threat to existing payments processors that don't have as big of an ecosystem of services as Square. Meanwhile, it may force Square to innovate and more deeply integrate its consumer and seller ecosystems, which could open up new opportunities for the company going forward and create stronger network effects.

With the push toward more digital payments both online and in-store, both fintech companies are well-positioned to win a greater share of payment volume going forward.