Lots of consumers have shifted their spending online amid the coronavirus pandemic. Visa and Mastercard reported 18% and 20% increases, respectively, in card-not-present spending (excluding travel) for the month of April.
PayPal (NASDAQ:PYPL) grew branded transactions more than twice as fast -- up 43% in April, CEO Dan Schulman said during its first-quarter earnings call. That's a good indication it's taking significant share of online checkouts.
When asked how PayPal is managing to grab market share despite a constant influx of competition for online checkout, CEO Dan Schulman gave three reasons: scale, technology, and brand.
1. The network effect is only getting stronger
At an investors conference in early June, Schulman said:
Scale begets scale on this. Every merchant accepts PayPal. It's simple. It's easy to use. Conversion rates are higher.
PayPal ended the first quarter with 325 million active accounts and 25 million merchant accounts. Schulman said in May active accounts will grow by at least 15 million in Q2, with the high end of guidance forecasting 20 million additions. Schulman also said he sees PayPal adding 1 million to 1.5 million new merchants in the second quarter as more businesses move online amid the pandemic.
PayPal benefits from a virtuous cycle. The more users there are on PayPal, the more attractive it is to merchants. The more merchants there are using PayPal, the more likely users are to sign up or use the service more often. Using the service more often means users are more likely to add more payment information in the app, which means higher engagement across all merchants.
This network effect is a massive competitive advantage that will only continue to strengthen over time.
2. Best-in-class technology
PayPal's lead in technology is a considerable advantage when it comes to winning the checkout, as well as new users. Schulman said:
We can make it simple and easy for checkout. We can make it One Touch when somebody comes in. We have a scope of products and services that I'd say no competitor has right now.
PayPal's sitting on loads of user data that allow it to offer services like One Touch with strong security. It can prevent fraudulent payments from going through and it can confirm payments very quickly.
That makes for a much better user experience than other digital wallets or storing payment information in a web browser. Users feel more secure in their payments and the checkout process is smoother.
PayPal's technology is supported by the network effect. The more data it has to feed into its artificial intelligence (AI) algorithms, the better they become. And the better the technology becomes, the more users and merchants use the service.
3. The online payment brand
PayPal is one of the top payments brands in the world. In Interbrand's 2019 global brand rankings, just two payments companies ranked ahead of PayPal: Visa and Mastercard. But when it comes to online payments or fintech companies specifically, PayPal is in a league of its own. Nobody's using Visa Checkout or Masterpass, and the two digital wallets are on their last legs.
"That brand is all about trust and security," Schulman points out. Users trust PayPal to keep their payment information secure, and that can be essential when a customer is visiting a merchant's website that they've never used before. Merchants can capitalize on the trust that PayPal has built in order to increase checkout conversion rates.
Other options may be just as secure as PayPal, but they don't have the brand that invokes that feeling of trust from consumers. Combined with the company's technology, which ensures a fast and secure checkout process, and a growing network of users and merchants, PayPal ought to continue expanding its share of e-commerce checkouts for the foreseeable future.