Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

How PayPal Is Helping Usher in a Cashless Society

By John Ballard - Dec 9, 2020 at 11:26AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Its new QR code technology could be a game changer for digital payments adoption.

While the U.S. still has a long way to go to match China as a cashless society, PayPal Holdings ( PYPL 3.31% ) is helping the U.S. bridge the gap. PayPal has struck deals with several major retailers to use its QR code solution at checkout. If its technology becomes more widely adopted, PayPal will cement its position in the rapidly expanding digital payments market. 

Here's what PayPal's QR code solution could mean for its growth.

A momentous year for PayPal

PayPal Holdings reported stellar earnings results through 2020, as mobile payment adoption soared during the pandemic. In the third quarter, total payment volume and revenue grew 36% and 25%, respectively, excluding currency changes. That's the strongest growth in the company's history. 

A hand holding a smartphone up to a wireless card machine at checkout.

Image source: Getty Images.

Even though more people are using mobile payments, the U.S. still lags China, where 53.5% of the population is estimated to use in-store mobile payments, according to eMarketer. In 2019, 64 million people in the U.S. used in-store mobile payments, which is about one-fifth of the population. That gap in mobile payments usage between the U.S. and China is PayPal's opportunity.

PayPal is on pace to gain 70 million net new active accounts in 2020. Those new customers should bring in even more transactions and fuel further growth for PayPal's platform, which just hit a record 4 billion transactions processed in the third quarter. 

Growth in new customers is not a problem for PayPal. The real challenge is figuring out ways to increase the frequency that users transact with their accounts for everyday purchases. Since PayPal makes most of its money by charging fees for each transaction processed, increasing customer engagement is a key ingredient to driving revenue growth and fueling returns for shareholders.

As of the third quarter, PayPal's transactions per active account stood at 40, which means users made a transaction at a rate of less than once per week over the last year. It is encouraging that PayPal can generate $20 billion in revenue and $3.1 billion in net profit with customers using their account as infrequently as they currently do.

Just imagine what those numbers would look like if PayPal achieves its long-term goal of making its platform an everyday use case for its users. Revenue and profits would certainly be multiples higher than they are now. PayPal's new QR code checkout solution is taking a big step in that direction.

Two bar charts showing PayPal's recent growth in total payment volume and customer engagement.

Image source: PayPal Q3 2020 earnings presentation.

Major retailers are adopting PayPal's checkout technology

In May, PayPal announced that its QR code payment solution was available to buy and sell goods across 28 markets worldwide. It was marketed as a "touch-free way to buy and sell in-person." Given PayPal's 361 million active customer accounts, it didn't take long for large retailers to sign up to tap into that large installed base of users. 

In July, CVS Health's pharmacy chain became the first national retailer to integrate PayPal and Venmo QR code technology at checkout across 8,200 CVS Pharmacy stores. 

More deals have followed, including with Nike and Bed Bath & Beyond. There could be more announcements coming, as PayPal remains in talks with more than 100 large retailers. 

The launch of its QR code solution does more than expand PayPal's addressable market to offline payments. For example, when people use two or more of PayPal's products, including checkout solutions and peer-to-peer payments, it drives down customer churn by 50%. In other words, QR codes are another way to make PayPal's brand more ubiquitous, easier to use, and a stickier experience for customers.

PayPal's move into offline retail will be a "multiyear journey," as CEO Dan Schulman explained during the third-quarter conference call. But he also acknowledged that management is already seeing "strong early adoption" of its QR code technology, which is a great sign for the company's long-term growth prospects. 

PYPL Chart

PYPL data by YCharts

Investors are high on PayPal's prospects

This growth stock has seen its valuation stretch to a high forward P/E of 57 recently. That could limit further gains in the very near term, but PayPal can grow into that valuation over the long term. Management believes the business is now on a trajectory to grow faster than the original medium-term outlook of 17% to 18% annual currency-neutral revenue growth. 

It might be tempting for investors who bought shares earlier this year to sell and lock in quick gains, but given the enormous opportunities PayPal still has in a wide-open market, this is a stock worth holding for the long haul.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$197.35 (3.31%) $6.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/09/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.