In its most recent quarterly report, PayPal (PYPL +1.24%) reported more than $1.3 trillion in annualized payment volume on its platforms. So, it shouldn't be too much of a surprise that the big banks want a piece of the action.
According to a Wall Street Journal report, a group of banks is developing a digital wallet that will let shoppers pay at merchants' online checkouts, similar to how PayPal's wallet works. While there aren't many details on the product yet, the report indicates the new wallet will be managed by Early Warning Services, the company owned by a group of seven major banks that also owns and operates payment platform Zelle.
There are some big players involved in EWS. The seven institutions that own EWS are Bank of America, Wells Fargo, JPMorgan Chase, Capital One Financial, PNC Financial, U.S. Bancorp, and Truist Financial, so it's fair to say there are a lot of bank accounts, debit cards, and credit cards that could potentially be linked to this new wallet. This raises the question: Should PayPal and its investors be concerned?
Should PayPal investors be worried?
To be clear, this is an important development for PayPal investors to keep an eye on. But there's a good reason that PayPal's stock didn't plunge after the new mobile wallet was announced -- because it's not likely to be a serious threat to its business.
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Key Data Points
It's important to keep in mind that this isn't the first time the big banks have tried to disrupt the fintech disruptors. Several years ago, the banks teamed up to create person-to-person payments platform Zelle to compete with PayPal's Venmo and Block's Cash App.
Was it successful? Absolutely. According to Early Warning Services, Zelle processed $490 billion in transaction volume in 2021 (the most recent year for which complete data is available) from 1.8 billion separate transactions. This is more than double Venmo's volume in the same period, plus Zelle's growth rate was significantly higher.
However, that doesn't mean Zelle was a "Venmo killer." It's fair to say that much of Zelle's transaction volume was from consumers and businesses who otherwise would have used bank-based means of money transfer (like writing a check or completing electronic transfers), as opposed to customers choosing to abandon Venmo or Cash App. Plus, PayPal has such a massive network effect, it would be a heavy lift for the big banks to take significant share of the mobile wallet space from it.
Take it with a grain of salt -- for now
PayPal is a powerhouse fintech company and its more than $1.3 trillion in annual payment volume isn't in jeopardy because of this announcement. It has a massive ecosystem and loyal following, and it's important to mention that not all of PayPal's users even have an account with one of the banks creating this new mobile wallet. In fact, many PayPal users are fans of the platform specifically because it allows them to keep their online payment activity separate from the traditional banking system.
Finally, with $185 trillion in money transfer volume worldwide, it's critical for investors to realize there is room for more than one winner in the mobile wallet space. Even if the product being developed by the big banks is successful -- and based on Zelle, there's no reason to think it won't be -- there is plenty of payment volume to go around.
