There's no doubt that PayPal (PYPL +3.33%) helped pioneer the popularity of digital payments. By making it incredibly easy and seamless for consumers to pay for things and send money to others and for merchants to accept these payments, the business has now amassed a whopping 435 million active accounts. What's more, PayPal's current market capitalization is just over $82 billion.
But there's a promising cryptocurrency, known as Solana (SOL +1.93%), that wants a piece of the lucrative payments industry, and it has some important properties that investors need to know about. Can Solana really disrupt the fintech leader and become the next PayPal? Let's take a closer look.
NASDAQ: PYPL
Key Data Points
PayPal's dominance
First, we need to look at just how dominant of an enterprise PayPal is in the payments sector. The business processed $1.36 trillion in total payment volume and generated $27.5 billion in revenue in 2022. As I already mentioned, the business counts hundreds of millions of active accounts today, of which 35 million are merchants. And as of Dec. 31, 2022, PayPal was the most widely accepted digital wallet among the largest 1,500 retailers in North America and Europe, with nearly 80% acceptance.
In 2022, 92% of PayPal's revenue came from transaction fees, which are earned anytime a transaction occurs on its network. The company's transaction take rate in the fourth quarter of last year was 1.88%, higher than the previous quarter.
PayPal's take rate might not seem that high to you, but it's worth it to consider small businesses that operate on extremely thin margins. If they can drastically cut what they pay just to accept payments, then their profits could soar. And they could use the extra money to pay their employees more, reinvest in growth opportunities, or pay down debt.
CRYPTO: SOL
Key Data Points
Solana's promise
This is where Solana has the chance to make a big impact. About a year ago, Solana Labs, the governing entity that directs strategic efforts of the network, launched Solana Pay. Solana Pay is a payment service that allows merchants and consumers to transact directly without using expensive intermediaries. And since it's built on the blockchain and uses Solana's native SOL token, the fees are essentially nonexistent.
What's more, Solana Pay can help drive even deeper connections between both sides of the transaction. One exciting feature is non-fungible tokens (NFT). Let's say you buy a pair of sneakers at a store that accepts Solana Pay. Instead of a receipt, you receive an NFT that authenticates the pair of shoes, plus gives you access to special events in the future. And it provides a valuable channel for merchants to communicate with customers.
Because the Solana network has a theoretical throughput of 50,000 transactions per second (TPS), it can be a viable payment solution. Ethereum and Bitcoin, on the other hand, process 12 TPS and 4 TPS, respectively, according to bitinfocharts.com. Solana's capacity is in the same ballpark as Visa's 65,000 TPS.
Many people question whether cryptocurrencies have any real use cases. The most promising, I think, is with decentralized finance protocols, and more specifically, payments, an area known for having lots of middlemen who all want a piece of the transaction. Therefore, it makes sense why Solana wants to make inroads. Payments is an incredibly lucrative business model at scale. PayPal generated a free cash flow margin of 18.5% last year. Visa and Mastercard, some of the most profitable companies on Earth, posted insane operating margins of 68.4% and 53.9%, respectively, in their latest fiscal quarters.
There are some important risks to consider, however. Most notably, there are technical risks. Solana's network has experienced outages in the past. There are also security risks. If consumers or merchants don't handle their assets properly, hacks can wipe them out. Lastly, it all comes down to how user-friendly this can be for merchants and consumers. The use case must be compelling enough for them to want to replace their current methods of transacting.
While I don't think it's likely that Solana will be accepted by every merchant anytime soon, this is something that investors should keep an eye on going forward.
