Amazon.com (NASDAQ:AMZN) acquired Gopago, the mobile payments service, last week in an effort to bulk up its mobile payments business. Currently, Amazon's ventures in mobile payments include in-app purchase processing for apps sold in its app store and an API for developers to sell Amazon products in their apps. Amazon also launched "Log In and Pay With Amazon" earlier this year to facilitate e-commerce outside of its flagship website.
But the purchase of Gopago is curious because the company works with brick-and-mortar retailers to allow customers to pay for items with their smartphones. Although in-store mobile payments is growing more popular, it hardly seems like an area that will welcome its largest competitor with open arms, especially when there's a viable option in eBay's (NASDAQ:EBAY) PayPal, and potential for other big tech names like Apple (NASDAQ:AAPL) to enter the space.
Amazon's size advantage
Amazon's biggest advantage may be its size. The company has about 215 million active accounts, which is nearly 60% more than PayPal's 137 million active accounts.
Remember, the entire purpose of mobile payments services is to reduce friction. If a user needs to sign up for a new account in order to use the payment system, it's less likely he's going to do it.
Apple, however, may throw a wrench in that strategy should it decide to enter the mobile payments market. It currently has over 600 million credit cards on file through iTunes. Moreover, iPhone users might not even need to download a new app in order to use a potential Apple e-payment service -- further reducing friction.
Competition to Apple's in-store presence?
With the growing number of iPads in stores functioning as displays and POS systems, an Apple payment system could capitalize on the trend. Amazon, too, may make a push to get its Kindle Fire tablets into stores, and is reportedly working on its own smartphone. An entire ecosystem could provide a boost to adoption by both retailers and consumers. Retailers may see more value in an inexpensive Kindle tablet compared to an iPad.
eBay, on the other hand, lacks much of a hardware presence, but does take advantage of Apple's iBeacon functionality. In fact, the company released its PayPal Beacon earlier this year, well before Apple placed the devices throughout their retail stores. PayPal may benefit from Apple's push to place the Bluetooth devices in stores.
Another advantage Amazon could have over eBay and Apple is that it could charge retailers less for its service and provide shoppers with excellent rewards.
Amazon is not afraid to skate by on thin margins. So, where other e-commerce companies like PayPal charge a 2.7% transaction fee, Amazon could provide retailers with a better fee. Moreover, it can win customers by providing better rewards than PayPal or Apple -- say credit on Amazon.com.
Amazon can afford to make such a thin profit margin on an e-payment product because every sale made using such a system would provide Amazon with additional data to better target its shoppers. That's exactly the reason why it might not catch on.
Amazon's biggest competition
Amazon's biggest competition isn't in the mobile payments business, it's retailers. There's too much risk to retailers for them to partner with Amazon as a payments processor. Amazon will try to compel customers, as it always does, with better pricing than the competition, but Amazon has a penchant for being ruthless when it comes to its flagship business. The more data it has from other retailers, the better it can compete with them.
I'll be interested to see where Amazon takes this latest acquisition, especially as the industry grows, but any headway Amazon makes over PayPal or any of the other competitors -- big and small -- is a bonus on top of the company's other operations.
Adam Levy owns shares of Amazon.com and Apple. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.