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Could Apple’s Mobile Payments Disrupt PayPal?

By Carolyn Heneghan – Feb 14, 2014 at 9:07AM

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Apple's interest in pursuing mobile payments may make PayPal uneasy, but does the company have anything to worry about?

With a simple click of a button on a smartphone or tablet screen, a mobile payment is made. According to market research firm Forrester, the mobile payment industry was at $12.8 billion in 2012 but is predicted to rise to $90 billion by 2017—and that's one of the lower estimates. The technology is catching like wildfire for its ease, convenience, and speed. Since PayPal got the industry off the ground in 1998, new players have entered the market over the years.

PayPal currently sits atop the mobile payments market. It's the apple of eBay's (EBAY -0.42%) eye (its parent company and another goliath in online transactions), as it brought in the most revenue of any sector ($20 billion in 2013), a 20% jump for PayPal and 41% of eBay's total revenue for the year. PayPal is also eBay's fastest-growing business.

However, PayPal might not be sitting pretty forever. Another sheriff has come to town: Apple (AAPL -1.96%).

Why PayPal might fear Apple's approach

With the right payment system in place, Apple's move toward mobile payments could be a smart strategy for the company—and a scary possibility for PayPal. Presumably, with the push of an Apple-logo button at checkout on websites and mobile devices, users could purchase goods and services easily and conveniently with the payment taken straight from their iTunes accounts.

Seeing as Apple has 575 million users with iTunes accounts—and adds about 500,000 new accounts per day— this could be a worrisome number for PayPal. PayPal itself has a sizable user base with 143 million active accounts in 193 markets and 26 currencies around the world. However, the ease and immediacy of mobile payments' availability for iTunes users could easily overtake PayPal should Apple prove to either provide a better service or offer cheaper fees (or both).

Another drawback for PayPal is Apple's access to the latest technologies. Already, rumors abound that Apple will integrate its Touch ID fingerprint sensor technology with its new mobile payments system—an offer of security and convenience PayPal simply can't (and may never be able to) provide. Apple also has its iBeacon technology, which could potentially determine where a user is in an actual store. These technologies could be a weak point for PayPal, which mostly sticks to its traditional, yet wildly successful, business model as of this point.

E-commerce vs. brick-and-mortar transactions

The industry of mobile payments is two-fold: mobile payments made online and mobile payments performed while inside brick-and-mortar establishments. Brick-and-mortar sales still comprise 85% to 95% of all commercial transactions, so this has become a target market for mobile payments companies.

This includes Apple, which wants to make purchasing its products with its products capable in its own stores as well as in many other retail establishments. In fact, some analysts believe that this may be Apple's chief aim, taking priority over e-commerce transactions.

If that is the case, PayPal can breathe a little easier, as its chief revenue-generator lies in online transactions, which accounted for most of its $27 billion worth of mobile transactions in 2013. PayPal too has made recent progress in securing some of these brick-and-mortar transactions, but its products are still in their infancy and waiting to take hold in the mainstream. Without its majority share of e-commerce transactions, PayPal -- and eBay -- could be in trouble.

If you can't beat 'em, join 'em

PayPal is making a move, perhaps out of fear of what kind of market share Apple could steal, or perhaps simply as a bold business strategy (or both). Instead of lying down and letting Apple become its next big competition—with its alarmingly loyal fan base and premium marketing efforts to boot—PayPal wants to join in on the fun.

Just recently, PayPal pitched to Apple a way to help the company finally make its mobile payments initiative a reality—by using PayPal's very own technology. PayPal has offered to white-label parts of its payment system—including anything from back-end infrastructure and fraud detection to the actual processing of payments—for Apple's own use. This tactic would move PayPal and eBay into a much more favorable position than simply being at odds with Apple with no involvement in its mobile payment growth.

How other competition has fared

Another possible issue for PayPal is that Apple is not the only potentially huge competition threatening to take over its market share. (AMZN -0.77%) is building a person-to-person payments system that puts it in direct competition to PayPal's own original service.

Similar to PayPal's mounting fears with Apple, Amazon has a staggering user base that could undermine PayPal's system in a heartbeat if Amazon got it right. Amazon is going head-to-head with eBay to offer a seamless online and mobile payments experience, and it likely has PayPal feeling a little uneasy.

However, when competitors like Square, Stripe, and even Google (GOOGL -1.02%) Wallet entered the mobile payments industry, PayPal didn't see too much of a drop in market share. In a study, comScore reports that 72% of respondents are aware of PayPal's digital wallet while only 41% are aware of Google Wallet, 13% of MasterCard PayPass Wallet, and 8% of Square Wallet. As for actual users, 48% of respondents have used PayPal's digital wallet while only 8% have used Google's, 3% for MasterCard PayPass Wallet, and 2% for Square Wallet.

As another ray of hope for PayPal, Gmail's massive user base, at 425 million as of summer 2012, also dwarfs PayPal's, just like Apple's and Amazon's—yet its service didn't nearly take the bite out of PayPal Google thought it would.

PayPal is still the clear winner in the mobile payments game, and it will likely continue that reign for years to come. But no king can reign forever, and Apple and Amazon may be just the kind of competition that gives PayPal a run for its money. But then again, Apple and Amazon could both share the fate of Google Wallet and other PayPal competitors and simply eat the dust of the mammoth mobile payments mogul who got it right first—and who won't give up its crown.

Carolyn Heneghan has no position in any stocks mentioned. The Motley Fool recommends, Apple, eBay, and Google. The Motley Fool owns shares of, Apple, eBay, and Google. 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.

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