Since its inception in 1998, the eBay (NASDAQ:EBAY)-owned service PayPal has dominated the world of online payments. But just like every other business idea on the web, this market is not safe from e-commerce giant Amazon.com (NASDAQ:AMZN).
Amazon has recently begun working on its own payment service with the idea that customers will be able to make payments for things like phone or Internet bills using their preexisting account on Amazon. This moves Amazon into the coveted online world of subscription billing and recurring payments. PayPal is where eBay generates 43% of its revenue annually, while Google has recently made a foray into this area with its Google Wallet.
Although PayPal has been the primary player in this field for years, Amazon will pose a strong challenge for several reasons.
First, Amazon boasts one of the most secure payment options online. People trust Amazon already because it has established itself as the world's leading online retailer. When you buy something from Amazon, you know your information is safe.
Second is the company's outstanding customer service. According to the American Customer Satisfaction Index, Amazon.com has consistently ranked as the top online retailer in customer satisfaction for the last decade. Customers will be more likely to use Amazon as their middleman in service transactions because of the website's outstanding track record in customer service.
Third, Amazon's enormous customer base gives it a huge edge when entering any new market. Amazon has more than 244 million active accounts, compared to PayPal's 148 million. PayPal's advantage over Amazon is that every one of its active users is already using it to make online payments, while very few of Amazon's customers have adapted their Amazon accounts for that use yet.
If Amazon is successful in leveraging its customer accounts toward this use, however, it could be a big money maker. PayPal pulled in an annual revenue of $6.6 billion in 2013. If Amazon comes close to this number of users (which is quite possible given the 244 million existing accounts), its foray into online payment plans will have been a victory.
The confidence that the marketplace has in Amazon's ability to succeed in the area of online payments was nowhere more evident than in the fact that eBay shares slipped 1.3% the day Amazon made its announcement.
What could this mean to Amazon?
Looking at the numbers, it's easy to see that Amazon is taking a calculated risk in setting up its own payment plan. Since nearly 40% of Amazon's sales are done through third-party sellers, creating a payment service increases its profitability as a middleman. The new service allows the company to collect 2.9% of each purchase made through it. This will significantly increase profitability of an area that accounts for 12% of its annual revenue, or roughly $8.93 billion in 2013.
If Amazon succeeds in leveraging a significant number of its existing customers the plan could generate billions in added revenue each year.
Prior to releasing the service Amazon has been working with several companies to great success, including the mobile phone company Ting. But now that the service is released Amazon says that its customers will be able to use the service with any mobile or web company.
With the unveiling of Amazon's Fire Phone the company is making moves toward a totally integrated shopping experience that it controls entirely. The success of these two new launches combined could see Amazon taking huge steps in the area mobile payment plans. If the phone is a success, its platform, which is designed to drive customers to the website and app store, makes it that much easier for customers to use Amazon rather than a competitor to send and receive payments online.
Amazon already has an infrastructure in place to make its subscription billing and recurring payments service a huge success. Its ability to reach a huge number of current customers, reassure consumers that their information will be secure, and leverage their reputation for outstanding customer service puts the company ahead of competitors and gives it the ability to compete with established players in the field.
Amazon has taken very few wrong turns in its existence because it's stuck to its core strengths. Its movement into this field plays directly into territory that Amazon has established as its area of expertise. There is potential for this experiment to fail for Amazon certainly, as with any new endeavor. But based on its track record and ability to expand into new areas, this looks like a home-run for the e-commerce titan.
Paul St.Jean has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com 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.