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Will Apple and Alphabet Destroy PayPal?

By Andrés Cardenal – Mar 30, 2016 at 8:00AM

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Rising competitive pressure from Apple and Alphabet is a big risk for PayPal. Is the company strong enough to fend off the competition?


Being the market leader in digital payments, PayPal (PYPL 0.51%) is one of the most exciting growth companies around. On the other hand, tech juggernauts such as Apple (AAPL 1.37%) and Alphabet (GOOG -0.29%) (GOOGL -0.47%) are rapidly expanding into mobile payments, and this is an important risk factor to watch. Is PayPal strong enough to fend off growing competitive pressure from Apple and Alphabet?

Rising competition in mobile payments
PayPal is an undisputed leader in digital payments, but the company is not that strong when it comes to in-store solutions and mobile payments. Big tech players such as Apple and Alphabet own enormous financial and strategic resources, and they are aggressively expanding into the industry lately.

Apple is making a lot of noise in in this area. The company is reportedly expanding its Apple Pay payments platform beyond the app and making it available to shoppers using the Safari Web browser in iPhone and iPad models that include Apple's TouchID fingerprint technology.

Apple has not officially confirmed nor denied these reports, but the fact remains that the company is aggressively pushing Apple Pay on a global scale. Management said in the latest conference call that Apple Pay is already available in over 5 million locations as of the end of 2015, and consumers have spent billions of dollars with the app. The platform is already established in Australia and Canada, and it's now expanding into key markets such as China, where Apple Pay is reportedly off to a strong start recently.  

Alphabet is also betting on mobile payments with its Android Pay platform. According to Alphabet, Android Pay is getting over 1.5 million new registrations every month in the U.S., and the company recently announced that Android Pay will be available in the U.K. over the coming months.

Based on data from a survey among over 500 merchant processing channel partners by Piper Jaffray, nearly 44% of customers are using or have requested information about mobile wallets. Among them, 67% wanted Apple Pay, while 18% asked for information about Android Pay, 8% of the respondents were interested in PayPal, and 7% asked about Samsung Pay.

Apple and Alphabet's Google are among the most valuable brands in the world. These companies own gargantuan amounts of money to invest in technology and advertising, and they have direct control over massively popular mobile ecosystems. For this reason, growing competition from Apple and Alphabet is not a risk to overlook, and investors in PayPal need to keep a close eye on the competitive landscape over the middle term.

On PayPal's competitive strengths
On the other hand, PayPal has the first-mover advantage in the industry, and the company benefits from the network effect, meaning that the platform becomes more valuable as it grows in size over time. Users and merchants attract each other to the most popular platforms, and this is building a self-sustaining cycle of growing size and increased competitive strength for PayPal.

Interestingly, PayPal CEO Dan Schulman said in the latest conference call that increasing competition could be a plus for the company. According to this point of view, consumers are becoming increasingly interested in digital payments as new options proliferate, and PayPal is in position of strength to capture a big share of this industry growth. 

In Schulman's words:

At this point, the more announcements that come out, actually the better off I think it is for us. It is so confusing out there for a customer. You have another announcement coming out. There's a lot of balkanazation going on, a lot of confusion. You can only use this pay in this retailer, this pay with this technology, this pay with this device.

And we've got a real trusted brand. We have a base of almost 180 million customers right now. And I think that the more confusing it is out there, the more people turn to brands that they can trust and that work across any OS [operating system], any device, any POS [point of sale] technology out there. And I actually think at this point, although I respect every one of those competitors greatly and we watch everything carefully, our biggest competition is our ability to execute against our game plan right now.

According to management, the market opportunity is worth nearly $2.5 trillion when considering online and mobile digital payments combined. Even better, the company believes its real potential is many times larger, as online and in-store shopping means a market size of nearly $25 trillion over the long term. PayPal, Apple, and Alphabet are barely giving the first steps in the digital payment business, and the industry is big enough for multiple players to thrive over the years ahead.

PayPal has solid competitive strengths, and the digital payments industry should offer enough room for PayPal, Apple, and Alphabet to do well and grow over the years, so rising competitive pressure is no reason to stay away from PayPal stock. Far from that, PayPal is offering tremendous potential for growth in the years ahead.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrés Cardenal owns shares of Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and PayPal Holdings. 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.

Stocks Mentioned

Apple Stock Quote
$142.87 (1.37%) $1.93
Alphabet Stock Quote
$94.50 (-0.47%) $0.45
Alphabet Stock Quote
$94.88 (-0.29%) $0.28
PayPal Stock Quote
$74.80 (0.51%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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