Thoughts on PayPal's Competition

There were lots of questions on PayPal’s competition so, rather than answering each question one by one, I thought I would just write a separate post tackling what I believe are their major threats.

Please remember these are just my personal opinions and that I am not a professional analyst or anything like that; just an individual investor with a mediocre track record.

Let’s start with the competitors to PayPal’s flagship payments service:

Traditional Credit Card Rivals: PayPal’s competition begins with traditional credit card rivals, AmEx, Discover, MasterCard, Visa, JCB (in Japan), and Unionpay (in China), will take POS (point-of-sale) and online market share and threaten profit margins in the regions in which they compete.

With a lower transaction fee, many merchants would prefer Paypal transactions which might mean future incentives from retailers to use this platform. More realistically, I would expect this to just further cut the margins of credit cards.

But, and this is important, PayPal’s platforms still uses MasterCard, Visa, AmEx, Discover or another payment processing network to handle transactions. So, as of right now, PayPal and the credit card majors are coexisting in a tense love-hate relationship.

Recently competition between the credit card majors and PayPal have heated up. Visa Checkout and MasterCard’s MasterPass are two products that are specifically geared towards competing with PayPal’s One Touch platform. These two programs basically allow card holders to sign up their existing credit cards into the program and checkout at participating retailers in a quick and easy process that mirrors PayPal’s One Touch’s magical formula.

The problems, as I see it, for MasterPass and Checkout are twofold. First, not nearly as many retailers are participating in these programs yet while nearly every online retailer accepts PayPal. Second, consumers don’t want (or need) to sign up for different programs for each different credit card they may hold. This is fine, if someone only uses Visa cards or MasterCard cards. But most consumers use a hodge-podge of credit cards. for instance, I personally have three different credit card accounts: one AmEx, one MasterCard, and one Visa. No way am I signing up for different programs for all three of these credit cards when I can have them all linked to my PayPal account and just use PayPal for everything I buy online.

Anyway, last month, Visa CEO Charlie Scharf used sharp language to describe the problems Visa has with PayPal:

PayPal has long been both a friend and a foe to credit card companies. But to Visa CEO Charlie Scharf, it’s either one or the other.

At a tech conference hosted by JPMorgan Chase this week, Scharf said he wants PayPal to stop urging its users to fund their PayPal accounts with their bank accounts — a method called ACH — instead of debit or credit cards. Such an arrangement is more profitable for PayPal, but a problem for card companies like Visa.


Empty threat and a sign that PayPal is striking a real nerve or does this signify a fundamental shift in PayPal’s essential relationship with credit card companies? Obviously each individual investor will have to decide for themselves, but I think it is more of a negotiating tactic than anything else. For now, both PayPal and the credit card companies need each other. Until that changes, they will remain “frenemies”.

Bitcoin: Much ink has been spilled about Bitcoin and I’ve read a great deal of that ink but still am not confident in my ability to explain what Bitcoin is or how it works. A digital payment system used as a P2P system with no intermediaries or banks. The U.S. Treasury has categorized it as a decentralized virtual currency though some believe it is best described as a cryptocurrency. But it is a whole new way of thinking about money and currency and, if it ever took hold, could radically alter the payment processing arena so that players like MasterCard would no longer be necessary.

While I am vastly underqualified to even to attempt to make this statement, I personally don’t believe Bitcoin, as we know it right now, will ever replace US currency or our current monetary system. Some of Bitcoin’s features, like its block chain technology, is truly innovative and can add much needed security to monetary transactions. I do believe this technology, whether still a part of Bitcoin or not, will be integrated into a number of different type of transactions in the future.

PayPal did recently partner with Coinbase, a Bitcoin exchange, so that Coinbase users could buy and sell Bitcoins with their PayPal accounts:

PayPal is slowly dipping its toes in the bitcoin waters.

The company has partnered with Coinbase, a virtual currency wallet and exchange, so Coinbase users can sell bitcoin and cash out to their PayPal accounts. Buying bitcoin isn’t possible yet, but the small integration is a noteworthy first step.

PayPal did not immediately respond to Quartz’s request for comment.


Possible Future Upstarts

Here is where this conversation gets interesting. I have long pondered how tech companies like Facebook, Apple, and Google could disrupt the payment processing industry if they really wanted to. All three companies have dipped their toes in the waters but have yet to show a real desire to become a major player in the payments industry.

Facebook: In March 2015, Facebook announced you could begin to send money to your friends via Facebook Messenger by linking your Facebook account to an existing debit card.

Facebook is currently working hard to build Messenger into the most holistic customer experience that exists in e-commerce. Soon you will be able to make your order, track your package, immediately talk to a customer representative, and probably post reviews - all through FB Messenger. Oh, and of course, you’ll be able to pay for everything with Messenger as well. Right now, this will all be done through a pre-existing credit or debit card. But what if Facebook ever considers eliminating the middle man?

They definitely have the firepower, resources and expertise to pull off such a move. Last year, they even hired former PayPal President David Marcus. Facebook’s network is so ubiquitous that the hardest part – getting people to sign up to the service – is already done. In countries with developed economies it is hard to find a person or company that does not already have an account.

Even the Washington Post believes Facebook could be the “future of money”:…

Yet I am a little more optimistic that Facebook is not planning to enter the payments arena. At least for the time being. Why? A few reasons.

In Facebook’s 2015 Q4 conference call, while answering a question from an analyst, Mark Zuckerberg went out of his way to note Facebook was not in the payments industry and simply wanted to partner with all existing players in the business.

On payments, the basic strategy that we have is to make it especially in products like Messenger that where the business interaction maybe a bit more transactional, to take all the friction out of making the transactions that you need. So, we don’t view ourselves as a payments business, that’s not the type of company that we are. We’ll partner with everyone who does payment. We look at the stuff that Apple is doing with Apple Pay for example as a really neat innovation in the space that takes a lot of friction out of transactions as well. And our view is that the less friction, the better the user experience, the more people can easily interact with businesses that they care about. And ultimately for our business that will drive up the amount that businesses are willing to pay to advertise to send people into those interactions because they perform well. So it’s good for everyone but that’s how we think about that.


Could Zuckerberg be playing coy? I guess but I didn’t take it that way. I think of it more as ensuring potential partners in the payments industry that Facebook has no plans to compete and that any potential partnerships will be mutually beneficial. I think Facebook’s sole focus is growing their platform universe and making them all-encompassing. Having the ability to process transactions is just a natural step in that direction.

In addition to this, a few months ago I watched the Lessons on Growth from the Facebook Payments Team from Facebook’s F8 conference. I couldn’t find the direct link, but you can scroll down this page to find the video:

Anyway, I listened intently as Samantha Maciel, Facebook’s Product Manager on Ads Payments, and Anand Subbarayan, Facebook’s Product Manager on Platform Payments, gave their joint presentation. Most of it focused on how Facebook wanted to grow their site’s capability to negotiate all types of payments from users and advertisers alike. At first, I thought we might be in trouble as they described a few problems they ran into in emerging markets by using a credit/debit card only type of system. They even called this approach as too “U.S. centric” as many emerging markets lacked robust credit card market penetration.

But the solutions that they used to solve these problems certainly didn’t involve making any type of superior product to existing payments players. Indeed, they described several different localized approaches that have worked in different countries. In Indonesia, for instance, they developed a system where potential advertisers could use cash to pay by depositing money in a local ATM.

At the conclusion of the presentation, Subbarayan even noted Facebook was proud to partner with popular payments players like PayPal, Stripe, MasterCard, Visa and American Express. He concluded by saying, “We want merchants to be able to use their existing payments processors, use their existing automated systems, and still be able to run transactions through Facebook.”

I reserve the right to be 100% wrong in this opinion but, to me, that doesn’t sound like a company that’s about to turn around and compete with the entire payments industry. Instead, it really feels like Facebook just wants to make their platform compatible and accessible to the existing payments solutions.

Apple Pay, Google Wallet and Samsung Pay: The thought process is similar for these three companies. Both already have hardware used for making payments via proprietary mobile apps but, as of now, all use pre-existing cards. If either ever decided to eliminate the middle man and establish their own payment processing network, they might be able to make a serious play into the payment processing industry. Apple and Google would have even more resources to use in either acquiring a company in the industry already or building its own network than Facebook.

Apple has announced that by the end of this year, Apple Pay will be able to handle transactions for online purchases. When e-commerce merchants begin widely accepting this method of payment, I believe Apple Pay might seriously rival PayPal for convenience and security purposes and might challenge PayPal for account holders who own an iPhone.

Google Wallet, for all intents and purposes, now has all the functionality of a digital bank account, right down to being FDIC-insured:

But the biggest news was its transition away from an acceptance mark to a “wallet,” which can store value, move money between people and businesses and enable transaction monitoring — just like a digital “bank” account — and do it across operating systems. Google Wallet is available for use on Android and iOS.

As a precursor to that, Google also took the necessary steps to make its mobile payments service FDIC-insured — giving its users a safer way to store their money.

Just this month, Google expanded the functionality of its mobile payments system when it announced that users can send money by using just a phone number. With the latest version of the app, funds can be sent directly to a mobile device with a secure link via text message. The recipient can then use the link to enter their debit card information in order to claim the money, which will be available in their selected bank account in minutes.


Samsung Pay is interesting because it is the most widely accepted mobile payments platform by merchants for POS transactions. This is because early last year Samsung acquired LoopPay, which uses patented technology to turn existing mag stripe readers into mobile contactless receivers. This technology makes Samsung Pay accepted at almost all merchant terminals (upwards of 90% I believe). Competitors like Apple Pay still have a low acceptance rate because it can only be used with merchants that have pay terminals equipped with NFC technology.

PayPal’s subsidiaries also have their own rivals. I will touch on these briefly:

Xoom’s Competition

Xoom is in the international remittance business making its competitors companies like Western Union and MoneyGram. Before it was scooped up by PayPal, Xoom was recommended by the Stock Advisor newsletter where it was described as a potential disruptor in this business because it was both cheaper and easier to use than its rivals. This is a huge marketplace and there is real potential upside for Xoom going forward. Yet if Xoom fails and falls flat on its face it will have minimal impact on PayPal’s current earning power.

Venmo’s Compeition

Venmo competes in the P2P business which currently is barely profitable but immensely popular. So it is competing with PayPal’s flagship service on some level and with others like Square Cash, Facebook Messenger, etc. But, and this is important, it is crushing the competition in its user base. If PayPal can make this profitable with initiatives like Pay with Venmo - watch out.

Braintree’s Competition

Braintree sets up online payment systems for traditional and e-commerce retailers. To Puddinhead’s point, this small segment of PayPal does compete with payment processing companies like TSS, VNTV, etc. But take a step back and think how much more PayPal can offer a retailer than these much more limited companies (create a retail company’s own mobile wallet app with Paydiant, accept Venmo at the retailer’s locations, etc.). This is a small source for current earnings but I personally think PayPal will do very well in this space as time goes on. JMHO though.

It’s late and I’m tired. Please ask questions away and I will be glad to answer them to the best of my ability. Remember, I don’t possess mystical analyst powers or claim to be an expert!

MasterCard (MA), PayPal (PYPL), and Verizon (VZ) Ticker Guide
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Another competitor is the British company Skrill, which used to be called Moneybookers. A long time ago, eBay listed them as a payment option. I don’t know anything about their current size, or even if they’re publicly traded.

I’ve heard of Moneybookers not Skrill. There are a few money wiring online players. The other outside the box competitors to watch for the in the future are the cyber currencies - including: Bitcoin, Ripple, VEN.

There were lots of questions on PayPal’s competition so, rather than answering each question one by one, I thought I would just write a separate post tackling what I believe are their major threats.

Amazing Matt! Thanks again for a second incredible post! It’s truly beyond expectations.



Thank you Saul for the kind words. That really means a lot. And thank you for the wonderful board you host from which I have learned so much.

Long on Saul’s Board
MasterCard (MA), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at


Anyway, last month, Visa CEO Charlie Scharf used sharp language to describe the problems Visa has with PayPal:

PayPal has long been both a friend and a foe to credit card companies. But to Visa CEO Charlie Scharf, it’s either one or the other.

Just an update as of today:
PayPal and Visa Enter Partnership to Extend Consumer Payment Choice
Companies Collaborate to Accelerate the Adoption of Digital Payments

PayPal will not encourage Visa cardholders to link to a bank account via ACH.

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