- PayPal turns to international growth when faced with competitive challenges in the US.
- Growing international transaction volume could be a significant growth opportunity, and assuming PayPal successfully introduces peer-to-peer transaction services in Africa at some future point, the company may be able to add significant volume to its network.
- Assuming PayPal converts some of the global transaction volume with current remittances exceeding $500 billion, onto its own network, I believe that international growth can prevent some of the downward pressure from competition.
As many of you are well aware competition is intensifying in the mobile payment space. eBay's (NASDAQ:EBAY) PayPal is in the crosshairs of Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Facebook (NASDAQ:FB). In response to a tenuous competitive position in the United States, PayPal has expanded into foreign markets. International transaction volume composes a meaningful percentage of PayPal’s total revenue, and the growth potential ahead is enormous.
Amazon encroaches on PayPal territory
In a previous Amigobulls post on Amazon payments, Virendra Singh Chauhan states:
The pricing is higher than our expected flat rate of 2%, which was used in our revenue estimates for Amazon’s payments service. Using the count of 244 million active users and a GMV of $60.9 billion, and minimum order value of $80, we get number of transactions for 2013 at 761 million transactions. This gives us the total revenue potential of $837 million, using the assumption that Amazon processes 50% of payments in-house. This compares against our earlier estimate of $609 million annual revenues.
If Amazon is able to generate as much volume as estimated by Virenda, PayPal will lose a sizeable chunk in terms of active user engagement via PayPal. Currently, Amazon has 240 million accounts registered with credit card information, so Amazon has a pretty large user base that may potentially go with Amazon over PayPal.
Currently, PayPal has 148.4 million active users that used some form of PayPal transaction services over the past 12-months. The company may be able to drive further top-line growth in the form of further expansion despite competitive pressure in the United States.
PayPal has announced in the past week that it will expand to Belarus, Macedonia, Moldova, Montenegro, Monaco, Cameroon, Ivory Coast, Zimbabwe, Paraguay and Nigeria.
Source: Volunteer4Africa, picture modified by AlexLeAnders
The regions circled in red, is where PayPal will be expanding into. The market opportunity in Africa is rather large, which is what I will try to explain in further detail.
Initially, PayPal is only offering "send money" services for consumers to pay for goods and services at PayPal-enabled merchant sites while safeguarding their financial details. This is free to consumers and covered by fees it charges merchants. A total of 80 million Internet users stand to gain access to PayPal global services this week, including those in five European markets. Internet usage figures are based on research by Euro monitor International. Roughly a quarter of the $52 billion in payment volumes PayPal reported in the first quarter of 2014 were for cross-border transactions.
PayPal will not offer peer-to-peer transaction services, and it will only allow merchant transactions to go through the PayPal payment network when it comes to these new markets.
Eventually, I anticipate PayPal to roll out a service in which peer-to-peer transaction can be set-up. This will allow PayPal to monetize the growing volume of remitted cash to emerging economies.
According to BBC the amount of cash that is remitted from the developed economies to Africa is $51.8 billion:
In 2010 - the most recent year for which meaningful comparisons can be made, according to Mr Bodomo - the African diaspora remitted $51.8bn (£34bn) to the continent. In the same year, according to World Bank figures, ODA to Africa was $43bn (£28bn)."I started the research to see if I could support a hunch I had that money remitted by African families was more efficient aid than ODA money," the Ghanaian professor told the BBC.
Family aid is pretty common in the emerging markets, and the main reason this occurs is because many in the emerging world immigrate to “richer” countries. Through this process of immigration, many eventually gain employment in the more prosperous country, save a portion, and send it back to family at home. Some African villages prosper under these circumstances, however high transaction fees have limited the effectiveness of cross-border transactions.
According to 2012 data, from the World Bank, the average transaction cost for sending cash to African families was 12.4%. PayPal can significantly reduce transaction costs, especially if they were done within PayPal. Assuming, PayPal can charge a more reasonable fee of 2%-3% the amount of fraud, potential loss, and over-charging can be significantly reduced. At the same time, PayPal will open itself to a massively growing market opportunity.
Eventually, PayPal will offer peer-to-peer transaction capability to some of the African countries it has expanded into. There’re further growth potential in this specific category alone, however many of these countries are known to be politically unstable, and internet penetration is limited in many of these regions. However, despite those short-comings, if PayPal can capture a reasonable portion of the $51 billion in transaction volume that occurs as a result of family members sending cash to other family members via cross-border transactions in Africa, PayPal may be able to off-set some of the difficulties that it’s currently facing in the United States.
PayPal certainly faces problems in growing transactional volume through its merchant network due to competition within the United States.
However, PayPal may offset this with cross-border transaction volume. Assuming PayPal can succeed, the company can unlock a business opportunity far more significant than what it currently engages in. PayPal had$50 billion in transaction volume over the first quarter of 2014. Global cash remittance was $550 billion in the previous year alone, and assuming PayPal can gain more of that kind of volume on its current payment network, it could have a very meaningful impact top line and bottom line performance. To put this in perspective, PayPal generated $52 billion in payment volume in the first quarter of 2014.