- PayPal is under increased competitive pressure mainly from Apple Pay.
- After a failed attempt to collaborate with Samsung in the smartphones market, PayPal collaborates again with Samsung to release a smart watch device.
- As Samsung holds 30% of the smartphones market and 70% of the smart watch market, collaboration with Samsung may be just what PayPal needed to drive eBay revenue growth.
The online payment market has attracted a lot of publicity lately following Apple’s (NASDAQ:AAPL) decision to enter the market through Apple Pay; Alibaba’s (NYSE:BABA) IPO, which triggered Alipay's extensive coverage; and Amazon’s (NASDAQ:AMZN) local register initiative for in-store credit card swipe. Recent changes in the online payment market together with the departure of PayPal’s president, David Marcus, to Facebook put pressure on PayPal to keep up with its competition. Amazon's new initiative for credit card swipe is a direct competition with PayPal Here, a mobile point-of-sale that enables small businesses to receive credit or debit card payment through PayPal. As mentioned in an earlier article, small businesses consider Amazon as their biggest rival, and gaining market share will not be an easy task for Amazon in light of small-business owners' fear of partnering with their competitor. Alibaba’s Alipay targets the Chinese market and is mainly used as the preferred payment method on Alibaba’s sites. As Alipay is currently not globally available as PayPal and is focused on China, it does not pose a direct threat to PayPal.
As widely discussed in the media, Apple launched Apple Pay in its September event. Apple Pay is a mobile payment service, using Apple mobile devices for in-store purchases in a secure method that is supported by more than 220,000 merchants across the US. Apple Pay competes with PayPal Here for in-store purchases. The PayPal Here service offers businesses the ability to accept and swipe credit or debit cards from a mobile device. PayPal Here requires that a business is registered to the PayPal Here program, has the dongle to attach to a supporting device, and that customers have a credit card in hand. Apple Pay frees customers from the need to have their credit cards in hand and enables businesses to receive payment directly from a mobile device. As shown in Chart 1 below, Apple has less than 20% of the market share in smartphone sales to end users, as of the end of 2013, leaving most of the market open for other solutions supporting an Android operating system.
As shown in Chart 2 below, the largest phone vendor of Android smartphones is Samsung, which has around 30% of the global market share. Collaboration with Samsung offers PayPal an opportunity to gain a large market share in the mobile payment market and increase PayPal’s revenues further, to offset the declining revenues in other segments, such as eBay.
PayPal and Samsung are aware of that opportunity, and seven months before Apple Pay launch, PayPal and Samsung announced a partnership between the two companies to allow secure PayPal payments through Galaxy S5 using fingerprint-reading technology. The general idea seems similar to the Apple Pay concept with one minor difference: the PayPal-Samsung solution can work only in businesses that already receive PayPal on mobile and in stores. A few days after the Samsung S5 release, a German security company released a video of Samsung S5 fingerprint authentication hacked in a very simple way, highlighting the importance of high-quality security as part of the solution. The German security company showed that even after countless swipes without authentication, no password was required. Even though the first attempt by PayPal and Samsung failed, it apparently led the way to Apple offering payment solution on Apple phones. At the beginning of 2015, Apple is expected to release its new iWatch, which also uses an NFC processor to maximize payment security similar to that in iPhone 6. The iWatch will enable customers to purchase items directly from their smart watch without the need to use their phone.
After its failed phone attempt with Samsung, PayPal is reportedly collaborating again with Samsung to include a fingerprint authentication feature in the next generation of Samsung smart watch to compete with the iWatch. Apple Pay success and iWatch penetration could have an impact on the PayPal-Samsung partnership in the smart watch market. Before the iWatch entered the market, Samsung held a 71% market share in the smart watch market. Collaborating with Samsung will enable PayPal to enter the smart watch payments market and potentially gain substantial market share, based on Samsung's strength in the smart watch market.
PayPal is under a lot of competitive pressure from Apple, Amazon and Alipay. As Amazon and Alipay present little threat to PayPal business, Apple Pay can risk future revenues from in-store purchases. PayPal is not the only company trying to fight back against Apple and its payment service. Samsung has also tried to penetrate that market and compete with Apple. As Samsung has a significant market share in the smartphone market and even a larger share in the smart watch market, a partnership with PayPal would generate substantial additional revenues from in-store purchases that do not require a credit card. Through a partnership with Samsung, revenue streams that could drive PayPal and EBay’s earnings higher may emerge as the current opportunity in the smartphone and smart watch markets.
Disclosure: The author is long EBAY. Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro Financial Consulting and Analysis are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.