- PayPal shares have been moving lower after news emerged that Apple is planning to launch a P2P payment service in 2016 to compete with PayPal's Venmo.
- PayPal, however, enjoys much wider adoption than Apple Pay.
- Venmo accounts for about 3% of PayPal's transaction volume, but a much lower percentage of revenue since the service is mostly free.
- Apple's P2P service won't hinder PayPal's growth.
Paypal Holdings (NASDAQ:PYPL) shares have lost about 5% after it emerged that Apple (NASDAQ:AAPL) is prepping a P2P (Person-to-Person) payment service that will be incorporated into Apple Pay. Person-to-person payments is an increasingly popular online technology that allows users to seamlessly transfer funds from their own bank accounts or credit cards to another person’s account using a mobile phone or via the Internet. Thus users of Apple’s P2P service will be able to easily zap payments from their checking accounts to another recipient using their Apple devices. Apple’s P2P service might be launched as early as 2016, and will compete directly with PayPal’s Venmo platform.
So, PayPal shares which were down post mixed Q3 earnings, are down further. However, the reaction isn't too surprising. The market tends to overreact whenever Apple launches a new payment technology, and this is exactly what is happening here. Apple’s new P2P service will not be a standalone service, but rather will be incorporated into Apple Pay as a feature enhancement. So the question that investors should really be asking themselves is just how big of a threat is Apple Pay to PayPal.
Apple has never divulged the amount of business that Apple Pay has handled since its launch in October 2014. But we do have estimates for NFC-enabled payments in aggregate, including Apple Pay. According to Statista, NFC-enabled payments in the U.S will reach $9.69 billion in 2015 but will grow rapidly to reach $58.42 billion by 2017. A Gartner report back in 2013 said that NFC payments continued to badly lag other modes of mobile payments due to poor adoption in international markets. PayPal has been expanding globally, and is now a very global platform with approximately 50% of its business coming from international markets. NFC payments (of which Apple Pay is the market leader) in the U.S. probably represent 70%-80% of global NFC payments. This implies that the value of global NFC payments in 2015 should be worth approximately $12.6 billion.
PayPal handled Total Payments Volume, or TPV, of $69.7 billion during the last quarter, or ~$280 billion annualized. In other words, the PayPal will handle 22 times as much transactional volume than all NFC payments combined in 2015. But perhaps a fairer comparison would be between PayPal’s mobile payments and NFC. PayPal annual mobile payment volume clocks in at ~$46 billion. That’s about 265% more transactional volume than all NFC payment platforms combined.
This is not to say that Apple Pay is not in any way a threat to PayPal. A 451 Research survey in March this year found that Apple Pay leads the way ahead of PayPal as the mobile payment platform that gives customers the most satisfaction.
But Apple Pay still faces considerable adoption problems due to lower acceptance of the new mobile platform as well as the fact that most POS terminals in the country are not NFC-enabled. NFC payments outside the U.S. are faring much worse than they are in the local market.
PayPal’s Venmo is the closest thing to Apple’s upcoming P2P service. Other companies that have already dabbled in P2P with mixed results include Facebook (NASDAQ:FB) through a payment service attached to Messenger and Alphabet Inc-C (NASDAQ:GOOG) through a service linked to Gmail/Google Wallet.
But alas, despite appearing glamorous on paper, P2P payments are not anywhere near as popular as you would imagine. PayPal launched Venmo in 2009, and the service is considered one of the leading, if not the leading, P2P services. Yet PayPal revealed that Venmo handled transaction volume worth just $2.1 billion during the third quarter, or about 3% of PayPal’s business. PayPal said that a year ago the platform did less than a billion dollars in transactions, and the strong growth was being facilitated by Braintree, a mobile payments company that eBay (NASDAQ:EBAY) acquired in 2013 and incorporated into PayPal.
The funny thing is that PayPal makes very little money from Venmo since it only charges when users transact using their credit cards. It’s hard to see how Apple’s new P2P service will do any better than Venmo since Apple is likely to charge a fee for using the service.
Apple’s new payment service should not scare off PayPal investors. Not yet at least.