Why PayPal Is Cashing in on Digital Money Wars
The future of money is cashless.
The growth of e-commerce and the ease of sending money online means the transition from physical to digital money was going to happen sooner than later. From payment processors to digital banks, there will be an opportunity for many companies up and down the payment stack to earn money.
It’s understandable if you’ve missed the underlying trend that led here. The changes have been subtle … but the impact will be anything but.
In a research note by Morgan Stanley (NYSE: MS) analysts, titled “Digging into Digital Wallets: Who’s Winning C2B”, researchers surveyed 1,960 digital wallet holders. Adoption rates grew among all demographic groups, with 67% of participants aged 18-34 saying they had at least one credit or debit card in their digital wallet. The reason they gave most often for going digital was the convenience of not carrying cash.
Apple Inc.’s (Nasdaq: APPL) Apple Pay is built into the operating system of every new iPhone. And Cash, a popular digital wallet from Square, Inc. (NYSE: SQ), was early onto Bitcoin. Corporate managers made it easy to buy and sell the cryptocurrency inside the application. For many investors, these factors seem like competitive advantages too important to ignore.
Going cashless was only made more popular by the global pandemic. Merchants were forced online and had to adopt contactless payment systems to avoid physical contact with customers. One of the fringe benefits of that migration was the greater acceptance of fully digital payments.
It also didn’t hurt that Apple pumped up its efforts to bring its contactless payment to more banks and real-world merchants. In December, Exxon Mobil Corp. (NYSE: XOM) began rolling out tap-to-pay at its gas stations. Members with Apple Pay and Google Pay, the Android equivalent, can now buy gas at the pump while earning Exxon Mobil rewards, according to a report from Apple Insider.
These little conveniences offer a “cool” factor, but more importantly, they’re driving faster adoption, especially for familiar brands.
There are a few big players are lining up with digital wallets in addition to Apple and Square. But those two seem to be getting the lion’s share of attention.
But by the looks of things, investors are rewarding the wrong businesses.
PayPal Holdings, Inc. (Nasdaq: PYPL) is winning … and it’s not even close.
At least, that’s according to the Morgan Stanley report. Analysts at the investment firm found that PayPal is making the most of its competitive advantages.
The San Jose, Calif.-based company held a 50% lead over the rest of the providers. Morgan analysts also found that the core PayPal brand was strongest. Nearly 70% of respondents ranked PayPal first in terms of merchant acceptance, popularity, user interface and customer service.
These numbers throw cold water on the idea Square and Apple are winning mind and market share. And in reality, both have big disadvantages too.
Apple is a closed ecosystem. While Apple alone has access to the near-field communications chip inside iPhones that permits mobile payments, that market represents only 11% of smartphone owners globally.
PayPal managers leveraged the firm’s legacy as a safe provider of online payments to dominate the transition to mobile payments … and they left little room for Square.
It’s hard to put too fine of a point on this.
Apple managers probably don’t stay up at night worrying about the growth of PayPal as a global business. Hardware sales are the engine of growth for the iPhone maker. That business, although smaller in market share, is remarkably profitable. It’s also the driver of an ecosystem of mostly high-margin Apple products and services.
However, the growth of Cash is driving Square’s valuation. Right now, it’s hard to see how managers at Square could ever overcome PayPal’s inherent strengths.
Morgan Stanley researchers point out that 59% of survey respondents prefer to use PayPal when shopping online. The second choice was Venmo, another PayPal business. In 2020, Venmo passed Apple Pay for the first time.
Square’s Cash App wasn’t even in the top six.
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Both PayPal and Square shares have performed well in 2020, rallying 118% and 276%, respectively. Their relative market capitalizations have risen to $277 billion and $106 billion.
That being said, Square shares appear fully priced at current levels. Investors should focus on buying PayPal into weakness.
If you prefer an exchange-traded fund that specializes in the digital future of money, check out ARK Fintech Innovations ETF (NYSE: ARKF).
Jon D. Markman