PayPal Holdings (NASDAQ: PYPL) is a really great company that could be a victim of its own success. PayPal’s signature product, the digital wallet, has become so popular that it is being copied by a wide variety of larger competitors.
The problem PayPal faces is that these competitors have greater resources than it does. The biggest challenges PayPal faces in the digital wallet wars include:
- Apple Pay from Apple Inc. (NASDAQ: AAPL). The highest profile of the new generation of digital wallets has become a huge hit because it offers customers the ability to pay brick-and-mortar and retailers directly from bank accounts and credit card balances. Apple Pay’s biggest advantage is the large number of banks and retailers that have adopted it.
- Android Pay from Alphabet (NASDAQ: GOOG), the company formally known as Google. It works much like Apple Pay except that it is not compatible with as many retailers or banks. The biggest advantage is that it works with the world’s most popular smartphone operating system: Android.
- CurrentC, from the consortium of big retailers known as the Merchant Customer Exchange (MCX). This app could be a major threat because some of the biggest names in American retail, including Walmart, Costco and Target, have signed on to it. The danger here is that all the marketing and sales power of those retail giants will be behind it.
- Chase Pay from JPMorgan Chase (NYSE: JPM), America’s largest bank, with over $2 trillion in assets. Chase has a huge advantage because it has around 94 million customers in the U.S., according to The Wall Street Journal. Chase Pay’s biggest advantage could be an alliance with the MCX. According to some reports, it is already integrated with that app.
- Samsung Pay from Samsung (OTC: SSNLF). This seems to be more of a niche product, but Samsung is the world’s largest manufacturer of smartphones, which gives it an edge.
PayPal’s Problem by the Numbers
PayPal’s problem is that all of these competitors dwarf it in size and scope. They simply have far more money to throw at the digital wallet business. Here is what the numbers tell us.
- PayPal reported a TTM revenue of $8.88 billion and a net income of $1.147 billion on September 30, 2015.
- JPMorgan Chase reported a TTM revenue of $92.5 billion and a net income of $23.96 billion on September 30, 2015.
- Apple reported a TTM revenue of $233.72 billion and a net income of $53.39 billion on September 30, 2015.
- Alphabet (NASDAQ: GOOGL) reported a TTM revenue of $71.76 billion and a net income of $16.48 billion on September 30, 2015.
- Samsung reported a TTM revenue of $204.93 billion and a net income of $26.76 billion on September 30, 2015.
Get the picture, folks; PayPal now has at least four direct or indirect competitors that have far more cash than it does. These companies can afford to lose a lot of money in an effort to develop a successful digital wallet and mobile payment app.
Okay, so which of these companies is the biggest potential threat to PayPal? My pick would be JPMorgan Chase for the very simple reason that its revenues have been shrinking for some time. In September 2014 Chase reported revenues of $95.52 billion that fell to $92.5 billion a year later—a drop of $3.02 billion.
Payment is also at the core of JPMorgan Chase’s business. At the end of the day, a bank is nothing but a payment processing center. The main reason people open bank accounts is to facilitate payment processing.
The problem that traditional banks like Chase have is that people now have lots of alternatives to their services, including money orders, credit cards, gift cards, preloaded debit cards, PayPal, and other digital wallets. If it wants to remain relevant and reverse its revenue losses, Chase will need to go digital in a big way.
The revenue figures indicate that Chase’s core business is shrinking and will continue to shrink. Its only real possibility for growth is to develop a successful digital wallet.
How Cash Could Help Chase Pay Best Apple Pay
Chase could be a real problematic competitor for PayPal and other digital wallets because its solution could allow customers to get cash from ATMs. That would be a huge selling point because around 65% of Americans still say they usually use cash for purchases less than $5, according to The Washington Post.
There are also lots of places that still do not take credit cards or digital wallets, such as garage sales, most vending machines and some small businesses. The ability to get cash quickly is still important. If Chase could figure out how to integrate digital wallets with its ATMs, it would have a huge advantage.
Digital wallet developers should watch Chase carefully because its solution could pave the way for other big banks like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) to enter the arena. Successful integration of Chase Pay with CurrentC could let other banks do the same and give the MCX a payment solution platform that would compete directly with PayPal and the major credit card providers, particularly Visa (NYSE: V).
Why PayPal Needs MCX and Chase
Okay, so what should PayPal do here? My suggestion for PayPal would be to try to get into bed with the MCX and possibly Chase right now. If it could get plugged into that system, PayPal would have access to tens of millions of retail customers and thousands of places where its customers could get cash.
The MCX and Chase would benefit by getting access to PayPal’s brand and its expertise, particularly with online payment and social media via Venmo. PayPal already has a large customer base through its brand, Braintree and Venmo and a proven reputation.
More importantly, this would give PayPal far greater resources, particularly in the lending arena. It is going to need those resources as Apple Pay and Android Pay grow and with companies like Amazon.com considering entering the world of digital wallets.
PayPal is going to need to dramatically change its business if it simply wants to survive because it is facing a level of competition it has never had before. Despite that, I still think PayPal is a good investment because of its expertise, experience and technological capabilities.
Disclosure: Your friendly neighborhood blogger owns shares of PayPal and Bank of America.