RIP PayPal?

When e-commerce pioneers Amazon and eBay launched in 1994 and 1995, respectively, consumers eyed the platforms with suspicion. Home computers weren’t quite mainstream, and the internet was a brand-new concept in a world where CDs had just recently started out-selling cassette tapes.

However, the biggest obstacle to the widespread use of online shopping tools wasn’t general discomfort with the new technology. Even early adopters had trouble – they struggled with the inability to make secure, reliable digital payments for web-based purchases, which significantly dampened their enthusiasm.

Before digital payments were available, the most common method of payment for online purchases was a paper check. That meant time spent waiting for the mail, then more waiting for the check to clear before the merchandise could be shipped.

On top of that, it was nearly impossible to pay with credit cards, so those who didn’t have cash on hand to pay for items outright were out of luck. Under the circumstances, online shopping was rarely worth the effort unless an item was particularly difficult to find locally.

Enter PayPal, the first digital payment platform to gain sweeping acceptance among consumers. PayPal started its journey under the name Confinity in 1998, and it almost immediately became the go-to payment method for eBay transactions.

PayPal held its IPO in 2002, and eBay rapidly moved to acquire it, correctly realizing the importance online payments would have in the growing digital economy.

The two remained connected through 2015, at which point eBay divested PayPal, and it became a standalone company once again. Though dozens of competitors have made inroads into the digital payment space, PayPal remains a formidable presence in the market.

However, some industry analysts are questioning whether PayPal can maintain its leadership position in light of new developments. Specifically, the big banks have come up with a plan to dominate the digital payment space. Is this the end for PayPal, or will PayPal’s wide moat enable it to overcome this threat to its market share?

What Is Early Warning Services?

The massive financial institutions that manage the majority of United States retail and commercial banking rarely cooperate with one another. However, they have realized that the best way to identify fraud is to share information, and they decided to join forces to reduce their risk.

In the 1990s, a group of the biggest US banks got together to form Early Warning Services, LLC, which works with all sorts of businesses in the financial sector, including check acceptance companies, payment processors, and traditional banks, to detect potentially fraudulent activity, identify criminals attempting to perform illegal transactions, provide fraud alerts in real-time, and generally support the prevention of activity that could lead to losses.

Today, Early Warning Services is co-owned by seven large financial organizations: Bank of America, Capital One, JPMorgan Chase, PNC Bank, Truist, US Bank, and Wells Fargo. The firm still puts most of its efforts into fraud prevention, but it also operates in the fintech space.

Among other accomplishments, Early Warning Services introduced the Zelle Network in 2017. This platform allows consumers to transfer funds electronically. The goal of the Zelle platform was to compete with similar payment services offered by Block’s CashApp, PayPal’s Venmo, and Meta’s Meta Pay with Messenger.

Now, the major banks have a new plan to enhance the digital payment products available through Early Warning Services. This time, they want to compete with Block, PayPal, and Meta, as well as Apple Pay and other mobile wallet services, by introducing a mobile wallet of their own.

The Early Warning Services mobile wallet will allow consumers to pay both brick-and-mortar merchants as well as online retailers without entering their credit and debit card information directly – something the other digital payment services have been doing for years. That’s a big step because consumers overwhelmingly prefer to keep their card details confidential for privacy and security reasons.

Does PayPal Have A Big Enough Moat?

PayPal’s long history as a leader in the digital payments market has allowed it to build a wide moat. First, PayPal has some of the best technology available, and it has a strong reputation for keeping consumer data secure. On top of that, PayPal has a large head start in terms of data collection and analysis, and it can mine its massive collection of user and transaction details to better understand consumer and merchant needs – then adjust its product line accordingly.

PayPal has a nearly insurmountable advantage in terms of its network effect. In 2021, a survey of 1,500 of the biggest retailers in North America and Europe determined that 76 percent accepted PayPal’s mobile wallet. Only 27 percent of those surveyed accepted Apple Pay.

Other key figures from 2021 indicate PayPal has little risk from competitors, including the fact that it controls 50 percent of the global market share for payment processing. PayPal had more than 426 million active accounts, and it passed the $1 trillion threshold for total payment volume (TPV) in the same year.

Sending and receiving PayPal payments requires user accounts for both parties. The fact that so many people already have PayPal accounts makes the service more appealing for new users deciding among digital payment providers, which suggests that PayPal’s moat is wide enough to withstand the threat from Early Warning Services.

Is This The End For PayPal? The Bottom Line

PayPal’s wide moat provides excellent protection against competitors pulling away market share. However, it is also worth noting that the digital payments market is enormous, and it is still growing rapidly as consumers in emerging economies gain internet access. The World Bank projected digital payment volume would top $8.5 trillion in 2022 and grow to $15.17 trillion by 2027 – a rate of 12 percent.

Another study noted that less than two million consumers had digital wallets in 2016. That figure grew to 2.8 billion in 2020, and it is expected to increase much more through 2028. According to the study, approximately 74 percent of the world’s population will use mobile wallets by 2028.

There is a tremendous amount of revenue associated with this volume of payments. In 2021, the global digital payment market was valued at $89.6 billion. That figure is expected to hit nearly $230 billion by 2028 – a compound annual growth rate (CAGR) of 14.3 percent.

In short, there is plenty of room in this market for multiple digital payment and digital wallet providers to operate profitably, even if PayPal continues on its current growth trajectory. That means there is very little risk of PayPal disappearing in the foreseeable future, no matter how advanced the Early Warning Services digital wallet turns out to be.

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