Visa Inc (V) is expanding its digital wallet program to include Wal-Mart Stores, Inc. (WMT), Starbucks Corporation (SBUX), and Walgreens Boots Alliance Inc (WBA) as partners. This adds to a slew of existing partners like United (UAL), Yum! Brands‘ (YUM) Pizza Hut and Staples (SPLS) among others.
Visa’s digital wallet and Visa Checkout is similar to PayPal Holdings Inc (PYPL) in that it allows users to store credit card information to pay at online retailers. Visa’s goal is to capitalize on the growing mobile and online payments market, an area of the market that PayPal currently dominates.
Given PayPal’s $40 billion market capitalization, it could be great for Visa stock if the company can actually take down PYPL.
Easier Said Than Done
For all of the risks facing PayPal stock, which include new competition like Visa Checkout, fact is that PYPL still has eBay Inc (EBAY) behind it, and has a completely different business model than Visa.
Visa is a processor, which means it creates revenue by charging fees to merchants every time its cards are used. With Visa Checkout, the company allows the credit cards of competitors to be stored, thereby minimizing the revenue stream that’s created from transactions on the platform.
PayPal is not an actual processor of payments, but rather a middleman from one account to another. It charges fees to consumers, whether that consumer is buying something online or sending money to another user.
The one area where Visa could become a thorn is with transactions from consumer to merchants. This is where PYPL creates revenue by charging the PayPal user, but Visa Checkout is free to the consumer, and only charges its transaction fee to merchants (around 3%).
That said, PYPL still has a thriving business as the payments middleman on eBay, in payments between users/businesses and in mobile payments. During PayPal’s last quarter, its payment volume rose 27% year-over-year to $69.7 billion, but mobile payments volume surged 42% and now accounts for 24% of total volume.
While the payment transaction volume on PayPal is incomparable to Visa, fact is that the two companies have different business models and Visa does not appear structured to become a problem in areas where PayPal is thriving. In retrospect, Visa Checkout’s list of participating merchants is still small and with just 10 million users, the service is still a long way off from challenging PayPal and its 173 million active users.
Hence, Visa stock is unlikely to gain much of PYPL’s $40 billion valuation, and if PayPal stock suffers, it is unlikely to be because of V.
Visa and PayPal Stock Have Other Worries
All things considered, both PayPal and Visa stock face their own unique set of challenges in the years ahead that could cause significant loss — challenges other than each other.
While Visa may not be a big threat to PayPal’s business model, the likes of Apple (AAPL) Pay, Android Pay, Stripe and Pay With Amazon.com, Inc (AMZN) most certainly are a risk. These are each payment services tied to enormous ecosystems that could quickly cause PayPal’s transaction growth to decelerate, if not turn negative, with little warning. This would be catastrophic for PayPal stock.
As for Visa stock, it and MasterCard Inc (MA) have built a duopoly in the payment processing industry. However, Apple and Alphabet (GOOG, GOOGL) have all of the components in place to become a legitimate threat to both companies. For V to be challenged, a company would need issuing banks, merchant support and consumer support/use.
Well, both Apple and Google already have well over a million retail locations that accept their payment services along with hundreds of millions of users in their respective ecosystems. All Alphabet and Apple need are banks to issue cards, and a willingness to pursue this business.
Given the high margins involved and the likely willingness of banks to give consumers more payment options, don’t be surprised if one or both pull the trigger to enter this space in the foreseeable future.
The bottom line: V may not be much of a threat to PYPL, but there is a laundry list of outside threats to both Visa and PayPal stock.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
