How Paypal Holdings Inc Just Upended Square Inc’s Growth Plans

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It couldn’t have been better scripted by a Hollywood studio. On Wednesday, the peer-to-peer payment app owned and operated by Square Inc (NYSE:SQ) was cheered for growing faster than a comparable platform called Venmo, which is part of Paypal Holdings Inc (NASDAQ:PYPL).

Though the two companies aren’t exactly head-to-head competitors, the development was presented as something that should concern owners of PayPal stock.

A day later, PayPay countered — with a vengeance. On Thursday, the online payments giant announced it was going to acquire Swedish company iZettle, stepping into the middle of Square’s turf. All told, the purchase will cost PayPal $2.2 billion, plugging the buyer into a network that had been expected to generate $165 million worth of revenue this year.

iZettle offers smartphone-based credit card acceptance services (and related products) which are currently used by hundreds of thousands of brick-and-mortar merchants. Most of them are in Latin America and Europe, as Square has taken the North American share of this market.

Like Square as well as PayPal, iZettle was eyeing expansion. The United States was the biggest and best opportunity but was also proving the toughest nut to crack. That’s set to change now, though. Between PayPal’s name and iZettle’s technology, it’s not surprising that the Square share price has fallen nearly 7% in just the past two days.

Better Together

The lines between online payments and banking services have been increasingly blurred in recent years, by design.

PayPal arguably did so first, attaching credit-based features to its online payment platform. Square, however, upped the ante on the idea late last year by seeking to become an actual bank that would make true loans to the small businesses it was serving as a credit card acceptance platform.

The combination of PayPal and iZettle, however, is a head-turner in that it puts PayPal directly in a market it hadn’t been in — small proprietors. Because small local shops collectively drive a little more than half of the country’s retail spending, this market is a big opportunity.

Yes, a PayPal payment is, or was, an option at many retailers. The company could have arguably simply leveraged that technology rather than shelling out $2.2 billion for iZettle.

Take a closer look the next time you visit a handful of stores at the mall, though. PayPal’s mobile payment platform is no longer an option. It was shuttered in March, having never caught on as expected. The remaining PayPal payment options (which require partners) aren’t exactly lighting it up either.

If they didn’t catch on with the large retailers, they’re certainly not going to be of much benefit to smaller ones.

Square, however, is a different story. Though its little cube-shaped credit card readers that attach to a smartphone are still around, the company has since unveiled physical cash registers that still read cards the same way but offer so much more to a small shop.

The company has been wary of divulging exactly how many proprietors are using its payment systems, but the figure is pegged around two million.

That’s a market of two million users that PayPal will soon be able to address with a comparable product.

And it will. PayPal CEO Dan Schulman wasn’t too shy about the acquitiion to clearly point out “Small businesses increasingly want a full suite of capabilities across channels, a one-stop stop. IZettle was the perfect fit in many ways.”

Bottom Line for PayPal Stock

It’s rare that an acquisition makes a particular company more ownership worthy. Indeed, when the price for a deal is steep, it can often make a stock less valuable.

PayPal is paying a steep price for iZettle to be sure. But in this case, it may not only be worth it; it may also distinctly make PayPal stock worth owning if it wasn’t before.

Small merchants were the proverbial final frontier within the payment-acceptance market, but they’d largely been avoided (or poorly served) because they were too fragmented and small to service cost effectively.

Technology has changed this paradigm, though; self-service is now possible. Square has proven it. Now PayPal has a means of taking aim at the market Square defined and jelled with so well, leveraging a brand name that’s far more powerful in North America than Square’s is.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/how-paypal-just-upended-square-growth-plans/.

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