eBay‘s (NASDAQ:EBAY) acquisition of PayPal in 2002 has proved to be an excellent strategic move that has helped the company come out of the 2008 recession stronger than before. The astonishing growth in PayPal’s revenues has been driving eBay’s overall revenue growth over the past couple of years as PayPal’s revenue growth over the past three years has averaged around 25% YoY. We expect PayPal to continue growing at similar rates for the next couple of years before the slowing down as the base effect kicks in and weighs on the growth rate gradually. Our forecasts for the next couple of years are supported by PayPal’s efforts to expand its presence offline. The company has entered into an arrangement with Discover Financial Services (NYSE:DFS) and launched hardware to enable payments through mobile devices and cards at merchant’s cash registers.
Here we take a detailed look at factors that support our forecast that the number of payments per account on PayPal are going to increase from 1.6 per month to about 2.5 per month in 2019. PayPal has about 123 million globally active accounts which we expect to increase to 275 million by 2019. We expect growth in the number of active accounts and payments per account to drive the growth in Paypal’s revenues.
The Tie-Up With Discover Financial Services
PayPal announced an arrangement with Discover in August last year which is expected to come into effect in the second quarter of 2013. As part of the deal, PayPal will issue payment cards to its more than 50 million active users in the United States over the next year. The new card will have a Discover Issuer Identification Number, or IIN, which is a code that identifies the card holder, and will allow users to buy from merchants that are part of Discover’s network. PayPal will charge merchants when users pay with the new cards, and, in turn, will pay Discover for access to its network, on a per-transaction basis. Paypal’s footprint will expand to cover an additional 7 million stores post the deal. We expect the enhanced ubiquity of the payment service will positively impact the number of transactions per PayPal account.
However, PayPal, will face tough competition from other card companies such as Visa Inc. (NYS:V), MasterCard (NYS:MA) and American Express (NYS:AMX). To be successful, PayPal will need to convince users that its low hassle payment method is better than the old stale version of transacting. Additional competition for PayPal will come from Square, the brainchild of Twitter founder Jack Dorsey.
PayPal Here As A Replacement For Cash Registers
Besides the tie-up with Discover, PayPal also launched a point of sales solution, PayPal Here in 2012. The solution will serve as a replacement for cash registers. It enables merchants to use a card reader attached to a mobile device to accept payments. The card reader device is aimed at small businesses who are unwilling to bear costs associated with keeping cash registers. With several big brands such as Home Depot, Abercrombie & Fitch, Jos. A Bank, etc. integrating PayPal into their existing payment platforms, the future for PayPal, subject to an effective implementation of the technology, looks promising. We expect the greater reliance on PayPal at point of sales and the ease of cashless transactions to drive the growth in the number of payments per account in the future.
PayPal Here Customized According To The Markets
The company has been careful about the local preferences when designing the PayPal Here devices for the individual markets. For example in Europe, the company recently launched a version of the device that is different from the one in the U.S. In Europe, most credit and debit cards use a chip-and-pin type of authentication, which is more complex than the swipe-based cards that U.S. shoppers use. For insights into the functional differences between the devices you can refer to videos posted by PayPal on its official channels on YouTube. [Links: The U.S.A device, The Europe device]
PayPal is also promoting mobile transactions as an alternative to payment by cards through its mobile app. The service works through the PayPal app that customers can use to check-in to the store. They can then place an order and pay using their PayPal account. The merchant will be able to see the name and photo ID of the checked-in customer via its point of sale terminal for security purposes. PayPal has tied up with point of sale technology companies such as MICROS, Island Pacific, Kounta and Vend and will soon add more retailers and hospitality partners into the mix. You can see the greater functionality of the service in this video posted by PayPal on its YouTube channel.
We expect PayPal’s offline expansion plans to drive its and eBay’s revenue growth in the near future. The service’s presence in both the online and offline transaction world is still limited and hence there is a lot of scope to grow. The PayPal service already boasts 123 million active accounts. eBay’s next challenge lies in getting these customers to use PayPal for offline transactions, too. To that end, the company has been busy getting major retailers on board as well as expanding the service internationally. The huge potential for growth supports our estimate of PayPal accounting for 46% of our $54 Trefis price estimate for eBay.