eBay’s (NASDAQ:EBAY) rapid growth in the payments sector with PayPal may slow significantly in the near term if the original masters of the payment space, Visa (NYSE:V) and Mastercard (NYSE:MA), have their way. Mastercard plans a new fee for digital wallet operators like PayPal starting in June. Fellow competitor Visa also announced an intent to follow suit. Here we take a look at two manners in which the situation may play out. In one scenario, PayPal could transfer the fee to its users which could result in a decline in PayPal’s usage, and in the second case, PayPal absorbs the impact and loses its margins.
The giants in the payment space had harbored mixed feeling about PayPal’s rapid growth in the past. While PayPal’s success in the online world was viewed cautiously as the service generated extra e-commerce transactions for them, they grew suspicious after PayPal announced initiatives to capture a share of the offline transaction market. Last year, PayPal had announced a tie-up with Discover Financial Services (NYSE:DFS) and launched hardware to enable payments through mobile devices and cards at merchant’s cash registers. They have also been launching mobile based transaction services which could act as a replacement to transactions through credit and debit cards.
Google‘s (NASDAQ:GOOG) Wallet, Square, iZettle in Europe and Intuit’s GoPayment are PayPal’s competitor in the online wallet space.
1- PayPal Transfers The Fee To Its Users
PayPal’s fees on transactions are based on whether a user makes a purchase payment, a personal payment or a PayPal business payment. As for purchase payments it is the recipient of the payment paying the fee, we don’t expect the transfer of hiked fee to impact individual users’ loyalty by much. The merchants permitting the service may hike the fees to maintain their margins or inhibit payments through PayPal. This could adversely affect the usage of PayPal if the number of such merchants is high.
For personal payments, the fee depends on the payment method used. Using a credit/debit card for a fully or partially funded payment, the sender/recipient would pay 2.9% of transaction value + $0.30 per transaction as a fee. Using a bank balance for the transaction entails no fee.
We think that an additional digital wallet fee by credit card companies could lead to a decline in usage of cards for personal payments but would have insignificant impact on PayPal’s usage. The PayPal Business Payment Fee is currently in pilot stage and hence we don’t expect it to have a significant impact on PayPal in the near-term. There could be a 5% downside to our estimate if PayPal’s usage declines to 1.6 payments per account instead of expected 1.8 according to our estimates.
2- PayPal Absorbs The Fee And Sacrifices Margins
The PayPal business of eBay had a higher adjusted EBITDA margin in 2012 than 2011. This growth was driven by rapid growth in adoption which saw the number of payments grow by 26% in Q4 2012 than the same period in 2011. The number of active accounts grew by only 15% during the period.
We currently estimate the margins to grow marginally as the company’s investments into capacity, new platforms and geographic expansion drive further adoption. The new digital wallet fee could see these margins shrink if the company decides to absorb the fee instead of passing it onto the customers. There could be a 5% downside to our estimate if PayPal’s Margins decline to 2011 levels of 25% in the near term and then expand only marginally.
We have a $54 Trefis price estimate for eBay, which is 5% above the market price.