EBay announced this week it will spin off PayPal in the second half of 2015, but that’s just the latest sign that financial services is in a software-induced flux. Although PayPal pioneered online payments fifteen years ago, a dramatic shift towards mobile represents the next frontier in the digitization of money.
The market is crowded. Not only with established online payments service like PayPal and credit card companies such as Visa, but also Apple, Google, and several upstarts, some of which are backed by original members of the PayPal team.But according to International Data Corporation, there might be enough to go around. The research firm expects mobile user spending to hit $1 trillion annually in 2017.
In order to understand the mobile payments market, it’s still important to start with understanding PayPal. The company posted $6.6 billion in 2013 revenue, one-third of which came from facilitating transactions on EBay. In the last 12 months the company processed $203 billion in payments, and currently counts 153 million active digital wallets. It makes its money the same way it always has, by charging sellers a $.30 fee plus a 1.9-2.9% surcharge, depending on the size of the transaction, and a $30 per month fee to websites that use the service to process payments.
Despite PayPal’s continued success and clear market lead, early PayPal conspirators Peter Thiel and Elon Musk have chosen to fund alternative online payment processing because of a perceived complacency within the company they built. In fact, the entry of these well-funded and aggessively growing start-ups is one of the main reasons why EBay CEO John Donahoe agreed to divest PayPal. The thinking was that only as a separate entity, unfettered from a major e-commerce company seen as a rival to many potential customers, could PayPal adequately confront the upstarts and maintain its leading position in the growing market.
Stripe offers real competition
The company backed by Thiel and Musk specifically is Stripe. Stripe was co-founded by brothers John and Patrick Collison in 2010, and was incubated shortly thereafter at Y Combinator. Today, up and coming payment-intensive services such as Lyft, Instacart, and Shopify all use Stripe to facilitate their transactions, and it was recently announced that the company would be powering the new “Buy” buttons on both Facebook and Twitter.
There are several reasons for Stripe’s growing popularity, but they largely come down to its tight security and elegantly crafted API. From a security standpoint, Stripe.js, stores credit card information with Stripe directly, instead of the user’s own local server. This process ensures that the data, stored on Stripe’s secure servers, is Payment Card Industry (PCI) compliant. Developers also rave about the usability of Stripe’s API. In fact, when PayPal launched its version of its own newest API, the RESTful PayPal API, it borrowed heavily from what Stripe had done. In effect, the challenge from Stripe has forced PayPal to improve its own product. It is perhaps not a surprise that Stripe’s most recent $80 million Series C valued the company at $1.75 billion.
While PayPal elected to emulate some of Stripe’s features, the company outright bought one of its other emergent competitors. Braintree, a Red Herring 2013 Top 100 North American finalist, was founded in 2007, three years before Stripe. Like Stripe, Braintree secures sensitive credit card data by sending it directly to the company’s servers, and has also been applauded for its easy to use API. The company’s does over $12 billion in sales volume annually, dwarfing the $1.5 billion handled by Stripe, and its A-List collection of high-growth customers includes Uber, Airbnb, GrubHub, and Dropbox. One of Braintree’s most compelling products, however, is Venmo, a generally fee-free overnight money transfer service that has been set up as a social network to facilitate payments among friends. If PayPal’s purchase of Braintree in 2013 for $800 million turns out to be a bargain (as Stripe’s current valuation suggests), Braintree’s decision to buy Venmo in 2012 for $26.2 million will most certainly be viewed in the same light.
Apple enters the market
Then there is of course Apple Pay, a service announced on September 9th alongside the iPhone 6 which has yet to be released. When it is, it will undoubtedly provide a boost to mobile payment figures overall. “Apple Pay is good for everyone in the payments ecosystem because ultimately, it increases the amount of transactions that are happening on mobile,” Stripe co-founder John Collison recently told The New York Times. While the seamless integration of a digital payments system with iOS would seemingly make Apple Pay popular on its own, it also takes a different approach to the security question. Instead of storing the data on its own servers, Apple Pay relies on the combination of a device-specific account number and a dynamic security code to complete each transaction. As a result of this system, Apple claims that it will never be privy to the transaction its users make.
In announcing his decision to EBay’s investors, Donahoe declared: “The era of digital payments is upon us.” A number of companies, both big and small, are convinced they will lead it.