Paypal's bet on the stablecoin may pay off… or not.

PayPal currently finds itself in an ambiguous zone between growth and maturity, confusing many investors about its place in their portfolios. The company has a strong presence in the online payments sector, but it faces ever-increasing competition. The stablecoin launch could be the next big revenue stream for this payment processing company.

What is going on?

PayPal's profits are solid, even spectacular, but the stock has lost nearly 13% this year, despite a strong market comeback.

  • The company faces competition from all sectors, including from co-founder Elon Musk, but also from legacy credit card companies and the Federal Reserve.
  • Having a stablecoin allows the company to charge fees on cryptocurrency transactions because they run on an internal blockchain.

PayPal's market dominance is mainly due to its early entry into the world of digital financial transactions.

Payment processing companies enjoy high loyalty and scalability. This means that consumers are not likely to switch providers once they have chosen one. Furthermore, after the marketing campaigns and similar costs required to penetrate a market, there are not many additional expenses to incur to maintain your position. These factors along with the first-mover advantage mean that PayPal is still the leading online payment service provider.

The financial fundamentals of PayPal

PayPal has more than 435 million customers in the fintech market, giving it a prominent place on the global stage. However, its dominant position and its relative maturity hardly allow it to experience the meteoric growth that many investors in the fintech field expect.

Furthermore, PayPal does not exhibit the characteristics of a value-oriented banking stock. The company does not issue dividends and trades at a high price-to-earnings (P/E) ratio compared to traditional banking companies.

PayPal's financial results are, at least, reliable and stable. Profits fell earlier this month, and while no one was surprised by the results, PayPal maintained a relatively positive trajectory even though the results weren't spectacular.

The financial results are reassuring for current shareholders, and the company reported the following:

  • 7% growth in turnover year-on-year
  • 2% increase in operating margins
  • 11% decrease in non-operating expenses

These three statistics indicate that PayPal is adapting well to a new economic climate that includes lower consumer sentiment, inflation and higher debt costs. Still, PayPal's stock price is nothing to write home about, as shares have fallen nearly 13% since January. This, despite the sharp market turnaround, represented below by the 16% rise in the S&P 500 during the same period.

Source: Morningstar

First mover advantage

The main advantage of PayPal lies in its pioneer status. PayPal was one of the first companies, if not the first, to facilitate digital transactions. It has also adapted well to the evolution of technology and consumer trends over time.
Payment processing, in general, has two advantages: loyalty and scalability. Once a seller has chosen a payment processing company, they are often reluctant to part with it within their business ecosystem. This is where PayPal's pioneering advantage comes into play, as the payments business is a vital part of growing small and medium-sized online businesses.

Competitors, old and new

Despite the first-mover advantage, PayPal faces increased competition from diversified companies offering payment processing services. When companies like Apple and Google expand their payment processing mechanisms, they effectively create a closed-loop ecosystem for brand followers. We all know someone who has the latest iPhone, the latest Apple Watch, the latest Mac and can't wait to get the Vision Pro – do you really think they will be keen to break their comfortable surroundings using payment systems other than Apple Pay?

Globally, PayPal faces the real threat of sovereign states approving or imposing internal competitors. Investors need only think of Alipay and WeChat in China, both of which have received state approval, effectively excluding PayPal from the market. In the United States and abroad, PayPal faces competition from X (formerly Twitter), with Elon Musk striving to make the platform a “universal application” like WeChat. If this plan comes to fruition and consumers favor payments on X at the same time as on social media, PayPal will be in big trouble.

Finally, PayPal is threatened by a new entrant: the Federal Reserve. In July, the Fed launched its own instant payments service, FedNow. FedNow aims to reduce the gap between transaction settlement periods and has been deployed to 41 banks and 15 service providers, including JP Morgan Chase and US Bancorp. While it's too early to know what FedNow's ultimate effect will be on providers like PayPal and Venmo, it's worth remembering that it's generally not wise to bet against the Fed.

PayPal's bet on stablecoin

The publication of PayPal's results was a surprise. Earlier this week, PayPal launched the PayPal USD (PYUSD) stablecoin, becoming the first U.S. financial services provider to launch its own stablecoin product.
Stablecoins are less speculative than traditional cryptocurrencies, since they are backed by cash and Treasury bills while remaining linked to the value of the dollar. This is not a particularly risky move for PayPal, as some feared in the wake of FTX's collapse. This launch follows the decision in 2022 to allow customers to buy, sell and transact with major coins such as bitcoin.

This initiative is as practical as keeping PayPal at the forefront of digital banking trends. Remember that PayPal's revenue comes from transaction fees between PayPal users. However, when cryptographic transactions take place on a blockchain, PayPal cannot obtain a share of these transactions, except by charging a convenience fee.

However, more and more businesses are turning to blockchain-enabled platforms. PayPal then risks being forced out of the market as more consumers become comfortable transacting directly between buyers and sellers through cryptocurrency exchanges. Finally, by managing transactions on its blockchain and banning PYUSD on third-party platforms and exchanges, PayPal is securing a share of the next-generation payments market.

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