Consumers rarely think about who processes their payments at the checkout. Whether it's in the offices of a traditional bank like JPMorgan or a fintech company like PayPal or Stripe, all they need is for it to be fast and hassle-free. Behind the scenes, however, a battle is raging to control buy-now technology.

Last year, electronic commerce (e-commerce) sales surpassed $1 trillion in the United States alone, with billions in revenue and profits flowing to dozens of companies competing to be at the epicenter of transactions.

Among processors, PayPal, with $27.5 billion in revenue in 2022, is a giant in the sector. In September, its new CEO, 46-year-old Alex Chriss, took the reins, inheriting a company that has adopted a risky low-pricing strategy, similar to Dell's approach of selling clones of IBM computers in the 1990s. Last year, the San José company began cutting costs on the payment services it offers under its Braintree brand, a “white label” service that allows small and large businesses to accept debit, credit cards and other online payment methods. the consumers.

Research firm MoffetNathanson estimates Braintree's revenue increased to $8.4 billion in 2022 from $6.2 billion in 2021, representing about 30% of PayPal's total net revenue. Braintree is growing faster than other parts of PayPal and non-branded transactions, which are primarily driven by Braintree, grew 40% in 2022. PayPal's branded business, when consumers press the yellow button, only grew 5% in 2022.

“PayPal was doing something to squeeze that growth and was probably giving it up because of pricing,” says Chris Donat, head of fintech and payments research at BWG Strategy.

According to analysts, PayPal is trying to gain market share in North America against its closest competitors, such as Dutch processor Adyen and fintech Stripe. PayPal's advantage is the broad set of services it offers, including processing, a digital wallet and its iconic branded payment system. It's trying to attract merchants by offering lower prices on Braintree's services, then combining them with more profitable features like branded checkout, its credit products, or PayPal Payouts, which helps merchants like Uber pay their customers. drivers.

Braintree's gross profit margin was around 28% in 2021, but today, thanks to its new low-pricing strategy, it is closer to 23%, MoffetNathanson estimates. A material drop, but one in which the unit is still above the break-even level, says Lisa Ellis, partner and senior analyst.

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The current low-pricing strategy was put in place by outgoing CEO Dan Schulman, 65, who took the reins at PayPal just before it spun off from online marketplace eBay in 2015. Three years later, eBay moved to Adyen. as the main payment processor. The move amounted to a declaration of war between fintechs. Determined to expand PayPal's footprint, Schulman acquired mobile payments startup iZettle and paid $4 billion for Honey, the browser-based rewards platform. In spring 2022, Schulman began cutting prices on Braintree's services.

Schulman, a blockchain booster who enabled PayPal and Venmo customers to transact in cryptocurrencies and recently launched a PayPal stablecoin, resigned in September but remains on the company's board of directors.

Chriss joins PayPal after 19 years at Intuit, where he led the company's efforts to become a leader in selling products like Quickbooks to its broad customer base of small businesses and self-employed entrepreneurs. Before Intuit, Chriss founded CollegeWeb, which he created while a student at Tufts University and sold near the peak of the dot-com bubble in 1999.

Its competitor Adyen, which is more exclusively dedicated to transaction processing, obtained revenues of 1,400 million for a processed volume of 815,000 million, that is, only 0.17% of its volume. Stripe's revenue was 3.2 billion from 817 billion in volume, or 0.39%. Adyen usually supplies the largest global retailers, companies such as McDonalds or the Spanish clothing manufacturer and retailer Mango. Stripe started out serving small, digitally native businesses but has moved upmarket, and PayPal is targeting mid-market retailers like Casper, Poshmark and Krispy Kreme.

The slowdown in e-commerce spending following the pandemic has put pressure on all three companies to maintain the coronavirus-era growth that excited investors. In 2020, PayPal and Adyen shares rose 116% and 173%, respectively. This year, they are down 19% and 47%.

Competition among processors has intensified as Adyen pushes for a larger share of the North American market. Adyen's strength is that it adapts to the needs and preferences of different financial institutions around the world to achieve high acceptance rates from global retailers. Retail giants typically use multiple processors: They may rely on Adyen for international processing and a combination of Braintree, Stripe, or others for U.S. business. Adyen is trying to use its international advantage as a leverage point to expand these relationships and capture more business in the United States.

“We started helping large international clients and American clients who were going international. Over time, we've had success with them on a national level,” Ethan Tandowsky, Adyen's chief financial officer, said at the Goldman Sachs Communicopia & Technology conference in September.

Braintree's price cut appears to have sent the European company reeling. Last month, Adyen presented mediocre results, which sent its shares down almost 40%. Its revenue growth slowed to 21% year-on-year, down from 37% a year earlier. Pieter van der Does, the company's co-founder and CEO, attributed the drop to rising interest rates, which have led customers to look for cheaper processing alternatives. He added that the company plans to maintain its prices. “We could join the price fight. “We don’t think it’s the right strategy,” he said.

The risk PayPal runs by cutting processing fees is triggering a race to the bottom. If all three companies choose to cut prices, they will all see their bottom line affected, although this could have a smaller impact on PayPal, given its greater range of products available for cross-selling. Another risk for Chriss is that customers will only purchase Braintree services and not add other PayPal products. “It's working in the sense that they're gaining share with Braintree,” Ellis says. “But we haven't seen evidence that it's really accelerating sales of the other products.”

PayPal's other pressure point is growing competition in one-click checkout across the brand, when consumers can choose from a growing list of buttons like PayPal, buy now, pay later, and Apple Pay. . Apple Pay has become a formidable competitor: Apple Pay users grew from 507 million globally in 2020 to more than 700 million in 2022. In April, PayPal added Apple Pay as a payment option in its checkout service for small businesses. and medium-sized businesses, probably in response to merchant demand.

PayPal has long been an aggressive competitor on the brand side of e-commerce payment processing. On October 5, a class action lawsuit filed on behalf of consumers alleges that the San Jose, California-based giant has adopted anti-competitive practices to prevent merchants from directing customers to potentially cheaper payment buttons.

Although PayPal has reduced prices for business processing, the company charges one of the highest fees in the industry for branded one-click payment business, at 3.49% per online transaction. Internet sellers are often willing to pay to access PayPal's 400 million consumer customers. However, to accept PayPal, merchants must sign an agreement that prohibits them from offering price discounts to direct customers to another payment button that may be cheaper, the lawsuit alleges.

The lawsuit against PayPal is similar to the antitrust lawsuit filed in 2010 by the Department of Justice against Visa and Mastercard. In the settlement agreement, Visa and Mastercard allowed merchants to offer discounts to consumers if they used cheaper payment methods.

“PayPal continues to put our customers first in everything we do, and we take this responsibility very seriously,” a PayPal spokesperson says via email in response to the class action lawsuit. “We are reviewing the lawsuit and have no further information to share at this time.”

Competitive pressures from alternative payment options like Apple Pay have forced PayPal to entrench itself in a two-front war, on both the branded and unbranded payments side, in an effort to maintain its position at the top of the sector.

One of the fiercest battlegrounds for PayPal, Adyen and Stripe is the processing volume of so-called platform businesses, such as Shopify, eBay, Etsy or Ticketmaster. These companies are marketplaces that help a large number of small businesses that sell to their own customers. PayPal considers its PayPal Complete Payments, a payment product for small and medium-sized businesses and platforms, a strategic priority. Similarly, Adyen heavily promotes its Adyen product for platforms. Stripe also serves platform customers, and Shopify is one of its largest customers.

”That set of, literally, about 25 clients that move enormous volumes is what these three players have decided to serve in recent years,” says Ellis. “That specific segment is viciously competitive.”

This article was originally published in Forbes US

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