PayPal's Profitable, But Success Could Spur Competition
BY PETE BARLAS
Friday, May 3, 2002
INVESTOR'S BUSINESS DAILY
PayPal Inc. (PYPL) is king today, but what about tomorrow?
The e-commerce transaction company reported its first-ever profit earlier this month after doubling its users to 15.5 million in a year.
But while PayPal is enjoying its lead, its success will likely spur competition, analysts say. It faces rival services from online auctioneer eBay Inc. (EBAY) and credit card giant MasterCard International.
"They are going to do very well for the next year or two, but there is going to be increased competition," said Aaron McPherson, analyst for International Data Corp., a research firm in Framingham, Mass.
PayPal's service lets consumers and small businesses transfer payments electronically when they're buying and selling products online.
So far, PayPal dominates this e-commerce payment market. But the trick is to stay on top, McPherson says.
Challenges loom.
MasterCard is working on a similar service. It's also talking about becoming more selective in working with payment services like PayPal. Many PayPal customers use their MasterCard cards in conjunction with the PayPal service.
Other Players
Similar online payment services are also available from eBay, Citibank (C) and Yahoo Inc. (YHOO), one of the leading portals on the Web.
"PayPal is in a unique position and will be successful, but they won't be the only player out there," said Franco Turrinelli, analyst for William Blair & Co., a Chicago-based investment bank.
PayPal last month reported first-quarter earnings of 7 cents a share, excluding one-time items. That was up from a loss of 23 cents a year ago. Sales rose 248% to $48.8 million.
PayPal's rocket ride to profit was fueled by payment volume.
In the first quarter, payments sent via PayPal totaled $1.46 billion. That was up from $1.21 billion in the fourth quarter and $643 million in the first quarter of 2001.
PayPal collects money from sellers. The average transaction on PayPal is $54, from which the company collects $1.80, say analysts.
PayPal mainly serves small businesses that don't have contracts with credit card firms. The service lets shoppers take money from a bank account or credit card account and send the money electronically.
That lets small businesses accept credit card payments without having to pay fees directly to credit card companies.
Credit card firms typically charge much higher rates than PayPal, says Peter Thiel, PayPal's chief executive. "It's more convenient and less expensive than setting up a credit card account," he said.
Buyers and sellers use credit cards for about 48% of the transactions on PayPal. The rest are direct bank transfers. A few buyers put money in special PayPal accounts.
MasterCard this month plans to more carefully scrutinize transactions from so-called payment aggregators like PayPal.
PayPal has a contract with MasterCard and probably isn't in any danger of losing it.
But MasterCard likely wants to know more about PayPal's clients, says Avivah Litan, analyst for Gartner Inc., a Stamford, Conn.-based researcher.
"PayPal will probably have to disclose more information on its customers, so (MasterCard) can get more information on just what this submarket of business is," she said.
MasterCard is also working on a rival service.
The service, developed with software company CertaPay, lets consumers send and receive payments through personal computers connected to the Internet. The service is already available in Canada.
The offering could pose a threat to PayPal's lead. "If the service allows you to send payments electronically to someone and it's easy to use, then PayPal is in real trouble," said IDC's McPherson.
PayPal also faces competition from Citibank, which operates the c2it online payment service.
But because c2it has only 375,000 users, it's not much of a threat - at least not yet, says Scott Devitt, analyst for Legg Mason Inc., a Baltimore-based investment bank.
"They only have a fraction of the market," he said.
PayPal established itself by working with online auctioneers. About 60% of its business comes from auction sales. Most of the business is from sellers on eBay's site.
EBay has its own online payment service, called eBay Payments (formerly Billpoint). So far, most eBay users prefer PayPal because it's familiar and easy to use.
Earlier this month, a rumor surfaced that eBay was interested in buying PayPal.
Deal Not Likely
Thiel declined to comment. But analysts say the deal probably won't happen because PayPal is trading at 25, up from its initial public offering price of 13 in February. That would make it a pricey acquisition.
Though PayPal could face more competition, the market for online payment services is largely untapped, analysts say.
By the end of 2002, PayPal will handle 124 million transactions with $6.8 billion online payments, they say. That's compared with 70 million transactions and $3.5 billion in payments last year. "Some people are talking about the market as if it's already mature, and that's just not true," said Blair's Turrinelli. |
