Last year PayPal has cut prices in its payment services business to try to fend off Dutch giant Adyen and other encroaching competitors. The strategy works, but at what cost?
By Emily MasonForbes team
VSconsumers rarely think about who processes their payments at checkout. Whether it’s managed in the back offices of a traditional bank like JPMorgan or by a fintech like PayPal or Stripe, it simply has to be fast and hassle-free. However, behind the scenes, a battle is underway to control “buy now” technology. Last year, e-commerce sales in the United States topped $1 trillion, with billions in revenue and profits flowing to dozens of companies vying to be at the center of transactions.
Among processors, PayPal, with $27.5 billion in revenue in 2022, is an industry giant. In September, its new CEO Alex Chriss, 46, took the reins, inheriting a company that adopted a risky low-price strategy, similar to the approach Dell took to selling clones of IBM PCs in the 1990s. 1990. Last year, the San Jose company began reducing the cost of payment services it offers under its Braintree brand, a white-label service that allows small and large businesses to accept debit cards , credit cards and other consumer payment methods. Research firm MoffetNathanson estimates that Braintree’s revenue grew from $6.2 billion in 2021 to $8.4 billion in 2022, representing about 30% of PayPal’s total net income. Braintree is now growing faster than other parts of PayPal and unbranded transactions, which are primarily driven by Braintree, jumped 40% in 2022. PayPal branded activity, when consumers click the yellow PayPal button , increased by only 5% in 2022.
“PayPal was doing something to drive that growth and it was likely to give up on pricing,” says Chris Donat, head of fintech and payments research for BWG Strategy.
PayPal is trying to grab land in North America to gain market share from nearby rivals, including Dutch processor Adyen and fintech darling Stripe, analysts say. PayPal’s advantage lies in the wide range of services it offers, including processing, a digital wallet, and its flagship payment system. It tries to lure merchants by offering lower prices on Braintree services, then bundling them with more profitable features like Branded Payments, its credit products, or PayPal Payouts, which helps merchants like Uber pay their bills. drivers.
Braintree’s gross profit margin hovered around 28% in 2021 but today, thanks to its new low-price strategy, it is closer to 23%, estimates MoffetNathanson. A significant drop, but where the unit is still above break-even, says Lisa Ellis, partner and principal analyst.
The current low-price strategy was implemented by outgoing CEO Dan Schulman, 65, who took the reins of PayPal just before it split from online marketplace eBay in 2015. Three years later, eBay switched to Adyen as the primary payment processor. This decision amounted to a declaration of war between fintechs. Schulman, determined to expand PayPal’s footprint, acquired new mobile payments company iZettle and paid $4 billion for browser-based rewards platform Honey. In spring 2022, Schulman began lowering prices on Braintree Services. Schulman, a blockchain booster that has enabled PayPal and Venmo customers to transact in crypto and recently launched a PayPal stablecoin, resigned in September but remains a member of the company’s board of directors.
New CEO Chriss joins PayPal after 19 years at Intuit where he led the company’s efforts to become a leader in selling products such as Quickbooks to its broad customer base of small businesses and independent contractors. Prior to Intuit, Chriss founded CollegeWeb, which he created while a student at Tufts University and sold at the height of the dot-com bubble in 1999.
Tit is a payment processing company is one that thrives on tiny percentages. In 2022, PayPal had net revenue of $27.5 billion, or 2% of the total $1.36 trillion in transaction volume it processed. Its total revenue includes a full range of fee-generating services. Its competitor Adyen, rather a pure player in transaction processing, achieved a turnover of 1.4 billion dollars on a processed volume of 815 billion dollars, or only 0.17% of its volume. Stripe’s revenue was $3.2 billion of $817 billion in volume or 0.39% percent. Adyen typically targets the world’s largest retailers, companies like McDonalds or Spanish clothing manufacturer and retailer Mango. Stripe got its start serving small, digitally native businesses but has moved toward the high end, and PayPal is moving toward mid-market retailers like Casper, Poshmark, and Krispy Kreme. The post-pandemic slowdown in e-commerce spending has put pressure on all three companies to maintain the coronavirus-era growth that has excited investors. In 2020, shares of PayPal and Adyen rose 116% and 173%, respectively. This year, they are down 19% and 47%.
Competition among processors has intensified as Adyen seeks a greater share of the North American market. Adyen’s strength lies in adapting to the needs and preferences of different financial institutions around the world to generate high acceptance rates for global retailers. Behemoth retailers often use multiple processors: they may rely on Adyen for international processing and a combination of Braintree, Stripe, or others for U.S. business. Adyen seeks to use its international advantage as a fulcrum to expand those relationships and gobble up more U.S. business.
“We started by helping large international clients and US clients go global. Over time, we were able to achieve 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 cut prices appear to have derailed the European company. Last month, Adyen reported lackluster earnings, sending its shares down nearly 40%. Its revenue growth slowed to 21% year-over-year, compared to 37% the year before. Pieter van der Does, the company’s co-founder and CEO, attributed the slowdown to higher interest rates that are pushing customers toward cheaper processing alternatives. He added that the company plans to keep its prices stable. “We could participate in the fight against prices. We don’t think it’s the right strategy,” he said.
The risk PayPal runs by reducing processing fees triggers a race to the bottom. If all three companies chose to lower their prices, they would all suffer negative consequences, although it might have less impact on PayPal given its wider range of products available for cross-selling. Another risk for Chriss is that customers only purchase Braintree services and do not purchase any other PayPal products. “It’s working to the extent that they’re gaining market share with Braintree,” says Ellis. “But we haven’t seen evidence that it actually accelerates sales of other products.”
P.AyPal’s other pressure point Competition is increasing when it comes to branded one-click checkout, when consumers can choose from a growing list of buttons such as PayPal, buy now, pay later services and Apple Pay. Apple Pay has become a formidable competitor: Apple Pay users increased from 507 million worldwide in 2020 to more 700 million in 2022. In April, PayPal added Apple Pay as a payment option for its payments product aimed at small and medium-sized businesses, likely yielding 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 trial filed on behalf of consumers argues that the giant San Jose, Calif.-based company engaged in anticompetitive practices to prevent merchants from directing customers to potentially less costly payment buttons. While PayPal has reduced prices for enterprise processing, the company charges some of the highest fees in the industry for branded click-to-pay business at 3.49% per online transaction. Online merchants are generally willing to pay for access to PayPal’s 400 million consumer customers. However, to accept PayPal, merchants must sign an agreement prohibiting them from offering price discounts to direct customers to another payment button that might be cheaper, the lawsuit claims.
The lawsuit against PayPal is similar to that of 2010 antitrust lawsuit brought 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 that responsibility seriously,” a PayPal spokesperson said via email in response to the class action lawsuit.. “We are reviewing the matter and have no further information to share at this time.”
Competitive pressures from alternative payment options like Apple Pay have forced PayPal into a two-front war on both the branded and unbranded sides of the payments industry in an effort to maintain its position at the top of the sector.
One of the fiercest battlegrounds for PayPal, Adyen and Stripe concerns the processing volume of so-called platform companies like Shopify, eBay, Etsy or Ticketmaster. These companies are marketplaces that help many small businesses sell to their own customers. PayPal calls its PayPal complete payments, a cash register product aimed at small and medium-sized businesses and platforms, a strategic priority. Likewise, Adyen strongly promotes its Adyen for platforms product. Stripe also serves platform customers, counting Shopify among its largest customers.
“It’s this set of around 25 clients that generate huge volumes that these three players have decided over the last few years to serve,” explains Ellis. “This specific segment is extremely competitive.”
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