PayPal Aiming to Dominate Global Payments

There are four top players in the payments industry: Visa ( V ), Mastercard ( MA ), American Express ( AXP ) and PayPal ( PYPL ). Visa is the largest payments processing company in the world, Mastercard has been keeping as close as it possibly can to Visa and American Express serves the high-end customers in the credit card industry. PayPal seems to be the odd one out in this group, but it has the most unique offering.

How did PayPal grow this big?

The fact that PayPal managed to find a niche where credit card companies were unable to penetrate is a validation of its business model. The company deliberately stayed away from mainstream domestic payments so it wouldn't have to go head-on with the card companies. Instead, it focused on international transactions, making it simple and convenient to move money from one country to another.

That's just one of the things that makes PayPal unique. There are no PayPal credit cards you can apply for; there are no branches you can walk into; but you can leverage the power of your card and your bank using PayPal.

That disruptive approach has made PayPal a trusted payments processor for millions of users, both in the commercial as well as individual user segments. All PayPal did was use the power of the internet and make it a vehicle for financial transactions at the very basic user level. That simple concept has now taken PayPal to a stage where it processed $281.76 billion worth of transactions (TPV, or Total Payment Volume) for fiscal 2015.

PayPal will report its fourth quarter 2016 earnings on Jan. 26, and we're likely to see a full-fiscal TPV of more than $340 billion based on TPVs for the past three quarters.

Q3 2016 - $87 billion

Q2 2016 - $86 billion

Q1 2016 - $81 billion

One of the biggest drivers of PayPal's growth is the way it's focusing on growing the merchant base. PayPal is doing this by making it easier than ever for small businesses to receive payments from across the border.

Consider this scenario. If a merchant wants to carry out a transaction with his customer in another country, all he needs to know is his customer's email address and that he has a PayPal account. He then logs into PayPal, and submits a request for payment. This PayPal invoice allows the customer to then log into his PayPal account and make the payment either with a linked credit card or bank account.


Now, let's say the same transaction were to be done using a bank. The merchant has to send all of his account details to the customer and request for a wire transfer. The wire transfer then has to be put through at the customer's end, which means they may have to call the bank for a request or visit their branch.

The same transaction on a credit card is also a cumbersome process. The merchant will need to have a website and a secure payment gateway, which means investing in technology. For a small business, this can definitely be prohibitive.

PayPal cuts through all of that and makes it as simple as using an email ID and a linked card or account to make the transaction. The simple, safe and "uncluttered" nature of transactions is the single biggest reason why PayPal now has a massive merchant base.

Now, PayPal has extended its reach in many ways . First was its acquisition of Braintree that led to the birth of Venmo, its own social mobile payment solution.

Then came the Xoom acquisition, which further extended its presence in web payments.

After that, PayPal tied up with Visa and MasterCard to have its mobile wallet accepted at physical locations.

More recently, PayPal has signed up with Alibaba ( BABA ) to allow Chinese merchants to accept PayPal remittances on AliExpress, Alibaba's B2C marketplace.

The company also launched, a peer-to-peer payments service, in India to facilitate freelancers and small businesses that need to access payments from clients outside the country.

By continually looking for new channels of growth, PayPal is further cementing its position near the top of the global online and digital payments markets.

The company is clearly on an upward growth trend, and we should see TPV and merchant base expansion continue through the next several years.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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