In theory, PayPal (NASDAQ:PYPL) is one of the companies with potentially the most to lose from Apple‘s (NASDAQ:AAPL) forthcoming entry into peer-to-peer (P2P) payments, considering the strong growth in total payment volumes (TPV) that its Venmo P2P service is enjoying right now. Venmo has emerged as one of the leaders in the growing P2P payments arena.
In a new interview with The Telegraph (registration required), PayPal CEO Dan Schulman says that he’s not all that concerned about Apple.
“We own the full value proposition”
There are a few reasons why Schulman is unfazed by the prospect of competing with Apple. For starters, PayPal is a cross-platform service, while Apple Pay is exclusive to Apple devices, which limits its scope. The vast majority of PCs and mobile devices in the world run Windows and Android, respectively, after all.
In addition to cross-platform support, here’s Schulman summarizing PayPal’s advantage over Apple: “We own the full value proposition, Apple can never do that because they don’t do the risk associated with it, they don’t do the onboarding, they can only provide what they hope is a good user interface. We try to provide that end to end value proposition and very importantly we do it across operating systems.”
In other words, PayPal is a more vertically integrated payments service that offers a full-service proposition to consumers and merchants alike.
All payment services have to deal with fraud
Payments fraud is a complicated issue, but Schulman is alluding to the fact that PayPal has sophisticated fraud prevention policies and protocols in place. The company has a number of protection programs that aim to protect both sides of any transaction, and these are an important aspect of its operations.
For example, PayPal discloses its hypothetical maximum potential exposure related to these protection programs (nearly $138 billion at the end of last quarter), which it calculates as a percentage of eligible TPV. The company is quick to point out that this figure is probably not “representative of our actual potential exposure,” which is extremely difficult to quantify. The more useful metric that PayPal discloses is its allowance for transaction losses ($213 million at the end of last quarter).
Fraud has long been a pain point for PayPal — how many times has exiled Nigerian royalty offered you huge sums of money through PayPal? — in part because an email address and password isn’t exactly the most secure authentication method. PayPal also still allows “unverified” accounts, which carry greater risk even though there are limits to how much those accounts can send and receive.
That’s not to say that fraud is absent on Apple Pay. While processing payments is extremely secure thanks to Touch ID (which is how Apple was able to score the “card present” processing rate of 0.15%), fraudsters can still easily add stolen credit cards to the service with ease; Apple’s focus on a seamless user experience means that thieves face relatively low hurdles to add such cards. This is the onboarding process that Schulman is referring to, and many banks have accepted these easier authentication hurdles in order to appease Apple and its users. Apple outsources the onboarding process to financial institutions.
Apple Pay on the Web is the greater threat
Ultimately, P2P payment capabilities are important to users, but there isn’t really much financial opportunity there since they are fundamentally money-losing propositions. The real business lies in facilitating consumer-to-business (C2B) payments, with merchants picking up the tab. That’s the foundation for PayPal’s core business, and why Venmo is expanding into C2B.
That’s where the real threat of Apple Pay lies — in processing in-app payments as well as on the broader internet. Apple Pay on the Web, which was released last year, is the real potential game-changer here since it directly competes with PayPal’s core offering.