PayPal Spin Off Is All About Apple Pay

canstockphoto15982673It is no coincidence that three weeks to the day after Apple Pay‘s introduction eBay Inc “chose” to spin off PayPal.

In announcing today that it will IPO PayPal in late 2015, eBay effectively acknowledged that PayPal will find it far more difficult to score the double-digit rate of growth the digital payments unit has enjoyed in recent quarters, as exemplified by the 19% year-over-year revenue growth last quarter. As a banker told me yesterday, “everything is about valuation; always follow the money.” By agreeing to IPO PayPal, eBay is acknowledging that PayPal’s valuation is at a high — and it is more likely than not that it will go lower.

Of course, you won’t hear that from eBay or PayPal, but it is hard to read the decision in any other light. The fight with Carl Icahn over spinning off PayPal last March was won (temporarily) by eBay with the argument that PayPal’s growth will merit a higher valuation. Icahn effectively conceded that.

However, with Apple Pay, the main driver of PayPal growth is in jeopardy. That driver is not marketing, not its management team, not even PayPal’s technology per se. Rather, that driver is the network effect. If I want to pay you and you are not on PayPal, you have to sign up for PayPal to get paid — that’s the network effect, which has ballooned PayPal’s “globally installed base” to 152 million users.

But in one announcement, Apple has undermined that, or, rather, it has cooped that, because it I want to use Apple Pay, I do not use PayPal (at least within certain environments). Apple hasn’t even launched Apple Pay and it had already broken PayPal’s momentum. Once the momentum is broken, the valuation declines. And that’s why the IPO will come. EBay has gotten all the value it can out of PayPal.

Indeed, Apple has done more than just break the momentum. Apple has effectively changed the digital payments game. Here’s how Brett King explained it recently on Bank Innovation:

Apple’s adoption of NFC signals that interoperability is a key component of the ecosystem moving forward, but it also probably means we’re going to see significant morphing of the existing networks around the shift to mobile. Those shifts will be:

  • Move away from card numbers to tokenized identity as the customer identifier (no more “cardholder” folks);

  • Card networks become data networks – the data passing before, during and after a transaction becomes just as important as the authorization itself; and

  • When we move to cardless ubiquity, do card networks just become payment networks with payment and identity protocols?

The upshot of what King is saying is more competition, more ubiquity for digital payments, more options for consumers. And that does not bode well for PayPal’s growth.

“[T]he new market emphasis on payments, the entry of Apple into the mix among others and the requirement to revitalize what is the oldest of ‘alternative’ payment networks probably tipped the decision” to IPO, wrote Nick Holland, retail payments practice lead at Javelin Strategy & Research. “PayPal is under intense pressure to deliver and competition is increasing from both incumbents such as the card network and traditional fintech vendors and newcomers such as Square, Apple and potentially even Facebook.”

Truth be told, you can already see hints of PayPal’s faltering growth, even before Apple Pay’s launch. In data released at the end of the second quarter, eBay/PayPal disclosed that the annual growth rate for its user base growth and its net total number of payments declined, even as its net total payments volume in dollars increased. The explanation there is that dollars paid through PayPal are going up because the economy is getting better, yet its market share is starting to bleed. Again, PayPal will give you a different story, but it is hard to read the declining growth rates in another way.

This is compounded by the litany of recent stumbles at PayPal, from the brain drain of David Marcus and Venmo’s founders, to the loss of the Uber account, to the lack of innovation, PayPal just doesn’t have the juice it once had.

To be fair, there is no imminent demise of PayPal. The unit is generating $7.2 billion of revenue per annum today. Additionally, it has hired a quality, creative executive in Dan Schulman to run the company. Oh, PayPal will still grow, and even if it doesn’t, it is already owns enviable market share and payments volume and what eBay says is a “total present value” of $203 billion, more than double eBay’s. Further, PayPal’s Braintree unit has some interesting endeavors. But I can’t see PayPal being the growth rocket it has been. Today’s announcement is nothing short of the formal launch of paypal [sic].

More on the PayPal spin off here.

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