PayPal’s confirmation yesterday that it will acquire Swedish tech company iZettle for $2.2 billion should be cause for concern for Square, because this acquisition gives PayPal more expansion potential and raises the bar for competition in the lucrative global payments industry.
iZettle--which had only recently said it would go public with an IPO before agreeing to the $2.2-billion acquisition—will be PayPal biggest-ever buy, and the timing is perfect: Square (NYSE:SQ) is gaining serious ground in the mobile payments industry after having started out helping small businesses and food-truck vendors enable credit card and mobile transactions.
The Swedish company has its own mobile-phone hardware for accepting credit card payments and also reaches into software and financing services for small business--and it will help California-based PayPal expand further in both Europe and Latin America.
The competition is now heating up considerably in this space.
The global, mobile payments industry topped $600 billion in 2016 and is projected to reach $3.3 trillion by 2022 and $4.5 trillion by 2023, growing at a CAGR of 33.8 percent from 2017 to 2023, according to Allied Market Research.
And it’s all about friction.
"Anytime you can remove the friction of the payment we are seeing those companies are getting a nice uplift,” Forbes Peter Olynick told Allied Research.
“If you walk into a retailer and pick up one or two things and there is a line at checkout, you put it down and walk out because don't have the 15 minutes it will take for that queue to open up. When we can get to the point where the payment itself is frictionless, we will get those sales that have been lost. We are very high on the idea that removing that friction, such as Uber, or just making it easier and a little bit faster to get through the line, all those things are going to make it be positive to the retailers who do it best."
PayPal understands the important of reducing the friction, and iZettle should help it do just that.
“Small businesses increasingly want a full suite of capabilities across channels, a one-stop stop,” PayPal CEO Dan Schulman told Forbes. “IZettle was the perfect fit in many ways.” Related: Walmart’s E-Commerce Rebound Fails To Boost Stock Price
iZettle also sees the benefit, with founder Jacob de Geer telling Forbes that he changed his mind about the IPO after meeting with PayPal, which convinced him that the Swedish company could continue to grow significantly through the acquisitions—and that he would continue to lead it.
So what should we expect? According to PayPal and iZettle, the deal—which should close in Q3—we should expect gross revenue of around $165 million in 2018 through the processing of $6 billion in payments on the platform.
In the meantime, as PayPal views its deal with iZettle as the creation of a force that is different from any other mobile payment offering out there, where does that leave Square?
Square also markets it payment products to small businesses, but oddly enough, just the day after PayPal and iZettle announced their merger, Square’s share prices have erased the 3-percent loss they suffered at the time the acquisition hit the news.
PayPal might have hit on something big with iZettle, but that doesn’t remove Square from this game at all. Some might even argue that it was a defensive move rather than an offensive one on the part of PayPal.
After all, Square was quickly moving in on PayPal’s Venmo mobile payment service as the Square Cash app has been increasing at a faster rate.
According to a Nomura Instinet report carried by Barron’s, monthly downloads of Square Cash have been taking place at a faster pace than Venmo downloads, which have seen their lead shrink from around 5 million in the middle of last year to around 1 million since July. This is partly because of Square’s bold move to enable bitcoin buying and selling on its platform.
By Michael Scott for Safehaven.com
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