Stripe's mobile technology may sound death knell for PayPal

Patrick Collison, co-founder and chief executive officer of Stripe

Mobile payments are having a heyday. Apple Pay has been splashed across the news and 20-somethings are paying for taxis with their smartphones. Yet one stalwart risks being left out of the conversation: PayPal.

The key to mobile payments is ease of use - wave a smartphone or tap a button. No need to hit the ATM for cash or write a cheque and wait for it to be deposited. The less the customer has to think about it, the better, which is why firms like Stripe - led by Limerick's Collison brothers - and potentially Apple's new technology to pay with the swipe of a smartphone, are taking off.

That's part of the reason PayPal is getting spun off from eBay, giving the business more flexibility to innovate and become the method of choice to replace your wallet. Once known as the ground-breaking start-up founded by the likes of Peter Thiel, Elon Musk and Max Levchin before it was purchased by eBay in 2002, PayPal is now facing new competitors from Square to Apple Pay, which will be ­introduced in the US this month.

'If you're below 30, PayPal's not relevant,' Gene Munster, an analyst at Piper Jaffray said in an interview. 'With consumer awareness, Apple is out there overnight. That's a piece PayPal is desperately struggling with.'

While the web-payments pioneer has more than 152 million active registered accounts, the de facto focus for payments has become the smartphone, a market that PayPal had already tried to break into without much success. The company had the Beacon check-out device for retailers and restaurants that triggered a customer's PayPal app on their phone, but people just weren't using it - so much so that former CEO David Marcus had said that 2014 was the year for campaigning to lure consumers.

About a quarter of PayPal's active users in the US are 18 to 35 years old, said Chris Morse, a spokesman for the company.That's more than researcher Forrester's estimate that 18pc of online adults fall in that age range, Morse said.

PayPal has gone after consumers with advertising at events like the Governors Ball music festival in New York, a three-day event where people flock to see shows from OutKast, The Strokes and Skrillex. The payment company had tried to get concert-goers to download its app to pay for food - but their attempt was thwarted by weak network connections.

In-store payments via smartphone is a revenue opportunity worth fighting for, even if that means reversing course after vowing earlier this year to keep eBay and PayPal together. The mobile payments market is potentially huge, with eMarketer projecting it to total $118bn (€93bn) in the US by 2018, up from$3.5bn this year.

An independent PayPal would have more latitude to forge alliances with retailers and other financial firms as Google and Apple seek to turn their products - Google Wallet and Apple Pay - into tools for digital payments.

Gaining a foothold in mobile payments will pose a challenge, given the control Google and Apple already have over smartphone operating systems, Ben Schachter, an analyst at Macquarie Securities said in a note. Square, started by Twitter co-founder Jack Dorsey, has made headway in signing up many small merchants to use the company's card reader and a smartphone or tablet to process payments.

'To stay relevant over the next five years, they have a tough road ahead of them,' Munster said of PayPal.

Apple accelerated its move into mobile payments with partnerships - aligning with financial companies like Citigroup and American Express, as well as merchants such as McDonald's. Instead of working with PayPal on the development of its payments system, Apple struck a deal with Stripe. To make a payment, a person swipes an iPhone at the checkout counter and confirms the transaction by using the fingerprint scanner on their iPhone.

The advantage it has over PayPal is that the payments system is integrated directly into the iPhone 6 and iPhone 6 Plus. The Cupertino, California-based tech giant already sold 10 million of the new devices in their debut weekend alone.

Some analysts, including Donald Fandetti at Citigroup, expect merchants to be eager to sign up. That would hand Apple Pay an immediate advantage in an area where PayPal has struggled to gain traction - with in-store purchases.

'Competitors will be forced to counter Apple's smart phone advantage,' Fandetti wrote in a note to investors on September 23. 'We see good merchant and consumer adoption over time.'

© Bloomberg

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