Paypal is on a TEAR.. iZettle and hyperWALLET

Note: I’m not subjective on this one as I’m both an investor and former BOD member of hyperWallet. Of course I’m biased on all of my others too.. but just don’t have much of a financial stake.

Paypal has been on a tear in 2018, and is the leading payment stock performer in last 12 months – up over 60%. Transaction volume is growing 32%+ (1Q18), new active accounts are growing 35% YoY, with a 52% growth in volume in mobile alone. They are delivering solid  57% Gross margin and ~20% earnings growth (see Motley Fool 1Q summary). This growth has certainly excited investors, as they trade near a 33x P/E.

Paypal is facing a future with significant headwinds

  • Transaction Margin fell from 65% in 4Q17 to 57% in 1Q
  • Loss of eBay to Adyen
  • Payment network’s SRC “buy button”
  • W3C open payment API (browser integration)
  • Shift to mobile and Applepay “lock out” effect
  • Payments as “dumb pipes” within an evolving commerce/advertising bundle
  • Saturation/Maturity of eCommerce

How does Paypal win? Focus. It is one of the only payment companies that can focus on payments, and move fast to execute. Obviously this can’t all be organic growth.  Paypal can’t run any faster in eCommerce then it already is.. Key for them is finding new payment areas that run at better margins and growth then their current core business.

Most of you know Square’s revenue growth is around 47% (adjusted) with large merchants leading, but its $27B market cap is almost a quarter of Paypal’s $103B, with none of the proven earnings and much of the upside baked into future “subscription revenue”. Paypal must focus on payments to win (as core), and the POS market certainly aligns to their network (merchants and consumers). Particularly when you also combine POS with eCommerce acquiring (as the seen by the $8.5B Adyen IPO)

iZettle

iZettle is a great play for them here, not only delivering the best platform in the hardest market (Europe) but also one of the best teams in the industry. iZettle may have been a tad expensive (see Forbes) but it is by far the best match in terms of platform, team and GLOBAL market. This is also a complimentary acquisition with minimal merchant overlap (Europe POS) and significant consumer synergies. My hope is that Paypal will create a solid competitor to Square, Adyen and a “on us” network.

hyperWALLET

I know this company well, having led their first major capital raise and serving on their BOD from 2009-2015. Anyone that knows me… knows that my favorite (and most profitable) payments business on the planet is Citibank’s GTS (created by Frank Bisignano). Commercial payment flows are regular, recurring and change infrequently.  Much of the United Nations transfer payments are managed by Citi GTS. The magic behind the Citi GTS business is that global net settlement allows Citi to charge FX fees without incurring them. The challenge for working with corporations is paying many small sized checks. For example GE paying dividends to every stockholder globally. Individual consumers don’t want a USD denominated check to cash, particularly with fees of more than 30% on the value AND 2 months to clear.

The gross margin on international commercial payments is around 65%, with the TAM at over $30B dominated by Citi GTS, Barclays, and HSBC (before the Iran payment stuff).

I outlined the international settlement problem in this youtube presentation

hyperWallet’s MIT founder Lisa Shields built a global net settlement network across 60+ local country ACH/Debit systems and cross border “pay anyone” engine that worked in multi-currency. For example, in 2017 hyperWALLET was a top 5 issuer of Visa pre-paid. A very old picture outlining the network.

Paypal (through hyperWALLET) will give small businesses, marketplaces and global “GIG ECONOMY” workers the ability to manage MCY, payments, FX and “cash out” distribution channels at a level only available in wealth services. It also gives corporations the ability to manage complex global disbursements through complex MSB/Bank/payment regulatory regimes.

Look at how Amazon uses hyperWallet in this PR

hyperWALLET is a great team, with a fantastic network and platform. I see the following synergies for Paypal:

  • New high margin commercial payments business enabling the Gig Economy globally. Pay anyone in any currency in any channel
  • Expand Paypal’s domestic clearing network globally (partnerships and integrations)
  • Expand use of Paypal’s services as beneficiary “on us” network
  • Replace PayPal masspay engine with the “nuclear reactor” of hyperWALLET
  • Drive transaction growth and margin growth in the most profitable niche in payments

Well done Paypal.. great team, great focus..

Related: 2008 Blog on Hyperwallet

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