PayPal or Bitcoin? Can both survive as alternatives to credit cards, or do we already need to choose a winner in a battle that hasn’t even begun in earnest?
PayPal’s stock value posted gains of 80% so far this year, pushing its market cap above American Express.[i] PayPal soared further on better-than-expected Q3 earnings. Combined with the impressive gains made by Bitcoin this year (despite continued infighting), this may indicate that online payment services are starting to gain ground against credit cards and investors are starting to notice.
What Does PayPal’s Increased Value Mean For Bitcoin?
PayPal’s increased Q3 earnings means primarily that there is demand for convenient online and mobile payments. Millennials are especially getting used to the idea of paying for purchases using their mobile phones and apps like Venmo, as evidenced by the fact that Venmo’s revenue jumped by 93% to $9.4 billion.[ii]
We’re used to big banks flipping over Bitcoin and blockchain apps that could do their jobs better, cheaper, and faster than they can. They’re scared of being replaced or at least having their role reduced by a technology that doesn’t care about international borders. The ones who aren’t running for the hills (or trying to convince everybody that Bitcoin is a scam) are quietly looking for ways that they can integrate the blockchain into their own operations so that they can compete in a future economic environment in which ordinary people don’t necessarily have to rely on banks.
However, financial institutions may also be secretly worried about PayPal turning them into a “back-end” service that is only useful for confirming a PayPal account or squirreling away the cash before PayPal has a chance to notice an unusual transaction pattern or an unusually large payment. Then they can only compete on pricing structures because customers will have finally realized that they all fundamentally do the same thing.
In fact, Bloomberg seems to confirm that banks are panicking by saying that they are suddenly extremely interested in creating payment options of their own.[iii] No longer is it good enough to hold the moneybags until the customer needs access to their cash. Payments need to be easy, seamless, and secure too. While Bitcoin wasn’t directly mentioned, mobile payment options like Apple Pay were apparently very much on the mind of banking giants like Barclays.
“That [payments space] may be where the battleground of finance is fought over the next 15 years,” said Barclays CEO Jes Staley.
Whether it’s PayPal or Bitcoin that Staley was thinking of, can Bitcoin insiders focus on where, when, and how cryptocurrencies can compete in the payments space? PayPal’s increased earnings and stock value does indicate that there is demand for convenient online and mobile payments. This may become a matter of whether cryptocurrencies should compete directly with PayPal, strike off on their own to see where its target markets are, or do a little of both.
Market Share, or Different Markets?
The interesting question is whether PayPal or Bitcoin – and of course, credit cards – are jockeying for market share throughout the entire online payments niche or are simply looking for their own specific markets in which they can dominate. It’s fair to say that there are people who use both PayPal and Bitcoin, or who would have no qualms about using Bitcoin to pay a credit card bill if they can find a way to do it. However, there are markets in which there wouldn’t be much overlap; it’s either PayPal or Bitcoin – and that means Bitcoin can dominate in certain markets if entrepreneurs are willing to take a chance on them, and not get too hung up on certain people’s inability to show a photo ID card or provide bank account information.
If PayPal tried to compete in markets in which there isn’t a robust banking system or the economy is unstable, its system is set up in such a way that it would get squashed like a bug. PayPal probably knows that, as evidenced by the fact that it doesn’t do business in some countries.[iv] Many of the countries that PayPal refuses to operate in have suffered from the effects of poorly considered economic policies. It’s been rumored that some countries refuse to abide by U.S. financial regulations, so PayPal covers its hind end by refusing to reach out to these markets.
Likewise, the use of credit cards is not very common in some parts of the world and may even be discouraged by the standards of certain societies. For instance, the use of credit cards has been slow to gain ground in Muslim-majority countries because Shariah law forbids taking out a loan from a financial institution that charges interest.[v] Even when they are legal and common, credit card companies usually won’t get involved in cases of fraud and may report suspicious purchases made with your credit card information to law enforcement authorities.[vi]
In markets that PayPal won’t touch and where credit cards haven’t really caught on, Bitcoin has the edge by basically being Honey Badger, which can follow its nature without caring much about what government authorities or large financial institutions think as long as its users are smart enough to cover their own hind ends.
If you are one of those unlucky people who has trouble getting on an exchange, there are ways to earn bitcoin and then use it to buy (most of) the everyday things that you would normally buy anyway and even buy some services that you wouldn’t want showing up on a credit card statement.
That means Bitcoin can reach the markets that PayPal and credit cards won’t touch, or that consider certain payment options to be untouchable. Market share only matters in environments in which multiple, equally valid options can compete on a level playing field. Market dominance will come into play in an environment in which PayPal is interested only in covering its ass and credit cards can’t gain a foothold.
Can PayPal Adapt to the Existence of Bitcoin?
PayPal could adapt to this new environment in which cryptocurrencies that don’t depend on governments or banks if it can pull its head out of the sand long enough to notice that it’s no longer the only fish in the sea. Even when people can and have confirmed a PayPal account, they can also dabble in Bitcoin out of simple curiosity or jump over to cryptocurrencies altogether if PayPal shuts down their account and steals their money for no good reason other than being greedy and lazy.
To be fair, PayPal has to cope with the fact that it’s tied to banks and, therefore, has to deal with a heavy regulatory load. It’s already given a heads-up to banks that they need to create a seamless payment experience by gaining ground in both revenue and stock value in 2017, especially in the last quarter. Now it just needs to improve its customer service.
Example: it may be understandable to ask some tough questions if a fundraising effort confuses potential donors by combining an attempt to express displeasure over the storyline of a video game with an attempt to raise funds for a nonprofit called Child’s Play.[vii] But PayPal seriously needs to clarify what to do if users want to use its donation buttons to raise funds for a charitable effort, so that there isn’t a repeat of Regretsy having to refund donations for a Secret Santa campaign while PayPal keeps the fees.[viii] In fact, Regretsy should try again, only making sure to use Bitcoin this time. If PayPal wants to avoid bad publicity of this sort in the future, then it should learn that it is sometimes okay to give somebody the benefit of the doubt.
More importantly, issues like this are a large part of the reason that PayPal is not as good a tool for helping the less fortunate as Bitcoin could potentially be. If in doubt, PayPal is going to protect its own interests even at the expense of the people who would benefit the most from easy-to-use online payment options. When combined with the fact that 2 billion people on this planet wouldn’t be able to confirm a PayPal account no matter how much PayPal would prefer to rope them in as users[ix], this makes PayPal effectively unusable as a tool for helping the underprivileged.
Decentralized cryptocurrencies are designed to dodge that problem and even have the added benefit of a fair amount of competition among top altcoins. If Bitcoin ever becomes outright unusable to the less fortunate, then Litecoin, DASH, Monero, Ethereum, or any combination of altcoins could take its place. Nobody minds taking second place to Bitcoin if they are ready to take the top slot if Bitcoin were ever to fall.
The Competitive Landscape: Why PayPal OR Bitcoin At All?
Effectively, PayPal has to compete with cryptocurrencies that are designed to include everybody even if they don’t have a bank account or photo ID card and banks have to compete with both PayPal and Bitcoin in the payment processing niche.
PayPal doesn’t look like it’s hurting too badly considering that its revenues and stock value are both up, but has had to deal with bad publicity when it shut down efforts to help the less fortunate. And itc can’t compete in some markets that Bitcoin can easily reach with a little foresight from entrepreneurs who can look beyond the next quarterly report.
Banks are getting nervous because PayPal or Bitcoin could theoretically instigate a joint task force, working together to squeeze them into a lesser role if they can’t come up with a seamless and competitive payment experience for their customers. Americans tend to forget that credit card use isn’t as prevalent in some parts of the world and developing countries may well welcome a financial infrastructure that includes Bitcoin and the ability to compete on an equal footing with the rest of the world even if banks aren’t as large a part of the picture as they could have been if they had cared to make the investment. Which of these options could come out on top in terms of market share and even market dominance in some regions?
The next few years are likely to get interesting as they jockey for position among their respective target audiences. These payment options might have to learn how to coexist in some regions and get used to watching another option gain ground in regions that they can’t touch.
At the end of the day, it may not be PayPal or Bitcoin at all – who knows if one of the upcoming payment systems ICOs might actually pull off a surprise and put them both out of a job? (Hint: probably not this one.)
Stay tuned, because this is likely to be quite an interesting competition in an environment where a respectable surge in PayPal’s market cap is enough to put it ahead of American Express and make banks go from nervous to outright terrified.
Which would be a nice reversal of roles.