PayPal preps for new opportunities and threats from Apple Pay

Apple's payments rivals are jumping at an opening resulting from the technology giant's settlement with European regulators that dilutes Apple's control over iPhone technology. 

During PayPal's earnings call on Tuesday, PayPal CEO Alex Chriss didn't directly address Apple's agreement to allow external companies to access near field communication, or NFC, technology, but made note of the changing competitive environment. 

"Given the changes in Europe around NFC … that opens opportunities for us and we will be prepared to operate in that space," said PayPal's Chriss during Tuesday's earnings call. 

Chriss' comments on mobile pay technology followed a strong quarter for PayPal, which is attempting to mount a recovery following an earnings slump in 2022 and 2023. For the quarter ending June 30, PayPal reported revenue of $7.15 billion, up 9% from the prior year's revenue of about $6.55 billion, better than analysts' projections of $7.08 billion; and earnings per share of $1.19, beating the analyst consensus of $0.98. Total payments volume was $4.16 billion, up 11% from about $3.78 billion, and near the analyst forecast of $4.17 billion. New income was $1.2 billion, up 28% from $971 million the prior year.  

Bite of the Apple

Part of PayPal's growth strategy includes boosting merchant and consumer share outside of the U.S., expanding products and enhancing customer experience to drive cross-selling to consumers and to enable businesses to use PayPal as a "one stop" for payments and other financial products. Chriss, for example, noted that 60% of PayPal's growth in buy now/pay later comes from non-U.S. users.  By competing more directly with Apple Pay, PayPal can expand the reach of its mobile wallet, which can then drive access to other products. 

Analysts from Kavout said the most immediate benefit for PayPal from Apple's EU settlement is increased access to Apple's extensive user base. "With over a billion active iPhone users globally, the ability to integrate PayPal's services directly into the iPhone's NFC technology could significantly expand PayPal's reach. This is particularly relevant in the European market, where iPhone penetration is substantial," Kavout said, adding the potential introduction of features like "tap-with-Venmo" could drive higher transaction volumes, particularly in the U.S. market where Venmo is already popular. Apple settled with the EU to avoid hefty fines over anti-competition rules.

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Samsung Pay is among the firms trying to take advantage, partnering with fintech Curve to power Curve's digital wallet that's designed to be an alternative to Apple Pay. PayPal competes globally with Apple, which is expanding its digital payment options, as both firms look to build "super apps," or a payment app that can be a venue to access multiple financial services. "Apple's commitment includes opening up access to not just payments, but also to other use cases for NFC, such as ticketing, keys, or identity. Understandably, banks and other payments and wallet providers are keen to explore new opportunities to reach the iOS users," said Zilvanis Bareisis, a director at Celent. "Having said that, it will be interesting to see how many providers realistically take up those opportunities.  Apple Pay is already well established amongst iOS users and, as we know, habits can be difficult to change."

Apple is planning changes that could pressure PayPal. Apple Pay's looming desktop rollout in the second half could hinder PayPal's growth, according to an analyst note from Jeffries. Apple's update will let consumers use Apple Pay on any third-party web browser through a code on their iPhone. 

PayPal has not seen an adverse impact based on how merchants and businesses use different browsers, Chriss said during the earnings call. Apple did not provide comment by deadline. 

"We play in a massive multi-trillion dollar market and it's not a zero-sum game," Chriss said. "There's lots of different buttons and branded experiences."

Signs of a turnaround

PayPal's second quarter earnings followed a strategic pivot toward more payments-focused products as executives deemphasized services Chriss considered outside of the company's core, such as selling its Happy Returns unit to UPS. PayPal also boosted investment in artificial intelligence-powered payments technology and new products for its Venmo peer-to-peer unit.   

"We're seeing early contributions from the changes that we have made," Chriss said during Tuesday's earnings call, adding that the full impact of the product changes and reorganization will contribute more fully to the company's earnings in future quarters as more initiatives come out of pilot testing. 

"While a gross profit beat was expected, the magnitude of the upside surprised positively," said Jeffries analysts in a research note.

PayPal's stock was up about 7% in early trading on Tuesday. "We're starting to see traction in several initiatives," Chriss said.