PayPal's Move Into Offline Retail: Balance of Power Means Cooperation, Not Competition

I've been wondering about the payment value chain. Specifically how PayPal (and to some extent, Square) moving toward offline retail will shape the industry. Specifically, can its P2P apps aggregate consumer attention and lead to less industry power for Visa and Mastercard.

Today's consumer transaction landscape is as follows:

• Peer to peer (P2P). PayPal and Square (with PayPal app, Venmo, and Cash App). Note that P2P transactions do not have to go through Visa and Mastercard's networks.
• Business to consumer (B2C) online. 
• Visa and Mastercard  - consumers puts in their credit card info online.
• PayPal buttons.
• Business to consumer (B2C) offline
• Visa and Mastercard.
• Apple Pay and Google Pay. These wallets mostly just wraps around credit/debit cards. 
• PayPal and Square both have debit cards that consumers can put into Apple/Google Pay.

Note that PayPal already dominate P2P and have solid presence in B2C online, but weak in B2C offline.  

That's why I'm really interested in PayPal's initiatives to use QR codes. Here's a tweet back in February when I was thinking out loud:

Why aren't more physical stores letting people pay with QR codes? (Like Starbucks app). Bypass $V and $MA right? And why wouldn't $pypl and $SQ push this method to extend their reach in offline transaction?
— mspacey (@mspacey4415) February 26, 2020
 

My original thought process was something like this: 

• The P2P apps (PayPal, Venmo, Cash app) already have ability to transfer money without going through V/MA. Brick and mortar retail is the missing piece before theses apps could be used anywhere.   
• You can also store money in these PayPal/Venmo/Cash App. So these apps can technically replace banks and credit cards. 
• The more transactions go through these apps, the more leverage they have. For example, if consumers rely on Venmo for all their transactions, including at retail stores, then Venmo can threaten to steer consumers away from V/MA's networks, and extract fee concessions. 

I've since updated my thinking. Why? Because if the above hypothesis is true, Google Pay and Apple Pay will be circumvented and rendered irrelevant. 

Is that realistic? Probably not. The payment space is so big that Apple and Google are unlikely to step aside without some competitive response.

how does Apple Pay / Google Pay respond to Paypal $PYPL's ambition in brick & mortar payments? it can bypass apple / google Pay with QR codes

— mspacey (@mspacey4415) June 4, 2020

The responses could come in 2 ways - co-op and retaliation. Google Pay and Apple Pay can easily co-opt the QR code movement by adding that features as well. The wallets can also retaliate by pushing into P2P space. In fact Google Pay already has P2P features but doesn't advertise it much. It's not very smooth now, but it works.

The payment sectors has a balance of power that prevents any one player from dominating. 

So what does PayPal really get out of this QR code move? I think it mostly furthers that balance of power - as if to say "hey Google/Apple/Visa/Mastercard, if you try to cut us out of the payment profit pool, we have the means to strike back."

It's building a bunch of nuclear warheads pointing at each other. Threat of mutual destruction upholds industry economics.

In the meantime, PayPal is broadcasting that they are open to cooperation, and not looking to cut any one out.

I now think the multi-player landscape will hold and no one sub-sector or company will dominate. PayPal, Square, Apple, Google, Visa and Mastercard are frenemies that will cooperate instead of compete. They will collectively gain leverage over the banks.

With expensive growth stocks, the key is TAM and strategy. If the TAM is vast, as long as the strategy works, companies can grow into it. I think that describes both PayPal and Square. They are both long term buys.