PayPal is the global online payments processing company based in California, USA. The company was founded in 1998 as Confinity and later named X.com before settling at its current name PayPal. The company is the front runner in the digital payments world; they made financial services more accessible and acted as a platform for the growth of e-commerce. The company has made it possible for untapped markets to be a part of the global economy. The company acts as a two-sided network that connects consumers and merchants in more than 200 countries. Moreover, it has 392 million active accounts, and it has processed more than $1 trillion of payments in 2020. (PayPal, 2021). The company has a diverse and inclusive culture and considers employees the real stakeholders of the entity. The company employs 27,000 individuals from across the community, acting as a vibrant culture that strives to serve. Porter’s five forces analysis is a valuable tool to assess the business and financial risk PayPal is exposed to in the global financial services sector.
Competitive Rivalry in the Market
PayPal is a hybrid company that acts as a Financial cum Technology Company; it has its different competitive environment. PayPal broke into the industry as an alternative to established corporations and leveraged the available technology to unleash its potential. The industry is oligopolistic in its competitive nature, where large services providers operate. Its primary competitors are Visa, Mastercard, and American Express. Paypal is at the 182 ranked company on the Fortune 500 index. In the financial year 2020, PayPal earned $17.5 billion and a profit of $2.5 billion (Forbes, 2021). Visa reported revenue of $21.4 billion and made a profit of $10.7 billion, with a yield to income ratio of 52.6%, and the company is at 137th rank in Fortune 500 global companies (Fortune, 2021). Mastercard is ranked 191 in Fortune 500 index; the company made a profit of $6.4 billion and revenue of $15.3 billion (Fortune, 2021). American Express reported revenue of $38.1 billion and profit of $3.1 billion, and the company is the highest-ranked US payments processing company in the Fortune Global Index ranked at 67 (Fortune, 2021). The industry maintains its oligopolistic state, and the competition remains moderate to low.
Threat of Substitutes
The threat of better substitutes is moderate to high. There is plenty of potentials for the digital payments industry to grow. The sector has the potential, and the data-intensive nature has made it the primary target industry for technology companies. Total transaction value is expected to show an annual growth rate (CAGR 2021-2025) of 12.00% resulting in a projected absolute amount of US$10,520,219m by 2025 (Statista, 2021). The increased volume of transactions and the excessive amounts of available data makes it a target industry for data-driven companies. The digital age has bought more customers to the platforms than expected, which has resulted in the growth of the digital ecosystem. Therefore, the threat of substitutes remains moderate.
Threat of New Entrants
The threat of new entrants is to be moderate in the digital payments processing industry. The industry has usual barriers to entry, such as regulation and stringent compliance with anti-money laundering laws. Strict rules also impact innovation and deter growth (Van & Veenstra, 2018). The other obstacle is a high capital requirement; startups can now overcome this obstacle by getting financed by venture capital firms. The growth of the industry and the potential make it the go-to choice for investment in new firms. The development of the digital landscape has also been accelerated by the global pandemic, which forced consumers and companies to conduct business through digital platforms. It has resulted in more companies breaking into the sphere. The threat of new players breaking into the globe is moderate to high.
Bargaining Power of Buyers
The bargaining power of the buyers depends upon the nature of the industry, and the value buyers bring to the company. Other factors that affect buyers’ ability are buyers’ concentration, switching cost, and available substitutes. The primary buyers for the payments processing company are banks, merchants with private cards, credit unions, and governments. The banks and credit unions hold moderate bargaining power as they bring the customers and increase the volume of the transactions. After the financial crisis, buyers have concentrated as various banks end up consolidated entities. Many entities are breaking in, allowing for better pricing options with seamless integration. Buyer’s concentration and low switching cost can increase the buyer’s power to negotiate better terms (Porter, 2008). Therefore, buyers hold high bargaining power.
Bargaining Power of Supplier
The bargaining power of suppliers consists of the state of the industry and underlying factors. Digital payments processing industry, suppliers usually have moderate to low bargaining power. The major suppliers for the card issuers are the specialist software providers responsible for providing vetted software’s for the payment companies. They have to comply with strict security and cryptographic standard to ensure payment security and integrity. The company can choose from an available pool of vendors, and additionally, new entrants have existing in-house development capabilities reducing their reliance on outside contractors. When suppliers are in concentration, they can bargain higher buying power (Lin et al., 2020). Another source of supply is expert financial, human resources; these people are in abundance and are willing to work in an excellent fast-paced environment. Therefore, suppliers have low bargaining power.
References
Albonico, M., Nagy, T., Farroni, A. & Digiacomo, N. (2020). The 2020 McKinsey Global Payments Report. Avaialable at: https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/accelerating%20winds%20of%20change%20in%20global%20payments/2020-mckinsey-global-payments-report-vf.pdf
Forbes. (2021). Paypal. Available at: https://www.forbes.com/companies/paypal/?sh=3e966c576f44
Fortune. (2021). American Express. Available at: https://fortune.com/company/american-express/fortune500/
Fortune. (2021). Mastercard. Available at: https://fortune.com/company/mastercard/fortune500/
Fortune. (2021). Visa. Available at: https://fortune.com/company/visa/fortune500/
Lin, Y., Xue, B., & Wang, C. (2020). Concentration and diversification: components suppliers’ strategy in utilising external knowledge. Innovation, 1-18.
PayPal. (2021). Who we are. History and Facts. Available at: https://about.pypl.com/who-we-are/history-and-facts/default.aspx
Porter, M., E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review (HBR). Available at: https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
Statista. (2021). Digital Payments. Available at: https://www.statista.com/outlook/dmo/fintech/digital-payments/worldwide
van den Broek, T., & van Veenstra, A. F. (2018). Governance of big data collaborations: How to balance regulatory compliance and disruptive innovation. Technological Forecasting and Social Change, 129, 330-338.