Shopify (NYSE: SHOP) is one of the largest e-commerce players in the world, providing software services to many businesses. One of the tools it offers its customers is payment processing. And on Sept. 9, Shopify partnered with PayPal (NASDAQ: PYPL) to get the job done better.
I should say Shopify expanded its partnership with PayPal because the two have worked together for some time to varying degrees. In fact, PayPal has a long history of scoring key partnerships. And it has even secured more partners than just Shopify in recent weeks.
On Aug. 29, PayPal announced an expanded partnership with Fiserv (NYSE: FI) , making it easier for Fiserv customers to use PayPal's features. And on Aug. 20, PayPal expanded its partnership with fellow financial technology ( fintech ) company Adyen (OTC: ADYE.Y) as well.
PayPal stock is down almost 80% from its all-time high, so its shareholders are certainly hoping that its partnerships with Shopify, Fiserv, and Adyen are good news. And indeed, these announcements could represent some positive developments beneath the surface, as I'll explain.
Thinking about the big picture
For those who haven't noticed, there are plenty of publicly traded companies that process digital payments. And that can be a problem for investors. It's hard for any company to have a competitive advantage when it comes to processing payments. And when there's lots of competition and little competitive advantage, profit margins get hit.
For its part, PayPal does have multiple strengths. For starters, the company has processed over $1.6 trillion in payment volume over the past year. Moreover, it has customers that are both consumers and merchants, giving it two-sided e-commerce data.
In his first earnings call with PayPal, CEO Alex Chriss highlighted these two things when he said, "Our data and scale are key strengths." The company's incredible amount of payment data might be its biggest asset to differentiate itself from its peers. As Chriss also said, "What PayPal sits on today is unrivaled."
What the company needs to do, however, is figure out ways to make its payment data useful to its users. That's not easy to do, and it's not easy for investors to objectively measure. But perhaps this is where its recent partnerships come in.
Shopify has its own payments solution called Shop Pay, so it might seem strange that it would add PayPal as a checkout option. But in its expanded partnership with Shopify, PayPal's management also said that it will allow transactions from PayPal Wallet to be integrated into the merchant experience at Shopify.
In other words, PayPal is sharing some of its data with Shopify users who would benefit from it. Shopify likely knows its customers would like this, and so adding PayPal as a checkout option was probably the compromise it had to make to get this data for its users.
Regarding its partnerships with Fiserv and Adyen, these two companies are adopting PayPal's new Fastlane checkout, which allows faster checkout and increases sales conversions. It's not the same as its deal with Shopify. But Fastlane does give PayPal some consumer data on a swath of the population that it doesn't have, improving its data set.
Will it work?
Many investors likely love how Chriss is talking about PayPal's data. But as I already mentioned, objectively measuring what the company is doing and its financial benefit to the business is difficult. But maybe there's one encouraging data point here.
PayPal has a metric called transaction margin -- conceptually this is like its gross margin (revenue minus direct expenses). When a company fails to differentiate itself, its gross margin usually suffers. And as mentioned, it's hard to stand out in the digital payments space. For this reason, it's not surprising that PayPal's transaction margin dollars have stayed flat in recent years despite ongoing revenue growth.
The chart below shows PayPal's revenue and gross profit in recent years to illustrate the point.
PYPL revenue (TTM) data by YCharts; TTM = trailing 12 months.
In the second quarter of 2024, PayPal's transaction margin dollars were up 8% year over year. This was its best growth rate for this metric since 2021. It's only one quarter's figure, so investors shouldn't take a victory lap yet.
But it suggests that something has changed. And perhaps the change is that PayPal is figuring out how to better monetize its business, differentiating itself from its competitors by using its data.
Investors certainly need to keep a close eye on things. But PayPal's partnership with Shopify could connect to a bigger picture of better leveraging the assets that it has. And if true, that's a very welcome development for PayPal shareholders.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adyen, PayPal, and Shopify. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy .
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