Choose Your Online Payment Provider Wisely

The growth of e-commerce and omnichannel adoption

e-Commerce is a broad term that not only encapsulates e-retail, which is its largest segment, but also online grocery sales, digital travel sales, event tickets, food delivery (order ahead), and bill pay for services such as digital media, electricity, cable TV, and internet. In recent weeks, e-commerce volume growth has accelerated from 20% Y/Y globally (~15% Y/Y in the US) to 30% Y/Y. There is a potential for ~28% Y/Y global physical goods e-commerce growth in 2020, which is at least ~9 ppts higher than pre-COVID-19 forecasts (Keane, Bryan, et al. “COVID-19 Brings Digital Payments Into the Limelight.” Deutsche Bank Research, 20 May 2020). In addition, new online consumers have grown significantly: more than 55 million new customers, who never shopped online before, were added since COVID-19 and at least half of them are evolving into repeat online shoppers. Moreover, traditionally offline categories, like pharmacy, personal care, groceries, furniture, and large consumer electronics, are moving online in a meaningful way (Rawat, Harshita, et al. PayPal Holdings Inc. Bernstein, 3 June 2020). Omnichannel is no longer a buzzword; use cases like ordering online and picking up at stores or curbside are taking shape.

It is too early to predict if these consumer behavioral shifts will continue in the long term. Trends in places like Germany, Austria, and the US, where states are gradually lifting lockdowns, indicate that these consumer habits will stick. The litmus test of e-commerce growth, however, will be when a vaccine for COVID-19 is available.

Acknowledging the secular adoption of e-commerce and omnichannel convergence, businesses are rethinking their strategy with a digital-first approach. There is now an urgency to offer online shopping, curbside delivery, and BOPIS (buy online, pick up in-store) solutions. To enable these solutions, one of the key considerations will be the choice of online payment providers, the largest of them being PayPal, Stripe, and Adyen.

PayPal is in a position of strength amid e-commerce rise

PayPal is on the cusp of a once-in-a-decade opportunity for inflection in growth owing to its massive exposure to e-commerce (e-comm); by one estimate, PayPal accounts for 20% of the global e-comm, outside of China and excluding bill pay. The company already has a broad base of merchants (~25 mn) and users (~300 mn). As noted in the 1Q2020 earnings call (Rawat, Harshita, et al.), PayPal started to experience user growth at the end of March before adding 7.4 mn net active users in April and realizing 25% growth in daily transaction volume at the end of April compared to the beginning of the month. Although PayPal has 9-10% of revenue exposure to the travel and ticketing segment, which has been the most affected amid COVID-19, the gains in other e-commerce segments will overcompensate for the loss.

Considerations for online businesses in using PayPal

Getting started with PayPal is reasonably straightforward. With a business account, you can accept all forms of major payments using a PayPal solution.

PayPal has two products for businesses: Standard and Pro. With PayPal Standard, you can take payments through credit cards (Visa, MasterCard, and American Express) and PayPal, accept mobile payments, send invoices online, email auto-generated receipts to customers, and ensure PCI compliance. However, with Standard, PayPal handles the complete checkout experience on its website, and therefore, owns the customer’s payment experience. Fees for PayPal Standard are 2.9% + $0.30 per domestic transaction. There is no monthly fee, start-up costs, or termination fee. PayPal Payments Pro enables you to own the customer’s payment experience, i.e. you can provide a customizable checkout experience for your customers. (Customers who choose to pay with the PayPal payment method, instead of credit or debit card, would still be redirected to paypal.com.) Fees for PayPal Payments Pro are 2.9% + $0.30 per domestic transaction, same as PayPal Standard. However, there is a $35 monthly fee but no start-up costs or termination fee. In case your average transaction size is less than $12, you may be eligible for micropayments processing fees that are less than usual. PayPal Payments Pro also includes a Virtual Terminal that allows you to accept payments over the phone, mail, or fax. Currently, PayPal Payments Pro is available in the US, UK, and Canada.

PayPal’s value-added services for businesses

PayPal offers comprehensive order management: you get detailed transaction history, monthly statements, and downloadable logs for every sale. The company also offers advanced fraud protection to target specific threats, like high-risk ZIP codes or suspicious bank IDs (advanced fraud protection is available for an additional fee), PCI compliance, and data analytics. Moreover, PayPal, in partnership with netParcel, offers an all-in-one shipping solution.

With PayPal Payment Pro, you can customize the reporting using APIs that integrate into your back-office applications. Moreover, the recurring billing service, which automatically debits a customer’s debit or credit card, is available for an additional fee.

Payflow Gateway

“Payflow Gateway is PayPal's secure and open payment gateway. Using the Payflow Gateway APIs, [businesses] can process debit and credit card payments, PayPal, PayPal Credit, authorizations, captures, and credit voids. PayPal Payments Pro internally utilizes Payflow Gateway and its API. […] PayPal Payments Pro [businesses] use PayPal as their credit card processor, while Payflow Gateway [businesses] can choose to process their online store payments with any major payment processor, bank, or card association [see chart below for comparison]. [Businesses] who want total control over the checkout experience can host their own checkout pages and send transactions to PayPal using the open Payflow Gateway API or choose to have PayPal host the checkout pages and manage security for sales and authorizations.” With Payflow Gateway, fees are $0.10 per transaction. There is also a $25 monthly fee and $99 initial setup costs.

The Stripe story

Among the most popular private players in the payment industry, Stripe has gained much attention and has grown significantly over the years. Stripe is a full-stack platform that enables payment acceptance for online merchants while also providing value-added services to help online businesses focus on their core offering. Stripe offers three services: payment acceptance, storage and management of funds, and payout. With Stripe (Keane, Bryan, et al.), any company can begin accepting online payments within ten minutes. Stripe has an enviable customer list, including Lyft, Target, Spotify, Google, Amazon, and Shopify, and it caters to businesses of all sizes (see Exhibit A).

Started in 2009, Stripe grew to more than 2,000 employees. Its latest funding round (Series G) was in September 2019, raising $250 mn that took its valuation to $35 bn (see Exhibit C). Stripe is a company with the fastest improving infrastructure; it deploys new versions of its core APIs 16 times every weekday. On a typical day, Stripe now handles ~250 mn API requests that peaks at about 13 k requests per second with every one of those requests being business critical.

Considerations for online businesses in using Stripe

Stripe does not have pre-packaged product bundles like those offered by PayPal. Stripe provides a range of customization for checkout solutions to online businesses, from a simple Stripe Checkout that can get you started in minutes to a customizable checkout using Stripe Elements (pre-built UI components). Businesses that want full control of their checkout experience can use Stripe.js – a foundational JavaScript library for building payment flows.

Similar to PayPal, Stripe uses a pay-as-you-go pricing model; it charges 2.9% + $0.30 per successful transaction. However, for customized payment needs of a large-volume business, Stripe offers discounts and other features.

Stripe’s value-added services for the businesses

Stripe’s fraud protection capability, Stripe Radar, has reduced fraud by 15% worldwide and by over 30% in Europe, without any material increase in false positives, for the fourth consecutive year (Keane, Bryan, et al.). By one estimate, Stripe Radar blocks $500 mn of fraud every month. Stripe is working on improving conversions and acceptance rates, ensuring its clients remain compliant with the rapidly changing regulations. It also recently launched a machine learning-powered acceptance engine, which impressively turned $500 bn worth of potential declines into revenue in just a few months of testing. Apart from fraud protection, Stripe offers recurring billing, invoicing, customized real-time reporting, terminals for offline payments, and more.

A framework to evaluate online payment providers

While evaluating your online payment providers, consider their capabilities across the payment value chain: accept, process, reconcile and settle, and manage (see chart below).

PayPal and Stripe offer similar functionalities and have a similar fee structure. The choice between the two can come down to the fit of the payment provider in your organization. It has been observed, in general but not as a rule, that businesses with some technical know-how gravitate towards Stripe as it allows more degrees of freedom in customizing the checkout experience.

Exhibit A

Exhibit B