August 3, 2017
Future of Finance
Payment Ecosystems
Equity Research
What happens when the world shifts online?
Payments: The next battleground in the online revolution
The world is pivoting online faster than ever—payments are no exception.
Amazon is breaking barriers between online and offline, forcing traditional
retailers to adapt to survive. The payments transformation is accelerating
as challengers Stripe, Alipay, and Adyen become online juggernauts. Huge
new online markets are being created – including B2B payments and the
sharing economy. We see $28 trillion in online spending growing to $51
trillion over 10 years, driving $200 billion in new payments fee revenue.
What will the future hold? Addressing top investor questions
As battle lines are drawn in these emerging online markets, we give our
views and supporting analysis on top investor questions including:
* Is PayPal’s growth sustainable? We take a look back at what has driven
PayPal’s formula for success, and whether it can maintain its relevance.
* How could Visa and Mastercard be disrupted? We lay out the case for
how Alipay and Tenpay could export China’s payment systems overseas.
* Could payments be the next industry that Amazon takes on? We assess
Amazon’s payments strategy, and how it could seek to upend incumbents.
* What’s the outlook for M&A in payments? We survey the payment
processor landscape in search of potential consolidation opportunities.
Startups: Profiling the most innovative global online players
We see few obstacles to slow the momentum of emerging companies that
are achieving scale, and we profile the leading private online payment
companies globally. Adyen has established itself as an international force,
crossing from online to offline. Stripe leads the sharing economy and is
building a presence in B2B payments. Alipay and Tenpay are dominant
names in China and could seek to expand overseas, while PayU and Paytm
build new ecosystems amid the digitalization of cash in emerging markets.
Affirm and Klarna have the potential to transform consumer credit online.
We interview Adyen’s CEO and Stripe’s CFO for their insights.
Incumbents: Can they be disrupted? Look overseas for clues
We tackle the question of disruption risk for Visa, Mastercard, and PayPal –
and if China’s payments model can be imported to the US. We think these
risks are real. However, incumbents are expanding to new opportunities.
PayPal should sustain mid-teens volume growth to 2025 as it diversifies to
online bill pay, B2B, and sharing economy. We think Visa and Mastercard
can sustain their growth rates driven by B2B, a new $40 trillion market.
Wirecard is
p
oised to build u
p
on its success as an online-first leader.
James Schneider, Ph.D.
(917) 343-3149 james.schneider@gs.com
Goldman Sachs & Co. LLC
Lara Fourman, CFA
(917) 343-7293 lara.fourman@gs.com
Goldman Sachs & Co. LLC
Heath P. Terry, CFA
(212) 357-1849 heath[email protected]m
Goldman Sachs & Co. LLC
Piyush Mubayi
+852-2978-1677 piyush.mub[email protected]
Goldman Sachs (Asia) L.L.C.
Mohammed Moawalla
+44(20)7774-1726 mohammed.moawalla@gs.com
Goldman Sachs International
Ryan M. Nash, CFA
(212) 902-8963 ryan.na[email protected]
Goldman Sachs & Co. LLC
Julia McCrimlisk
(917) 343-2456 julia.mccrimlisk@gs.com
Goldman Sachs & Co. LLC
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by
non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
More on the
Future of Finance
This report is the latest in our series
exploring the technology, new business
models and regulation reshaping
finance. See inside for more.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 2
Table of Contents
Payment ecosystems: What happens when the world moves online? 3
Online payments: Overview and industry roadmap 7
Q1: Can PayPal sustain its growth trajectory? 14
Q2: How could Visa and Mastercard be disrupted? 21
Q3: Is Amazon Payments a threat to the existing ecosystem? 30
Q4: What are the most promising & disruptive payments startups? 37
Interview with … Pieter van der Does, CEO of Adyen 38
Interview with … Will Gaybrick, CFO of Stripe 42
Q5: How are Visa and Mastercard positioned for the move online? 52
Q6: Can payment processors still grow as the market shifts online? 59
Q7: How is e-commerce changing the consumer credit landscape? 65
Q8: What role will mobile wallets like Apple Pay play in the emerging online payments landscape? 68
Q9: Why does C2C matter, and will it ever make money? 73
Appendix I: Index of global emerging payments companies 79
Appendix II: Model assumptions and price targets 80
Disclosure Appendix 84
Payments Internet Int'l Payments/Financials Financials Consumer
James Schneider, Ph.D. Heath P. Terry, CF
A
Mohammed Mowalla Ryan M. Nash, CF
A
Matthew J. Fassler
james.schneider@gs.com heath.terry@gs.com mohammed.mowalla@gs.com ryan.nash@gs.com matt.fassl[email protected]m
(917) 343-3149 (212) 357-1849 +44(20)7774-1726 (212) 902-8963 (212) 902-6740
Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs International Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC
Lara Fourman, CF
A
Piyush Mubayi Mancy Sun Richard Ramsden
(917) 343-7293 +852 2978-1677 +852 2978-6072 (212) 357-9981
Goldman Sachs & Co. LLC Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Goldman Sachs & Co. LLC
Julia McCrimlis
k
Daniel Powell Stanley Tian Will Nance
(917) 343-2456 (917) 343-4120 +852 2978-1945 (212) 357-7438
Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC Goldman Sachs (Asia) L.L.C. Goldman Sachs & Co. LLC
Derek Taylor Adam Hotchkiss
derek.ta[email protected]om adam.hotchkiss@gs.com
(801) 884-4434 (212) 902-3941
Goldman Sachs & Co. LLC Goldman Sachs & Co. LLC
Technology, regulation and new business models are changing the shape of finance. From shadow banks to new tech
platforms, an evolving class of competitors is emerging to go after the profit pools of traditional lenders and institutions.
In a series of reports on the Future of Finance, we explore what these trends mean for how companies and consumers
bank, lend, borrow and pay.
The Rise of the New Shadow Bank, March 3, 2015
Redefining the ‘Way We Pay’ in the Next Decade, March 10, 2015
The Socialization of Finance, March 13, 2015
Profiles in Innovation: Blockchain—Putting Theory into Practice, May 24, 2016
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 3
Payment ecosystems: What happens when the world moves online?
Background: Setting the stage
The world is pivoting online, and the payments industry is no exception. We estimate
there will be over $50 trillion in online payment volume by 2026, with $23 trillion
shifting online over the next 10 years, driving $200 billion in new fees the payments
industry can capture. We think investors underestimate the disruption of online
payments outside e-commerce, and we estimate that other segments – notably B2B
payments, bill payments, and the sharing economy – will drive 50% of that growth.
The battle for payments dominance will play out globally, and we expect competing
ecosystems of consumers and businesses – from banks to PayPal to Amazon to
Alipay – to compete based on the scale and scope of market power they represent. In
this report we lay out our answers to the most common investor questions on who
could be disrupted, highlighting the most promising new companies on the horizon.
Top investment conclusions
PayPal (Buy-CL) – We believe PayPal still has a long runway for success and can
maintain volume growth of about 15% over the next 10 years.
We think investors
often see PayPal’s market simply as e-commerce, but we think PayPal is positioned to
seed growth in new markets. To be sure, this growth is not without execution risk. But
we believe the biggest driver of PayPal’s success – its base of over 200mn users – will
prove critical as it markets next-generation payments services to millennials and others.
Visa (Buy-CL) and Mastercard (Buy) – The networks face threats, but are also
positioned to open new avenues of growth.
The card networks face real threats
from China and elsewhere (Alipay, Tenpay), and will need to invest and partner
aggressively (Apple, Square, Klarna) to ensure that faster payments stay on their rails.
But they are positioning themselves to capture substantial share in greenfield markets
like B2B payments, allowing them to sustain their growth rates over the next decade.
Payment processors – Changing of the online guard: Stripe and Adyen lead while
traditional acquirers consolidate.
Online-first companies, both incumbents (PayPal,
Wirecard, and startups (Stripe, Adyen) are growing unimpeded, while offerings from
traditional acquirers have struggled to keep pace.
We believe Wirecard (Buy-CL) is
positioned to sustain growth
as an online-first leader. We think merchant acquirers
will consolidate further
to mitigate price pressure and sustain stock multiples. Global
Payments (GPN, Buy) is our preferred name
given its M&A execution. Square (SQ,
Buy)
is positioned to grow profitability by expanding its TAM to software and services.
Private companies: We profile the most promising private companies in payments
including
Adyen, Stripe, Ant Financial, Tenpay, Paytm, Affirm, Klarna, and PayU.
Top 9 investor questions addressed in this report
Question #1: Can PayPal sustain its growth trajectory?
In our analysis, we break down PayPal’s opportunity by market segment and find
PayPal has meaningful room to grow as it taps into new markets including the sharing
economy, bill payment, and B2B payments. We believe this is a key point often missed
by investors who expect PayPal’s growth trajectory to come under pressure as Amazon
consolidates the e-commerce market (estimated under 40% of PayPal volume by 2026).
Question #2: How could Visa and Mastercard be disrupted?
Emerging markets, including China and India, have developed alternative ecosystems
to those in the United States and Europe. We evaluate how the Chinese model – Alipay
and Tenpay – can be exported to the United States and potentially disrupt incumbents
including Visa and Mastercard. We also consider “moonshots” – such as blockchain
and artificial intelligence – and the long-term impacts they could have on the payments
industry.
We interview Adyen’s
CEO and Stripe’s CFO
(pp. 38 and 42)
We estimate traditional
e-commerce will be
under 40% of PayPal’s
volume by 2026 (p. 14)
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 4
Exhibit 1: Battle of the payment ecosystems
Top global payments providers, arranged by number of users (or cards), merchants on platform, and purchase volume
Source: Company data, Goldman Sachs Global Investment Research.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 5
Question #3: Is Amazon Payments a threat to incumbent payment ecosystems?
After several unsuccessful attempts, Amazon is seeing more traction with Amazon
Payments (after its re-launch in 2013), which allows third-party merchants to improve
checkout rates by letting shoppers pay with their Amazon account. We think Amazon
can substantially expand its reach by signing new merchants. However, we do not see
Amazon as an imminent threat to PayPal or the card networks. While Amazon has a
large and growing base of consumers, we believe it still has substantial work to do in
order to prove it can develop a broader ecosystem of merchants on par with PayPal.
Question #4: What are the most promising and disruptive startups in payments?
The term “frictionless payments” has long been used to describe a seamless and
convenient user experience. E-commerce and the complexity of merchant websites
have created new pain points in the payments experience that many companies have
tried to remove. We highlight six payments innovators—Adyen, Stripe, Alipay, Tencent,
Paytm, and PayU—that have scaled quickly, as their superior merchant and consumer
experience has driven adoption. We also interview the CEO of Adyen and CFO of Stripe.
Question #5: How are Visa and Mastercard positioned for the move online?
The advent of traditional e-commerce has accelerated the structural shift to electronic
payments, and e-commerce is a tailwind to volume growth for the networks. We
believe Visa and Mastercard are positioned to capture substantial share of the
untapped $45 trillion opportunity we see in B2B payments, bill payments, and other
emerging areas. We see the networks maneuvering to become essential names, with
partnerships to capture the next generation of online payments over the next10 years.
Question #6: Can payment processors still grow as the market shifts online?
We believe traditional merchant acquirers will lose online payments share to acquirers
like PayPal, Adyen, Stripe, and Wirecard who have more advanced technology
solutions and who serve more online-first merchants. While this phenomenon is not
new and has been impacting the growth of acquirers for years, we see an increasingly
narrow path to success for this group. We believe merchant acquirers will continue
consolidating in order to mitigate pricing pressure and sustain stock multiples.
Question #7: How is e-commerce changing the consumer credit landscape?
Payments companies have always aimed to tackle one of two core issues in order to
drive increased consumer spending: (1) make the payment experience more
convenient; (2) expand consumer spending capacity. The past five years has witnessed
the rise of online point of sale (POS) credit facilities – and we examine how startups
like Affirm and Klarna are seeking to reduce friction and transform retail lending online.
Question #8: What role will mobile wallets play in the emerging landscape?
Mobile wallet adoption has been underwhelming to date. Apple Pay and Samsung Pay
do not disintermediate the existing payment system, but instead reinforce it by relying
on enhanced security technology provided by the card networks. We think mobile
wallets stand a good chance of gaining traction in the long run, but expect adoption to
be slow because of a lack of uniform acceptance, ease of use, and rewards.
Question #9: Why does C2C matter, and will it ever make money?
We believe scaling a presence in peer-to-peer (C2C) payments will be of greatest value
in emerging markets given a large under-banked population and lack of tech-enabled
banking, as it can establish a user base upon which a larger payment presence can be
built. We have seen this play out with mobile money transfers in the past 10 years, and
believe China and India are well down this road. In the United States, Venmo has
successfully built a loyal millennial user base that can be monetized in the future.
We analyze over 100
Amazon Payments
merchants and find
that 90% also accept
PayPal (p. 32)
We expect merchant
acquirer consolidation
to continue (p. 62)
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 6
Exhibit 2: Mapping the online payment landscape
Global market opportunity and major industry players: retail and travel, B2B payments, bill payment
Source: Company data, Goldman Sachs Global Investment Research.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 7
Online payments: Overview and industry roadmap
In this section, we define the online payments market and map out 10 distinct sub-
segments – many of which are untapped opportunities today – and we also discuss
current and potential profit pools tied to each segment. We briefly review the
ecosystem of providers involved in the online world, and how this system contrasts
with the offline world. Using this foundation, the rest of the report is organized as a
series of common investor questions that tie back to the market roadmap presented
here.
What do we mean by online payments? The sum of 10 markets
Any treatment of online payments begins with a clear definition of the market. We find that
many investors conflate online payments with e-commerce, for understandable reasons: e-
commerce dominates the news flow around public companies, it is a key point of investor
debate, and industry/government data have sized the e-commerce retail market (but the
broader online payments market remains largely undefined). Our view is that traditional e-
commerce (goods and services solid online through Amazon, Walmart.com, etc.)
represents only a small piece of the online opportunity today, and could be even less in the
future:
We estimate traditional e-commerce makes up only about 4% of global online
payment volume and 38% of global payment processing fees today.
We estimate that $28tn of payment volumes are transacted online today and that this will
nearly double by 2026. We estimate online payments generate $84bn in fees today, which
based on current rates we project to grow at a 9.2% 10-year CAGR to $202bn in 2026. Our
definition of the online payments market is comprised of the 10 different sub-segments
outlined in Exhibit 3:
(1)
Traditional e-commerce ($3.3tn in volume, $98bn in fees by 2026): This familiar
category of consumers shopping for goods online is comprised of three major
segments: pure online names (Amazon), omni-channel retail (Walmart.com), and
specialized online retailers (Etsy). The majority of traditional e-commerce payments
today (we estimate about 80%) are made with credit or debit cards. Given the higher
yields associated with card-not-present payments, traditional e-commerce comprises a
much larger share of payment processing fees relative to payment volumes (38% vs.
4%). We estimate that $32bn in payment fees are generated in processing traditional e-
commerce volumes globally today (ex-China), and that this market will grow at an
11.8% CAGR over the next 10 years.
(2)
Travel ($1.4tn in volume, $41bn in fees by 2026): Travel booking was one of the first
markets to move online, as evidenced by the IPOs of Expedia and Priceline in 1999.
Whether booking travel through an online travel agent or directly on a vendor’s
website (delta.com, hilton.com), the Internet has become a major booking engine for
airlines, hotels, and car rental. We estimate that $21bn in payment fees are generated
in processing online travel volumes globally today (ex-China), and this market will
grow at a 7.2% CAGR over the next 10 years.
(3)
Bill payment ($5.0tn in volume, $25bn in fees by 2026): Bill payment is a large
market opportunity for online payments—with utility, insurance, and mortgage
payments increasingly moving online. These non-retail categories are part of PCE
(personal consumption expenditure), and have historically been the domain of checks
– but are poised to benefit payment processors as more payments shift online.
According to Aite, 50% of US bill volume is paid online in the United States today, with
30% paid through a bank’s website and 70% paid directly on biller websites. We
estimate $15bn in payment fees are generated in processing online bill payments
globally today (ex-China), and that this market will grow at a 5.2% CAGR over the next
10 years.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 8
Exhibit 3: We estimate online payment fees are a $200bn opportunity by 2026, growing at a 10-year CAGR of 9.2%
Online payment fees by market segment
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment Research.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 9
(4) B2B payments ($41tn in volume, $21bn in fees in 2026): We believe the B2B
payments market is a large and relatively untapped online opportunity (albeit at lower
yields for payment processors). We believe online penetration in B2B payments is
around 25% today, driven primarily by accounts payable transactions via Automated
Clearing House (ACH). We estimate credit and debit cards comprise a very small share
of both online and offline B2B payments today (less than 5%), and most of these
volumes are associated with travel-related corporate expenses. We believe the
industry transition to instant B2B payments—whether instant ACH or push payments
through Visa Direct and Mastercard Send—will fuel a significant new market
opportunity over the next decade. We estimate that $12bn in payment fees are
generated in processing online B2B payments globally today (ex-China), and that this
market will grow at a 5.9% CAGR over the next 10 years.
The “last 10%” of online payment fees: Smaller markets, but at higher yields
(5) Sharing economy ($325bn in volume, $10bn in fees in 2026): The sharing economy
is a market that has emerged over the last few years. Payment volumes are dominated
by Uber and AirBnB, plus other ride-hailing and travel competitors. Given the novelty
of the space, we expect the sharing economy to be the fastest-growing market within
online payments, as existing players scale rapidly and de novo businesses enter the
market, and our payment volume estimate could surprise to the upside. We estimate
that $1.5bn in payment fees are generated in processing sharing economy payments
globally today (ex-China), and that this market will grow at a 20.4% CAGR over the next
10 years, after nearly doubling in 2016.
(6)
Ticket sales ($91bn in volume, $3bn in fees in 2026): This online payments category
combines slower-growing primary ticket sales (generally those sold by event providers
such as Ticketmaster and Live Nation) and the secondary ticket market (re-sold through
sites such as StubHub). We estimate that $1.6bn in payment fees are generated in
processing online ticket sale payments globally today (ex-China), and that this market
will grow at a 5.3% CAGR over the next ten years.
(7)
Food ordering/delivery ($57bn in volume, $1.7bn in fees in 2026): Online takeout is
a growing and competitive market, and we believe less than 10% of restaurant takeout
in the United States is online today. Our food delivery segment includes online
ordering models such as GrubHub and Seamless. We estimate that $0.5bn in payment
fees are generated in processing online food ordering/delivery payments globally
today (ex-China), and that this market will grow at a 12.8% CAGR over 10 years.
(8)
Online gambling ($56bn in volume, $1.7bn in fees in 2026): Online gambling is a
highly regulated market and is legal today in only three US states (Delaware, New
Jersey, and Nevada). We estimate that $0.4bn in payment fees are generated in
processing online gambling payments globally today (ex-China), and that this market
will grow at a 16.5% CAGR over the next 10 years.
(9)
Media delivery services ($48bn in volume, $1.4bn in fees in 2026): This segment
combines popular consumer offerings like Netflix, Hulu, Pandora, and Spotify (but
does not include single downloads from iTunes or Amazon). We estimate that $0.5bn
in payment fees are generated in processing online media payments globally today
(ex-China), and that this market will grow at a 10.7% CAGR over the next 10 years.
(10)
Online dating ($2bn in volume, $0.1bn in fees in 2026): Online dating includes sites
operated by Match Group (match.com, OkCupid) and Spark Networks. We estimate
that $0.04bn in payment fees are generated by online dating payments globally today
(ex-China), and that this market will grow at a 5.1% CAGR over the next ten years.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 10
Defining the major consumer and business payment segments
We believe online payments is a $28tn global payments opportunity (ex-China) today
growing at a 6.2% CAGR over the next ten years. We see the market as split across
consumer-driven payments (B2C and C2C) and business-related payments (B2B):
Consumer payments (B2C):
o Online payment penetration: We estimate $4.9tn in payment volume
was online by consumers globally (ex-China) in 2016, 19% of total spend.
o
Card penetration: We estimate 36% of total consumer spend (both online
and offline) is transacted with a credit or debit card today. Card
penetration is higher online: we estimate 52% of total consumer online
spending is transacted with a card today.
o Percentage of card volume done online: We estimate 28% of total
consumer card payment volumes occur online.
Business payments (B2B):
o Online payment penetration: We estimate $23tn in payment volume was
online by businesses globally (ex-China) in 2016, or 25% of total spend.
o
Card penetration: We estimate 3% of total business spend (both online
and offline) is transacted with a credit or debit card today. Checks are still
the dominant form of payment, comprising 70% of B2B volume. Card
penetration is only 5% of total business online spending today.
o
Percentage of card volume done online: We estimate 47% of total
business card payment volumes occur online.
Peer-to-peer payments (C2C): Our definition of online payments does not include
consumer remittances, but we see it as an important related topic. We discuss the
potential for monetization of digital peer-to-peer payments on p. 73 of our report:
o
Online payment volume: We estimate just under $1tn of online peer-to-
peer payment volume was transacted globally (ex-China) in 2016.
Exhibit 4: We estimate about 20% of B2C card volumes
are online payments
2016 consumer (B2C) payment volume, in $tn
Exhibit 5: Check still dominates offline B2B payments
today, and ACH is the dominant mode of payment online
2016 business (B2B) payment volume, in $tn
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Nilson Report, Goldman Sachs Global Investment Research.
Source: NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
Card
online,
$2.6
Non-card
online,
$2.4
Card
offline,
$6.7
Non-card
offline,
$13.8
Card
online,
$1.1
Non-card
online,
$22.1
Card
offline,
$1.2
Non-card
offline,
$66.9
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 11
Who are the major competitors?
The offline card payment ecosystem in the United States, Europe, and LatAm is complex,
with a number of middlemen—merchant acquirers, card networks, and issuing banks—
interacting with each other to enable consumer payments. We summarize the traditional
“four-party system” in Exhibit 6.
The online card payment ecosystem introduces two new participants that have
innovated on the front end of online payment processing to make the transaction more
seamless:
(1) the digital wallet, so the consumer can easily input his payment information
on the merchant’s site; and
(2) the gateway, so the merchant can easily accept the
consumer’s payment information. We summarize the online system in Exhibit 7.
The digital wallet
is effectively a token representing user payment and personal
information, obviating the need to re-enter this information on every website and thus
increasing conversion rates for online payments. Digital wallets include Apple Pay,
Walmart Pay, Visa Checkout, Amazon Payments, and PayPal. All of these wallets make the
consumer experience more seamless, although digital wallet providers have different
motivations for capturing market share. PayPal and Visa claim online payment success/
conversion rates 50% higher than transactions for which information is entered manually.
The gateway can be thought of as an online “point of sale”— a payment terminal for the
Internet. With a gateway, web developers have a single point of communication to collect
payment information on their websites. Gateways have become more sophisticated over
time, with sleeker application programming interfaces (APIs) like Adyen, Stripe, Braintree
(owned by PayPal), and Wirecard reducing the gateway implementation time (from months
to hours), eliminating the need to change the user interfaces to accommodate payments.
Exhibit 6: The “four-party system” is the dominant bank-driven system used across US, Europe, and LatAm
US offline card payment ecosystem
Source: Goldman Sachs Global Investment Research.
Consumer Merchant
Card issuing bank
Chase, BofA, Wells
Fargo, Barclays
Merchant acquirer
Global, First Data,
TSYS, Cielo, Worldline
Card network
Visa, Mastercard,
China UnionPay
Consumer charges $100 Merchant receives $98
Merchant discount rate =
2% or $2.00
Process/acquiring =
$0.10
Dues/assessments
= $0.10
Interchange
= $1.80
• Merchant sends
card data
• Acquiring bank
pays merchant
• Acquiring bank sends
request to authorize
• Clearing & settlement
• Network authorizes
card at issuer
• Clearing & settlement
• Issuer sends bill
• Consumer pays bill
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 12
Exhibit 7: Online card payments introduce new players, gateways and digital wallets
US online card payment ecosystem
Source: Goldman Sachs Global Investment Research.
We highlight two important online impacts on the payment ecosystem:
1) The back-end interaction between merchant acquirers, card networks, and issuing
banks to complete the transaction remains unchanged.
2) Newer companies (PayPal, Stripe, Adyen) have entered the fray: these entrants believe
they can address the pain points of online payments better than incumbents. These
companies have heightened the competitive landscape among gateways and merchant
acquirers, which is illustrated in Exhibit 8.
New online payment methods are inventing new ways to pay
In traditional payments, any consumer not paying with a card had paid with cash, check, or
bank transfer. We are seeing wholly new online payments methods emerge that bypass
much – if not all – of this payments infrastructure.
Affirm/Klarna:
Affirm and Klarna are online point of sale credit facilities. These companies
can offer installment loans to consumers at online checkout, in lieu of traditional credit card
lending. Affirm in particular was founded with the intention of providing credit-averse
millennials with a credit card alternative. Affirm and Klarna do not circumvent the card
networks entirely—both companies accept debit cards, as well as bank transfers, for loan
repayment.
Alipay:
Alipay can process payments directly from a depository account or through a
linked bank card. By offering depository accounts in China, Alipay can compete directly
against card networks (i.e., China UnionPay) for volume.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 13
Exhibit 8: Payment flows in online payments: we see greatest competition among gateways and merchant acquirers
Flow chart of payment methods
Source: Goldman Sachs Global Investment Research.
BACK END
GATEWAY
MERCHANT
ACQUIRER
PAYMENT
PROCESSOR
ISSUER
NETWORK
Visa / MasterCard / China UnionPay
Consumer’s bank
Credit/
debit card
(manual
input)
Apple Pay/
Samsung
Pay
PayPal
Merchant
acquirer
(e.g., First
Data, Global
Payments)
PayPal
FRONT END
PAYMENT
METHOD
Stripe/
Square
Bank
processor
Braintree
Adyen/
Wirecard
Alipay
Affirm/
Klarna
Alipay
deposit
account
Amazon
Payments
Amazon’s
merchant
acquirer
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 14
Q1: Can PayPal sustain its growth trajectory?
In our new analysis, we break down PayPal’s total payment volume (TPV) by market
segment and find that PayPal has meaningful room to grow as it taps into new
markets including the sharing economy, bill payment, and B2B payments. We believe
this is a key point often missed by some investors who expect PayPal’s growth
trajectory to come under pressure as Amazon consolidates the market. Traditional e-
commerce is only one of PayPal’s markets, and we estimate it comprises about 50%
of PayPal’s volume (TPV) and 40% of its TPV growth today.
We think PayPal can sustain ~15% volume growth over 10 years
In our volume analysis, we adjust PayPal’s TPV to exclude PayPal Credit and Venmo in
order to better understand PayPal’s core transaction fee-generating volume.
We estimate PayPal’s TPV (excluding PayPal Credit and Venmo) will grow at a 15% CAGR
over the next decade, totaling $1.5tn in 2027, compared to $328bn in 2016 (Exhibit 9). We
expect PayPal will grow about 1000bps faster than the overall market as it leverages
strategic partnerships, its two-sided network of merchants and consumers, and its
international footprint (Exhibit 10). We note that, if we were to include PayPal Credit and
Venmo, PayPal’s TPV would grow about 300bps faster (18% CAGR) over the next decade.
Exhibit 9: We expect TPV ex-Credit and Venmo to grow
to $1.5tn in 2026 from $328bn in 2016
PayPal Total Payment Volume (TPV)
Exhibit 10: We expect PayPal to drive outsized payment
volume growth over the next decade
PayPal TPV growth (ex-PayPal Credit and Venmo) vs. global
online payments growth
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
We see several points that give us confidence in PayPal’s growth trajectory.
First, PayPal is not just about e-commerce. We estimate that today, about 50% of
PayPal’s volume (TPV) and 40% of its TPV growth (ex-PayPal Credit and Venmo) comes
from “traditional” e-commerce, which we define as the direct sale of goods online (Exhibit
11). We see traditional e-commerce as comprised of three major segments: pure online
retail (eBay), omni-channel retail (Walmart.com), and specialized online retailers (Etsy) (see
the Online payments overview section on page 7 for the segment details).
In many of our client conversations, investors express concerns around PayPal’s growth
runway by assuming that nearly all of PayPal’s TPV comes from traditional e-commerce
(i.e., online retail sales). By this math, PayPal (ex-PayPal Credit and Venmo) and Amazon
$0
$500
$1,000
$1,500
$2,000
$2,500
2014 2016 2018 2020 2022 2024 2026
Total Payment Volume ($bn)
TPV less Credit and Venmo Venmo PayPal Credit
0%
5%
10%
15%
20%
25%
2016 2018 2020 2022 2024 2026
Payment volume growth
PayPal TPV (ex-PayPal Credit and Venmo) Global online payments
10%
higher
growth
Note: We exclude
PayPal Credit and
Venmo from PayPal’s
TPV in our segment
analysis in this section
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 15
would have 31% and 23% market share in traditional e-commerce in 2016, respectively,
leaving less than half the market remaining (and assuming PayPal does not convert
Amazon as a customer). However, we estimate PayPal’s penetration rate in traditional e-
commerce is significantly lower—at about 16%—as roughly 50% of its volumes come from
other areas such as travel and the sharing economy (Exhibit 12).
Exhibit 11: About 40% of PayPal’s growth comes from
traditional e-commerce today
PayPal TPV growth (ex-PayPal Credit and Venmo) by market
Exhibit 12: About 50% of PayPal’s TPV comes from
traditional e-commerce in 2016
2016 PayPal TPV volume (ex-PayPal Credit and Venmo)
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
Second, we expect PayPal’s traditional e-commerce TPV to grow with the overall
market while gaining share excluding Amazon.
We expect PayPal’s traditional e-
commerce share to stay roughly stable over the next decade, even as Amazon gains
meaningful share (Exhibit 13). Excluding Amazon purchase volumes, we expect PayPal to
grow about 350bps faster than traditional e-commerce retail sales (11.9% vs. 8.3%) over the
next decade (Exhibit 14), as it leverages its two-sided network of merchants and consumers.
Exhibit 13: We estimate PayPal’s market share in traditional e-commerce should remain
roughly stable over the next decade as Amazon gains share
Global traditional e-commerce (ex-China) market share
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
0%
5%
10%
15%
20%
25%
2016 2021 2026
PayPal TPV growth build
Secondary ticket sales
Primary ticket sales
Food delivery
B2B
C2C (ex-Venmo)
Bill pay
Sharing economy
Travel
Traditional e-commerce
Traditional
e-commerce
51%
Travel
24%
Sharing
economy
9%
C2C
(ex-Venmo)
12%
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 16
Exhibit 14: We expect PayPal’s traditional e-commerce volumes to grow in line with the
industry
Traditional e-commerce retail sales growth CAGR, 2016-2026
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
Third, we believe PayPal has substantial room to tap into large, underpenetrated
markets, including bill payment and B2B (Exhibit 15).
By diversifying its TPV volume,
we expect PayPal (ex-PayPal Credit and Venmo) can maintain 15% TPV growth. As a result,
we estimate traditional e-commerce will comprise 39% of TPV (ex-PayPal Credit and
Venmo) in 2026, compared to 51% in 2016 (Exhibit 16). We view the underlying growth in
broader online payments is healthy, with volume growing at about a 6% CAGR over the
next decade.
Exhibit 15: PayPal remains underpenetrated in larger markets, leaving room for growth
vertical-axis: PayPal market penetration as of 2016; horizontal-axis: market growth CAGR from
2016-2026; circles are scaled to industry market size in 2016
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
19.1%
11.8%
11.9%
8.3%
0%
5%
10%
15%
20%
25%
Amazon Traditional
e-commerce
PayPal traditional
e-commerce
Traditional
e-commerce
(ex-Amazon)
Traditional e-commerce growth
B2B
Bill
pay
Traditional
e-commerce
Travel
Primary
ticket sales
Secondary
ticket sales
Food delivery
Sharing economy
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
0% 5% 10% 15% 20% 25%
Market penetration
Market growth rate
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 17
Exhibit 16: We expect PayPal’s expansion into new markets to drive continued growth
PayPal TPV (ex-PayPal Credit and Venmo) by market
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
We detail PayPal’s positioning and opportunities by market (Exhibit 18)
(references to PayPal’s TPV exclude PayPal Credit and Venmo):
Online travel: Although the travel market is fairly penetrated by traditional acquirers,
we believe the shift to online bookings from agent-driven models has created an
opportunity for companies like PayPal to gain share, as many airlines have adopted the
company’s PayPal button on their websites. We estimate online travel to be a $690bn
volume opportunity globally in 2016, and we expect this to grow at a 7% CAGR over
the next ten years. Given the ease of integrating PayPal’s offerings, we anticipate
modest share gains (from 12% in 2016 to 18% in 2026) in the online travel segment.
We expect online travel to be PayPal’s second-largest market in 2026 at 19% of
TPV (ex-PayPal Credit and Venmo), compared to 24% of volumes in 2016.
Sharing economy:
The sharing economy is the fastest-growing online payments
market in our analysis, growing at a 20% CAGR over the next ten years by our
estimates. PayPal capitalized on the sharing economy trend through its acquisition of
payment gateway provider Braintree in 2013, which services the two largest sharing
economy companies, Uber and AirBnB. By processing these two businesses (as well as
several smaller businesses like TaskRabbit), our model assumes that PayPal processes
nearly 60% of global sharing economy payments today. We expect this dominant
position to remain fairly stable over the next decade, but note the loss of key clients
(Uber or AirBnB) as a risk.
We expect the sharing economy will be PayPal’s third-
largest market in 2026 at 14% of TPV (ex-PayPal Credit and Venmo), compared to
9% of volumes in 2016.
Online bill payment:
About $1.5tn in bill payments are paid online in the United States
today, according to the Aite Group, and PayPal has started to pursue this large market
opportunity. PayPal acquired online bill payment company TIO Networks in 2017 for
$233mn. The company processed about $7bn in volume in 2016, and we expect PayPal
to leverage this acquisition to grow its footprint quickly. Our model assumes PayPal is
able to gain about 30bps of bill payment market share per year over the next 10 years,
and that PayPal will have just over 3% market share of online bill payments in 2026.
We expect bill payment will be PayPal’s fourth-largest market in 2026 at 12% of
TPV (ex-PayPal Credit and Venmo), despite having negligible volumes today.
-
200
400
600
800
1,000
1,200
1,400
2016 2021 2026
PayPal TPV ($bns)
Secondary ticket sales
Primary ticket sales
Food delivery
B2B
C2C (ex-Venmo)
Bill pay
Sharing economy
Travel
Traditional e-commerce
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 18
We consider a scenario in which PayPal is able to successfully roll out a bill payment
offering to its consumer base of 210mn, and the implications this would have on the
company’s TPV. We make simplified underlying assumptions, with the company
driving 5% incremental adoption among its user base in the first three years of launch,
applying a 2019 penetration rate of 15%. A user paying $500 in bills on average per
year using this service would yield $5bn in TPV in the first year (assuming a 2017
launch), building up to $20bn in 2019 as the company increases its penetration rate
and user base (Exhibit 17). Therefore, a simple bill payment tool with a relatively low
penetration could add over 1.5% to TPV growth in each of the next three years.
Exhibit 17: Given the company’s large customer base, a new product can drive meaningful
incremental TPV
New bill payment TPV assuming 5% penetration per year and $500 in annual payments
Source: Company data, Goldman Sachs Global Investment Research.
C2C (ex-Venmo): Our C2C (ex-Venmo) segment includes fee-generating C2C
payments made through the PayPal wallet and Xoom. We exclude Venmo in our
analysis in order to highlight the revenue impact of fee-generating volume on PayPal’s
growth. The remittance market has been slow to evolve, with the majority of
remittances still occurring through informal channels. A smaller share of remittances
are transmitted through banks or money remittance companies like Western Union
and MoneyGram, which largely rely on a vast network of retail partner locations to
complete the money transfer. PayPal processes C2C payments through its core PayPal
wallet feature (we estimate $30bn in 2016) and through Xoom (we estimate $8bn in
2016), which was acquired by PayPal in 2015 for $890mn. While C2C remittances could
be a compelling opportunity for PayPal, we see larger competitors like Western Union
have compelling digital offerings with a larger geographic reach.
We expect online
C2C (excluding Venmo) to be PayPal’s fifth-largest market in 2026 at 10% of TPV
(ex-PayPal Credit and Venmo), compared to 12% of volumes in 2016.
Online B2B payments:
The B2B payments space has seen significant M&A and
partnership activity as larger payments companies begin to penetrate the market. Visa
and Mastercard have gained exposure to the space, with offerings including Visa Direct,
the Chain Inc. partnership, the VocaLink acquisition, and the AvidXchange partnership.
Payment processors have also engaged in significant deal activity, with FleetCor’s
announced acquisition of Cambridge Global Payments in May 2017. PayPal also
announced a partnership with B2B e-commerce platform provider Oro in March 2017.
We estimate the online B2B payments market represents a $23tn volume opportunity
globally today, and expect this to grow at a 5.9% CAGR to $41tn over the next ten
0%
1%
2%
3%
4%
5%
$0
$5
$10
$15
$20
$25
2017 2018 2019
% of total TPV
New product TPV ($bns)
New product TPV ($bn) % of total TPV
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 19
years as businesses transform their back-end infrastructure to adopt more efficient
payment methods. Our model assumes PayPal had no B2B exposure in 2016, and
ultimately anticipate the company can achieve just under 0.15% market share of online
B2B spend in 2026.
We expect online B2B payments to be PayPal’s sixth-largest
market in 2026 at 4% of TPV (ex-PayPal Credit and Venmo), despite having
negligible volumes today.
Exhibit 18: We expect PayPal to diversify into new markets over the next ten years, particularly bill payment and B2B
PayPal TPV (ex-PayPal Credit and Venmo) by market segment, 2016, 2021, 2026
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment Research.
Upside and downside risks to PayPal’s growth
Our TPV segment analysis estimates the composition of PayPal’s TPV today and its ability
to maintain growth. We briefly touch on some other upside and downside risks below:
Upside potential:
Venmo monetization:
We exclude Venmo and PayPal Credit from our TPV segment
analysis, and currently expect Venmo-related revenues to be negligible in our forecasts.
We note that Venmo has started testing merchant acceptance with several websites,
including Munchery, ParkingPanda, and Poshmark, and we will follow its merchant
acceptance closely.
Offline payment penetration:
Our TPV analysis assumes PayPal can maintain 15%
TPV growth without making progress in offline payments. Therefore, offline payment
penetration would be entirely incremental to our estimates. Given the limited traction
of mobile wallets in the offline space, we expect PayPal to gain minimal offline traction
in the medium term – but this could occur over time.
Powerful track record:
PayPal has grown in the face of competition and countless
new entrants (Exhibit 19). While the status quo can change—especially among
technology companies—we find PayPal’s track record and scale reassuring. With
partnerships with 14 of the largest 20 US merchants (Exhibit 20) and direct access to a
large base of consumers and merchants, we believe PayPal is well-positioned to
compete against new entrants.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 20
Exhibit 19: PayPal has successfully grown TPV despite
persistent market competition
PayPal TPV vs. competitive entrants
Exhibit 20: PayPal is accepted at 14 of the top 20 online
merchants in the US
PayPal acceptance among top 20 US merchants
Source: Company data, Goldman Sachs Global Investment Research.
Source: Euromonitor, company data, Goldman Sachs Global Investment
Research.
Downside risks:
Need for increased investment in growth: Technology companies cannot rest on
their laurels, especially in a space as dynamic and innovative as online payments. As
we see with the rise of Stripe against incumbent gateways like CyberSource,
companies can gain and cede market share quickly. PayPal must continue investing in
its growth—both organically to ensure its technology is best-in-class and easy to use
and inorganically to gain a foothold in new markets, as demonstrated by PayPal’s
acquisitions of Braintree (gateway/sharing economy), Xoom (C2C remittance), and TIO
Networks (bill pay) over the last few years.
Margin pressure: There are risks to PayPal’s model beyond volume, notably on
margins. Margin compression could come on two fronts: (1) take rate compression:
PayPal’s take rate can come under pressure, either by virtue of mix toward lower-
yielding segments or price pressure. However, with offerings like Amazon Payments
and Stripe with comparable pricing to PayPal, plus healthy growth in cross-border
online payments at richer fees, we expect PayPal’s take rate (excluding Venmo) to
remain fairly stable and see modest erosion over the next few years; (2) transaction
expense growth: with a greater share of PayPal’s volumes on credit and debit cards
(we estimate 78% in 2021, compared to 68% in 2016), fees paid to Visa and Mastercard
will continue to increase. We believe PayPal can offset these higher transaction
expenses and expand margins over this period by recognizing efficiencies in SG&A
and other operating expenses.
Security risk: A key premise underlying the success of PayPal—and online payments
in general—is security and trust. If PayPal were subject to a security breach, this could
limit customer use and merchant acceptance.
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
Total payment volume ($bns)
Google
Checkout
June 2006
ISIS
demo
Oct.
2012
V.Me by
Visa Nov.
2012
Amazon
Payments
Aug. 2007
Square
June
2010
Google Wallet,
Stripe
Sept. 2011
Facebook Credits
Jan. 2011
Amex Serve
Mar. 2011
Amazon
Payments
relaunch
Oct. 2013
Apple
Pay
Oct. 2014
Visa
Checkout
July 2014
Facebook Messenger
Payments
June 2015
Merchant
V
olume ($mn) PayPal accepted?
1
Amazon.com Inc 102,843 No
2 Wal-Mart Stores Inc 24,339 Yes
3 eBay Inc 22,993 Yes
4 Apple Inc 14,821 Yes
5 Valve Corp 5,702 Yes
6 Macys Inc 4,967 Yes
7 Home Depot Inc, The 4,465 Yes
8
Liberty Interactive Corp 4,379 No
9
Sears Holdings Corp 3,917 Yes
10
Best Buy Co Inc 3,782 Yes
11
Target Corp 3,699 Yes
12
Kohl's Corp 3,683 No
13
Wayfair LLC 3,484 Yes
14
Costco Wholesale Corp 3,289 No
15
Williams - Sonoma Inc 2,513 No
16
Nordstrom Inc 2,425 Yes
17
Office Depot Inc 2,382 Yes
18
Newegg.com Inc 2,368 Yes
19
Gap Inc, The 1,858 No
20
HSN Inc 1,830 Yes
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 21
Q2: How could Visa and Mastercard be disrupted?
We consider the potential for incumbent payment ecosystems to be disrupted. We
examine the core elements needed to build a consumer payment ecosystem, and
specifically look at how certain emerging markets like China have developed
alternative ecosystems to those in the United States and Europe. We evaluate how
the Chinese third-party payments model – specifically Alipay and Tenpay – can be
exported to the United States and potentially disrupt the ecosystem of incumbents.
Finally, we consider “moonshots” – new technologies like blockchain and artificial
intelligence – and the long-term impacts they could have on the payments industry.
Building a disruptive payment ecosystem in three “easy” steps:
A successful payments system requires two basic ingredients: consumer adoption
and merchant acceptance. Consumers must perceive clear value (such as easy credit
financing for large purchases, better convenience, rewards) and merchants must be
compelled to accept a payment type (such as fear of missing a sale, higher ticket
consumer spending, lower cost of acceptance). Building consumer adoption has
always been a pre-condition for merchant acceptance. In the United States and
Europe, a new ecosystem aimed at disrupting incumbents will need to provide
superior solutions capable of changing both consumer and merchant behavior:
(1)
Build critical mass with consumers: We see financial incentives and improved
convenience as the two main avenues for driving consumer adoption of new payment
methods. Payment cards are ubiquitous in the United States and Europe due to their
convenience and direct links to consumer bank accounts and services (such as
revolving credit lines). As we discuss elsewhere in this report, mobile payment
methods offer similar or slightly higher levels of consumer convenience (similar in-
store experience, without the need to carry physical cards) – but these have failed to
gain significant traction thus far. Starbucks is the main exception to this trend,
achieving 29% adoption with its mobile payments app, which has been driven in large
part by the company’s attractive 10% rewards program. Thus, we expect any
successful disruptive competitor would need to provide substantially greater
convenience, significantly greater financial incentives or rewards, or both, in order to
gain widespread consumer adoption.
(2)
Gain widespread merchant adoption: Every merchant is motivated to maximize sales
and minimize costs, and payments are no exception. Historically, merchants have
accepted credit cards (even higher-cost cards like AmEx) as a way of driving higher
sales conversion, more large-ticket sales, and higher spending levels. Merchant
acceptance tends to be driven by consumer demographics—that is, they accept new
payment methods only after a critical mass of consumers wants to use one. However,
we believe it is also possible for merchant acceptance to be stimulated by either
significantly lower acceptance cost or direct subsidies by payment providers.
(3)
Drive a “virtuous cycle”: Once a minimum critical mass of consumers and merchants
is achieved, adoption rates can be increased over time by payment providers. To
increase consumer adoption, the payment provider can offer ancillary services on the
platform such as other financial services or concierge service that appeal to a wider
demographic range. To expand the merchant base, the provider can offer merchants
incentives for new signups or exclusivity.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 22
How could Chinese payments models disrupt the US and Europe?
Over the past five years, a number of potential threats to the incumbent payment
ecosystems in the United States and Europe have surfaced, including Apple Pay,
Google Wallet, MCX (Merchant Customer Exchange), and others. Thus far, these
methods have failed to gain widespread adoption because of either modest
consumer adoption or merchant acceptance. However, in China, “third-party”
payment methods Alipay and Tenpay have been growing at over a 40% CAGR and
comprise $2tn in payment volume today. Here, we build the case for how they could
disrupt the incumbent payment systems outside of China.
Background: Growing fast by winning users and merchants.
“Third party” payment
methods such as Alipay and Tenpay allow consumers to pay either directly through linked
bank cards (removing the role of the acquiring bank and the card network) or with an e-
wallet balance (removing the role of the acquiring bank, the card network, and the issuing
bank). As a result, third-party payment providers play multiple roles in a transaction and
dis-intermediate portions of the payments value chain (Exhibit 21).
We believe the lack of domestic competition provided a clear opening for third-party
payment providers in China to gain a strong foothold among consumers and expand
rapidly. China UnionPay, the only bank-linked network in China, had failed to develop (1) e-
commerce technology capability for processing online transactions, instead partnering
with Alipay and Tenpay; and (2) mobile payment technology for consumers to pay with
smartphones.
Exhibit 21: Third party payment companies can replace more than one traditional payment value chain player
Value chain of traditional bank card and third-party payment transactions
Source: Goldman Sachs Global Investment Research.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 23
Below we examine how these systems have succeeded in China, and how this could be
applied elsewhere:
(1) Building the consumer base:
We believe Alipay and Tenpay will need to provide a
payment offering that is as convenient and has better incentives than incumbents:
Replacing the bank by attracting deposits and cross-selling financial services:
Ant Financial launched Yu’e Bao (Chinese for “leftover treasure”) in 2013, which
provides interest-bearing depository accounts to both banked and underbanked
individuals. By offering cash returns up to twice as high as interest-bearing
accounts offered by Chinese banks (about 6% vs. about 3%, although rates have
receded in recent years), Ant Financial has successfully drawn substantial deposit
share away from the banks and is now the world’s largest money market fund (per
Financial Times) with Rmb1.4 trillion ($208 bn) in AUM. We believe these
incentives were critical in driving consumers to the Alipay platform and have
effectively helped create a viable substitute to Chinese banks (Exhibit 22). The
addition of other financial services such as insurance and consumer loans has
further diversified Ant’s portfolio. We believe Chinese third-party payment services
could potentially gain users in the United States and Europe if they are able to
offer significantly higher deposit rates, along with a broad array of financial
services – provided they can overcome regulatory obstacles (see below).
Exhibit 22: Ant Financial’s leading breadth and scale
Source: Company data.
Improving convenience with a one-touch mobile experience:
Alipay and
Tenpay succeeded in bringing an easy-to-use mobile experience to both
consumers and merchants. To pay, the consumer launches the appropriate
payment app, which generates an on-screen QR code (similar to a bar code) which
is then scanned by the merchant at the point of sale. While technically simple and
lacking in security, the consumer experience is at least as easy as Apple Pay and
requires no new equipment investment by the merchant.
Filling an unmet need for the underbanked:
Many Chinese consumers were not
historically served by banks, providing an opening for FinTech disruptors. Just 15
years ago, China was virtually an all-cash economy (Exhibit 23). Chinese
consumers quickly evolved and became more sophisticated with their payment
methods, and cards and eWallets make up roughly 50% of consumer spending
today. Bank penetration has also increased rapidly, with 79% of individuals over 15
years old having a bank account as of 2014, up from 64% in 2011, according to the
World Bank. We believe the large number of unbanked and underbanked
consumers in China has provided a fertile environment for Alipay and Tenpay to
introduce new payment and financial services. We believe a similar market
opportunity exists in developed markets as well – and we would point to Ant
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 24
Financial’s proposed acquisition of US-based remittance provider MoneyGram as
an attempt by Ant to gain a foothold with this demographic in the United States.
Exhibit 23: Cards/eWallets have meaningfully scaled over the last 15 years
Payment volume mix in China, 2002-2016
Source: Euromonitor.
(2) Building merchant acceptance at scale: While Chinese third-party payment providers
will likely need to first drive consumer adoption, we believe they are already taking
important steps to build a global footprint of merchant acceptance:
Forging partnerships to drive merchant acceptance. Alipay and WeChat Pay
(Tencent’s payments platform) are leveraging their existing Chinese consumer
base to gain merchant acceptance outside of China by forging global partnerships.
They have announced several partnerships over the last year with Verifone (Alipay
in October 2016), Citcon (WeChat Pay in February 2017), and First Data (Alipay in
May 2017) to build international merchant acceptance. These services are available
in 28 countries outside of China for Chinese tourists (Exhibit 24). We expect this
initial merchant base will be a useful baseline for rolling out local Alipay and
WeChat Pay offerings to North American and European consumers. The larger and
more penetrated the consumer base, the more merchants will be convinced to
offer the payment method in their stores.
Lowering the cost of acceptance: As we have written previously (see our July 7,
2014 report, Resume on Payments), we believe there is a long-term trend toward
lower merchant acceptance fees, mainly as a result of regulation (which has
already been executed in the United States, Europe, and Australia). Today, we
estimate that third-party payment transaction costs in China are slightly higher
than debit fees in the United States and in Europe for in-store transactions (about
40bps) and online transactions (about 60bps) (Exhibits 25 and 26). However, US
credit card fees remain significantly higher than third-party payment fees (which
do not offer a direct credit option). We highlight that debit spreads for Alipay and
Tenpay (8-28bps) are richer than those for Visa and Mastercard (5-10bps). Recent
EU interchange cuts implemented in December 2015 demonstrate that pricing can
impact merchant acceptance. Aldi and Lidl, the Germany-based supermarket
chains that together represent about 25% of German retail sales, announced that
their stores now accept credit cards after the interchange cuts took effect, and we
0%
20%
40%
60%
80%
100%
2002 2004 2006 2008 2010 2012 2014 2016
% of payments
Cash Electronic/ACH Check Card/eWallet
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 25
expect small merchants to follow. We believe charging comparable or lower fees
relative to merchants will be necessary to gain widespread merchant acceptance.
Exhibit 24: Alipay and WeChat Pay are available in 28 countries / regions outside of Mainland China
Countries and regions where Alipay or WeChat Pay can be used
Source: Company data, Caixin, Goldman Sachs Global Investment Research.
Exhibit 25: China third party payment fees are slightly
higher than other regions for instore transactions…
Estimated instore transaction fees
Exhibit 26: …and for online transactions
Estimated online transaction fees
*Other includes merchant acquirers, payment aggregators, gateways, etc.
*Other includes merchant acquirers, payment aggregators, gateways, etc.
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
0
10
20
30
40
50
60
China third party
payment
US debit Europe debit
Third party payment provider Card network Issuing bank Other*
0
10
20
30
40
50
60
China third party
payment
US debit Europe debit
Third party payment provider Card network Issuing bank Other*
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 26
What could go wrong? Obstacles to exporting China’s third party model
While we have outlined a path for China’s third-party payments model to expand overseas
and challenge incumbent ecosystems in the United States, Europe, and elsewhere, it is
important to recognize that there are substantial challenges (regulatory, competitive, and
demographic) associated with success outside China, including:
(1)
Stricter regulatory regimes: China’s FinTech industry grew with few regulatory
constraints in the early days. However, there are stricter regulations governing
financial institutions (particularly broad financial service providers) in the United States
and Europe. If building an integrated platform tied to depository (interest-bearing)
accounts is important to building scale, Chinese third-party payment companies would
need to apply for bank licenses and comply with broad banking regulations, which
could slow their growth and introduce more complexity.
We believe the bar to becoming a bank is lower in Europe. For example, PayPal has a
bank license in Europe (and is issuing debit cards in partnership with Visa), but it does
not have an equivalent license in the United States. There is also precedent for non-
financial institutions (such as retailers Tesco and Sainsbury’s) to become banks in
Europe. Wal-Mart’s efforts to obtain a special banking charter in the United States were
stymied before the financial crisis. While it might be easier to obtain a license in
Europe, we note the path forward is not easy – and we would point out that online-only
“challenger banks” in the United Kingdom such as Atom Bank and Revolut have
gained limited market traction in recent years.
In the United States, if the OCC were to issue Special Purpose National Bank Charters
(as discussed in the next section), that could offer the opportunity for China’s FinTechs
to receive a bank license. However, there is significant uncertainty around whether
these bank charters will be introduced, what the definition of them will be, and if they
would be issued to non-US institutions.
(2)
Stiffer competition, with powerful incumbents backed by US banks: Simply put,
payment industry incumbents in the United States and Europe are substantially
stronger than their counterparts in China. Credit cards in the United States offer rich
reward plans (often with 2% or better rewards programs which directly benefit
consumers and drive loyalty), and card usage in the United States and Europe is
already widespread among consumers with ubiquitous merchant acceptance (Exhibit
27). In our view, this dominant market position is the main reason why tech companies
like Apple and Google partnered with the card networks and banks when launching
their digital wallets, rather than attempting to disintermediate them. Importantly,
payments companies have driven significant technology innovations – as the core
security technology underlying mobile payment services such as Apple Pay and
Google Wallet was developed by Visa and Mastercard.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 27
Exhibit 27: Visa’s user base grew in tandem with merchant acceptance
Visa cards and merchant locations, 1958-2016
Source: Company data.
(3)
“High inertia” consumer base:
Consumers in the United States and Europe are
arguably more widely served by existing financial institutions than Chinese consumers,
with bank account penetration of about 95% (Exhibit 28). Consumers in these
developed markets are slow to change their current payment method. Consumer
adoption of new technologies such as Apple Pay has been disappointing over the last
three years – in large part due to a lack of clear advantages in terms of convenience or
rewards. At its core, we believe consumer payment is a fundamentally high-inertia
market, and most consumers do not actively re-evaluate the cost-benefit of their
payment choices.
Exhibit 28: China has lower bank account penetration than other large economies
GDP and bank account penetration for top 20 largest economies; countries with less than 80%
bank account penetration highlighted in blue
Source: World Bank, Goldman Sachs Global Investment Research.
OCC’s Special Purpose Bank Charter: Advancing FinTech breadth
In December 2016, the US Office of the Comptroller of the Currency (OCC) published and
solicited comments on a paper considering whether FinTech companies should be granted
Special Purpose National Bank Charters. The OCC currently grants Special Purpose
National Bank Charters to trust banks and credit card issuing banks. The OCC provided
'58 '01 '08 '16
Visa Cards
1bn
2bn
3bn
'58 '92 '00 '10 '16
Visa Merchant Locations
10mn
20mn
30mn
44mn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 28
three reasons for why this may be in the public interest: (1) FinTech companies and banks
will operate in the same “safe and sound manner”; (2) the OCC can provide consistency in
the application of law and regulation across the country for FinTech companies and banks;
and (3) the federal banking system could strengthen, as FinTechs could explore new ways
to promote fair access, financial inclusion, and innovation.
There is ongoing debate as to whether these charters would be beneficial for FinTech
innovation, especially for smaller companies. Some argue that smaller FinTechs would
benefit from a national charter because it would provide consistent national FinTech
regulation, rather than state-by-state laws. Others argue that smaller FinTechs would
struggle to gain the scale necessary to apply for a national charter, ensuring a wider
competitive moat around larger FinTech companies. Other opponents are concerned that
OCC oversight could slow down innovation—because the pace of regulatory change is
slower than the pace of technological change.
Potential risks to Visa and Mastercard: In the existing payment ecosystem, the banks
and card networks work in tandem. Therefore, Visa and Mastercard have two competitive
moats: (1) the card network moat, whereby Visa and Mastercard have achieved a level of
convenience and ubiquity in most developed markets that is difficult to disrupt; and (2) the
bank moat, whereby FinTechs struggle to disrupt the role of banks as credit facilities
(although there have been efforts—see our discussion on point of sale credit (p. 65)), and
Visa and Mastercard have deep partnerships with the banks. If FinTechs are granted
Special Purpose National Bank Charters, it could give rise to a business model that offers a
greater breadth of offerings (similar to those of an Alipay or Tenpay) that has the potential
to disintermediate banks and eliminate one of these competitive advantages. However,
with consumers satisfied with their current payment method, we believe it could be
challenging to uproot the status quo without offering the same scale, convenience, and
incentives as the card networks.
Blockchain: Limited use cases consumer payments; opportunities in
cross-border
Blockchain has captured the imagination of Silicon Valley and Wall Street alike over the
past few years, and is in the early stages of being tested across different industries, such as
security, capital markets, and compliance. It is fundamentally a new type of database
technology that is optimized to tackle a unique set of challenges. Blockchain is a shared,
distributed database of transactions among parties that is designed to increase
transparency, security, and efficiency.
We believe blockchain technology will have limited use cases in traditional payments
(i.e., retail sales, bill pay, etc.).
We think Visa and Mastercard are too cheap and too
convenient to be displaced for conventional debit transactions. From a cost perspective, we
estimate that Visa and Mastercard break even at about 2bps of transaction value when
processing a transaction on their debit rails; with Bitcoin, we estimate it costs 450-500bps
as it is computationally intensive. On convenience, Visa and Mastercard can authorize
transactions in 20ms, compared to 18 hours of verification on the public Bitcoin network
today.
Blockchain offers an enticing opportunity in cross-border payment settlement, an
estimated $25tn addressable market (according to Ripple).
Cross-border FX settlement
currently takes several days, and near real-time cross-border payment and FX settlement
systems can reduce working capital needs, maximize liquidity, and minimize settlement
risk. Ripple is a promising innovator in this field and uses customized protocols based on
blockchain technology and transactional ledger technology that is bilateral in nature to
provide real-time cross-border payment functionality. Similar to SMTP (Simple Mail
Transfer Protocol), which allows emails to be sent seamlessly from one email system to
See our report,
Profiles
in Innovation:
Blockchain, Putting
Theory into Practice
(May 24, 2016) for more
on applications of
blockchain technology.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 29
another, Ripple aims to remove the friction of moving money from one banking system to
another. The company provides payment solutions to both corporate customers (treasury
operations) and banks (both large and small) and is currently working with over 90 global
banks. Chain Inc., another blockchain company focused on transforming back-end
processes with software, plans to launch a cross-border B2B payments initiative with Visa
called Visa B2B Connect in 2017.
Artificial Intelligence: Complementary to the current ecosystems
The leap from computing built on the foundation of humans telling computers how to act
to computing built on the foundation of computers learning how to act has significant
implications for every industry including payments.
We believe artificial intelligence (AI)
will be complementary to existing payments applications—particularly with respect
to fraud and customer service—rather than disruptive.
Fraud:
Mastercard announced the acquisition of Brighterion, a software company
specializing in artificial intelligence, in July 2017. Brighterion allows Mastercard to evaluate
the likelihood of fraud for each transaction. Similarly, Stripe and Adyen use machine
learning to identify transaction fraud and merchant fraud. Other gateways, merchant
acquirers, and networks also use machine learning to identify fraud.
Customer service: Machine learning can also be used to resolve customer complaints. Ant
Financial launched an AI-powered chatbot in 2015 in order to reduce its number of
customer service calls. Given its fast pace of growth, Ant would not be able to hire
customer service representatives quickly enough, and its 300-person AI team has
developed a chat assistant to reduce service times.
See our report,
Profiles
in Innovation: Artificial
Intelligence
(November
14, 2016) for more on
the applications of
machine learning and
deep learning.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 30
Q3: Is Amazon Payments a threat to the existing ecosystem?
Amazon has maintained payment initiatives in the market since 2007, navigating
through a number of product launches and re-configurations. With the re-launch of
Amazon Payments product in 2013—which allows third-party merchants to improve
their checkout rates by letting shoppers pay by using their Amazon username and
password—Amazon is seeing more traction in the market. However, we do not see
Amazon Payments as an imminent threat, particularly to PayPal. We continue to
believe that PayPal will remain dominant in online payment processing as a result of
its two-sided network of direct consumer and merchant relationships. While Amazon
Payments has a large consumer base, we believe it still has substantial work to do in
order to sign up Marketplace merchants for its Amazon Payments offering.
How Amazon Payments works
Amazon Payments allows consumers to use their Amazon username and password to
transmit payment and delivery details onto a third-party website. The core rationale for
merchants accepting Amazon Payments is to increase sales conversion and reduce cart
abandonment (due to the time required to enter payment details or to decline card
transactions). The key features of the offering are as follows:
Transaction economics: The merchant fee structure is simple, and similar to PayPal’s
wallets. The domestic fee is 2.9% plus $0.30 per transaction, and the international fee is
3.9% plus $0.30 per transaction. Amazon Payments does not change the payment
economics for acquirers, card networks, or issuing banks.
Partners: Amazon Payments has partnered with hundreds of online retailers, including
Gogo air, Nine West, and Merrell. In April 2016, Amazon expanded Amazon Payments
by launching its Global Partner program, which allows e-commerce platform providers,
not just individual merchants, to integrate Amazon Payments. The Global Partner
program boasts at least 50 service providers today, including PrestaShop, Shopify, and
Future Shop.
Security: Although consumer identity and credit card information is not stored on
merchant systems, payment through Amazon Payments is not biometrically secure (as
is Apple Pay) and thus remains susceptible to counterfeit card fraud.
Amazon Payments’ growth trajectory and estimated TPV
Following the re-launch, Amazon Payments has posted impressive growth:
Transaction volume grew 150% in 2015 and nearly 100% in 2016.
Merchants grew by 200% in 2015 and more than 120% in 2016.
New verticals were introduced beyond traditional online retail, including government
payments, travel, digital goods, insurance, entertainment, non-profits, and charities.
More than 50% of Amazon Payments’ customers are
Prime Members, and 32% of
transactions using Amazon Payments were made on a mobile device in 2016.
We estimate Amazon Payments processed about $6bn in 2016
To understand the degree of traction behind Amazon Payments, we consider a scenario
analysis to estimate Amazon Payments’ Total Payment Volume (TPV). We estimate that
Amazon Payments’ TPV was about $6bn in 2016 (Exhibit 29). This compares to PayPal’s
TPV (excluding Venmo) of $336bn. We arrive at this estimate based on the following
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 31
assumptions: (1) Number of users: Amazon has stated that more than 33mn customers
have used Amazon Payments to make a purchase as of February 2017, and 23mn
customers had used Amazon Payments as of early 2016. Because Amazon Payments is a
fast-growing platform, our scenario analysis assumes that 60-90% of the 33mn cumulative
customers used the Amazon Payments platform in 2016; (2) Transactions per user: We
assume the transactions per user are between 1 and 5. As Amazon Payments is still
building its merchant base, we believe people are primarily using the service on a one-off
basis. We expect Amazon Payments’ average transaction per user to be much lower than
PayPal’s—even over a decade ago—given PayPal’s partnership with eBay and other larger
merchants;
(3) Average purchase size: Amazon disclosed that the average Amazon
Payments purchase was $80 in 2016.
Exhibit 29: We estimate Amazon Payments’ volume was ~$6bn in 2016
Amazon Payments’ estimated 2016 TPV for a range of users and transactions per user ($mns)
Source: Company data, Goldman Sachs Global Investment Research.
Does Amazon Payments pose a threat to PayPal? Not for now
Amazon Payments competes more directly with PayPal than nearly any other participant in
the payments universe. Both products charge similar fees and have similar fee structures,
and they both address the same pain points for consumers and for merchants – simplifying
the payment process to increase purchase conversion and reduce cart abandonment
(Exhibit 30).
Exhibit 30: PayPal dwarfs Amazon Payments in size, although Amazon is growing quickly
Amazon Payments and PayPal comparison (2016)
Source: Company data, Goldman Sachs Global Investment Research.
20 23 26 30
1 $1,584 $1,848 $2,112 $2,376
2 $3,168 $3,696 $4,224 $4,752
3 $4,752 $5,544 $6,336 $7,128
4 $6,336 $7,392 $8,448 $9,504
5 $7,920 $9,240 $10,560 $11,880
Number of users (in mns)
Transactions per user
A
mazon Payments PayPal PayPal vs. Amazon
TPV ($mns)* $5,940 $354,015 59.6x
Transactions (mns) 74 6107 82.2x
Average purchase size $80 $58 0.7x
Accounts (mns)** 33 197 6.0x
Transactions per account 3 31 10.3x
Domestic fee 2.9% + $0.30 2.9% + $0.30
Cross-border fee 3.9% + $0.30 4.4% + $0.30
*Amazon Payments' TPV is GS estimate based on midpoint of sensitivity.
**Amazon figure applicable for last three years ending 2016; PayPal is last 12 months ending 2016.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 32
However, we do not think Amazon Payments poses an imminent threat to PayPal for
three core reasons:
(1) PayPal’s significantly greater scale. We estimate PayPal processes 60X more
payment volume and 82X more transactions (Exhibit 30).
(2)
Large online merchants. 14 of the top 20 US online merchants accept PayPal,
including Wal-Mart, Macy’s, and Home Depot. Only one company on this list lets
customers pay through Amazon: Amazon. Given the competitive dynamic between
Amazon and brick-and-mortar retailers, we do not expect most large online merchants
to offer Amazon Payments as a checkout option. While Amazon has a larger customer
base (we estimate roughly 340mn account holders), we believe it will struggle to scale
its payments business to compete with PayPal given this competitive dynamic.
(3)
PayPal’s compelling user statistics. Amazon has been trying to compete in the
payments space for a decade, and even after the Amazon Payments’ re-launch in 2013,
PayPal’s user base and user activity continues to grow at a healthy pace (Exhibits 31
and 32).
We will be watching these metrics carefully to see if Amazon Payments is
impacting PayPal’s account growth or activity.
Exhibit 31: PayPal added 19mn active accounts in 2016…
Number of active accounts (mns), 2007-2016
Exhibit 32: …and transactions per account continues to
grow as PayPal expands its merchant base
Transactions per account, 2007-2016
Source: Company data.
Source: Company data.
What could Amazon do to pose a greater threat?
We see two competitive differentiators Amazon could leverage to pose a greater threat:
(1) Offer amazon.com promotions for paying with Amazon Payments. We believe the
rationale behind Amazon Payments is to increase Amazon’s mindshare and stickiness
among customers, and ultimately grow volumes on its own site and through
Marketplace. We believe Amazon could start offering promotions for customers to pay
with Amazon Payments, such as Amazon gift cards or Prime membership discounts,
that are not available to PayPal users today. Separately, Amazon (outside of Amazon
Payments) launched 2% back rewards on purchases when customers first load funds
into their Amazon balance using a debit card in June 2017.
We analyzed over 100 merchants that accept Amazon Payments and found that
90% of them also accept PayPal
(Exhibits 33 and 34). We believe all of these
merchants are fairly small (as Amazon Payments has not partnered with top online
retailers), and customers would be fairly indifferent between paying through Amazon
Payments or PayPal given the similar customer experience. Therefore, we think
57
70
81
94
106
123
143
162
179
197
0
50
100
150
200
250
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Number of active accounts (mns)
12
13
14
15
18
22
23
25
28
31
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Transactions per acount
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 33
Amazon would pose the greatest risk to PayPal’s TPV if Amazon Payments offered
financial incentives that would also ultimately drive more traffic back to the Amazon
website.
(2)
Tap into Amazon’s large third-party online network. Amazon has an extensive
partnership with third-party websites through Amazon Marketplace (over 60% of
Amazon’s total purchase volumes) and Fulfillment by Amazon (Amazon’s service to
help streamline logistics). While these merchants might be willing to accept Amazon
Payments on their websites, we estimate that total Amazon Payments volumes are 25X
smaller than Amazon Marketplace volumes today (Exhibit 35), thus leaving a potential
runway for Amazon Payments.
Exhibit 33: We found that 90% of Amazon Payments merchants also accept PayPal
PayPal merchant participation rate at 106 Amazon Payments merchants
Source: Goldman Sachs Global Investment Research.
100% 100% 100%
90%
88%
75%
67%
0%
20%
40%
60%
80%
100%
Consumer
Electronics
(8)
Digital (3) Sports &
Auto (16)
Fashion (39) Home (25) Other (12) Toys & Baby
(3)
PayPal Merchant Participation (%)
Avg. = 90%
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 34
Exhibit 34: Over 90% of Amazon Payments merchants also accept PayPal
Amazon Payments merchants that also accept PayPal
Source: Goldman Sachs Global Investment Research.
Exhibit 35: Tapping into the Amazon Marketplace network is an interesting opportunity
for Amazon Payments
Amazon Payments TPV as % of Amazon Marketplace TPV
Source: Company data, Goldman Sachs Global Investment Research.
Amazon Merchants that Accept PayPal
47st.Photo
CityPass
Beauty Encounter
Red Dress Boutique
Adafruit
FactSpring
Bellami Hair
Schuler Shoes
Colamco
Gogo Air
Bling Jewelry
Shinola
Coveroo
BlueFly
Simple Wishes
Monoprice
123Stores
Bombas
Stadium Goods
Pro Audio Star
As We Change
CupShe
Studio Gear
Scuf Gaming
Bed Bath Home
Current Elliot
Super Jeweler
Vizio
Build
Crazydog Tshirts
ThredUP
Cymax Designers Studio Store
UNIF
Bambi Baby
HomeSquare Dr Jays
Unique Vintage
Hobby Works Discount Filters
Equipment
ToyWiz
Dogids
Fashion Nova
Banza
Easy Comforts
Filson
Blick
Auto Parts Warehouse
eFaucets
Guess
Comixology
Auto Truck Toys
Exposures
Joie
Dr Vita
Autoplicity
Fabric
Julianna Rae
From You Flowers
CarParts
Goedekers Karen Kane
Personal Trainer Food
Cycleplicity
Grizzly
Kuru Pike Place Fish Market
Divers-Supply
Homeclick
L'Occitane
Supply
DJBennet
Miles Kimball
Lulus
Swanson
Evike
Rockler
MantraBand
The Washington Post
Hockey Giant
Ruglots
Merrell
Ting
Horseloverz
Shindigz
Moda Operandi Woot
JC Whitney
ShoppersChoice
MVMT
Midwest Sports
Startup Vitamins
Nine West
Optics Planet
TGL Direct
Orthotic Shop
Redsgear
US Mattress
Palm Beach Jewelry
Sports Memorabilia
Walter Drake
Puravida Bracelets
Sports Unlimited Inc.
Wise Company
Rebel Circus
Sports & Auto
Consumer Electronics
Other
Fashion Cont.Fashion
Home
Digital
Toys & Baby
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
% of Amazon Marketplace TPV
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 35
Amazon Payments: Small today, but survey data raises concerns
In our survey of over 100 US merchant acquirers, ISOs, and ISVs in Spring 2017, we asked
participants to provide their view on which existing payment provider or technology
company might have a disruptive impact on the payment ecosystem.
Amazon was
viewed as the most likely potential disruptor in 2017, with 48% of respondents
ranking Amazon as their top perceived threat –
a substantial uptick from a year earlier,
when only 4% of respondents viewed Amazon as the biggest potential disruptor (Exhibit
36). We note that the data normalizes somewhat when expanding the dataset to look at
respondents’ top 3 threats out of 10 potential disruptors, but Amazon still showed a large
uptick from spring 2016 (45% in 2016 vs. 63% in 2017), whereas PayPal dropped off slightly
(63% in 2016 vs. 59% in 2017). The question also did not specify about the threat of
Amazon Payments vs. any other Amazon product.
A ChannelAdvisor Online Retail Survey of 200 online retailers (100 in the United States, 100
in the United Kingdom) in mid-2015 also suggested Amazon Payments was gaining early
traction. The survey asked online retailers which alternative payment method was most
commonly used by customers after credit and debit cards. While PayPal was the dominant
payment option selected by 67% of respondents, we were surprised Amazon Payments
garnered 15% of the vote. This was well ahead of mobile wallets provided by phone
companies (Google Wallet at 5% and Apple Pay at 2%) (Exhibit 37).
Exhibit 36: Amazon is viewed as the biggest threat to the existing payment ecosystem
Which of the following do you view as the biggest potential threat to the existing payment ecosystem? Percentage of
respondents that ranked the company #1 is shown below.
Source: ETA, Goldman Sachs Global Investment Research.
4%
32%
18%
0%
14%
18%
4%
0%
11%
n/a
48%
14%
10%
7% 7%
3% 3% 3% 3%
0%
0%
10%
20%
30%
40%
50%
60%
Amazon PayPal Square Groupon
(Breadcrumb)
Stripe Apple Pay Google
(Android Pay)
Samsung Chase Adyen
Percentage of respondents
2016 survey 2017 survey
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 36
Exhibit 37: We were surprised that Amazon Payments showed some traction in mid-2015
After debit/credit cards, what is the most popular payment method used by your customers?
(Respondents include 200 online retailers (100 in US, 100 in UK))
Source: ChannelAdvisor Online Retail Survey (August 2015).
2%
2%
5%
7%
15%
67%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Square
Apple Pay
Google Wallet
None of the above
Amazon Payments
PayPal
% of respondents
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 37
Q4: What are the most promising & disruptive payments startups?
The term “frictionless payments” has long been used in the industry to describe a
seamless and convenient user experience. E-commerce and the complexity of
merchant websites have created new pain points in the payments experience that
many companies have tried to remove. These challenges relate not just to the
consumer experience, but also to the ease of integration for merchants. We highlight
six payments innovators—Adyen, Stripe, Alipay, Tencent, Paytm, and PayU—that
have scaled quickly, as their superior merchant and consumer experience has driven
adoption. We also interview the CEO of Adyen and the CFO of Stripe.
Adyen and Stripe have gained share in the gateway market by re-inventing and
streamlining the application programming interface (API) for payments, making payment
integration much easier. Stripe’s website states, “We believe that payments is a problem
rooted in code, not finance.” Stripe and Adyen’s APIs give the merchant more control over
the user interface. Customers do not have to visit an outside site to check out—a pain point
that could increase the likelihood of cart abandonment—and merchants do not have to
redesign their sites to accommodate payments. Stripe and Adyen are more vertically
integrated and therefore easier to implement compared to early gateway leaders like
CyberSource (acquired by Visa in 2010), where implementation time could be up to six
months.
Alipay, Tencent, Paytm and PayU have accelerated the shift to digital payments in
emerging markets. Alipay and Tenpay are dominant names in China and could seek to
expand overseas, while PayU and Paytm build new ecosystems amid digitalization of cash
in emerging markets.
Exhibit 38: Gateways are becoming more vertically integrated
Flow chart of payment methods
Source: Goldman Sachs Global Investment Research.
BACK END
GATEWAY
MERCHANT
ACQUIRER
PAYMENT
PROCESSOR
ISSUER
NETWORK
Visa / MasterCard
Consumer’s bank
Credit/debit
(manual input)
Traditional
acquirer
(e.g., First
Data, Global
Payments)
FRONT END
PAYMENT
METHOD
Stripe
Bank
processor
CyberSource/
Authorize.Net
Adyen
Braintree/
PayPal
Wirecard
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 38
Interview with…Pieter van der Does, CEO of Adyen
GS Research Payments analysts James Schneider and
Mohammed Moawalla spoke to Pieter van der Does, founder,
President, and CEO of Adyen. Since its founding in 2006,
Adyen has grown from startup to online juggernaut. In 2016,
Adyen processed $90bn in total payment volume.
James Schneider: Adyen has gained impressive scale,
reporting $90bn in payment volume and 80% growth in 2016.
What are the key differentiators that have allowed you to grow
quickly in such a competitive space?
Pieter van der Does: I think initial decisions about the way to build
our company have helped us grow quickly. First, we are a single
platform. Everyone uses that term, but we mean that we move the
payment data directly from the merchant to the payment rail such as
Visa or Mastercard. That gives us a lot of advantages in terms of
high conversion rates, high uptime, quicker response rates, and
more data. We get access to the direct core data from all of the card
networks, so we can help merchants understand better what’s going
on. Second, we built Adyen as an international company, so we
almost immediately started opening offices in other countries. It is
not a company that was active in one market and then tried to add
other markets. Third is unified commerce—mobile, in-store, and
online are all on one platform and a single interface. That way,
merchants can have a view of their shoppers independent of the
channel. It’s nice to be in an environment where, if a merchant says,
“I’m an international merchant, who can help me?” the list of
answers is very short.
Schneider: Can you walk us through the process for a new
client to implement Adyen’s solution in terms of coding and
integration complexity, and typical timeframe to convert?
van der Does: With us, as with some others, you can connect and
process your first transaction in minutes. Incumbents often have
several—if not dozens—of systems. But I must say that for our large
international merchant base, implementation time is not the issue.
The main topic for these merchants is typically around unlocking
specific data, protecting against fraud, or optimizing certain settings.
These merchants have all sorts of requirements, and we often work
with an implementation team to really unlock everything that you can
do on our platform.
Schneider: You’ve mentioned data a couple times now. What
are the most common types of data or capabilities which clients
demand?
van der Does: A big issue is how we can lower false transaction
decline rates online. If we have seen a purchase in a store, we know
the shopper was physically present with that card. If she shops
online with that store, then you know so much about that individual
card so you can reduce the transaction error rate radically. You
lower the fraud threshold and make it easier for that consumer to
shop because they’re less likely to see a transaction being declined.
It’s also about store payment details which you can use over multiple
channels. We know how certain card issuers have implemented their
systems, and therefore what the optimal setting is for us to get the
cards effectively authorized. Another part is to get feedback to
merchants and let them know this is the seventh time you have seen
this shopper back in their store this week. So: how often do people
come into the store, are the people in my store the same people
online or are they different? If I open a store somewhere, does that
mean that I get a new base of clients, or does that mean clients who
were shopping online now will shop online less – and how does this
affect our merchants’ marketing?
Mohammed Moawalla: What proprietary data do you have, and
how are your analytics tools differentiated?
van der Does: All our systems are built in house. For fraud detection,
a lot of companies claim to be able to do the same but those systems
usually stand alone. If we say that the transaction is likely to be
fraudulent and it’s actually not, then the system learns. And because
we also handle the money, we can see the effect of our predictions
so we can see how good we are. Most of those systems don’t have
that feedback cycle so they never really know how good they are. So
that gives an enormous network effect because there are volumes of
data and there are enormous benefits to being a self-learning
system.
Schneider: Are most of your clients de novo businesses, or do
they switch from a different merchant acquirer?
van der Does: Most of our merchants already exist. Most of them
already have volume, and often the reason to come to us is because
they are dissatisfied with their current provider, perhaps because
they want to move into a region or have some other issue. We tend
to gain share from banks and European merchant acquirers.
Schneider: You’ve referred to Adyen’s partnerships with 8 of the
10 largest US Internet companies. How much of this is
processing payments in markets outside the US, and what’s
your strategy to gain regional wallet share at these companies?
van der Does: Historically, US companies gave us international
volume in Europe, LatAm, and Asia—but not the domestic volume in
the US. The US is now a growth market for us because we are now
getting domestic volumes. If you look at our volume based on invoice
(i.e., an Uber ride in Europe counts as European volume), our
volumes would be about 70% Europe, 10% US, 10% LatAm, and
10% Asia. If you look at our volume based on legal entity (i.e., an
Uber ride in Europe is US volume since it’s a US company), then our
volume is about one-third US, one-third Europe, and one-third rest of
world.
Pieter
van der Does
James
Schneider
Mohammed
Moawalla
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 39
Moawalla: Is there a way to characterize your wallet share gains
at some of your larger customers?
van der Does: For most of our merchants, we typically start in one
region and then get more wallet share. We are not very
concentrated, so our top 10 merchants constantly change based on
which merchants are giving us more volume. We are in airlines, we
are in travel, we are in retail, and we are in the sharing economy—
we are so well divided over the different industries, and we’re not
overexposed to any given industry.
Schneider: You’ve been vocal about pursuing in-store (offline)
payments growth, and have suggested a target of 50% in-store
over the next few years. How much of your offline volume
comes from getting new in-store clients vs. converting
business at existing online clients to physical stores (omni-
channel)?
van der Does: Our first in-store merchants were new merchants like
Burberry – not existing online clients. They encountered problems
and were looking for long-term solutions. Now, many of our existing
online clients see our track record in the physical world and are
joining us in store as well. Merchants can be working with as many
as 50 acquirers to cover their service globally, and they want to
reduce that footprint. With so many different providers, you don’t
have a single system, consolidated overviews, or streamlined
reporting—and we’re trying to make our clients’ lives easier.
Moawalla: What is the benefit or ROI your customers have cited
using Adyen relative to legacy providers in terms of their IT
footprint or operating cost going forward?
van der Does: It’s interesting – we don’t need to be the cheapest in
those RFPs [requests for proposal] to win the business, since we
solve so many problems for our clients. But it’s all very merchant
specific so it’s difficult to be precise.
Schneider: In which regions do you expect to grow the fastest
over the next 3-5 years?
van der Does: I think Asia and the US will grow as a percentage of
volumes. Asia is a very strong growth region, as we expand our
geographical coverage and number of payment methods supported.
We are also seeing more volume in the US as we win domestic
volume, but that is a less technical investment.
Schneider: Across the payments industry we’ve seen a great
deal of consolidation, both in the US and cross border. Do you
think this makes the competitive environment easier or more
difficult for Adyen, and do you see Adyen as a natural
consolidator in the market?
van der Does: Adyen has never done an acquisition, and we don’t
intend to. We believe that once you start moving away from a single
platform toward owning multiple platforms, it starts to become a
distraction and introduces integration problems. From where we
stand, it looks like incumbents still believe they will benefit if they
have more volume, whereas for us the game is about innovation and
doing things that make it easier for our merchants to grow their
business.
Schneider: In June, Adyen announced that it had received a
pan-European banking license to process cross-border
payments directly for merchants, bypassing banks. Why did
Adyen apply for the license, and how will it help you
differentiate your offering and gain share?
van der Does: I think there are two really good reasons for it. First,
we have historically relied on banks to do settlement. Rather than
doing instant settlements, we were relying on the bank and that
would delay our settlement by a day, and sometimes more. This
gives us more control and lets us really operate a single system.
Second, we wanted to be a part of the banking system. Being under
the supervision of the European Central Bank gives us a better
position to help those markets.
Moawalla: Is your focus still on larger merchants, or do you
have any intentions of moving down to SMEs?
van der Does: We are moving down a step, but we are not going for
the long tail—that is not our focus. We have only approximately
4,500 merchants, and we don’t want 300,000 merchants. That
requires a different kind of company. That doesn’t mean that we will
never do it, but for now it is not on the agenda. We are more
specialized in merchants doing one transaction per second than
merchants doing one transaction per month.
Schneider: What do you believe is the long-term role of
products like PayPal or Apple Pay in the market, and do you see
them as partnership opportunities or competitors?
van der Does: I think those payment methods will get some traction.
And it’s not just those methods—it’s also WeChat, Alipay, Android
Pay, and other local variants. They all have traction, and they create
complexity for the merchant because they are new methods to
support. There is a lot of innovation in payment methods, which
means there are more payments methods for us to support – so we
work together with those companies. We work well with those
companies and we are also specifically can make them work with
physical terminals. We intend to cover all the methods that are
relevant for the merchant, so for us it’s actually a way to help our
customers. Our role would be more limited in a world where
everybody only had a Visa card.
Schneider: What keeps you up at night?
van der Does: As good as things are, we need to make sure that we
use this window of opportunity. We need to make sure we don’t
become an organization that is used to everything being easy.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 40
Adyen
Company overview
Adyen enables payment acceptance for merchants integrated across e-commerce, physical
point of sale, and in-app platforms, and provides ancillary services including analytics, risk
scoring, and optimization. The company offers its solutions to merchants globally across
verticals including retail, airlines, gaming, hospitality, and ticketing. We expect Adyen’s
volume growth to continue outpacing the market as it expands its geographic footprint and
expands its reach into the offline payments market (Exhibits 39 and 40).
Key merchants: Over 4,500 merchants including Uber (international), Etsy, Netflix,
Booking.com, LinkedIn, Spotify, KLM, and Groupon.
Pricing: Adyen’s pricing generally follows a tiered processing fee (per transaction) plus
commission (typically interchange plus) which bundles ancillary services including risk
management and payment optimization.
Competitors: Because Adyen offers both online gateway and offline payment
processing services, key competitors include traditional merchant acquirers, as well as
newer technology companies including PayPal/Braintree and Stripe.
Exhibit 39: We expect Adyen’s volume growth to
consistently outpace the market
Adyen volume ($bn) and relative growth rate
Exhibit 40: Offline payments are set to approach 50% of
Adyen’s payment mix by 2026
Adyen payment volume by channel
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
A brief history and drivers of success
Adyen was founded in 2006 in Amsterdam, and has expanded beyond Europe to serve
over 4,500 customers across North America, LatAm, Asia/Pacific, and Europe. It has raised
over $250mn in funding, and been valued at $2.3bn as of 2015. In 2016, Adyen processed
$90bn in total payment volume, growing substantially from $50bn processed in 2015 and
$25bn in 2014. Adyen has translated this strong volume growth into revenue, reporting
revenue of $727mn in 2016, more than doubling the $350mn in revenue it reported in 2015.
In 2016, Adyen reported that it has added key merchants in the United States including
Microsoft, Sephora, and Symantec.
A key driver of Adyen’s path to success has been the company’s single platform approach
to payments. As the line between e-commerce and brick and mortar begins to blur, it is
becoming increasingly important for payment processors to offer an easy-to-integrate
solution across offline and online commerce which enables cross-border transactions.
Adyen’s single platform model has enabled it to quickly win new, multinational clients.
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Company snapshot
Year launched: 2006
Headquarters: Netherlands
Countries: worldwide
Employees: 500
Funding to date: > $265mn
Last disclosed round: Venture
Last funding amount: $250mn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 41
Core product offerings
Adyen’s core product offering involves payment enablement online, in-app, and at the
physical point of sale. Along with its payments offerings, Adyen provides merchants with
risk and optimization services to better run their businesses.
(1)
Payment processing: Adyen’s core payment processing offering helps merchants
accept electronic payments in store, in app, and online. The company’s brick & mortar
and online offerings help merchants achieve an integrated omni-channel payment
solution. Adyen offers its POS solutions to merchants across the United States and
Europe, and has partnered with VeriFone to distribute hardware solutions.
(2)
Risk and optimization: Adyen’s integrated risk management solutions including
RiskProtect and ShopperDNA offer merchants enhanced fraud defense to minimize
chargebacks.
Differentiation and growth strategy
Adyen has successfully scaled worldwide despite its original regional presence in Europe.
Its key differentiator is its all-in-one offering (gateway, risk management, and processing)
which enables cross-border payments for international online businesses. Adyen also
received a pan-European banking license in June 2017 that allows it to bypass banks and
process cross-border payments directly to its merchant customers.
Adyen recently expanded its strategy to physical POS systems that deliver a seamless
omni-channel experience. We believe Adyen’s ability to gain scale in offline payments will
be critical to its future growth trajectory. We estimate that offline payments as a share of
total payment volumes could expand from 8% in 2016 to 47% in 2026. We believe Adyen’s
easy-to-integrate API, geographic expansion, and offline growth will allow the company to
grow its card payment volumes faster than the market over the next decade (29% CAGR vs.
6% for the overall market).
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 42
Interview with…Will Gaybrick, CFO of Stripe
GS Research Internet analyst Heath Terry and Payments
analyst James Schneider spoke to Will Gaybrick, CFO of
Stripe. Since its founding in 2010, Stripe has built a sleek
technology stack that helps over 100,000 businesses
accept online payments and expand their global reach.
Heath Terry: When Stripe wins, what’s the most common
reason? When Stripe’s competitors prevail, why is that usually
the case?
Will Gaybrick: Stripe is the overwhelming choice for extremely fast
growing companies, “innovation divisions” at large incumbents, and
any internet or mobile-first company doing anything complex with
funds flows.
While payments is at the core of Stripe, we’ve also built an entire
suite of products that sit atop our deep financial and technological
infrastructure. The result is a comprehensive set of software tools for
starting and running an online business. This is everything from
incorporating a company and managing fraud to business analytics
and handling pay-ins and pay-outs globally. In this vein we’ve
launched Stripe Sigma, Radar, and an updated version of Connect
in the past year.
Stripe makes moving money as easy as spinning up a server on
AWS—and all this functionality is integrated into one stack that’s
constantly improving under the hood.
Terry: Some of your leading-edge competitors are increasingly
emphasizing omni-commerce solutions that include brick-and-
mortar payment acceptance. Is that part of Stripe’s strategy,
and if so, how big could the brick-and-mortar business be over
time?
Gaybrick: Internally we say our goal is to increase the GDP of the
internet. That may sound lofty, but we mean that in a very practical
way. We aim to help more businesses get started and to help them
grow more quickly, no matter where they are in the world, or what
their business model is. It’s pretty unusual that a brick-and-mortar
coffee shop or a hair salon wouldn’t get started because they
couldn’t accept money from their customers. So we focus on the
online companies selling to a global audience.
Particularly for more complex internet business models like
marketplaces, companies have to build serious treasury
infrastructure to be able to carry out basic operations. These are the
types of problems we’re most interested in solving and where you’ll
see us devote continued effort in the coming months and years.
That said, we already support many customers using Stripe as an
omni-channel solution. These are typically larger customers
consolidating their payments onto the Stripe platform.
James Schneider: How important is international expansion to
Stripe’s growth outlook, and which countries do you see as
being the most promising opportunities?
Gaybrick: Despite how it sounds, the “global online economy” in
2017 is still anything but global. Only around 5 percent of global
commerce happens online today, and of that 5 percent, most is still
fairly local. You mentioned our recent launches in Europe. Today
only about 16 percent of online commerce happens across borders –
even within the EU.
In Europe we’ve shipped 65 major improvements to the Stripe
platform over the past 18 months, including adding support for new
countries, Apple Pay, 3DSecure, local payment methods like iDeal
and Sofort, and more. In the past year we’ve also launched
operations in Singapore, Japan and Hong Kong, as well as new
global partnerships with Alipay and WeChat Pay, which were both
industry firsts.
It would be relatively easy for us to launch the same US-centric
product everywhere – it would certainly be faster. But we deliberately
push against that, and our conception of payments is different. Stripe
is a fully integrated payments platform that helps internet businesses
start, run, and scale.
Will Gaybrick Heath Terry James Schneider
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 43
Stripe
Operating in more than 25 countries, Stripe enables payment acceptance for internet
businesses online and in mobile applications via its APIs. Stripe helps enable payment
acceptance for early-stage businesses, and typically focuses on mobile commerce, sharing
economy companies, SaaS businesses, nonprofit companies, and software companies
seeking to add payment functionality to their websites. We expect Stripe to continue
growing at a rapid pace as de novo businesses launch and scale (Exhibits 41 and 42).
Key merchants: Over 100,000 businesses including Target, Lyft, TaskRabbit, Splunk,
Facebook, and Salesforce.
Pricing: Stripe offers two forms of pricing for its customers, depending on the size of
the business. Smaller businesses can set up a “pay as you go” model, which charges
2.9% + $0.30 per card transaction (0.8% with a $5 cap on ACH and Bitcoin), which is
consistent with domestic fees charged by PayPal and Amazon Payments. Enterprises
receive customized pricing with additional services including account management,
migration assistance, and dedicated support. The company’s core payment product
includes the Subscriptions service as well.
Competitors: Stripe faces competition from both traditional acquirers and their
gateways and newer technology companies like PayPal/Braintree.
Exhibit 41: We expect Stripe’s volume growth to outpace
the market over the next ten years
Stripe and relevant market volume growth rates
Exhibit 42: We expect Stripe to target e-commerce and
international expansion to continue its growth trajectory
Stripe payment volume by channel
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
A brief history and drivers of success
Stripe, based in San Francisco, launched in 2011 (though a private beta was available
earlier) with its core payments product. The United States is the company’s largest market,
although Stripe operates in over 25 countries. The company has received over $440mn in
funding to date, with an implied valuation of $9bn in November 2016.
Although Stripe was not the first company to enable online payments, the company’s focus
on simple, easy-to-implement APIs has driven its success. Stripe is focused on shortening
the payment implementation time, which could take up to 6 months with legacy gateways.
Stripe’s gateway does not change the website’s user interface, so merchants do not have
to make last-minute adjustments to website aesthetics in order to accept payments. In
some cases, Stripe has integrated its APIs on behalf of the merchants, providing a high
level of customer service compared to competitors.
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B2B (card - Europe)
Other online (Europe)
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Sharing economy (travel - US)
Sharing economy (Uber + Lyft - US)
Food delivery
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Company snapshot
Year launched: 2010
Headquarters: San Francisco
Countries: 25
Employees: >700
Funding to date: $440mn
Last disclosed round: Series D
Last funding amount: $150mn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 44
Core product offerings
Stripe’s flagship product is a suite of payment enabling offerings, which quickly helps
merchants accept payments online. The company has since expanded its offerings with
products such as Atlas and Connect that help companies launch and grow. We highlight
Stripe’s core offerings:
(1) Payments and Subscriptions: Stripe’s core Payments offering is comprised of its
commerce toolkit. Developers are able to build customized experiences or select pre-
designed options. Stripe’s Subscriptions offering, an automated billing system that
allows merchants to send customers their bills, is complementary. This core offering is
built to ensure ease of use, short implementation time, and security.
(2) Connect:
Stripe’s Connect offering allows businesses and consumers to connect their
Stripe accounts to the merchant’s account in order to enable the routing of payments
and recipients. Connect also offers an instant payout option for users for an additional
fee.
(3) Sigma: One of the company’s newest products, Sigma offers merchants the ability to
analyze business data in order to develop key insights. Businesses including Slack and
Harri have used Sigma to reconcile their card transactions.
(4) Relay: This offering allows one merchant to list its products on the app of another
merchant via Stripe’s API.
(5) Atlas:
Another recent offering launched by Stripe, Atlas helps entrepreneurs set up
their online businesses, from opening a bank account to becoming incorporated and
establishing a tax ID.
(6) Radar:
With its Radar product, Stripe offers data-driven tools that use machine
learning in order to detect and prevent credit card fraud.
Differentiation and growth strategy
Stripe’s easy-to-implement payments APIs have allowed the company to build a strong
book of business. By offering ancillary products like Connect (disbursements), Sigma (data
and analytics), and Atlas (business set-up), Stripe is able to cross-sell other offerings into
its existing client base. We believe these product offerings will improve client retention
levels and provide a steady pipeline of new customers through its Atlas product. The
company has grown its global footprint, with active beta/preview launches in 12 countries
along with full support for 12 countries.
Stripe has also secured some important partnerships to facilitate its growth and expand
into new geographies. Most recently, Stripe struck global partnerships with Alipay and
WeChat Pay (Tencent) that enable Stripe’s merchants to integrate the ability for Chinese
users to pay with these Chinese payment apps on their websites in July 2017. Stripe also
partnered with Visa and Mastercard in 2015 and 2016 to facilitate fund disbursements.
We expect Stripe’s growth strategy to consist of three elements: (1) continue gaining
market share by targeting de novo businesses that will scale over time; (2) expand into new
geographies and new markets; (3) cross-sell complementary software offerings. Given its
playbook of core payments functionality coupled with ancillary software offerings, we
believe Stripe is in many ways an online version of Square. Although Stripe’s public
disclosures are limited, we estimate Stripe processed about $30bn in 2016, up roughly 50%
from about $20bn in 2015, and we expect Stripe’s growth to continue to outpace the overall
market. By market, we estimate Stripe has the greatest market penetration in food delivery
and the sharing economy, but we believe traditional e-commerce is the largest contributor
to overall volume given its sheer size.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 45
Alipay
Alipay is the payment arm of Ant Financial Services Group, and operates a third-party
online payment platform that serves 520mn active users annually. According to Analysys,
Alipay is the largest player in China’s third-party payment market with about 37% market
share. Beyond payment processing and escrow services to Alibaba’s ecosystem, Alipay’s
mobile payment app serves as an important entry point for its users to access other
services provided by Ant Financial, Alibaba Group, and their business partners.
Key merchants: Taobao, Tmall, Ctrip, Weibo, Didi Chuxing, millions of offline
merchants (per People.cn), and millions of SMEs in Alibaba’s ecosystem.
Pricing: Alipay offers various payment services for merchants, including PC online
payment, mobile online payment, in-app payment, offline payment, and QR-code
payment designed for small offline merchants. The pricing of these services is set from
0.0% to 1.2% of transaction value (Exhibit 43). Alipay is currently promoting QR-code
payments to small offline merchants, and this service is offered for free. SME
customers are entitled to a lower rate of 0.55%, with the exception of those in the
online gaming business. Individuals and merchants are also charged from 0.1% to
0.2% for transferring money from Alipay to their bank accounts (Exhibit 44).
Competitors: Alipay competes mainly with Tencent’s Tenpay and China UnionPay, as
well as smaller platforms such as JD Pay, Baidu Wallet, Lakala, and Wanda Group’s
99Bill.
Exhibit 43: Pricing for transaction services
Exhibit 44: Pricing for transfer to bank account
Source: Company data.
Source: Company data.
A brief history and drivers of success
Alipay was established in 2004 as an escrow service provider to Alibaba’s Taobao
marketplace. Alipay allows consumers to verify the receipt and quality of goods before
releasing money to sellers, which solved the lack of counterparty trust in the early days of
e-commerce and helped Alibaba to emerge as China’s leading e-commerce platform. In
2005, Alipay expanded its operation to external payment scenarios including online
gaming, transportation ticketing, public utilities, other e-commerce platforms, and mobile
payment, and has established itself as the leading third-party payment platform in China. In
2014, Ant Financial Services Group was founded, and Alipay became their payment arm
and important entry point for Ant’s other four pillars: wealth management, financing,
insurance, and credit.
Core product offerings
Alipay, together with other services by Ant Financial, provides comprehensive financial
services for consumers (Exhibit 45):
Payment: Alipay’s payment function enables transactions between 520mn annual
active users and millions of merchants and organizations, both online and offline.
Consumers top up their Alipay account with a linked bank account, after which they
Alipay transaction services Cost Term
PC online payment 0.6% 1 year
Mobile online payment 0.6% - 1.2% 1 year
In-App payment 0.6% - 1.2% 1 year
Offline payment 0.6% 1 year
QR-code payment Free In promotion
For SME merchants* 0.55% In promotion
*: SME promotion excludes SMEs in online gaming businesses
Alipay transfer to bank account Cost Note
Individual (real-name verified) 0.10%
Cumulative Rmb20k free
transfer
Individual (not real-name verified) 0.10% N/A
Merchants (same day transfer) 0.20%
Merchants (next day transfer) 0.15%
Rmb50k/100k transfer limit
to individual/enterprise
account; Rmb2mn daily
transfer limit.
Company snapshot
Year launched: 2004
Headquarters: Hangzhou,
China
Countries: 110
Employees: >3,600
Funding to date: >$6bn
Last disclosed round: Series B
Last funding amount: $4.5bn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 46
can transfer money to friends and family, or purchase products and services through
PC, mobile, in-app, and offline payment channels.
Wealth management: Alipay allows users to access Ant Financial’s wealth
management products including Ant Fortune, an online marketplace for investment
products, and Yu’e Bao, the world’s largest money market fund (per Financial Times)
with Rmb1.4 trillion ($206 bn) AUM. According to Alibaba, Ant Financial’s wealth
management products have attracted 330mn cumulative users by the end of March
2017.
Financing: Alipay users can also access consumer financing product Ant Credit Pay
and Ant Cash Now, which now have 100mn annual active users. Ant Credit Pay allows
users to buy on credit and repay next month, and it supports Taobao, Tmall, and
several other external platforms. Ant Cash Now provides consumer credit to
creditworthy users, and can loan up to Rmb50k (about $7.4k) for up to 12 months.
Ant Insurance Service: Ant Financial’s insurance arm operates an online marketplace
for Alipay users to purchase insurance products from various insurance companies,
including Cathay Insurance and Zhong An Insurance, two companies in which Ant
Financial has invested. Insurance products on the platform cover accidents, health, life,
property, car and travel, and the platform now has 392mn annual active users.
Credit system: Ant Financial also provides Alipay users with a personal credit system
called Zhima Credit, which calculates a credit score by leveraging cloud computing and
deep learning technology. Users with high Zhima Credit scores are entitled to greater
credit lines from Ant Credit Pay and Ant Cash Now, riding shared bicycles without
deposits, among other privileges.
Exhibit 45: Ant Financial’s leading breadth and scale
Source: Company data.
Differentiation and growth strategy
Alipay’s role as the payment infrastructure of Alibaba (and Ant Financial’s ecosystem)
differentiates itself as being more commercially relevant than competitive offerings.
According to Alibaba, 70% of Alipay’s transactions are commercial transactions (30%
money transfer and red packets). This has allowed Alipay to gain 61.5% market share in the
monetize-able third party payment market, as per iResearch.
Alipay has launched the Cashless Society initiative in February 2017, aiming to convert
China to digital payments in five years. With this initiative, Alipay has pushed its offline
applications into more use cases, including public transportation and small offline
merchants (with free QR-code payment). Alipay is also rapidly
expanding overseas
: it now
has members from 110 countries, and recently signed a strategic cooperation with Monaco
to build a cashless country.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 47
Tenpay
Tenpay is Tencent’s third-party payment platform; it provides technical infrastructure
support for WeChat Pay and QQ Wallet, two products based on Tencent’s dominant social
and communication platforms, WeChat and QQ. According to Tencent, its mobile payment
function has surpassed 600mn month active users and 600mn daily payment transactions
in December 2016. Per Analysys estimates, Tenpay has 25.5% share in China’s third-party
payment market, second only to Alipay.
Key merchants: JD, Didi Chuxing, Meituan Dianping, Watsons, 7-Eleven, eLong, and
more than 700k offline merchants (per “Cash-Free Day” on August 8, 2016).
Pricing: Tencent charges WeChat Pay merchants 0.6% of transaction volume, with the
exception of virtual online services, which are charged 1.0%. For enterprise accounts
that subscribe to Tenpay’s instant transfer services, Tencent charges 0.4% to 1.5% of
transaction volume, depending on the plan and transaction volume. To transfer money
to bank accounts using WeChat Pay, merchants can transfer for free, while individuals
are subject to a 0.1% fee (each individual is entitled to Rmb1,000 (about $150)
cumulative free transfer amount) (Exhibit 46).
Competitors: Tenpay mainly competes with Ant Financial’s Alipay and China
UnionPay, as well as smaller competitors such as Baidu Wallet, Lakala, and Wanda
Group’s 99Bill.
Exhibit 46: WeChat Pay and Tenpay cost structure
Source: Company data.
A brief history and drivers of success
Tenpay was established by Tencent in 2005 along with its e-commerce platform Paipai, and
served a similar escrow function as Alipay. Tenpay subsequently expanded its usage to
other use cases, marked by strategic cooperation with China Southern Airlines (2007),
China Unicom (2009) and Deppon Logistics (2010). Tenpay and WeChat launched WeChat
Pay in August 2013, and gained strong momentum with its red packet feature, the rapid
advancement of its online-to-offline (O2O) model, and the rise of online taxi hailing and
Didi Dache (backed by Tencent). WeChat Pay has developed into a critical pillar in
Tencent’s “Connect” strategy by commercially connecting its 938mn MAUs with WeChat
Official Account, strategic partners (JD, Meituan Dianping, Didi, Mobike), and offline
merchants.
Core product offerings
Other than payment processing for merchants, Tenpay’s main product offerings are
WeChat Pay and QQ Wallet, which provide similar features on different platforms.
Peer transfer and red packet: This feature leverages and reinforces WeChat’s social
feature, allowing users to transfer money to WeChat friends (can be in red packet
format), send probability-based red packets to group chat, and request payment in a
Industries Cost
Online virtual services 1.00%
Other industries 0.60%
Tenpay Plan fee (Rmb) Plan limit (Rmb) Implied cost within plan Cost exceeding plan limit Term
1,200 100,000 1.20% 1.50% 1 Year
2,000 200,000 1.00% 1.50% 1 Year
4,000 500,000 0.80% 1.50% 1 Year
6,000 1,000,000 0.60% 1.50% 1 Year
11,000 2,000,000 0.55% 1.50% 1 Year
25,000 5,000,000 0.50% 1.50% 1 Year
40,000 10,000,000 0.40% 1.50% 1 Year
WeChat
Pay
Tenpay
Company snapshot
Year launched: 2005
Headquarters: Shenzhen,
China
Countries: 15
Employees: N/A
Funding to date: N/A
Last disclosed round: N/A
Last funding amount: N/A
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 48
group chat. QQ Wallet also developed “Password Red Packet,” giving red packets only
to those who repeat a password, making money transfer more social and engaging.
Products/services by partners and merchants: Tencent connects its social network
users with strategic partners and other merchants, with WeChat Pay and QQ Wallet
serving as critical infrastructure and entry points. Through these services, users can
access JD (e-commerce), Meituan Dianping (O2O), Didi Chuxing (ride hailing), Mobike
(bicycle sharing), eLong (hotel), and 58 Home (local services). In addition to existing
mobile and offline payment functions (bar code and QR code payment), WeChat Pay
also provides payment services for WeChat Mini Program, empowering offline SMEs
and connecting offline services to online users.
Wealth management: WeChat Pay and QQ Wallet provide entry points to Tencent’s
wealth management platform Li Cai Tong, which is a marketplace for wealth
management products such as money market funds and index funds. According to Li
Cai Tong, they have 100mn total users and Rmb140bn (about $20bn) assets invested.
Differentiation and growth strategy
Tenpay’s key advantage lies in the ubiquity of Tencent’s social and communication assets,
WeChat (938mn MAUs) and QQ (861mn MAUs), through which Tenpay’s services are
offered. This significantly lowers the customer acquisition cost (CAC) for WeChat Pay and
QQ Wallet, and underpins its strong performance in mobile and offline payments.
We believe Tenpay’s key focus for growth is still offline payments. We expect promotion
events such as August 8 “Cash-Free Day” (continued in 2017 as well) and initiatives such
as Mini Program will help Tenpay further enhance its position in mobile and offline
payment markets. According to Analysys, Tenpay’s share in the third-party mobile
payment market has increased from 11.4% in 1Q15 to 39.5% in 1Q17 (Exhibit 47).
Exhibit 47: Third-party mobile payment market share
Source: Analysys.
75%
74%
72%
67%
63%
55%
50%
54%
54%
11%
13%
16%
20%
23%
32%
38%
37%
40%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Alipay Tenpay Others
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 49
Paytm
Paytm is India’s largest mobile payments platform, and it also operates one of India’s
leading e-commerce platforms. According to the company, Paytm has reached over 220mn
registered users since its establishment in 2010. For the fiscal year ended March 2017,
Paytm processed 1.5bn transactions, with GMV of US$5bn. Alibaba and Ant Financial are
strategic investors in Paytm’s parent company One97 Communication, as well as its e-
commerce spinoff Paytm Mall.
Key merchants: Airtel, Tata Docomo, Vodafone, Aircel, BSNL, Idea Cellular, and 5mn+
merchants integrated with “Pay with Paytm” mode.
Pricing: Paytm charges merchants a flat fee of 1.99% for accepting payments, which
includes Whatsapp/SMS link payment, website online payment, and in-App payment.
To transfer money from Paytm to a bank account, merchants can transfer free of
charge, while individuals are charged 2% of transaction amount. Paytm introduced a
2% charge on credit card top-ups in March 2017 to curb improper usage (this was
suspended shortly thereafter). Currently, individuals can top up their Paytm Wallet with
credit card, debit card or online bank account free of charge (Exhibit 48).
Competitors: In the mobile payment market, Paytm mainly competes with peers such
as MobiKwik, Freecharge, and Citrus Pay. In the broader payment market, Paytm’s
competitors also include payment platforms backed by banks, such as HDFC’s Payzapp,
ICICI’s Pockets, and Axis’ Lime.
Exhibit 48: Paytm’s cost structure
Source: Company data.
A brief history and drivers of success
Paytm was launched by One97 in 2010 to facilitate bill payments and e-commerce via
mobile devices. Since then, Paytm has expanded selectively into the online-to-offline (O2O)
segment, initially by selling bus tickets and then movie tickets. In January 2017, Paytm
Payments Bank Limited (PPBL), 49% owned by One97 Communications and 51% owned by
private investors, was awarded a payments bank license. In March 2017, Paytm launched
bill payment services in Canada, marking its first move outside of India.
Core product offerings
Paytm started with online mobile recharge and bill payment, and has expanded its
operation to online travel agency (OTA), online-to-offline (O2O), and offline payment
scenarios.
Mobile recharge: Paytm allows users to recharge their mobile phone online. Paytm
supports India’s top cellular networks, including Airtel, Vodafone, Idea, Reliance
Industries, Tata Docomo, and others.
Bill Payments: Paytm users can pay their electricity bill, gas bill, water bill, education
admission fee, insurance premium and loans online.
Travel booking: Paytm also offers the complete range of travel bookings, including bus,
train, flights and hotels. According to a company announcement in February 2017, its
annualized GMV from the travel vertical has crossed US$500mn.
Part
y
Activities Charges Note
Merchants
A
ccept pa
y
ments with Pa
y
tm 1.99% Support Whatsapp/SMS, app and website
Merchants Transfer mone
y
to bank account 0.00%
Individual Transfer money to bank account 2.00% Up to Rs.20k per month and Rs.5k per transaction
Individual Top up Paytm Wallet 0.00% Suspended 2% credit card top up charges in Mar'17
Company snapshot
Year launched: 2010
Headquarters: Noida, India
Countries: 2
Employees: >11,000
Funding to date: $2.4bn
Last disclosed round:
undisclosed
Last funding amount: $1.4bn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 50
Entertainment ticketing: Paytm launched a movie ticketing business in March 2016,
and is connected to 3,500 screens in more than 550 cities. According to The Economic
Times, Paytm’s movie ticketing GMV is above Rs 400 crore (US$61mn) since its launch
as of April 2017. Paytm also allows users to book tickets for events such as concerts,
comedy shows, and amusement parks.
Mobile and offline payment: Paytm users can pay offline merchants under Paytm’s
network by scanning a QR code, or send money to the merchants through a mobile
number. Paytm’s offline solutions cover grocery stores, chemists, restaurants, parking,
and even street food and milk booths.
Differentiation and growth strategy
In our view, Paytm has benefited from the presence of its strategic investor, the Alibaba
Group, which has brought capital, technology, and experience based on its own journey.
Paytm is critical to Alibaba’s two billion customer target by 2020. The Indian footprint has
the ability to attract as many customers by 2020 as Alibaba currently has in China.
We believe the genesis of Paytm, a telecom recharge and value-added service (VAS) re-
seller, is the reason the company understands the importance of being at the top of the
traffic funnel, as well as the transformation to smartphone. The company’s management
has a deep understanding of the importance of cross-selling, customer targeting, and
customer relationship. This is also the reason the management team had the necessary
conviction to enter the payment business, despite being a late market entrant in India.
We believe Paytm will continue to provide solutions where there is a social need, just as
Alibaba has done over the years by tapping into the e-commerce, payments, logistics,
cloud, and entertainment.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 51
PayU
Company overview
PayU provides payment and credit solutions to emerging markets in India, Eastern Europe,
and LatAm. The company processed over 400mn transactions for over 300k merchants in
17 markets for the year ending March 2017. PayU actively invests and acquires other
FinTech startups to grow its scale and product capabilities.
Key merchants: Adidas, Groupon, Tui, Sony, Booking.com, goibibo.com.
Pricing: PayU’s payments gateway has two pricing models depending on the size of
the online merchant, and pricing also varies by country. In India, PayU charges smaller
businesses 0.75% per transaction for debit cards and 2.95% for most credit cards and
wallets, compared to 0.75% and 2.25% for enterprise clients (respectively). In Mexico,
PayU charges smaller merchants 3.50% + P$4 per transaction (or about 3.50% +
US$0.22 at current exchange rates), with volume discounts for larger companies.
Competitors: PayU competes against PayPal, Adyen, Stripe, and local gateways. In its
credit business, PayU competes against traditional banks. PayU is not focused on the
competitive digital wallet space, where companies like Paytm and Flipkart operate.
A brief history and drivers of success
PayU is owned by Naspers, a South African-based technology conglomerate. For the year
ending March 2017, PayU generated $186mn in revenue (+33% yoy) and processed over
$16bn in total payment volume (+36% yoy). About 40% of its processed volumes are from
India, about 40% from Eastern Europe, and approximately 20% from Latin America.
Core product offerings
PayU has two core product offerings. PayU often makes investments in different FinTech
companies to bolster these offerings:
(1)
Payment gateway: PayU Hub provides local payment processing to online merchants.
PayU believes that its gateway can increase customer approval rates by as much as
40%. PayU’s gateway improves the customer experience by eliminating international
transaction and FX fees and providing access to local banking and alternative payment
methods. To extend its Indian merchant network, PayU acquired Citrus Pay for $130mn
in August 2016—the largest cash M&A deal in Indian FinTech history—and now has
over 50% market share of total e-commerce transactions in India.
(2)
Credit: PayU provides consumers and small businesses access to several different
local credit offerings which provide deferred payment for online transactions (LazyPay
in India; PayU Te Fía in Colombia), consumer loans to the underbanked (Kreditech in
Poland; Creditas in Brazil; and PaySense in India), and credit financing at the online
point of sale (ZestMoney in India). These products have been developed internally,
through partnerships, and through strategic investments.
Differentiation and growth strategy
We believe PayU has two key differentiators: (1) in-depth local market knowledge; and (2)
access to capital for FinTech investments. PayU’s on-the-ground teams understand the
complexities of each region they serve. Its gateway can deploy more than 300 payment
methods across its 17 markets, providing access to 2.3 billion new customers through a
single API. PayU also has capital to invest in promising FinTech companies, which has
been key to building out its consumer credit strategy. In the past year, PayU has made
several strategic investments, including Kreditech, Creditas, PaySense, and ZestMoney. We
expect PayU to continue investing in FinTech to expand its product offerings, gain scale,
and enter new markets. PayU is also focused on incorporating AI/machine learning into
payments models.
Company snapshot
Year launched: N/A
Headquarters: N/A
Countries: 17
Employees: N/A
Funding to date: N/A
Last disclosed round: N/A
Last funding amount: N/A
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 52
Q5: How are Visa and Mastercard positioned for the move online?
The advent of traditional e-commerce has accelerated the structural shift to electronic
payments, and e-commerce is a tailwind to volume growth for the networks. But
more important in the long run is the fact that we believe Visa and Mastercard have
positioned themselves to capture a substantial share of the untapped $45 trillion
volume opportunity we see in B2B payments, bill payments, and other emerging
areas. We see the networks maneuvering to become key players, with partnerships
to capture the next generation of opportunities in online payments over the next 10
years.
The transition to e-commerce is accelerating card penetration
As a greater share of consumer spending is done online than in-store, the penetration of
electronic card payments has accelerated. We estimate card penetration is roughly 50%
greater among traditional e-commerce (about 90%) compared to brick and mortar stores
(about 60%) in the United States. We estimate that for every 100bp increase in e-commerce
penetration as a percent of total retail sales, card penetration increases by 30bps, all else
equal (Exhibit 49).
Exhibit 49: For every 100bp increase in e-commerce penetration, card penetration
increases by 30bps
E-commerce as % of retail sales vs. card penetration as percentage of total spending
Source: Goldman Sachs Global Investment Research.
In our analysis, we divide US retail sales between brick-and-mortar and traditional e-
commerce sales to better understand the impact the transition to e-commerce has had on
card volumes over time. We focus exclusively on traditional e-commerce (rather than all
online payments), as total retail sales has an 85% correlation with Visa and Mastercard card
payment volumes.
We estimate that card penetration is about 250bps higher—or 4%
greater—today because of e-commerce (Exhibits 50 and 51). However, because e-
commerce has gained share at a fairly steady pace, we believe e-commerce has had a
more modest impact on Visa and Mastercard’s payment volume growth.
59%
60%
61%
62%
63%
64%
65%
66%
67%
0% 5% 10% 15% 20%
Card penetration as % of total spend
E-commerce as % of retail sales
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 53
Exhibit 50: Card penetration is slightly higher today
because of e-commerce
Card penetration for total retail sales and brick and mortar
only, 2Q08-1Q17
Exhibit 51: As e-commerce gained share, its benefit to
card penetration increased
Difference between total retail sales card penetration and
brick and mortar card penetration, 2Q08-1Q17
Source: Census Bureau, Goldman Sachs Global Investment Research.
Source: Census Bureau, Goldman Sachs Global Investment Research.
Visa and Mastercard’s key e-commerce initiatives
Digital wallets: Mastercard launched Masterpass in 2013 and Visa launched Visa Checkout
in 2014 (after V.Me was launched in 2012 and later abandoned) to provide consumers with
a streamlined and more secure payment experience, primarily online. Both products have
focused on the versatility of the digital wallet to be used anywhere (online, in-app, or in-
store) on any device (phone, tablet, or computer). In an attempt to emulate PayPal’s
success, Visa and Mastercard provide consumers with a payment login credential that
obviates the need to re-enter card details with retailers, reducing the rate of cart
abandonment and card fraud by 51% and 63%, respectively, according to Visa. Visa
Checkout and Masterpass have been adding users and merchants quickly (Exhibits 52 and
53), although their enrollment figures are dwarfed by PayPal. Despite PayPal’s large
customer base of 210mn active customer accounts, PayPal added 19mn active customer
accounts in 2016 – roughly the same number of total consumers enrolled in Visa Checkout
since its 2014 launch.
Exhibit 52: Visa Checkout users have steadily grown
Visa Checkout users (mns), July 2014-present
Exhibit 53: Masterpass is accepted at 340k merchants
Masterpass merchant acceptance, June 2013-present
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
According to our survey of merchant acquirers, ISOs, and ISVs, mobile wallet sentiment
improved significantly in early 2017 compared to prior year surveys, with 70% of
respondents now expecting mobile wallets to succeed (up sharply from 35% in 2016,
40%
45%
50%
55%
60%
65%
70%
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
Card penetration
Brick and mortar + e-commerce Brick and mortar
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
Incremental card penetration
0
5
10
15
20
25
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Visa Checkout users (mns)
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Merchants with Masterpass
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 54
Exhibit 54). However, Visa Checkout and Masterpass trail “big tech” names (Apple, Google)
and retailers (Walmart, Starbucks) in industry expectations on their likelihood to succeed.
Exhibit 54: Respondents have an optimistic outlook on mobile payments; “Big tech,”
retailers, and networks are expected to be winners
Based on your industry knowledge, which option best expresses your view on the prospects for
mobile payment apps and wallets?
Source: ETA, Goldman Sachs Global Investment Research.
Visa’s acquisition of CyberSource: Visa acquired online payment gateway CyberSource
in 2010 for $3.0bn to gain a foothold in online payment processing, and it is the second-
largest acquisition in Visa’s history as a public company (after Visa Europe). At the time of
the acquisition, CyberSource held significant market share, processing about 25% of online
transactions in the United States. However, beginning in 2013, CyberSource begin ceding
share to newer entrants Braintree and Stripe. We believe CyberSource’s struggle over the
last few years is a cautionary tale: with the online payments landscape evolving quickly,
any company with meaningful market share can be disrupted by more advanced and
easier-to-use technology.
B2B: Untapped market potential to sustain growth in next decade
B2B payments represent a huge market opportunity at 3.5X the volume of consumer
payments today. Historically, Visa and Mastercard have focused on penetrating consumer
payments (but have pursued selective B2B payments such as travel and entertainment
(T&E)). However, even modest penetration in B2B payments can drive meaningful
upside for Visa and Mastercard, and we believe the card networks are crystallizing
their product offerings while securing partnerships that will position them to capture
significant share over time.
B2B payments are made today mainly with paper checks (about 50%) and Automated
Clearing House (ACH) transfers (about 30%) (Exhibit 55). ACH transfers are aggregated into
batches, allowing banks to process them more efficiently and inexpensively relative to
paper checks. As a result, ACH has been taking share from paper checks (as it is cheaper
and digital) and this payment channel is expected to exceed check payments by 2020,
according to a survey by the CRF and NACHA (Exhibit 56). However, despite being
electronic, ACH remains a slow and manual process due to wide technology gaps between
the over 12,000 banks in the United States. Transfers typically take 1-3 days to process and
Mobile
payment
apps and
wallets will
fail to gain
traction
9%
It is too
early to say
21%
Apple and
Google
42%
Retailers
(Walmart,
Starbucks)
25%
Visa and
MasterCard
17%
PayPal
8%
Card issuers
(Chase, Bank of
America)
4%
Venmo
4%
Mobile payment
apps and wallets
will succeed
70%
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 55
clear, although the Federal Reserve is focused on bringing Faster Payments’ ACH options
to the United States with same-day (and over the long run, real-time) clearing. Perhaps
more important, ACH records provide extremely limited detail on the nature of the transfer
(sender, recipient, amount) – and businesses have no ability to track the details (such as
items being invoiced) underlying the transaction – thereby increasing the manual burden
attached to reconciling accounts payable and receivable.
Exhibit 55: B2B transactions made via check have
declined over the past decade…
% of organization’s B2B payments made with checks
Exhibit 56: …and this trend is expected to continue over
the next few years
US B2B payment breakdown
Source: Association of Financial Professionals.
Source: Credit Research Foundation, NACHA.
Enter Visa Direct and Mastercard Send: Simplifying B2B payments
Visa Direct and Mastercard Send are the networks’ products for real-time debit push
payments. The two products reverse the traditional payment flow to facilitate C2C, B2B,
G2C, and B2C payments. Visa Direct and Mastercard Send’s “push” capabilities—whereby
people, governments, and banks can proactively send funds to a bank account tied to a
debit card number —leverage the card networks’ existing infrastructure, security protocols,
and risk. These products are currently focused on disbursements, such as sharing economy
sites like Uber using Visa Direct to pay its drivers, or Berkshire Hathaway Travel Protection
using Mastercard Send to deliver travel insurance claims within seconds. These products
are small but growing quickly; Visa Direct volume increased 65% yoy to $12bn in 1Q17.
We believe the success of Visa Direct and Mastercard Send will rest on expanding their
partnerships with banks and software companies. For instance, Visa and Mastercard have
partnered with Fiserv to gain access to its client base of banks and credit unions that
service more than 4,600 banks and 21mn debit accounts. Visa Direct is also partnered with
Stripe, Hyperwallet, and Ingo Money to facilitate disbursements. On the software side, Visa
partnered with Amazon Business to provide US commercial accountholders full line-item
details on Amazon Business customers’ purchases, and Mastercard partnered with Oracle
to integrate its general ledger software directly with payments flows.
While the benefits of electronic payments (speed and cost) are obvious, we believe Visa
Direct and Mastercard Send offer unique advantages over ACH that will help them
penetrate the market:
Automatic reconciliation reduces overhead costs: Push payments provide rich data
records which allow businesses to record itemized details underlying transactions,
making it easier to record and track payments. Information such as item details,
invoice numbers, and descriptions can be easily transferred to and from accounting
software. This eliminates the need for manual reconciliation overhead associated with
tying individual payments to specific expenses and items – offering the potential for
dramatic reductions in office overhead.
81%
74%
67%
50%
51%
0%
20%
40%
60%
80%
100%
2004 2007 2010 2013 2016
Check B2B payment penetration
63%
50%
34%
22%
32%
45%
8%
11%
13%
7%
8%
9%
0%
20%
40%
60%
80%
100%
2014 2017 2020
% of B2B payments
Checks ACH Cards Cash/wire
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 56
Working capital and cash flow management: Visa Direct and Mastercard Send
improve cash flow for both buyers and suppliers. Payment times can be scheduled
precisely in advance (for example, according to net 30 or net 15 day rules), allowing
buyers to manage their working capital more efficiently and giving sellers increased
cash flow predictability.
Ease of use: ACH is not particularly efficient for one-off transactions, as it requires
each buyer-seller relationship to be set up separately with completed forms and
agreements. One-time B2B push payments offered by the card networks require only a
debit card number.
Security: ACH requires buyers to have a supplier’s bank account information, which
can raise security concerns, especially for first-time customers.
Real-time payments: Visa Direct and Mastercard Send both settle B2B transactions in
real-time. Although ACH may transition to real-time settlement over the next few years,
the card networks have a clear head start.
With nearly 80% of organizations in the process of transitioning their B2B payments from
paper checks to electronic payments (Exhibit 57), according to the Association of Financial
Professionals, we believe both the card networks and ACH stand to gain share.
Exhibit 57: Nearly 80% of organizations are in the process of transitioning their B2B
payments from paper checks to electronic payments
Reasons for moving away from paper checks
Source: Association of Financial Professionals.
VocaLink: Mastercard’s bet on the future of B2B payments
In order to accelerate its entry into fast ACH and the broader B2B payments market,
Mastercard acquired VocaLink in 2Q17 for approximately $920mn. VocaLink operates a
leading-edge instant payment clearing system (and ATM switching platforms) in the United
Kingdom and several other countries. Its real-time Faster Payments Service in the United
Kingdom serves as a useful model for the rollout of fast ACH in other countries globally.
We believe the VocaLink acquisition bolsters Mastercard’s presence in the United Kingdom
(where it has had limited market share) and diversifies its payments offering beyond cards.
We believe there is ample opportunity for both faster ACH and products like Visa Direct and
Mastercard Send to gain share from legacy B2B payment methods such as cash and check.
Virtual cards: Another potential avenue of growth
Virtual card payments are a way to automate the accounts payables process by using non-
physical credit card numbers – or “virtual cards” for payments. Compared to Visa Direct
and Mastercard Send, which facilitated “push” payments, virtual cards are stored value
instruments. A virtual card is a single-use account number that processes against a master
88%
82%
60%
38%
34%
0% 20% 40% 60% 80% 100%
Increase efficiency
Reduce cost
Fraud prevention
Facilitate straight-through-processing
Enhance remittance info handling
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 57
card account. The virtual card is created by an application that can be hosted by the bank
or the card networks. The virtual card application provides a secure, convenient, and smart
way for users to sign in, request a card and specify how it will be used (including things
like amount, timeframe, supplier name, number of transactions). While virtual payments
have been in existence for the last 10-15 years, the market is seeing an inflection in growth
driven by increased focus on cash management, product maturity and regulation-driven
demand in verticals like healthcare, construction, and online travel.
Virtual card use has become popular among online travel agents like Expedia in order to
reconcile online reservations with onsite payments at a hotel or car rental agency (Exhibit
58). Mastercard has found the most success in this space by partnering with FleetCor and
WEX to provide virtual card capabilities.
Exhibit 58: The travel sector has seen strong adoption of virtual cards
Virtual credit cards for travel suppliers
Source: Company data.
American Express’ B2B partnership with MineralTree: American Express has partnered
with MineralTree, an accounts payable automation company, to provide an integrated
solution for B2B payments that reduces the need for paper checks and enhances B2B
payment security through the use of a virtual card. AXP’s partnership embeds B2B
payment capabilities from MineralTree directly into AXP’s commercial T&E platform and
allows B2B payments using virtual card payments. AXP has also embedded the value
propositions of its traditional credit card offerings by connecting B2B payments over the
MineralTree platform with its Membership Rewards program, providing additional
incentives for adoption.
What risks can online payments pose to the card networks?
We highlight two potential risks to card networks that could arise from the transition to
online payments.
Pricing power could be hurt if a single merchant becomes too dominant. As the e-
commerce landscape consolidates, it is likely that large merchants will negotiate lower
merchant discount rates. The largest online merchant today is Amazon, and we estimate it
represents 1.9% of global card payments (excluding China) in 2016 and will be 5.5% in 2026
(assuming 100% of Amazon volumes are transacted through cards) (Exhibit 59). This does
not include the company’s Amazon Payments offering, which could drive incremental
bargaining power. While this could impact Visa and Mastercard’s spreads, we believe more
pain is likely to be absorbed by bank issuers (since they receive the majority of the
merchant discount rate) and merchant acquirers.
1
Booking
2
Request: Issue
single use con
3
Con sent to the
supplier
Consumer
4
Good service
delivered
Travel Co
6
Reconciliation
Virtual Credit
Card System
Supplier
Processes
5
Supplier charges
Credit card
Supplier
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 58
Exhibit 59: Amazon’s market share of card volumes set to grow to 5.5% by 2026
Amazon’s market share (including third party sales) of global card payment volumes (ex-China)
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
Second, if Chinese payment systems gain traction in the United States and Europe,
that could erode Visa and Mastercard’s market share.
Chinese consumers that use
Alipay or Tenpay do not have to pay with a credit card. These services provide interest-
bearing escrow deposit accounts that allow consumers to circumvent the card networks
entirely. If Alipay or Tenpay were to make significant inroads in the United States and
Europe, this could be a competitive threat to Visa and Mastercard. However, these Chinese
payment providers would have to address three main obstacles: (1) receiving bank-related
regulatory approvals to offer deposit accounts in each country of operation; (2) providing
additional incentives to win consumer wallet share, as card issuers (particularly in the
United States) offer more compelling rewards programs than those in China; and (3)
achieving high levels of merchant acceptance needed to make these forms of payment as
convenient as cards are today.
0%
1%
2%
3%
4%
5%
6%
2014 2016 2018 2020 2022 2024 2026
Market share
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 59
Q6: Can payment processors still grow as the market shifts online?
We believe traditional merchant acquirers will lose online payments share to players
like PayPal, Adyen, Stripe, and Wirecard who have more advanced technology
solutions and who serve more online-only merchants. While this phenomenon is not
new and has been impacting the growth of acquirers for years, we see an
increasingly narrow path to success for this group. We believe merchant acquirers
will continue consolidating in order to mitigate pricing pressure and sustain their
stock multiples going forward.
What is the online opportunity for traditional merchant acquirers?
We estimate online card volumes (credit plus debit) are growing twice as fast as offline
card volumes in the United States and EMEA (10.0% vs. 4.3% CAGR over the next ten
years). We believe online card spend captures more than traditional e-commerce and
includes categories like online travel, online bill pay, online B2B spend, and the sharing
economy. We believe online card payments represented 32% of total card volume in 2016
and will grow to 45% by 2026 (Exhibits 60 and 61).
Exhibit 60: Online card volumes are gaining share…
US and EMEA card volume, online and offline ($bn)
Exhibit 61: …as they grow roughly 2X faster than offline
card volumes
US and EMEA online and offline volume growth
Source: World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA,
Visa, Nilson Report, Goldman Sachs Global Investment Research.
Source: World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA,
Visa, Nilson Report, Goldman Sachs Global Investment Research.
Traditional merchant acquirers have been consistently losing online market share to newer
players like PayPal, Adyen, and Stripe that were quick to recognize the online payments
opportunity (Exhibit 62). We estimate that traditional merchant acquirers’ online market
share could decline by 13% over the next ten years including Amazon (from 89% in 2016 to
76% in 2026). Excluding Amazon, PayPal, Adyen, Stripe, and Wirecard, the online card
volume available to traditional merchant acquirers is growing at a 6.4% CAGR over the
next ten years, meaningfully slower than the 10.0% CAGR for the overall online market
(Exhibit 63).
Online card volume available to traditional merchant acquirers is set to
grow 200bps faster than offline volume over the next decade
(Exhibit 64).
$0
$5,000
$10,000
$15,000
$20,000
2015 2017 2019 2021 2023 2025
Card volume ($bn)
Offline Online
0%
2%
4%
6%
8%
10%
12%
2016 2018 2020 2022 2024 2026
yoy growth
Online Offline
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 60
Exhibit 62: Traditional merchant acquirers are losing online market share to players like
PayPal, Adyen, and Stripe
US and EMEA card volume online market share, 2016-2026E
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite Group, NACHA, Visa, Nilson Report, Goldman
Sachs Global Investment Research.
Exhibit 63: Online volume available to traditional
merchant acquirers is only growing at a 6% CAGR…
US and EMEA online card volume growth, 2016-2026E
Exhibit 64: …which is 200bps faster than offline volume
growth
US and EMEA traditional acquirer online and offline card
volume growth, 2016-2026E
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
Source: Company data, World Bank, Euromonitor, eMarketer, Adyen, Aite
Group, NACHA, Visa, Nilson Report, Goldman Sachs Global Investment
Research.
Increasing risks to growth suggests more consolidation is likely...
Risk 1: Retail sales growth is unlikely to remain constant
If retail sales growth slows, companies with more e-commerce exposure will likely be more
resilient. While a decelerating macro environment would weigh on any merchant acquirer,
we believe that companies with less e-commerce exposure will be more vulnerable. Brick-
and-mortar sales growth is driven more by macro variables than is e-commerce sales
growth, which is also driven by structural tailwinds. We have seen this relationship play
Amazon volume
PayPal
Adyen
Stripe
Wirecard
Traditional merchant
acquirers (ex-Amazon
volume)
0%
20%
40%
60%
80%
100%
2016 2018 2020 2022 2024 2026
4%
5%
6%
7%
8%
9%
10%
11%
12%
2016 2018 2020 2022 2024 2026
yoy growth
Online
ex-Amazon
ex-Amazon & PayPal
ex-Amazon, PayPal,
Adyen, & Stripe
0%
1%
2%
3%
4%
5%
6%
7%
8%
2016 2018 2020 2022 2024 2026
yoy growth
Traditional acquirer online Offline
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 61
out in recent changes in retail sales growth – all of which occurred in an expansionary
economic environment. The spread between e-commerce and brick and mortar retail sales
growth widens when retail sales growth decelerates (such as in 2012) and narrows when
retail sales growth accelerates (such as in 2016) (Exhibit 65).
Exhibit 65: Retail sales growth has an inverse relationship with the dispersion between e-
commerce and brick and mortar growth
left-axis: spread between US e-commerce and brick and mortar retail sales growth; right-axis:
US retail sales ex-food growth
Source: BLS, Haver, Goldman Sachs Global Investment Research.
Risk 2: Online share losses could accelerate.
Acquirers like PayPal, Adyen, Stripe, and Wirecard could continue to crowd out traditional
merchant acquirers. The analysis above does not take into account a potentially
intensifying competitive environment and accelerating market share gains for the names
noted above. We believe Chase Paymentech (which processes large Internet retailers like
Amazon) and Global Payments (which derives about 10% of its total company net revenue
from online) are particularly well-positioned online among traditional merchant acquirers.
Conversely, we note that merchant acquirers within our coverage universe (particularly
Global Payments) can take share from other traditional merchant acquirers among SMB
brick-and-mortar retailers to offset any online share losses.
Risk 3: Residuals could increase in the fast-growing integrated payments
segment.
We will watch changes in independent software vendors (ISVs) residuals carefully, as
upward pressure on ISV residuals (the portion of merchant acquiring spreads paid as a
commission to ISVs) could pressure net yields for traditional merchant acquirers. At the
moment, we expect residuals to tick up gradually, broadly consistent with the results of our
GS-ETA survey of merchant acquirers, ISOs, and ISVs (Exhibit 66). We believe ISVs seem
more focused on growth through volume than through price and the fragmentation of the
ISV market limits pricing power. Generally, we continue to view the shift to integrated
payments as a necessity to maintain share: integrated payments provide a stickier
customer base (more than 50% reduction in churn) and allow merchant acquirers to
compete on service elements other than price.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Retail Sales ex-Food
E-commerce vs. brick and mortar
E-commerce vs. brick and mortar Retail Sales ex-Food
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 62
Exhibit 66: ISV residuals are expected to increase, while ISO commissions are expected to
remain stable or decline
Which of the following do you view as the most likely trend for ISO and ISV commissions/
residuals over the next 3 years?
Source: ETA, Goldman Sachs Global Investment Research.
Risk 4: Pricing pressure could intensify if consolidation activity dries up
Our GS-ETA Merchant Acquirer survey shows that higher levels of industry consolidation
are well correlated with a more benign pricing environment. In Exhibit 67, we show that
recent acquisitions (such as TransFirst by TSYS and Heartland by Global Payments) likely
improved the pricing environment in our Spring 2017 survey after years of consistent
pricing declines. We expect merchant acquirers to continue to use their balance sheets for
further consolidation to keep the pricing environment in check. However, if acquisitions
were to slow down, we believe pricing pressure could intensify.
Exhibit 67: We believe an accelerated pace of acquisitions serves as a tailwind for pricing
left-axis: merchant discount rate for merchant with over $1mn in annual card volume; right-axis:
total acquisition spend lagged by ~1.5 years
Source: Company data, ETA, Goldman Sachs Global Investment Research.
...although the online shift is not the biggest risk facing the industry
We look to understand how growing online spend could impact merchant acquirer volume
growth, holding macro forces constant.
We find that, if e-commerce growth remains
constant or even accelerates slightly, there is likely only a modest negative impact on
a merchant acquirer’s volume growth trajectory.
40%
17%
57%
17%
3%
66%
ISOs ISVs
Stable Decreasing Increasing
0
1,000
2,000
3,000
4,000
1.84%
1.86%
1.88%
1.90%
1.92%
1.94%
1.96%
1.98%
2.00%
2014 2015 2016 2017 2018E
Acquisition spend ($mns)
Merchant discount rate
Merchant discount rate Acquisitions ($mns)
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 63
For the sake of simplicity, we limit our analysis to US retail sales, which have an 85%
correlation with Visa and Mastercard US card volume growth. Therefore, e-commerce and
brick and mortar sales growth serve as our proxies for online and offline spending,
respectively. E-commerce sales comprised 10.1% of retail sales in 2016. Given the higher
rate of card usage for e-commerce purchases, we estimate e-commerce comprised roughly
20% of US retail sales card volumes in 2016.
Accelerating e-commerce growth:
In this scenario, we hold total US retail sales growth
constant, but e-commerce sales growth accelerates by 10bps mom and levels at 16.5%.
This implies that brick and mortar growth would decelerate to offset the e-commerce
acceleration (Exhibit 68). We believe most traditional merchant acquirers would experience
modestly decelerating volume growth if e-commerce growth accelerated. While we believe
typical traditional acquirers derive 10-15% of volumes from e-commerce (below total
industry penetration of about 20%), this is partly offset by nearly 2X greater card
penetration for e-commerce sales vs. brick and mortar sales in the United States (we
estimate 90% vs. 50% based on company and industry data). Companies with less
exposure to e-commerce would be worse off, though – we find that an acquirer with little e-
commerce exposure will experience a meaningful deceleration in card volume growth over
five years (Exhibit 69).
Exhibit 68: Our scenario assumes e-commerce growth
accelerates to 16.5%, at the expense of brick & mortar
E-commerce and brick and mortar sales growth, 2010-2022E
Exhibit 69: Accelerated mix shift to e-commerce is offset
by accelerated mix shift to card spending
E-commerce sales growth accelerates: Volume growth for
theoretical, traditional merchant acquirers with different e-
commerce volume mix exposures
Source: BLS, Haver, Goldman Sachs Global Investment Research.
Source: BLS, Haver, Goldman Sachs Global Investment Research.
E-commerce sales held constant: We assume US retail sales growth and the spread
between e-commerce and brick and mortar retail sales growth remain constant. As a result,
e-commerce continues to gain share of total retail sales, as e-commerce sales growth
continues to outpace brick-and-mortar sales growth at the same rate (Exhibits 70 and 71).
We then use the regression between retail sales and card volumes to calculate e-commerce
and brick-and-mortar card volume growth. Not surprisingly, merchant acquirers with lower
e-commerce sales exposure will grow more slowly.
However, when retail sales and e-
commerce sales are constant, there is a mild deceleration in card volume growth over
time for each business model (Exhibit 72).
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Sales growth
E-commerce Brick & mortar
6%
7%
8%
9%
10%
2017 2018 2019 2020 2021 2022
Volume growth
5% e-com 10% e-com 15% e-com 20% e-com
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 64
Exhibit 70: E-commerce continues to gain share…
E-commerce as % of total retail sales, 2010-2022E
Exhibit 71: …as we hold the spread between e-commerce
and brick and mortar sales growth constant
E-commerce and brick and mortar sales growth, 2010-2022E
Source: BLS, Haver, Goldman Sachs Global Investment Research.
Source: BLS, Haver, Goldman Sachs Global Investment Research.
Exhibit 72: The less e-commerce exposure an acquirer has, the bigger the headwind if e-
commerce growth accelerates
E-commerce sales growth stable: Volume growth for theoretical, traditional merchant acquirers
with different e-commerce volume mix exposures
Source: BLS, Haver, Goldman Sachs Global Investment Research.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
E-commerce as % of total
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Sales growth
E-commerce Brick & mortar
6%
7%
8%
9%
10%
2017 2018 2019 2020 2021 2022
Volume growth
5% e-com 10% e-com 15% e-com 20% e-com
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 65
Q7: How is e-commerce changing the consumer credit landscape?
Looking back at the evolution of the payment ecosystem both online and offline,
payments companies have aimed to tackle two main issues to drive increased
consumer spending: (1) make the payment experience more convenient; and (2)
expand consumer spending capacity. Every party—from card networks to digital
wallets to payment gateways to merchant acquirers—can credit their success to
addressing some aspect of these two issues. The rise of online point of sale (POS)
credit facilities over the last decade is no different.
An online POS credit facility provides the ability for consumers to sign up for flexible
financing for an online purchase at checkout.
This stands in contrast to a standard online
lender like Lending Club or SoFi, which are trying to drive standalone loan issuance and
refinancing. Instead, online POS credit facilities are an alternative to using the credit facility
on a credit card. We view them as the digital version of in-store credit card offerings of
companies like Synchrony. We highlight two companies, Affirm and Klarna, which provide
installment loans to consumers originating at the point of sale. Affirm and Klarna pay the
merchant the full price of a customer’s purchase (with funds supplied by a partner bank),
and then Affirm and Klarna collect installment payments from consumers (Exhibit 73).
While the mechanics behind Affirm and Klarna look similar, the two companies evolved in
different ways. We believe Affirm’s platform is focused on providing a cash management
solution to specific demographics such as millennials, which Affirm believes are averse to
conventional bank-sponsored credit card products. On the other hand, Klarna was initially
focused on reducing cart abandonment with its Klarna Checkout product, which allows
customers to order and receive online goods before making payments. Its installment loan
solution is an ancillary offering to Klarna Checkout merchants. Nonetheless, both Klarna
and Affirm seek to tackle the two core issues at the center of all successful payments’
companies: convenience and spending capacity.
Exhibit 73: Business model for online POS credit facilities, Affirm and Klarna
Exchange of information and payments when customer pays using installment loan
Source: Goldman Sachs Global Investment Research.
Customer Merchant
Affirm/
Klarna
Bank
Checkout/shipping info
Goods
Purchase
information
Pays
merchant
in full
Loan to pay
merchant in
full
Installment
payments
Payment info/
bill reminders
Installment
payments
Exchange of information
Exchange of money
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 66
Affirm
Company overview
Affirm is transforming personal lending online. Affirm differentiates itself from personal
lending peers in that it provides financing alternatives to consumers directly at the point of
sale as an alternative to traditional bank- or retailer-sponsored credit cards.
Key merchants: Casper, Wayfair, Expedia, Peloton, Tradesy, Reverb, Joybird Furniture,
and Motorola.
Pricing: Affirm loans vary between 10% and 30% APR simple interest paid over 3, 6, or
12 month periods. Merchants have the option of customizing the interest rates for
certain products, product categories, cart sizes, or promotions. To drive incremental
volume, merchants can offer 0% APR financing on a promotional or permanent basis.
There are no hidden fees or deferred interest on loans.
Competitors: Affirm is competing against traditional credit card lenders and services
like PayPal Credit. The company’s emphasis on pricing transparency and ease of use is
what makes it a compelling offering for consumers. The company claims that its
unique risk-scoring model looks beyond FICO scores, often reaching those overlooked
by the traditional credit scoring system.
A brief history and drivers of success
Affirm was founded in 2012 by PayPal cofounder Max Levchin. It has raised $420mn in
three rounds of equity funding. In April 2017, Affirm announced its one millionth consumer
installment loan. Affirm’s loan volume more than tripled in 2016, growing to hundreds of
millions of dollars, and the number of retailers offering Affirm’s services has grown from
just 100 at the end of 2015 to over 900 in April 2017.
Affirm has a couple of key differentiators: (1) a unique product offering, targeted toward
millennials with a potential aversion to credit card products; and (2) clear transparency that
drives high levels of customer satisfaction (and a Net Promoter Score of +72).
Core product offerings
Affirm offers installment loans to consumers directly at the online point of sale. Loans are
approved in real-time, the merchant processes the order, Affirm settles the full amount
with the merchant, and the customer pays Affirm over time with a debit card, bank transfer,
or check. There is a simple and transparent pricing structure, and consumers can customize
the loan duration.
Differentiation and growth strategy
Affirm believes it can maintain a sustained long-term advantage over traditional lending
products given its lower cost of customer acquisition combined with its risk-scoring model.
Affirm has grown its retail partner base quickly for two reasons. First, there is a clear value
proposition for retailers. When retailers use Affirm, they see average order value increase
by 75%, merchant conversion increase by 20%, and revenue per visitor increase by 10%.
Affirm also eliminates chargebacks for merchants, as it takes on repayment and buyer
fraud risk. Second, Affirm has partnered with several e-commerce platforms such as
Salesforce Commerce Cloud, Magento, Shopify, and NetSuite to expand its merchant reach.
It is also planning to expand its installment loan offering to offline spending.
Company snapshot
Year launched: 2012
Headquarters: San Francisco
Countries: 1
Employees: 101-250
Funding to date: $420mn
Last disclosed round: Series D
Last funding amount: $100mn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 67
Klarna
Company overview
Klarna is simplifying online checkout by expanding the traditional gateway to include
consumer credit. With Klarna, the shopper no longer has to provide payment information
at checkout and can receive the product before paying for it. Klarna also offers installment
loans to customers during checkout. The company has serviced 45mn customers with 65k
online merchants in 18 countries.
Key merchants: Spotify, Disney, Samsung, Wish, ASOS, and Overstock.com.
Pricing: Klarna charges a flat rate to the merchant for each transaction, although no
pricing is disclosed on its website. Klarna’s loans through Klarna Payments are
extended for 6-36 month payment terms with 19.99% APR for standard purchases.
Competitors: Klarna Checkout is competing against other gateways provided by
merchant acquirers, Stripe, or Braintree. Klarna Payments competes with traditional
credit card lenders and services like PayPal Credit. Klarna believes that its algorithms
can identify creditworthy customers better than conventional financial firms by relying
on details like the email and delivery address supplied, size and type of purchase,
device used, and time of day.
A brief history and drivers of success
Klarna is a Swedish company, founded in 2005. It has raised $521mn in equity funding, and
was valued at $2.5bn in 2017. In 2017, Visa and Klarna announced that Visa would invest in
Klarna (terms not disclosed) and pursue a strategic partnership. Klarna has dominant scale
in Sweden, where about 40% of all e-commerce sales are processed through it, and it has
expanded into other markets. Klarna acquired Sofort in 2013 and BillPay in 2017 to expand
its presence in Germany, and launched in the United States in 2015. The company has
disclosed that it increased transaction volumes 50% in 2016, and Pitchbook estimates
revenue above $450mn in 2016. By providing value to both retailers (by eliminating credit
card and fraud risk) and to consumers (by delivering products ahead of payment), Klarna
has grown rapidly and has differentiated from other gateway offerings.
Core product offerings
Klarna offers two products: (1) Klarna Checkout: Shoppers provide an email and delivery
address to the merchant at checkout, but no payment information. Klarna pays the
merchant upfront, and the shopper pays Klarna after receiving the product; and
(2) Klarna
Payments:
Klarna offers installment loans to customers directly at the point of sale. The
merchant processes the order, Klarna pays the merchant upfront, and the customer pays
Klarna over time. In Sweden, about 10% of Klarna’s transactions use financing.
Differentiation and growth strategy
The fact that consumers pay after delivery is a key aspect of Klarna’s differentiation, and
this can facilitate its growth for two reasons. First, as more online shopping is done on the
phone, consumers are demanding easier and more secure checkout. With Klarna,
consumers do not need to provide sensitive payment information when purchasing items
in crowded public places, and do not need to remember another username and password.
Second, shoppers do not have to pay until the goods are delivered, obviating delivery and
quality assurance concerns – which is especially important when shopping across national
borders. Klarna appears focused on international growth, making two acquisitions to gain
scale in Germany and launching in the US market two years ago. Klarna also streamlines
the payment process for merchants by providing a single integrated solution with a single
technical integration, one agreement, and one customer support. Its platform partners
include BigCommerce, Shopify, WooCommerce, and Magento.
Company snapshot
Year launched: 2005
Headquarters: Sweden
Countries: 18
Employees: 1500
Funding to date: $521mn
Last disclosed round: private
equity
Last funding amount: $225mn
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 68
Q8: What role will mobile wallets like Apple Pay play in the
emerging online payments landscape?
Mobile wallet adoption has been underwhelming to date by nearly every objective
standard, including initial penetration of smartphone users and repeat usage rate.
“The Pays”—Apple Pay, Samsung Pay, and Android Pay—do not disintermediate the
existing payment system, but instead reinforce it by relying on enhanced security
technology provided by Visa and Mastercard that significantly reduces fraud and the
leakage of personal financial data. However, we believe mobile wallets have not
gained meaningful traction because (1) they are not universally accepted online or in-
store; (2) consumers do not perceive them to be significantly easier to use than cards;
and (3) they have lacked rewards programs which would stimulate regular usage.
While we think mobile wallets stand a good chance of gaining traction in the long run,
we expect medium-term adoption to be slow for these reasons.
Exhibit 74: The types of digital wallets quickly multiplied from 2014-2016
Timeline of digital wallet launches
Source: Goldman Sachs Global Investment Research.
Timeline of digital wallet launches
We outline a timeline of digital wallet launches in Exhibit 74. The first digital wallets were
provided by Starbucks and Dunkin Donuts in 2011 and 2012 as part of their loyalty rewards
program. Visa and Mastercard launched their mobile wallet offerings in 2012 and 2013, and
Visa re-launched its offering in 2014. Apple was the first among mobile phone
manufacturers to introduce its digital wallet, launching Apple Pay nearly a year before
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 69
Samsung Pay and Android Pay. Banks and most retailers followed suit in 2015 and 2016.
As a result of the rapid pace of these launches, it is not surprising to us that there is
significant confusion among consumers about how and where to use digital wallets, as
reflected by our survey of merchant acquirers, ISOs, and ISVs in early 2016 (see our April
19, 2016, report, ETA – Goldman Sachs Merchant Acquirer and ISO Survey: Spring 2016).
How Apple Pay, Samsung Pay, and Android Pay work
Exhibit 75: Overview of token provisioning for Apple Pay transactions
Source: Goldman Sachs Global Investment Research.
Digital wallets provided by smartphone providers broadly work in the same way. They do
not attempt to disrupt the existing payment system, but rather work with payment and
technology incumbents (including networks and banks) to bring ease-of-use and increased
security features to consumers, issuers, and merchants. Apple, Samsung, and Google
launched mobile wallets in order to bolster customer retention for their mobile phone, not
to break into the payments industry.
The Pays combine EMV, NFC, and Touch ID to ensure the credit card information used is
protected, and is being properly authorized by the card user (Exhibit 75). Apple Pay,
Samsung Pay, and Android Pay use tokenization provided by Visa, Mastercard, AmEx, and
banks to ensure that consumer identity and credit card information is never stored on
merchant systems and hence not subject to data breaches. In addition to NFC wireless
Customer
Apple TouchID/
NFC
Merchantor
DigitalWallet
Merchant
Acquirer
Payment
Network
Issuing Bank
Token ServiceAPIInterface
ExistingInteraction
PAN:PrimaryAccountNumber
ID&V:Identification&Verification
PAN/Token
TokenPresentment
(Server)
TokenAssurance
(ID&V)
Token
Request
Token Service
Provider
Optional
Cloud‐based
dataexchange
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 70
functionality, Samsung Pay uses another wireless magnetic technology that allows the
phone to transmit the user’s credit card information via magnetic field to most standard
magnetic stripe point-of-sale terminals.
Banks that make up the majority of US credit card purchase volume (over 90%) have
partnered with Apple Pay, Samsung Pay, and Android Pay. We estimate the issuer banks
pay tech companies (we believe only Apple, but not Samsung or Google) a small fee (5-
15bps for US credit transactions), although this loss in economics is likely to be offset by
lower fraud rates and higher volumes. Apple claims that Apple Pay doubles the conversion
rate for online shoppers and speeds up checkout by 60%.
Innovation since launch: Moving beyond replacing plastic cards
We believe Apple Pay has paved the way in mobile wallet innovation among mobile phone
providers, as it has focused on expanding the functionality of its mobile wallet beyond
simply replacement of a physical card at the point of sale. We highlight three
developments:
(1)
Loyalty. Over the last few years, Apple Pay has been focused on augmenting merchant
loyalty programs with its digital wallet. It has introduced new offerings with large
merchants (Kohl’s, the Gap, Walgreens, Dunkin Donuts, etc.) to support private label
and co-branded credit cards, rewards programs, and gift cards. For example, the
Walgreens loyalty card is automatically added to a customer’s iPhone if they swipe
their rewards card and then tap with Apple Pay. The POS and the phone communicate
so the phone digitizes the rewards information. Apple Pay has also worked with Kohl’s
and the Gap to automatically present their private label and co-branded cards (rather
than the default card) at checkout.
(2)
Web-based payments. Initially, paying through Apple Pay was available only in-store
and in-app, but not on the web through a standard browser. In 2016, Apple extended
Apple Pay to browser-based shopping on its Safari browser on devices which are
enabled with Touch ID fingerprint technology. Apple also partnered with Braintree to
accept Apple Pay on the web outside of Safari browsers.
(3)
C2C payments. In June 2017, Apple announced that consumers can send money
digitally to each other via text. These C2C payments will launch in fall 2017 on its new
operating system (iOS 11).
We expect modest mobile wallet penetration in the medium term
Despite much publicity upon launch, Apple Pay, Samsung Pay, and Android Pay have
struggled to gain traction. Apple Pay has the highest penetration (in part because it
launched nearly a year earlier), with 27% of compatible iPhone users having ever used
Apple Pay, compared to 15% and 10% for Samsung Pay and Android Pay, respectively.
Frequent usage is even less common: 8%, 6%, and 3% of people use Apple Pay, Samsung
Pay, and Android Pay at least once per week, respectively (Exhibit 76). That being said,
Apple Pay is seeing rapid growth (albeit off a small base), with transaction volume up 450%
over the last 12 months as Apple expands its merchant and user bases. Apple Pay is the
dominant name among the digital wallets with 90% of all mobile phone contactless US
transactions done on Apple Pay, according to Apple.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 71
Exhibit 76: Mobile wallet traction remains low…
Penetration, activation, and usage statistics for Apple Pay,
Samsung Pay, and Android Pay (January 2017)
Exhibit 77: …largely because people are satisfied with
their current payment methods
Reason why consumers have not tried Apple Pay, 2015-2017
Source: First Annapolis.
Source: PYMNTS/InfoScout.
We identify several reasons why usage has fallen below expectations:
(1) Low merchant penetration. If digital wallets are not as ubiquitously accepted as
plastic credit cards, consumers will likely be confused about where they can use them.
One-third of the biggest 100 merchants in the United States do not accept Apple Pay
(including merchants like Wal-Mart and Kroger) – and we estimate that nearly 80% of
smaller merchants do not accept Apple Pay. However, we expect this to be remedied
over time as the US merchant base becomes fully penetrated with EMV/NFC payment
terminals.
(2)
Lack of perceived utility. We believe most consumers fail to see a clear advantage in
terms of ease of use relative to traditional cards (particularly magnetic swipes which
take 2-3 seconds). However, we would point out that with the advent of EMV in the
United States, card verification times have extended significantly (to 4-6 seconds in
many cases), which could bolster consumer adoption over time. We note that in
mature EMV countries like Australia, NFC usage now exceeds 80% of all transactions.
(3)
Lack of consumer incentives. According to a survey of over 8500 consumers, among
the consumers who have not tried Apple Pay, about half were already satisfied with
their current payment methods (Exhibit 77). Apple Pay, Samsung Pay, and Android Pay
do not provide any additional incentives to use their mobile wallet. However, we have
seen consumers choose their mode of payment based on incentives, which has been
the case with credit cards rewards programs driving incremental credit card spend and
loyalty programs linked to digital wallets at Starbucks and Dunkin Donuts driving
mobile app usage.
(4)
Confusion about security benefits. Even though Apple Pay is clearly more secure
than plastic cards by virtue of biometric authentication, nearly 40% of smartphone
owners believe mobile payments are less secure than credit cards and only 33%
consider them more secure, according to technology firm 451 Research.
Mobile wallet sentiment has improved, but it’s not yet reflected in hard data
According to our survey of merchant acquirers, ISOs, and ISVs, mobile wallet sentiment
improved significantly in early 2017 compared to prior year surveys. 70% of respondents
now expect mobile wallets to succeed (up sharply from 35% last year, Exhibit 78). Within
the group of respondents that expects mobile payments apps/wallets to succeed, 42%
expect Apple and Google to succeed (given their integration with smartphone operating
systems) (see our May 20, 2017, report, Goldman Sachs – ETA Merchant Acquirer, ISO &
ISV Survey: Spring 2017).
34%
27%
8%
20%
15%
6%
14%
10%
3%
0%
10%
20%
30%
40%
Penetration
(% enrolled in Pay)
Activation
(% have used Pay)
Usage
(use 1/week or more)
% of compatible devices
Apple Pay Samsung Pay Android Pay
0%
10%
20%
30%
40%
50%
60%
I'm satisfied
with my
current
payment
methods
I'm not
familiar with
how Apple
Pay works
I am
concerned
about security
I hadn't heard
of Apple Pay
before this
survey
I tried
registering a
card with
Apple Pay,
but it didn't
work
Other
% of respondents
Mar-15 Mar-16 Mar-17
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 72
Exhibit 78: Respondents have an optimistic outlook on mobile payments; “Big tech,”
retailers, and networks are expected to be winners
Based on your industry knowledge, which option best expresses your view on the prospects for
mobile payment apps and wallets?
Source: ETA, Goldman Sachs Global Investment Research.
Mobile
payment
apps and
wallets will
fail to gain
traction
9%
It is too
early to say
21%
Apple and
Google
42%
Retailers
(Walmart,
Starbucks)
25%
Visa and
MasterCard
17%
PayPal
8%
Card issuers
(Chase, Bank of
America)
4%
Venmo
4%
Mobile payment
apps and wallets
will succeed
70%
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 73
Q9: Why does C2C matter, and will it ever make money?
We believe gaining a scale presence in peer-to-peer (C2C) payments will be of
greatest value in emerging markets given a large under-banked population and lack
of tech-enabled banking, as it can be used to establish a user base upon which a
larger payment presence can be built. We have seen this story play out with mobile
money transfers in the past 10 years, and believe China and India are well down this
path. We are less optimistic about monetization of C2C payments in the United
States, although we think Venmo is a prime example of the importance of building a
loyal base of users in a particular demographic – millennials. We define C2C payments
as any payment made from one person to another for any purpose (to split a bill, to
settle a debt, to give a gift), rather than a payment made in exchange for goods and
services.
Emerging markets: C2C offers a gateway to other payment services
Mobile money transfers: Expanding beyond C2C payments
Historically, wireless carriers have had a negligible role in payments, but the emergence of
mobile in emerging markets as the primary growth channel for payments has created
interesting opportunities for telcos. The first mobile money transfer service launched in
2001, and the trend gained momentum in 2007, with the launch of M-Pesa (owned by
Vodafone) in Kenya. For the last decade, non-financial institutions with distribution
strength have grown a strong presence in un-banked and under-banked populations. We
expect this trend to continue going forward, as many emerging markets have higher
mobile phone penetration than bank account penetration (Exhibit 79).
Exhibit 79: Significant gap between mobile and banking penetration creates attractive
opportunities
Mobile phone penetration (%), bank account penetration (%) for countries in West Africa
Source: World Bank’s Global Findex Database, GSMA Mobile Money Tracker.
Mobile money accounts have already achieved impressive scale, and have surpassed
bank accounts in sub-Saharan Africa in 2015
, according to the GSMA Mobile Money
Tracker. As of the end of 2016, more than half a billion mobile money accounts were
registered globally. More than 40% of the adult population in Kenya, Tanzania, Zimbabwe,
Ghana, Uganda, Gabon, Paraguay and Namibia are using mobile money on an active basis
(90-day window).
0%
20%
40%
60%
80%
Penetration
Mobile penetration Bank account penetration
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 74
The largest component of mobile money transfers is C2C transfers. C2C transfers have
steadily grown over the past decade, exceeding $7bn in December 2016 (Exhibit 80).
The
ability to facilitate C2C transfers has been integral to growing mobile money’s scale
and expanding into higher-yielding categories like bill payment, disbursement, and
merchant payments.
C2C transfers comprised 69% of total mobile money payment
volume in 2016, compared to 82% in 2011 (Exhibit 81).
Exhibit 80: C2C mobile money payment volume has been
growing at a healthy clip
Monthly C2C payments through mobile money, $mns
Exhibit 81: C2C has been a useful foothold for mobile
money to diversify into other payment verticals
Breakdown of mobile money payment volume
Source: GSMA Mobile Money Tracker.
Source: GSMA Mobile Money Tracker.
China: Alipay’s interest-bearing accounts provide compelling alternative to banks
Through its Ant Financial arm, Alibaba provides a diverse set of financial services including
wealth management, financing, insurance, and credit, on top of core payments capabilities.
We believe Alipay’s wealth management arm—Yu’e Bao, or “leftover treasure”—has
already started to transform the financial services industry by providing convenient,
interest-bearing depository accounts to both banked and unbanked individuals. Yu’e Bao’s
returns have historically been up to twice as high as interest-bearing accounts through
banks (~6% vs. ~3%), although rates have receded in recent years. Alipay’s wealth
management business boasts 330mn users in the past 12 months (117% yoy growth) and
assets under management (AUM) of $170bn as of March 2017 (Exhibit 82). Yu’e Bao has
posted impressive growth and has now surpassed JPMorgan as the largest money market
fund ($150bn) in the world, although it still lags international financial banks in total
deposits (Exhibit 83).
Exhibit 82: Yu’e Bao’s AUM has grown quickly since
launch
Yu’e Bao assets under management (AUM), $bn
Exhibit 83: Alipay still lags global banks in total deposits
Total deposits as of 4Q16, $bn
Source: Bloomberg.
Source: Company data, Goldman Sachs Global Investment Research.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
P2P payment volume ($mns)
82%
74%
72%
72%
70%
69%
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 2016
% of total volume
P2P transfer Bill payment Bulk disbursement
Airtime top-up Merchant payment International remittance
0
20
40
60
80
100
120
140
160
180
Sep-13 Sep-14 Sep-15 Sep-16
AUM ($bns)
0
200
400
600
800
1,000
1,200
1,400
1,600
Total Deposits ($bns)
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 75
India: Payments banks offer new, quasi-banking options
Three “payments banks” have launched in India this year, representing a new type of bank
in the country. A payments bank cannot issue loans or credit cards, but it can provide
access to interest-bearing accounts. Aside from the India Post Payments Bank, a state-
owned entity, two non-bank entities have launched as payments banks: Airtel Payments
Bank (with a telecom parent company) and Paytm Payments Bank (the largest mobile
wallet provider in India) (Exhibit 84). These companies provide interest rates between 4%
and 7.25% on deposits. Eight other entities received payments bank licenses, including
Vodafone M-Pesa (the telecom company that provides the popular mobile money offering
in Kenya) and Tech Mahindra (the Indian consulting and outsourcing company).
Exhibit 84: “Payments banks” have now entered the field in India
Three payments banks have launched to date
Source: Company data, livemint.com.
US: Strong growth prospects, but monetization more challenging
Few areas of payment technology are changing as rapidly as peer-to-peer (C2C)
transactions in the United States, with C2C payment volumes nearly doubling in each
of the past three years.
Non-bank players have entered the space given substantial
growth opportunities, but the market has proven difficult to monetize thus far.
Relative to other payment types, we believe mobile C2C payments have the potential to
evolve much more rapidly due to several factors: (1) convenience and ease of use
compared to cash and checks; (2) lack of slower-moving counterparties such as businesses,
which typically adopt new technologies with a significant lag; and (3) lack of “stickiness”
for incumbent service providers given lack of offers and rewards.
We believe US companies are building out their C2C payments presence in order to benefit
from the “network effects” that come with it. Every participant, from Venmo to banks,
wants to increase customer stickiness and mindshare—whether it is to gain access to a
younger demographic and potentially expand to other payment options (Venmo), or to
offer a more comprehensive app to increase customer stickiness (banks/Zelle), or to
incentivize people to continue buying iPhones (Apple Pay).
Venmo remains the market leader, while banks play “catch up” with Zelle
A number of mobile C2C payment services have developed over the past decade, and user
adoption has grown dramatically over that period. We estimate that $34bn of volume was
transferred using various C2C payment services in the United States in 2016, compared to
$19bn in 2015. We highlight key service providers—including Venmo (owned by PayPal),
Popmoney (owned by Fiserv), Square Cash, and Zelle (owned by Early Warning and
operated by a consortium of banks)—in Exhibit 85.
India Post Payments Bank Airtel Payments Bank Paytm Payments Bank
Launch date Jan-17 Jan-17 May-17
Core business State-owned entity Telecom Mobile wallets
Interest rate 5.50% 7.25% 4.00%
Online fund transfer
Rs2.5-5 for NEFT,
IMPS at bank branch
0.5% of the amount Free
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 76
Exhibit 85: Comparison of various C2C payment providers by features and cost
*Currently in trial period.
Source: Company data, Goldman Sachs Global Investment Research.
In most cases, these services provide users with the ability to send money to another user
using a mobile app, email, or SMS message. Nearly all of them give users the ability to
fund their transfer with a bank account transfer linked to their account, and many offer the
ability to use a credit or debit card to fund the transfer. Given the convenience and ease of
use of many of these methods, we expect rapid growth in this segment to continue. Not
surprisingly, the heaviest adoption of these C2C payment services has been among
younger demographic groups such as millennials – while adoption among older users has
remained relatively low (Exhibit 86).
Exhibit 86: C2C payment penetration is significantly higher among millennials
Q: Which of the following types of payments have you made using your mobile phone within the
last 12 months? Send and/or receive money to other people (data collected in June 2016)
Source: First Annapolis.
Venmo: Venmo was acquired by PayPal in December 2013 and is the clear market leader
among independent online C2C payments (which excludes offerings from companies like
Facebook and Bank of America). We estimate Venmo garners 80% and 51% transaction and
Google Wallet
Facebook
Messenger
PayPal Square Cash Venmo Popmoney Zelle
Platforms
iOS, Android iOS, Android
iOS, Android,
Windows Phone
iOS, Android iOS, Android
iOS, Android,
Windows Phone
iOS, Android
Instant Transfers
N/A N/A $0.25* 1% fee $0.25* N/A
Bank Account Transfe
r
Free Free Free N/A Free $0.95
Credit Card Payments
Free N/A 2.9% fee+$0.30 3% fee 2.9% fee $0.95 N/A
Debit Card Payments
Free Free 2.9% fee+$0.30 Free Free $0.95 Coming in 2017
Cash out time
2-3 business days
Up to 5 business
days
3-5 business days 1 business day 1 business day 1-3 business days
Real time within the
Zelle network
Up to 3 business
days if bank is
outside the network
Transfer amount limit
$10,000 per
transaction
$50,000 per 5 day
period
$10,000 per
transaction
$10,000 per
transaction
$2,500 per week
$2,999 per
transaction
$2,000 from bank
account per day
$500 from debit
card per day
$1,000 per day
$2,500 per week
$10,000 per month
Differentiators
Can attach a
payment to any
Gmail message
Installed Facebook
Messenger user
base of 1.2bn
Works overseas;
most commonly
used service
No account
required; input debit
card number to
receive your money
Newsfeed lists your
friends' transactions
Flat fee per
transaction
Accessible through
a participating
bank's mobile app
Free
37%
23%
17%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Under 34 35 to 44 45 to 54
% of respondents
% of respondents = 27%
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 77
volume share in this segment (Exhibits 87 and 88). We expect Venmo’s market dominance
to continue over the next few years and forecast its volumes to double in 2017 given its
strong network effect and ample runway to grow principal per transaction.
Exhibit 87: We estimate Venmo garners 80% transaction
share…
US C2C mobile payment transaction share, 2016
Exhibit 88: …and 51% wallet share given lower average
principal per transaction
US mobile C2C payment volume share, 2016
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Zelle: Zelle, the C2C network backed by some of the nation’s leading financial institutions
and re-branded from ClearXchange, officially launched in June 2017. Over 30 banks are
expected to go live on the network in the first year. We see two clear benefits from Zelle:
(1) real-time availability of funds; and (2) perceived security of banks. In fact, First
Annapolis has shown that consumers would prefer a comprehensive mobile payments
offering provided by their bank rather than non-traditional providers (Exhibit 89), but we do
not think banks are adequately meeting this market demand today. We believe that in order
for Zelle to succeed, banks need to deliver a consistent user experience and marketing
message, and consumers need to be fully aware of the service and its specific benefits.
Exhibit 89: Consumers would prefer a mobile wallet through their bank
Q: If you were to choose one provider of a mobile wallet app, which would be your preferred
provider? (data collected in January 2017)
Source: First Annapolis.
Venmo
80%
Popmoney
8%
SquareCash
5%
Zelle
3%
Circle
0%
Other
4%
Venmo
51%
Popmoney
31%
SquareCash
3%
Zelle
12%
Circle
0%
Other
2%
48%
16%
10%
13%
4%
3%
4%
0%
10%
20%
30%
40%
50%
60%
Bank
Card Brand
PayPal
Apple
Google
Samsung
Other
Traditional providers Non-traditional providers
% of respondents
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 78
How can Venmo be monetized?
Given its dominant share in the United States, we focus our attention on Venmo and its
path to monetization. Despite impressive user and volume fundamentals, we believe
Venmo’s prospects for monetization as a C2C service are limited given zero fees assessed
by competitors – although we note that Venmo’s instant deposit feature should generate
incremental revenue. We believe PayPal needs to eventually drive Venmo user traffic to its
merchant payment platform. While the path to monetization could be slow, Venmo
represents a demographic – millennials – which we believe online merchants want to
access.
We see several ways of connecting Venmo users into the PayPal ecosystem, including:
Extend “Pay with Venmo” functionality to online B2C transactions. By offering a
“Pay with Venmo” button on merchant sites which already accept PayPal, PayPal can
drive incremental volume at merchants for customers with Venmo but no PayPal
account. PayPal can thus maintain the integrity of its free C2C offering, preserving its
core Venmo user base, and drive more and different types of users to the Venmo
platform. Venmo has already started down this path with a limited number of
merchant partners, including Munchery, ParkingPanda, and Poshmark.
PayPal can earn investment income from Venmo users’ balances. Anecdotally, we
believe many Venmo users store a cash balance directly on Venmo’s mobile app. We
think Venmo could make use of this cash by investing it in short-term or long-term
instruments, capturing yield from the float between users’ transactions.
Monetize Venmo’s user traffic via personalized ads. The possibility of ads on
Venmo’s newsfeed based on personal transaction history could potentially be a
revenue opportunity. We note that the most common use cases for C2C payments can
be broadly categorized as “Dining,” “Gifts,” and “Entertainment.” Importantly, users
often post captions that describe the nature of their payment interactions (i.e., “Sushi”
or “Billy Joel tickets”), which indirectly offer insights into consumer habits.
Pair international remittances with free domestic C2C payments. PayPal could
merge its Venmo and Xoom offerings to accelerate Xoom transaction volumes. We
note that this path seems less likely, as we do not think there is significant overlap
between Venmo and Xoom’s user bases.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 79
Appendix I: Index of global emerging payments companies
Exhibit 90: Index of global emerging payments companies
List of payment vendors
Source: TechCrunch, company data.
Company Year Business Latest Series Capital TotalCapital
Name Domicile Founded Model Financing Round Raised(mn) Raised(mn)
Paymentserviceproviders/gateways
Adyen Netherlands 2006 Outsourcespaymentservicestointernationalmerchants Sep‐15 Venture N/A $266.0
Ariba(partofparent,uncovered) U.S. 1996 Providerofcollaborativebusinesscommercesolutions N/A N/A N/A N/A
Basware(public,uncovered) Finland 1985 Offersenterprisesoftwareforfinancialprocesses N/A N/A N/A N/A
BlueSnap U.S. 2002 MobilecheckoutandpaymentconversionsforeCommerce Nov‐14 PrivateEquity $50.0 $183.0
Cardspring(partofparent,uncovered) U.S. 2012 Platformenablingappdevelopmentsforpayments May‐
13 SeriesA $9.8 $19.8
ChinaPnR China 2006 Providerofintegratedpaymentservices Sep‐11 SeriesB $6.7 $6.7
FasterPayment U.K. 2011 P aymentnetworkbetweenbankstofacilitatefasterremittance N/A N/A N/A N/A
Justpay China 2011 Providerofwebsolutionstoenhancee‐commerceinfrastructure N/A N/A N/A N /A
Klarna Sweden 2005 E‐commercepaymentsolutionsformerchantsandshoppers Jun‐17 SecondaryMarket N/A $296.4
MineralTree U.S. 2010 Paymentsoftwarethatautomatesinvoice‐to‐paymentprocesses Feb‐15 SeriesB $11.1 $22.7
PaylineData U.S. 2009 Flexiblepaymentsolutionsforbusinesses Feb‐17 Non
EquityAssistance $3.0 $7.0
PayNearMe U.S. 2009 E‐commerceplatformforconsumerswithoutcreditordebitcards Apr‐15 SeriesF $14.7 $71.2
Paytm India 2010 E‐commerceplatformthatoffersmobilewalletsolutions N/A N/A N/A N/A
PayU Netherlands 2011 Onlinepaymentservicesforindividualandinstitutionalcustomers N/A N/A N/A N/A
Skrill U.K. 2001 Onlinepaymentsanddigitalwalletprovider N/A N/A N/A N/A
Stripe U.S. 2010 P roviderofonlinepaymentsinfrastructure Nov‐16 SeriesD $150.0 $440.0
TenPay China 1998 OnlinepaymentsolutioninChina N/A N/A N/A N/A
WePay U.S. 2008 ProviderofpaymentsAPIfor
platformbusinesses May‐15 SeriesD $40.0 $74.2
Directbankdebittransfersystem
Dwolla U.S. 2008 Ele ctronicpaymentsplatformusingACH Jan‐17 Venture $6.9 $39.3
Euronet(public,uncovered) U.S. 1994 OffersEFTprocessingandmoneytransferservicesusingACH N/A N/A N/A N/A
NVoicePay U.S. 2009 ElectronicaccountspayablesolutionusingACH Oct‐16 SeriesF $10.0 $20.3
Paymode‐X U.S. 2000 ElectronicaccountspayablesolutionusingACH N/A N/A N/A N/A
Popmoney(partofFiServ) U.S. 2010 P2Pmoneytransfersolutioninpartnershipwithbanksusing
ACH N/A N/A N/A N/A
Revolut U.K. 2015 P2PandB2BmoneytransferinpartnershipwithMastercard Jul‐16 Crowdfunding $1.3 $14.3
Xoom(public,uncovered) U.S. 2001 DigitalmoneytransferservicesusingACH N/A N/A N/A N/A
Internationalmoneytransfer
Azimo U.K. 2012 Onlineinternationalmoneytransfercompany May‐16 SeriesB $15.0 $46.6
CrowdTransfer Chile 2014 Socialnetworkforpeer‐to‐peerinternationalmoneytransfer Jun‐14 Seed $0.04 $0.04
CurrencyFair U.S. 2009 Peer‐to‐peerFXmoneytransfer Mar‐16 Venture $9.0 $24.4
Earthport(public,uncovered) U.K. 2010 Cross‐borderremittancesolution N/A N/A N/A N/A
Kantox U.K. 2011 ComprehensiveFX
managementsolutionforSMB May‐15 SeriesB $10.9 $21.1
Midpoint(public,uncovered) U.K. 2013 Peer‐to‐peerFXmobilematchingplatform N/A N/A N/A N/A
TRANSFAST U.S. 1988 M obileinternationalmoneytransfer N/A N/A N/A N/A
TransferWise U.K. 2010 Peer‐to‐peerFXmoneytransfer Jan‐00 SeriesD $26.0 $116.4
WeSwap U.K. 2010 Peer‐to‐peermoneytransferproductusingnetworkrails Oct‐16 Crowdfunding $3.0 $21.5
WorldRemit U.K. 2010 Onlineandmobilemoneytransferplatform Feb‐16 DebtFinancing $45.0 $192.7
Loyalty&rewards
Cardlytics U.S. 2008 A dvertisingtechnologyconnectingbuyers/sellers
viaonlinebankingchannels M ay‐17 Undisclosed $11.9 $177.9
SavingStar U.S. 2010 Shoppersearnsavingswithofferslinkedtoretailloyaltycards May‐15 DebtFinancing $5.0 $32.4
Shopkick U.S. 2009 Mobileappwithrewardofferingsforpatronsofparticipatingvendors N/A N/A N/A $26.7
Truaxis(partofparent) U.S. 2007 P roviderofloyaltyrewardsandpersonalizedstatementsolutions N/A N/A N/A N/A
Mobilepaymentssolution
LevelUp U.S. 2011 MobilenetworkwithQRcodesandloyalty/rewardsofferings May‐17 DebtFinancing $13.0 $111.8
Obopay U.S. 2005 M obilemoney
transfersolutionviamobile,online,emailortext Jul‐11 SeriesF $8.8 $144.8
Seamless(public,uncovered) Sweden 2001 MobilenetworkusingQRcodes/NFCchipsthatoffersloyalty/rewards N/A N/A N/A N/A
SoftCard U.S. 2011 MobilewalletwithNFCchipandloyalty/rewardsofferings N/A N/A N/A N/A
M‐Pesa(partofparent) U.S. 2007 M o bilebasedmoneytransferandmicrofinancingservices N/A N/A N/A N/A
edo U.S. 2007 Personalizedoffersconnectedtomobilewallet Feb‐14 SeriesD $7.5 $73.5
ClearXchange U.S. 2011 Peer‐to‐peer
paymentsapplicationthroughthenetworks N/A N/A N/A N/A
POS/analyticssolution
Affirm U.S. 2012 Installmentloanstoconsumersatthepointofsale Oct‐16 DebtFinancing $100.0 $520.0
AvidXchange U.S. 2000 We b‐basedaccountspayableandinvoicemanagementsolutions Jun‐17 PrivateEquity $300.0 $545.3
Bill.com U.S. 2006 AccountspayableapplicationforCPAsandsmallandmid‐sizedbusinesses Apr‐15 SeriesF $30.0 $159.1
Izettle Sweden 2010 MobilepaymentPOSsolutioncompatiblewithEMV Jan‐17 DebtFinancing $51.3 $225.9
PowaTechnologies U.K. 2007 MobilePOS
solutionandpaymentenablementapplication(PowaTag) Nov‐14 SeriesC $80.0 $176.7
RevelSystems U.S. 2010 P OSsolutionprovidercompatiblewithEMV Aug‐15 SeriesC $13.5 $128.5
ShopKeep U.S. 2008 P OSsolutionproviderdesignedforSMB Jul‐15 SeriesD $35.0 $72.2
SumUp U.K. 2011 POSsolutionformobiledevices Jun‐15 SeriesD $11.4 $44.4
Payleven Germany 2012 MobilePOSdevicethatattachestosmartphone Feb‐16 SeriesD $10.0 $50.5
Womply U.S. 2011 Offlineto‐onlinecardprocessingserviceandanalyticssolution Nov‐16 PrivateEquity $30.0 $50.0
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 80
Appendix II: Model assumptions and price targets
We take a top-down approach to building our model, starting with personal consumption
expenditure/final household expenditure as a starting point for consumer spend, and B2B
spend for commercial expenditure. With a goal to capture the global opportunity for online
and offline payments, we incorporate data from the following regions: North America,
Latin America, EMEA, and Asia Pacific. We looked to estimate the breakdown of payments
by method (card, check, ACH, and cash) across regions in order to develop a global card
spend estimate in the online and offline channels.
Our model uses historical and forecasted data from many sources, including The World
Bank, Nilson, eMarketer, NACHA, and Euromonitor, as well as company-specific data and
internal Goldman Sachs estimates.
Volume assumptions by region
North America
(1) Personal Consumption Expenditure: We use an adjusted PCE figure sourced from
Nilson as a baseline for our forecasts. This is essentially goods and services-related
PCE, excluding non-purchase transactions like food furnished to employees, life
insurance, employee lodging, etc. As this figure is specific to the United States, we
apply a gross-up factor to incorporate the impact of adding Canada. We incorporate
our macro team’s PCE growth estimate for our forecasts.
(2) B2C online spend:
We take a bottom-up approach to building our B2C online spend
estimate. This figure includes three main categories: retail sales (e-commerce), travel
spend, and other online spend. Our
retail sales figures are sourced from the Census
Bureau for historicals and eMarketer for our forecast, while our
travel figures are
sourced from Euromonitor. For the build up to
other B2C online spend, we estimate
the following categories (with sources in parentheses): primary ticket sales (Live
Nation, PwC), secondary ticket sales (Live Nation, Tech Navio), curated music delivery
services (Goldman Sachs Internet team), curated movies/TV delivery services (Netflix,
Goldman Sachs Media team), online gambling (state gaming regulatory boards), food
delivery (Euromonitor, GrubHub), online dating (Match Group, Spark), bill payment
(Aite Group), and sharing economy (Uber, Lyft, company data, and news releases).
(3) B2C offline spend:
Our B2C offline spend estimates are calculated as the difference
between our total adjusted PCE estimate and B2C online spend estimate.
(4) Total B2B spend:
We use data from Visa’s Commercial Consumption Expenditure
(CCE) presentations for our historical and forecasted estimates.
(5) B2B online spend:
We use estimates from Visa’s CCE presentations and NACHA
Automated Clearing House (ACH) transfer data.
(6) B2B offline spend:
Our B2B offline spend estimates are calculated as the difference
between our total B2B spend estimate and B2B online spend estimate.
Rest of world
(1) Personal Consumption Expenditure: We adjust World Bank PCE data for LatAm,
EMEA, and APAC using a similar methodology as North America. The relative
adjustment amount varies across regions, as some may have more non-payment
transactions than others. Our PCE forecasts across regions are sourced from our
Goldman Sachs macro team.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 81
(2) B2C online spend: We take a bottom-up approach to building our B2C online spend
estimate, though it is a little more simplified relative to North America given the lack of
available information. This figure includes three main categories: retail sales (e-
commerce), travel spend, and other online spend. Our
retail sales figures are sourced
from eMarketer for our forecast and historicals, while our
travel figures are sourced
from Euromonitor. For the build up to
other B2C online spend, we estimate the
percentage of total B2C online spend this figure represents compared to our North
America estimate, and back into the number accordingly.
(3) B2C offline spend:
Our B2C offline spend estimates are calculated as the difference
between our total adjusted PCE estimate and B2C online spend estimate.
(4) Total B2B spend:
We use data from Visa’s Commercial Consumption Expenditure
(CCE) presentations for our historical and forecasted estimates.
(5) B2B online spend:
We use North America as a baseline to forecast B2B online spend
in other regions.
(7) B2B offline spend:
Our B2B offline spend estimates are calculated as the difference
between our total B2B spend estimate and B2B online spend estimate.
Countries included in each region
(1) North America: United States and Canada.
(2) Latin America/Caribbean:
Antigua and Barbuda, Argentina, Belize, Bolivia, Brazil,
Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, El
Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua,
Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines,
Suriname, Uruguay, and Venezuela.
(3) Europe, Middle East, and Africa:
Europe & Central Asia, Middle East & North Africa,
and Sub-Saharan Africa, as defined by the World Bank.
(4) Asia Pacific (ex-China):
Japan, South Korea, Australia, New Zealand, and India.
Payment mix assumptions
Broadly, we expect card penetration to increase over time, ACH to increase modestly, and
cash and check payments to decrease meaningfully. We use the pace of historical trends as
a basis for our forecasts.
(1)
B2C mix: We use Euromonitor data and our internal Goldman Sachs estimates to
determine a B2C payments mix. We use data from Adyen and other online payment
providers’ market reports to determine the B2C online mix. We are able to calculate the
implied B2C offline mix based on the total B2C mix and B2C online mix.
(2)
B2B mix: We use Visa’s Commercial Payments Study, Phoenix-Hecht’s Treasury
Management Monitor (for the United States), and internal estimates to determine a
B2B payments mix. We use NACHA data and internal estimates to determine a B2B
online mix. We are able to calculate the implied B2B offline mix based on the total B2B
mix and B2B online mix.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 82
PayPal
We use estimates from our Internet team, combined with data from company filings and
our internal forecasts to build a
Total Payment Volume (TPV) forecast for our model. We
adjust this TPV figure to exclude non-payment volume including Venmo and PayPal Credit
– which helps us achieve a figure more comparable to the volume traditional merchant
acquirers process. We incorporate management’s commentary with our internal estimates
to determine PayPal’s penetration among markets (retail, travel, bill payment, etc.). We
assume PayPal has limited exposure to China.
Amazon
We source company filings (for historical data) and our Internet team’s estimates for our
volume forecast. We assume Amazon has minimal exposure to China and 100% of
payments are made with cards (credit and debit).
Exhibit 91: Price target, methodology, and risks
*Shares of AMZN, BABA, GOOGL, PYPL, V and WDIG.DE are on their respective regional Conviction Lists.
Source: Goldman Sachs Global Investment Research.
Company Name Ticker Rating
Price
08/02/17
Price Targets PT Methodology Risks
Alibaba Group BABA Buy* 151.91 $186 SOTP analysis
Slower GMV growth, lower monetization, more
intense competition
Alphabet Inc. GOOGL Buy* 947.64 $1100
Equal-weighted blend of DCF, 14X 2018E
EV/EBITDA, and 24X 2018E P/E
Weaker-than-expected cost discipline,
competition, dilutive M&A
Amazon.com Inc. AMZN Buy* 995.89 $1275 SOTP analysis
Competition, margin pressure from investment,
valuation
First Data FDC Neutral 18.31 $18 11X 2018E EBITDA
Market share, financial leverage, pricing,
merchant attrition.
FleetCor Technologies, Inc. FLT Buy 154.18 $200 21X 2018E EPS M&A execution, interest rates, fuel prices, FX
Global Payments, Inc. GPN Buy 95.41 $105 22X 2018E EPS
Consumer spending, cost cutting,
pricing/margins, and M&A accretion
Mastercard, Inc. MA Buy 130.61 $146 28X 2018E EPS
Slower consumer spending, share loss, and
regulatory issues
PayPal Holdings PYPL Buy* 59.12 $72
85%/15% blend of 20X 2018E EV/EBITDA
fundamental valuation and 24X 2018E
EV/EBITDA M&A valuation
Competition, transaction/operating margin
pressure, security threats
Square Inc SQ Buy 26.46 $29 9.5X 2018E EV/Sales
Slower client growth, faster investment, credit
quality, weaker SMB trends
Tencent Holdings 0700.HK Buy 39.48 HK$300 SOTP analysis
Slower gaming growth, competition in online
advertising
Total System Services, Inc. TSS Buy 63.69 $71 19X 2018E EPS
Slower revenue growth, fewer client wins, weaker
margin expansion
Visa, Inc. V Buy* 101.28 $112 26X CY18E EPS
Slower consumer spending, litigation and
regulatory issues, and FX volatility
The Western Union Company WU Sell 19.49 $17 10X 2018E EPS
Stronger remittance volumes, improved pricing
trends, more efficient compliance spending
WEX, Inc. WEX Neutral 106.85 $114 18.5X 2018E EPS
Credit losses, fuel prices, margin execution on
acquisitions, increased competition
Wirecard AG WDIG.DE Buy* 77.17 € 78
70%/30% blend of 26X 2018E PF EPS
fundamental valuation and 6.5X 2018E EV/Sales
M&A valuation
Volumes/pricing, regulations, M&A integration,
competitive landscape
Worldline WLN.PA Buy 40.49 € 39
Based on 13.5X 2018E PF EV/EBITDA (ex-
minorities)
Competition, M&A, maintaining a specialized
focus, regulatory changes, contract renewals,
and pricing pressure
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 83
Financial Advisory Disclosure
Goldman Sachs and/or one of its affiliates is acting as a financial advisor in connection with
an announced strategic matter involving the following company or one of its affiliates:
Amazon.com, Inc.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 84
Disclosure Appendix
Reg AC
We, James Schneider, Ph.D., Lara Fourman, CFA, Heath P. Terry, CFA, Piyush Mubayi, Mohammed Moawalla, Ryan M. Nash, CFA, Julia McCrimlisk,
Mancy Sun, Richard Ramsden, Matthew J. Fassler, Daniel Powell, Stanley Tian, Adam Hotchkiss and Will Nance, hereby certify that all of the views
expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that
no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
GS Factor Profile
The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and
its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth,
Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock.
The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each
metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows:
Growth is based on a stock's forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a
higher percentile indicating a higher growth company.
Financial Returns is based on a stock's forward-looking ROE, ROCE and CROCI (for financial
stocks, only ROE), with a higher percentile indicating a company with higher financial returns.
Multiple is based on a stock's forward-looking P/E, P/B,
price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile
indicating a stock trading at a higher multiple. The
Integrated percentile is calculated as the average of the Growth percentile, Financial Returns
percentile and (100% - Multiple percentile).
Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs
for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics).
For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate
performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
James Schneider, Ph.D.: America-ATM/POS and Self-Service, America-IT Consulting and Outsourcing, America-Transaction Processors. Heath P.
Terry, CFA: America-Internet. Piyush Mubayi: China Internet. Mohammed Moawalla: Europe-IT Services, Europe-Software. Ryan M. Nash, CFA:
America-Credit Cards, America-Regional Banks. Mancy Sun: A-share Insurance, Greater China Insurance, Hong Kong Insurance. Richard Ramsden:
America-Large Banks. Matthew J. Fassler: America-Retail: Specialty Hardlines.
A-share Insurance: China Life Insurance Co. (A), China Pacific Insurance (A), New China Life Insurance (A), Ping An Insurance Group (A).
America-ATM/POS and Self-Service: CPI Card Group, CPI Card Group, VeriFone Systems Inc..
America-Credit Cards: Alliance Data Systems Corp., American Express Co., Capital One Financial Corp., Discover Financial Services, Synchrony
Financial.
America-IT Consulting and Outsourcing: Accenture Plc, Black Knight Financial Services Inc., CGI Group, CGI Group, Cognizant Technology Solutions,
DXC Technology Co., Fidelity National Information Services, Fiserv Inc., International Business Machines, Sabre Corp., West Corp..
America-Internet: Amazon.com Inc., Bankrate Inc., Blue Apron Holdings, Criteo SA, eBay Inc., Endurance International Group, Etsy Inc., Expedia Inc.,
Groupon Inc., GrubHub Inc., IAC/InterActiveCorp, LendingClub Corp., Match Group, Netflix Inc., Pandora Media Inc., PayPal Holdings, Priceline.com
Inc., Shutterfly Inc., Snap Inc., TripAdvisor Inc., Trivago N.V., TrueCar, Twitter Inc., WebMD Health Corp., Yelp Inc., Zillow Group, Zynga Inc..
America-Large Banks: Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley & Co., PNC Financial Services, U.S. Bancorp,
Wells Fargo & Co..
America-Regional Banks: Bank of N.T. Butterfield & Son Ltd., BankUnited Inc., BB&T Corp., Cadence Bancorporation, Citizens Financial Group,
Comerica Inc., Fifth Third Bancorp, First Hawaiian Inc., First Horizon National Corp., First Republic Bank, Huntington Bancshares Inc., KeyCorp, M&T
Bank Corp., Regions Financial Corp., Signature Bank, SunTrust Banks Inc., Synovus Financial Corp., Zions Bancorporation.
America-Retail: Specialty Hardlines: Advance Auto Parts Inc., At Home Group, AutoZone Inc., Bed Bath & Beyond Inc., Best Buy Co., CarMax Inc.,
Container Store Group, Costco Wholesale, Floor & Decor Holdings, Genuine Parts Co., Home Depot Inc., KAR Auction Services Inc., Lowe's Cos.,
Lumber Liquidators Holdings, Michaels Cos., Monro Muffler Brake Inc., O'Reilly Automotive Inc., Office Depot, RH, Staples Inc., Target Corp., Ulta
Beauty Inc., Wal-Mart Stores Inc., Wayfair Inc., Williams-Sonoma Inc..
America-Transaction Processors: Automatic Data Processing Inc., Blackhawk Network Holdings, Evertec Inc., First Data Corp., FleetCor Technologies
Inc., Global Payments Inc., MasterCard Inc., MoneyGram International Inc., Paychex Inc., Square Inc., Total System Services Inc., Vantiv Inc., Visa Inc.,
Western Union Co., WEX Inc..
China Internet: 58.com Inc., Alibaba Group, Baidu.com Inc., Ctrip.com International, Gridsum, JD.com Inc., NetEase Inc., New Oriental Education &
Technology, SINA Corp., TAL Education Group, Tarena International Inc., Tencent Holdings, Vipshop Holdings, Weibo Corp..
Europe-IT Services: Atos, Capgemini, Evry AS, Indra, Wirecard, Worldline, Worldpay Group.
August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 85
Europe-Software: Aveva, Dassault Systemes, Hexagon AB, Sage Group, SAP, SAP, Simcorp A/S, Software AG, Temenos.
Greater China Insurance: China Life Insurance Co. (H), China Pacific Insurance (H), China Taiping Insurance Holdings, New China Life Insurance (H),
PICC Group, PICC Property and Casualty Co., Ping An Insurance Group (H).
Hong Kong Insurance: AIA Group.
Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 65% 56% 49%
As of July 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,753 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
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provided investment banking services within the previous twelve months.
Price target and rating history chart(s)
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compendium can be found in the latest relevant published research
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Goldman Sachs Global Investment Research 86
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August 3, 2017 Global: Technology
Goldman Sachs Global Investment Research 87
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