PayPal vs. American Express — who will own the future of payments?

There’s a lot of talk about a global digital-payments revolution, and how it will reshape the financial industry. The example of Sweden, where a mere 2% of the value of total transactions are conducted with cash, is often heralded as a portent of things to come.

But there’s a separate school of thought that this so-called cashless craze isn’t all it’s made out to be.

For starters, Sweden’s central bank Riksbank warned a cashless economy would give a small number of financial players outsized power as they process the lion’s share of transactions. And 2015 data from the Federal Reserve showed that cash made up roughly one-third of U.S. transactions despite many digital alternatives.

Furthermore, it’s pretty transparent that cost-cutting commercial banks have driven digital payments as much as changing consumer tastes — think of online banking and ATMs as cousins to self-checkout in grocery stores, or the rise of automated kiosks and mobile ordering at fast food restaurants.

As is so often the case, investing in the finance and payments sector demands a healthy dose of skepticism and distance. Instead of taking the entrenched mainstays on faith or worshiping blindly at the altar of “disruption,” it may ultimately pay off much more to try and take in the big picture.

The stories of PayPal PYPL, -0.98% and American Express AXP, +0.73% help illustrate this complicated dynamic in the payments industry, but in very different ways. Both companies are serious players in the transaction space right now, but their paths look to be diverging dramatically.

Here’s how American ExpressAXP, +0.73% and PayPal both are trying to navigate an incredibly complicated landscape of innovation and competition in mobile payments, and what investors can expect from both companies and some important competitors.

As many (including me) predicted in the runup to American Express earnings, the company failed to meet second-quarter revenue expectations, and its stock fell 4% in short order.

The headline of a disappointing top line isn’t the whole story, however. The real concerns arise from the very business model of American Express as it focuses on wealthy individuals and provides them rich rewards for their loyalty. Specifically, AmEx spent $2.4 billion in member rewards during the quarter — up 11% year-over-year.

As rivals offer equally lucrative perks to members, including the Sapphire Reserve card from J.P. Morgan Chase JPM, +1.02% that saw huge success after a 2017 launch, it’s getting more expensive for AXP to keep up. And as its 2016 breakup with retail behemoth Costco COST, +0.29%  shows, many businesses and consumers are content to trade in this storied brand if it means they can get a better deal elsewhere.

These items are part of a broader trend, where American Express risks falling behind a marketplace that continues to evolve away from simply swiping plastic. Big financial innovations of the past few years have allowed for more entrants offering a diverse array of products, and consumers have had no qualms shrugging off the American Express brand for more forward-thinking alternatives.

Take Mastercard MA, +0.14% which may have once been seen as a down-market competitor to AXP in the credit card space. Forgetting the old competition for space in the wallet, Mastercard is focused on the future, locking up dozens of blockchain-related patents including one that will allow it to facilitate business-to-business payments.

That’s not the only reason for investor optimism in the stock, but it’s worth noting Mastercard’s stock is up 36% in 2018, while shares of AXP are flat.

Or take Visa V, -0.36% , which has embraced its old slogan of “It’s everywhere you want to be” in a digital age where millions want to be online, or out and about paying with their smartphone. Visa has invested big in mobile- and digital-payments technology, which has allowed it to tap into huge international growth despite a deep field of competitors. Visa will announce its quarterly results on July 25, but in its April report showed it showed impressive cross-border volumes. Initiatives such as its Visa Digital Commerce program will surely keep it competitive.

Once again, this isn’t the only thing driving Visa. But investors like what they see, with the shares up 22% this year.

If American Express wants to maintain relevancy, it has to get with the program like Visa and Mastercard. Simply relying on existing customers and a flashy brand will not hold off the pressures of technology, and both its recent earnings and share declines prove that.

Contrast the travails of American Express with mobile-payments giant PayPal, and you see a very different story. Sure, many consumers in the early 2000s saw PayPal as little more than a way to make purchases on its parent eBay EBAY, -1.35% But as payments technology has evolved by leaps and bounds in the intervening years, so has PYPL.

That’s to be expected when you consider its DNA. While AmEx was born out of the money orders and traveler’s checks of the late 19th century, PayPal has only existed in a rough-and-tumble digital age. Its founders include billionaire entrepreneurs Elon Musk and Peter Thiel, two men who have made names for themselves by challenging the status quo in sometimes dramatic ways.

PayPal’s powerful position in the mobile-payments ecosystem is now obvious. In its 2017 annual report, the firm boasted 227 million accounts in 200 markets that performed 7.6 billion transactions worth over $451 billion. Oh, and all those metrics were up at least 15% from the prior year.

PayPal reports quarterly earnings July 25.

But what’s interesting at PayPal right now isn’t just its organic growth. It’s also noteworthy how PYPL is always thinking about what’s next, and how it can stay relevant in this fast-changing marketplace.

For instance, in 2007, PayPal partnered with Mastercard in an effort to broaden its reach to platforms that wouldn’t accept its transactions directly. Rather than simply lament the lost opportunity or force their way in, the firm let consumers and merchants decide.

Similarly, it quickly snapped up Venmo parent Braintree in 2014 — an amazingly shrewd move at the time. It also has bought other payments upstarts including Xoom, which it acquired in 2015, and related operations like Paydiant, which interfaces with major merchants such as Walmart WMT, -0.17% on mobile payments.

The history of PayPal is one of innovation. The firm continued to push forward even while it was part of eBay, and its eventual spin-off is a testament to the success of that vision. And in the intervening years, the company’s management team has kept thinking beyond the here and now of payments through both internal change and acquisitions of external technology.

It’s worth noting that PayPal has some serious competition to fend off, particularly abroad. One report tallies payments through the Alipay interface run by Alibaba BABA, -0.34% is in the ballpark of $1.7 trillion — 23 times higher than just four years ago. And stateside, platforms like Square SQ, +0.55% continue to see breakneck growth as they sign on with a new generation of merchants that are more concerned with mobile payments than simply digital and e-commerce transactions.

But as an investor, PayPal is the kind of company you want to bet on for long-term success. It may not win the mobile-payments war years from now, but unlike AmEx and many other legacy firms, it is at least prepared for a good fight.

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