Is This the Next Industry Amazon Wants to Conquer?

By Matthew Cochrane Markets Fool.com

Just days after announcing its 2016 fourth-quarter results, Amazon.com, Inc. (NASDAQ: AMZN) issued a press release with a bold headline: "More than 33 Million Customers Have Used Amazon Payments to Make a Purchase." The release was seemingly out of left field. In the conference call for the previous quarter -- held less than a week before the press release was issued -- Amazon's management failed to mention Amazon Payments even once.

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Image source: Amazon.com, Inc.

That's not to say the rare detailed look Amazon management gave us into the numbers wasn't impressive -- it was. The release gave plenty of updated stats on its Pay with Amazon service, a platform that allows shoppers to make purchases from third-party websites using the payment information from their Amazon account.As the headline proclaimed, more than 33 million customers have now used Pay with Amazon to make a purchase. The platform's payment volume doubled in 2016. Active merchants accepting Amazon Payments grew 120% year over year. More than 50% of the customers who used the platform were also Amazon Prime members.

How does Amazon Payments compare?

Amazon Payments is the latest payment platform that allows customers to pay for online purchases from a number of different websites using one account. It joins PayPal Holdings Inc (NASDAQ: PYPL) and Apple Inc's (NASDAQ: AAPL) Apple Pay as other popular digital wallets with a built-in customer base.

In Apple's 2017 fiscal first-quarter conference call, CEO Tim Cook had some very positive things to say about Apple Pay. Among other things, Cook said that during the past year the number of Apple Pay users had tripled and transaction volume for the quarter was up 500% year over year.

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Image source: Visa Inc.

While it's hard to make an apples-to-apples comparisons (pardon the pun), PayPal is the unquestioned leader in this space. In its most recently reported quarter, PayPal had 197 million active accounts, each averaging a shade more than 31 transactions per month. The company's total payment volume was reported at more than $99 billion, a 25% increase year over year.

The reason why these numbers don't easily compare is because Apple and Amazon are still in the nascent stages of their efforts and, as such, are working from much smaller bases. PayPal's active accounts represent customers who are making regular purchases or transactions. In Amazon's press release, the trumpeted 33 million customers were just customers who had used the platform once, a far different metric than customers who are regularly engaged with the platform.

Online merchant coverage -- the availability of a company's payment processing service -- is another arena where PayPal holds a big lead. In a September 2016 survey conducted by PYMNTS.com, of the top 965 online merchants, 652, or roughly 68%, featured PayPal's "Buy" buttons. In second place was Amazon, with 101 websites featuring its button. No other competing payment service was featured on more than 10% of the websites surveyed. Since that was the same month Apple Pay users could begin using its service to make payments on the web, stats were not yet available for its merchant coverage.

Furthermore, while the percentage gain in users, transactions, and payment volume for both Apple Pay and Amazon Payments were certainly impressive, they were coming off much smaller bases than PayPal's much higher numbers. That doesn't mean these two companies might not overtake PayPal as the dominant digital wallet one day, just that it is far too early to make such a prediction.

PayPal is still the top dog -- for now

PayPal still emerges as the top digital wallet among consumers. Its base of almost 200 million active accounts and impressive online merchant coverage will be a tough moat to overcome, even by rivals with such deep pockets as Amazon and Apple. Furthermore, PayPal shows no sign of slowing growth. The company's number of active accounts, payment transactions, and total payment volume were all up by double-digit percentages in its most recently reported quarter.

Nor is PayPal resting on its laurels. Innovative and popular new products like One Touch are powering mobile growth and it continues to increase market share in the growing e-commerce movement.

But none of that should take away what Amazon Payments and Apple Pay have the potential to accomplish in this space. Apple Pay has legions of loyal iPhone users. Last quarter alone, Apple sold more than 78 million iPhones.

Amazon has a loyal base of about 63 million Amazon Prime members. This gives it a lot of room for growth with customers who already use their Amazon.com account for online purchases. Amazon's biggest challenge might be convincing more merchants to give them access to what their customers are buying. With all the data Amazon already has on digital spending trends, competing merchants might be reluctant to give up more data to the online retail giant.

At the end of the day, it is hard to recommend buying Amazon or Apple solely on their efforts in payments. Both companies sport some of the largest market caps in the world and feature lots of moving parts. But the impressive growth their respective payment platforms are seeing should not be overlooked, and should probably be considered as yet another catalyst for both businesses.

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Matthew Cochrane owns shares of Amazon and PayPal Holdings. The Motley Fool owns shares of and recommends Amazon, Apple, and PayPal Holdings. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.