PayPal Holdings to Acquire TIO Networks: What Investors Need to Know

By John Ballard Markets Fool.com

PayPal is going after a big market opportunity with the TIO Networks acquisition. Image source: PayPal Holdings Inc.

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PayPal Holdings (NASDAQ: PYPL) recently announced plans to acquire Canada-based TIO Networks (TSXV: TNC), a bill-payment processor that has seen explosive revenue growth over the past decade.

TIO has 10,000 billers, 65,000 over-the-counter locations, and 900 kiosks. PayPal will pay $233 million in cash, or $2.56 per share for the company that can help it expand its customer base.

How PayPal will help TIO Networks

TIO's mission is to make it more convenient and affordable for customers to pay bills, which fits PayPal's mission to "democratize money." The most important role TIO plays is bridging the gap between people who lack access to bank accounts and the digital world. According to PayPal CEO Dan Schulman, more than 2 billion people worldwide do not have "affordable access to basic financial services."

Clearly, over the long term, PayPal and TIO Networks have a big opportunity to reach these potential customers. However, TIO Networks will not materially impact PayPal's revenue or earnings any time soon. TIO's fiscal-year revenue at the end of July 2016 was $57 million, and adjusted operating income was $8.1 million.

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TIO is a drop in the bucket compared to PayPal's $10.8 billion in revenue for 2016, but the consistent, fast growth of the small Canadian company stands out. TIO's revenue has grown about 630% over the last 10 years, demonstrating the consistent year-to-year growth that PayPal experienced during the same period when it was owned by eBay.

With PayPal's vaster resources and 197 million customer accounts to cross-sell with a new bill-payment service, TIO's growth may accelerate. In fiscal 2016, the company processed $7 billion in bill payments and served 14 million customer accounts. Not only can TIO use PayPal's resources to accelerate its reach, but PayPal adds yet another important feature to its platform that extends the brand's ubiquity.

How TIO Networks will help PayPal

PayPal's business objective is to grow its total payment volume (TPV), which is a function of growth in customer accounts and transactions per customer account. In recent quarters, TPV has been growing around 25% year over year, and management expects to maintain this volume growth over the next three years.

One way management has been growing TPV is by using partnerships with credit card issuers and banks to expand the availability of PayPal's payments service in more physical locations. PayPal is dominant in online transactions, but has lacked a strong presence within stores. Management has gone a long way to address this weakness by signing partnerships with Mastercard, Visa, Discover Financial Services, and Citigroup, allowing PayPal customers to use their credit cards where contactless payments are accepted.

Another strategy management is implementing to grow TPV is to continue to launch a steady stream of new features or enhancements to existing services. This is where TIO Networks comes in.

The addition of a bill-payment processor adds an important feature to PayPal's platform that should encourage people to use PayPal more often. This should help the payments service increase transactions per customer account and grow TPV.

Looking at the big picture, PayPal is inching one step closer to being a full-featured money management service. With the addition of a bill-payment service to its platform, PayPal is gradually removing the need for customers to have relationships with financial-service companies that nickel-and-dime their account holders.

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John Ballard owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends eBay, Mastercard, PayPal Holdings, and Visa. The Motley Fool has a disclosure policy.