PayPal Is Still King of Online Payment Services

By Matthew Cochrane Markets Fool.com

Online commerce continues to surge and take a bigger piece of the overall retail pie. While this might seem obvious from our own shopping patterns and those of our friends, the data also backs up this observation.

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Earlier this year, the U.S. Census Bureau estimatedthat e-commerce sales for the fourth quarter of 2016 were $102.7 billion, an approximate 14.3% increase from the fourth quarter of 2015. For the year, e-commerce sales came in at $394.9 billion, a 15.1% increase from 2015. All this growth occurred while total 2016 domestic retail sales grew a much more anemic 2.9% from 2015's figures.

With online sales growing, investors should note who the future winners might be in the online payment services space. One metric that can be used to compare the different players is to learn which companies have built up a loyal following of engaged customers. Let's take a look atBrand Keys' Customer Loyalty Engagement Indexto see how they stack up.

Online and mobile commerce continues to explode. Image source: PayPal Holdings Inc.

The Customer Loyalty Engagement Index examines the relationships customers have with 740 brands across 83 categories. While Brand Keys doesn't fully reveal how they determine their rankings, the consulting group does tell us:

The Brand Keys data paints a detailed picture of the category drivers that engage customers, engender loyalty and drive real profits.

These drivers not only define how the consumer will view the category, compare offerings, and, ultimately, buy, but also identify the expectations the consumer holds for each driver. The brand whose drivers come closest to meeting (or even exceeding) those of the category Ideal is always the one whose customers will demonstrate the highest levels of engagement and loyalty over the next 12 to 18 months.

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Rounding out the top five

Image source: Square Inc.

In the online payment services category, Square Inc (NYSE: SQ) placed fifth. Square is perhaps best known for making it easy for small merchants to accept credit card payments with a simple attachment to an iPhone, but has recently been growing its ecosystem well beyond its card-reading products.

Amazon.com's (NASDAQ: AMZN) Amazon Payments placed fourth in the category. The platform allows customers to use the payment methods stored on their Amazon.com accounts to make purchases at third-party websites. In early February, Amazon issued a press release on the progress Amazon Payments had made over the past year and the numbers were nothing if not impressive: 33 million customers had now used Pay with Amazon to make a purchase, more than half the customers using the payment platform were also Prime members, and the number of merchants accepting the platform had grown 120% year over year.

Alphabet Inc's (NASDAQ: GOOGL) (NASDAQ: GOOG) Google Wallet finished third. The app allows the user to send money to family and friends via the app, online, or through a Gmail account. There are also a few commercial transactions where customers can use the app. The neatest feature might be that users can send money to anyone with an email address or phone number and the recipient doesn't need to have the app to accept the payment.

In second place came private company Stripe. Stripe makes it easy for individuals and merchants to accept online payments through a website. Stripe is raising capital that values the company at $9.2 billion and has no plans to go public anytime soon.

But the online payment champion is still...

Image source: PayPal Holdings Inc.

Take a bow, PayPal Holdings Inc (NASDAQ: PYPL). PayPal recently took the opportunity to pat itself on the back when it almost simultaneously reached 200 million active accounts and 50 million One Touch users. One Touch has become the most rapidly adopted product in PayPal's history. The platform allows users to register a device, whether a smartphone, tablet, or PC, and stay logged into their PayPal account on that device for forever afterward. This means users do not have to retrieve their logininformation or enter payment credentials when making purchases on that device. This can become especially important when dealing with the small screens on smartphones.

Here is what PayPal CEO Dan Schulman said about the platform during the company's latest conference call, transcript provided by S&P Global Market Intelligence:

One Touch has redefined online checkout. Simply put, it produces, by far and away, the best conversion rate in the payments industry by making it faster and simpler for customers to pay with a single tap. Its adoption has well exceeded our projection.

PayPal has also made it a priority to forge partnerships across the payments industry, which it believes adds orders of magnitude of convenience and choice to its customers. Schulman routinely refers to this as being a "customer champion." At this year's Goldman Sachs Technology and Internet Conference, he said,"To build a great company over the long term, I think it is absolutely essential that you embrace the mantra of being a customer champion, which means that you've got to solve pain points for your customers, all of them, instead of creating potentially pain points for them."

The partnerships have allowed PayPal to become much more than just a button appearing on online checkout screens; it is now a comprehensive payment platform that can be used for mobile, online, and in-store purchases.

By all appearances, this strategy is working. Active account growth, user engagement, and total payment volume were all up by double-digit percentages year over year last quarter. With a corporate culture focused on solving customers' biggest problems with the platform, PayPal could well inspire customer loyalty for years to come.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Alphabet (A shares), Amazon, and PayPal Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and PayPal Holdings. The Motley Fool has a disclosure policy.