Google and PayPal Join Forces on Digital Payments

By Danny Vena Markets Fool.com

As smartphones rose to prominence, one of the expected side effects was increasing adoption of the digital wallet -- apps on a smartphone designed to store credit card information and used to facilitate mobile payments. Turns out that consumers are creatures of habit and the rate of adoption has been slower than expected. Consumers have become accustomed to swiping credit or debit cards and aren't ready to switch just yet.

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A recent report by Statista revealed that just 14% of U.S. consumers had used a mobile payment to make a purchase in 2016, though that number is expected to grow to 18% in 2017 and to 37% by 2021. The transaction value of these payments totaled $24 billion in the U.S. last year.

PayPal joins forces with Google in the digital wallet. Image source: PayPal.

Rivals become partners

Seeking to get their share of this nascent opportunity, PayPal Holdings, Inc. (NASDAQ: PYPL) and Alphabet Inc.'s (NASDAQ: GOOGL)(NASDAQ: GOOG)Google are joining forces. The partnership will allow users to link their PayPal account to Android Pay, Google's mobile payments platform. The companies are expanding on a collaboration that started nearly three years ago, with PayPal being added as a payment option for Google Play, the company's online app store.

Consumers upload their credit card information into a digital wallet app in their phone, which allows users to pass their smartphone over a terminal equipped with near-field communications technology rather than swiping or inserting their credit card. These mobile payment systems use one-time-only codes, rather than the card number, making them a more secure form of payment. Ironically, worries about personal data and fear of fraud are the most cited reasons among consumers who have not yet used mobile payments, according to Statista.

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Image source: Google.

Expanding its footprint

PayPal, whose service got its start as a secure payment option on websites,has been partnering with a growing number of companies to expand its footprint. Over the past year, PayPal has announced deals with major credit card processors Visa Inc., Mastercard Incorporated,and most recently Discover Financial Services, along with a host of other providers. PayPal believes that by partnering with other companies it will provide more choices to consumers.

Google is hoping to increase adoption of its mobile-payment service, which has been lagging competitor Apple, Inc. (NASDAQ: AAPL) in the digital-wallet space. Statista reports that while 12% of consumers have used Apple Pay for a transaction, only 9% have used Android pay, and 6% have used Samsung (NASDAQOTH: SSNLF) Pay, the other major smartphone-based mobile wallet. The principal reason for its lead is availability. Apple Pay is accepted at 36% of U.S. merchants, followed by Android Pay at 24%, and Samsung Pay at third with 18%.

Coffee to go

Starbucks Corporation (NASDAQ: SBUX) boasts one of the most popular store-only mobile payments. The company launched its app in 2011, one of the first such hybrid programs joining a mobile-payment app with a customer-loyalty program. Statista reports that mobile payments accounted for 25% of all Starbucks' transactions in the United States. The coffee purveyor has taken things a step further with its Mobile Order & Pay program, by allowing customers to order and pay in advance and pick up their purchase without waiting in a register line. Starbucks recently announced the opening of a location at the company's Seattle headquarters that will only accept ordering and payments via mobile.

Beginning of a trend

We are still early in the adoption cycle, and as digital wallet technology becomes more pervasive, companies are vying for their share of the proceeds. These transactions are expected to grow at a rate of 52% annually to $866 billion by 2021. The digital payment space is highly fragmented, with a host of options available to consumers. These partnerships and innovative solutions are only the beginning of a trend that will be years in the making.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Apple, PayPal Holdings, and Starbucks. Danny Vena has the following options: long January 2018 $85 calls on Apple, short January 2018 $90 calls on Apple, long January 2018 $640 calls on Alphabet (C shares), and short January 2018 $650 calls on Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Mastercard, PayPal Holdings, Starbucks, and Visa. The Motley Fool has a disclosure policy.