Almost exactly a year ago, Facebook (NASDAQ: FB) and PayPal (NASDAQ: PYPL) announced a partnership where users could pay for purchases on Facebook's nascent e-commerce offerings, including Messenger, using PayPal. That allowed merchants to utilize Facebook chatbots to accept payments, among other features.
The two companies announced today that they're taking their relationship to the next level, and incorporating PayPal into peer-to-peer (P2P) payments on Messenger. The new feature will start rolling out within the U.S. today. PayPal is also launching a customer service bot for Messenger, which can handle basic tasks like password resets, account inquiries, and processing refunds.
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Apple Pay Cash is imminent
The news comes as Apple (NASDAQ: AAPL) is preparing to launch its own P2P payment service, Apple Pay Cash, any day now. Apple Pay Cash is a headline feature of iOS 11, and is expected to launch this fall. Apple has been testing the service internally ahead of rolling it out more broadly. As the market leader in P2P payments thanks largely to its Venmo subsidiary, PayPal potentially stands to lose the most if Apple Pay Cash gains serious traction.
PayPal says 2.5 million U.S. users will be able to use the new integration with Messenger, which is but a fraction of Apple's estimated U.S. installed base of around 70 million iPhone users that will soon have access to Apple Pay Cash.
Each company has a different end game
The economics of Facebook's expanded P2P partnership with PayPal are unclear, but it's possible that the social network is looking to offload some of this cost burden for P2P payments that are processed through PayPal instead of its own back-end processing (which primarily relies on debit cards).
More generally, P2P payments aren't really a great stand-alone business. There are negligible costs associated with processing P2P payments, but those add up over time in lock-step with payment volumes. More importantly, consumers have precisely zero propensity to pay for P2P payment fees (which is partially why paper checks are still a thing in 2017), so companies really have no way to monetize P2P services directly to recover the operational costs.
They are typically just offered as a tertiary feature to complement other e-commerce or payment services that can be monetized, most often processing merchant transactions. There can be other tangential benefits of offering P2P payments, like customer acquisition, brand building, or engagement.
For Apple, that means selling more iPhones. For PayPal, that means getting more users purchasing from merchants using PayPal. For Facebook, it's too early to know how well the company can execute in building a business on Messenger.
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Evan Niu, CFA owns shares of Apple and Facebook. The Motley Fool owns shares of and recommends Apple, Facebook, and PayPal Holdings. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.