Square Inc., a payments processing company led by Twitter CEO Jack Dorsey, went public yesterday. Despite the company’s weak financials dominating headline coverage over the past few days, technology-focused firms such as Square continue to grow in market share within the Credit Card Processing and Money Transferring industry. Despite traditional major players such as Visa, MasterCard and American Express expanding their revenue at over an annualized 7.0% over the past five years, their market share in the $55.5-billion industry has stagnated since 2011. In particular, companies like PayPal and Square have been able to leverage trends in e-commerce and mobile device proliferation to expand into new markets and outperform the industry as a whole.
Prior to the entrance of technology-focused firms, the industry was commonly classified as a mature industry. Operators earned steady revenues as they celebrated their market position as the cornerstone of American credit card transaction processing for both consumers and businesses. However, the rise of e-commerce and increased access to the internet has forged a path for new entrants. In the five years to 2015, IBISWorld estimates that e-commerce sales and the number of mobile internet connections will increase at an annualized 10.4% and 22.9%, respectively. These trends reflect the shift towards web and mobile based commerce as consumers increasingly utilize the internet to make purchases and conduct business activities. As a result, tech-based solutions have paired the rise of e-commerce and mobile app usage to carve out new markets in what appears to be a new frontier in a very profitable and very competitive industry.
At the forefront of this shift are companies like PayPal, which are latching on to these trends to further develop market share. So far, it’s worked. Since 2010, PayPal has established themselves as the premier e-commerce company to conduct transactions through. Along the way, PayPal has expanded into different web and mobile based markets such as retail payments and peer-to-peer (P2P) transactions. As their presence in these markets has grown, so has their market share. Since 2010, PayPal has increased their stake in the industry from 4.4% in 2010 to an expected 8.3% in 2015. Additionally, Square Inc. has integrated these trends into their core business line, payment processing, by attracting mom-and-pop shops with a free Point-Of-Sale (POS) system, business analytics and fluid user experience to gobble up the low-end of the market, which IBISWorld considers significant. According to the US Census, 62.0% of US business establishments have one to four employees. Further, with the inclusion of sole-proprietorship owned establishments, that figure rises to 92.0% of US businesses. These figures serve as a proxy when analyzing the potential size of the lower-end of the market and remain critical in understanding the potential effect Square can have on the industry. In addition, both PayPal and Square have established themselves as premier P2P money transferring services through their mobile apps, a space in which they dominate. In point, the idea and implementation of tech-based solutions such as these are quickly allowing new entrants to gain a footing in new markets within the industry, which could disrupt the dominating market presence of traditional players in the future.
As tech-based companies become more dominate in their respective markets, they will be in a strong position to leverage their market position, technology and user base down the road to compete for larger or more profitable corners of the industry. However, traditional firms still remain poised to dominate market share within the industry and revel in high operating profits, which are on average pegged at 50.0% of revenue. Margins remain high as a result of their already established infrastructure and enormous debit and credit card transaction volumes, of which, a significant portion can be attributed to the rise of e-commerce. However, it is still in the best interest of these traditional players to take action, which they have. Visa, MasterCard and AMEX have all taken steps to integrate their business into other transaction payment processing platforms such as Google Wallet and Apple Pay, as a way to establish presence in new markets within the industry.