Market Scan

PayPal by the Numbers

An AP Article by Josh Funk provides some interesting insight into PayPal, e-Bay's alternative payment processor:

• PayPal accounts for approximately 25% of e-Bay's revenue
• PayPal had 143 million accounts in March
• PayPal processed 177 million transactions worth $11.36 billion in the second quarter (average transaction size = $64.18)
• PayPal charges $0.30 plus up to 4.9% of the payment amount

    http://biz.yahoo.com/ap/070626/paypal_power.html?.v=1

Commentary

PayPal is used primarily for person-to-person (P2P) payments and payments to micro-businesses in an e-commerce context.  It facilitates e-commerce by acting as a trusted third party for transactions between strangers.  Rather than threatening the banking industry's payments franchise, PayPal adds value to it by increasing the total number account transfers and card payments in the economy.

Perfect Storm Brewing for Money Service Businesses

Last Week, Wal-Mart Financial Services announced plans to add 1,000 MoneyCenters to the 225 it currently operates.  Wal-Mart MoneyCenters are stand-alone counters in Wal-Mart stores that offer check cashing, money order and money transfer services to the under-banked at substantially lower prices than other providers.  Meanwhile, BankNet360 reports that major payday lenders including Advance America, Cash America, and EZCorp have announced aggressive growth plans.

Commentary

To date, Wal-Mart Financial Services has avoided the payday lending business.  But, having abandoned its bid for a merchant banking license, Wal-Mart Financial Services will need to add new products to grow its business substantially.  Payday lending is a logical next step and one where Wal-Mart's "everyday low price" strategy may be welcomed by consumer advocates and regulators.

Further clouding the picture for money service businesses, Congress is continuing to pursue immigration reform which may include tough border security and workplace enforcement measures.  A substantial decrease in legal or illegal immigration could have a negative impact on the long term outlook for money service businesses.

In summary, traditional money service businesses may face a perfect storm - price pressure from Wal-Mart, industry overcapacity, immigration restrictions, and new regulatory constraints at the state (e.g. usury) and federal (e.g. anti-money laundering) level.  Commercial banks with credit or transactional exposure to this industry should monitor these clients closely.