Morningstar Magazine - December 2017/January 2018 - 67

very difficult to get consumers to use low-cost
payment methods because of the rewards
and benefits they get with the traditional system.
At the same time, although merchants would
like to see lower-cost payments, they are very
reluctant to share their data with companies such
as Apple and Amazon.com AMZN, which
are also powerful competitors. Apple takes 30%
of all iTunes sales; Amazon is having a huge
negative impact on a lot of retailers.
In the U.S., it's also very easy to make a credit card
payment. It's fast, secure, and convenient. We
haven't seen the killer app yet in mobile payments
that makes people want to use something
like Apple Pay.
What about competition from bitcoin?

Sinegal: Blockchain technology is great; it can
reduce costs of accepting payments. But,
again, there is no big incentive for consumers
or merchants to use it. There's a small percentage
of people who are using bitcoin right now
more because of the novelty than anything else.
The competitive advantage for Visa and Mastercard
is based on a network of 16,000 banks around
the world, more than 40 million merchants
that accept those payment methods, and over
a billion cards outstanding. But the banks
themselves, or Visa and Mastercard, could use
blockchain technology to lower the cost
of payment.
How is PayPal PYPL positioned today?

Sinegal: PayPal's business model is very much
in transition, and that's what makes it one
of the more interesting names I cover. Traditionally,
they've competed with Visa and Mastercard.
Now, they're moving more toward a merchantacquiring business. They're also expanding
their efforts in other types of financial services,
such as lending and bill payments. There
are opportunities for them, but their success is far
from guaranteed.

You have to balance the opportunity and the
growth they have in their current business
with the risks associated with the new businesses
they're entering and with the transition in their
business model. Right now, the stock is priced at a
level where the risks outweigh the opportunities.

But we like the management team at PayPal.
We like the strategy. If the stock gets somewhat
cheaper, we'd be interested.

Along with that, Square is trading at a very high
price that incorporates a lot of future growth
that may not materialize. We'd be very hesitant
to invest at current prices.

PayPal also faces competition from startups.

Sinegal: Exactly. PayPal is at its heart a merchant
payment processor, and that's where most new
competition in payments is happening. Companies
like Square SQ are doing very much the same
thing PayPal did 20 years ago for small merchants
in the physical environment. Companies
such as Stripe and Adyen are processing online
payments for merchants. And then there
are CyberSource and Authorize.net, both owned
by Visa.

At the same time, need for the consumer-facing
side of PayPal is declining. For a long time,
PayPal dominated the consumer digital wallet
space. Now, you can store your payment
information with Apple Pay, Google, or Android.
You can store it within your browser.
How can competitors like Square build a moat?

Sinegal: It's challenging. Small merchants
are looking for low cost and reliability first. There's
been a lot of consolidation among payment
processors because this is a scale business; Vantiv
VNTV and First Data FDC have gotten bigger.

Square has a great head start. If you're bullish,
you can look at them as the Apple of small
merchant payments. When we went out and
talked to merchants, a lot of people told us
it's worthwhile to pay a little bit more for Square,
because it has nicer features, better design, easier
use-the same reasons people pay more for
an iPhone. What makes us skeptical is that there
are very few Apples. Typically, competition
wins out, and we think that's going to be the case
for Square over time.
Payment processing companies are moving into
the software side of things, as well. In addition to
managing your payments, they can manage
employee hours, inventory, things like that. But
merchant needs vary widely. Restaurants may
prefer one system, while retail stores prefer
another. There are a variety of factors on which
these companies compete, so it's very difficult for
one company to take a lot of market share.

What about competition from Zelle?

Sinegal: This is more of a defensive play for
the banks. There are a lot of companies attempting
to get into peer-to-peer payments as a first
step to develop usage and hopefully monetize
it at some point later. The banks would like to keep
people from going outside to pay friends, so
they've developed Zelle.

Peer-to-peer is very hard to monetize. Small
merchants are paying 2% or 3% to process
payments to Square or PayPal, but peer-to-peer
is typically free. It would be interesting if the banks
started to use it for consumer-to-business
payments. Mastercard and Visa were owned by
the major banks until 2006 and 2008, respectively,
when those two companies had initial public
offerings. With Zelle, the banks are essentially
replicating what they once had with Visa and
Mastercard. Now that they are competitors, it'll be
interesting to see if the banks try to bypass them.
On the other hand, one of the reasons they
got rid of those companies was due to antitrust
concerns. They may run into that once again
if they're running their own payment system.
It's in early stages, but at this point, I see
peer-to-peer across the board as a defensive move
and almost a must-have feature. PayPal has
Venmo. Facebook Messenger has peer-to-peer and
Apple Pay is introducing it. No one's making
money on the initiative.
What is the most significant trend in the
payment space?

Sinegal: Hardware is being replaced by software.
A lot of Square's success was due to the Square
Reader, which was rapidly replicated. But
we're going to see payments go completely digital.
More commerce is being done online, and
more of that is being done through mobile phones.
Five or 10 years from now, we don't think people
will be swiping nearly as many cards.

As Warren Buffett said of the auto industry, 100
years ago, you might not have known which auto

global.morningstar.com/Morningstarmagazine

67


http://www.Amazon.com http://www.Authorize.net http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018

Contents
Morningstar Magazine - December 2017/January 2018 - Cover1
Morningstar Magazine - December 2017/January 2018 - Cover2
Morningstar Magazine - December 2017/January 2018 - 1
Morningstar Magazine - December 2017/January 2018 - 2
Morningstar Magazine - December 2017/January 2018 - Contents
Morningstar Magazine - December 2017/January 2018 - 4
Morningstar Magazine - December 2017/January 2018 - 5
Morningstar Magazine - December 2017/January 2018 - 6
Morningstar Magazine - December 2017/January 2018 - 7
Morningstar Magazine - December 2017/January 2018 - 8
Morningstar Magazine - December 2017/January 2018 - 9
Morningstar Magazine - December 2017/January 2018 - 10
Morningstar Magazine - December 2017/January 2018 - 11
Morningstar Magazine - December 2017/January 2018 - 12
Morningstar Magazine - December 2017/January 2018 - 13
Morningstar Magazine - December 2017/January 2018 - 14
Morningstar Magazine - December 2017/January 2018 - 15
Morningstar Magazine - December 2017/January 2018 - 16
Morningstar Magazine - December 2017/January 2018 - 17
Morningstar Magazine - December 2017/January 2018 - 18
Morningstar Magazine - December 2017/January 2018 - 19
Morningstar Magazine - December 2017/January 2018 - 20
Morningstar Magazine - December 2017/January 2018 - 21
Morningstar Magazine - December 2017/January 2018 - 22
Morningstar Magazine - December 2017/January 2018 - 23
Morningstar Magazine - December 2017/January 2018 - 24
Morningstar Magazine - December 2017/January 2018 - 25
Morningstar Magazine - December 2017/January 2018 - 26
Morningstar Magazine - December 2017/January 2018 - 27
Morningstar Magazine - December 2017/January 2018 - 28
Morningstar Magazine - December 2017/January 2018 - 29
Morningstar Magazine - December 2017/January 2018 - 30
Morningstar Magazine - December 2017/January 2018 - 31
Morningstar Magazine - December 2017/January 2018 - 32
Morningstar Magazine - December 2017/January 2018 - 33
Morningstar Magazine - December 2017/January 2018 - 34
Morningstar Magazine - December 2017/January 2018 - 35
Morningstar Magazine - December 2017/January 2018 - 36
Morningstar Magazine - December 2017/January 2018 - 37
Morningstar Magazine - December 2017/January 2018 - 38
Morningstar Magazine - December 2017/January 2018 - 39
Morningstar Magazine - December 2017/January 2018 - 40
Morningstar Magazine - December 2017/January 2018 - 41
Morningstar Magazine - December 2017/January 2018 - 42
Morningstar Magazine - December 2017/January 2018 - 43
Morningstar Magazine - December 2017/January 2018 - 44
Morningstar Magazine - December 2017/January 2018 - 45
Morningstar Magazine - December 2017/January 2018 - 46
Morningstar Magazine - December 2017/January 2018 - 47
Morningstar Magazine - December 2017/January 2018 - 48
Morningstar Magazine - December 2017/January 2018 - 49
Morningstar Magazine - December 2017/January 2018 - 50
Morningstar Magazine - December 2017/January 2018 - 51
Morningstar Magazine - December 2017/January 2018 - 52
Morningstar Magazine - December 2017/January 2018 - 53
Morningstar Magazine - December 2017/January 2018 - 54
Morningstar Magazine - December 2017/January 2018 - 55
Morningstar Magazine - December 2017/January 2018 - 56
Morningstar Magazine - December 2017/January 2018 - 57
Morningstar Magazine - December 2017/January 2018 - 58
Morningstar Magazine - December 2017/January 2018 - 59
Morningstar Magazine - December 2017/January 2018 - 60
Morningstar Magazine - December 2017/January 2018 - 61
Morningstar Magazine - December 2017/January 2018 - 62
Morningstar Magazine - December 2017/January 2018 - 63
Morningstar Magazine - December 2017/January 2018 - 64
Morningstar Magazine - December 2017/January 2018 - 65
Morningstar Magazine - December 2017/January 2018 - 66
Morningstar Magazine - December 2017/January 2018 - 67
Morningstar Magazine - December 2017/January 2018 - 68
Morningstar Magazine - December 2017/January 2018 - 69
Morningstar Magazine - December 2017/January 2018 - 70
Morningstar Magazine - December 2017/January 2018 - 71
Morningstar Magazine - December 2017/January 2018 - 72
Morningstar Magazine - December 2017/January 2018 - 73
Morningstar Magazine - December 2017/January 2018 - 74
Morningstar Magazine - December 2017/January 2018 - 75
Morningstar Magazine - December 2017/January 2018 - 76
Morningstar Magazine - December 2017/January 2018 - 77
Morningstar Magazine - December 2017/January 2018 - 78
Morningstar Magazine - December 2017/January 2018 - 79
Morningstar Magazine - December 2017/January 2018 - 80
Morningstar Magazine - December 2017/January 2018 - Cover3
Morningstar Magazine - December 2017/January 2018 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com