PayPal (PPPL -0.96%) is a seasoned leader in the world of financial technology. His digital payment system has been the lifeblood of the e-commerce market for years.
The RippleNet blockchain network was designed to make cash payments fast, with low fees, and across international borders. These features are driven by the XRP (XRP 1.80%) digital token, often referred to as Ripple, due to its close association with the payment system.
Many investors are wondering if Ripple poses a threat to PayPal in the long run, thanks to its overlapping use cases. Can the digital upstart steal PayPal’s crown, establishing himself as the king of international e-commerce payments?
What PayPal does well
PayPal’s business is gigantic in every way. In the recently reported second quarter of 2022, it handled payment volume of $340 billion, generating $6.8 billion of top-tier payment fee revenue. Payment volumes were up 13% year-over-year on a currency-neutral basis. The most effective engine of growth right now is money transfer app Venmo, where trading volume more than tripled from the previous year’s reading.
This payment system benefits from strong economies of scale. Any challenger to this behemoth better bring their A-game to the fray.
What Ripple does best
As powerful as PayPal is, its system still works much like a traditional bank. PayPal has more than $37 billion in customer accounts and funds receivable, balanced by $40 billion in funds payable and cash owed to customers.
These huge account balances are the heart of PayPal’s system, allowing the company to transfer payments, as needed, through its internal books. The company must manage some funds in each of its end markets, numbering up to 200 countries today.
You can pay extra (nearly double the total fees) for an instant transfer or wait up to three days to execute transfers at the 2% base fee.
Vibe is different. Instead of holding a ton of cash in various currencies, RippleNet has a global pool of XRP-based liquidity, available to every corner of the world at the drop of a hat. To provide the crucial first and last steps in the journey of every payment, Ripple partners with payment services and banks in dozens of countries.
These transactions are completed in seconds. The minimum transaction fee on RippleNet is 0.00001 XRP, which is equivalent to $0.0000046 per transaction.
In plain language, RippleNet payments are essentially free and instant. By contrast, the average fee for a cash transfer from Japan to the Philippines, a popular transaction route, due to a large Filipino population with Japanese family roots, is almost 11%. And as discussed above, a PayPal transaction would come with a 3.75% fee if you’re in a hurry and 2% if you’re not.
From a practical point of view, there is no reason why RippleNet should not disrupt the global cash transaction regime and replace it with a faster and cheaper alternative. That would be bad news for PayPal. Cross-border payments are a significant component of PayPal’s business, accounting for $45 billion of value transferred in the second quarter.
Is Ripple the clear winner, then?
Sure, at first glance. But RippleNet is the new kid on the block, lacking PayPal’s unparalleled collection of partners around the world. Additionally, Ripple-based payments may be thriving in some markets, but a huge piece is missing from that financial puzzle.
Ever since the US Securities and Exchange Commission (SEC) filed a lawsuit against Ripple in 2020, US banks and exchanges have refused to do business with this digital service. The legal wheels keep turning Two years later.
The courts could issue a ruling in the first half of 2023, but that is arguably an optimistic estimate. Even then, various levels of possible appeals could delay the final blow for years. And the XRP token is not useful or valuable to US investors until this mess is sorted out.
Ripple could very well put a dent in PayPal’s worldwide business over time. But the victory cannot be complete without the participation of the world’s largest economy. That’s not likely to happen any time soon.
However, I still don’t want to point to PayPal as the clear winner in the long run.
You see, PayPal is no stranger to blockchain networks and cryptocurrencies. As long as the Ripple SEC dispute ends, I hope that users will be able to buy, sell and send XRP tokens through PayPal and Venmo.
But wait, there’s more! Ultimately, PayPal could integrate RippleNet transactions into its payment systems. That would be a highly efficient, asset-light alternative to the bank-like system in use today. So I think we are comparing two future partners here.
Hurry and wait: the day of Ripple will come
All that said, PayPal is the most obvious winner for the foreseeable future. If Ripple ever topples the king of digital payments, the charge to the throne may take years. That gives you plenty of time to move your investment between these tickers.
So yes, I think Ripple may become the next PayPal in due time. We just have to wait for the final appeals in the SEC dispute, and it could take years to get there. In the short term, PayPal is king supreme.