Shopify, Fiserv, and Adyen just joined this downed financial stock. Is this good for investors?

Shopify (STORE 1.56%) is one of the largest e-commerce players in the world, providing software services to many businesses. One of the tools it offers its customers is payment processing. And on September 9th, Shopify partnered PayPal (PYPL 1.38%) to do the job better.

I would have to say Shopify EXTENDED its partnership with PayPal, as the two have worked together for some time in varying degrees. In fact, PayPal has a long history of landing key partnerships. And it’s even secured more partners than just Shopify in recent weeks.

On August 29, PayPal announced an expanded partnership with Fiserv (BE 0.26%)facilitating Fiserv customers’ access to PayPal functions. And on August 20, PayPal expanded its partnership with another financial technology (fintech) company. Adyen (ADYE.Y -0.69%) also.

PayPal’s stock is down nearly 80% from its all-time high, so its shareholders are surely hoping its partnerships with Shopify, Fiserv, and Adyen are good news. And indeed, these announcements could represent some positive developments beneath the surface, as I will explain.

Thinking about the big picture

For those who haven’t noticed, there are plenty of publicly traded companies that process digital payments. And that can be a problem for investors. It’s hard for any company to have a competitive edge when it comes to payment processing. And when there is a lot of competition and little competitive advantage, profit margins are affected.

For its part, PayPal has several strengths. For starters, the company processed more than $1.6 trillion in payment volume in the past year. Additionally, it has both consumer and merchant customers, giving it two-sided e-commerce data.

In his first earnings call with PayPal, CEO Alex Chriss highlighted these two things when he said, “Our data and scale are our key strengths.” The company’s incredible amount of payment data could be its biggest asset to differentiate itself from its peers. As Chriss also said, “What PayPal stands for today is unmatched.”

What the company needs to do, however, is find ways to make its payment data useful to its users. It’s not easy to do, and it’s not easy for investors to measure objectively. But perhaps that’s where his recent partnerships come into play.

Shopify has its own payment solution called Shop Pay, so it might seem strange that it would add PayPal as a payment option. But in its expanded partnership with Shopify, PayPal management also said it will allow PayPal Wallet transactions to be integrated into the merchant’s Shopify experience.

In other words, PayPal shares some of its data with Shopify users who would benefit from it. Shopify probably knows its customers would love this, so adding PayPal as a payment option was probably the compromise it had to make to get this data to its users.

In terms of partnerships with Fiserv and Adyen, these two companies are adopting PayPal’s new Fastlane Checkout, which enables faster order completion and increases sales conversions. It’s not the same as its contract with Shopify. But Fastlane gives PayPal some consumer data on a part of the population it doesn’t have, improving its data set.

Will it work?

Many investors probably love the way Chriss talks about PayPal data. But as we already mentioned, objectively measuring what the company does and its financial benefits to the business is difficult. But perhaps there is an encouraging data point here.

PayPal has a value called transaction margin — conceptually this is like its gross margin (revenue minus direct expenses). When a company fails to differentiate itself, its gross margin usually suffers. And as mentioned, it’s hard to stand out in the digital payments space. Because of this, it’s no surprise that PayPal’s dollar transaction margin has remained flat in recent years despite continued revenue growth.

The chart below shows PayPal’s revenue and gross profit over the past few years to illustrate this.

PYPL Revenue Data (TTM) by YCharts; TTM = last 12 months.

In the second quarter of 2024, PayPal’s dollar transaction margin was up 8% year over year. This was the best growth rate for this stock since 2021. It’s only a quarter figure, so investors shouldn’t take a victory lap just yet.

But it does suggest that something has changed. And perhaps the change is that PayPal is figuring out how to better monetize its business by differentiating itself from its competitors by using its data.

Investors should definitely keep a close eye on things. But PayPal’s partnership with Shopify could connect to a bigger picture of better leveraging the assets it has. And if true, this is a very welcome development for PayPal shareholders.