PayPal vs. Apple Pay: The Battle for Wallets Heats Up Again

By Uday Cheruvu, CFA, Analyst and Portfolio Manager | April 09, 2025

To many iPhone users ensconced in the Apple ecosystem, PayPal may seem like a forgotten relic of the 2010s. Although the company was a pioneer in digital payments, in recent years, PayPal’s technology failed to keep pace with the increasing ease of Apple Pay and other digital wallets that offered contactless, or tap-and-go, functionality for in-store purchases. This technology, also called near-field communication (NFC), allows shoppers to hover their smartphone over a payment terminal to complete a transaction.

But the idea that PayPal lost its relevance isn’t true for the millions of people and merchants who do rely on it, especially for online purchases. More than 430 million PayPal accounts made a transaction through the platform in the past year, and it remains the leading digital wallet provider and the one accepted by the most retailers. The company also owns Venmo, a money-transfer app with social-media-like features that is popular with 18-to-29-year-olds, a slightly younger demographic than the PayPal brand targets.

Your perception of who is winning the battle to control your digital wallet is in some way dependent on which smartphone you use and what websites you shop at. Beyond PayPal and Apple Pay, there are Amazon.com’s Amazon Pay, Alphabet’s Google Pay, and Shopify’s Shop Pay, among others, each one fighting for your business. Smartphone ecosystems tend to limit awareness of alternatives to their baked-in services, making it hard for third-party apps that fade in popularity to claw their way back. However, PayPal still has key competitive advantages that may allow the company to reposition its platform as the default choice for more people.

The digital-payments industry is a broad umbrella, comprising everything from consumer services such as digital wallets and peer-to-peer payments to merchant-facing technology that forms the backbone of online shopping, such as merchant acquiring, payment gateways, and payment processing. On the consumer side, digital wallets securely store the same cards found in your physical wallet, while peer-to-peer payment apps such as Venmo are the kind you might use to settle a tab with a friend by wiring them your portion. On the merchant side, a merchant acquirer is an institution that enables retailers to accept credit-card payments. Retailers also need a payment gateway to securely transmit payment information, and a payment processor to authorize and confirm the funds transfer between the cardholder’s issuing bank and the retailer. PayPal is unique because it does all of those things—and nothing else.

Focus is crucial for industries in which consumer habits determine growth. Products and services that become easy routines for people generally see greater usage, resulting in higher revenues; they also have a better chance of holding onto their users even when other good options become available. But for a company to achieve this level of customer loyalty, it must understand its users’ needs and be able to anticipate how those needs might change. The odds of success are likely higher if the product or service is an area of strategic focus. It’s why Spotify, for example, has been able to out-innovate and build a more user-friendly service than Apple Music. Much like music streaming, payments are a small extension of Apple’s core business, while at PayPal, it is the core business. Chief Executive Officer Alex Chriss, who started in late 2023, said at a recent investor presentation that the company is focused on product improvements that should help differentiate PayPal and build habituation among users.

For example, it is applying artificial intelligence to the data it collects from merchants and a shopper’s financial institutions so it can flag which card in their digital wallet would provide the most rewards points or largest discount. PayPal can do this because it is a two-sided network, with both consumers and merchants on its platform. Apple Pay and Google Pay don’t directly partner with merchants or track purchases at the individual product level, so they’re more limited in their ability to offer personalized rewards.

Last year, PayPal also introduced Fastlane, which significantly speeds up the online checkout process by allowing a shopper to skip several steps. No password is needed—Fastlane uses other authentication methods—and the shopper’s billing and shipping information is already securely stored. They can go to their cart and complete the transaction in one click. This is similar to Shopify’s handy Shop Pay functionality. PayPal said in February that 25% of the shoppers using Fastlane were new to PayPal, and more than 50% were PayPal users whose accounts had been inactive.

PayPal is trying to catch up in NFC payments, too. In September, the company began airing a commercial in which Will Ferrell discovers PayPal’s tap-and-go and cash-back features while singing “I want to pay with you everywhere” to the tune of Fleetwood Mac’s “Everywhere.”

Credit: PayPal

The growth that investors would like to see from this push will take some time. By 2027, PayPal aims to have more than 80% of customers globally using its new checkout options, such as Fastlane, Buy Now Pay Later, and Pay with Venmo, up from just 30% in the US currently. Therefore, it expects transaction margin dollars—the percentage the business earns on its gross merchandise value, the total value of goods and services sold through its platform—to grow by more than 10% after 2027, up from the low-single-digit rate that’s estimated for this year.

Whether PayPal can deliver on its long-term promise largely hinges on continued improvements to the convenience of its products and more consumers gaining a sense that PayPal really is everywhere. So far, it appears to be on the right track.

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Ex US Marks the Spot: Where future returns might be heading

March 31, 2025

Over the last 14 years, a powerful narrative around the exceptionalism of US equity markets took root. Dominant tech stocks, prolonged low interest rates, and economic stability led to higher returns for US stocks and caused many investors to question the necessity of international allocations. However, the tide has shifted in 2025; international equities have outperformed. Watch Portfolio Specialists Ray Vars, CFA, and Apurva Schwartz discuss the recent shift in market leadership and what the next decade might hold for global equity markets.

The transcript, lightly edited for clarity, follows.

Ray Vars: Amidst a lot of the market turmoil this year, I think something that stands out is non-US stocks outperforming the US. A lot of things today rhyme with the last time international embarked on an extended period of outperformance back in 2001: We had just come off the 1990s, a decade of US stocks outperforming, powered by great businesses, great innovation, the internet, all rooted here in the US. Earnings were strong.

We also saw the dollar strengthen for a decade, a couple hundred basis points per year. We saw a big valuation gap open up between US and non-US companies. I recall people saying, “Well, that’s okay. Why bother investing overseas? All the great businesses are here. The US is different.” But, of course, right when everybody decided that, the US went nowhere for a decade and international outperformed.

A lot of things today rhyme with the last time international embarked on an extended period of outperformance back in 2001.

Today, it feels very similar. We’ve had 14 years now of US outperformance driven by great businesses, innovation, and more earnings here. The dollar’s been strengthening for a decade and you see that valuation gap widen again, once again excused by US exceptionalism. Why bother with international companies? All the great businesses are here.

This peaked following the election last year. People said, “Oh wow! The US is going to continue to do well. The dollar’s going to strengthen.” Then we get to this year. Amidst the uncertainty, all of a sudden we’ve seen US stocks fall, international stocks actually go up, and we’ve seen the dollar weaken. The last time we saw the dollar weakening and US stocks falling was back in 2001. The question today is can we continue to see international stocks outperform over the next few years. Let’s walk through some of the reasons we think that might happen.

Apurva Schwartz: Maybe the first thing to talk about is tariffs. We don’t know what the policy will look like, it seems like there are changes every day, but I think tariffs are bad. Bad for companies outside the US and bad for US companies and their potential competitiveness abroad. Globalization has been such a tailwind for the US, for China, but also the world. The wealth effect and the prosperity that’s been generated by companies and countries being cooperative with each other. Interestingly enough, when you look at the last several years and the impact of the first round of tariffs we saw five or six years ago, global trade continues to do well.

Source: Deutsche Bank, Haver Analytics. Reproduced with permission.

Data depicted is IMF DOT export data for last twelve months ending September 2024 compared to the twelve-month period ending September 2017.

Current coverage of world trade represented herein is around 87%. Chart is from the report “Five Fresh Perspectives on Global Trade”
issued December 12, 2024.

I think the question is that as the US pursues a policy of tariffs, and you see retaliatory tariffs on top of that, what does that actually mean?

If global trade is continuing to do well, perhaps you are starting to see the US begin to squander that leading position that it has.

RV: That’s another interesting point, that the global leadership the US has shown—stability of policies, stability of institutions, driving for that change—I think is part of what underpins that idea of US exceptionalism and the premium valuation awarded to some US stocks, why the US dollar is the reserve currency for the world, and also why the dollar has been so strong.

To the extent that there’s some uncertainty around those things and some abdication of that leadership, it feels like that could also be a positive for non-US stocks. You can have that valuation premium evaporate a bit for the US. You could also see what we’ve been seeing today, the dollar continue to weaken.

AS: I think that’s exactly right. If you think about the enthusiasm over Europe today and the outperformance of European markets, it may be as much about people moving away from the US as it is about some changes that are happening in Europe. You have more unity, less regulation going forward, more investment as countries like Germany relax their fiscal constraints, and more monetary support.

The narrative is changing a little bit. Previously Europe was seen as slow moving, bureaucratic, and the European Central Bank behind the Federal Reserve in decision making. Now it feels that Europe is a little bit more on its front foot these days.

When you bring that to the company level, you mentioned this idea of US exceptionalism and the best businesses are found in the US, I acknowledge that earnings growth in US companies has generally been a little bit better, but The Magnificent Seven are very much a double-edged sword today. They drove the concentration of market returns in the US in 2024. But there’s certainly been a reversal of that and the pain in the markets in the US today is quite acute.

top-7-holdings-mag-7-acwi-ex-us-msci-us-chart

RV: Some of that reversal, if we think back over this year, is when DeepSeek announced how strong and how efficient and effective its model was. That news was certainly a shot across the bow of US-based hyperscalers, but I think it also highlights that there is innovation beyond the US.

Even within AI, when we think about who makes all of NVIDIA’s chips, TSMC makes all of them. And what equipment do they use to make it? It’s all from ASML and their extreme ultraviolet lithography (EUV) equipment. Both are near monopolies from a Taiwanese company and a Dutch company. Even the inputs are less well known, like a company called Disco in Japan: They slice, dice, and polish the wafers that are used in making those chips, and have something like a 70% market share. This is a critical niche component to the whole infrastructure and AI supply chain. Again, these are non-US companies.

When we think about who makes all of NVIDIA’s chips, TSMC makes all of them. And what equipment do they use to make it? It’s all from ASML and their extreme ultraviolet lithography (EUV) equipment. Both are near monopolies from a Taiwanese company and a Dutch company.

Even outside of tech, you’ve got a company like Schneider Electric based in France. They do energy management equipment and services and software around that. People thought about it for green energy, but the reality is they’ve got a fantastic and fast-growing business helping build out AI infrastructure. Those AI data centers need very efficient and consistent power, and I think it’s grown to something like 20% of their business from almost nothing not too many years ago.

Health care is another area of innovation outside of the US. Anti-obesity, weight loss drugs have certainly been a focus of markets and the Health Care sector. Novo Nordisk, the Danish company, is the leader. They’re competing today with Lilly. When we look forward, what people are looking for is not just the weight loss but convenience and a better safety profile with fewer side effects.

Lilly has taken to phase three a once daily oral GLP-1 drug. That would certainly be more convenient. But interestingly, the science behind that is from Chugai, a Japanese-based company. And when we think about lower side effects, Roche recently did a deal to co-develop drugs with Zealand, a Danish-based company. It’s still an injectable, but far fewer side effects than Ozempic, Wegovy, and Mounjaro. Again, a lot of innovation for future growth is coming from non-US Health Care companies.

AS: That’s a really good point. When you look at the top 20 cash-flow return-on-investment businesses, you mentioned areas of innovation like Health Care, Information Technology, and Industrials, but there are other sectors as well. You do see a preponderance of high-quality, growing businesses in those sectors outside the US.

If you look at the ACWI benchmark, the US has a large weight, 67% in US and 33% in International. But when you slice it by market cap and look at the number companies greater than US$5 billion in that high-quality growth universe, it’s a very different skew: 73% of the companies in that high-quality growth universe are outside the US. Certainly the monopoly on innovation does not belong to the United States.

relative-valuation-msci-acwi-ex-us-vs-us

RV: Yet it’s still not reflected in valuations. You see the widest gap we’ve seen in 20 plus years, actually ever I think, but it feels like that could close. We’ve listed quite a few different potential positives. If any one of them happen, it feels like that could narrow that gap and lead to some international outperformance, hopefully within rising markets.

It can also be a powerful defense. Diversification in international, if things are going awry, that valuation can provide some support in down markets, along with the quality growth of the businesses. Outperforming in down markets is actually almost more powerful than on the way up. If you think about the magic of math, if a stock falls in half, it has to double to get back to zero.

So international markets could outperform on the way up, but there’s also a good chance that they could provide protection if markets get difficult in the coming years.

AS: That point on downside protection is a good one. I also think it’s worth mentioning, from a style perspective, that growth and value have had very different experiences outside of the US, and growth stocks in the last three years have significantly underperformed to the tune of thirty percentage points unannualized versus value stocks.

To the extent that you’re looking about at international markets and looking where to put that that marginal dollar, I think international growth stocks are pretty interesting right now.

RV: Yes, I think so, too. I think international markets definitely have the potential to perform well over the coming years.

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Wise’s Money-Transfer Business Has Inadvertently Become a ‘Narrow Bank’

By Isaac May, CFA, Analyst | March 05, 2025

With regulators in both the US and UK looking at revamping the rules around banking, now is a good time to reconsider what it even means to be a bank. Today, virtually every bank in the world is a “fractional reserve bank.” In broad strokes, fractional reserve banks take depositors’ money and promise to give it back whenever the depositor asks for it. The bank then sends that money out to their other customers either in the form of loans or securities, earning money on the difference in interest rates between what it gets from borrowers and what it pays depositors.

This is helpful to society because it allows that capital to be recycled and put to productive use by consumers and businesses. But lending borrowed money comes with several different kinds of risk. Most notably, there is credit risk, where borrowers fail to pay back loans to the bank. Duration risk comes when long-term interest rates on the loans and securities are low but short-term rates are rising; the banks therefore can sell assets only at a loss (i.e., the assets are “underwater”) and cannot afford to pay the new, higher rate of interest that depositors demand. And liquidity risk hits when a bank’s assets are still worth more than its liabilities, but the depositors want their money right now and the loans won’t be paid back for some time. In other words, the money is tied up. As George Bailey explained in the famous bank-run scene in It’s a Wonderful Life, “The money’s not here. Well your money’s in Joe’s house, that’s right next to yours, and in the Kennedy house and Mrs. Mayklin’s house and a hundred others.”

Each of these risks have sunk banks in recent years. During the 2008 financial crisis, many banks failed because of credit risk when borrowers defaulted on their mortgages. In 2023, Silicon Valley Bank, Signature Bank, and then First Republic Bank all collapsed when duration risk fears sparked bank runs (to be clear, they were not the only banks with underwater assets, they were the only banks to suffer a run). And liquidity risks often come up when there are already other problems, such as the bank run at Washington Mutual that turned long-term issues into an immediate crisis and the largest bank failure in US history.

Regulators create rules to keep banks and their management teams from taking too much risk, but it is only a partial solution. No amount of regulation can force banks to make only good loans. So, one idea that’s been getting some attention recently is that maybe banks shouldn’t make loans at all. A “narrow bank” would take in deposits and provide payment services but wouldn’t make loans or take credit risk. Instead, it would hold all the cash it brought in as deposits at the central bank or buy short-term government bonds, meaning that there is basically no credit risk. There is almost no duration risk because the assets are short term or even overnight, like the deposits. And there is no liquidity risk because the assets are cash (or as liquid as non-cash assets can be).

To my knowledge, none of the tens of thousands of banks around the world operate this way. In part, that is because the regulators who are supposed to keep the current banking system safe don’t seem to trust the idea. In February 2024, for example, the Fed rejected the application of a bank called The Narrow Bank, which had been trying to secure a banking license for nearly a decade. Indeed, some have even argued that narrow banks actually make the system less secure. Because a narrow bank would be so secure, depositors, during a panic, might move their money away from conventional, risk-taking banks to narrow banks, exacerbating the crisis.

Today, the closest company to a narrow bank anywhere in the world isn’t even a bank. Wise is a financial-services firm with more than 11 million customers that started as an international money transfer service. Wise lets customers leave their money inside of the service as a pseudo deposit, similar to keeping money in Venmo or Cash App. Many customers who travelled frequently or did a lot of international business realized it was more convenient to leave their money with Wise than constantly shift it in and out of local banks. Today, Wise holds about £16 billion in deposits on behalf of its customers, investing the money in government bonds and other low-risk assets (see chart). And in fiscal 2024, it made £360 million in net interest income on those deposits, compared to £1 billion from its main business.

For large depositors, Wise could be safer than a traditional FDIC-insured bank even though it is not one itself. A small business in the US with US$5 million deposited at a bank is insured only up to US$250,000 by the FDIC.

Unlike banks, Wise does not lend out its customers’ money but instead holds it in cash or cash-like, safe assets.

Source: Wise PLC. and Harding Loevner analysis.

The other US$4.75 million is at risk in a bank failure. So, what is really safer, a regulated bank taking on credit, duration, and liquidity risks, or a less-regulated payments company that just holds onto cash? Its customers have decided that Wise’s approach is at least good enough for them.

But Wise also highlights some of the weaknesses of narrow banks. Without taking on any risk, it is difficult to generate any kind of return. Until interest rates started rising in 2022, it made effectively no money on its deposit-taking operation. It was just for customer convenience so that Wise could make more money on fees from its other services. Commercial banks don’t rely on fees; most of them are primarily lenders that make most of their revenue from net interest income and offer some services on the side. Rates could fall to zero again, and that revenue stream of hundreds of millions of pounds per year could disappear—Wise cannot rely on it.

As ever, there are some wrinkles. Wise doesn’t claim to be a narrow bank. Someday, it could get a banking license and start making loans. And its international business adds a new currency risk because its assets do not perfectly match its liabilities’ currencies. A kibitzer could also point out that it doesn’t hold only cash at central banks and short-term government debt. Wise doesn’t disclose exactly what is in its securities portfolio, so some of it could be corporate debt. And it deposits money at commercial banks that puts them in the same fractional reserve banking system that narrow banks are supposed to avoid. But these are molehills. Ninety percent of the deposits are in US dollar, British pounds, and euros, and they are closely matched. Banks can fail, but that is much less common than borrowers failing to repay a loan, and even if there are a few corporate bonds in there, a sliver of the funds being lent to investment-grade corporate borrowers is much lower risk than any conventional commercial bank.

On the whole, Wise is the narrowest and one of the safest banks in the world. Without being a bank at all.

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BBVA Takes a Risk By Going Hostile

By Isaac May, CFA, Analyst, and Moon Surana, CFA, Analyst and Portfolio Manager | September 11, 2024

BBVA is Spain’s second-largest bank and wants to get bigger. Management thought a good way to do that would be to buy its rival Sabadell, Spain’s fourth-largest bank. The resulting firm would be Spain’s second-largest bank, with a roughly US$70 billion market cap, 100 million customers around the world, and US$1 trillion in assets. Sabadell’s management, however, was not so taken with the idea, and rejected the offer.

After being rebuffed on its US$12.9 billion “friendly” offer at the beginning of May—a 30% premium to Sabadell’s market cap at the time—BBVA came back with a US$13.1 billion offer that it plans to present directly to Sabadell shareholders, bypassing management. This kind of hostile merger is a rarity among banks. Mergers are risky enough on their own. Hostile mergers amplify those risks, and hostile mergers in the highly regulated world of banking amplify them even further.

Analyst Isaac May presents a few of the biggest reasons why hostile mergers for banks can be risky, and portfolio manager Moon Surana presents counterarguments for why BBVA might be able to overcome those risks.

The Regulators

May

The challenge: Spain’s stock-market supervisor, the National Securities Market Commission, began its review of the proposal in June. BBVA will have to convince regulators of the deal’s merits before it can bring it to Sabadell’s shareholders. That could be tough. The Spanish government has already come out against the deal, and an acquisition would also require the approval of Spain’s antitrust watchdog, the CNMC, as well as the European Central Bank and even regulators in the UK and Mexico, where the banks have operations.

Those hurdles illustrate the first problem with a bank trying to orchestrate a hostile merger. Every industry is regulated, but banking is more regulated than most, and those government overseers have a lot of leverage. The regulator can block the deal outright or add conditions that make the deal very expensive. Regulators have a lot of power that they can use to discourage actions they don’t strictly have control over.

Surana

The answer: BBVA needs regulatory approval before it can take the tender offer to Sabadell shareholders (its own shareholders have already approved the offer). The offer has been authorized by the ECB and several other countries, but not yet by Spanish regulators. And there is a chance that it gets approval from both companies’ shareholders and regulators, but is still blocked by the Spanish government. In that scenario, the parent company would own two banks but couldn’t combine them, leaving them to nominally compete against each other.

BBVA management claimed the deal would be worth doing even if it has to operate the banks separately, though it would be a very unusual construction that makes it harder to realize the originally expected cost savings. Ultimately, though, the downside risk seems limited. If Sabadell shareholders reject the offer, or if regulators block it, BBVA moves on. There is little damage for BBVA at this point in making one last attempt to get a deal done. Even in the worst-case scenario the upside—BBVA gets bigger in its home market—still outweighs the downside.

The Employees

May

The challenge: One of the common reasons to merge companies is so managements can cut costs, which generally means employees. Therefore, every merger affects the staff at both the acquirer and the target to some degree. Hostile mergers by their nature can amplify the very natural resentment some employees might feel after an acquisition. But within the world of banking, issues with a company’s employees can have a more pronounced effect.

In a bank, many employees are important contacts with the customers, and in some cases they can leave and take the customers with them. Think of wealth managers who generate fee income and have personal relationships with clients. If senior managers leave, normal business may get disrupted. Loans stop getting processed, new sales leads go quiet. Even tellers leaving can be a problem that helps push customers to a competitor.

Many of these kinds of problems can be partially solved with money, but it can cost a lot, and isn’t sustainable. A takeover’s economics often depend on layoffs or branch closures, so employees know that their job security is under threat. If the acquirer has to give some employees a big raise to keep them at the job and happy, it likely exacerbates whatever the company had to overpay by going hostile in the first place.

Surana

The answer: The deal is actually less hostile than it seems. In its announcement of the offer, BBVA pledged to keep “the best talent and culture of both entities.” And BBVA made “friendly” offers, such as having an integration committee with members from both banks, keeping the management team at Sabadell’s SME (small and medium enterprises) business, and maintaining the Sabadell brand. BBVA also has a track record of successfully integrating companies through mergers across geographies. That experience should help here.

The Loan Book

May

The challenge: When two banks negotiate a friendly merger, at some point the acquiring bank will get to look at the loan book of the target bank. If not the entire book, they will at least see some of the bigger loans. This is critical, because it tells the acquirer if there are problems looming that wouldn’t be visible to an outside party. In a hostile merger, the acquiring bank is an outside party. It will not get that inside look at the bank’s true balance sheet. If there are any problematic loans or brewing issues, the acquirer will find out about them only after it has bought the company.

Surana

The answer: These companies are already very familiar with each other. BBVA held merger talks with Sabadell in 2020 and has long mulled the benefits of integrating the two companies. They were close to a friendly deal in 2020, and close this year, too, until the merger talks leaked.

Taking a merger offer hostile adds extra risks to what is already an inherently risky maneuver. Add up all the extra costs that come with a hostile transaction and the odds of it adding value for shareholders get very long. BBVA has enough levers and cushions to offset those risks and still make this deal work, if it can maintain its discipline on price and focus on execution.

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Out of Our Minds

PayPal vs. Apple Pay: The Battle for Wallets Heats Up Again

Credit: PayPal

Ex US Marks the Spot: Where future returns might be heading

Source: Deutsche Bank, Haver Analytics. Reproduced with permission.

Data depicted is IMF DOT export data for last twelve months ending September 2024 compared to the twelve-month period ending September 2017.

Current coverage of world trade represented herein is around 87%. Chart is from the report “Five Fresh Perspectives on Global Trade”
issued December 12, 2024.

Wise’s Money-Transfer Business Has Inadvertently Become a ‘Narrow Bank’

Unlike banks, Wise does not lend out its customers’ money but instead holds it in cash or cash-like, safe assets.

Source: Wise PLC. and Harding Loevner analysis.

BBVA Takes a Risk By Going Hostile

Disclosures

Out of Our Minds

Credit: PayPal

Ex US Marks the Spot: Where future returns might be heading

Source: Deutsche Bank, Haver Analytics. Reproduced with permission.

Data depicted is IMF DOT export data for last twelve months ending September 2024 compared to the twelve-month period ending September 2017.

Current coverage of world trade represented herein is around 87%. Chart is from the report “Five Fresh Perspectives on Global Trade” issued December 12, 2024.

Wise’s Money-Transfer Business Has Inadvertently Become a ‘Narrow Bank’

Unlike banks, Wise does not lend out its customers’ money but instead holds it in cash or cash-like, safe assets.

Source: Wise PLC. and Harding Loevner analysis.

BBVA Takes a Risk By Going Hostile

Disclosures

Current coverage of world trade represented herein is around 87%. Chart is from the report “Five Fresh Perspectives on Global Trade”
issued December 12, 2024.