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2 Strategic Moves That Gave PayPal Steam for TPV Growth

- By Sangara Narayanan

PayPal Holdings Inc. (PYPL) has already become one of the top payment processing companies in the world. Total payment volume, or TPV, the most important metric for payments processors, has now reached $354.014 billion, growth of 26% compared to the previous year. The impressive part about PayPal's growth is, despite operating in a mature industry, the company has been able to increase its payment volume by strong double-digits over the past several years.

PayPal has made two significant moves that will keep its TPV growth intact for the next few years.

TIO Networks acquisition

PayPal bought TIO Networks Corp. (TNC.V), a multichannel bill payment processor, in February 2017 for $233 million. Canada-based TIO offers a range of payment options for its users and has more than 65,000 retail locations in North America. In 2016, TIO processed more than 7 billion consumer bill payments while supporting more than 10,000 billers.

The strength of TIO is the consumer segment that it serves. There is a huge population sitting outside the current financial services industry that is underserved by the segment. TIO, with a massive network of kiosks and endpoint locations, has already grabbed that underserved segment, which will now move to PayPal. Apart from helping PayPal boost its total payment volume, TIO brings in a large volume of customers who have avoided traditional payment processors.

"By acquiring TIO and integrating bill payment into our global payments platform, PayPal adds another key service in our efforts to become a part of a consumer's everyday financial life," Dan Schulman, president and CEO of PayPal, said. " Worldwide, more than 2 billion people do not have affordable access to basic financial services, making it difficult and expensive for consumers to carry out basic financial tasks, including bill payment."

Working with, not against, Visa and Mastercard

The decision to work with its rivals instead of against them raised a lot of eyebrows initially. This was surprising because PayPal was expected to eventually break the control Visa (NYSE:V) and Mastercard (MA) have over the digital payments market. By working with the two companies, PayPal will increase its payment volume but will lose on margins. The company's decision, however, had more to do with increasing competition in the digital wallet space, which saw the likes of Apple (AAPL), Samsung (005930.KS) and Alphabet's Google (GOOG)(GOOGL) enter the race in a big way.

PayPal announced earlier this month the extension of its partnership with Visa:

"This partnership makes it easier for Visa-issuing banks in Asia Pacific to offer their cardholders the ability to checkout anywhere PayPal is accepted online. It also expands the use of PayPal to retailers that accept Visa in physical locations."

Together, these two strategic initiatives will have a huge impact on PayPal's overall payments volume growth in the short to medium term. That is something investors and potential shareholders would do well to take note of.

Disclosure: I have no positions in the stock mentioned above and no intention of initiating a position in the next 72 hours.

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This article first appeared on GuruFocus.