Will Ripple Be the Next PayPal?

PayPal (PYPL 0.37%) is an experienced leader in the world of financial technology. Its digital-payment system has been the lifeblood of the e-commerce market for years. 

The RippleNet blockchain network was designed to carry cash payments quickly, with low fees and across international borders. These features are powered by the XRP (XRP -1.32%) digital token, often referred to as Ripple, due to its close association with the payment system.

Many investors are wondering whether Ripple poses a threat to PayPal in the long run, thanks to their overlapping-use cases. Will the digital upstart steal PayPal’s crown, installing itself 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 managed a payment volume of $340 billion, generating $6.8 billion of top-line revenue from payment fees. Payment volumes rose by 13% year over year on a currency-neutral basis. The most effective growth engine right now is the Venmo money-transfer app, where the commerce volume more than tripled from the year-ago reading.

This payment system benefits from robust economies of scale. Any challenger to this giant better bring its A game to the fight.

What Ripple does better

As powerful as PayPal is, its system still operates much like a traditional bank. PayPal holds more than $37 billion in customer accounts and funds receivable, balanced against $40 billion in funds payable and cash due to customers.

These enormous ledger balances are the meat of the PayPal system, allowing the company to transfer payments, as needed, across its internal books. The company must manage some funds in each of its endpoint markets, adding up to 200 countries nowadays.

You can pay extra (almost doubling the total fees) for an instant transfer or wait up to three days to execute transfers at the base fee of 2%.

Ripple is different. Instead of holding a ton of cash in various currencies, RippleNet holds a global reserve 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 on each-payment’s journey, Ripple partners with payment services and banks in dozens of countries.

These transactions are completed in seconds. The minimum transaction fee on RippleNet stands at 0.00001 XRP, which works out to $0.0000046 per transaction.

In plain English, RippleNet payments are essentially free and instantaneous. 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 nearly 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’s no reason why RippleNet shouldn’t disrupt the global cash-transaction regime and replace it with a quicker, cheaper alternative. That would be bad news for PayPal. Cross-border payments are an important component of PayPal’s business, accounting for $45 billion of transferred value 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 incomparable collection of partners around the globe. Furthermore, Ripple-based payments may be thriving in some markets, but there’s a massive piece missing from that financial puzzle.

Since the U.S. Securities and Exchange Commission (SEC) launched a lawsuit against Ripple in 2020, American banks and exchanges have refused to do business with this digital service. The legal wheels are still turning two years later.

The courts could issue a ruling in the first half of 2023, but that’s arguably an optimistic estimate. Even then, several levels of potential appeals could delay the final gavel bang for years. And the XRP token is neither useful nor valuable to American investors until this mess is cleaned up.

It’s complicated

Ripple could very well put a large dent in PayPal’s worldwide business over time. But the victory can’t be complete without participation from the world’s largest economy. That’s not likely to happen anytime soon.

I still don’t want to anoint PayPal as the clear winner in the long run, though.

You see, PayPal is no stranger to blockchain networks and cryptocurrencies. If and when Ripple’s SEC dispute ends, I fully expect that users will be able to buy, sell, and send XRP tokens through PayPal and Venmo.

But wait — there’s more! In the end, PayPal could integrate RippleNet transactions into its payment systems. That would be an asset-light and highly efficient alternative to the bank-like system in use today. So I think we’re comparing two future partners here.

Hurry up and wait — Ripple’s day will come

All that being said, PayPal is the more obvious winner for the foreseeable future. If Ripple ever overthrows the digital-payment king, the charge toward the throne may be years in the making. That gives you plenty of time to move your investment between these tickers.

So yes, I think Ripple can 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 reigns supreme.