It is going to be a tough road for Walmart (ticker: WMT), to catch Amazon (ticker: AMZN). The latter can use profits from PRIME and AWS to subsidize investments that provide a competitive advantage in retail operations and elsewhere (think cashierless checkout). One way for Walmart to begin to remedy this situation would be to acquire a payments company such as PayPal (ticker: PYPL).
There are three primary benefits that Walmart would enjoy were it to acquire PayPal.
First, Walmart would capture transaction fee revenue associated with online transactions that occur outside of Walmart’s portfolio.
Second, Walmart would benefit from operating margin lift as transaction fees carry much higher margins than retail operations (Transaction revenue is “asset-lite”. The underlying technology – payment gateways, fraud detection algorithms and peer-to-peer capability – do not require warehouses, transportation, nor other non-scaleable operations). A portion of this incremental cash flow could be re-deployed into the business to drive innovation.
Third, bringing PayPal inside of Walmart would infuse WMT with a much needed shot of Technology IP.