Since the e-payment giant Paypal Holdings (NASDAQ:PYPL) joined the public equity markets last year, its stock price has fluctuated sharply between $31 and $38, as shown in the chart below. The sharp fluctuations in the PayPal's stock price have been triggered by overall market weakness, the company’s quarterly performances and e-payments market developments. PayPal has been growing at an astonishing pace of 28% CAGR in past six years, which positions the company as the biggest pure-play e-payments company with a strong presence in online, in-store, and peer-to-peer transactions, with a broad portfolio that includes other successful services like Venmo,Braintree, and Xoom beyond the core PayPal activity.

The total transactions value processed through digital payments methods is expected to reach $2T in 2016 and climb to $4T in 2020, which reflects an amazing 16.4% annual growth rate. Assuming that e-payments service providers charge between 1.5% to 3% for a transaction fee, the e-payments market size is estimated to grow from $48B in 2016 to $89B in 2020. The enormous size of the e-payments market and its incredible growth rate has attracted many new players, including tech giants like Apple (NASDAQ:AAPL), Samsung Electronics (OTC:SSNLF), Google, and Facebook (NASDAQ:FB), as well as financial institutions like Visa (NYSE:V),Mastercard (NYSE:MA), and JP Morgan Chase (NYSE:JPM) and independent initiatives by leading retailers like MCX’s CurrentC.

123rf

As the number of players is increasing rapidly, the e-payments market is becoming so crowded that it is preventing some players from generating substantial revenues that will justify their efforts. Even though the e-payment companies are struggling to generate significant revenues from their e-payments business, the credit card networks, which receive a fee for every  transaction, are benefitting from the market expansion.

A large number of players, in the market, forces the e-payment companies to settle for a small market share, which prevents them from having a real negotiating power against the credit card networks that process the payments – namely, Visa and MasterCard. Other credit card companies, like American Express (NYSE:AXP) and Discover, are absent from the market. However, as the payment market is moving from traditional payment methods to digital methods, American Express (and Discover) can't afford to ignore or neglect this business. American Express made its first effort in the e-payments processing market when it partnered with Apple Pay in penetrating Canada and Australia, which was, of course, not enough to challenge Visa and MasterCard and to develop a new, strong revenue stream.

The recent rumor of a possible merger between PayPal and American Express could answer some of the problems that both companies are having, and it highlights the enormous synergies and benefits for both companies from such a merger. The merged company would have a significant market share in the e-payments market with minimal transaction costs that will improve PayPal’s transaction margin beyond the current level of 60% and significantly and instantly increase its transaction revenues.

AmEx could use the merged company's market share to attract more e-payments businesses to its network and challenge Visa and MasterCard's dominance by creating a strong e-payment processing solution that could offer a similar solution with lower costs compared to the competition. The players in the crowded e-payments market strive for an additional processor to offer competitive fees and serve as a viable alternative to Visa and MasterCard.

The merged company could offer a comprehensive third-party solution for tech companies interested in developing their own payment's offering (Apple Pay-like) and are willing to outsource the entire service. PayPal-AmEx could provide a comprehensive solution for an e-payment service and a transaction processing service that could be easily implemented into tech companies' eco-systems and executed by wearable devices, in-store, and online transactions. Company’s like LG, HTC, and Lenovo, for example, could use the PayPal-AmEx service and launch their branded e-payments service as part of the PayPal-Amex network. The new company could offer preferred terms for users of these newly branded e-payments services across its platforms (PayPal, Venmo, Braintree, Xoom, etc.).

The combined company could use AmEx’s credit card issuing license and PayPal’s (European) banking license to become a significant international player that could offer diversified financial services worldwide either in digital or traditional banking. There are many benefits to a combined PayPal-Amex company, and the fact that PayPal CEO Dan Schulman came from AmEx should ease on the merge; however, executing the deal might be a tough task.

The combined market capital of both companies is $103B (PYPL $48B, AXP $55B), which means that AmEx, the acquiring company – according to rumors – will have to raise a huge amount of debt to finance the deal and that might be difficult in the current economic environment. Both companies will also have to gain many regulatory approvals due to their worldwide presence, leadership position, banking and credit card issuances licenses, and the fact they operate in highly regulated industries.

Addressing the multiple regulatory requirements worldwide might be another very difficult task for the companies. Even if the companies complete the deal at the end, both Visa and MasterCard could mimic some aspects of the deal by partnering with e-payments service providers like Square and Stripe or even Google and Apple to block any future business initiative by the combined companies. So, even if the merger will happen, leveraging it to monetize the entire list mentioned above is possible but will face intense completion while doing so.

There is no certainty whether the rumor has any basis in reality, but after many months of PayPal’s stock tumbling between $31 and $38, it touched $40 following the possibility of the merger, which shows the market's positive sentiment towards such a deal.