PayPal’s $500m investment paves the way for an Uber digital wallet

Uber’s getting a half billion dollar investment from PayPal at a time when the ride-sharing app is prepping a $100 billion IPO and can least afford speed bumps in its user experience and payment process.

That's what makes PayPal’s role so vital, since its investment includes an agreement to explore future commercial payment collaborations such as the development of Uber’s digital wallet.

The IPO is part of Uber’s diversification beyond basic mobile ride-hailing, and will likely require broader digital wallet capabilities and more independence over enrollment and payment credentials, which is the key to Uber's "invisible" payment process.

Chris J. Ratcliffe/Bloomberg

The existing “Pay” wallets shift more control over the user’s relationship to the Pays, particularly in regard to enrollment and updating payment cards and information. Because of this, Uber has shown a reluctance at times to rely too heavily on third party wallets. It just added Apple Pay as an option for Uber Eats, even though Apple Pay had been an option on Uber's main ride-sharing app for years.

Uber has also had relatively stagnant revenue growth and heightened competition from Lyft, which is rapidly picking up riders and investing heavily in product diversification. Asian ride sharing app Grab is also adding financial services and an innovation lab for payment technology. Uber is responding by extending its UberEats partnership with Starbucks, adding incentive marketing and embedding itself in mass transit payments. Uber has expanded Uber Eats to serve corporate clients and has applied for an e-money license in anticipation of providing broader financial services.

Amid all of these projects, PayPal can help Uber develop future payment technology to accommodate its increasingly diverse product range.

“This is a great example of a partnership that benefits both companies,” said Zil Bareisis, a senior analyst at Celent. “As Uber continues to grow from transportation into a broader commerce app, it will need increasingly sophisticated payments capabilities and will benefit from a partner like PayPal. PayPal will benefit from serving a leading marketplace and having access to engaged and digitally savvy customers."

PayPal did not provide comment for this story and Uber did not return a request for comment, but in a LinkedIn post PayPal CEO Dan Schulman said the expanded relationship would help "enable global commerce" by connecting the world's leading marketplace and payment networks.

During this week's earnings conference call, Schulman said he is feeling "really good" about the wide range of activities at PayPal that are driving engagement and new activities, mentioning partners such as Uber and Airbnb have tremendous growth opportunities even though these companies have been partners with PayPal for years. "Partnering with these companies is a really important element for our mutual customers."

The investment additionally demonstrates PayPal's role in providing an embedded payments capability, said Thad Peterson, a senior analyst at Aite Group, adding PayPal is also the payments engine behind Instagram commerce.

"Once embedded it will probably be fairly difficult to get PayPal 'unembedded,'" Peterson said. "As payments continue to integrate into the commerce stack, the companies that provide a seamless and frictionless payment process will be in a powerful position to grow."

There’s also more forward looking technology that could drive collaboration between Uber and PayPal. While self-driving cars still feel like a far horizon, companies are making their bets now. Order ahead, pay and delivery require that the “last mile” will become a more important part of the user experience.

Walmart, for example, is testing autonomous delivery as part of its wide-ranging push to automate in-store and e-commerce technology. It has collaborated with automotive technology company Udelv to test delivery in the Phoenix area. Walmart has also worked with Ford to develop automated delivery.

Amazon and UPS are also experimenting with autonomous vehicles. UBS, German auto parts maker ZF and IBM are building a platform for an in-auto e-Wallet using blockchain; and Visa has detailed a future in which driverless cars become movable e-commerce portals.

PayPal’s collaboration with Uber comes as the ride-sharing app announces much larger investments of about $1 billion from SoftBank, Toyota and Denso into Uber Technologies, suggesting investor interest in Uber’s self-driving car development.

“PayPal expects Uber will win the autonomous transportation battle currently taking place,” said Tim Sloane, vice president of payments innovation at Mercator.

David Heun contributed to this story.