Being acquired by eBay Inc. has enabled the instant online credit provider Bill Me Later Inc. to tap into the risk management expertise of its former rival, PayPal Inc., and expand down-market years ahead of schedule.
eBay's PayPal unit is the payment method of choice for many online auction sellers, especially small ones, but Bill Me Later started at the extreme upper end of the e-commerce spectrum, working only with the largest and most established merchants.
A key reason for working with giants is that they are less risky, Mark Lavelle, a Bill Me Later co-founder and its vice president of development and strategy, said in an interview this month.
"We were quite focused on the smaller group of merchants that sell to more people and hadn't really trained our system and honed our experience on a broader set of merchants," Lavelle said.
The company's preferred pool of merchants was limited to retailers with more than $20 million in annual card-not-present sales. "It was fairly small, way at the end of the pyramid there," he said.
As a part of PayPal, which absorbed Bill Me Later in November, the latter will soon be able to serve a much larger pool of much smaller merchants than Lavelle's company was previously able to serve on its own.
"When you get into the longer tail of merchants, you have … to decide which merchants are good sellers and which merchants are bad sellers, which ones have good reputations and deliver good service and are stable in their company — or not," he said.
Larger, more established merchants have built reputations for themselves so that their trustworthiness is easier to judge, Lavelle said. But sometimes it is not worth the risk to work with smaller merchants, who lack established reputations, he said.
"Risk is about experience," he said. "You don't go into a market not expecting to have risk issues." Without access to PayPal's technology and risk-management expertise, it would have taken Bill Me Later years to build up the experience it needed to move substantially down-market.
Ultimately the issue boils down to data security, he said, which is a more pressing concern for Bill Me Later than for PayPal. With PayPal's main online payments service, merchants do not see customers' card accounts, and the transactions are authorized directly through PayPal.
With Bill Me Later, users provide their date of birth and a partial Social Security number as part of credit decisioning; depending on the setup, merchants may have access to this data, Lavelle said.
"The implementation of that is one of evaluating who that merchant is," he said. "How is that data getting to you, and what's the integrity of that? We have a very, very high standard for that; so does PayPal, in terms of who can offer the brand, who can offer the product."
PayPal's fraud detection capabilities got a boost in 2000 when co-founder and then-chief technology officer Max Levchin developed Igor, a transaction monitoring system that presented payment patterns graphically. Named for the account favored by a particularly diligent scammer, Igor has been credited by PayPal executives with helping the company overcome its early risk issues.
Lavelle said that Bill Me Later lacked an Igor-like nemesis of its own but that it still faces fraud attempts and has become experienced within the market where it has focused its attention.
"Igor had retired, but he had plenty of offspring … . We knew going in that fraud would be there and that you needed to defend against it, that you wouldn't necessarily win all the time but, if you took a rigorous approach toward investing in it and evolving and learning, you could stay ahead of it," he said.
There is no longer a clear lower boundary for what size merchants Bill Me Later can serve, Lavelle said. Though not every PayPal merchant will be deemed trustworthy enough to offer Bill Me Later, many smaller merchants will soon have access to it.
Avivah Litan, a vice president and research director at the Stamford, Conn., market research company Gartner Inc., said that fraud management "had a lot to do with the acquisition. It would have taken them years to develop the risk management technology; it took PayPal years."
Bill Me Later was right to be concerned about moving down-market too fast, she said. "It's a lot riskier working with smaller merchants," she added, but if a company can manage the risk, moving in that direction can pay off.
Litan estimated that the acquisition allowed Bill Me Later to "leapfrog five to six years of technology refinement and risk management development."
Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said that Bill Me Later's pairing with PayPal could improve consumers' views on Bill Me Later's security.
"The consumer feeling analysis that we've done with regards to the PayPal brand, specific to their fraud analytics, is very positive," Cundiff said. "The risk capacity … and the ability to combat merchant fraud, it increases the integrity of the product in the consumer's eyes."
