Look out, banks: PayPal and its non-bank siblings in payments are gaining.
The San Jose, CA-based firm is expanding further into the consumer-payments space and offering more bank-like services. And even though the firm says it is a partner, not a competitor, to banks, industry veterans say they know a rival when they see it. This is a threat that will only get stronger.
PayPal, which defines itself as an "online wallet," has expanded well beyond its original plan of facilitating eBay purchases and is now a major force in the payments market. Founded in 1998, and acquired by eBay in 2002, it had second-quarter revenue of $454 million, up 31 percent from the same time period last year. And its volume for the quarter was $11 billion, up 32 percent. It now has 153 million accounts in 190 countries, says Chris George, PayPal's senior director of financial products.
One of the company's new offerings is a "virtual debit card," a response to customer requests that PayPal be accepted at more online merchants. The card assigns a one-time number for each purchase. Now in testing, the card is expected to be rolled out in the Unites States by the holiday shopping season. Other new services pose an even bigger threat to banks, according to Aite Group payments analyst Adil Moussa: deferred-payments options and mobile payments.
The 90-day deferred-payment option will especially benefit merchants, Moussa says, because it will prompt customers to spend more. Existing financing options from the company include: no interest if paid in three months, and no payments for three months for total purchases over $199; no interest if paid in six months, if monthly payments are made for total purchases over $199; no interest if paid in 12 months, as long as monthly payments are made for total purchases over $199; a fixed monthly payment schedule for 12 months, at 12.9 percent annualized, for total purchases over $999; and a fixed monthly payment schedule for 24 months, at 12.9 percent, for total purchases over $1,999. The options are financed by GE Money Bank.
PayPal's European Union bank license became effective on July 2, which corresponded with a move of the company's European headquarters to Luxembourg from Dublin. The firm says it has no interest in establishing a bank, but rather sought the license to market its payment services more easily in Europe.
PayPal's meteoric rise in the global payments business in just nine years does not bode well for banks' glacial speed in similar endeavors, says Dana Gould, senior research analyst for payments at research firm Financial Insights. In that period, PayPal has amassed more consumer accounts than the top five banks in the U.S. combined, he says.
Moussa notes that the threat from PayPal rests with the merchants' banks in the payments process, rather than the bank issuing the consumer credit card.
Tom Llewellyn, evp and CIO of Broadway National Bank in San Antonio, TX, sees PayPal as a definite threat. "And the sad thing is, banks aren't doing anything about it," he says. The payments situation is "moving inch by inch, but one day we're going to wake up and see a two-foot gap," he says. "And we'll think 'Whoa, when did that happen?'"
As if that were not enough of a worry, Aite says that PayPal has also broken ground on another area banks long to dominate: mobile payments. PayPal rolled out a service in July allowing consumers to use their phone to make payments directly to merchants. The service is free for consumers. PayPal would not say exactly how much it costs the retailer, but it is slightly higher than a normal PayPal transaction, between 1.9 percent and 2.9 percent of the transaction.
The American Bankers Association's senior policy analyst Doug Johnson hasn't decided if PayPal is a friend or foe, but its growing number of services could reduce the value of traditional banking payment services. The worst-case scenario for banks' payments business? "We'll become the pipes, and not have the [financial] relationship," he says."