First Look: Inside PayPal's Innovation Center

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Next to The Container Store and across from a Bed, Bath & Beyond sits a building that Manhattan passersby would be unlikely to look at twice in a city that counts among its many sights Times Square, an (almost) naked singing cowboy, a man who wears a cat on his head, and a church converted into a shopping center.

Inside, however, there is much that would warrant a second glance, even from a jaded New Yorker. The third floor houses PayPal's Innovation Center, where it demos mobile app pilots designed to simplify shopping. The company, which dominates online payments, is one banks should watch as it aims to capture revenue from a growing commerce channel and includes banking services within its app.

The showroom, which opened in 2011 and looks like a mini-mall, is the equivalent of a Hollywood movie set in which visitors get a guided tour of emerging PayPal technology and watch mock-ups of how it could be — and in some cases is — used in real life. The Innovation Center is staged with props to show how people preorder and prepay for a smoothie through the PayPal mobile app, for example. Less intentionally, it illustrates one way a non-bank app could nibble away at a financial institution's branding, by winning consumer mindshare through an intuitive user experience.

This week, during a major retailer conference, the Innovation Center was put to good use demoing eBay and PayPal's latest initiatives — and therefore, what customers will come to expect in a financial services app.

The newest feature simplifies online checkout so shoppers can pay with PayPal without the need to leave the merchant's site.

This and other efforts to simplify shopping are driven by consumer demand, PayPal executives say, a sentiment echoed by bankers who say consumer preferences drive their mobile app design.

"Consumers are changing what technology is doing," says Don Kingsborough, vice president of global retail at PayPal and one of my tour guides. "[Innovations] are a reflection of what people are trying to do."

Along with its online checkout update, PayPal showed the latest version of its mobile app, which it updated in the fall.

The app, which can be linked to credit and debit cards, gift cards and savings accounts, comes with features that obviously vie with banks' services: account balance checks and, more important, person-to-person payments. Here PayPal competes with Fiserv, FIS, and bank-owned clearXchange. Unlike most banks' apps, PayPal's comes with the ability to pay for things with smartphones at some merchants, among other features that are pitched to consumers as saving them time and money.

To that end, the app displays nearby merchants that accept PayPal accounts front and center. Users who have uploaded their photos (for authentication purposes) can preorder and pay for their items at select local partners, a feature designed to inspire usage. My tour guides demonstrated the experience of pre-ordering a drink from Jamba Juice, one of its partners, through the app. Though my first pick — wheat grass — was not listed, my second choice, Razzmatazz, was. The tool is designed to circumvent a line in the store while applying a discount automatically to the payment. If I didn't want to pre-order, I could pay with a PIN and phone number if the merchant permits it -- some require a physical card for payment, among other methods. (This is the case with many of the stores that participate through PayPal's partnership with Discover Network.)

The app adds new dimensions to the idea of being "top of wallet." Users can set preferred payment methods for some types of transactions. If a person has not yet selected a preferred payment method, PayPal funds the transaction in this order: PayPal balance, instant transfer from a bank account if available, PayPal credit, debit card, credit card, or finally, electronic check.

PayPal claims 137 million active accounts globally but does not break down its mobile app user numbers.

The mobile wallet is meant to eventually work with other innovations coming to physical stores. Among this week's flurry of eBay-related announcements was one about merchant-funded offers, an area that banks have been working to modernize.

Indeed, eBay said it's growing out its in-store-offers pilot program that uses Bluetooth Low Energy (BLE) beacons. The merchant sets up at least one beacon wireless device in the store that communicates with a mobile app. This is used to check a person into the PayPal app either automatically or through a prompt on his smartphone. Current pilot programs are running at a few merchants in Australia and the U.S. and let consumers make so-called hands-free payments.

The experience would work something like this: A shopper walks down an aisle and gets pitched a discount for Crest toothpaste based on his shopping data and what a merchant wants to offer, Kingsborough says. The idea is to provide a digital experience to shopping in-store while collecting more data for companies to continue to upsell.

Proximity offers are an area most banks have yet to publically explore with some exceptions. Capital One, for example, partners with PushPoint to let merchants distribute offers to nearby shoppers in certain markets through its mobile point of sale software. U.S. Bank has experimented with geolocation-based offers, too.

Location-based tech, however, is just one piece of the mobile payment puzzle and one whose utility depends on the merchant.

This is why PayPal is testing scanning QR codes and four-digit codes for its app — methods targeted at larger merchants whose clerks would lack the time to analyze shoppers' headshots (part of the checkout experience at some PayPal partners).

Simply Shopping

PayPal users, of course, are nudged to pay for eBay goods with their PayPal accounts.

While sitting in a pretend living room with a bookshelf full of African-themed knickknacks, I got schooled in the eBay app, which uses PayPal accounts as default payment if available. (Incidentally, auction sales only account for 30% of eBay's business these days.)

The app, like other retail apps, offers product recommendations based on past purchases. Unlike some apps, it also lets users snap a photo of an object in their house to get product recommendations that complete the look for a party they're hosting later that evening. The feature has appeal for time sensitive purchases, but as a former fashion editor and shopping enthusiast, I have reservations: namely, will the algorithm's suggestions actually suit my tastes, which vary? Gilt, my primary digital shopping website, has yet to recommend products I like.

Once the payment has been made, the eBay shopper can decide to pick up the goods at the store, or more interestingly, have them delivered within about an hour. The latter feature, called eBay Now, is available in a handful of markets — including New York — and charges customers $5 (plus tip, I'm sure). The customer can view a map showing where the courier is en route and can click to call him if he wishes.

Currently, Kingsborough says the company loses money on the service as it's a volume play. But that's ok. eBay, which recently acquired a courier service, plans to launch in 25 cities by yearend. And more broadly, he's bullish on how consumers will expect — and demand — the shipping options looking ahead.

"We're trying to get ahead of the curve," says Kingsborough. "There's inevitability."

Banks, meanwhile, are pressured by analysts to design mobile app tools that offer guidance to people on their discretionary digital financial decisions like: can I afford the purple pumps displayed in Bloomingdale's window? Such features are coming to personal financial management tools product lines slowly but surely.

Which points to another emerging trend: the store front is getting reimagined with a tech edge; eBay spotlighted some of its work.

eBay is placing large touch screens in the windows of physical stores. With a tap on the screen, consumers can find out more about an item displayed and have the information sent to their phone. (Side note: The touching required is more demanding than a tablet experience. I struggled.)

The retailer, then, collects data on what location gets more use to better know where to build its next physical store. The software could also be used to facilitate shopping at events or after hours. The tech does not yet let consumers digitally try on items, however.

Such commerce innovations come at a time when banks are dipping their toes into mobile wallets, mobile commerce and merchant-funded rewards at the point of purchase. Like PayPal, banks want to be top-of-wallet when a consumer intends to purchase an item on a mobile device. U.S. Bank , for example, conceptualized its vision of the future of commerce in a YouTube video released earlier this year. The video shows how smartphone-equipped consumers can scan a blue leather jacket featured in a magazine to purchase, among other things.

What it all points to? Customers want to do a lot more than check account balances on their mobile apps.

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