PayPal Becomes a Contender at the Point of Sale with Home Depot Pact

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Given all the time and money banks have been putting into nascent mobile payment systems, the last thing they need is a new competitor parachuting into the mix — and in a more advantageous position.

But that's exactly where banks find themselves, now that PayPal is testing software at Home Depot that allows customers to bypass credit cards and another new payment systems presence, Google Wallet, at checkout.

"There is a race between PayPal and Google and all the players like Visa and MasterCard to really be driving mobile payments at the point of sale," says Gwenn Bezard, co-founder and research director at Aite Group.

The payments unit of eBay Inc. announced Friday that it is testing software at the point of sale in five undisclosed Home Depot stores. The software allows shoppers to spend from their PayPal balances by typing in a phone number and PIN — no card or app required.

This echoes what rivals, particularly Google Inc., have been doing at the point of sale to encourage consumers to tap into new payment methods, often by using a mobile phone in some way to access the account.

But PayPal may be pulling ahead. "[PayPal] isn't starting from zero," says Bezard. At the end of the third quarter, there were 103 million active accounts for PayPal and Bill Me Later, eBay's instant credit service that is being woven into PayPal's mobile payment system. PayPal defines an active account as one that has transacted in the last 12 months.

PayPal's edge over other technology companies is that many of those active users already have a balance in their PayPal accounts, accrued from selling items on eBay auctions or receiving person-to-person payments — and since PayPal isn't designed to be a long-term savings account, that money is waiting for an excuse to be spent.

PayPal "already [has] one side of the equation," which is customers who want to spend money, "whereas Google has to address the two legs of the equation," says Bezard.

Banks also have something to worry about. Mobile payments "is an important new touch point for the bank," says Richard Crone, the chief executive of Crone Consulting LLC of San Carlos, Calif. "They don't want someone to open up their mobile banking application to check in for offers and promotions and then have the customer close it and open up somebody else's wallet to make a payment."

Many large banks have been working on their own trials of mobile-payment systems. The goal behind these initiatives is to make the mobile wallet so compelling that the bank behind it becomes the top-of-wallet account for the consumer's normal spending. Mobile wallets might also attract other revenue to banks by enabling merchant-funded reward programs and replacing cash payments.

Google has been working to build a userbase of its own. In November, it announced plans to shut down Google Checkout, its online payment system, and move those accounts to Google Wallet. Although Google Wallet allows users to store a balance in a prepaid account, Checkout never did, so those new mobile-wallet users don't have stored balances itching to be spent.

That said, Google has also shown a willingness to put banks' brands within its mobile payment app — Citigroup Inc. was attached to the app when it was first announced. "Google, so far, has been relying on essentially integrating into the Visa, MasterCard world," says Bezard. "Google is trying to work with the establishment."

Wedbush analyst Gil B. Luria reported PayPal's Home Depot trial in a note to investors Friday. He speculated that the Home Depot trials, including one in San Jose, where PayPal is based, are just a "friends and family" test, but will inevitably evolve into a national rollout.

A "small number" of PayPal employees are in the five Home Depot stores to help show customers how to make payments by typing their cell phone numbers and their PayPal PIN codes, according to PayPal.

The system is designed to be easy for merchants to set up. "We have been developing our own technologies to provide a one-stop shop for merchants," says Anuj Nayar, PayPal's director of global communications.

PayPal's work with Home Depot builds on its October announcement of a planned magnetic-stripe card that allows consumers to spend from their PayPal accounts in retail stores. Last year, PayPal tested a point of sale payment system with VeriFone Systems Inc. and Bling Nation Ltd. (Bling Nation shut down its service last year after its business model proved flawed.)

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