To help it cement its position as the dominant player in online payments, PayPal Inc. this month will introduce tools designed to foster outside development of a wide variety of applications.
The move could make the San Jose company's systems easier to use for complex transactions.
If these tools work as promised, observers say they will likely give PayPal a boost in areas where it has not had much success to date, notably mobile payments. The plan could also make PayPal's parent company, eBay Inc., a more formidable rival to Amazon.com Inc., which is also stepping up its efforts in online payments.
By opening up its systems to outsiders, PayPal hopes "to unleash developer innovation," Osama Bedier, its vice president of platform and emerging technology, wrote in a corporate blog posting Monday. Other companies have had mixed results with this strategy. Apple Inc.'s App Store has been a huge hit, but in payments, Amazon has not been so successful.
Gareth Lodge, the regional research director for Europe at TowerGroup Inc., an independent research unit of MasterCard Inc., said PayPal is raising its profile at a critical point. "This is partly making sure they're playing in the market, but also trying to identify all of these different payment occasions that they can address going forward," he said. "We're entering an interesting period of time where there's regulatory change, there's economic change, there's technological change all coming together."
PayPal and Amazon are both angling to fill a void that could result from Google Inc.'s recent decision to increase its rates for handling online card payments. Google's Checkout service has long offered subsidies on processing fees for clients that also use its advertising service, but in May it raised its rates to match those of both PayPal and Amazon. Several observers speculated that Google's business model is suffering because of the poor economy, and that the higher fees suggested that Google wants to exit the online payments space. (Google never confirmed that notion, and would not comment for this story.)
In May, Amazon announced free processing for some clients; observers said it wanted to woo disgruntled Google users, though merchants were more likely to switch to the more established PayPal.
PayPal is not the first company to give outsiders access to its technology. Amazon rolled out its Flexible Payment Service in 2007, enabling third parties to craft tools for its payments systems.
However, Lodge said that Amazon's service "hasn't, as far as I can see, gained a huge amount of traction." (An Amazon spokeswoman said "hundreds of thousands" of developers have registered for its Amazon Web Services, which covers payments and many other capabilities; she would not say how many companies use its Flexible Payments Service, nor would she discuss PayPal's new strategy.)
Lodge said that by following Amazon's lead two years later, PayPal is likely not trying to match the online retailer; with its background in e-commerce, PayPal almost certainly will have more luck attracting payments developers.
PayPal is a leader in online payments, while consumers typically equate Amazon with retail, he said. PayPal is now trying to expand within its market, while Amazon's payments services are often viewed by users as a new field where it has less experience.
Aaron McPherson, a research manager for payments at the Framingham, Mass., research firm IDC Financial Insights, said that PayPal "is something a lot of people already have."
As developers build payment systems for new platforms, "it would make a lot of sense for" users "to sign on with PayPal," McPherson said. "People would not have to sign up for a separate account."
One key area could be mobile payments, McPherson said; most of the existing services have used prepaid accounts, and developers could easily build tools to link them to PayPal accounts.
PayPal's first major foray into mobile payments came in 2006, a text-based system called PayPal Mobile. This had little adoption, though it got a lift last year when PayPal wove it into a payment application that runs on Apple's iPhone. PayPal has also become the only payment provider for Research in Motion Ltd.'s application store for its BlackBerry devices.
Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said that PayPal's new developer tools are less of an attempt to counter Amazon's payment system and more likely a move against its retail store. "It is certainly the next step in the eBay-versus-Amazon marketplace competition."
eBay is "trying to be a marketplace for larger and larger merchants," he said; one of PayPal's goals is allowing payment recipients to disburse funds to several parties, an approach that would serve more complex businesses than those that typically use eBay.
By allowing merchants to aggregate different elements of a sale into a single transaction, eBay is going after the heart of Amazon's expansion strategy, Cundiff said. Amazon is trying to prove it's not a bookseller, but "a marketplace. They're an aggregator of smaller merchants."
PayPal hinted at its strategy during an analyst presentation in March, and more details emerged this week when a document describing PayPal's new program, Adaptive Payments, was posted online by the news blog TechCrunch. Adaptive Payments is expected to be formally introduced on July 23.
Under Adaptive Payments, PayPal will make available an application programming interface, or API, available to developers, enabling them to build payments tools that will easily plug into PayPal's systems.
Nick Holland, a senior analyst at Aite Group LLC, said that a merchant could use PayPal's new tools to create a marketplace of their own. "As a vendor, you've got the potential to look significantly larger than your product portfolio — or you — necessarily are," he said.
With PayPal's new system "there's fewer clicks for more transactions. That's got to be good."