PayPal Deals Aim To Draw More Consumers, Banks

PayPal Inc. is trying to make its service more useful to those who do not have bank accounts or do not want to use their debit cards online.

The online payments company announced two agreements last week that let people fund their PayPal accounts with prepaid cards from Green Dot Corp. or through debit cards linked to First Data Corp.'s Star EFT debit network.

The Star agreement is "a way for banks to participate in online transactions," Sanjeev Kriplani, a PayPal senior director and general manager, said in an interview Friday. "We want to increasingly partner with the banking community."

Star is the first network to sign up for what PayPal is calling its Debit Access service, and Kriplani said the eBay Inc. unit plans to offer it to other networks. Banks that are part of the Star network can choose to link their debit cards to PayPal, enabling customers to fund their PayPal accounts through debit transactions. The service also connects online banking sites to PayPal, enabling consumers to create PayPal accounts through their banks' sites.

The Green Dot partnership allows people who have the Monrovia, Calif., company's prepaid MoneyPak cards to fund their PayPal accounts; this makes it easier for people without bank accounts to make online purchases.

PayPal said the two agreements would also help online merchants increase sales to different segments of the consumer population.

Analysts said the moves would help boost PayPal's credibility with online merchants.

"This is a sign that PayPal is going to rise above other [alternative payment options] that have come and gone," said Ali Raza, an executive vice president at Speer & Associates, a consulting group in Alpharetta, Ga.

According to one industry study, financial institutions are losing a significant amount of transaction volume to alternative payment methods.

Though payment cards dominate the $170 billion e-commerce market, buyers use alternative payment methods for approximately 15% of that volume, according to a report issued last year by Celent.

The Boston market research company estimated that the major card brands and issuers stand to forgo $345 million in volume in 2010 and about $1.7 billion in 2015 to alternative payment methods.

PayPal Debit Access could help those financial institutions that tend to focus on customer relationships and do not wish to lose some of that relationship to PayPal, James Van Dyke, the founder and president of Javelin Strategy and Research, said in an interview.

Banks may be thinking "we'd rather have someone go through our partnership with Star then lose them to" automated clearing house transactions, Van Dyke said.

The agreement with First Data, a unit of Kohlberg Kravis Roberts, gives participating banks the chance to earn a slice of revenue from online transactions, and also gives them placement on PayPal's checkout page, Julie Seville, Star's vice president of product development, said in an interview last week.

Participating banks can market the PayPal service as soon as customers log in to their Web sites, Seville said.

Online banking authentication adds an extra layer of security to the process and helps confirm to PayPal the customer's identity, Seville said.

The financial institution's logo will appear on the PayPal checkout page when a consumer completes a transaction. The Star logo also will have a spot on the Web page, giving both institutions the opportunity to "reinforce their brand," Seville said.