PayPal Inc. may face its most crucial test this year as it seeks to broaden its reach.
Through a handful of recent initiatives, PayPal has signaled intention to expand its role as the dominant alternative online-payments provider by, among other things, serving new customers, including banks, and by encouraging third-party software developers to incorporate PayPal into mobile-payment applications.
Scott Thompson, PayPal’s president, is spearheading these moves at a noteworthy moment. As the mobile-payments future begins to take shape, PayPal could win by capitalizing on the potential convergence of online and mobile payments. There is also the chance that PayPal, the first of its breed when it launched 11 years ago, could find itself bypassed in the exploding evolution of new online and mobile-payment technologies.
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As the leading alternative online-payment channel based on purchase volume, PayPal enables users to fund accounts and receive payments through a variety of channels, including direct debits and credit, debit or prepaid cards. In recent years PayPal’s role as an online-payment channel has spread from person-to-person payments to a thriving e-commerce payment engine, fueling everything from micropayments up to large-ticket purchases such as airline tickets.
Since eBay Inc. acquired PayPal in 2002 for $1.5 billion, its revenue and payments volume has continued to outpace the growth of most traditional payments-industry players. The acquisition last year of Bill Me Later added credit services to PayPal’s array of payment options. Altogether, PayPal plus eBay’s payment volume represent about 15% of U.S. and 9% of global e-commerce, according to Forrester Research Inc.
PayPal’s plan to provide banks with a la carte online payments is stirring interest along with some doubts about its effect on banks.
PayPal last fall signed agreements with technology vendors Fidelity National Information Services and S1 Corp. to enable banks to offer PayPal’s service for sending and receiving electronic payments to their core customers. It is the strongest example yet of PayPal’s desired goal to be viewed as a bank partner and ally instead of a rival. Mercantile Bank of Michigan has agreed to offer PayPal to customers through its online-banking channel, and PayPal says it is in discussions with other banks planning to offer its services.
At least one analyst is skeptical about the benefits PayPal may offer banks.
“In the mobile-payments revolution, the big prize is $6 trillion in point-of-sale transactions, and the way forward for banks is to leverage their existing infrastructure to capture that,” says Philip J. Philliou, a partner with the management consulting firm Philliou Selwanes Partners LLC. “PayPal takes banks down a different path, away from the existing infrastructure. We don’t see any need for banks to get bogged down in trying to adapt alternative-payment companies’ models to their own.”
Thompson contends that thinking is misguided and suggests that PayPal can enhance banks’ relationships with customers.
And while Thompson is keenly aware of the possibility that new and yet-to-appear mobile-payment technologies could upend existing online and mobile-payment concepts, he seems confident that Twitter founder Jim Dorsey’s much-touted Square Inc. is not one of them.
Kate Fitzgerald, PaymentsSource associate editor, spoke with Thompson recently about PayPal’s latest developments and its evolving role in the payments industry.
Q: Some observers believe PayPal poses a threat to banks because it steers payments away from traditional bank-dominated routes to lower-cost channels such as automated clearinghouse and person-to-person payments. If that is so, why would banks suddenly decide to embrace PayPal’s services?
A: I read all the time that banks are wary of PayPal, and I guess I can understand where that thinking comes from. But if you dig into the data, in almost all respects PayPal is complementary to what banks are doing today in payments. If you look at all the electronic transactions PayPal processes, the great majority are incremental to banks’ systems. And while banks continue doing their thing, PayPal has enabled all kinds of small merchants around the world to accept payments, including through credit cards. When banks take time to examine it, they realize that what we do reinforces existing bank models.
Q: What advantage does PayPal offer to banks that already provide their customers with an array of payment services? Why wouldn’t a bank instead develop its own online-payment option?
A: To be clear, we are not trying to do bill payment and cash management so consumers essentially bank with PayPal. As more consumers gravitate to online banking, banks are looking for ways to make that experience better for consumers. PayPal has a high brand-recognition factor. Why not let banks give their customers a PayPal button on their online banking home page to make online payments and money-transfers that much easier? It adds convenience and further solidifies the bank’s customer relationships. Banks are already operating a lot of payment platforms and, rather than innovate or invent new brands, we’re giving them something they can add to their menu that is known and trusted worldwide.
Q: How exactly will PayPal’s brand work within a bank’s services?
A: We are offering banks the opportunity to offer their customers a “Powered by PayPal” option for certain transactions. The bank customer doesn’t need to have a PayPal account. The customer can simply log in to their online banking Web site and send money to anyone anywhere in the world who has an e-mail or a cell-phone number, with all the security and fraud protection we provide. The recipient can push the funds into a bank account or any other payment instrument, or even send it to someone else. U.S. banks currently have only 3% of the international remittance market. Banks can add this capability relatively easily and roll it out on their mobile banking and ATM channels. The integration is easy. Banks will pay an undisclosed fee to PayPal to offer its service, based on the institution’s size and product scope.
Q: What is PayPal’s advantage in directly serving banks versus other providers in the mushrooming competition in mobile payments, such as person-to-person payments provider Obopay and CPNI Inc., a Toronto-based company providing bank-to-bank mobile payments?
A: There is indeed a great deal of competition, and a lot of startups and entrepreneurs aspire to be in payments. Everyone is very interested in getting involved at some level in mobile payments. Lots of people are trying lots of things, but we’re confident because we play the game better. Our main advantage is that we have an 11-year head start over everyone else. (Our) scale is so important because when a new phenomenon or product hits the Internet, developers don’t want to be stuck with a small, limited audience. We have already invested a tremendous amount of money in building payment platforms that work in markets around the world. New corridors of trade are opening up everywhere. One example is the rapid growth of e-commerce between Asian merchants and European buyers. You don’t have to wonder why our business is growing so fast in Asia; they want to reach the biggest customer bases.
Q: Last November, PayPal announced the opening of its payments platform (PayPal X) to software developers, along with availability of a mobile-payment “toolkit” to embed payments into social networks and mobile applications and devices, starting with Apple Inc.’s iPhone. Where are you headed with this, and what is its significance?
A: We had a huge influx of interest from third-party developers, including from overseas. In December we sent a PayPal team to Europe and Asia to meet with developers and answer questions. We want to make the front end of our system very flexible so developers can easily connect to our applications and then accept payments in multiple currencies using our authentication, risk management, fraud management, clearing and settlement. We want to give every developer the opportunity to add PayPal and all the things we’re known for to all types of new programs and applications.
Q: There has been a lot of excitement in the past year about the iPhone and mobile-payment applications. Have consumers made too much of this particular device and its impact?
A: The iPhone and other mobile devices are very significant because of where they’re going and how they are changing consumer behavior. The device becomes a Web-surfing device–you’re shopping, you’re playing games, you’re personalizing it. A lot of different companies are copying this metaphor. We don’t know who will ultimately win in the mobile-payments space, but we want our technology to work on every device. No one can say which type of device will win in five years. It might be the iPhone, the BlackBerry, the Palm, the Android or something we haven’t even seen yet. But we plan to position ourselves to be part of it.
Q: Everybody has been buzzing about Square, the mobile-payments technology Jim Dorsey, creator of Twitter, is co-developing. The concept reportedly is valued at $40 million even before its launch, and they promise to enable anyone to take payments for merchandise through mobile devices. Are you worried that Square, or some revolutionary new technology, might come along that will redefine mobile payments, bypassing PayPal?
A: We’re watching Square, along with everyone else, because of Dorsey’s accomplishments with Twitter. And we’re certainly worried about anything revolutionary that might come along that could bypass us. Two years ago, some of our developers offered similar technology at our eBay Live conference. The concept isn’t new. Saying you can accept credit and debit cards through a reader on your mobile phone is not a big deal. The thing I do know is that all these devices in development are going to drive demand for more security, privacy and protection. This is what we already offer, and it is difficult to provide. We have not yet seen anything yet that we think will bypass us.
Q: Where do you think the next truly game-changing idea may come from in online or mobile payments?
A: Many people are working on new payment innovations. A lot of money is funneling into this area. What will be a big deal is when you can tap your mobile device against your friend’s device to conduct payment transaction or mobile commerce. You can’t do this yet, but I think it’s coming. The next really tough competitor in payments will come from a new (direction). For instance, if a startup figured out a technology that cuts across a variety of businesses and currencies in a new manner, that would be a big deal.
Q: What do you see happening in the future with micropayments, and how significant will that category become?
A: Micropayments are on the rise in a lot of channels, such as online games. What’s interesting is seeing that micropayments are coming from people in countries all around the world. We foresee a lot of potential growth in this area.
Q: What is the outlook for tapping unbanked consumers and those in emerging markets?
A: In developing economies, we see enormous opportunity in markets where credit and debit payments are not well-established yet. Overall, I see a lot of demand, particularly among younger people. Online payment is a global opportunity; the addressability of online or mobile payments could be as large as 6 billion people worldwide. As time goes on, and technology creeps further into consumers’ lives around the globe, the various types of alternative payments we enable will become increasingly significant.
Q: While PayPal is expanding in so many directions, what about moving into
business-to-business payments?
A: We have an enormous way to go before getting into B2B payments. The runway for our industry is huge. It’s still a very young industry, and e-commerce still represents only 5% of gross domestic product in the U.S. Our whole strategy now is to stay focused and expand in the right directions at the right time. PS
