Everyone knows the big payments company is the dominant player in online transactions. But it is moving in several new directions as the quote above indicates, including mobile. Should you worry? Or partner?
Two years past its tenth birthday, PayPal exudes mainstreamed qualities that many of its present and emerging competitors in the quirky world of alternative payments would covet. This includes established brand recognition and the ownership of a payment platform that is becoming a standard.
In keeping with this status, President Scott Thompson has said that a day doesn’t pass when he reads of some new entrant stating its designs to be the next PayPal.
Not that the San Jose, Calif.-based payments company is without detractors, as sites such as PayPalS*cks.org attest.
“The critics come with the territory,” says Ron Shevlin, senior analyst at Aite Group, Boston. But he adds that “the company has improved risk management in recent years and elsewhere worked on enhancing both the customer and merchant experience.”
Imbedded in the PayPal success story up until now is that its core business model—that of sending money via the internet—has proven itself, initially in the auction space, then in other e-commerce sectors. PayPal lets users send funds without sharing bank account information, and in the privacy-obsessed U.S. that works.
To get a sense of the company’s progress, consider its growth path, punctuated by eBay’s 2002 acquisition; the 2005 commitment to developing mobile tools and techniques; the 2008 acquisition of Israeli-based Fraud Sciences, and in the same year, the acquisition of the online credit product, BillMeLater.
Rather than being the activity of a stealth niche player, these are the moves of a global payment system competitor seeking a heavier weight.
There are many wells to draw from in alternative payments. As Glenbrook Partners categorizes the virtual payment space it is divided into eBay commerce; e-commerce related virtual currencies (formerly “micropayments”); game currency cards (“closed loop prepaid card”); 1-900 billing (“bill to mobile”); performance marketing (“offer-based payments”); digital goods (“virtual goods”); and P2P payments (“social payments”).
For PayPal, the revenue potential from getting further into this rapidly growing alternative payment ecosystem is huge. Consider: Wave and pay... with PayPal. Buy a nifty gift from a Hong Kong merchant... with PayPal. Split a meal or buy a glass of lemonade on a street corner with PayPal... and so on.
Moving beyond eBay
PayPal is on a steady path to grow its user base of 84 million active accounts. Within the universe of eBay transactions, it’s all systems go for growth. (As to those rumors that parent corporation, eBay, might spin off PayPal, the official word of the moment is “absolutely not.”) But as you would expect with an alternative payments company, it is also moving into the emerging realm of mobile payments.
Although mobile payments in this country have been a “hurry up and wait” affair, there seems to be renewed enthusiasm in the space. TowerGroup estimates that there are over five million active mobile banking users in the U.S. As reported in ReadWriteWeb, partnerships have mushroomed despite 2009’s economic doldrums, including MasterCard’s launch of its MoneySend person-to-person service in concert with Obopay, and Nokia’s launch of NokiaMoney.
In line with overall industry movement, PayPal this March introduced version 2.0 of its Send Money application for the iPhone. (It also offers a Mobile Payments Library for Android, according to WebProNews.) The payment company’s mobile capabilities include the ability for iPhone users to more easily initiate ACH transfers, bypassing the traditional registration process.
Despite the gradual mobile-payments timeline in this country, Aite Group’s Ron Shevlin believes the issue will be pressed by Generation Y’s increasing presence in the world of work and commerce.
“This generation isn’t entrenched in traditional ways of doing their banking,” the analyst says.
Moreover, Shevlin adds, PayPal appears in a good position to make hay of any sudden changes in mobile usage patterns as it continues to invest in product development behind its firewall. The company also opened up its platform to developers with the advent last year of PayPalX Developers.
Dan Schatt, senior director and head of financial innovations for PayPal, shed light on many new initiatives and where the priorities are for the firm.
“Business is growing year over year at a fantastic clip. We experienced 26% growth in our core business since 2008,” Schatt says. “But our thinking is, e-commerce is just around 6% of the entire spectrum of retail payments, so we have room to expand beyond e-commerce, into the wider world of anytime, anywhere payments.”
Schatt, a former analyst with Celent, indicated that as smart phone adoption reaches an inflection point in this country and elsewhere, new opportunities will exist in areas such as superior management of rewards programs. “We just announced a program with Carlson Worldwide Marketing and could take a similar approach with banks,” he explains. “This could give consumers more options for redeeming points and make the programs more affordable to deliver.”
While enthusiastic about mobile payments, Schatt admits that the user experience of person-to-person transfers has to be as simple as dealing with cash, as in, “click on a menu and press ‘pay Sally Smith’.”
Schatt sees this as a way for banks to get in on the act of supporting new payment options.
“Last year’s PayPal X initiative isn’t limited to e-commerce merchants,” he says, “it can let any business offer us as a payment option—including banks.” Currently, Grand Rapids-based Mercantile Bank of Michigan offers this real-time money transfer to its customers. The co-branded effort was launched this May.
Friend, enemy, “frenemy”?
The basic PayPal formula works with—or sits on top of—the bank payments system. People or businesses fund their PayPal transactions typically with either a credit card or an automated clearing house debit from a checking account. PayPal is an ACH originator and gains access to the network via several Originating Depository Financial Institutions. The PayPal account would be very lucrative for these banks. In a 2007 article on the Finextra.com website, Chris Skinner, a payments expert formerly with Unisys, wrote that PayPal, “runs through Wells Fargo and JPMorgan’s infrastructures and generates payment transactions through Visa and MasterCard.”
For its part, PayPal collects a transaction fee. “The seller pays the interchange fee for a credit card transaction or a transfer fee if it’s an ACH transaction,” says bank technology consultant Dan Fisher, who is a PayPal seller (he sells books from his website, copperwombat.com). For the ACH debits, pricing is $0.30 plus a percentage of the transaction ranging from 1.9% to 2.9%. Fisher, president of Copper River Group, pays the lower amount because of his volume.
Within the banking industry the worry over losing control of the payment system surfaces periodically and the notion that PayPal is a threat lingers.
George Thomas, president and CEO, Radix Consulting, New York, who worked at The Clearing House Payments Company earlier in his career, believes bankers are right to be wary of PayPal, although clearly, banks that work with the company to facilitate ACH funding likely have fewer issues.
“PayPal has leveraged the ACH network in an innovative way and provided a service that banks should be providing,” says Thomas. He sees the still-emerging business-to-business sector, especially the segment that includes small and medium-sized businesses who need to pay each other and have the greatest cash management struggles, as the down-the-road payoff for PayPal.
Fisher, on the other hand, who was formerly chief information officer of Community First Bancshares, now part of Bank of the West, sees PayPal differently.
“PayPal won’t go away,” he says. “Banks should stop being sticks in the mud and put PayPal on their websites” as a way to accommodate what Fisher calls “digital natives”—the emerging generation weaned on electronic devices and preferring them.
Choice Financial Group, a $540 million-assets bank based in Grafton, N.D., is considering doing just that. It already does online account opening and may use PayPal as an additional means to fund an account.
“We always have our eyes open for alternative payments,” says Tim Heilman, the bank’s CIO, who believes mobile payments growth is going to explode in this country at some point.
“The payments landscape is changing,” says Heilman; “you either have to pick a niche or accommodate them all.” Choice Financial’s route is to accommodate all types of payments. Heilman regards partnering with PayPal as an opportunity—one that will set banks apart.
The fact is, in the Wild West world of internet and mobile payments, “coopetitors” and “frenemies” thrive, and PayPal isn’t the only choice. Notable examples are the recent announcements by Fundamo and Clickatell to make mobile payments available through bank-labeled services.
Capturing more eBay volume
Despite this period of delicate economic recovery, PayPal publicly exudes the optimism you’d expect from a firm that is expected to generate up to $1 billion of operating profit in 2011. As reported by Bloomberg, PayPal could handle as much as 14% of global online payments in 2011, up from less than 10% this year.
At the 38th Annual Global Technology, Media, and Telecomm Conference hosted by J.P. Morgan in Boston, PayPal chief Scott Thompson said in a presentation that the payment company’s “job wasn’t done until we capture 100% of the eBay transaction volume.”
Recognizing that as an ambitious task given the wide-ranging habits of consumers, Thompson reminded attendees that the goals stated during 2009 performance reviews were to reach around 75% of eBay transaction volume by the end of this year.
PayPal doesn’t publicize its funding mix, but analysts say that a big share of its wallet holders fund through bank accounts, and a significant percentage fund with a credit card. A minority use credit billing via BillMeLater. (There is another funding option aimed at the unbanked segment that PayPal recently began offering in conjunction with GreenDot. Called MoneyPak, it allows users to fund their PayPal account with cash deposited at participating retailers, which include Walmart, Walgreens, and CVS.)
Going global with room to grow
Currently, 23 currencies are supported by PayPal. Cross-border transactions account for 25% of the company’s total payment volume of $71 billion.
Going forward, cooperative ventures will be key. In March of this year, PayPal entered into an agreement with China UnionPay (CUP), China’s bankcard association, to allow Chinese consumers to use PayPal to shop online. In that same period, PayPal also announced a partnership with Singapore’s largest bank, DBS Bank, to give consumers in that region additional payment options during online shopping.
Even mature markets such as the U.S., the U.K., and Canada “have room to grow,” according to Thompson. “We have about half of the top 100 U.S. e-commerce vendors,” the CEO said, “and we’d like to be a wallet option in more of those large companies as well as build market share in smaller merchants. We think small businesses, ones that need to be paid quickly, will benefit from a PayPal relationship.”
Lauren Bielski was senior editor of ABA Banking Journal for ten years. She covered technology and payment system developments. Originally published in 2010