Commentary - PayPal Poked at Goldman Sachs

PayPal Poked at Goldman Sachs

by Karen Webster

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The Goldman Sachs technology conference last week in San Fran sure did stir the pot around PayPal and its Point of Sale ambitions. The centerpiece of this criticism is PayPal’s earlier in the year public announcement of its physical point of sale trials with Home Depot, the specifics of which questioned its inability to scale, business model, and security risk.

Seems like a sure sign to me that PayPal is making the traditional players a little nervous.

Here’s my quick take, in reverse order.

The whole security risk thing seems like a bit of a red herring to me. Keep in mind, this the same PayPal that built its whole value proposition on security. When PayPal launched some 11 years ago, as an alternative, online only network, it’s only hope for adoption and survival was to convince people it was secure. It came into life as a way to enable people to buy from teeny-weeny merchants they never heard of and built its systems and user interface to safeguard customer data and card information. If people didn’t trust it to be secure, it would have probably been a dead carcass on the dot com highway. Not only that, PayPal was the company that figured out how to balance easy payment online with hordes of criminals stealing them blind. Lots of others, including banks, tried that but were either too cautious (no fraud but no transactions!) or too careless (uh oh!) PayPal created (and had to) a very robust risk and fraud system, that has only been made more robust via its Bill me Later acquisition. In fact, PayPal has done such a good job at convincing people that it is secure, it rates 3rd – right behind Visa and ahead of American Express, MasterCard and Discover - as the most trusted financial services brand in the mobile payments arena. [link to Market Strategies study] And not only has it convinced people but its profit contribution to eBay sure suggests that they aren’t wallowing in fraud losses themselves. Home Depot also made a very good point – if it wasn’t safe, it wouldn’t risk its customer’s relationships just for the sake of a trial.

As for the business model, well that’s all about money. I would imagine that this is the sort of thing that could get negotiated, especially when in pilot mode.

The scale claim might also be another thing to fall into the red herring category. It is a fact that Visa processes a huge volume of transactions, but there’s no evidence that PayPal can’t or won’t be able to do the same. I am not a technologist, but it seems to me that cloud-based networks, like PayPal, would seem to be able to scale relatively easy, too. And gee, Discover, seems to have done all right despite being small.

There are a lot of things that one might criticize PayPal for at the Point of Sale, but these don’t strike me as the top three. As on and offline commerce converge – fueled by the mobile phone and the point of sale transacting that it enables - a lot of issues emerge that all of the players will need to solve for. For instance, what changes are required at the point of sale to accommodate a new mobile payment scheme and how much will that cost? Will this new scheme enable store cards (where retailers make the most money)? How does a new scheme support loyalty and other consumer engagement strategies? How is customer data captured and shared with the merchant?

2012 promises to be very interesting, indeed. What are your thoughts?

Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.

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Comments

Good article, thanks! If PayPal is 3rd and Visa is the 2nd most trusted financial services brand in mobile payments arena, who is first?

Posted by Bob Smith, 16/03/2012 4:48pm (2 months ago)
Karen,
Thank you for your post.
Having had supported risk based solutions relative to consumer propensities, I now am supporting real time, risk mgt. tools for which companies can ensure compliance, data security and or productivity.
What is mind boggling and more than concerning to me is hearing first hand,
"Pam, we understand the value, the ROI is a non-issue BUT we've already built in losses relative to data compromises."
REALLY???
At what point are companies going to recognize we as consumers will and can not afford to deal with companies that claim their security is of utmost importance, yet continue on a weekly basis to be hacked.
I would hope that securitization becomes a mandate that all companies need follow strict(er) guidelines or fully disclose in detail,
"their" definition of SAFE.
Perhaps my background is the reasoning behind my passion for this innovation, in my opinion what requires more stringent requirements.
It's not just operating with actionable clean, current data indexes it's protecting them in real time, 24/7.
Don't know about anyone other than myself who is tiring of unnecessary fee hikes due to corporate ignorance, moreso the disregard (mismanagement) of PROACTIVE risk management tools for the betterment of client's interest and in many cases, shareholder value.
Reputational Risk?
To many they claim "of utmost importance".
Really?
Zappos, an Amazon Co.
SCARY

Posted by Pamela Hill, 28/02/2012 3:17pm (3 months ago)
I would not discount the technology part and PayPal's ability to rapidly scale when needed. Cloud technology is relative new and still has bugs to be worked out with each individual deployment.

If you recall the rather large outage that Amazon had a couple years back with their cloud services being offline for awhile due to a relatively minor issue. That outage had very broad implications for Amazon customers, which are not tolerated in a 100% availability transaction processing environment.

Posted by MaryAnn Allison, 23/02/2012 2:11pm (3 months ago)
I am surprised at how many Merchant Acquirers have not seen the writting on the wall. Not only is Paypal going after merchants directly but so is Google, Amazon, Facebook and Square. Within two years these five will be the only Merchant Acquirers unless Authorize.net decides to deploy a sales team.

Posted by Victor Arcuri, 23/02/2012 12:07pm (3 months ago)