Handicapping PayPal in its Mobile Race
by Karen Webster
PART 2: • Handicapping Google in its Mobile Race with PayPal and Others
PART 3: • Handicapping PayPal and Google in the Mobile Transaction Platform Race
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MORE ANALYSIS FROM KAREN WEBSTER Payments Players vs. Google vs. Facebook: Who Should Really Win Your mPayments Trust? |
Ah, September! It’s the beginning of fall: back to school, football, sweaters here in Boston, and now apparently, the race to the physical point of sale – mobile payments style. PayPal let the world in on its mobile payments vision two weeks ago at an invitation-only forum in Rancho Palos Verdes, Calif. Google launched its mobile payments scheme for real (sort of) a week later in San Francisco. Their approaches couldn’t be more different, in spite of sharing the mobile phone as the enabler of the experience for merchant and consumer.
By now, I am sure that everyone has read up on what PayPal is doing, so I won’t lay it all out here. Suffice it to say that they have channeled their inner John Donahoe, who has been reported as saying NFC really stands for “not for commerce.” There is nary an NFC element to be found in their solution. What can be found is a series of clever experiences that leverage PayPal’s core assets – namely, its digital wallet – to deliver a frictionless experience for merchant and consumer: cardless (phone number + PIN), card (but PayPal branded + PIN) and line-busting options that enable bar code scanning and checkout in aisle. As everyone knows, Google’s mobile wallet solution is NFC-enabled and leverages MasterCard’s PayPass (and soon Visa payWave) capabilities at merchant POS that take contactless (more on this later).
The blogosphere is filled with comparisons of one over the other, so I’ll not do that here. I’d like to pull back though and focus on the bigger question of how the transition to mobile payments will be won in the United States and who is best positioned to pull it off. Having PayPal’s vision freshly revealed to the public makes that discussion much less hypothetical at this point. (Related: PayPal President Reveals Plans to "Free You From the Cash Register")
Let’s start with the basic fact of the matter. Solving for mobile payments in the United States means dealing with a complicated chicken-and-egg problem: consumers with mobile devices that can talk to compatible merchant POS devices. In the United States at least, that also means improving the experience that exists today for both merchants and consumers (or at least not making it seem like either party has to take giant steps backwards just to enable a mobile payments experience). The little complication is that the industry, at least in the United States, has spent the last four decades perfecting the experience at point of sale so that whipping out a card to pay for stuff works easily, safely and quickly for both consumers and merchants. Making the move to something new then means convincing consumers that they’re not losing anything either (as in being able to use their preferred payment type at their favorite merchants, safely and quickly) but that they might even gain some extra-special goodies along the way (offers from merchants that are much easier to get and redeem since they are on the phone). At the same time, merchants have to be convinced that this new consumer experience will drive more spend – maybe even more incremental customers and spend – and that the cost of accepting something new (technology and/or tender type) won’t cost them an arm and a leg.
So, that means that anyone with aspirations of playing to win in the mobile payments space has to successfully solve the simultaneous equations of consumers and merchants (enough of each to matter), tender types accepted by consumers, the technology solution that enables acceptance today and projected time to ramp in order to get critical mass, and the value-add that makes the trade off to something new worth making for both consumers and merchants.
In my mind, what really makes the discussion now of mobile payments at the point of sale so interesting is that no one has successfully solved those equations and are all approaching its resolution in very different ways.
Let’s take quick look at Google and PayPal from the standpoint of who has what and how that may influence their future (and ours) in this space. Today, I’m going to give you my thoughts on PayPal.
Consumers: On the consumer side, they certainly have a decent start. They have 100 million active registered accounts in total worldwide and say they are adding about 1 million more every month. As I’ve written before, that means that they have a lot of digital wallets that could be used at merchant locations right out of the gate. They’ve also seen the number of their transactions driven by the mobile phone exceed even their most aggressive estimates lately – some $3 billion by the end of the 2011, which suggests that people are using PayPal now to transact via mobile phones. They also scored very high in the “mobile payments are secure” category. [See my prior writings on this subject.] That’s all important since a lot of the concern that consumers have today about using their phones to pay is that the experience is that it is not secure.
Merchants: Well, that’s another matter. Their penetration at major merchants online is still very low. This is due to pushback over merchant fees, the challenges of getting into the merchants’ technology queue and the reality that probably not many sales are being lost at major merchants, because PayPal is not accepted. On the other hand, PayPal’s Bill Me Later acquisition gives them access to some primo multichannel merchants who might be game to try a mobile POS experience. Stats shared in a recent interview with STORES magazine report that PayPal drove $56 billion in payments for retailers in 2010, which is up significantly (42 percent) from a year earlier suggesting that (a) the picture is improving, but (b) there is still a lot of work to be done on the merchant acceptance side of the equation. That is perhaps the biggest challenge, not to mention getting merchants to change anything whatsoever at the POS (especially in this economic environment) without the prospect of a big return and soon.
Preferred/accepted tender type: It is reported that PayPal is the second most popular way to pay online (after Visa) in the United States, so consumers like using it and trust it. That should scare the living daylights out of MasterCard and AmEx but probably Visa, too. Limitations, as stated above, are places to use it online and obviously offline. The important point here is that consumers already have their digital wallets and know how to use them. And their solution is not operator or handset dependent.
Technology and ramp time: This is where it could get interesting. From what has been revealed so far, it appears that the heavy lift is in the cloud, via IP-enabled devices that may not entirely solve the technology queue problem but doesn’t involve the installation of new gear at the POS either. Leveraging their existing devices and enabling new ones, like tablets, are far less cumbersome for the merchant. At least one of their solutions does not require any more than a phone number and a PIN to work, and others leverage the devices that most people carry around today or soon will – smartphones and those that merchants already have on their counters. The card solution, which reminds me of the Revolution Money proposition (anonymous mag stripe card), would require a channel strategy of some kind to get distribution. So, it seems more of a slog (but presumably one that Don Kingsborough’s experience at Blackhawk might help them remedy). That said, it strikes me that the ramp time to enable merchants for any of these solutions is much faster, since it is less about hardware refresh cycles and big budget line items at multiple national locations and much more about integration with POS software in the cloud that can be activated at the POS in a much less intrusive way.
Value Add: PayPal has a bunch of assets that enable it to play as well as anyone in the deal space– driving geo-targeted deals, serving up coupons/info/price comparisons/discounts based on items in the basket or seen elsewhere, etc. Where things could get interesting is the notion of extending instant credit based on customer profile and items being purchased via their BML capabilities and primo risk management infrastructure.
Bottom line: Theirs is a versatile approach to solving POS acceptance for consumers and merchants, leveraging what consumers and merchants have available to use today, including 100 million (and growing) populated wallets. Their solutions are also handset and carrier agnostic, which is a big plus. There are already too many moving parts in the mobile payments space to orchestrate. Eliminating this one is pretty huge. All that said, the big gap to fill for PayPal is on the merchant side, which is not insignificant and is also quite tied to the business model that will underpin these solutions. And we will all have to watch and see how they get merchants on board: will they focus on the big guys or leverage their DNA in the small merchant category and enable those “main street” merchants and others who drive everyday spend?
Come back tomorrow for how I’m handicapping Google.
[PART 2: • Handicapping Google in its Mobile Race with PayPal and Others]
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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“Not For Commerce” (NFC)—John Donahoe
And, what would this headless turkey know about anything? NFC is already rolling out in Australia: I can just tap my “chipped” MasterCard on the terminal …
“When Do We Start Calling eBay A Payments Company?”
http://www.businessinsider.com/ebays-transformation-when-do-we-start-calling-ebay-a-payments-company-2012-1
A picture is worth a thousand words, so they say. This linked “Business Insider” article contains a graph of eBay revenues since 2003. It shows, quite starkly, how eBay’s Marketplace revenue has stagnated since 2008, about the time that the headless turkey from Bain & Co, John Donahoe, got hold of the tiller and started his “destructive renovations”, and eBay’s share price has moved little in the same period; ergo the eBay Marketplace has effectively been in decline since 2008.
It should be obvious, even to the simplest of analysts, that as time passes, the Amazon River flows ever more strongly, whereas the eBay Marketplace now consists of little more than a chain of stagnant ponds covered in slimy green algae—and isn’t that a couple of rusting Chinese-made shopping trolleys that I can see dumped therein?
The graph also shows the eBay-underpinning increases in revenue eBay has received from PreyPal during the same period, that is, from roughly when the “eBafia Don” effectively mandated PreyPal’s use on the eBay Marketplace. Some analysts therefore think then that eBay’s future lays in PreyPal.
Well, if anyone thinks that the retail banks are going to let such a clunky, parasitic, flea-sized, upstart, middleman, “merchant of sorts” such as PreyPal—who after all does no more than ride precariously on the back of those banks’ own payments processing systems—continue to nibble away at one of the banks’ principal areas of business for any length of time, all I can say is, dream on …
PreyPal is little more than a clumsy, fraud-enabling middleman that also nullifies the statutory protections that, in many countries, would otherwise be available to users paying directly with a real bank’s credit card.
Then there is PreyPal’s current testing of “mobile payments” at POS in Home Depot stores. Are people actually leaving their funds “on deposit” with this clunky, unlicensed, prudentially unregulated, PayPal “non-bank” that is itself not even licensed to provide credit? Otherwise, how are the funds for such mobile payments being sourced by PreyPal from the payer’s real banking account in a way that the merchant can be sure of ultimately getting paid by PreyPal? Not with the standard non-guarantee of payment that PreyPal serves up to its online merchants, I hope.
And, unfortunately for eBay’s chief headless turkey, Visa’s professional online offering “V.me”, when it is up and running later this year, will undoubtedly put paid to whatever success that the clunky PreyPal has had with professional online merchants outside of its mandated use on the eBay Marketplace—and soon thereafter both these unscrupulous and clunky entities should commence/continue their long-deserved journeys down the gurgler.
Scott Thompson saw the writing on the wall; John Donahoe remains delusional, that fact confirmed by the many reported sightings of him waving his mobile phone about and mumbling about UFO sightings over San Jose.
“How secure is PayPal for sellers?”—UK “Guardian”
http://www.guardian.co.uk/money/2012/jan/27/is-paypal-safe-protection?commentpage=last#end-of-comments
And an interesting follow up to this UK "Guardian" article at:
http://www.hadess.net/2012/01/getting-conned-ebaypaypal-fun.html
“Vendor Claims eBay Plays Dirty” (Who could have believed it?)
http://www.courthousenews.com/2012/02/01/43529.htm
Scott Thompson abandons the struggling eBay for the struggling Yahoo
http://forums.auctionbytes.com/vbulletin/showthread.php?p=166803#post166803
PayPal claims PayPal not a debit card or payment network!
http://forums.auctionbytes.com/vbulletin/showthread.php?t=24148
eBay / PayPal / Donahoe: Dead Men Walking
Posted by Philip Cohen, 02/02/2012 12:40pm (3 months ago)
The one major player that gets missed most of the times with Mobile Payments & Payments discussions generally are the Banks. When many of you stop laughing at this, keep in mind that the Banks still own the payments infrastructure in many respects. Once they get beyond their issues today, I do not believe that Banks will give up much of the payments infrastructure in the long run. Most of the mobile efforts right now by Banks are defensive plays to keep them marginally in the Mobile Payments game. There are many trade groups among the Banks, Wireless Carriers and large payment providers such as First Data that are examining these issues today. I do not believe that one can dismiss these players as insignificant participants in this space.
Posted by PaymentsGuy, 11/10/2011 4:06pm (7 months ago)
Karen,
Really interesting article. I work in the payments sector advising clients on payments innovation.
I also have been following the Mobile payments industry with interest and see it this way for the time being.
It was only 10 years ago that the remain big retailers eventually agreed to accept credit cards. This was based on consumer demand of wanting to pay this way. They resisted because of the high cost of interchange fees.
What we see today in Europe are a number of initiatives in mobile payments and NFC that are driven by 2 things. Either schemes wanting consumers to pay with scheme routed transactions rather than cash. Or issuers wanting to demonstrate some (and minimal) levels of innovation.
These initiatives are therefore heavily subsidised, so it is difficult to tell if the real economics works for consumers (apart from the tech-heads) or (bricks and mortar) merchants.
NFC and mobile payments will come for POS, but slower than online and slower than you might predict.
The game change is a shift in the commercial model between Consumer, Issuer, Scheme, Acquirer and Merchant.
Contact me on cnp_moore@yahoo.co.uk if you think this makes sense.
Regards
Chris Moore
Posted by Chris Moore, 04/10/2011 6:38am (8 months ago)
Another sticky wicket is going be security and compliance with PCI and Payment Brand rules on the merchant side. Consumer smartphones cannot currentlly be secured to meet PCI standards. So while they're fine for consumer wallet applications (PCI doesn't apply to cardholders), they're only marginally suited for payment applciations. Right now it seems the only way to build mobile payment application that will pass muster is to segment the phone from the cardholder data - be in mag stripe read, NFC, EMV, or manually entered. The phone can sever a POS role, but it cannot access the cardholder data lest it be drawn into scope for merchant PCI and render the merchant non-compliant. The most common mechanism is a hardware sled that reduces the phone's role to a radio, but the sleds that can handle NFC, MSR, EMV, AND manual entry are few and far between.
Posted by Cranston, 28/09/2011 9:16am (8 months ago)
Great article, Karen.
It is interesting to see the lack of NFC in PayPal's strategy/solutions but also the lack of EMV. Visa has incentivised US merchants to adopt both contact (chip&PIN) and contactless (NFC) EMV payments by dangling a PCI-waiver carrot in front of them - starting from 1st of Oct 2012. And since PayPal's adoption strategy means a HW and SW refresh at the POS it would make sense to throw in a chip reader to increase the merchants ROI, one would think.
Posted by David Gudjonsson, 27/09/2011 3:52am (8 months ago)
Karen...great POV, and looking forward to your take on Google's position.
I think you missed one important distinction between PayPal and Google's approach...and I suspect it will play significantly into how value is created for each...who owns the balance?
In Google's case they "outsource" the balance to established players (i.e. the wallet) and will live off of advertising and promotions by riding next to or inline with the transactions...its what they're good at, lots of data, advertising, etc. I personally feel like they might have missed an opportunity by not taking a different (more transactional / own the balance approach) but this does leverage a huge existing base of accounts (assuming we can get them into the wallet sooner or later....and merchants make the investment to accept the robust transaction....big if, but that's a whole other response.)
In PayPal's case they own the balance, and have a (growing) infrastructure to move money in and out of the account. They can monetize these transactions as they push to lower cost options like ACH, but they don't have the advertising/promotional punch of Google.
In my opinion I'd rather have robust payment infrastructure and own the balance; layering on adverting and promotions...because the payment infrastructure is hard to build (or buy) vs. advertising and promotions.
In the end I think the real question is will the consumer allow ONE entity to own both the transaction and the personalized promotion...and can ONE entity create ONE platform in which personalized promotions and loyalty can be manged for MANY merchants...to date no one has successfully done this in scale across multiple merchants. Credit cards cards did a good job of owning both with points/cash back, but the promotions were not targeted, where Starbucks is now proving loyalty and payment can be married but that is at one captive merchant.
Only time will tell, but I'd say we are converging in on this...is Google, Paypal or someone else the invisible engine to make this happen? will we ignite?
Posted by Drew Kese, 26/09/2011 10:53pm (8 months ago)
Great insight, will check out tomorrow's piece. Handset and carrier agnostic is very big.
Posted by Brian Booth, 26/09/2011 10:38am (8 months ago)
Karen,
Another insightful analysis of the rapidly evolving mobile wallet space. I love the quote from John Donohoe that NFC stands for "not for commerce" since that's what we're seeing from our perspective when dealing with small and mid-sized merchants.
As you've expressed in other columns, what most mobile payment providers have failed to capture is any compelling reason or amazing user experience that would compel consumers to switch from their current credit card swipe to a new, unknown and unproven smartphone-baed payment system.
So, what lead consumers to make the switch?
Every mobile payment provider has indicated that they intend to incorporate some type of loyalty component in their wallet, but nobody has actually done it. Replacing cumbersome loyalty cards, providing realtime status updates and pushing money saving targeted deals and coupons could provide the enriching experience and added value necessary to entice consumers to consider switching.
Google has the experience in pushing mobile ads, so transitioning to mobile coupons shouldn't be too much trouble. However, integrating a robust loyalty platform that addresses the needs of diverse merchants won't be as easy. This may open the door for platforms like Paycloud (shameless plug) or others to integrate loyalty with the mobile wallet providers to catalyze the consumer shift to mobile payment.
No matter how the wallet providers shake out, it appears that the payment process itself won't determine the winner.
Posted by John Heaney, 26/09/2011 9:00am (8 months ago)
Karen,
Another insightful analysis of the rapidly evolving mobile wallet space. I love the quote from John Donohoe that NFC stands for "not for commerce" since that's what we're seeing from our perspective when dealing with small and mid-sized merchants.
As you've expressed in other columns, what most mobile payment providers have failed to capture is any compelling reason or amazing user experience that would compel consumers to switch from their current credit card swipe to a new, unknown and unproven smartphone-baed payment system.
So, what lead consumers to make the switch?
Every mobile payment provider has indicated that they intend to incorporate some type of loyalty component in their wallet, but nobody has actually done it. Replacing cumbersome loyalty cards, providing realtime status updates and pushing money saving targeted deals and coupons could provide the enriching experience and added value necessary to entice consumers to consider switching.
Google has the experience in pushing mobile ads, so transitioning to mobile coupons shouldn't be too much trouble. However, integrating a robust loyalty platform that addresses the needs of diverse merchants won't be as easy. This may open the door for platforms like Paycloud (shameless plug) or others to integrate loyalty with the mobile wallet providers to catalyze the consumer shift to mobile payment.
No matter how the wallet providers shake out, it appears that the payment process itself won't determine the winner.
Posted by John Heaney, 26/09/2011 9:00am (8 months ago)
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