Home Depot Is a Good Start for PayPal’s POS Ambitions, But Much Work Likely Remains

PayPal Inc.’s pilot in five Home Depot stores, which the payments processor announced on Friday, represents the start of a major push by PayPal to the point of sale at major merchants. But allowing for a completely new payment method in a physical store, in this case one that has historically been used only online, also means a lot of work for the two companies to bring it off properly, experts warn.

“It’s a new transaction-origination method as well as a new payment method [at Home Depot],” says George Peabody, director of the emerging technologies advisory service at Mercator Advisory Group, Maynard, Mass. “There’s a lot of moving parts that have to be tested and debugged.”

For now, the pilot is confined to an undisclosed number of PayPal employees to make sure transactions flow without problems. But it will likely expand “in the next few weeks” to all PayPal accountholders who shop at the five participating stores, says a Home Depot spokesman. “You’ll see some signage” in the stores, he says, referring to the more public phase of the pilot.

Atlanta-based Home Depot is the first chain to try PayPal’s new point-of-sale payment technology, which includes an unembossed, PIN-protected physical card as well as a system called Empty Hands that lets consumers make payments with just a PIN and their mobile-phone number. The technology also lets customers change the funding source for a transaction within 14 days of the transaction and includes the ability for merchants to extend offers to customers’ mobile devices.

Home Depot thus becomes the first of nearly two dozen major chains that have agreed to use PayPal’s system for POS transactions. John Donahoe, chief executive of PayPal parent company eBay Inc., said in October that 20 merchants had signed on to adopt the technology during the first half of 2012, but he did not name any of them.

Much, therefore, could be riding on the Home Depot pilot, though much about it remains unclear, including how many employees are participating, how many cards have been issued, where the stores are, and what PayPal and the home-improvement chain hope to learn. PayPal refuses to comment beyond a note it posted confirming Home Depot’s participation.

According to the Home Depot spokesman, who also remained mum on these questions, the PayPal test is part of an overall improvement program the chain embarked on some time ago for its checkout process. “It’s a matter of convenience for customers,” he says, referring by way of example to a program called First Phone that equips store personnel with mobile devices that can look up inventory and check out customers when lines grow at the cash register. The chain also hopes to save on acceptance costs. While the spokesman says pricing it has worked out with PayPal is “proprietary,” he adds it will be “lower than traditional networks.”

Given the probable complexity of the new system, though, Mercator’s Peabody says PayPal is right to start slowly at a limited number of locations. While PayPal says its technology works with most POS terminals equipped with a PIN pad, Peabody warns a good deal of reprogramming will likely be required for the program to scale up. At a chain the size of Home Depot, which has almost 2,000 big-box stores across the country that have historically accepted major credit and debit cards, “a lot of software has to be updated, [along with] an enterprise system and a payments switch,” he says. “It’s not trivial.”

The current effort by PayPal culminates years of effort to bring its payments service to brick-and-mortar retailing, which, while not growing as fast as online commerce, offers far greater volume potential. Moosejaw Mountaineering, a small outdoor-gear chain in the Midwest, began in 2008 allowing customers to pay at the cash register by using PayPal Mobile. And just last month, PayPal ran tests in Sweden with a pair of merchants to try out a POS system based on contactless stickers.

But by last fall the processor had worked out a systematic strategy to penetrate the point of sale, along with its card-based and mobile technology. It said then a merchant had agreed to run a pilot to test the technology, and on Friday it turned out the merchant is Home Depot, which Peabody calls an “interesting” choice. Unlike other major merchants, the home-improvement chain offers PayPal a chance to test transactions with both consumers and commercial accounts, since it sells to contractors as well. “It’s a good sign for PayPal,” notes Peabody. “But it’s going to be a long march.”