Sunday , October 1, 2023

How iZettle Could Boost PayPal’s Long-Held Strategy to Embrace the Physical Point of Sale

For years, PayPal Holdings Inc. has worked to expand its reach to physical merchants, and now, with the closing on Thursday of its $2.2 billion acquisition of Stockholm-based iZettle AB, the digital-payments company is taking a significant step in achieving that ambition.

At a stroke, the acquisition brings to PayPal a network of almost 500,000 merchants in 11 markets, nine in Europe plus Mexico and Brazil. They are served by iZettle’s Square-like point-of-sale system, which aims to make payments and related functions fast and easy for small and mid-size sellers often ignored by larger acquirers.

But the importance of the deal, which was announced in May, goes beyond the potential to broaden PayPal’s acceptance base. The company understood years ago it needed to follow its e-commerce clientele, much of which also did business in physical stores. “We know merchants are no longer selling in one channel and we need to provide powerful, integrated commerce tools to make sure our customers don’t miss a sale no matter where they choose to sell,” notes a PayPal spokesperson in an email message sent in the wake of Thursday’s announcement.

Jacob de Geer (left), founder and CEO of iZettle, will report to PayPal chief operating officer Bill Ready, pictured here with de Geer.

Observers agree, noting the importance for PayPal to complement its wallet brand with an acceptance network that goes well beyond online sales. “It makes compelling sense for them to be a full-spectrum network,” says Eric Grover, an independent payments consultant based in Minden, Nev.

That need drove PayPal to make a number of moves to go to the point of sale, some of which have worked out better than others. In 2012, the San Jose, Calif.-based processor launched its own Square-like dongle for small merchants, PayPal Here. Beyond occasional tweaks along the way, not much has been heard of that product for some time. At the same time, PayPal struck a deal with Discover Financial Services to run POS transactions on the Discover Network. That deal was initially stymied by First Data Corp.’s refusal to handle PayPal traffic. First Data later relented.

PayPal made a much more promising move in 2016 with a deal to gain access to Visa Inc.’s token engine, a crucial step in bringing PayPal to physical merchants. It has followed that up with similar arrangements with Mastercard Inc. and other providers.

But now that it owns the iZettle merchant business, PayPal will have to work to be more than merely a multibrand acquirer, Grover argues. The real payoff, he says, lies in using this new asset to promote the PayPal wallet. It won’t be easy, since it will be processing acceptance for multiple brands.

“The bigger and more difficult upside [with iZettle] is to boost the PayPal network,” Grover argues. “It would be a really big win if they could do that.” PayPal’s big asset in this regard is its existing brand value. “The PayPal branded network, the PayPal digital wallet, those are the core of the franchise,” says Grover. “It’s the biggest multinational wallet.” Bigger, he adds, than Alipay and WeChat Pay, which, though they claim far more users, are concentrated largely in China.

One potential, and immediate, snag is an inquiry the acquisition has drawn from the United Kingdom’s Competition and Markets Authority, a governmental department that acts to prevent anti-competitive activities. The PayPal spokesman says the company expects the inquiry to wrap up some time in the fourth quarter. “The review is fairly standard. PayPal is voluntarily filing a merger notice and working cooperatively with the CMA on its review,” he says. Until this happens, PayPal says it will operate the two companies separately.

Grover agrees the review is unlikely to present difficulties. “Square, Adyen, and PayPal are in the market—it’s preposterous to suggest there aren’t new competitors,” he says. “It’s hard to see what their objection will be.”

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