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After 13 years, PayPal is free of eBay and once again an independent company. It dominates online and mobile commerce, but has stumbled at the point of sale. What will it do now that it calls all the shots?
Like a young adult getting his first apartment and starting a new job, PayPal Holdings Inc. no longer has to heed the parents. In PayPal’s case, the single corporate parent was eBay Inc., which owned the online-payments provider for 13 years before, at the urging of activist shareholder Carl Icahn, spinning it off to eBay shareholders in July.
While eBay’s once-raging online-auction business has mellowed, the San Jose, Calif.-based company did a pretty good job of parenting PayPal. Auction users liked PayPal so much that eBay bought the 4-year-old, publicly held payments company in 2002 for what now looks like a bargain, $1.5 billion.
On July 20, when its shares again began trading on the Nasdaq Stock Market, PayPal’s market capitalization was close to $50 billion, instantly making it the fourth-largest publicly traded payments company by market cap and nearly twice as big as No. 5 Discover Financial Services.
With 169 million active users and $130.5 billion in payment volume in 2015’s first six months, PayPal is the online-payments leader. PayPal also wears the mobile-payments crown, with 30% of 2015’s volume coming through mobile devices, and it’s growing at a 40% clip, the company says.
PayPal, also based in San Jose, once generated most of its revenues by providing payment services for eBay users, but now more than three-fourths of revenues come from merchants.
PayPal steps out on its own as a solidly profitable company with some rock-star subsidiaries—e-commerce merchant processor Braintree, person-to-person payments provider Venmo, and mobile-payments technology provider Paydiant among them.
Then there’s the credit operation formerly known as Bill Me Later. Soon to join them is online money-transfer provider Xoom Inc., which PayPal will buy under a pending $890 million all-cash deal expected to close before year’s end.
Even after acquiring Xoom, PayPal will still have more than $5 billion in cash jingling in its corporate pockets.
All good, right?
At the moment, pretty good. And while the tangible benefits of the PayPal spinoff so far have flowed to investors, the deal created intangible but possibly lucrative opportunities for future growth. They include potential deals with e-commerce companies that compete with eBay, such as Amazon.com Inc. and China’s Alibaba, that heretofore may have been closed to PayPal, as well as with merchants and tech companies.
“It [the spinoff] allows us to respond to the fast changes in commerce and payments, and allows us to be partners with companies that we might not have,” says Brad Brodigan, PayPal’s vice president and general manager for retail. “We expect to have new partnerships.” Brodigan declines to say with whom these partnerships might be forged.
Jeff Crawford, a manager at First Annapolis Consulting Inc. in Annapolis, Md., says “being attached to another large e-commerce brand in the marketplace limited them somewhat from … doing anything with Amazon or anyone who has a large e-commerce presence.”
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Less Than Surefooted
But PayPal’s crystal ball also brings up images of uncertainty in a fast-changing payments scene. There’s a powerful pack of competitors eager to grab some of that online and mobile volume and thwart its ambitions of becoming a major point-of-sale payments provider.
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“They had a greenfield in that e-commerce space when they started; that’s gotten much more competitive,” says Tim Sloane, vice president of payments innovation at Maynard, Mass.-based Mercator Advisory Group Inc. “And with mobile coming in on a full-tilt boogie, their competition is across the board.”
A recent report from Jim Sinegal, a senior equity analyst at Chicago-based Morningstar Inc., says “our confidence in the company’s competitive position fades as we look out more than a decade and the line between online commerce—PayPal’s historical stronghold—and physical commerce blurs.”
PayPal’s biggest hole is its lack of presence at the point of sale. E-commerce activity in the United States still accounts for less than 10% of all retail sales, which means PayPal’s biggest “greenfield” lies in stores, restaurants, hotels, and other physical locations. Here, PayPal has been less than surefooted.
A much-touted POS initiative that PayPal launched in 2012 started well enough, landing The Home Depot and some other retailers. Later, a partnership with the Discover Network held the promise of reeling in millions of Discover-accepting small and mid-size merchants.
But the effort largely fizzled, according to observers. This first iteration early on had PayPal giving old-fashioned plastic cards to consumers that could be used at merchant locations that did not accept smart-phone-based payments through the PayPal mobile app.
PayPal also deployed Beacon, a potent Bluetooth Low Energy technology that detects and communicates with consumers’ mobile devices when they enter a store.
But results apparently didn’t match expectations.
“They placed a very big bet on PayPal Beacon, which has essentially died on the vine,” says Jordan McKee, senior analyst at Boston-based 451 Research (formerly Yankee Group).
A huge obstacle was the opposition of some of the nation’s biggest merchant acquirers, including First Data Corp., Chase Paymentech, and Elavon. According to industry insiders, those acquirers, which process for more than half of U.S. merchant locations, refused to offer PayPal to their physical merchants because their bank owners or partners considered PayPal a competitor.
“[PayPal’s] first attempt wasn’t very successful,” says McKee. “It was a good try.”
Other powerful payments players also regard PayPal with suspicion. Asked by an analyst at Visa’s July 23 quarterly earnings call for his thoughts about the newly independent PayPal, chief executive Charles Scharf noted that many PayPal transactions are funded by general-purpose cards, including Visa cards, “and that’s important.”
But Scharf went on to say that PayPal can use Visa transactions to “disintermediate” Visa’s client relationships, and that the PayPal model “has to evolve” and “is not something that we think is sustainable for the long term.”
Visa, along with American Express Co. and Sequoia Capital, in July invested an unspecified amount, believed to be less than $100 million, in Stripe Inc., an online-payments startup that some see as a potential rival to PayPal. Stripe said the investment valued the company at $5 billion.
“They [the networks] don’t see Stripe as a threat, while increasingly PayPal is seen as a threat to the networks,” says 451’s McKee. “What I’m seeing is that the card networks see Stripe as a partner.”
Arrows in the Quiver
Thus, PayPal has plenty of work ahead of it to maintain its position and expand in rough waters. Dan Schulman, a former American Express executive who became PayPal’s president last September and chief executive upon the spinoff, is aiming for a big increase in customer usage.
“We want to inspire our customers to use the PayPal app two to three times a week rather than the two to three times a month we see today,” Schulman said July 16 during the last quarterly earnings conference call in which eBay still owned PayPal.
How’s he going to do it? Acquisitions almost certainly will continue after the Xoom deal closes.
“We’ve got $6 billion in cash on our balance sheet … that affords us tremendous flexibility,” says Brodigan. “We’ll continue to invest in expanding the payment services that we provide to our merchants and consumers.”
Arrows in PayPal’s quiver also include the new One Touch technology, introduced last September by Braintree and now rolling out to PayPal’s platform.
The technology lets users, who log in separately, check out on merchants’ mobile sites with a single click or touch, a process PayPal expects will reduce abandonment rates and boost merchant sales.
Schulman expects One Touch will be available for half of PayPal’s transactions by the end of the year, up from about 5% currently. “We’re doing this in a disciplined fashion,” he said, with introductions so far in the United Kingdom and Canada as well as the United States.
Then there’s Xoom, a fast-growing, online wire-transfer provider that eschews the costly agent networks of such legacy providers as The Western Union Co. and MoneyGram International Inc. Xoom will bring 1.38 million customers to PayPal.
The San Francisco-based firm recorded a 19% year-over-year increase in transactions in the second quarter to 3.88 million although gross sending volume slipped 4% to $1.73 billion.
Xoom operates in more than 30 countries, but its biggest receiving markets are India, the Philippines, and Mexico, which account for about 75% of revenue.
“Xoom is an exciting opportunity to expand our set of services for our global customers,” says Brodigan.
Counting Xoom, PayPal will have three different ways of sending money from one person to another since the legacy PayPal system and Venmo, which is popular with young U.S. adults, also enable such payments. But Xoom seems to be the one best suited for cross-border transfers.
“The amount of money PayPal spent getting [Xoom] suggests they need to invest in a better platform than they had,” says consultant Steve Mott, owner of Stamford, Conn.-based BetterBuyDesign.
Now for Commerce
But filling the point-of-sale hole will the most visible—and difficult—task that PayPal must accomplish if it wants to capture high transaction growth.
Gil Luria, a managing director and payments-industry analyst at Los Angeles-based Wedbush Securities, believes success is more likely this time as the lines between traditional card-present payments and payments originating from mobile devices continue to blur.
“They already have a great digital wallet that’s far ahead of anybody else,” Luria says. “It’s going to be much harder to shut PayPal out.”
Consumer demand exists to bring PayPal to storefronts, according to executives with independent sales organizations that sell payment-processing services to merchants.
“We’re seeing higher demand or requisition from our customers’ customers to accept PayPal,” says Paul Bridgewater, chief executive of Sage Payment Solutions, a Reston, Va.-based ISO with 170,000 merchants generating $30 billion in annual charge volume.
PayPal has not laid out, in public, a detailed plan for another run at the point of sale. But a spokesperson says the company has been consistent in using a “partner-based approach.” Through the Discover relationship, PayPal has signed some 55 U.S. acquirers, he says.
PayPal’s recent announcements and new products and services give some other broad hints.
The company flip-flopped on its formerly disdainful attitude toward near-field communication, the powerful technology behind Apple Pay and Android Pay, and now embraces it. PayPal chairman John Donahoe, while he was chief executive of eBay, several years ago jibed that NFC stood for “not for commerce.” But that was before the debut of Apple Pay.
NFC, which besides payments can handle loyalty programs and non-payment transactions with smart phones, had been around for years but did not get much traction in the U.S. until Apple adopted it last fall.
NFC opens up new contactless-payments possibilities as millions of merchants, wittingly or not, are gaining NFC-acceptance capability when they upgrade their POS systems to accept EMV chip cards because of the payment card networks’ EMV liability shifts taking effect next month (“Now for Commerce: PayPal Embraces NFC,” May).
Exactly how PayPal will use NFC isn’t yet clear. But the technology gives PayPal an option if an acquirer blocks regular PayPal transactions. PayPal could communicate via NFC “with the terminal as a non-payment transaction,” says Luria. “That pathway is designed for loyalty cards and other transactions, but could be used by PayPal based on the retailer’s cooperation.”
Meanwhile, thanks to Auburndale, Mass.-based Paydiant, which PayPal bought in April for $230 million, PayPal already has a highly regarded, white-label mobile-payments platform for the point of sale. Paydiant deployments so far have used Quick Response (QR) codes to transmit data, but its system is adaptable to other technologies.
“Paydiant is form-factor agnostic,” says Brodigan.
Paydiant’s customers include the Subway sandwich chain; Capital One Financial Corp., a large credit card issuer and banking company; the Harris Teeter grocery chain; and the big payment processor Fidelity National Information Services Inc. (FIS).
In yet another example of the strange, simultaneous competition and cooperation that exists throughout the payments industry, MCX’s pending CurrentC mobile-payment service also relies on Paydiant. The three-years-plus-in-the-making CurrentC was scheduled to begin tests late last month in Columbus, Ohio.
While NFC is the more whiz-bang technology, most merchants are satisfied with QR codes, according to consultant Mott. “For right now, I think QR codes are the preferred paradigm,” he says.
What’s more, using Paydiant’s QR codes “would also allow PayPal to circumvent acquirers” should they not want to provide PayPal service to a merchant, according to Luria.
Says the PayPal spokesperson via email: “Our recent acquisition of Paydiant allows us to work with merchants directly to help build their white-labeled wallet. Subway is a great first example. We also have relationships with millions of merchants around the globe, and with some we have been working closely to integrate PayPal into stores directly.”
All-in-One Reader
PayPal has yet another tool for cracking the POS safe: its new all-in-one card reader for mobile point-of-sale devices that processes NFC, EMV, and magnetic-stripe card transactions.
The reader, available now in the U.K., was scheduled to be introduced late this summer in Australia and is expected hit U.S. shores next month. The device will enable merchants using the PayPal Here mobile POS service to accept payments regardless of the form factor the consumer uses, Brodigan told Digital Transactions News in July.
“It allows merchants to capture all forms of payments,” Brodigan said. The reader will be compatible with mobile-payment services using NFC technology, such as Apple Pay, Android Pay, and the new Samsung Pay.
And with PayPal’s mobile volume growing in the 40% range, customers may soon press more merchants to add PayPal acceptance, according to John C. Mayleben, senior vice president of technology and new product development at the Lansing-based Michigan Retailers Association.
“If consumers demand to use it, absolutely retailers are going to find a way to make it work,” says Mayleben, whose firm, founded in 1969, claims to be the nation’s oldest ISO.
This mystery-shrouded POS effort is likely to become clearer as the all-in-one reader hits the market and PayPal continues to strike alliances with more merchants and payments players. For PayPal, the name of the game these days is being just about everywhere—online, in mobile devices, and at the point of sale.
“The only way we’ll continue to be a payment method of choice is if we create enough value that merchants and consumers elect to use PayPal,” says Brodigan. “We’ll continue to partner with a wide number of payments companies in the payments ecosystem.”
—With additional reporting by John Stewart
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