Trends & Tactics

 

PayPal’s Triangulation Strategy

 

It was Visa Inc. that popularized “It’s Everywhere You Want To Be” as its slogan years ago, but these days it appears to be PayPal Inc. that’s living up to the old tagline.

 

First, the San Jose, Calif.-based eBay Inc. unit established itself as the dominant processor for e-commerce payments. Then, only last year, it began striking out into terra incognito—the physical point of sale. The Home Depot Inc. has rolled out PayPal acceptance to all of its 2,000 U.S. stores, and another 20 chains are expected to follow suit this year. Customers pay with a special PayPal card or enter their mobile number and PIN at the terminal.

 

So much for the big-box guys. Last month, PayPal took care of the other end of the spectrum by rolling out a mobile app for micro-merchants. Both the app and its accompanying card swiper—a blue triangle, to contrast with rival Square Inc.’s stark white cube—are free. Merchants pay 2.7% for swiped transactions and get a MasterCard-branded debit card that returns 1% on purchases, taking a bit of the sting out of PayPal’s fees.

 

With big chains and small Mom-and-Pops covered, that just leaves the vast middle market, long the domain of Visa and MasterCard Inc. “We have a comprehensive strategy to make PayPal available wherever the consumer wants to shop,” says Hill Ferguson, senior director of PayPal Mobile. Both Fergson and his boss, David Marcus, who runs PayPal Mobile, came to the company last year when eBay bought their startup, Zong Inc.

 

That means that “pretty soon, they’ll go after the medium-size segment [of merchants],” says Rick Oglesby, a senior analyst at Boston-based Aite Group LLC who follows mobile payments.

 

But PayPal seems set on covering all the bases when it comes to payment methods, as well. PayPal Here, as it has dubbed its new acceptance app, images checks for remote capture, too, relying on Mitek Inc.’s software. The fee? Nothing.

 

In fact, with technology from startup card.io (“Are Cards Ready for Their Closeup?” November 2011), the app will harness the phone’s camera to capture card images, as well, so users don’t even have to swipe the plastic. They might want to, though. The rate for non-swiped card transactions is 3.5% plus 15 cents.

 

Transactions on PayPal accounts bear the single 2.7% rate rather than the sliding scale of volume-dependant rates PayPal has advertised for years. “We felt it was important to really simplify [pricing],” Ferguson says.

 

PayPal is clearly counting on the panoply of payment options to help it stand out in a crowded field of mobile-acceptance vendors. “We offer the most ways for a small business to get paid,” says Ferguson, who adds merchants told PayPal they wanted to be able to accept checks so they could avoid card fees.

 

“Several thousand” small-merchant clients were using the app at its unveiling, according to Ferguson, and PayPal expected to start offering it commercially this month.

 

But of all the competitors now in this space—including names big and small such as VeriFone Systems Inc., Intuit Inc., MagTek Inc., and a number of merchant processors such as eProcessing Network LLC, North American Bancard, and Heartland Payment Systems—the rival many observers see in PayPal’s sights is Square. Having launched only in 2010, San Francisco-based Square has recruited an estimated 1.3 million merchants and says it is processing an annualized $4 billion in volume.

 

PayPal Here’s swipe rate, indeed, undercuts Square’s by 5 basis points, though the two apps’ card-not-present pricing is the same. Contacted by Digital Transactions News, this magazine’s sister publication, Square had no comment on PayPal Here.

 

Some experts, though, doubt PayPal Here will have much impact on Square, at least in the early going. “With a million Square users, it’s hard to be a Square killer no matter who you are,” notes Todd Ablowitz, president of Double Diamond Group LLC, Centennial, Colo.

 

PayPal Here’s pricing advantage, agrees Oglesby, is “a very small rounding factor” even for small merchants.

 

For his part, Ferguson says what PayPal Here has going for it is international capability, including the potential to reach merchants in the 190 countries PayPal’s platform serves. “We’ll scale [PayPal Here] across every one of those countries,” he says. “That’s something those other guys will have a hard time doing.” That blue triangle could become a thorn in a lot of sides before long.

 

 

 

Tech Firms:  Can You Trust ‘Em?

 

Consumers look to Google Inc., Apple Inc., Amazon.com Inc., and Facebook Inc. for innovation, but they place more trust in their own banks, PayPal Inc., and the card networks than in tech companies or social networks to protect their privacy and financial data.

 

Javelin Strategy & Research recently queried more than 5,800 consumers about their perceptions of what it calls its “Gang of Four” in addition to the nation’s top five banks, four general-purpose card networks and PayPal, and three leading phone companies. The survey’s context was the coming of mobile payments.

 

Consumers do consider the Gang of Four to be more innovative than banks, payment networks, or telecommunications companies. None of the 17 companies Javelin asked about stood above the rest in all three categories—innovation, trust, and privacy protection, however. But the one firm that seemingly does a superior job in each category is PayPal.

 

Apple, cited by 32% of respondents, ranked No. 1 when survey takers gave consumers a list of the companies and asked them which they believe is most innovative. Google, Amazon and Facebook ranked second, third, and fifth, respectively, with PayPal fourth.

 

But when consumers were asked who’s the best at protecting private data such as Social Security numbers, passwords, birth dates, and other identifying information, the Gang of Four’s ratings dropped precipitously.

 

And asked which of the 17 companies “would you trust most with your financial information?” Visa came in first followed by PayPal. Only 11% of respondents named Amazon; Apple, 5%; Google, 4%, and Facebook tied with Sprint at the bottom with 2% each.

 

Banks had fairly low scores in some categories; for example only 4% of the main sample listed U.S. Bancorp as the company that best protects their private information. Some of that may result from respondents outside of the banks’ branch footprints not knowing about them, according to Mary T. Monahan, research director, mobile, at Pleasanton, Calif.-based Javelin.

 

Indeed, the trust factor was very high among respondents who said their primary bank relationship was with one of the five named banks. Some 79% of U.S. Bank customers, for example, said they would trust that bank the most with their financial information. Next were Chase, 75%; Wells Fargo, 71%; BofA, 64%, and Citigroup, 54%. Respondents “have a strong preference for their own financial institution,” says Monahan.

 

These customers weren’t quite as confident their banks would protect their privacy, but banks still scored high: Chase, 68%; U.S. Bank, 67%; Wells Fargo, 64%; BofA, 60%, and Citi, 53%.

 

PayPal ranks fairly high in perception of innovation in part because it’s simply younger than the legacy networks and banks, and it’s also done things such as open its platform to outside software developers, according to Monahan. PayPal also has carefully cultivated its reputation for trustworthiness, she adds.

 

“It took a while for PayPal to get that trust,” she says. “They had some issues, they overcame them, they developed a trust.”

 

The overall lesson from the results may be that companies weak in one area probably will need to pair with stronger ones if they want to roll out a successful mobile-payments service. Monahan cites the recent privacy travails of Google and Facebook.

 

“You can’t build models built on openness and say, ‘We’re really great on privacy and trust,’” she says. “It’s going to be difficult to make that argument.”

 

 

 

A Retailer-Owned Payment Network? Really?

 

Retailers are critical actors in the payments drama, but they’re rather passive actors functioning mostly as acceptors of cash, checks, and cards. When merchants want to offer prepaid cards or capitalize on the new, Internet-based possibilities for payments-related loyalty programs, they almost invariably call on processors and marketing specialists to do the heavy lifting.

 

So when news broke last month that a group of about two dozen retailers that includes such heavyweights as Wal-Mart Stores Inc. and Target Corp. plans to create a merchant-owned network for mobile payments, some in the payments industry expressed disbelief.

 

“It’s all [B.S.],” a consultant and former processor executive told Digital Transactions privately at a recent industry conference.

 

But backers of the new network insist it’s for real. The premise is that a retailer-owned system could operate more cheaply than current payment card networks while keeping fraud levels low and protecting customer privacy.

 

“One would hope that we could create a more efficient system than the existing inefficient, fraud-prone system,” says a merchant executive familiar with the project who asked not to be identified

 

The retailers are not taking the radical step of refusing to accept general-purpose credit and debit cards, which probably would be suicidal. Instead, they’re focusing on payments from smart phones, which today account for only a tiny fraction of total sales but could be poised for big growth.

 

The executive would not comment about the network’s structure or exactly how transactions would work. Asked, however, if the network might have its own brand, with consumers downloading software to their mobile devices to enable payments, the executive says, “You’re getting real warm.”

 

Regarding pricing, the executive says the network would recover its costs through some sort of charge to merchants, but any charges would be lower than what merchants pay today for card acceptance.

 

Nor have the network’s founders decided on technology. The executive says some blog postings that the network has settled on near-field communication (NFC) technology are wrong. “That’s not a foregone conclusion at all,” he says. “There’s plenty of other technologies that don’t include NFC.” He notes that different merchants and industries have different needs, and the network’s technology offerings will reflect that.

 

Besides Wal-Mart and Target, the group includes Alon Brands Inc., a regional 7-Eleven franchise owner in Texas, as well as drug stores, fast-food restaurants, and vending companies, according to The Wall Street Journal, which broke the story. Working with the group is payments consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign, a frequent contributor to Digital Transactions.

 

“None of the systems out there today address what’s wrong with the payments system,” Mott argues, referring to what the group sees as the vulnerability of cards—and of mobile systems based on card networks—to fraud.

 

Still, for all their criticism of existing payments systems, the merchants don’t view banks and wireless carriers as the enemy. Mott adds that retailers “have been talking to banks and telcos for some time” in an effort to avoid disruptive rivalry.

 

But should it fly, a merchant network might challenge Google Inc.’s Google Wallet, the Isis joint venture sponsored by AT&T Mobility, Verizon Wireless, and T-Mobile USA, Visa’s V.me, and a host of other mobile-payment ventures.

 

If the early players in mobile payments “do not take retailers’ interests into account, they’re going to have problems getting launched,” says payments consultant Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group LLC. “Retailers demand a seat at the table.”

 

None of the retailers identified as network participants would comment publicly when contacted by Digital Transactions.

 

 

 

How EMV Is  in the Chips

 

With signs that the United States is gearing up to adopt chip cards, a major trade group announced last month that worldwide shipments of chip-embedded payment cards topped 1 billion in 2011.

 

North America accounted for some 88 million of the estimated 1.044 billion shipments, according to the Munich-based Smart Payment Association, whose members include six major chip card makers.

 

Surpassing the 1-billion mark for the first time represents “a real milestone for the industry,” Brian Russell, an SPA representative, said in March at the Cartes North America conference in Las Vegas. Russell is a senior vice president at Giesecke & Devrient, one of the SPA’s members. The other five are AustriaCard, Gemalto, Incard, Oberthur Technologies, and Safran.

 

The SPA members themselves accounted for 898 million shipments in 2011, or 86% of total shipments. The SPA estimated the worldwide total based on its member’s numbers and their share of shipments, he said.

 

With Canada wrapping up its move to chip cards and the U.S. “finally” showing signs of adopting the technology, North America is starting to take on greater prominence as a smart card market, Russell said.

 

Still, the North American market remains one of the smallest in the world, exceeding only South Asia, which accounted for 87 million total shipments in 2011. Europe, where chip cards began taking root over a decade ago, is still the industry’s largest market, with 367 million cards.

 

Of the chip cards the SPA members shipped, some 15% were contactless cards, up from 13% in 2010 and almost double the percentage in 2007. Contactless capability is seen as a key precursor to mobile payments based on near-field communication technology, which allows smart-phone users to pay at the point of sale by using a digital wallet and tapping their handsets on a contactless reader.

 

More than 80% of the contactless chip cards were of the so-called dual-interface variety, meaning they can be used in both contactless and contact terminals.

 

Some major U.S. banks and credit unions over the past year or so have begun issuing smart cards, chiefly to customers who travel overseas. At the same time, Visa Inc., MasterCard Inc., and Discover Financial Services have all released plans that include rules and incentives that are expected to accelerate movement by issuers, processors, and merchants to chip cards.

 

Visa, for example, has mandated that acquirers and merchant processors must be prepared to support chip card transactions by April 2013. It has also set April 2015 as a deadline for a shift of liability for counterfeit-fraud losses to acquirers, and by extension to merchants, in cases where merchants have not installed chip card readers.