The Challenge Confronting PayPal, Google, And Amazon

This is the third installment of a six-part series on how Web 2.0 developments are likely to transform the payments business. The online marketplace is morphing to payments embedded in top-line oriented-marketing services, and integrated infrastructure where small retailers can share the scale and cost savings of bigger players. Both shifts are setting the stage for migration to Web 2.0 applications, where payments become transparent and subservient to people-to-people interactions. PayPal, Google, and Amazon have the early momentum?if a new breed of innovators doesn't beat them to it It's the World Series of Poker in Payments: Mainline processors and independent sales organizations are on the sidelines, unsure of whether to play. PayPal Inc., Google Inc., and Amazon.com Inc. are at the table, betting freely and raising the stakes in the early rounds. All of a sudden, at the end of the table a relatively unknown player, Obopay Inc., shoves all of its chips into the pot and says, “I call.” Is this the moment Web 1.0 ends and Web 2.0 begins? In one fell swoop, this small mobile payments provider's announcement Jan. 12 that it was facilitating transactions on social networks both exposed how the conventional payment industry has been sitting out Web 2.0 commerce and called the bluff on the Web 2.0 strategies of the three big three payments innovators. How could this happen? First, most people probably didn't notice. Obopay is one of a large number of mobile-payments wannabes, and while its affiliations with major banking players Citibank and MasterCard make it a key company to watch, the announcement of its deal to provide person-to-person (P2P) transfers, donations to charities, and payments for purchases on a dozen social networks (including Facebook and MySpace) probably seemed like just one more oblique PR event. Second, how could any small startup aspire to initiate game-changing transformation of the venerable payments business? Third, and perhaps most important, even if payments get going on the world's biggest and fastest-growing social networks without the participation of the payments stalwarts?old or new?it's just a matter of time before they can catch up and replace the brazen upstarts.

Or is it? We know PayPal pretty much made a better mousetrap out of the merchant-services business by giving smaller online retailers an even shake on both service provision and pricing. It made international transacting easier and safer. And it amassed 165 million account openings by consumers willing to try a different way to pay.

The PayPal formula was so successful that while it certainly benefited by becoming the most convenient and effective way to pay for auctions on parent company eBay Inc., the payments offshoot in recent years has carried the parent, growing at nearly 30% a year to $1.8 billion in revenue.

With 60+% profit margins?thanks to loading accounts as much as possible with low-cost automated clearing house transfers but charging merchants average rates of 3.65% all-in for guaranteed payments?PayPal can easily afford to extend its business model into supporting digital content (discounting a typical 20-cent cost for a $1 song by half) and offering its “ecosystem” of buyers and sellers to Web 2.0 companies.

Google buries payments underneath its high-profile marketing services, such as paid search, Adwords, and customer analytics. Up to a certain level of their marketing-services purchases, Google merchants can get their payments free of charge. Until recently, the company was growing so fast it didn't even worry about payment “nuances” like chargebacks!

More significantly, once it figured out what it wanted to be, Google built the biggest, fastest-growing e-commerce business yet, amassing an estimated 60%-70% market share and approaching $20 billion in revenue. That's twice what all payment companies put together take out of the Internet. Some of Google's marketing innovations opened the door to Web 2.0 functionality, beginning with the brilliant nuance of user-based ratings of search relevance.

Amazon pioneered e-commerce with an obsessive long-term vision for reinventing retailing, enduring huge losses and investing more and more into mastering online technology as fast as it became available. It has also led the retailing world into harnessing the power of Web services and widget technology for building hundreds of highly efficient subsystems under the covers of online transactions that can be called upon to seamlessly support the consummation of a purchase.

Amazon was also an early Web 2.0 leader, as it was among the first to enlist its customers into building its business through credible book and product reviews, and uses them as guinea pigs for downstream product targeting based on prior purchasing histories.

Certainly, these Web 1.0 pioneers are capable of accelerating their movement into Web 2.0 and play catch up if newbies like Obopay gain any traction. PayPal started out as a 1999 merger of Confinity, a payments platform for the Palm Pilot, and X.com, an e-mail payments company for financial services. Five years later, after the acquisition by eBay, PayPal became the dominant growth model for online merchant services.

Back when it was just one more new search engine, Google recognized that Overture (formerly goto.com, a spinout of the old IdeaLab) had a better idea, offering pay-for-placement. So it adopted the Overture model and roared past it (even as it was acquired by Yahoo!) to the paid-search finish line.

Amazon always strove to be the biggest and best e-commerce company. It has relentlessly invested in its payments, risk management, computing, and data-management and services platform, and is nearly universally acknowledged as the biggest and best online operation. Letting a million affiliated small e-retailers share this platform just makes good sense: The infrastructure is already built, it has lots of capacity, and Amazon can't expect to sell everything to everyone. So why not build an ecosystem of its own around its infrastructure investment?

But as imposing as these three new-generation payments companies have been to conventional payments players, none of the three is a sure bet for Web 2.0 leadership.

PayPal appears to be struggling to get more traction with digital-content and Web 2.0 companies. Google's still looking for its next big business among hundreds of fledgling product initiatives. And Amazon, for all of its good-neighbor policies and posturing, is still viewed as a competitor by many online retailers. All three are increasingly butting heads against each other in a growing number of sectors where they've seemingly become tentative and cautious, such as mobile payments.

And with mainstream payment processors and providers still a no-show for Web 2.0, there really is an opportunity for another new generation of providers to offer embedded payments, integrated risk management, and other infrastructure, along with marketing services supporting personalization and permissioning. Look for a lot more announcements like Obopay's in the months ahead before the big players get back into the game.

Next week's article will present the case for how the behavior of GenYers on social networks and in other Web 2.0 venues will turbocharge the process of defining the new relationships between buyers and sellers, and why mobile-applications providers have both the time and opportunity to lead the charge.–Steve Mott