For most of us 2020 isn’t going to be a year to linger fondly in the memory. It’s been a monumental slog in the face of grim news and little cheer but from a payments perspective we’ve seen an unsurprising surge in interest in all things payment related.
People have moved from cash to electronic payments – contactless transaction numbers have soared. People moved from face to face purchases to online. And, there’s been a ton of stress on payment systems as people have demanded refunds for holidays and flights they couldn’t take due to various travel restrictions. It’s been a year like never before.
We can expect this to be exacerbated over what will likely be an extended Black Friday and Christmas holiday shopping period. Online payments are expected to grow even though economies are in recession. For us in Europe it’s the last hurrah before PSD2 requirements on strong customer authentication come into force on January 1st. Merchants and payment companies will be well staffed on News Year Eve as they wait and see how the systems will hold up, and what sort of abandonment figures they’ll see as puzzled customers are presented with confusing authentication screens. We can probably expect a flood of concerned calls about phishing which are actually Strong Customer Authentication requests.
PayPal has been my most-used alternative payment system for years. The last time somebody sent me some money that they owed me it was through PayPal. The last time I bought something on eBay (yesterday, as it happens) I paid using PayPal. The last time I paid for an online service (file conversion) it was PayPal. If you don’t include my splendid Barclaycard sticker or my Starbucks app, the last time I bought something in a shop with my mobile phone it was using PayPal Here. I’ve had a PayPal account for many years.
Online they had a particularly strong proposition, which is that paying for anything with one of your cards is a total pain in the arse and so it’s easier tap pay with PayPal because you just click and type your password, and it’s safer to because they send you a one time code on your phone to enter when you need to log into your account. It’s been a pretty good system. And I can tell you that from the work that Consult Hyperion has done over the years, PayPal are pretty smart people who built a pretty smart network. I like PayPal.
But life is about to get tougher for them. While the people who run banks see PayPal as a newbie Internet-speed start-up, the truth is that to the people who are building payment systems now, PayPal is as much part of the establishment as the Federal Reserve or MasterCard. In a recent Finextra survey of bank executives, around four-fifths said that when it comes to new market entrants, their competition will come not from “challenger” banks but from PayPal as well as Amazon, Google and other e- and m- market players (*). Yet PayPal, it seems to me, is at much at risk from Google and Amazon as the legacy players are. All of which is a topic of conversation at the moment because of the eBay/PayPal split.
The nice people at the BBC asked me on to World Business Report to talk about the split on live TV, and I decided to focus on three main points (remember, you only have a couple of minutes, so you have to boil things down!) that help to establish the big picture. I was also interviewed for BBC World Service’s World Business Report by Sarah Stolarz (starting at 9m20s in) on the same topic.
I began by pointing out just what a terrific business PayPal is. They handled $235 billion in 2014 and that is growing around a quarter year-on-year right now. They have 162 million active accounts around the world, making them in effect a global digital wallet. They have built a convenient and secure proposition for the average consumer (although it has to be said that it is not universally popular amongst merchants). They have developed a range of products beyond the wallet, such as Express Checkout, PayPal Here (shown above), PayPal Credit and others. It’s not just about “e-mail money” any more.
My second point was that PayPal has, in effect, been decoupling from eBay for years. A few years ago, I had the privilege of having breakfast with John Donahoe of eBay with a couple of other bloggers and he struck me as very impressive leader and a very smart guy. He must, therefore, have seen this coming and taken steps to maximise the value of PayPal and to create a future for eBay without it.
The person-to-person origins of PayPal have, in a way, been re-interpreted through Venmo, which added a social component to inter-personal transfers and found immediate success. For the debit-card generation, Venmo provides an enhanced debit experience that they seem to find most appealing.
Venmo is growing by leaps and bounds. Last quarter, it processed $1.6 billion in transaction volume, and that was up 247% year-over-year [from the previous quarter.] Our strategy is to provide even more value to users and tie the Venmo community into the PayPal merchant marketplace so that they can use Venmo to buy things.
Finally, PayPal has been very active when it comes to acquisitions over the last couple of years and these look like providing a solid foundation for life as an independent payment system. They spent $890 million on Xoom so that they could cross sell Xoom’s services to their US customers and expand their presence in markets such as China and Brazil where Xoom has strong presence; they spent something in the region of $300 million to acquire the mobile wallet provider Paydiant; and they spent $800m to acquire Braintree, an API-focused payment gateway that provides online payment services the merchants. The acquisition of Braintree was, I think, especially important.
Braintree’s payment gateway helps businesses quickly and easily accept credit cards online. The technology takes care of processing transactions, securely storing customer data, accepting payments internationally, recurring billing, and so on, so merchants can focus on front-facing issues. It introduced Venmo Touch in limited beta earlier this year, which enables consumers to save credit card details on their iPhone so they can pay with one-tap across all Braintree powered apps.
I’ve bored people to tears with my “wallet is an API, not an app” talk so I”m going to have to add the new category of “unwallet” to my client presentation on the wallet roadmaps, to mean an API-based third party service that cloud-consolidates payment information for retailer apps, many of which will of course use Paydiant to access that API. They’ve been developing this approach for a couple of years.
Called Venmo Touch, the service is Braintree’s take on a one-touch payments service that works across multiple iOS apps. Customers enter their debit or credit card details once, for instance on HotelTonight’s app. That info is securely stored and automatically populated into any other app using the Venmo Touch network
But the world of secure and convenient online payments is no longer the safe space for PayPal, where it could chuckle in the face of 3D Secure and continue to ride the online commerce wave while experimenting at physical POS. POS has gone EMV and NFC, chip and contactless, and Apple Pay’s mindshare has cemented into place the architecture: strong authentication against a revocable token stored in tamper-resistant hardware. Having decided that NFC had no future a couple of years ago, PayPal is now making an effort to catch up again.
With PayPal’s mobile payments transactions volume increasing 40 percent year-over-year, the business is testing NFC payments prior to its imminent split from eBay, executives revealed this week
So, with Apple, Google, Samsung and others gunning for them in this world, what can they do? Well, yes, PayPal have not been terribly successfully at extending their franchise from online to offline, although I personally rather like PayPal Here as must be evident from the image earlier, but as I have said countless times before, it doesn’t matter. The future is about #appandpay, not #tapandpay and this must be, if I am reading the tea leaves correctly, where PayPal must strike. In Karen Webster’s excellent overview of PayPal’s horizons she said that “the payments problem to crack isn’t offline where cards work well and just about everywhere in the developed world, but online and via mobile where using card products is a real pain”. She goes on to say that:
But the competitors that I’d pop to the top of PayPal’s worry list aren’t Apple and Google and their “Pay” schemes, but Amazon and Alipay.
PayPal needs to build a better proposition in order to compete with these guys. And they can! With Braintree, Paydiant and Xoom (and their expertise in APIs) they can provide a flexible and open alternative to Apple Pay et al. A stable of retailers using Braintree to accept payments from apps using the Paydiant wallet to manage not only payments but loyalty, coupons, receipts and so on could form an attractive nexus for mass market consumers who expect to use their phone to pay in store, via the web and on the phone all in exactly the same way.
* Mind you, three-quarters of European bank executives claimed that their bank has a strategic programme at board level to take advantage of PSD2, which sounds on the high side to me.
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