We’re now in the midst of a new transformation of the payments space. Giants like Google, PayPal, American Express, Visa, VeriFone and Groupon are fighting for wallet share. (Although Apple hasn’t officially announced anything, it’s only a matter of time.) Dozens of startups such as Square, Gopago, LevelUp, Swipely, and Cardspring are trying to either carve out their niche or get acquired by one of the big guys.
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PayPal has significant consumer awareness and adoption, with 113 million accounts.
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The company has announced big initiatives to bring PayPal payments into the physical world. PayPal is now accepted at big box merchant Home Depot. At the other end of the spectrum, PayPal created an initiative called PayPal Here that competes head on with Square for the small and micro merchants.
PayPal has its challenges. It has a reputation of being difficult for merchants, providing a terrible consumer experience and being an unpleasant place to work.
I sat down with David Marcus, PayPal’s new president, at PayPal’s offices in San Jose to talk about the future of payments and PayPal. Marcus replaced Scott Thompson in March. After our conversation, PayPal PR took me through a tour of the PayPal Shopping Showcase, an impressive laboratory that PayPal uses to sell retailers on its vision of the future of mobile payments and to conduct consumer research.
Marcus wants PayPal to be a brand that consumers interact with every day. That’s a tall order; there are very few brands that do that.
“The beauty of payments is that you pay for stuff everyday,” Marcus said.
I left feeling that PayPal is thinking about the right problems in the right ways.
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Some in Silicon Valley look at PayPal’s legacy and its corporate parent and dismiss it. That’s a mistake. If I had to pick a winner today between Google and PayPal, it would be PayPal, hands down. But I’m equally confident that the folks in Cupertino will have something to say about this soon.
PayPal Here
Here is PayPal’s answer to Square. And after months of waiting, it’s finally here. I received my triangular dongle in the mail recently.
Marcus admits that PayPal was late to the party. Until now, PayPal hasn’t marketed Here, because it didn’t want to have a long line of people waiting for dongles before they could get them out. Marcus said that the dongles are now being shipped within a couple of days of a merchant signing up. PayPal plans to use eBay’s large merchant base as a marketing channel to reach small merchants for Here. Although he didn’t have a percentage, Marcus said that a large number of eBay merchants also have physical storefronts.
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Although the software isn’t yet as elegant as Square, Here provides merchants a more complete solution than Square when it comes to payments. In addition to accepting credit cards, merchants can deposit checks into their PayPal account. Unlike Square, funds are available to spend immediately through a linked debit card. For merchants who handle both online and offline transactions, Here is a clear winner. It is also marginally less expensive than Square; but merchants who are worried about that tiny difference should be using a regular merchant account.
PayPal at retail
PayPal is making a big push into retail, allowing users to pay with PayPal at Home Depot, Abercrombie & Fitch, and Jos. A Banks. I’ve been highly critical of the experience. Instead of swiping a credit card, consumers can enter their phone number and a PIN to pay.
Although it has value to PayPal and to merchants (in the form of lower transaction costs), I’ve been hard pressed to find a meaningful consumer value proposition today. So was Marcus. He sees the real value of PayPal at retail in the future. (He hinted at features that were in the works but didn’t share any.)
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The goal, Marcus said, was to make PayPal another option, not to displace existing payment mechanisms. “We have no ambition to process all the credit card transactions for Home Depot,” Marcus said.
Mobile payments
When it announced its quarterly numbers, eBay also announced that PayPal is expected to process $10 billion in mobile transactions this year. Although it’s always tempting to compare numbers, this number is very different from the $6 billion in transaction volume that Square is expecting for 2012.
The $10 billion comes from eBay users who complete purchases with PayPal on their mobile devices, as well as merchants who use PayPal in their mobile products. (Tablets are included in the $10 billion number.) PayPal Here and PayPal at retail aren’t included in that number, but I doubt they would be meaningful.
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Depending on the final tally for this year, I expect that to be between 5% and 8% of PayPal’s total transaction value this year.
I asked Marcus where he thought that mobile payment figure would be in five years. After getting the customary warning from a PayPal PR representative who was sitting with us, advising Marcus not to project numbers, Marcus said that in five years the lines will be so blurred that it wouldn’t matter. If someone researches a transaction online, reserves it, and then pays for it with a mobile phone, is that an online or mobile transaction?
“You won’t be able to tell the difference in that time,” Marcus said. “Everything will be converged.”
Those lines are blurring already. Yesterday, I placed an order using the new eBay Now app on my iPad. A courier picked it up from the Best Buy store in San Francisco and brought it to me. When he arrived, I used PayPal Here on his iPhone to pay. Is that an offline or online transaction? It it mobile or not?
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User experience
One of the biggest issues I have with PayPal is that, at every step of the way, the user interface is designed not to accomplish what I want to do, but what PayPal wants me to do. I never, ever want to pay with my checking account. I want to use my credit because of the consumer protection benefits and the Starwood points I get with my American Express. PayPal would rather have me pay with my checking account because it makes more money that way. It’s a sore point every time I pay with PayPal.
“That will change,” Marcus said.
He wants PayPal to be a consumer-centric company at the same time that it serves merchants. He didn’t specify a timeframe, but he said that mobile will help drive that change.
The small screen size forces designers to focus on the user’s most essential tasks. “It’s a forcing function for simplification,” Marcus said. “As a result of that, the Web experience will be a lot simpler.”
User experience also extends far beyond just a Web site or mobile app. It extends to every interaction with the consumer. “Historically, PayPal hasn’t been good at product marketing,” Marcus said. “This is a muscle we’re building.”
For a product like PayPal Here, this includes something as mundane as the packaging that the dongle arrives in. PayPal did a great job. To be fair, the packaging design is a blatant ripoff of Square’s package design. The one improvement I saw in an earlier PayPal Here package prototype — corrugated paper instead of foam — was replaced with plastic in the version being sent to merchants. But both companies ship the dongle complete with an attractive window cling that shows that your business takes credit cards and concise instructions on how to get started.
Data and interchange
Transaction data is going to be a big battleground. That’s one of the motivations for Google’s push into payments. Transaction data is one of the most powerful tools that can be used for offer targeting and personalization. I suggested to Marcus that some retailers may not want want to share line-item transaction information with a company like PayPal. He responded that PayPal already had more data than it uses.
The contention for data will also exist with card networks. Card networks have liked PayPal because many of its transactions have been additive. The eBay buyer who otherwise would have been using a money order means more volume, which translates into more data and more interchange fees for the card networks. But if a PayPal transaction replaces a Visa transaction at Home Depot, that means less data and less interchange.
PayPal Shopping Showcase
Inside its headquarters, PayPal has built a fake mall to showcase the future of payments. There’s a clothing retailer, a fruit stand, hardware store, grocery store and coffee shop. Josh Schoonmaker, the showcase’s manager, showed me around.
PayPal uses it to show retail executives how they can incorporate PayPal into their retail experiences. Schoonmaker showed off a number of concepts:
- A window display with QR codes. A shopper walking by when the store is closed can scan the QR code and order the item for pickup. When the order is placed, the clerk has access to the shopper’s history and can be prepared with upsells to matching items when the customer comes in.
- In the hardware store, we saw a barbecue grill that had been ordered online. It was paid for using the PayPal wallet, which contained a store gift card. An offer was automatically generated for a grill tool set.
- At the grocery store, we paid using a phone number. (This is the experience currently offered at Home Depot.) A receipt arrived by email.
- In the coffee shop, we could order ahead and walk to the front of the line to pick up our prepaid espresso.
Although some of these are just conceptual, they show that PayPal is thinking deeply about the best ways to integrate offline and online shopping experiences.
Just as important, PayPal is thinking about the right way to sell these concepts to merchants. Retailers are not technology visionaries. Having a tangible experience is key to selling them on the future of selling.
Shopping psychology
Shopping is not a perfectly rational activity. (How else can you explain Chia Pet?)
That’s something a lot of startups who are chasing the space fail to understand. A lot of psychology goes into a shopping experience, and just as much needs to go into trying to change it.
Schoonmaker explained that when you offer features like “skipping the line,” which allows users to order and prepay for coffee, there also needs to be corresponding signage. People are uncomfortable just walking to the front of the line and appearing to cut in front of everyone. Like elite lines at airports, there needs to be signs that implicitly give some people permission to cut the line. (And serve as a marketing vehicle to encourage other people to sign up for the service.)
You don’t get that by whiteboarding product features. The best way to get that is by watching consumers in action. (Paco Underhill’s “Why We Buy: The Science of Shopping” is a good read on the subject.)
PayPal also uses its showcase to introduce consumers to new concepts in payments and get their feedback.
Being part of eBay
Having a large business within a large business is always a challenge.
Of course, eBay was instrumental to PayPal’s early success. eBay users needed a way to pay. Before PayPal, paying online to small merchants was painful. I was an eBay seller back then. After an auction closed, I had to hound the buyer for payment. I provided my street address, the buyer went and purchased a money order, mailed it to me, I had to verify that it looked legitimate, then I shipped out the product. A best case scenario was a three-day turnaround, with many transactions taking a week or more. PayPal cut that time to minutes.
Even today, eBay accounts for about 67% of PayPal’s transaction volume, according to eBay’s quarterly report.
“We are blessed with an unbelievable business,” Marcus said. But the downside is that it provides the ability and incentive to not innovate, he said. It’s easier to just not rock the boat. But, “there is huge upside if we ship the right products.”
Recruiting and culture
eBay and PayPal have long had a reputation as terrible places to work, especially for engineers. As it happened, I was having lunch with a top engineer before my trip to PayPal. When I mentioned that I was headed to interview PayPal’s head, he expressed his disdain for the company’s culture. A friend who is a high-profile recruiter in Silicon Valley promised to smack me if I ever went to work for PayPal.
As with anything in Silicon Valley, being able to compete for top talent is going to be a big determinant of whether PayPal succeeds. I asked Marcus how he would compete with the likes of Square, which is often perceived to be the next hot startup.
Marcus said they’ve shifted from the old model where engineers and product managers sat far apart. Product managers would write 100-page PRDs and ship them over the wall to engineers who would build them without regard to whether the features made sense. A year later, you’d have a product that most likely didn’t meet the needs of a rapidly changing market. Now, they sit together and iterate more frequently.
As we chatted, Max Metral, who is leading up PayPal Here was walking by. He joined PayPal as part of the Fig Card acquisition last year.
“I’ve never had more fun,” Metral said. “And I’m at PayPal.”
PayPal also has more than 100 million people signed up. The payments business involves a lot of drudge work, including partnerships and regulatory regimes. (For example, to do what PayPal does legally, you must be a licensed money transmitter, which is a state-by-state process.) Much of that work has already been done, and you can just focus on building great consumer experiences, Marcus said.
Marcus said he has a lot of top engineers knocking on his door because of the new culture and PayPal’s significant resources.
Such statements are always hard to assess. Every big company claims it is like a startup and wants to empower employees and cut bureaucracy. Very few actually do. But Marcus’ pitch was convincing enough that I’d actually entertain a conversation, whereas a few years ago I’d never return a call from eBay.
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[Top image credit: PayPal]
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