Inside the Black Hole

PayPal continues to grow at an incredibly fast rate for a company of its size and it now accounts for 40 percent of its parent company’s revenue, according to eBay’s latest regulatory filing. In the first quarter of this year, the payment processor has brought in $1.3 billion in revenue, a 32 percent increase on a year-over-year basis. And there is no reason to expect its growth to slow down.

PayPal has been very aggressive in its pursuit of opportunities in the quickly expanding and diverse field of mobile payments. Moreover, the processor has the resources to compete in several different sub-sectors of the fledgling industry at once and has not been afraid to use them. At least one of PayPal’s mobile initiatives – the Square-like PayPal Here – which was launched just over a month ago, is already showing all signs of a huge success and for good reason. But this is just one element of the processor’s multi-prong m-payment strategy, which is designed to appeal to both consumers and retailers. And it is already bearing fruit.

PayPal by the Numbers

We don’t usually do reporting on companies’ financial performances, but let me just briefly quote the headline numbers concerning PayPal’s Q1 2012 performance out of eBay’s quarterly report, just to give you an idea of the type of growth the processor is experiencing.

Payments revenue grew by 5.6 percent on a quarterly and 31.9 on a yearly basis. Revenue from transactions increased by 5.1 percent and by 29.0 percent, respectively. Total payment volume (TPV) rose by 1.5 percent and 22.5 respectively, respectively.

PayPal continued to add more than 1 million new accounts per month in the first quarter, ending it with almost 110 million active accounts. The processor’s latest mobile payments initiative – PayPal Here – has attracted more than 200,000 subscribers since it went live in the middle of March and the sign-up rate was 1,000 per hour during its first day of availability.

PayPal’s Mobile Initiatives

PayPal has been very busy on the mobile payments front. A couple of months ago the processor entered the physical retail territory for a first time through a partnership with Home Depot. Consumers can now check out of more than 2,000 of the home improvement retailer’s stores with their PayPal accounts by entering their mobile telephone number and PIN. The biggest news, however, and the one that best demonstrates just how committed PayPal is to making this a success, is that the processor is in effect subsidizing Home Depot’s credit and debit card processing cost, making up for its losses from bank card transactions with the very high-margin profits it gets when PayPal users fund the purchase amount from their bank accounts.

The processor’s other recent big mobile payments initiative was PayPal Here, the Square-like service that enables everyone to accept credit and debit cards for payment through their phones. And as our initial review of the service showed, PayPal Here is better than Square, for two major reasons and a couple of smaller ones. Firstly, it provides users with an immediate access to their funds and secondly, it comes with live customer support. Additionally, PayPal Here’s pricing is marginally better and it offers a couple of extra payment choices (PayPal and checks), which are not supported by Square. Here is what we wrote back then:

So PayPal has set new standards for the industry and they are quite high. Square will be forced to build its own live customer support center, which it should have done long ago anyway, but probably didn’t want to invest any precious resources into it. But whether or not Square will be willing or able to match PayPal’s immediate funding provision (Square takes a couple of days to make funds available to its users) and lower rate remains to be seen. What is certain is that few others will be able to come anywhere close to that.

In other words, the barrier to entry into the direct payment acceptance segment of the mobile payments industry has been raised very, very high.

Busy as it was in the first three months of the year, PayPal also found the time to acquire Tabbedout, a start-up that enables its users to pay their restaurant and bar tabs through their mobile phones. It was a small acquisition, but it nevertheless demonstrated yet again just how heavily invested the processor is betting on the future of mobile payments.

The Takeaway

PayPal gets mobile payments, as evidenced by the rapidly rising share of the m-payment portion of its processing volumes, and that share is set to keep growing. We don’t have any information on how well its Home Depot test is going, but we do know that people love PayPal Here, which, barely in its second month of existence, is already a fifth of the size of Square, which has been around for a year and a half. And PayPal’s success is well-deserved and there is no secret to it. The processor’s m-payment offerings are very good!

Image credit: PayPal.

Barclaycard, a large British card issuer, is upgrading the NFC-based mobile payment service it launched a year ago, we learn from various news reports this morning. Just as the original version, known as Quick Tap, the new service, named PayTag, enables users to make payments by waving their phones by an NFC-compatible point-of-sale (POS) terminal. The news is that PayTag charges the transaction amount directly to the user’s credit card, a sticky version of which is attached to the cardholder’s phone. By comparison, Quick Tap users had to create a separate payment account and transfer funds into it. So the new version is simplified and more consumer-friendly than the older one.

However, PayTag falls far short of what’s required of a mobile payments service in 2012, for a couple of reasons. Firstly, it is nothing more than an incomplete copy of just one of its user’s credit cards and secondly, it places a very low limit on the allowable transaction amount, which requires consumers to have a back-up payment plan. In other words, users would still have to carry their physical wallets. So what’s the point?

How PayTag Works

PayTag is an adhesive credit card, about a third or a quarter of the standard size, which is attached to its user’s phone, allowing her to make payments by waving the phone by a compatible point-of-sale (POS) reader at a participating store. Barclays claims that there are “over 100,000 contactless readers across the UK” and the list includes fast-food chains Eat, SubWay, MacDonald’s and Pret A Manger, among others. At first, PayTag will only be available by invitation, but eventually every Barclaycard holder will be offered the upgrade, we are told.

A relic from the Quick Tap days is the limit of £15 ($24) on the amount of a single contactless purchase, which is set to increase to £20 ($32) at the beginning of June. No PIN entry is required for any PayTag transactions (remember that U.K. payment cards contain an EMV chip, so the verification method is PIN entry, not a signature, as is the case in the U.S.).

What’s the Point?

The BBC calls PayTag’s announcement “the latest salvo in the battle to launch a digital wallet,” which I guess it might be, if one could muster the imagination necessary to see it as such. More than likely, however, is that PayTag would be seen in retrospect as a dead-end turn in mobile payments’ evolutionary path.

To begin with, PayTag is nothing like a mobile wallet. It is just an adhesive extension of a credit card that can be used for completing contactless payments. However, many regular credit cards already support contactless payments. The way I see it, the only novelty here is that a card is attached to its user’s phone.

And the thing is that you would still need to carry your regular credit card, in addition to the sticker. Why? Well, once it’s increased in June, the PayTag transaction limit will be the equivalent of $32. I don’t know about you, but most of my credit card transactions are for larger amounts. For example, my average payment at gas stations is around $65 or so (and gas is far more expensive in the U.K than it is here in the States) and it is about the same at grocery stores. In fact, the only swiped transactions that are consistently below the $32 threshold are my Starbucks payments. So yes, I would still need to carry my real credit card, along with the rest of my wallet’s contents. So really, what’s the point?

The Takeaway

Mobile payment technologies promise to enable us to complete payments faster and easier than we can currently do. Eventually, they may allow us to store all of our payment account information into our phones and free us from the necessity of having to carry our physical wallets around. These are goals worthy of pursuing.

However, Barclaycard’s PayTag is not bringing us any closer to achieving these objectives. It merely adds yet another payment tool, an imperfect copy of one that we already have, into our arsenal. It wouldn’t necessarily be inconvenient to have it, but it would also not make our checkout experience any better or indeed, any different.

Image credit: Barclays.

Starbucks has been extremely successful with its mobile payments platform, Venture Beat’s Jennifer Van Grove reminds us today. The coffee chain has processed more than 42 million m-payment transactions since its Mobile Pay platform was launched in January 2011, Van Grove tells us. Back in December, Starbucks reported that “there have been 26 million mobile transactions to date,” so evidently the growth rate is accelerating.

As regular readers know, we have been covering the latte maker’s progress on the m-payment front since its platform was still in a test mode a year and a half ago and have praised it for its simplicity. And yet, we always felt that Starbucks’ Mobile Pay was not the most consumer-friendly way to do mobile payments. In our very first post on the topic, we asked:

Would you want to have to use a separate app for each retailer and provide sensitive personal information over and over again?

Well, just as it was the case in November 2010, the answer to this question today is unequivocally negative.

Starbucks Mobile Pay

Mobile Pay’s success is in large measure due to Starbucks’ decision to build their m-payment platform around an existing and distinctly unglamorous technology. At a time when the near-field communication (NFC) technology was all the rage and seemingly everyone started building digital wallets around it, Starbucks chose to rely on the far more prosaic 2-D scanning devices that they already had deployed in their stores and linked to the point-of-sale (POS) terminals. And consumers loved it.

Here is how it works. Before you can use your phone to pay for your latte, you need to get the Starbucks prepaid card, which is the only payment method you can use with Mobile Pay. Then you need to download Starbucks’ mobile app, link your card to it and you can start using it. Whenever you are ready to check out, the app will display a 2-D barcode on your phone’s screen, which will be scanned by the barista and the payment will be completed. When you need to replenish your prepaid card’s balance, you can do so using PayPal or a credit card.

There Must Be a Better Way

So if Starbucks customers are so eagerly adopting its m-payment service, why am I still not embracing it? Well, I have a couple of issues with Mobile Pay, both of which have to do with limitations.

My first issue is that Mobile Pay can only be used at Starbucks locations. By contrast, all digital wallets are designed to allow users to make payments at any participating merchant. Of course, the mobile wallet concept suffers from its reliance on NFC, which requires that existing POS terminals are retrofitted or replaced with ones that are NFC-compatible, which is both expensive and time consuming. However, when (and it is not “if”) the infrastructure is in place, consumers will be able to use one service for payment at any merchant. The alternative is that we download an app for every retailer whose stores we are frequenting and get one of its prepaid cards. And that brings me to my second issue.

I, and many other consumers, just don’t want to be using prepaid cards, even ones that are as good as Starbucks’ (and it is a good one, as prepaid cards go). There is absolutely no reason anyone with an access to credit cards should be using prepaid cards, which have no effect on your credit history and offer no rewards. And anyway, why should I get a card, which I can only use at Starbucks? Should I do the same for Whole Foods, Trader Joe’s, Marshalls? Where does it end? It just makes no sense to me.

The Takeaway

A digital wallet that supports all types of cards, as well as other payment methods, and places no restrictions on the locations where it can be used for payment, would be a much more consumer-friendly service than Starbucks’ Mobile Pay. It will truly be a digital version of our leather wallets and I believe that it will become just as indispensable. Well, Google Wallet is already offering that, but it is not doing well. Isis will be launching this summer, but only in two cities.

The major issue, as I already mentioned, is that the infrastructure is not yet in place. Additionally, there are only a couple of NFC-enabled smart phones that are currently available, although that will change by the end of the year. So it is a question of time and while we are waiting, Starbucks will keep gathering steam.

Image credit: UKMobilereview.com.

The fact that Google Wallet – the search giant’s heavily publicized mobile payments service – has been slow to take off shouldn’t come as a big surprise. After all, at present there are only two phones that can work with it and there is only one carrier that sells them. Moreover, that carrier – Sprint – is only the third-largest in the U.S., with about half the number of subscribers boasted by each of the two biggest wireless telecoms – Verizon and AT&T.

And yet, Google is unhappy with the progress of its digital wallet and is looking for ways to spur adoption, Bloomberg’s Olga Kharif tells us. But there is a problem: Verizon, AT&T and T-Mobile have invested heavily in a mobile wallet of their own – Isis – that is supposed to go live later this year and are not exactly keen on helping Google take the early lead. So what’s a search giant with plenty of cash on hand to do? Well, there are really only two possible alternatives – work either with or around the carriers – and apparently Google is in the process of weighing the relative value of these strategies against each other. And whatever decision the Google executives make, they’d better get it right, because it will not be easily reversed.

What Does Google Want?

From a consumer’s perspective, Google Wallet, and any other digital wallet for that matter, is a payment tool. It simply lets you store credit and debit card information and then it allows you to select one of the cards for payment at a participating merchant.

However, that’s not how Google sees its latest payment service. Google Wallet’s primary function, as far as the search giant is concern – is data collection. These data can later be used by participating merchants for targeted ad campaigns, for a price. So early on Google decided that it didn’t want any share of the payment processing fees, which it wouldn’t have received even if it had asked very nicely for it, and it focused instead on the data piece of the equation.

That was the right decision, although apparently not an obvious one. Isis – Google Wallet’s as-of-yet dormant competitor – initially decided to build a closed system, in which the company would be issuing the cards, processing the payments and managing the data. That would’ve been a potentially immensely profitable venture, but it was even more difficult one to build. It took many months of precious time for the Isis executives to finally realize just what they were getting themselves into and they eventually decided to scale down the project’s ambitions to Google Wallet’s level. I’m still amazed with the sheer cluelessness of the Isis management. As a result, Google got a huge jump start on its competitor.

Google’s Way Forward: Bribe the Carriers or Sidestep Them

Isis’ misfortunes notwithstanding, Google has not been able to make much headway with its digital wallet for the reasons I already mentioned. Now, one of them – the scarcity of compatible devices – will soon be resolved, as all major handset manufacturers are expected to release phones supporting NFC (the data transmission technology behind Google Wallet) by the year’s end.

But what can Google do with the carriers? Verizon – the biggest one among them – has blocked Google Wallet, citing security concerns (which are not entirely unfounded). The search giant claims to have resolved the issue, but the ban remains. And now Bloomberg tells us that Google is attempting to bribe its way into Verizon’s system by offering a piece of the advertisement revenue pie, which really is the only thing it has to offer.

It will be interesting to see whether Verizon (as well as AT&T and T-Mobile) will take Google up on its offer. On one hand, doing so would hurt the prospects of Isis, the trio’s own digital wallet. However, if the carriers reject Google’s advances, the search giant might sidestep them altogether. But then, Google may decide to do so anyway and is in fact already exploring carrier-free possibilities. As Bloomberg reports, Google is working with manufacturers of point-of-sale (POS) terminals for a solution that would enable payments to be authorized between the merchant and Google, sidestepping the carrier. It’s not immediately clear how that would be done if Verizon keeps blocking the Google Wallet app from being downloaded by its users, but it’s also not an insoluble problem. If all else fails, the search giant can possibly resort to NFC-enabled stickers, which Google Wallet users can attach to their phones.

The Takeaway

Verizon cannot just keep blocking Google Wallet forever. Whether it decides to work with or against Google, the carrier will have to at some point allow its users to download the app. So I think that Verizon and its competitors will be happy to reach some kind of a revenue-sharing agreement with Google, if one was offered. Google, for its part, doesn’t really need to share the loot. If payments could be reliably authenticated without the carriers’ help, why share anything with them?

Image credit: Google.

I would never have guessed it, but it now seems very probable that sometime soon we will have just as many different types of Square-like credit card acceptance platforms as we now do point-of-sale (POS) terminals. But the launch of such a service by Eventbrite – a website that enables users to plan events and sell tickets for them – has opened my eyes to the possibility.

And it does make sense. Eventbrite could just let its customers take payments through Square, PayPal Here or some other service provider, but doing so would deprive it from the transaction fees that payment processors collect. And these fees are not to be ignored. Of course, the company gives a different reason for its decision to build a proprietary payment service – that doing so allows it to capture customer data that the Squares of the world would not otherwise have made available – but that assertion doesn’t hold any water. Let’s take a look at what Eventbrite has done.

Eventbrite At The Door

So At the Door, as the new payment acceptance service is called, is available exclusively for Eventbrite users. It is designed for iPads and it requires that users first download the free At the Door app and buy the card reader (it costs $10, but the money is later refunded) that plugs into the tablet’s charging dock. An optional printer can be added for about $300.

The At the Door event set-up process is not in any way different from the standard Eventbrite set-up procedure and users can still collect customer payments online. The difference, as the name implies, is that At the Door now makes it possible to collect card payments on location.

Eventbrite charges a flat 3 percent fee for At the Door credit and debit card payments. I wasn’t able to find any other pricing details, so I don’t know if there is a higher non-qualified fee for key-entered payments, which is what all Square-like service providers do. What is known is that the processing fee is in addition to the 2.5 percent plus $0.99 per-ticket fee charged by Eventbrite.

At the Door vs. Square

At the Door is a slick card acceptance tool that will surely be put to good use by any iPad-armed Eventbrite user who ever needs to sell tickets on location. Last-minute attendees will also love the convenience of being able to pay their ticket by a credit card.

And yet, useful as it is, At the Door could never compete with Square and PayPal Here on its payment acceptance merits alone. And Tamara Mendelsohn, Eventbrite’s VP of marketing, has been more than a bit disingenuous when she told the New York Times that her company chose to build At the Door, because

[T]hird-party payments companies like Square do not make available the data they capture about the people who are buying those tickets at the door.

In reality, Square Register does provide its users with plenty of customer data and much better reporting capabilities than what At the Door seems to offer and it costs less to boot. And everyone can see that on Square’s website:

Find out which of your customers are loyal to your business based on how often they visit or how much they spend. Reward your Regulars with special discounts and a personalized experience.

I really wish that the NYT had challenged Mendelsohn’s assertion.

The fact is that Eventbrite has gone into the POS card acceptance business with the goal of collecting some extra revenue. Yes, At the Door is a neat way to take cards, but then anything looks neat on an iPad. And anyway, as I said, there are cheaper and more powerful ways to do that.

The Takeaway

But there is a bigger lesson to be learned from the At the Door launch than the knowledge that one service provider’s executive has made a less-than-accurate statement about a competitor. I do have to reiterate, though, that Mendelsohn’s statement is rather exceptional in its disregard for the facts. It would’ve been OK if she had said that At the Door gives Eventbrite users a better way to collect customer information than anything currently available. I don’t think it would have been a correct statement, but it would have left room for interpretation. But to say that no other processor makes available to its users the data captured about their customers is simply incorrect.

Still, what the story teaches us is that certain B2B service providers, whose platforms incorporate some type of a third-party payment acceptance solution, can quite easily turn into a Square or PayPal Here, under the right circumstances. Such businesses don’t necessarily have to be all that big, but they do need to be well-placed. And the potential reward is well worth the effort.

Image credit: Eventbrite.