PayPal and Its Quest for Ubiquity (June 2013)

By Bill Grabarek, Senior Editor

Having already garnered a “substantial” chunk of the online payments business—approximately one-fifth of the $225 billion U.S. e-commerce market, according to Aite Group Senior Analyst Rick Oglesby—PayPal has set its sights on brick-and-mortar payments.

While Don Kingsborough, PayPal vice president of retail and prepaid products, for months has been banging the drum of achieving “ubiquity at the point of sale,” the San Jose, Calif.-based online payments processor methodically has been forming partnerships and launching pilots to reach that goal.

PayPal’s brick-and-mortar strategy includes: a Discover deal that will enable more than 7 million U.S. merchants that accept Discover to offer PayPal as a payment option without POS changes; NCR’s integration of PayPal as a payment option within the NCR Mobile Pay app; agreements with Dollar General and 7-Eleven to offer the Paybefore Award-winning PayPal Prepaid MasterCard in their stores; and in-store pilots in the Netherlands, Australia, France, Costa Rica and Singapore.

“They’ve got a good strategy; they’re trying lots of different approaches and not putting all of their eggs in any one basket,” Oglesby tells Paybefore. “There have been lots of failed new payment brands, so the exploratory approach makes tons of sense.”

Though Anuj Nayar, PayPal’s senior director, global communications, says PayPal doesn’t have aspirations of becoming the “fifth network,” Oglesby says the company is looking to redefine what a payment brand is. “I wouldn’t necessarily say they’re going head to head with the payment networks, rather they are creating a new type of network.”

Where Does It Hurt?

Many industry players have said the road to mobile payments is not about payments; it’s about the shopping experience. And, with numerous electronic wallets vying for the attention of consumers and retailers, PayPal believes the near field communication (NFC) focus of many mobile wallets largely has been off the mark.

“A lot of technology has gotten ahead of consumer adoption because it’s not clear what problem it addresses. The question becomes, ‘What is the pain point you’re trying to solve?’ We don’t think it’s payments at the POS,” Nayar says.

The problem rests in the complexity of a consumer’s life and the friction between consumers and retailers and, according to Nayar, saving consumers time and money and removing any inconveniences is “real, tangible value.” PayPal believes it’s in a unique position to remove such friction because of its more than 120 million active PayPal accounts and millions of online and (by the end of 2013) millions of offline acceptance locations.

Oglesby agrees that PayPal is well-positioned because it has a complete, self-contained ecosystem with direct relationships with consumers and merchants, and feature-rich products and technology that fits between them.

“On the merchant side, PayPal will have near ubiquity in offline payments later this year [through Discover], but it won’t have much in terms of consumer enrollment and utilization offline. Just giving consumers another [payment] option is not going to drive offline adoption, either,” Oglesby continues. “The big challenge will be to get consumers to change behavior and adopt PayPal solutions in the offline arena. Consumers aren’t out there looking for new ways to pay.”

Adding Functionality

Because of PayPal’s direct relationship with consumers and merchants, Nayar says PayPal is able to mitigate any friction, both merchant-specific and universal, by adding features to the existing payments infrastructure. For example, at Jamba Juice, where customers can order complex juice drinks with multiple ingredients, the possibility of long lines is a real issue. In January, PayPal said it was testing an order-ahead feature at the Jamba Juice in Emeryville, Calif., enabling consumers to use their PayPal apps to order, choose a pick-up time, pay from their mobile devices and pick up their orders—bypassing the lines to order and pay. A similar order-ahead pilot is in progress at 30 McDonald’s restaurants in France and at a coffee shop chain in Hong Kong.

The Home Depot, with its massive inventory and possibly cumbersome stock, presents an entirely different scenario. Consumers who might have trouble getting their purchases home—perhaps, because of the items’ size or they live in an urban area and don’t own a vehicle—soon will be able to shop in the store and have the items delivered.

Some of the more universal pain points for consumers and merchants pertain to loyalty, coupons and gift cards. PayPal’s digital wallet will track these features and automatically prompt the consumer or cashier to redeem a special offer, for example. Another feature is the e-receipt.

Consumers can opt to save digital receipts to their accounts rather than receiving paper. The e-receipt feature is available now, and the gift card and loyalty features are being tested.

The driver to improve the shopping experience is “removing complexity from the consumer and taking care of them on the back end, whether it’s automatically applying a gift card, tracking rewards or electronically storing receipts,” says Nayar.

While some industry players are betting on the eventual mass adoption of NFC, PayPal is using several technologies that don’t require merchants to purchase hardware.

“NCR, for example, isn’t going to replicate PayPal technology and PayPal isn’t going to ask millions of retailers that already have a relationship with NCR to rip out their existing systems and replace them with ours,” Nayar explains. “We’re saying, ‘Work with the infrastructure you already have to bring some of these new experiences to life and drive real value to the consumer.’”

Aite’s Oglesby believes diversifying technology is key. “PayPal probably has the most diverse strategy of the major players, but we’re seeing diversification from all the players,” he says. Examples include Google’s October announcement of a next-generation Google Wallet and its exploration of various “bridge solutions” until NFC phones are widely available; Visa and MasterCard are in beta with cloud-based wallets; Isis is testing its solutions in Salt Lake City and Austin, Texas; and Square added e-gift cards to its wallet last fall.

Lessons Learned

Through its numerous global pilots and the PayPal Shopping Showcase storefronts in New York City and San Jose, Calif., where the public can sample PayPal’s technology and vision for the future of retail, PayPal is learning what consumers really want. And, Nayar admits, some of those lessons have been surprising. Sometimes it’s the simplest things that impress consumers most, he says.

“We’re walking consumers through these incredibly in-depth examples of what’s going to be possible, and one of the things they loved was one of the easiest [to implement]: e-receipts,” Nayar says.

“There are many consumers who don’t want to deal with bits of paper. They want to be able to track receipts and store them digitally.”

When testing its order-ahead feature, PayPal also learned consumers hate skipping ahead of others in line. “They just don’t feel comfortable doing that,” says Nayar, so PayPal recommends merchants set up a specific line for customers who’ve ordered ahead. “These examples are at the most basic level, but drive real consumer utility as opposed to just being technology for technology’s sake,” he says.

As the company continues to grow its offline business, Nayar says PayPal is helping merchants develop an omnichannel strategy to meet the demand of a growing number of consumers who want the option of shopping at the store, online at home or using their mobile devices.

“It’s all about driving consumer choice and flexibility.”