PayPal: The king of Web-based payments returns to its mobile roots

David Cotriss — Thu, 16 Oct 2008 13:20:03 -0400

(The following is part of the Standard's First To Market special feature) Every day, when millions of people make online purchases, they choose PayPal as their payment method. Convenience has proven to be a powerful attraction, allowing users to pay in virtually any way they prefer, including credit cards, bank accounts or buyer credit. Widespread adoption by merchants is another reason for PayPal's success. The service now has over 60 million in-use accounts worldwide. PayPal doesn't share payment details with merchants, therefore creating a higher perception of security for some consumers.

PayPal was founded in 1998 but didn't open to the public until October 1999. Early PayPal product development focused on allowing people to "beam" money to each other using handheld devices, but it quickly became clear that sending money instantly via the Internet had much greater appeal. PayPal got a major boost when it was acquired by eBay in October 2002 for $1.5 billion in stock.

Emmett Higdon, senior analyst for eBusiness and channel strategy at Forrester Research, tells The Industry Standard via email that PayPal had no real competition early on due to its unique model. "PayPal was unique at the time because users were able to send money to someone with no other information except for an e-mail address," Higdon says. "No bank account number. No routing number. No personal information. The anonymity of the transaction appealed to both senders and recipients."

Higdon also outlines the early competitive landscape. "[Early] competitors (including the Citibank competitor, c2it) could not match the ubiquity of the PayPal service. eBay wisely saw that this was the case, folded its own competitor Billpoint and bought PayPal."

He says other early competitors included Cybersource's BidPay and Yahoo's PayDirect. None of these services are in operation today. "No other service could match PayPal's user base. Other services like Yahoo and Citibank's c2it could leverage their brand awareness to build scale, but were simply too late to the game to seriously threaten PayPal," Higdon says. Current competitors include Google Checkout, ClickandBuy and Amazon Flexible Payments Service (FPS).

Gartner research director for banking and investment services Kristin Moyer cites PayPal's early lead and profitability as helping to sustain the service, but also points to its acquisition by eBay. "eBay acted as a significant recruitment engine for both consumers and merchants, allowing PayPal to establish a critical mass of users that was both profitable and that could be leveraged for other payment services," Moyer explains.

But this doesn't mean PayPal has become dependent upon the eBay connection. "Fifty percent of PayPal's transaction volume currently comes from outside eBay," Moyer notes. "PayPal has focused on its arbitrage role between the card industry and merchants, allowing online merchants that were unable to accept card payments to trade electronically. It also now wins business from larger merchants that are already able to acquire card payments (for example, airlines), with more attractive pricing models."

PayPal is also gaining traction in newer areas such as social networking. "Financial social networks create new payment requirements [such as] how to make the funds transfer and repayments," says Moyer. "For example, Kiva [a site that arranges loans to entrepreneurs in developing countries] is using PayPal to do this. . . . With regard to social networks [such as MySpace and Facebook], you can create a widget on one social network that can easily be ported to another social network. For example, on Facebook, you can create an application using a widget created from Chipin for Dell. It makes a request to friends/families to make a donation to buy a PC using PayPal," she says.

Several recent innovations are also helping keep PayPal ahead of the competition. In 2006, PayPal introduced PayPal Mobile to allow consumers in the U.S. and Canada to send money using their mobile phones, echoing the service's original focus in the 1990s. Perhaps more significantly, PayPal made its service even more secure through the introduction of the PayPal Security Key in January 2007. PayPal also launched a service called PayPal Pay Later in August 2007, offering buyers the option to defer payments for purchases on participating merchant sites, with financing options such as no payments for 90 days. While similar services such as Bill Me Later exist, PayPal's enormous user gave this feature an immediate, built-in boost.

The future looks promising for PayPal, but there are significant challenges. "International is still an enormous market for PayPal that it has yet to crack," Higdon says. "Mobile, however, will be the biggest challenge, and opportunity, PayPal has faced. Everyone from VISA and MasterCard to major financial institutions to mobile carriers is working on mobile payment initiatives -- any of which has the potential to disrupt PayPal's business model."

Read the rest of the First To Market special feature: