Is PayPal Inc. friend or foe to banks? With 65 million accounts, the San Jose, Calif.–based unit of eBay Inc. has emerged in the past decade as a dominant player in online payments, where it competes with bank-issued credit cards, and more recently has been moving into mobile payments, another arena where banks are trying to play. In March, PayPal announced a deal with Research in Motion Ltd. (RIM) to be the only payments application on RIM’s Blackberry App World’s Mobile Application Store.
PayPal critics are vociferous about the threat banks face. Consultant Steve Mott, blogging in the BAI Community, complained that “every time PayPal loads from a user’s ACH account, bank card money comes off the table and into PayPal’s pocket.” Likewise consultant Stephen Bohanon, during a recent BAI Webinar, cited PayPal as the greatest single threat facing banks in the payments space.
PayPal, not surprisingly, begs to disagree. During a presentation at last November's BAI Retail Delivery Conference & Expo, president Scott Thompson presented his San Jose, Calif.–based payments provider as a potential ally for banks and proposed that the two sides work together to link bank deposit accounts directly to PayPal accounts. PayPal currently funds its accounts from banks via the Automated Clearing House (ACH) — which lacks same-day funds availability, and through credit cards.
Thompson warmed to this theme of PayPal-as-bank-ally in an interview with BAI Banking Strategies conducted the same day. His main argument is that PayPal’s services stimulate online commerce in general, which ultimately works to the advantage of banks. Rather than winning in a zero sum game, he said, PayPal is expanding the game, which provides a seat for everyone at the table.
“While I wouldn’t say that we’re the greatest service ever invented for banks, I do think we’ve enabled electronic transactions that otherwise just wouldn’t happen,” Thompson said.
Q: How does PayPal work with banks in this country? Is your model cooperation, competition or a combination of both?
Thompson: We’re completely complementary to what the U.S. banks have done and what they will do in the future. Now, banks may say: how does that make any sense? Aren’t you competing against us for the same customer, for the same payment model?
| I think if you took the time to decompose all of the payment volume that goes through PayPal, you would see that the majority is payment volume that wouldn’t have otherwise happened. The small seller on eBay, the small seller with a Web site, doesn’t have access to the banking system to handle payments. PayPal can enable that transaction electronically in a risk-managed, secure way. |
So I think the majority of our volume is additive and, therefore, complementary. And that will be the case for some time to come.
When we talk to consumers around the world, three out of four times they tell us they would shop more online if they felt secure, if they weren’t afraid their financial identity could be compromised. They’re worried and anxious. At PayPal, we enable transactions for small businesses, for cross-border businesses and for this population of people who are nervous. While I wouldn’t say that we’re the greatest service ever invented for banks, I do think we've enabled electronic transactions that otherwise just wouldn’t happen.
I might mention that we consciously balance between merchants and consumers. Unlike almost everybody else, we run a closed loop system. By that I mean PayPal is used on both ends of the payment. We have a relationship with the merchant and we have a direct relationship with the consumer and therefore balance or equilibrium is very important to us.
Consider this example: if you’re an online merchant in Germany, there’s a standard method for German consumers to purchase from you. Customers go online, they’re redirected to their bank, they give the bank their secret code number and the bank pushes the money to the merchant.
Now, if you’re an Italian who wants to buy something from this German Web site, how do you do it? In the U.S., we would just pay with Visa, MasterCard or American Express, but the Italian doesn’t have Visa, MasterCard and Amex and the German merchant doesn't accept those cards — at least if they’re a small merchant. So the Italian consumer has no way to initiate that transaction.
When you put PayPal in the middle, you provide value to the merchant because you enable a whole set of cross–border transactions that wouldn’t otherwise be possible. And it’s not just Italy to Germany. If you look around the world, it’s amazing how different the payment standards are in various markets.
Q: Do you see PayPal’s major strategic opportunity as residing overseas?
Thompson: We will, over time, fully enable our payment system in all 190 countries that we operate in. When you look at our quarterly earnings, you’ll see two phenomena in our business.
One, our off–eBay business is growing very dramatically. Two, our international business is also growing very dramatically. And that’s because we solve problems that others, for whatever reason, haven’t focused on.
Our vision is really to be the world’s favorite way to pay and be paid because it truly expresses our aspirations over a very long period of time.
In terms of accomplishing our goals, there's a long, long road in front of us. Inside the organization, I tend to say that we’re in the first inning of at least a nine–inning baseball game. I think that’s true overall with payments. We just look at ourselves as kind of a value–add on top of existing banking systems and payment networks, so there’s a long way to go.
Q: What sort of initiatives are you working on to advance that strategy?
| Thompson: I would say we continue to singularly focus on one thing and that is online payments. That’s it. You won't see us veer off course on that. We have a great value proposition for merchants online — helping them sell their wares to consumers around the world. | |
So for us, as boring as that may sound, it really is more of the same: more integration into local banking systems around the world, more currencies, more languages and more localization. It's bringing the PayPal service to more and more people in the 190 markets that we service today.
I recently spent some time in China, for example, where we have a good business. But it’s very early; we’re just scratching the surface in that area. We’ve got a lot of work to do there because we haven’t fully localized our payment system and we haven’t fully enabled it to interact with the banking system the way it does here in the United States.
For example, we haven't enabled all the “funds–in” capabilities in China. In the U.S., customers know that they can link PayPal to their credit card, debit card or bank account. But to the average Chinese consumer online, Visa, MasterCard and Amex don’t mean anything. The Chinese have a whole other set of financial instruments. Enabling all of that is part of our strategy of doing more of the same.
Q: Despite your focus on online, there has been a lot of speculation in the industry press that PayPal wants to offer its services offline, at the point of sale. What can you say about that?
| | Thompson: We have no initiatives underway to go offline. We just don’t feel that we need to do that. We don’t feel that is necessary for growth. We want to solve problems online.
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Offline represents a whole different venue. We don’t see that the technology there is suitable for what we want to do and we don’t think we can solve unique problems offline by using our technology.
Q: How has PayPal been affected by the current uncertainty and turbulence in financial services?
Thompson: Consumer spending is going to affect anybody in payments, anybody in banking. And we’re not impervious to that. I do think, however, that we need to keep in mind that while there is some uncertainty among consumers in the U.S. and around the world, people still need to buy things.
While online growth is not as robust as it was a year ago, it’s still growing. Outside of the U.S., Europe is relatively healthy and Asia still sees dynamic growth in online e-commerce. While it’s still early in Latin America, there are signs that the market is going to develop in the same way.
Mr. Cline is managing editor of BAI Banking Strategies.
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