Exclusive: PayPal Innovation Guru Shares Secrets to POS Success

Not even a month into 2012 and the payments space is already abuzz with innovation. One company seeming to have its finger in many of those pots is PayPal. Patrick Gauthier, Head of Product Strategy and Business Operations for Retail Services at the company opened up to PYMNTS.com about goals for the Home Depot pilot, the digital wallet’s future and addressed in-store payments as PayPal’s game to lose.

KAREN WEBSTER, PYMNTS.com: So we’re fresh off the NRF conference. Or I guess you’re still there. So I thought we could talk a little bit about what PayPal is doing to reinvent the shopping and retail experience for both consumers and merchants. So to kick off that conversation why don’t you give us a little overview of the big splash that you guys made around your shopping showcase? What did anyone miss who wasn’t fortunate enough to take your tour?

PATRICK GAUTHIER, PayPal: Yeah. So both at the shopping showcase, which was a pop-up store that we’ve had in New York for now a couple months, and at the NRF, we have been showcasing commerce vignettes that cover the spectrum of commerce, a coffee shop, an apparel shop, a home improvement store, and a supermarket. And the point of those vignettes is to really illustrate how a number of new technologies and new platforms are going to radically transform — are already transforming — the way consumers shop and buy and the way merchants can engage those consumers. So let me give you a couple of examples. In the coffee shop vignette that we had both at the NRF and in the shopping showcase, we show how you can integrate mobile for engagement before the store. You can preorder. You can receive offers specific to that particular store when you’re in the vicinity. And then at the store use either your phone or a different modality — a card or simply keying in your phone number — in order to execute the payment. And so the storyline in this is the consumer can start to engage with the merchant before they’re at the store. And the engagement with the merchant at the store can be much richer. The loyalty cards of the merchant can be included in the experience. You can really tie much more the purchase with consumer preference and therefore personalize. But also with any form of rewards that the merchants would want to do to really then have a direct connection between the business the consumer is making with that merchant and ongoing efforts that the merchants have to stay connected with that consumer. Another example would be the apparel store. Again we have both at the NRF and at the shopping showcase. And there this is a fairly elaborate vignette, which starts again outside of the store. But in this case we start with the window. And the action of looking at the window. Saying oh, there’s a product that I’m interested in here. Might want more information. I’m going to potentially scan some more information. And even through the interaction with the wallet have some clarity over what funds I have available. Which may be direct funds or credit that we extend to that consumer. Because the store was a high-end store. So it’s more about discretionary shopping. And then in the context of the interaction. OK, I’m interested in a product that the store has. And I see using a technology such as Milo that they have a certain inventory. And because they recognize me as a frequent customer they’re willing to extend a certain offer for me to not just the product that I’m interested in but also a companion product. And to keep them on hold for me for a period of time. A day or so. Until it is convenient for me to come and pick it up. And we translate that into an experience into the store, where having reserved the product, now I come to pick it up. The interaction again is such that the store knows me. It’s personalized. And the knowing me includes knowing my sizes for instance. Conduct the transaction. And then as the consumer is exiting the store, there is a promotion by the store for a gift card. And that gift card is a virtual gift card. I scan a barcode, initiated a transaction for gift card, which by the way via e-mail I now send to a family member as a birthday present. And then collect in my wallet funds. Promotional funds for the store for my next shopping journey there. And so to tie again multiple opportunities to engage the consumer. So what those vignettes showed is in a narrative that was very practical how the interaction between a merchant and a consumer is changing in time and in space as well as in kind. And so it’s of course argued that first commerce drives payment, not the other way around, and secondly we have to be willing and capable to support commerce anywhere anytime in any way that the merchant and the consumer desire. That we are now at a time of reinvention. Rapid reinvention that uses multiple channels and mobile in particular to create a richer degree of engagement. And that it is something that the consumers expect, but it’s also something that the merchants now have an imperative to do. Because otherwise they will be remedied at the low end of their segment.

WEBSTER: I want to talk a little bit about the merchant in just a second. But I want to pick up on something that you just said about the apparel vignette. So what’s interesting is that these technologies that you are demonstrating and enabling really allow consumers to be a little bit more self-sufficient than they’ve ever been before, by giving them information about things that they see before they walk in the store. Yet that kind of puts the consumer-merchant relationship a little bit at risk. How do you balance the double edge of the technology enabling such a rich feature set of information, yet driving the consumer closer to that merchant?

GAUTHIER: That’s a very good question. So the first thing we have to acknowledge is that it’s happening. Consider the Amazon promotion to essentially pay people to go scan prices at merchants and then not buy anything. So it is happening in the marketplace out there today.

WEBSTER: That’s pretty awful though. That’s a pretty awful thing.

GAUTHIER: No, it’s a pretty awful thing for the merchants. But my point here is the cat is out of the bag. And then having looked at the consumer behaviors who are already using mobile to look at product information and price and availability and recommendations and so on. So the consumers were already adopting these forms of services. The question we ask ourselves is how do we make this into something that is positive for the merchants. Not just something where it plays into the fear of the merchants. Which goes something along the line of now my competitor can invite himself into my store. You can play it around. And say well now I can engage my consumers not just within my four walls. And so merchants, especially branded merchants and so on, completely understand the importance of being present in the mind of the consumer not just when they walk through the door. What we suddenly have is the capacity to do that in a much richer fashion. It’s no longer through magazine ads and billboard ads and so on. It’s through a variety of interaction. And we see for instance the wallet as an important channel to facilitate those interactions. Because the wallet is not a container of cards. The wallet is a platform to aggregate different information streams and to facilitate the personalization of the consumer’s buying and paying experience in a way that is respectful of both the consumer’s need — including that of privacy — and the merchant’s business objective, which is to merchandize and sell in the most effective way.

WEBSTER: So let’s take on the merchant conversation just for a second. So no big insight here. But the whole chicken and egg business of payments makes it challenging to get enough consumers and enough merchants colliding on a platform at the same time. Really difficult. And so certainly getting PayPal accepted at the physical point of sale is not trivial. But obviously you guys are well on your way. Given a bunch of things that you announced at NRF including your Home Depot pilot which we’ll talk about in a second. And your Ingenico partnership. So why are merchants so interested in what you’re offering when on the first point they’ve been so uninterested in overtures by others to make any changes at the physical point of sale? And you’ve had some struggles in the past to get even broad acceptance online. What’s different?

GAUTHIER: Well, so let me address the second one. I think acceptance online has been growing steadily for years now. And consider that six or so years ago we were really only a method of payment for small merchants. And for purchases on eBay. And within six years we have taken a very significant share of e-commerce. So I think that the premise that it’s been a struggle online, I think the numbers don’t necessarily support that. Considering —

WEBSTER: But it takes time to get broad acceptance.

GAUTHIER: No, it does take time. And so let’s move to the physical point of sale. Look. Here’s what we’ve heard consistently from the merchants. They know that the world is changing, and the world is changing extremely fast. They are often struggling with understanding the implication, more importantly understanding how to take advantage of those new technologies. They see eBay as — not just PayPal, but eBay, as a company that has taken steps to really enable their business historically over the last 15 plus years. And more recently more aggressively through both some of the evolution of our platform as well as some of the acquisitions that we’ve made. So eBay, and PayPal with it, is clearly here as a company to enable the merchant to take advantage of the opportunities afforded by the emergence of multiple channels of commerce that are converging into one flow. One continuous experience for the consumer. And so what we’re seeing therefore from the merchant saying OK, they know they have a problem, that the world is changing, they know they need to adapt. They look at the people that are out there. And one of the first things that comes to mind is who can we partner with, who can we trust, who has the ability to help us through this transition. And if you look around, there’s not that many companies. Not that many companies that do not compete against them but enable them. Not that many companies that have historically been dealing in a fair and balanced way when it came to business accommodation. And then the next step. Pointing to more specifically acceptance at the point of sale. We deliberately took the steps of saying we will make the transition in the merchant infrastructure as simple as possible. So we will not start the conversation with by the way you need to change the POS. We will start the conversation with here are the minimum set of steps from a software standpoint that we can take in the context of your footprint in order to enable these new forms of payment. And here is what the wallet platform will enable in terms of business logic and business services to connect you better with the consumer. And here’s how this wallet platform which extends to the mobile and online and so on will help you generate more business. So from a merchant standpoint if you come with the proposition where we’re saying we’re going to partner with you, we are going to literally explore and invent the future together, we’re going to do it in a way that looks first at minimizing the pain, the entry cost, and maximizing the gain, it’s a fairly easy conversation. And if I connect to some of the conversations that I had in my past life, which started with you need to change the point of sale, you need new hardware, you need to radically change your processing infrastructure to support new this, new that, we’re going to impose new rules on you, we’re going to impose new costs on you, and oh by the way the upside for you as a merchant is that you will not get a negative impact on your business, well, that’s not a very pleasant conversation.

WEBSTER: Right. It’s a headache.

GAUTHIER: Right. It’s a headache. And so I think really this is a question of we’re approaching the markets and the merchants in a way that is focused on solving their business problems. Helping them at a period of enormous transitions. Which with it carries both opportunities and challenges. We’re very open about it. And what we’re seeing is response from the merchant community is very strong.

WEBSTER: So speaking of that. Tell us about the Home Depot pilot. What the goals are and how will you know it’s working.

GAUTHIER: So being that it’s the first merchant, you learn a lot through these activities. I think as John pointed out in his multiple interviews yesterday and today, this is the year where we build, we test, we learn, we adapt. And Home Depot has been a really phenomenal partner in the context of really working with this notion of we build, we test, we learn, we adapt. So we started with the first thing you have to do is make sure you can take payment in a way that is appropriate for the operation of the merchant himself. And that was really what we’ve been after first in the five stores and now in the 51 stores. Understanding how the two first modality of paying that we’re introducing blend in the merchant context. Especially in a merchant like Home Depot. Their store operations are extremely well managed. Extremely tight. And so it’s a bit like training for the Olympics of payment at retailers. If we can build a solution that works for them, it’s going to be a solution that works for many merchants. And our first goal is do we blend well with operations. So the two modality we’re supporting are pay with your phone number and a PIN, we call that card-free. And this is for essentially the consumer that left his or her wallet in the car as John did yesterday and does not want to abandon the cart. And think about it from a merchant’s perspective. Enabling the consumer to not have to abandon their purchase is of course something that they value. The second modality that we’re introducing is a PayPal card. And this is not a credit card or debit card. This is a card that essentially allows access to the PayPal wallet in the cloud. So you might think of it as an access card. And the reason why we went down this path is because consumers are pretty familiar with cards today. In the context as I said earlier of blending into the existing infrastructure of merchants, all merchants have the capacity to read a mag stripe. Not every merchant has necessarily a consumer-facing PIN pad to enter a user ID and password. So we wanted to make sure that we had a modality that was again easy to roll out for every merchant. In the course of this pilot we’re really going to test. We’ve now been testing the various use cases. And now we’re going to start to scale and make sure that we can operationally meet the demand of a large merchant like the Home Depot.

WEBSTER: It’s a very interesting and elegant approach at the point of sale. I’ll be curious to see how consumers react. So that’s a nice segue to talking about the consumer. So obviously one of the things that you bring to any merchant is the number of consumers that today have a PayPal wallet. Which in the US is what? Something like 60 plus million roughly. Probably about that.

GAUTHIER: Number on a global basis is just a little bit under 107 million. And as a rule of thumb about half of those in the US.

WEBSTER: So you’ve got a bunch of consumers that you can enable at those merchants. But what are you going to do? What are your plans to making PayPal something that is very relevant and indispensable to those consumers?

GAUTHIER: That’s a very good question. So first just as point of reference. 107 million active consumers is a broader customer base than that of American Express. So that instantly makes us an incredible player in this space. And then it becomes a question of indeed how do we gradually surface value to our consumers to really engage them and to make this something of their everyday life. And this is something that we jumped on very quickly when we were building our plan, which was let’s focus on everyday purchase. So you are going to see us work with large merchants, a number of them this year, 20 at least this year. And those merchants will be merchants that consumers visit frequently. And what we’re after is not the — oh let’s replace cash and so on. What we’re after is if consumers are visiting them frequently, being there raises the exposure and awareness and engagement with our consumer. Then after that as we deploy throughout 2012 you will see us really utilize our marketing muscle. We have a number of ways of engaging consumers today through the wallet and through the connections we have with them. And you will also see us deploy capabilities leveraging both the wallet and the Where acquisition we did to really surface promotions that are relevant to the consumers. And that will create an opportunity to try PayPal at a participating merchant. And this is the way by which we will gradually prime the pump. As John pointed out yesterday, it’s not going to be a big bang. I want to say it’s a labor of love. And this year we will build on the base of merchants and the base of engaged consumers. And as we do that we will learn. PayPal — I think one of the things that excites people in the industry about PayPal is our capacity to adapt. There are very few payment provider payment participants that have the degree of nimbleness that we have. And so we intend to use that. And test and learn and adapt and test and learn and adapt. And as a consequence grow our base. And this is not a six-month plan. This is a multiyear plan that we’ve thought through very carefully. We understand the glide path that we have to create.

WEBSTER: So Patrick, you’ve had a really interesting career. Most people may know this, but it’s worth repeating. You were an executive at the largest global payments network in the world recently. And I’m curious to know what about that experience prepared you to really take a leadership role at PayPal in driving it to the promised land of on- and offline payments domination.

GAUTHIER: Well, domination is your word. Our word is we want to be a vibrant participant in the market and to serve our customers. No, I definitely learned a lot when I was at VISA from payment operation all the way to the challenges of introducing new payments. You’re very familiar with the challenges of two-sided markets. And this was particularly evident in a payments network with a four-party model, which is both a strength in terms of its presence today in commerce but also a weakness in terms of how difficult it is to create any evolution in the ecosystem. You have to align many many many many players whose business objectives may be divergent. Case in point. Issuers and merchants. And you also have to create — as we were talking before — this conjoint movement of merchant and consumers. And when you are just the payment network and you do not own the endpoints, you do not own the relationship with the merchants, you do not own the relationship with consumers, it’s really hard. It’s really hard to move from a current established method in a four-party network to a new one. And I think the best illustration of that, Karen, is the time that it’s taken the payment industry to move from mag stripe to chip. In the time that it’s taken the payment industry to not complete the migration, the mobile industry has gone through four generations of infrastructure. And through very significant paradigm shifts in user interface and new services and so on. And I put those two in contrast to show that it is indeed very hard to move something that is as squarish as the four-party model. Once you know where those challenges are, and you migrate into a position like PayPal where we do have an end-to-end set of capabilities engaging consumers, engaging merchants, it becomes much easier to understand and to apply the activities. You understand what activities will foster adoption. It is much easier to have a conversation with both the most important stakeholders, the consumers and the merchant, about what matters to them and how we can deploy it in ways that they will find relevant. So I had always been on the side of innovation at VISA. And clearly PayPal in two thousand and — gosh — nine now I guess, when it introduced the — opened the APIs, the platform, made a really big statement about its desire to innovate in payment. And so it was very natural for me to come to PayPal.

WEBSTER: Well, we’ve mentioned — just a couple more questions. I wanted to talk about the wallet in particular. Because we’ve talked about wallet in a couple of different settings. But it’s obviously a topic that everyone’s talked about. I have written a number of times that you guys really invented the concept a decade or so before anyone really knew what that concept was all about and why it would be so important. But how do you see the digital wallet space shaking out? Will there be a wallet? Many wallets? How will that get decided and when?

GAUTHIER: So first I should start with indeed we’ve been in wallet for a long time. And we think that just as commerce is involving, the evolution of commerce really requires an evolution of wallet. And so we’re really looking now at the new wallet. And the new wallet is not just about storing some payment information and facilitating the payment transaction and funding in and of itself. The new wallet is really about integrating payment and purchasing into the shopping journey and facilitating this connection between consumers and merchants. So it’s as much about payment as it is about information. As much about payment service as it is integration with other services. And if you look at some of the things that we’ve been doing with X.Commerce, it foretells of what this notion of commerce platform really means in the future. It’s a little easier to do it online. But the paradigm is going to extend across all channels. As John said, it’s no longer about e-commerce and m-commerce, it’s about commerce. So we think that at the end of the day the wallet is going to be judged not by who controls and who establish what rules and so on. The wallet is going to be judged by how does it take some friction points out of the commerce experience. Think backs to the early stages of card payments before the introduction of general purpose credit card. Most merchants could take cash or checks or store credit. And that in and of itself was a friction point. If I didn’t have enough cash or if my check was out of state and there was a certain risk with insufficient fund, or if the store did not know me well enough to extend me credit, it was clearly impacting sales that those merchants might be able to take. The introduction of the general purpose credit card clearly facilitated commerce and reduced some friction point at checkout. OK. So that was 40 years ago. And clearly it created a very successful industry. Well, it should tell us what is important today. What’s important today is to look at in the interaction that merchants have with consumers where the friction points are. And the friction points are most of the time not in the act of paying at checkout. The friction points are in how do I engage the consumers, how do I present things that are relevant to them. For consumers, how do I sort through the mass of options and information that I have available to them, how can my life be not more complicated but simpler, how can I make choices with the various merchants and the various products that I’m interested in buying in ways that are friendly to me, how can I choose how to pay for things in a way that are friendly to me. All of these before the actual act of paying and after the act of paying. There are a number of friction points. We see the wallet as a way to reduce those friction points. And if we do that, then we’re serving consumers, we’re serving merchants. And that will give us a place, a very healthy place, a very healthy position in the industry.

WEBSTER: So Patrick, two more questions. Your boss Don Kingsborough said in an article recently that in-store payment is PayPal’s to lose. What are you going to do to make sure you don’t?

GAUTHIER: Well, it’s all about execution, right? So as I think an Asian proverb says, vision without action is a dream, and action without vision is a nightmare. We have a very clear vision, and a very clear plan. And we’re executing. And this is a company. I go back to what I said earlier in terms of nimbleness. Think about the traditional payment industry. Two releases of software a year. That establishes a certain cadence. PayPal is capable of doing one or more a month. That allows us to test and learn and adapt in a way that is much more rapid than what the traditional industry can do. Now let’s envision what the new entrants in this business have. People who want to use NFC for instance. They have to create the customer base that we’ve created over the years. They have to create the capacity to execute in payment. The payment operation. Operationally payment is fairly demanding. That capacity that we’ve built over the years. So the reason why we think it’s ours to lose is because compared to some of the new entrants we have knowledge and capabilities that are very strong. Compared to the established players we have the ability to test and learn and adapt much faster, which is really crucial at a time of transformation like the one we’re seeing.

WEBSTER: So there’s no shortage of stuff written about PayPal these days. And all of your point of sale ambitions. What I’d like to know in closing is what has every one of those articles failed to emphasize or mention about your approach to really reinventing shopping and retail that you’d like to share with our readers.

GAUTHIER: I would make a couple of comments. I remember a conference I spoke to shortly after joining PayPal and getting a question about whether we wanted to replace the existing industry. That is a really wrong view of looking at this. PayPal partners with about 15,000 financial institutions around the world. Likewise we’re partnering with merchants around the world. Our intention is to really add value to the business of our partners. We do not view payment and commerce as a zero-sum game. We view it as an industry and set of services that are in evolution. And we intend to participate to the invention of the future. Not just react to it. We’re going to — we’re engaging with merchants. We’re engaging with consumers. We’re engaging with partners such as Ingenico and so on. We’re engaging around the world with financial institutions to really help invent the future of commerce and the future of payment in ways that are beneficial to the business. To our business but also to the business of our partners. This is not a zero-sum game. This is an opportunity to improve the position of many.

WEBSTER: Well, Patrick, I really appreciate your taking the time to share some really great insights with us. I know it’s a very busy time for you. And thank you again. You and PayPal and the team have made this space really interesting and fascinating to watch. And we look forward to watching and engaging with you as you really take on the physical point of sale space. And get consumers and merchants aligned around your approach. So thank you again.

GAUTHIER: Thank you for taking the time. I think as we progress we’ll have many more opportunities to share what we’re learning and what we’re doing anew. This is a tremendous world of opportunity.