The A, B, Cs Of PayPal’s Next Act

Today is the day that Carl Icahn has been waiting for. The day that PayPal begins trading as a company independent of the parent he said made it impossible to recognize and monetize the value that was buried beneath the eBay facade.

Over the years, we have all gotten quarterly peeks of that value when eBay reported its results.

Back in 2007 — the year the iPhone was introduced and Amazon and eBay were both celebrating their 12^th birthdays — PayPal was about 25 percent of eBay’s total revenues. By 2011, that had become just about a third, and in 2014 it was reported to be 43 percent. Last week — and the last time that both would report as a single company – PayPal was just about half of eBay’s reported revenues. Analysts estimate that eBay will have an $8 billion revenue hit as a result of the split. As a single entity, eBay not only masked PayPal’s value, it also masked eBay’s challenges in operating in an increasingly crowded and competitive space.

Much has been written about PayPal’s and eBay’s futures as separate companies. Most seem to believe that eBay will be worse for wear given its struggle to hone in on a distinguishing strategy that will drive revenues and profit. That’s not hard to imagine.

But most also share the belief that PayPal will face some tough headwinds, too, particularly as it goes up against two that most characterize as its “strongest” competitors: Apple Pay and Android Pay.

That’s where I think they have it wrong.

PayPal will surely face headwinds – everyone does and will as the digital payments landscape evolves and shakes out – and a lot of formidable competition. But the competitors that I’d pop to the top of PayPal’s worry list aren’t Apple and Google and their “Pay” schemes, but Amazon and Alipay.

Why — and why that matters — I also think will be decided by a few key things. Let’s call them the A, B, Cs of digital payments dominance.

The payments problem to crack isn’t offline where cards work well and just about everywhere in the developed world, but online and via mobile where using card products is a real pain. And there, acceptance matters for the obvious reason: consumer engagement and habituation – something I’ll get to later.

The data is pretty conclusive and you know it well. Merchants are capitalizing on the consumer’s use of mobile and other connected devices to help them discover what they want to buy on the Web, in apps and in other marketplaces. But they’re missing out on converting those shoppers to buyers given the dreadful experience of filling out forms and entering payments information there. And although everyone is chasing that space in a big way, PayPal has a running head start in getting their button to appear on lots of merchant checkout pages.

According to PayPal’s investor deck, you can find PayPal on 74 percent of the largest U.S. online retailer’s sites, and nearly 70 percent of those across Europe, the Middle East and Africa. On last week’s earnings call, CEO Dan Schulman said that PayPal is also now on 67 percent of top mobile apps. PayPal’s Braintree also powers Pinterest buy buttons which enable acceptance in a marketplace that 51 million visitors a month go to to draw inspiration from what others see and have bought so that they can buy too – and a front door into a backdoor PayPal enablement on the sites of those merchants, too. All told, PayPal says that its reach is something on the order of 10 million merchants and developers with payment enabled apps, including those who sell cross-border, a market opportunity that PayPal says drove $14 billion in volume last year.

It’s hard to find another digital “buy button” that comes even close today. I repeat, not even close, and that is so important for understanding just where PayPal is in the competitive race these days.

Amazon, off of Amazon, isn’t for sure. It’s trying really hard to persuade merchants to add the familiar pay with Amazon button to their merchant checkout pages too. But let’s face it, not being off Amazon hasn’t exactly hurt them as a marketplace.

Amazon’s strategy has been to bring as many merchants and merchandise inside Amazon’s virtual walls as it possibly can — and nearly 50 percent of the items sold are in fact items from its marketplace merchants. Amazon Fresh pulls in grocery and food services companies off Amazon for purchase on Amazon and Amazon Pantry offers consumers a slew of brands they’d see on the aisles of their favorite grocers. Of course, Amazon owns a few merchants itself, including Zappos and Shopbop.

But, you won’t find the big Internet retailers with storefronts on Amazon, and you won’t find Amazon payment options on any of the big Internet retailers. So, for now at least, Amazon isn’t close to competing with PayPal for acceptance.

Alipay is another story. It is a bigger, better, version of PayPal — but really mainly in China and for the Chinese.

Now, it’s focused on garnering acceptance off Alibaba where merchants remain willing and able to welcome those 300 million Alipay users who use their mobile devices to shop and buy. Of course, getting Alipay users initially was a bit like shooting fish in a barrel; there were no other alternatives for the Chinese consumer to use online. That’s why many merchants believe that the quickest path to incremental value is to open their doors to the Chinese consumer with an Alipay account who want to buy off Alibaba, often from a luxury brand. But for Alipay, the acceptance game isn’t just about retail and shopping, it’s about much more – like sending money to another person and paying bills, and acceptance that enables engagement, habituation and preference.

But face it, Alipay is a long way from getting non-Chinese consumers outside of China to use Alipay, and from getting big non-Chinese retailers who want to sell outside of China signed up.

Which is a nice segue into the second thing that matters a whole lot when playing the digital payments game.

It’s easy to pigeonhole PayPal as just a buy button on a checkout page, which is, of course, one of its primary functions and how it started.

PayPal CEO Dan Schulman describes PayPal as the company that he believes will democratize the movement of money between people and businesses. The recent acquisition of Xoom punctuates that statement pretty well. Xoom is a way for U.S. consumers to send money outside of the U.S. to important receive markets where they can use PayPal to receive money but also, oh by the way, now buy stuff using the mobile devices that are pervasive in those markets. Xoom becomes a convenient way to establish a user base in those markets, markets like India, China, the Philippines, Mexico — all now easily PayPal-enabled.

But before that, PayPal had invested in any number of services, companies and capabilities designed to make PayPal more interesting for consumers and also more valuable to merchants – small and large. PayPal Credit, built off of its Bill Me Later acquisition in 2008, offers transactional credit on purchases of $99 or more, giving both consumers and merchants a tool to increase sales. Working Capital provides credit for merchants based on receivables and PayPal Here is its “Square-like” solution which offers SMBs all of the “baked-in” value of PayPal’s retail services portfolio. Buyer protection raises the comfort level of consumers that they’re protected if something goes wrong. Offers and loyalty programs automatically linked to checkout at participating merchants makes it easier for consumers to redeem offers that sync with their buying habits and preferences. Braintree’s payment enablement and gateway services offer an easy way for developers to payment enable their apps (including enabling Apple Pay); its recent expansion of “One-Touch” Checkout for online and mobile purchases reduces the number of steps involved in using PayPal to checkout.

Amazon has a similar yet slightly different consumer and merchant portfolio — a set of services for small businesses including a Square-like competitor and access to working capital, the ultimate in one-click checkout and a loyalty program that is the envy of many a retailer – Prime – which offers free two-day shipping on qualifying purchases. Alipay is part of Ant Financial, which includes a variety of financial services targeted to consumers and businesses – money market funds, financial services and wealth management, a micro lending platform and a bank.

Each has invested in creating a platform that goes well beyond the retail payments experience at checkout and neither is pinning their futures on preserving the existing checkout experience in the store. Each believes that the opportunity to transform commerce is a function of using connected devices to transform the point of sale experience – Amazon through Dash buttons that turn washing machines into point-of-sale devices (yes, I am obsessed with mine) or PayPal via apps that enable a consumer to be checked into a store and be served with relevant offers to then checkout via that app, or Alipay via the ability for a Chinese consumer to buy tickets from foreign merchants. But that is just scratching the surface.

Each has a strategy that is independent of device or enabling technology and even one specific user experience.

Today’s consumer retail and financial services experience is a heterogeneous mix of devices, channels and operating systems – including at a single merchant or even a financial institution.

At the moment, of course, there’s not a single payment method that enables a consistent experience across the various permutations of those devices, channels, operating systems and geographies, much less a single provider who can enable that for a consumer. And, when a consumer mixes in anything cross-border, it gets even more complicated.

Platform-based schemes are betting on the long game, a long game that is about driving offline acceptance where consumers have to be persuaded that using a mobile wallet occasionally (for now, given lack of acceptance) is less friction-filled than pulling out a card and using it everywhere. Mobile apps are part of their focus, too, but constrained by access to the specific devices and mobile software platforms that support them. And, the browser part of their roadmap is TBD, a channel where the bulk of online commerce still happens today.

PayPal, Amazon and Alipay both have placed their bets on the device – the mobile phone – and apps that enable them to play across any connected device and any channel today – and tomorrow. Each has invested in apps that work regardless of devices owned or operating systems downloaded and where friction runs rampant when trying to transact on a small screen. Each, of course, is also paying attention to the long game – offline enablement – but playing that game a bit differently. Their game seems to be about enabling a mobile device and an experience independent of technology and device at a merchant location.

Each is also solving for another “C” related merchant problem: conversion.

At the moment, the area of greatest concern for merchants is online conversion, where cart abandonment is high. PayPal and Amazon each have their pitch for why their button can help to fix that problem – something Amazon says shows a 20x conversion anytime their button is present and where PayPal is seeing its volume skyrocket. Alipay’s conversion pitch is to merchants seeking to serve Chinese consumers without any other payment method available to them. PayPal’s cross-border pitch to merchants and consumers is not just an easy way to pay and be paid, but a way to break the logjam of dealing with an unknown merchant by offering buyer protection and payment only upon delivery.

Offline conversions are much trickier since that’s a function of getting consumers into stores where, once there, the data says they’ll buy. This is where Amazon, PayPal and Alipay each have their strategies to fine-tune but where Apple Pay and Android Pay face their own challenges with limited acceptance. We’ll have to wait to see how PayPal, with its acquisition of Paydiant, solves for the offline conversion problem facing merchants. And whether Amazon’s definition of offline isn’t a physical retailer but the consumer’s home where pantries and closets and bathrooms and laundry rooms and home offices and family rooms become the physical places that consumers “shop” and have purchased items delivered to them a day or two later.

This is the one word that will separate the winners from the also-rans in the race for digital dominance — and where PayPal has the most work to do.

Schulman acknowledged as much last week when he said that his goal – and that of PayPal’s entire team – is to get consumers who use PayPal two or three times a month to use it two or three times a week.

Acceptance is a start. But as we’ve seen with Amazon, which is only accepted on one place, acceptance is a function of being in the places that consumers want to shop – and do it a lot. One of PayPal’s biggest hurdles in not having a lot of acceptance a few years back was the hassle of remembering the password each time a consumer wanted to use it. Recovering a lost password was a major hassle. That has since changed, and One-Touch removes the friction once associated with checking out using PayPal.

Alipay solved the engagement and frequency puzzle by expanding the set of things that its users could do with an Alipay account – pay bills, shop offline, pay for taxis and buy tickets, invest and bank. Amazon solved the engagement problem by expanding the number of items that consumers can buy from them and becoming one of the first places (if not the first place) that consumers turn to when they have something they want to buy - which in turn generated visits two or three times a week.

PayPal’s engagement strategy seems to be to go broad like Alipay – e.g. financial services such as cross-border P2P (Xoom), social P2P (Venmo), SMB lending and retail credit services (PayPal Working Capital and Credit) - and deep – expanding the retail points of acceptance online and via mobile (PayPal and Braintree) and creating incentives for consumers to use it at checkout (consumer credit - PayPal Credit - and offers and promotions - PayPal Media).

That’s an ambitious plan – one that will require both focus and execution and some partnerships to pull off and a plan to slay offline payments. Maybe even some partnerships that start with another “F” word – Financial Institutions. As an independent network now, partnering with FIs to “issue” PayPal accounts could be one of the sources of value that PayPal can now unlock. Doing so could not only give PayPal the chance to add more PayPal users to its roster, but also enable FIs to drive top of wallet position with a digital player that has more acceptance than anyone else online and via mobile – and one that also plays on a global stage today.

Engagement and experience is critical to getting consumers on board. And, the fastest way to a merchant’s heart is to bring them lots and lots of consumers bearing digital-enabled accounts.

Much has been made of the merchant-friendliness (or unfriendliness) of all of the payments schemes in market today – plastic or digital, PayPal included. Merchants have been said to push back on new payments schemes because they cost too much or they don’t deliver access to enough of the right data or they cede control of the consumer relationship. At the end of the day, the payments scheme that merchants find most merchant-friendly is the one that brings customers through their doors because it’s how consumers want to pay them.

Of course, merchants push back when presented with new ways to pay. It’s often non-trivial to enable something new – big merchants have lot of things to integrate with and small merchants have constrained resources.

Today, when merchants push back on new things, it’s often because they’re not convinced that there’s enough consumer demand if they go to the trouble of changing their systems to accommodate it.

That’s why, today, offline, the dominant payments scheme is still the network-branded plastic card.

Of course, Apple Pay and Android Pay are betting that there will be enough EMV and NFC terminal refreshes to drive usage of their payment schemes longer term. And if that was all that had to happen, maybe in a couple of years, they might be right. But, there’d also have to be enough consumers with enough of the right devices using them at those stores to tip the engagement and frequency scales.

That’s where one has to step back and map the next three to five years carefully to see how the consumer’s use of the device that every single one of them have all over the world – mobile phones and apps and access to the Internet – can enable a different offline experience – by doing it via an online experience.

Will the economics of how these schemes come together influence that? On some level, but only because it will have to support and incent consumers to use it and use it consistently. Access to data will enable a variety of new business models that can better link the economics of the experience to the likelihood of conversion.

And completion among all of these players will likely intensify as new initiatives emerge to embed payments in a host of financial services and commerce experiences, loyalty and incentive schemes are designed and launched, new merchant relationships are formed and more retail acceptance is pursued.

And as a more consistent payments experience is designed that helps consumers move with ease across all of the channels they use to shop and buy today.

And as I hinted at earlier, some interesting mashups form that could turn the notion of merchant-friendly as we are thinking of it today, on its head.

Of course, payments is a highly competitive space these days and aside from the card networks (for now) no one really has it made in the shade. Payments and financial services is a scale business that takes time – and money – to develop. And change that requires consumers and merchants to buy in. And while mobile and the cloud have given innovators more opportunities to create options that could change merchant and consumer behavior, most of them won’t since they’ll never get to scale.

So, that’s why — the harsh reality of being a public company and reporting results to Wall Street every 90 days notwithstanding — I don’t think that “Day 1” of PayPal as an independent payments company has them starting off behind the proverbial payments eight ball. In fact, the issue is whether they can use their newfound independence to increase their lead and keep everyone else way back as it has so far.

You’ve heard my views on PayPal. Now here’s how a few executives — including one executive who used to run strategy for PayPal, the CEO of a partner company and a couple of competitors — in the payments business see it.

And, of course, we’ll have PayPal at our Retail Reinvention summit in Chicago in two weeks to talk about all of this and more in one of their first public appearances since becoming a public company.

PayPal actually has a huge opportunity to alter the payments and commerce landscape. They’ve shown a propensity to get into the B2B services, like offers and loyalty, that Google and Apple seem to ignore or avoid. In our experience, offering the merchant another mechanism for checkout/payment is just not enough to move the needle; you need to cut across the services that can empower their 1-to-1 relationship with their customers, while being smart about using data and working with merchants on data ownership.

One potential obstacle for them is that while being a consumer-friendly brand, no matter how much they argue differently, it is NOT a merchant-friendly brand. They need to get better about understanding and working with merchants. If they play their cards right, they could be in a perfect position to be agnostic and ultimately win but they have to behave differently than the PayPal of the past to actually succeed. History tends to repeat itself and PayPal had a chance to win this battle back when carriers were a driving force and then again when Apple made its intentions clear, but an inability to play the supporting role always undermined success. The question is now that they have autonomy, will they choose wisely?

One overlooked impact of an independent PayPal is the fact that eBay will now have the freedom to serve their customers with the most optimal range of payment options and services and not be constrained by only using PayPal.

To stay competitive and serve their partners better, many of the top eCommerce marketplaces are now allowing their partners to select their preferred payment method from a wide selection of different options (including PayPal) and also to receive payment in their local currency, directly to their own bank. Additionally, partners are demanding 24/7 insight into their payment status and payment history through modern payment management automation systems.

In recent years, through a series of acquisitions and internal development, PayPal has been busy diversifying away from its time with Ebay. They have brought on board a lot of non-Ebay based merchants and they have introduced several new aspects to their business model with a much stronger focus on mobile. This is likely only the beginning and following the anticipated IPO much more will likely happen.

Through its acquisitions of VeriSign and Braintree, PayPal has gained access to more than 100,000 merchants, in addition to the developer community. The acquisitions of Paydiant and Card.io both focused on the mobile space as well as loyalty solutions. Fig brought with it a technology foundation for cloud based wallets and Zong provided PayPal with direct barrier billing technologies. Bill Me Later formed the basis for PayPal Credit and Venmo made it possible to address P2P payments successfully. With its latest move, the acquisition of Xoom, PayPal enters the money transfer business in direct competition with Western Union and M-Pesa in Africa.

Processing more than 30% of its $60 billion processing volume through its mobile solutions, PayPal’s primary competition in the mobile space is from Apple and Google. This competition is expected to only intensify as Apple Pay has launched in Europe and Google gets its own model together after absorbing Softcard.

There will likely be more consolidation in the market with a good share of it expected to be with PayPal as the acquirer. Depending on how things play out between Apple and Google, PayPal may be a target of consolidation also.

The spin-off of PayPal is very positive, and representative of the fundamental shift in the marketplace to cashless payments. An independent PayPal positions the organization to take every advantage of the new payment landscape as it continues to evolve. According to MasterCard’s “Cashless Journey” Project, currently only 45 percent of payment transactions in the U.S. are cashless, compared to 61 percent in Singapore. What we are seeing more and more with PayPal is the integration with your digital experience, which translates nicely into mobile.

The greatest barriers to entry are currently security and privacy. Given the millennial generation’s propensity towards convenience, being “always on” and their lack of concern regarding privacy, we believe the trend towards greater adoption of mobile payments and e-wallets will continue.

Lastly, PayPal as a standalone company brings with it the opportunity to attract significant amounts of new capital to the payments market, the ability to strengthen Paypal’s ecosystem (as key players have been hesitant with eBay ownership), and finally, with a significant size of market ownership, there is the opportunity to increase that already sizable number in a 'pure play' format.