PayPal’s Efforts to Capture Payments Share

Three announcements over the last week highlight PayPal’s moves to take a big share of the payments market.

Let me begin with some background that I covered in my recent keynote address at the Chicago Fed.

First, PayPal has rolled out a software platform that is encouraging developers to write applications that incorporate PayPal payment features. They are trying to ignite the same positive feedback loop between applications and users that Microsoft used to dominate personal computers operating systems worldwide and that Apple has most recently used to revolutionize the mobile world.

Second, the distinction between online and offline will fade away in developed countries over the next decade as most devices that consumers and merchants use get internet connections. From the consumer’s standpoint the three screens they interact with mostly—mobile phones, televisions, as well as desktops—with be connected to the internet. For merchants point-of-sale devices will be connected to the internet as well.

The consequence of those two points is that PayPal has the opportunity to become a significant alternative for all payments since most payments will involve a device that has an internet connection. (Check out PayPal’s vision of the future video where everyone is paying everywhere with PayPal.)

Now for the announcements.

PayPal has linked up with Bling Nation for its foray into today’s physical world. Bling enables consumers to pay at merchants through a tag that people ordinarily slap on their mobile phones. When consumers pay the funds come out of their checking account. Bling partners with banks to recruit their merchants, who must install equipment, and individual customers, who must provide access to their checking accounts.

As TechCrunch has described, Bling has partnered with the online payment giant to allow consumers to pay at merchants with their PayPal accounts. That expands the base of consumers that Bling has access to from the ones they recruit from local banks. Of course, Bling still has to persuade merchants to install equipment to accept this new payment option and history tells us that is one tough sell. Nevertheless, if successful it moves PayPal squarely into the physical world.

PayPal also announced last Friday a service for developers call Guest Payments. This is an online play designed to get more applications (remember in this new world we live in applications usually refer to businesses that deliver services using software on internet-connected devices) to incorporate PayPal. The traditional PayPal model required the sender and receiver of funds to have PayPal accounts. Merchants can only receive funds through PayPal if the consumers that pay them are using a PayPal account. PayPal did great with that model on eBay where both sides found that this was a really convenient way to pay and be paid. It is a lot more problematic for merchants off of eBay because most people still do not have PayPal accounts. With Guest Payments PayPal gives enables application-based merchants to accept cards and run the transactions through PayPal’s system (and thus relying on its fraud control and processing capabilities). The consumer doesn’t have to have a PayPal account. This is a way for PayPal to expand its merchant base. This is a way to ignite positive feedback effects. As they get more merchants using PayPal they will encourage more consumers to get PayPal accounts. The endgame is likely to be that both sender and receiver will have to have, or be strongly encouraged to have, PayPal accounts.

The other announcement concerned a delay in PayPal’s payment software platform development efforts. But it was a good reminder to things to come. PayPal wants developers to write applications that use its ACH-based system for rent, consulting, payroll, and so forth. Of course, this emphasizes what PayPal is really all about. It allows consumers and merchants to use traditional cards. But ultimately PayPal wants to switch the transactions over to higher-margin ACH-based solutions.

PayPal has been tremendously successful on eBay. Whether it can leverage this success into the rest of the world of payments remains to be seen. Many have tried getting merchants and consumers to adopt a new payment solution only to realize just how hard it is to ignite a multi-sided platform. But PayPal has some new moves—with its software development platform the most significant one—to bust loose. It is sure to be causing loss of sleep at the traditional card schemes who have to figure out how to handle a firm that on the one hand drives a lot of transactions to their cards while aiming to eventually converting those cardholders to something else.