When it comes to using invisible engines to drive innovation and transform industries, PayPal is the first out of the gate in the payments industry and well ahead of the traditional players. This online payments giant claims that “PayPal X is the first and only global payments platform open to third-party developers. Our new set of APIs will offer unlimited possibilities for [developers] to easily monetize your ideas, by providing security and connectivity to the world’s financial systems.” This isn’t the usual hype—whizbangthing.ppt—that we get from payments providers trying to stake a claim. Six months after announcing its open platform more than 25,000 applications have been written to it and a vibrant developer community is are cranking out more apps as you read this.
Here’s what PayPal has done.
To begin with it turned PayPal into an open platform that provides a rich set of services to developers. It rolled out a new set of APIs that developers can use to build PayPal’s payment services into their applications. Now, in addition to sending and receiving money for P2P and B2B transactions, developers can make parallel and chain payments, pre-approve with PIN-authorization, integrate PayPal into the merchant’s order and account flow, pay attention to the context in which the merchant is interacting with the consumer, integrate ACH, pre-populate a PayPal account application for customers who don’t have one, and many other things. These APIs link to code in PayPal’s Adaptive Payments Platform that do the work for the developer.
Like every successful platform play, Pay Pal created a set of tools that help developers use these APIs. Just go to PayPal X Developer Network and you will see that PayPal has provided the standard “software developer kit” (sdk). Then it has provided a set of sample applications that give developers some guidance on what to do. PayPal X also have a “sandbox” where developers can test out their applications to debug them and make sure they work.
Taking a cue from the Invisible Engine strategy that Andrei Hagiu, Dick Schmalensee and I described in our book, PayPal put on a develop conference as soon as it opened its new platform. Over 1500 came to the November 3-4 conference in San Francisco. PayPal also offered prizes for the best applications. The winner of the $50k prize was Rentalic which helps people rent their stuff to other people. It has been described as a mashup of eBay and Craigslist. Here’s how it works. Joe lists her lawnmower on rentalic. Sue offers to rent it for a fee they agree on. Joe uses PayPal to verify they can pay the deposit for it. Sue gets a secret code. After meeting Joe and making sure that she’s getting a working lawnmower she gives Joe the secret code.
PayPal has been trying to get people excited about the iPad. On April 16th, it held a developer bootcamp in San Jose that was focused just on using PayPal X for iPad apps. It got 300 participants. Naveed Anwar, who is the head of Pay Pal X and seemingly its chief evangelists, talks about PayPal X and the IPad, and shows some clips of the developers beavering away on apps, in the Pay Pal X IPad Developer Camp video on YouTube.
PayPal is also rolling out its own applications but even here it is allowing developers to build value-added services on top of them. Most significantly, PayPal just rolled out the PayPal IPhone Bump which makes it possible for people to transfer money to each other using their iPhones. (Now, personally, on this one I’m a bit skeptical. The video provides a great example of overhyped P2P. Maybe there’s a market for P2P, especially for small B to P transactions, but it isn’t likely to be splitting meal bills which seems to be the favorite example of the P2P optimists, or charging a friend for a slice of my pizza which is what is featured on the video.) With X.com PayPal is ignited a new global payments platform very quickly. Here’s the virtuous circle:
o They’ve started with rolling out a series of services that are available through APIs.
o They’ve poured money into encouraging developers to write applications by providing prizes and putting together a VC network.
o They’ve provided these developers with tools and soon a place where develops, like the iPhone Store, will be able to sell their applications.
o This has led to the rapid growth of applications, the growth of a developer community, and more buzz that will drive more developers to PayPalX.
o They’ve started building alliances with companies like Facebook, Microsoft, IBM, and Salesforce. That’s the start of building out a potentially huge ecosystem.
It is remarkable how quickly PayPal has ignited its open platform strategy.
What does this mean for the traditional payment networks? For one it puts further distance between PayPal’s online dominance and the traditional networks. PayPal conquered eBay, has made great strides in moving its payment services off eBay, and is now creating a potentially enormous ecosystems of online applications. This is coming at a time when the distinction between online and offline will soon end. For example, the iPad with wiFi at the point-of-sale is technically online but is can easily compete with traditional hardware and private connections, as evident with Square. PayPal and the traditional networks have had an uneasy relationship for the last decade. PayPal drives an enormous volume of card transactions but everyone knows that they have strong financial incentives to move transactions to ACH and that in any event PayPal—not a card network and not a bank—owns the online customer relationship.
For another, it means that the traditional networks are far behind their alternative payment system rival in seizing the most important opportunity of the coming decade: creating an open platform for development payments applications. First movers such as PayPal aren’t necessarily the category winner—and in fact often get leapfrogged by those who bide their times. That said, PayPal—like Apple in the smart mobile space—is rapidly generating network effects and creating an increasing number of applications that will make it hard to beat.
Finally, PayPal’s seemingly flawless execution of its open platform strategy makes one wonder whether the traditional card networks have the genes to compete in this very Web 3.0 kind of world. PayPal has its roots as a software application that lived within one of the great internet companies. It wasn’t that long ago that the traditional card networks mainly used mainframes running Cobol. If the card networks can’t pull it off though they could be to payments what the mobile carriers are to mobile communications.
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.
I. The Invisible Engines that Drive Innovation and Transform Industries
II. How the iPhone Invisible Engine Provided a Catalyst for the Mobile Phone Industry
III. The New Age of Invisible Engines: How Software Platforms Will Drive Growth in the Next Decade
IV. What’s in the Cloud for Payments?
V. Why the Payments Industry Needs a Catalyst to Drive Payments Innovation
VI. Can IP Commerce Create the Apps Store for Payments?
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