Why Paypal May Do to Payments What Apple Did to the Mobile Ecosystem
The 4th quarter of 2009 is definitely starting to feel like the dawn of a new age for e-commerce, with many attempts to integrate commerce with social computing and mobile use cases. Many companies are vying for a spot as the primary gateway to payments, thus fueling a new round of innovation.
While I have been following with interest the likes of Boku, Zong and mPayy, the game changing announcement in my opinion came from PayPal, the "grand-daddy" of alternative payment platforms, as it was celebrating its 10th anniversary. Every payment related startup that I have been involved with has struggled with the capital intensity of building the right back-office functions, and the challenges of creating a critical mass of users and acceptance case. It is not only expensive, but fundamentally often involves reinventing the same wheel over and over again. Just consider the challenges, time and moneys associated with securing money transmitting licenses for instance.
One of the fundamental reasons for these challenges is that payments are one of the last remaining walled gardens in the modern economy. Notwithstanding the tremendous benefits brought by the likes of Visa and MasterCard, traditional card payments have proven difficult to secure, expensive for merchants and slow to adapt to emerging use cases because of the constraints of servicing the huge face to face volumes. Furthermore payment networks have protected their considerable market power by bundling their underlying services (authentication, authorization and settlement) making it particularly difficult for new entrants to offer alternatives PayPalX, changes these constraints in a fundamental way by giving to third parties means interface with account management and transaction processing flows. Suddenly commerce and payment innovators can build new offering without having to wade into "heavy plumbing".
To understand the far reaching nature of PayPal's new offering let's consider a few examples:
- Redemption of points at POS: with loyalty cards in every wallets often going unnoticed by consumers, redemption of points of the point of sale has been the Holy Grail of loyalty managers for a quite some time. American Express was among the first to recognize it with its options to redeem points online for partners products. Yet the redemption of points directly at the merchant checkout while theoretically possible on traditional payment networks have proven difficult to integrate with existing payment processing infrastructure. PayPal's Adaptive Payments breaks down these barriers by enabling parallel and chained transactions.
- B2B payments: ever since the advent of Purchasing Cards, attempts have been made to build commerce platforms that would allow further penetration of commercial payments. Yet supporting such common terms as "Net 30/5%-10" require complicated systems and transaction flows. By enabling third party applications to call payment transactions, without the intervention of the payer or payee, PayPal overcomes elegantly this challenge, which could propel business market places (such as www.alibaba.com) to new heights.
- Payments in social networks: Traditional payment platforms are built on set roles (account holders/issuers/acquirers/merchants/acceptors). These are difficult to adapt in fluid groups of peers such as those founds in Social Networks, where everyone can be a sender or receiver of moneys and where the usual cycles required to open payment accounts are too long and complex. With Adaptive Accounts allowing a third party to create and manage accounts, conducting commerce in the midst of a social network becomes a reality, as demonstrated by Fundrazr.
Beyond opening up the payments' ecology to new participants, PayPal has also repositioned itself again as a strategic partner of the traditional payments players. Almost a decade ago when PayPal enabled acceptance at micro-merchants, it was welcomed by the payment industry for fueling transactions that would never have occurred otherwise. New volume is always welcomed. But as it became accepted at more traditional merchants, PayPal made more than one banking executive concerned about cannibalization. With PayPal X the old symbiotic relationship is back, as it enables new classes of transactions. I have a feeling I will be writing quite a bit more about it.
Patrick Gauthier is a senior payment industry executive with 20 years of experience in developing, selling and deploying new technologies for payment and commerce, on a international basis, in private and public companies ranging from start-ups to global organizations.