PayPal: The Online Payments Friction Fighter That Became Friction

I have perfected the art of multitasking.

Thanks to my mobile devices, the internet, apps and embedded payments, I can book airline tickets while waiting for a Zoom call to start, shop for holiday gifts while in the back of an Uber on the way to the airport, buy groceries while waiting for my dinner guests to join me at a restaurant, find and buy a car while waiting for the plane to take off (I actually saw someone do that a few months back), and pay the dog walker while sitting in the lobby waiting for a meeting to start. In a few minutes I can accomplish tasks that once required being in a totally different physical location.  My digital multitasking experiences are fast, easy and hassle free. It’s become my expectation. And yours too, I’m sure.

While on my Saturday morning run, I received a notification on my phone that an item on my wish list was now in stock. Since I intended this item as a holiday gift, I stopped running so that I could buy it — I didn’t want to lose it. Within a few seconds, I got to the checkout page where I selected PayPal to complete the purchase.

I was taken from the merchant site to the PayPal log in screen, where I had to enter my email or phone number, then wait for a mobile code since I can never remember my password. I was then taken back to the PayPal page to complete the purchase, where it felt like an eternity for the transaction to process — the little wheel kept spinning and spinning. I cancelled the transaction, returned to the checkout page, and completed the purchase in less than ten seconds with Apple Pay.

A business that solves friction at one point in time can be a source of friction at a later point in time when other alternatives can provide a better experience.

My PayPal experience on Saturday wasn’t unfamiliar. I have had a PayPal account since 1999. I have done thousands of transactions with them. I have enrolled in One Touch on all my devices and use PayPal on all of them. (Note: It’s up to the merchant to enable that experience on their sites, which is why it can be inconsistent from site to site.)

The three-step process PayPal-checkout-jitter-jive (click on checkout page, enter mobile code after logging in, then click back to the merchant page) was a friction that I was happy to put up with for many years because of the convenience of using PayPal at most of the merchants I shopped online. It kept me from having to enter and save my card credentials at every merchant. It made shopping online efficient. It was great during those days.

Not so much anymore.

Friction is all relative. A business that solves friction at one point in time can be a source of friction at a later point in time when other alternatives can provide a better experience.

And relative to its competitors, PayPal introduces a friction that my inner multitasker is less willing to tolerate now. PayPal has a lot of company on checkout pages that make the experience easy and truly one touch or an easy double click. The PayPal checkout experience, by comparison, appears unchanged from the late 2010s, old and clunky. Where there are other options, I now often choose one of them.

The payments innovator that unlocked online payments at scale by removing friction at checkout — and became the wallet that owned the online checkout experience — is now at risk because they create too much of it, relative to others.  PayPal’s Q3 2023 earnings reflect this, too. Branded checkout volumes are not growing as robustly as they once did. Active users are in decline.

Friction and its impact on a company’s prospects is a topic I have been writing about since 2019. It is also the foundation for the FITTM Framework that I introduced that year. This framework gets its name by examining the interdependencies among Friction, Inertia and Time as a proxy for assessing opportunities for disruptive innovation — and the future success of any business, regardless of its stage or stature.

For further reading: Using FIT Framework to Drive Success in a Digital World

I define Friction by how much hassle the prevailing status quo creates and whether that hassle is big enough for a large enough group of people to build a business around.

Inertia is defined as whether the alternative to the current friction is so much better that a critical mass of customers will move away from the status quo to something new.

Time is simply about whether the swishy new alternative saves time and is available to customers in a timeframe that is relevant to them.

One company’s friction often becomes a challenger’s opportunity to use modern technology to create a different experience that can quickly change market dynamics in their favor.

Plainly speaking, the FITTM Framework is a rigorous analytic framework, informed by hundreds of business experiences. It is predictive in determining whether the juice is worth the squeeze for enough customers to invest time and money in building and scaling  profitable business.

My Saturday morning PayPal experience is a great illustration of why understanding those interdependencies matters, particularly in a highly competitive space like payments, and why it isn’t enough to assume that market share will always mean customer preference.

And how one company’s friction often becomes a challenger’s opportunity to use modern technology to create a different experience that can quickly change market dynamics in their favor.

Fighting Online Checkout Friction

PayPal’s origins are certainly quite familiar.

Transacting on eBay was one big ball of friction when it launched in 1995. Buyers who found stuff to buy from sellers on the platform indicated their interest in the item, then put a check in the mail. Days later, banks got the checks and had to clear them, then send the seller the money once the item was sent to the buyer. Transactions took weeks not days, and were a hassle for everyone: buyers, sellers, eBay, and the banks with the responsibility of managing the flow of funds.

PayPal launched in 1998, went public for the first time in 2002 and was sold to eBay that same year for $1.5 billion. It became the trusted payments intermediary on the eBay platform — establishing merchant accounts for sellers and payments accounts linked to buyer bank accounts — making money movement faster, secure and digital.  It was an amazing friction fighter, making it so easy for buyers, sellers and eBay alike to do business with each other.

It and eBay grew like a rocket ship, and PayPal with its thousands — then millions, then tens of millions — of buyer accounts moved off eBay to create a network of merchants that wanted an easier way to sell and accept payments online. PayPal’s second IPO and decision to add issuer cards more easily in its wallet drove more merchant acceptance and consumer usage. Today, PayPal is the most widely accepted digital wallet, with nearly 76% of all U.S. merchants accepting it and roughly 237 million US consumers with an active PayPal account.

The One Touch experience in 2014 was a first — a breakthrough — that sidestepped the need to authenticate the user for every transaction. For both consumers and merchants that was a huge deal at the time, if merchants adapted their checkout to enable that smoother experience for the buyer. Even though the experience still added steps to the checkout process, it saved time by eliminating the hassle of entering card credentials on sites consumers wanted to shop. The benefit to the merchant was more sales, particularly for smaller merchants where consumers were reluctant to enter and store card credentials.

For many years, guest checkout and registered card credentials were PayPal’s only competition. Other “buy buttons” were a long way from ubiquitous and the card networks abandoned their own buy button ambitions after a few years. Merchants’ efforts to create their own never got off the ground. Ambitions around a secure remote commerce button sort of imploded. But PayPal’s two-sided network continued to crank, more users brought in more merchants, more merchants brought in more users — the flywheel went into overdrive.

For years, it was the best checkout experience on the web — and its user numbers, merchant acceptance and GMV proved it. When PYMNTS Intelligence published its Buy Button Index in May 2022, merchants that enabled PayPal were proven to save consumers an average of 51 seconds at checkout, a time savings of  43% when PayPal as not used on those same sites.

Ubiquity is no longer about one wallet being accepted everywhere, but which payment experience moves a buyer through the virtual checkout line the fastest and easiest.

But paying with or without PayPal is no longer the only choice facing consumers when shopping online or in their mobile apps.

Google made it possible to store credentials in the Chrome browser in 2015, providing payments choice at guest checkout using Autofill on any connected device. Shop Pay, introduced in 2017, created a true one-touch checkout experience by taking the customers of Shopify merchants directly to a checkout page to complete the purchase in one click.  Amazon Pay moved off Amazon, as did Amazon’s merchant services — including free shipping with Buy with Prime and fulfillment — to create its own two-sided network. Apple Pay, where available, is a fast double-click. GPay offers payments choice and soon BNPL options as part of the payment mix. BNPL and pay later options are now proliferating. Seeing multiple options on the checkout page is no longer unusual, and consumers have already registered their card credentials in many of them.

This dynamic has changed the consumer’s perception of ubiquity, choice, and friction.

Choice is no longer between entering credentials from scratch at a guest checkout or PayPal. Consumers can choose from multiple “buy button” or wallet options each time they visit a merchant checkout page. What used to look like a jumbled-up Nascar page a few years back is more organized today, and not as off-putting or confusing.

Ubiquity is no longer about one wallet being accepted everywhere, but which payment experience moves a buyer through the virtual checkout line the fastest and easiest. Why? Because consumers have their cards registered on all of the ones they use.

Friction is no longer the hassle of switching to something new, it is using a checkout option that takes too much time.

PayPal, I Hardly Knew Ye

I’m not the only digital card-carrying member of Generation Multitasker. More than half of baby boomers and 70% of millennials use their mobile devices to compress time and place and do multiple things at the same time, according to recently published PYMNTS Intelligence data. As people become more mobile, return to the office, and get out and about more with family and friends, the ease with which consumers and businesses can interact with their assorted connected devices will decide consumer preference and, by design, their loyalty.

With study after study suggesting that payments preferences play a huge role in establishing that choice, having a seamless or invisible payments experience will become a critical capability. Innovations in checking out will reflect these expectations, and innovators will use new technology to make interactions, well, invisible — a non-experience that becomes a fluid part of the customer buying journey. Eliminating friction and saving time is where innovators are focused, and to the successful friction fighters will go the spoils.

Eliminating friction and saving time is where innovators are focused, and to the successful friction fighters will go the spoils.

Everyone — from issuers to card networks to merchants and innovators across the payments ecosystem — is focused on what they can do to further reduce, or eliminate, the hassle of checkout and boost conversion for the merchant. It’s no longer a tough slog to convince consumers there is a better way.

The risk to PayPal is that there are a lot of people like me who can still be counted as active PayPal users, but who transact at a much lower volume than in years past as alternatives make paying for something online or in app  more efficient. That the spend that used to flow through PayPal will find its way through other channels — and those other channels now include Apple Pay for iPhone users, who skew to a more affluent user base and drive a disproportionate share of retail spend.

As any platform innovator will tell you, it is much faster to lose network mojo than to build it. PayPal has done a remarkable job over the last 25 years of building an online payments network that is the envy of many of its fiercest rivals. It has added capabilities that position it as a viable alternative for capturing the “everyday app” opportunity that 79% of consumers say they would love to have.

Last Saturday was a stark reminder of how the PayPal I once knew is getting tougher to recognize in a connected economy where ease and convenience will drive adoption, usage and scale. PayPal has an incredible foundation to leverage and a global presence and merchant acceptance that remains unmatched. I am quite sure that managing the friction/inertia/time dynamic is a high priority for the new PayPal executive team, even though they may not refer to it in those exact terms.

This new team now includes one of the most accomplished professionals in payments leading its global markets focus. It’s a team with all the right incentives to turn things around. Let’s see what 2024 has in store.