The Goldman Sachs technology conference last week in San Fran sure did stir the pot around PayPal and its Point of Sale ambitions. The centerpiece of this criticism is PayPal’s earlier in the year public announcement of its physical point of sale trials with Home Depot, the specifics of which questioned its inability to scale, business model, and security risk.
Seems like a sure sign to me that PayPal is making the traditional players a little nervous.
Here’s my quick take, in reverse order.
The whole security risk thing seems like a bit of a red herring to me. Keep in mind, this the same PayPal that built its whole value proposition on security. When PayPal launched some 11 years ago, as an alternative, online only network, it’s only hope for adoption and survival was to convince people it was secure. It came into life as a way to enable people to buy from teeny-weeny merchants they never heard of and built its systems and user interface to safeguard customer data and card information. If people didn’t trust it to be secure, it would have probably been a dead carcass on the dot com highway. Not only that, PayPal was the company that figured out how to balance easy payment online with hordes of criminals stealing them blind. Lots of others, including banks, tried that but were either too cautious (no fraud but no transactions!) or too careless (uh oh!) PayPal created (and had to) a very robust risk and fraud system, that has only been made more robust via its Bill me Later acquisition. In fact, PayPal has done such a good job at convincing people that it is secure, it rates 3rd - right behind Visa and ahead of American Express, MasterCard and Discover - as the most trusted financial services brand in the mobile payments arena. [link to Market Strategies study] And not only has it convinced people but its profit contribution to eBay sure suggests that they aren’t wallowing in fraud losses themselves. Home Depot also made a very good point - if it wasn’t safe, it wouldn’t risk its customer’s relationships just for the sake of a trial.
As for the business model, well that’s all about money. I would imagine that this is the sort of thing that could get negotiated, especially when in pilot mode.
The scale claim might also be another thing to fall into the red herring category. It is a fact that Visa processes a huge volume of transactions, but there’s no evidence that PayPal can’t or won’t be able to do the same. I am not a technologist, but it seems to me that cloud-based networks, like PayPal, would seem to be able to scale relatively easy, too. And gee, Discover, seems to have done all right despite being small.
There are a lot of things that one might criticize PayPal for at the Point of Sale, but these don’t strike me as the top three. As on and offline commerce converge - fueled by the mobile phone and the point of sale transacting that it enables - a lot of issues emerge that all of the players will need to solve for. For instance, what changes are required at the point of sale to accommodate a new mobile payment scheme and how much will that cost? Will this new scheme enable store cards (where retailers make the most money)? How does a new scheme support loyalty and other consumer engagement strategies? How is customer data captured and shared with the merchant?
2012 promises to be very interesting, indeed. What are your thoughts?
Karen Webster is the CEO of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.