Friday, April 9, 2010

Interview with Blueshift Research on PayPal

In April 2010, I was interviewed by Seth Agulnick of Blueshift Research for a strategy piece that he was compiling on PayPal. Below is my excerpt from that study, "PayPal's Recent Efforts Secure Its Leadership Role":


Three payment industry experts consider PayPal an industry leader in the alternative payment industry. One source pointed to PayPal’s 130 million membership base and Facebook’s recent decision to partner with PayPal for its online payments. PayPal’s growth could come from transactions outside the United States as well as in-game, in-store and mobile payments. PayPal’s challenges include 15 to 20 foreign PayPal imitators, its decision not to accept online “sin payments,” customer service issues and merchant frustration, and the United States’ slow adoption of mobile payments.

A digital currency consultant, blog author and a former bank and software executive said PayPal’s growth will be somewhat limited by international competition, especially in payment categories where it has chosen not to participate, such as gambling and adult sites. However, its recent deal with Facebook is a huge coup as Facebook could have provided serious competition in the United States with its own payment system. PayPal could break into the brick-and-mortar store market as mobile payments increase. However, its ability to change consumer behavior the way credit cards did likely is limited to certain online games.

1. “They’re going to be limited internationally and by the choices they’re making in restricting some of their categories. If you look outside the U.S., there are probably 15 or 20 PayPal imitators that have sprung up because they’re addressing markets PayPal is either intentionally or unintentionally ignoring.”

2. “There are a lot of categories they restrict. They restrict online gambling, which is very big in Europe. They restrict the adult sites. They are now restricting the prescription drug companies. Those are the things that have given their competitors an opening, so I don’t think they’re going to just grow and grow unchallenged. I think they’ll actually be facing a lot more competition in the future.”

3. “In the online gambling world, the two notable competitors are Moneybookers and [Neovia Financial PLC’s/LON:NEO] Neteller. Both are in the UK. There’s also a company often considered a serious competitor of PayPal called [Smart Voucher Ltd.’s] Ukash. They started in Germany, I believe, and their volume is extraordinary.”

4. “Facebook decided recently not to challenge PayPal but to allow PayPal transactions to go through Facebook. I think Facebook has more of the branding trust than PayPal, but they made the decision that they didn’t want to deal with the customer service issues or fraud issues that would come up. That’s an enormous win for PayPal because Facebook is probably the only [competitor] they were afraid of.”

5. “I know there’s a lot of merchant frustration around transactions being reversed without warning, and it’s difficult for them to dispute it because it’s time-consuming and PayPal is so big. It’s really the same thing you see with Visa and MasterCard. There’s no finality of the transaction. It’s always subject to a charge-back if the customer disputes it. That’s why they don’t want to be in online gambling, because a guy will say, ‘I didn’t mean to make that bet. I need to reverse it.’”

6. “PayPal does not have finality of payment the way you’re seeing some of their competitors do. If PayPal does get challenged, it’s probably going to be driven more by the merchants than by consumers.”

7. “Talk to 10 people who use PayPal from the merchant side, and you’ll have three, four, five of them who’ll say they’ve had problems with payments. That’s the same issue with Visa and MasterCard. PayPal started out with the mission of improving what Visa and MasterCard do in the online world, but they’re really just turning into those guys.”

8. “A PayPal account used at a walk-in location? PayPal could do that, absolutely. They’ve already opened up their API [Application programming interface] to developers. If they get more into the mobile payment world, I don’t see why it couldn’t function there just as well as it does in the online world. You flash your mobile phone at the merchant. Definitely, that’s possible.”

9. “I definitely think that’s a good way for PayPal to go. It doesn’t attack the cash market, but it eats into checks and Visa and MasterCard and Amex [American Express Co./AXP].”

10. “[Mobile payments] already are common in Africa and South America and other parts of the world. That’s kind of the big joke: Why do mobile banking and mobile payments work for undeveloped countries, but we can’t seem to get a foothold in the U.S.?”

11. “In the undeveloped countries in Africa, there were so many people who were unbanked. They didn’t have traditional banking relationships, but many of them had mobile phones. They were able to send money to Grandma or to each other, and it started getting accepted at the merchant level.”

12. “The challenge in the U.S. is that you already have the infrastructure here of the banks and the payment networks and the payment processors. What’s slowing it down is that you have to do all the negotiating with all the interested parties. Everybody wants a slice of the pie and wants to protect its turf.”

13. “Especially when you look at in-game payments, like the spontaneous purchases for Farmville and things like that, it definitely can change consumer behavior if you can make a payment without having to leave the game. A lot of the mobile payment companies are recognizing that already and they’re ahead of PayPal in that area. One is Zong and another is Boku [Inc.].”

14. “PayPal has the possibility to change consumer behavior, but I think it will be focused on the in-game payments. I don’t see it changing people’s spending habits just because they’re on eBay and somebody takes PayPal. I don’t think it changes behavior there.”

15. “They do have a good brand, and they do have trust with that brand. But it’s only the same kind of trust you’d have with your bank. They would turn over your banking records if required by subpoena. So how far does that trust go?”

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