December 31, 2011, 12:00 AM

The Checkout Challenge

With the mobile phone as a bridge, PayPal aims to extend its e-payments franchise to physical stores.

PayPal has built a solid niche as an online payments company with 103 million active accountholders, but the eBay Inc. unit has much greater aspirations. It aims to grab a piece of the $4 trillion in purchases that U.S. consumers make in stores each year.

PayPal's idea is to use the web-connected smartphones that 90 million U.S. consumers now carry as a bridge between its online base and its uncharted foray into stores. It aims to build on a number of acquisitions eBay has made in recent years that enable consumers to use their phones to find items in local stores and check prices. The next step would be to allow shoppers to pay with PayPal—whether they purchase on the web or in a bricks-and-mortar store.

"What's happened over the last 12 to18 months is the blurring of the lines between e-commerce, m-commerce and retail," eBay president and CEO John Donahoe says in explaining eBay's strategy. "Retail and e-commerce are becoming one. Consumers don't make a distinction between the two." To introduce these still new services to consumers, eBay this fall set up a storefront in New York City to demonstrate these technologies.

PayPal is squaring off against a potent rival in Google Inc., which has built on its own base as the provider of Android, now the most popular operating system for smartphones, to create Google Wallet, a system that, like PayPal, would let consumers pay with their mobile phones at physical stores. If either of these well-known companies succeeds in popularizing its in-store payment service, it could have important implications for online retailers, as consumers likely will want to pay the same way online as they do in stores.

Well prepared

One area where Google and PayPal are butting heads is over how consumers will pay at the checkout counter. Google is touting a little-deployed technology called Near Field Communication that would let a shopper tap her mobile phone on a specially equipped reader that emits radio signals to complete a payment, much as transit riders in cities like Washington and Chicago tap plastic cards to ride buses and subways. PayPal will not ask retailers or consumers to adopt a technology "they may not be interested in adopting," says Sam Shrauger, PayPal vice president of global product experience, without specifically mentioning NFC. PayPal has tested issuing consumers PayPal-branded plastic cards to use at stores.

While taking on Google is not for the faint of heart, eBay and PayPal are well prepared for the struggle ahead. That's because, piece by piece over the past couple of years, eBay has assembled the components of a compelling offering for store shoppers.

That includes the hiring last spring of Don Kingsborough, a payments executive who helped build the Blackhawk Network into a competitive prepaid card company that placed racks of prepaid cards from many retailers into supermarkets and other retail locations.

In addition, eBay has made several acquisitions of technology start-ups that had developed applications for mobile shopping. Among the most recent was its purchase in April of Where, a provider of advertising services, search and mobile apps that support shopping in nearby stores.

That followed the December 2010 purchase of Milo, a local search utility that forms the bedrock for much of PayPal's in-store effort. Retailers supply a data feed of their inventory to eBay so when a consumer searches for a product using Milo she sees local retailers that have the product in stock. Earlier in 2010, eBay bought RedLaser, a bar code scanning app that enables in-store shoppers to comparison shop on the spot. Shoppers hold an iPhone up to a product and RedLaser scans the bar code, identifies the item and product details, and searches the web for similar products.

"If you look at the assets we've acquired, they're really focused on providing the mechanics for merchants to reach customers at every stage of the purchase process," Shrauger says. RedLaser is not only useful for consumers, he notes; it also lets retailers that work with eBay to know a consumer is interested in an item. The Where technology also can provide merchants with information about the ads or promotions that interest a particular shopper.

Retailers want that kind of information, he says. "Retailers see there is massive change in consumer behavior, given that everyone is walking around with the Internet in their pockets," Shrauger says. "That's changing the behavior of the shoppers and, consequently, retailers themselves."

What would that cost online?

Shopper behavior is indeed changing. Roughly half of smartphone owners use their devices while shopping in bricks-and-mortar stores, a 21 percentage point increase from a year ago, according to a report released in December by New York-based marketing consultants WSL/Strategic Retail. Among the main reasons consumers pull out their phones inside a store are to compare prices (56% of those using their phones for shopping), taking pictures of products (53%) and seeking coupons or discounts (46%).

PayPal's in-store payments offering may bundle loyalty programs into a consumer's PayPal account, making it easier for shoppers to manage multiple payment and loyalty programs. "We're trying to help merchants know their customers better and add utility for consumers," says David Marcus, PayPal vice president of mobile. Marcus was formerly CEO of Zong, a mobile billing company eBay bought for $240 million in July.

For PayPal, the offline opportunity puts it in a position to be more than just a way to pay on the web. "If you really want to expand and become the preferred payment brand," Marcus says, "you need to enable it so consumers can use you anywhere."

In a test last fall at an undisclosed retailer, a consumer ready to make a purchase inside the store had two choices in how to pay with PayPal. One was to enter into the payment terminal a phone number associated with her PayPal account and a personal identification number; the other was to swipe a PayPal-branded magnetic stripe card and enter a PIN. Either way a consumer pays, PayPal will process the transactions because both options are tied to PayPal accounts.

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