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Building with eBay
And there's more to come, PayPal says. Another project focuses on making PayPal the way consumers pay in stores with their mobile phones. In this arena, PayPal takes on payments processor Square Inc., whose mobile payments app is building a base among small retailers and recently landed a nationwide deal with the Starbucks Coffee Co. chain. PayPal is piloting a mobile app that lets a consumer click an icon on her mobile phone of a participating retailer before walking into a store, causing her account information and her photo to appear on a store cash register screen. The idea is that the clerk will recognize the customer by her photo, and process her payment without the customer having to present her phone.
That is just one of the pilot projects PayPal is working on with 16 major retail chains that operate some 17,000 store locations, Kingsborough says. Although PayPal won't release many details on those projects until later this year, the company says they will build on PayPal's mobile technology and loyalty program, enabling retailers to reward customers with electronic loyalty points they can redeem while using PayPal to complete a purchase. PayPal's loyalty program extends to users of other payment card brands, when consumers use those brands to load their PayPal accounts. "We'll be taking information from these projects and use what works best," Kingsborough says.
PayPal also plans to work more closely with other e-commerce technology providers within the eBay corporate family, including the e-commerce and inventory management offerings of GSI Commerce Inc., the PayPal spokesman says. For example, eBay and PayPal may develop ways to integrate with GSI's inventory management systems and eBay's Milo mobile app for checking in-store availability of products.
In the security area, Mott of BetterBuyDesign says PayPal owns technology from its 2012 acquisition of mobile marketing company Where Inc. that can identify the cell phone tower through which a buyer transacts a mobile payment, enabling it to alert a merchant if the buyer's location doesn't match his PayPal account information or if it's in a geographic area known for high rates of fraudulent transactions. Such alerts could lead a retailer to automatically block a transaction or manually review the purchase to verify a shopper's identity. A spokesman for PayPal confirms it is working with such technology as it takes advantage of cell phone infrastructure to increase payment security.
By building its presence among physical stores—most of which already accept the Discover Card from Discover Financial Services, which has agreed to process consumers' PayPal transactions over its network of some 7 million store locations—PayPal also has the opportunity to introduce more consumers to its brand, Mott says. "There's sure to be spillover from stores to online," he says.
Indeed, with PayPal's more than $4 billion in 2011 revenue coming almost exclusively from e-commerce—and with e-commerce accounting for a small fraction of total retail sales—PayPal figures it can make huge strides even if it wins only a tiny share of store payments. "E-commerce represents only about 9% of total retail sales," Kingsborough says. "That leaves 91% that's not online, and that's a massive opportunity."
While such developments are still in their infancy, experts say PayPal is building on an inherent advantage of its payment system. Consumers can load funds into their PayPal accounts from their bank accounts, a no-risk transaction through the interbank network known as ACH that costs PayPal only pennies, while credit card issuers take the risk that consumers won't pay their bills. The lower cost of funds means PayPal can offer retailers pricing that undercuts that of the big payment card brands, says Allen Weinberg, a payments industry analyst with consultants Glenbrook Partners LLC. "No question about it, PayPal can offer a less expensive payment service compared to standard bank cards," he says.
PayPal charges from 1.9% to 2.9% of transaction value plus 30 cents per transaction, with a separate schedule of 5% plus 5 cents for micro payments of $10 or less. While its rates fall between Visa and MasterCard on the low end and American Express on the high end, PayPal also offers more flexibility in setting contract rates, experts say.
Indeed, that's part of what attracts Caché's Metz to PayPal. "With PayPal, you have more negotiating leverage to get better rates," he says, referring to the cost of accepting payments on customers' PayPal accounts.
PayPal may also be willing to cover some of a retailer's deployment costs. Depending on a retail site's size, it can cost anywhere from tens of thousands of dollars to well over $100,000 to deploy PayPal, including the cost of coding pages and designing pages with PayPal checkout buttons, Mott says. He says PayPal generally covers most, if not all, of these costs. Caché and other retailers including Moosejaw Mountaineering and BabyAge.com contacted by Internet Retailer declined to discuss what they paid to deploy PayPal, but noted that PayPal does negotiate how much of the cost it will cover. PayPal declined to comment.
With its mixture of merchant costs and services, PayPal is betting that retailers will increase their reliance on it as a consumer payments vehicle, putting it on a more equal footing with the established payment card brands.
But that may still take some time. When asked if Caché planned to offer PayPal in its 270 stores as well as online and through mobile devices, Metz hedged. "Hard to say," he says. "It's not something for 2013, but maybe later after we see how the online PayPal presence impacts sales."