October 9, 2013, 11:33 AM

PayPal tries a software-only approach to in-store payment

The mobile payments scheme doesn’t require merchants to invest in new hardware.

Lead Photo

A consumer that checks in at a store via the PayPal mobile app can pay for purchases via a QR code or a four-digit code generated by PayPal's new payment code point-of-sale system.

PayPal, eBay Inc.’s payments arm, has introduced a new mobile payments system that enables consumers to pay for goods in stores using their smartphones. This is the second new in-store mobile payments system PayPal has unveiled in as many months.

Called “payment code,” the system requires smartphone owners with PayPal accounts to download the PayPal app on their devices and retailers to download payment code software to their existing payment terminals.

When a consumer is ready to pay, she opens the PayPal app and checks in at the retailer by going to the Local tab in the app and selecting the store from a list of participating merchants in that immediate area. The retailer’s payment terminal communicates with the app through technology developed by PayPal with its point-of-sale system partners; PayPal declines to reveal details about this technology. The POS-based payment code system generates a QR code (a type of two-dimensional bar code) and a four-digit code. If the retailer has optical scanners, which can scan smartphone screens, the retailer scans the QR code and the payment is made, deducting the amount of the purchase from the consumer’s PayPal wallet. If a retailer has the more common laser scanners, which cannot read smartphones because lasers bounce off the glass screens, the retailer can enter the four-digit code to accept payment.

“The problem that needs to be solved is not paying at a POS terminal,” PayPal writes on its blog. “While payment code does make the checkout process smooth, with easy access to all funding sources in one simple place, your phone, the real benefit is that it will allow consumers to automatically redeem any special offers, gift cards, merchant rewards programs or other forms of payment that might be saved in their PayPal wallet in one quick transaction.”

PayPal adds that in its talks with merchants, many indicate they’re interested in in-store mobile payments but do not want to rip out existing technology to do it.

The payments company also says retailers can integrate PayPal’s payment code system into their branded mobile apps.

It’s important for PayPal to offer software-only solutions for a few reasons, says Rick Oglesby, senior analyst at mobile payments consulting firm Aite Group.

“Lowering implementation cost for merchants is one of them,” Oglesby says. “Another is the ability for PayPal to activate its existing, enrolled consumer base without having to re-enroll the consumers; for example, for a consumer to pay with a PayPal card, PayPal would need to enroll the consumers in the card option so the consumers can receive a card. The software-only solution can be used by existing PayPal customers with no new enrollment.”

Software-only systems enable merchants to quickly enable mobile payments and are easier for merchants to control, Oglesby says. Further, software is more customizable than hardware and therefore allows for experimentation with the customer experience, he adds.

Last month PayPal introduced another in-store mobile payments system. Dubbed PayPal Beacon, it uses Bluetooth wireless technology built into many smartphones and sensors that retailers plug into a wall outlet. PayPal may be the first company to create a mobile payments method that is easier to use than credit cards. With PayPal Beacon, all a consumer needs to do is have her smartphone—with the PayPal app onboard and Bluetooth turned on—in her pocket or purse.

The sensor recognizes when a consumer with the PayPal app—open or closed—enters the store. It prompts the customer to check in; a customer also can set her app to automatically check in. After the customer checks in by going to the Local tab in the app and selecting the store from a list of participating merchants in the immediate area, her picture and name pop up on the retailer’s point-of-sale system. When a sales associate at the store totals a bill on a cash register or a card-reading terminal, the customer gives verbal confirmation to the associate, who matches the customer with the picture of the customer on the POS screen and concludes the transaction. In hands-free mode, a consumer never needs to take her smartphone from her pocket or purse to pay.

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