Online retail giant eBay just announced its 4th quarter results, including 18% year-on-year revenue growth to $3.9 billion. Forrester analyst Brian Walker called those results “lukewarm” because eBay lost market share to Amazon.com and Walmart.com. But one division of eBay posted growth that exceeded all others—PayPal, up 23%, to $1.37 billion.In its quarterly report, PayPal attributed much of that growth to people’s growing use of mobile phones to pay for things. PayPal Mobile processed 250% more money for merchants than in the same quarter last year. But another reason for that growth is that PayPal has moved into processing payments for brick-and-mortar stores. Customers can now pay via PayPal in 23 large US retail chains.
Given the competition from payments startups like Square, which is now handling transactions at Starbucks, and Stripe, which is going international, it might seem improbable that PayPal should be gaining so much traction with retailers. Yet the company just announced a system in McDonald’s France that allows customers to order ahead and pay online, and a similar system at Jamba Juice in the US, and it will be doing a lot more such deals this year, says Anuj Nayar, PayPal’s spokesman.
PayPal’s secret: unsexy technology
PayPal can lock down these lucrative deals with big retailers for a simple reason. It can offer their customers high-tech services, like online ordering or mobile wallets (money stored on your phone), which the retailers’ existing payment systems may not be able to handle; but the retailers don’t have to junk those systems, because PayPal works with their current providers. For example, in order to land the deal with Jamba Juice, PayPal partnered with NCR Corporation, formerly National Cash Register. NCR is a 128 year-old company—it literally invented the cash register, and it has almost 40% of the market for them in the US.
You can think of PayPal as the IBM, Hewlett-Packard or (post-transformation) Dell of payments. All three of those companies are accomplished at building software and hardware that can work with the mind-bogglingly complex mix of “legacy” (i.e., old) technologies that large firms all have. Running a global retail operation is a huge logistical problem, and the equipment required to do it can’t just be ripped out and replaced overnight. Upgrading legacy systems is a bit like transforming a turboprop plane into a jet while still flying it.
Making the leap from online to in-store payments could be a massive opportunity for PayPal. We take e-commerce for granted these days, but it’s still only 9% of all retail in America, and less in many other countries. Getting into stores gives PayPal access to a market many times larger than the one available to online-only competitors like Braintree and Stripe.
But PayPal is still vulnerable
PayPal’s ultimate goal is to become as ubiquitous as Visa, Mastercard and American Express. People can already pay via PayPal at old-style credit card terminals: the company is renting the payments network of Discover, America’s fourth-largest payments handler, so any stores that accept Discover can now accept PayPal. Integration with retailers’ inventory management systems, location-based systems that can tell from a PayPal user’s mobile phone when she’s arrived at a store, and a mobile wallet are all in the works or already being tested at retailers.
But there’s an existential threat to PayPal, and it’s Square. Square’s model is more or less the opposite of PayPal’s. Instead of connecting to retailers’ existing infrastructure it offers them a completely independent, soup-to-nuts payment system with a checkout terminal based on an Apple iPad, and takes all the bureaucracy of dealing with banks and credit-card networks off their hands.
That’s great for small retailers and those just starting out. But if bigger chains start deciding to replace their payments systems, as they age, with an all-in-one system like Square’s, there could come a tipping point when the entire payments industry, and not just PayPal, is swept aside by more nimble competitors.
Still, banking, retail, and consumers’ preferences for how they manage their money change slowly. That’s why PayPal’s strategy makes sense for now. It offers big retailers more sophistication in payments without obliging them to make the leap to a completely new system. That means it could capture a sizeable share of the market while Square and the like are still only just breaking into it.
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