Paypal at Crossroads (? buying Blackhawk)

25 June

Big things are in store for my favorite eCommerce payments company. Really, I do like Paypal. I may ding them on their POS strategy… as it makes no sense at all… but I love Paypal online.. the “original” ecommerce payments solution that adds value to merchant and consumer. In 98/99 Thiel and Levchin were the first to dream up digital wallets, and first to solve a REAL problem of card acceptance online for small retailers. Perhaps even better than the great Paypal PRODUCTS, were the great PEOPLE that grew out of PayPal.. that have done soooo many great things: Peter Theil, Max Levchin, Elon Musk, Keith Rabois, Premal Shah, Osama Bedier, Amy Klement, Steve Chen, .. (list too long sorry to those I left off).

As its early leaders went on to do great things, the company “evolved” from an innovative start up to take on a bank flavor. Scott Thompson came from Visa and all his direct reports had bank backgrounds… the top tier of the organization led to a culture change (in a bad way) and it went from the coolest company in the valley… to … errrr… something else.  Pierre and the BOD recognized this and tried to get the mojo back with putting David Marcus in at the helm. They wanted to recapture what made Paypal great (people).. to reset the culture. David is a great guy, as he says this week he was an innovator.. but one that never ran a team larger than 200.. and certainly not a global one which was highly regulated.  It didn’t help that eBay’s CEO essentially undercut David by allowing Don Kingsborough and Gary Marino end run and make decisions directly with John. How could any CEO make it in that kind of environment!?

Now that David is gone (see Venture Beat) who can lead them (today) and what is their new strategic imperative.. their vision for growth beyond eCommerce?

Next 12 months

I believe Paypal will see competition in its core business like never before, As I stated previous Payments are moving into the OS… and Paypal doesn’t have one. Apple, Amazon, Google are new competitors in core eCommerce… all with an OS.

Paypal’s new competitors?

  • Apple will own payment presentment and authentication on all iOS devices.
  • Amazon will begin to get off Amazon traction (example today is Gogo wireles)
  • Google’s massive success in Shopping Express (Free shipping and payments). Google also just launched wallet in iOS (see google’s blog)
  • Bank Token Schemes and forthcoming rules for cards on file

As a side note, Paypal did squeeze itself into the Apple wallet (for NFC/POS transactions), but Apple will be expanding the iTunes buying experience very soon, and it won’t be looking to drive Paypal merchant adoption, as it is in the process of negotiating card present rates for CNP transactions (See my Apple blog).

Paypal at the POS is a complete joke (see blog). The business guys that have been running the show (or end running David) are focused on a Visa/Mastercard like strategy… not on one that delivers value to their core constituents (merchants and consumers).  Paypal was the company best positioned to execute on a Braintree/Stripe product 5 years ago (remember X.com) and also the best company to have built a Square/Clover like solution. They missed all these things because their business heads were focused on quick transaction volume deals and solutions.. NOT ON VALUE.

POS – Buying Blackhawk?

This is my big theory today. With eBay repatriating $9B and taking a 30% tax hit, we all know that acquisitions are planned. But what?

Obviously Carl Icann, David Marcus and the BOD have had some disagreements. Rather than guess the strategy, lets take a look at WHO is staying at Paypal. Don Kingsborogh is the former CEO of Blackhawk and head of Paypal’s POS strategy, and Discover Network strategy/relationship.

Paypal has promised its institutional investors progress at the POS.. and they have NONE. Jamba Juice and Home Depot numbers are terrible. The Discover partnership did nothing for them, as MCX merchants REFUSED to accept Paypal (routed as a Discover Card) or new processor agreements (that ran as high as 210 bps). Paypal has “learned” it cannot sneak in payment products within an existing network (Discover), nor can it deliver enough value to push merchants toward a new agreement. Few eBay investors realize that the Discover relationship is yielding NO FRUIT.  Even IF they could convince a merchant to TRY paypal at POS.. they first have to line up the Processors to support, and big ones like First Data were not playing (WSJ Article). This Paypal was paying $50k-$250k+ for merchant to SWITCH to Vantiv just to do a pilot.

Paypal at POS needs a ubiquitous merchant acceptance solution and a physical connection to all major merchants. They also have learned how both Google and Apple have developed strategies to end run the traditional payment terminal and integrate directly with the POS (see the brilliant Google/TXvia Patent US 8676709 B2. )

Blackhawk may fit the bill, as it has a merchant network and POS integration solution today. Every time you pull one of those pre-paid cards off the shelf the SKU bar code is tied to the card Primary Account Number.  The Retailer’s POS system sends the SKU to Blackhawk upon payment and Blackhawk activates the card.

Blackhawk is working to leverage this transaction flow to create its own scheme to fund the transaction.See Blackhawk’s patent US8676709 B2. An item in the shopping card becomes a payment instrument. This could be “THE” enabler to someone like Apple too.. a new payment “gateway” that end runs the traditional payment stream. For Apple, all they would have to do is get a secure “TOKEN SKU” to the POS and the POS would leverage Blackhawk to route. Of course items in a basket usually have a cost, but settlement could be accomplished through a 100% discount, or by capturing the merchant ID and terminal ID to push the payment back through their current processor.

I think this is THE most brilliant scheme EVER!! I love it.. If implemented via ACH.. and MCX. I just don’t love Paypal delivering it because of “cost” and ability to coordinate/execute in delivering value from  all merchant data.

I’m only 50% confident here.. just put a small $10k bet along these lines for fun.  But at a $1.4B market cap.. this would not be a bad bet for PayPal.. problem is that merchants will never go for it.. this does NOT solve the VALUE problem (for consumers or retailers).. it only solves the network acceptance problem. This approach continues the “we will sneak it in” approach. It may “solve” a short term problem of Processors.. but it creates a new one for the merchant in having to deal with multiple processors (one for swipe one for … something else).

IF the merchants would go for this, it may be the best payment design on the planet.. as it would give a way to provide discounts and rebates within the POS system. Integrating with the POS would completely disrupt the processor/payment terminal process, and we would begin to realize the “power of tokens”.

5 thoughts on “Paypal at Crossroads (? buying Blackhawk)”

  1. Blackhawk only reaches 100k locations and 500 content providers. PayPal was able to exceed that on their own in a year with their “complete joke” of a POS strategy. And in the meantime PayPal (and others) are busy demolishing Blackhawk’s current business which is physical gift cards. PayPal buying HAWK would be like AMZN buying Borders to get a brick&mortars strategy going.

    1. Think we are talking apples and oranges. In 2013, Blackhawk processed a total load value of $9.9 billion and over 240 million load transactions. Their Retail network connects to more than 650 content providers and over 180,000 active retail distribution locations. From their 10-Q

      ..gift cards from leading consumer brands such as Amazon.com, Applebee’s, iTunes, Lowe’s, Macy’s and Starbucks and from leading network card associations such as American Express, Discover, MasterCard and Visa. We also distribute prepaid telecom products offered by leading prepaid wireless telecom brands. In addition, we distribute GPR cards provided by Green Dot and NetSpend, the industry leaders in this product category, as well as PayPower, our own GPR card. Reloadit, our proprietary reload network, allows consumers to reload funds onto certain of their previously purchased GPR cards. We also offer innovative prepaid solutions including functionality and connectivity for digital wallet products within the rapidly growing digital payments space as well as an online gift card exchange called Cardpool.

      The blackhawk numbers above actually UNDERSTATE the Pre-paid volume it ENABLES as it serves as the “activation only” network for many other cards.

      Paypals TPV is running around $200B, which is weighted heavily to eCommerce (POS is much less than $1B). Paypal’s “distribution” at the POS is the result of Discover. But as I pointed out merchants have the ability to exclude Paypal products within Discover agreements, as to processors. Thus Paypal’s true POS network as measured by active physical locations.. is in the 1000s… HAWK would help PayPal substantially.

      Think that if you check to see how gift cards are activated, you will find that HAWK wins no matter who processes the gift card. HAWK is the activation network.. (example http://www.bizjournals.com/sanfrancisco/print-edition/2011/10/28/blackhawk-network-prepaid-cards-soaring.html?page=all) … which is why I view this is a key asset to be leveraged (HAWK’s assets are quite unique). I think we will have to agree that we disagree.

    1. Blackhawk has POS software in place with major retailers. Today it is primarily an “activation network”.. this is their key strategic value, they do manage their own pre-paid cards too.. but what if I told you that 90% of all iTunes gift cards needed Blackhawk for “activation”… I don’t know the number.. but I think I’m close.

      Today Blackhawk takes the SKU of the card (a unique SKU) and “activates” the card when the merchant sends the SKU to them. This has taken many years to put in place.

      In addition to Activation, safeway has also built mechanisms to process payments without need of the payment terminal. If you look at the patent I reference, this is the basis for what Safeway has done to enable ACH payments (directionally.. as SW owned BH just a few months ago). Of course they do need a PIN Pad here. https://fastforward.safeway.com/enrollmentui/enrollment/ff/FAQ.html

      What I’m proposing is to turn the current Blackhawk SKU in to a payment token. As you know there is a settlement process completed before the payment terminal ever gets the final total (ex tax, discount, coupons, rebates). There would be a POS software upgrade (on par with what Safeway completed) to allow the SKU to activate and/or pay depending on the enrollment of the customer in a program (per the patent). This ties SKU to a virtual ACH/Payment account.. (enrollment per patent).

      From a technical perspective, how the SKU gets to the POS could be through bar code, QR Code, BLE, or … ? The payment terminal is not involved in this process.

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