PayPal at POS – Take 4

Another institutional investor brought back to reality. PayPal is telling physical merchants that Amazon is the common enemy ..Yeah .. eBay as friend of physical retail.. how rich is that?

24 September 2012

Previous Blog – Paypal at POS

Just met with an institutional investors who was really high on Paypal @POS..  here is his recap of Paypal’s pitch:

Amazon is the enemy let me help you compete with them. We can help you with our marketplace to position your product, with our payments to pay for it, with GSI to help you distribute your orders and manage it for you, with our new tools to help you engage the customer before or during their [physical] shopping. We don’t want to compete against Visa, we want to help you compete against Amazon.


–          180bps for payment

–          9% of sales on eBay marketplace

Wow what a great deal.. no wonder they have 6 sales people working full time on it at PayPal. I asked Fred how this works for JambaJuice or HomeDepot neither of which do much online sales..

Here are 4 scenarios… let’s see if PayPal works in any of them

1) Best Buy. $1000 big screen … but only $800 on Amazon

2) Home Depot. 8 2x4s, 5 bags of mulch and a new drill

3) Restaurant

4) Grocery store.

Scenario 1 – Best Buy

How did the customer decide on the product? Did the customer go into best buy to see it? Did Best Buy’s team influence the customer in the sale?

If the customer has decided on the product independent of best buy it will be hard for any retailer to win them separate from price. PayPal can’t possibly help BestBuy on price, actually its online marketplace competes with BestBuy.. as many other merchants sell there too. Does BestBuy really want it’s brand in the eBay flea market? Doesn’t a manufacturer direct model make more sense here? What value is Best Buy bringing?

It would also seem very difficult for eBay to help BestBuy EVER compete on price, particularly when it is charging 180bps for payment and up to 9% in sales fees ( for its marketplace.. It is actually 4x the cost of Visa.

The only circumstance I can identify, where eBay can assist in sales, is when a customer is searching for a product, and BestBuy has the lowest price, will they be able to assist. However, consumers don’t leverage eBay for price comparison shopping.. they use other tools like Google particularly when looking for merchandise in a nearby physical store (see Google Local Support).

Can eBay assist in guiding a consumer to a product? Keys are content, touch and brand. Do consumers normally go to eBay to research products? Do consumers normally trust the eBay brand to give them good shopping recommendations (online and offline)?  Again I don’t see how eBay or Paypal can play in the shopping experience until a consumer has selected a product. If selection is made what services do they have to help in completing the purchase? A: Payment… However payment does not drive product selection or purchase decision, it is a just the last phase of a long process.

Could Paypal uniquely deliver incentives to the consumer during the product selection process to influence them? sure… so could Santa Claus and ShopKick (both equally real) .. but this is not what PayPal does today so PayPal must first build credibility to establish a NEW customer behavior pattern. Paypal today does not do advertising, they do not do physical POS purchases, nor do they do enterprise sales, … in general consumers just don’t care about the PayPal brand off line. Sure, Paypal could invest to establish itself in each of these areas. But these are not trivial investments, it takes tremendous marketing investment to change consumer behavior. Little Square ($8B TPV) has more than 8x of PayPal’s POS volume… which today is primarily driven by their Masterdcard debit (only works against a balance with PayPal).

I was planning to go through 3 more scenarios.. but what is the point? How can PayPal help any physical merchant? eBay’s only asset here is a consumer account.. they may make the point that 100M consumers have a PayPal app loaded on their smart phone.. well that does not equate to usage for payment (rather balance checking)… and it certainly does not equate to usage for shopping.

Top 20 retailers take the view ” we just won Durbin.. we have $0.21 payments… we can steer… why on earth would we want to accept any other form of payments and confuse customer, or our efforts to encourage debit?”

Neither PayPal nor eBay drive sales of traditional retail. For small retailers they are a hero.. giving massive distribution to unique goods. To traditional retailers: they are a flea market that further dilutes your brand and puts emphasis back on price.

Why are retailers playing in the sandbox with paypal.. ? A: To experiment (at someone else’s expense)..

I’m open to comments..

Footnotes. Based on 2012 reporting earnings

  • Marketplaces on average charges 9% commission on transaction volume (for 2011, 10.4% in US and 8.2% International). Volume sellers will receive discount (could be 20% or higher) on final value fees (and other fees).
  • PayPal Regular rate is 2.9% + $0.30/transaction, can go down to 2.2% + $0.30

9 thoughts on “PayPal at POS – Take 4”

  1. I agree that the value of Paypal today is extremely limited, but this is an inherent problem for payment companies who think exclusively in terms of payment transaction fees. That said if they ever do shift to becoming a product discovery tool per their demos and switched up the fee model, they may have a better shot at getting merchants to ally with them as a full solution to take on Amazon and their ilk.

    To date I have only seen them talking about this but their practices are still those of a payments oriented company.

  2. Hm, shorting that investor’s company sounds like a good idea…

    As for Amazon, were they to launch a mobile wallet to compete with Google in retail, they could link it to the already stored card details, thus simplifying consumer onboarding (as well as making “it’s cheaper on Amazon” offers, in-store…)

  3. Great blog! I have been trying to wrap my brain around the change in the payment industry with contactless payments and what Square is doing. I never really understood the advantage Home Depot had in offering Pay Pal on their check out terminals. I have asked the store I frequent as to how many people have used the Pay Pal option and they always say “none”. For me as a consumer, I simply don’t like using my Pay Pal account and try to avoid using it with online purchases if I have the option. I recently experienced a goofy experience where one of my vendors was automatically deducting their fee’s from my credit card using Pay Pal. After doing it for almost two years Pay Pal gave notice that I exceeded my payment limit and had basically two options. Either get a Pay Pal card or use my bank account. At first this was quite frustrating but I figured out a way to get around it and continue using my credit card. What I figured is that this was Pay Pal’s attempt to lower cost with a bank account or use their own Credit Card to which I could possibly use at Home Depot or where ever they are installed on a merchants POS system. Personally, I don’t think their attempts will bring much to the market and it will eventually go away forcing them to stay with the status quo or find some other avenue for income.

  4. The only way I can see PayPal (or anyone like PayPal for that matter) to come in successfully into the retail market is by:
    bringing more new customers to merchants
    bringing old customers more frequently to merchants
    increasing ticket size of every customer

    In other words by making merchants more successful and thus sharing in that incremental success.
    But to do that PayPal would need to become a marketing enabling company and develop expertise in consumer behavior, consumer product selection and purchase decision making.

    Merchants’ payment cost budget is already too large and merchants will not pay more for the same service implemented with new modality (Durbin made this statement even more true). The only wiggle room left is in the low value and micro payment area which has not been successfully addressed yet by anyone and merchants will listen if one has a good story to tell. Cash/coins are expensive to process and electronic ticket is on average 30% higher than cash ticket. Plus electronic payments eliminate lost sales due to cash unavailability.

    PayPal could try to develop this area but their business model is laughable.

  5. This is one of the few places I’ve ever heard anyone questioning PayPal’s ultimate value to merchants. Their deal with Home Depot was hailed as the beginning of something huge. If PayPal is giving Home Depot a fantastic deal on processing fees, I can see why they said yes. But can PayPal do that for all merchants? And I still don’t know what’s in it for the consumer to go through PayPal at the POS.

    What am I missing?

    1. same thing I’m missing.. re: home depot.. not much paypal volume this week.. was it just was a ruse to get better rates with the issuers? On discover… PayPal’s net may be 5-10bps..

    2. The consumer wants more convenience or a “deal”. All 4 PayPal’s attempts in retail payments were not more convenient and there was no extra value attached to PayPal as the form of retail payment but there was cost scattered across the value chain.

      PayPal has a lot of data on some 100M consumers and I suppose it could develop something that could be attractive to consumers and funded by merchants out of their marketing budget. Google knows that and there are betting a lot of money (via Google Wallet 2.0) that merchant will reward them.

      PayPal also could if they knew how to explore elements of viral marketing to grow adoption and generate new value to consumers and merchants. In a grand scheme of things, they are one of the few successful P2P companies. This has to be worth something when combined with commerce.

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