Case for Paypal + Square

4 May 2014

For those of us with kids we know them pretty well. Take for example a 6 year olds ability to pull a fast one (not very good at keeping secrets/lying) We know how our kids think.  How many times have we admired inventions built with Tinkertoys and Lego’s with pride, congratulating them on their effort and inventiveness… as they build their skills. The kids are all quite certain that their design has never before seen the light of day.. an original masterpiece. You see the same effort and development with your other kids, and you share stories with your friends and family.

I call Payments the World’s second oldest profession, as at the end of the day he had to settle. Not much new changes in the payments world, the same ideas are recycled again and again, as new teams try “new” approaches and discover things they did not know… just like the kids above. The industry in general is hurting for continuity today.

Per Wednesday’s blog  iPhone 6 – Payment Predictions I outlined what I believe will launch. Putting on my “Apple Hat” I was trying to imagine their perspective:

• Banks won’t support me in launching iBeacons, and I really wanted to enable all iPhones with this thing. It feels like I’m getting squeezed into this Bank box where I wanted to do something new and creative.  I could launch Beacons without them, but I’d be eating card not present interchange and merchants won’t really see that as innovation… but a cost if I pass it along.
• Banks are not giving me any incentives to make this work for them, I can’t believe they shut out my patented process with this token thing, and Mastercard is the only group with it even close to working.
• PayPal is sharing economics with me, but they have absolutely no POS merchant adoption
• That Square thing was worth looking at, but just isn’t core to my business.. I don’t want to own a cash register software company
• I hope I can find a business leader to run this payment area for us…. We have been looking for over a year and everyone runs away when they realize we are locked and loaded on our strategy and we just want someone to execute it.. and own the reputational risk for making it work. My treasury guys know payments, but don’t think they get the consumer implications.. its not about making money in payments, but about being a consumer champion.

Now I put on my eBay/PayPal hat. Just what massive opportunity did Carl Icann see for a Paypal Spin off? Why did they repatriate $9B and take a $3B tax hit? What will they buy for $6B?

• It was a real pain to get into Apple’s wallet, we had to give them 40 bps and for what … iBeacons and the hope that Apple can make POS payments cool? I can’t imagine Jamba Juice driving the iPhone’s success here and we really don’t have anyone else lined up to try it. Even if we get the merchant, we still have to convince the consumer to use us versus their V/MA.
• This means we are the ONLY path for Apple to execute on POS payments for their legacy phones and support their ideal consumer experience with iBeacons
• We need POS merchants. I just can’t believe we have made absolutely no progress in signing up merchants for our Point of Sale. We have got to get moving before Investors call us on it … soon
• What is our “perfect” merchant profile? iPhone heavy consumer base, Wants to try new things, small (not multilane).
• Could we acquire merchants quickly? Another PSP? How could we make this work for us financially?
• Could we ride on Apple’s coat tails to make Beacons REALLY big? After all if Apple pays for a merchant to accept beacons and I’m the only one to help them execute it.. why limit it to iPhone. Paypal could own the beacon space for Android.

I have absolutely no idea if eBay is considering Square. But could understand their interest in assessing it within an Apple opportunity. The risk eBay faces has nothing to do with Square, and everything to do with consumer preferences/behavior and Apple.  Apple MUST support consumers in the manner they WANT TO pay (Consumer choice is key), similarly Apple is in no position to force new payment scheme (Paypal) AND a new payment process (iBeacons). To garner adoption they must narrow the number of changes to 2 at most and deliver VALUE to the consumer/merchant.

Given Apple’s cash position, they are certainly in a position to move iBeacons in a CNP model with the goal of getting bank support for iBeacons/Tokens in a card present model next year. However there is no long term “payments” business case. If Apple paid merchants to accept tokens (offset higher CNP rates and Apple accepted Fraud) when banks allowed the model there is no revenue share for a wallet provider in Card Present. In other words Apple would have done all the leg work to make mobile payments work, but get nothing for it (outside of handset revenue).

Makes you wonder why anyone would invest in mobile payments…

Update — How would it work

I’m moving a question asked below up into the main article: what do you mean “Beacons in a CNP model”? Card present transaction is something defined by the network and accepted by the issuer, examples: mag stripe swipe, chip and PIN. EMVCo just release a BRAND NEW card present transaction type: Tokens (see EMVCo).The spec is out, but the actual use of tokens is not quite prime time. Thus we are largely stuck in the “old world”. This was my blog on Token Assurance. Thus the only way for iBeacons to exist is outside of the card present specifications, with another entity taking the risk on the transaction and serving as the merchant of record. Either Apple or Paypal could fill this role. Example, you go into store and pay (at POS) with the card  in your iTunes account. Apple could either create a new token identifier (iBeacon) or issue a card. If they create a token identifier they have to work with all the processors to route it back to them for approval, so card numbers are easier. In either the token or Card example, the transaction flow is the same… the merchant obtains a verification from Apple that funds were transferred into their account.  Apple thus takes risk in settling the transaction with the underlying payment product. This is how Stripe, Braintree, Paypal, Google … and many others work today in the eCommerce world (see my blog on TPPA). Google accomplishes a the POS version by through a prepaid card (see blog). My view is that Google’s model is absolutely brilliant (great job Osama and team), but few people are capable of modeling it because of the economics. Google is the ONLY wallet that lets the consumer pay with ANY PAYMENT INSTRUMENT they choose. Downside.. they loose money on every transaction. The are also responsible for all fraud losses.

There is nothing stopping Apple from making this work functionally with either a card or a token. It seems that they are not keen on loosing money on every transaction, particularly given their strategy to become the consumer champion (no data monetization). Thus they are stuck with the following options

1. Use Paypal + iBeacons, make money on the transaction, knowing that there is no merchant acceptance of Paypal or iBeacons and this will GREATLY irritate the banks
2. Go it alone, push iBeacons, allow payments for ALL apple iPhones with Apple as TPPA. Take ownership of fraud, loose money on every transaction, and pay to integrate every merchant.. All for the good of the platform.
3. Partner with Banks. Get on the NFC bandwagon, no Beacons and payments with iPhone 6 only. Hope that the banks work out rules on tokenization and push for iBeacons + Tokens next year. Downside.. there is still not business case for us, and there is no merchant adoption of EMV contactless. Upside.. we don’t bear fraud losses, or get involved in the POS subsidies.. it is the Bank’s problem.
4. Delay all this payments stuff until Banks support me and make it worth my while. All the fun stuff for the iPhone is before the payment happens anyway.