As an ex-PayPal Mobile exec, I was pleased to find that PayPal has finally made strides into retail with their recent announcement around their partnership with Home Depot.
Since the internal pilot had completed and the ability to pay using PayPal was open to all PayPal users, I wanted to test the system out and understand how it worked (and what the business model looked like), so I signed up for the service and went to Home Depot to try it out. (By the way, I couldn’t find anything on the site to get me to the registration area for this, so I finally had to reach out to a PayPal mobile employee to find out where I could sign up!)
Here’s what my big question was.. (and this relates to the business model)… Is PayPal in the red or in the black on these transactions? This was the constant struggle we had 5 years ago while I was at PayPal when we were first contemplating retail payments using mobile.
What does this mean?
PayPal enables people to fund their accounts in several ways. You can have balances from selling goods or receiving money from others (or now depositing from a check.) You can link your bank account. You can get PayPal credit. Or you can link your credit/debit cards to fund your PayPal account. The cost to PayPal is in order of this priority. Balances are near zero cost. ACH pulls from bank accounts are pennies. Providing PayPal credit is cheap, but funding using cards is expensive because PayPal has to pay Visa, MC, or Amex for card-not-present transactions (although they get volume discounts.)
The difficulty is this: Card present interchange fees are SIGNIFICANTLY lower than card-not-present fees. This means that if you fund an account with a card-not-present card for a card-present transaction, you lose a MINIMUM of 100 basis points. So… on to my test.
Would PayPal allow me to pay for something at Home Depot using cards? (And note that American Express cards are even more expensive than Visa or MC)
So, I unlinked my bank account. I drained my PayPal balance (note: PayPal always pulls from the least costly sources first, so it was necessary to do this.) I unlinked my Visa/MC cards, and kept only the Amex card as the funding source. Would PayPal allow me to do the transaction?
1. Went to Home Depot Self Checkout Kiosk. To see pictures, visit my PINTEREST site
2. Chose PayPal as the method to pay on the self checkout kiosk
3. When prompted by the POS, I entered my mobile number and PIN
4. “Declined” = PayPal does not let you pay using American Express
5. So, I then added a Visa/MC card
6. Went through the flow again
7. This time, it was accepted. I got a paper receipt and a text message with a link to a digital receipt from PayPal
Bottom line – PayPal is losing money on transactions that are funded by cards, but I’m assuming they are assuming that they will either make it up with users who fund with balances, ACH pulls, and credit, or they will make it up in value-added offerings that they will later launch that compliments retail payments.
For any PayPal folks reading this blog, here’s a suggestion on better user experience:
1. Make it easy for people to register for this by making the registration page easy to find
2. The checkout is confusing because on the POS, there’s a button that says “Pay with PayPal” but if you hit that button, it prompts you for the PayPal card. Users don’t know that they have to choose the PayPal option on the kiosk rather than the POS
3. Let consumers know AHEAD of time during registration that AMEX-only funded accounts won’t work
Stay tuned to see how this all pans out…