PayPal at Home Depot – How does it Work and Does it Make Money?

3/1/2012
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…

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17 responses to “PayPal at Home Depot – How does it Work and Does it Make Money?

  1. Very interesting observations on the checkout process. And leaving out the Amex fiasco sounded like more than just someone overlooking that step during customer experience testing. But Paypal probably makes up the biggest threat to issuers today as the latter fights to remain relevant. If Paypal can convince a few more Tier1 merchants, and fix the gaps you had identified, they will have a substantial challenge at the point-of-sale and elsewhere that the current payment rails will have a hard time to match.

  2. Don’t forget that CNP interchange on regulated debit cards is the same as CP interchange – thanks to Durbin and the Fed.

  3. Tejas Kotecha

    I feel like PayPal’s real hope of making money here is on PayPal Credit and I think it is the biggest threat to Visas of the world. If the entire offline transaction happens on PayPal Credit and later user can pay off balance using bank account, check or even cash; it will cut CC companies out of equation. From user’s point of view you can leave your CC home and still shop but I wonder how is experience while typing your phone number on kiosk compared to swiping the card and if it is tempting enough for users to switch.

  4. I am not sure this is going to work out. According to Visa, they are saying PayPal just doesn’t have the back end systems to make it work and will not be able to scale to the demand. Time will tell, according to a few research reports, mobile wallets will only pick up over the course of the next three years.

  5. Just for fun, a critical comment on “The New Way To Pay In-Store” with PreyPal

    http://forums.auctionbytes.com/vbulletin/showthread.php?t=24611

    eBay / PayPal / Donahoe: Dead Men Walking

    • Philip, I agree with many of your observations re: adoption of this. I believe the reporting on adoption rates has been intentionally vague and I also find it inane when people say, ‘You can leave your wallet at home.’ Really? And how did you drive to Home Depot?

      Incidentally, when I was testing this out, a checkout person came over and said she had never seen anyone try the PayPal checkout yet. (in Daley City… Part of original pilot)

  6. Menekse, Donahoe is desperately clinging onto his now 16 million a year. Yet the eBay marketplace has been stagnant since this turkey took the helm; so he’s got to keep spending lots of that river of cash that eBay generates on crazy ideas such as this POS exercise to make it look like something is happening when in fact very little he has ever done has caused anything to go right.

    As Meg once said, even a monkey could have driven the eBay train; why did she then hand the job to this headless turkey? Were there no monkeys available?

    Even PreyPal, with its effectively mandated use on the eBay marketplace had to be a very easy winner in the short term—on the eBay marketplace, but I have no doubt that Visa’s coming V.me with bury the clunky PreyPal outside of the eBay marketplace.

    There has been “talk” of PreyPal talking to “the banks”. I can’t imagine that the banks would not touch this clunky operation with a forty foot pole, and why would they, their very well behaved child, Visa, is about to launch V.me.

    I see no future successes for either PreyPal or eBay, certainly not under Donahoe.

  7. Donahoe has been too long on the tit of eBay’s “tied house” merchants; apparently, he is laboring under the delusion that, even off eBay, he can mandate the uptake of his latest clunky PreyPal products. Good luck John, you are going to need it.

    eBay / PayPal / Donahoe: Dead Men Walking

  8. Well, this is not yet launched in India, so unable to experience it and offer my views on it.

    Safe ePayments – Awareness Campaign http://goo.gl/XXIZr

  9. Richard D. McGrail

    Hi, I am not sure this is going to work out, this partnership between Paypal and Home Depot is really good, but I don’t see success in the future, I agree with Alex “according to Visa, paypal just doesnt have the back end systems to make it work and will not be able to scale to the demand in online payments“, thanks for share

  10. There is a rumour afoot that the reason PayPal is now so aggressively applying lengthy holds on seller-users’ funds is because PayPal’s clunky, stand-alone payment system is causing too much trouble for the real banks with charge-backs and other transactional disputes and PreyPal has apparently been told to shape up or ship out, and if they don’t shape up, then they risk having their “merchant account” with the infamous Wells Fargo Bank declared “persona non grata”. (Funny too how the unscrupulous tend to congregate.) This, of course, is the same risk that any unscrupulous merchant account holder faces with the real banks. And what could such action against PreyPal mean? It could effectively mean the end of the clunky PreyPal.

    And, when do we start calling eBay a payments company …

    http://forums.auctionbytes.com/vbulletin/showthread.php?t=24590

    eBay / PayPal / Donahoe: Dead Men Walking

  11. Sebastian Bermudes

    This is awesome news! Are there any plans to roll out a similar payment service at other retailers?
    This gives me one more option, but I’d love to be able to ditch my wallet completely.

    • That would be your wallet with all your other items, like your driver’s licence, would it? Really, the eBay Dept of Spin should be providing you shills with better bullet points—if only there were any …

      • You could then just keep you DL in the car. I’m guessing that was Sebastian’s thought since it’s obvious.

  12. Cohen sounds like an ebay Short. Too many overly negative posts to be credible…

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