It has been too long since I’ve blogged, but with the recent announcements around ApplePay and as the former head of PayPal Mobile Business Development for North America, I feel compelled to do so. More to come later as more news is synthesized in my brain…
First, let me start by saying, I may quite possibly be the last person who had a Nokia phone in the U.S. My loyalty as an Apple user is relatively recent. Some time in the last 6 years, I begrudgingly bought an iPhone, because I had to do so to understand mobile payments. Like everyone else, I can’t imagine my life pre-iPhone anymore.
It has been an exciting week in mobile payments between MCX’s announcement last week with their merchant-focused mobile payments/loyalty service riding on prepaid card and debit rails and, of course, Apple’s new Apple Pay service announced on Sept. 9. Conspicuously absent from all this news is PayPal.
PayPal is in big trouble.
How, you say, can PayPal, the 100 lb gorilla in ecommerce payments and mobile payments be in trouble? After all, it has over 150+ million active accounts worldwide (every time you sneeze, there are 25+ more million accounts added) and processed $25 billion in mobile payments volume in 2013, by far, the leader in mCommerce in the US/globally (except for China). Doesn’t size in payments matter? Besides, they have cross-platform (iOS, Android), online/and mobile payments mark. How could they get unseated?
Some thoughts to consider:
1. Apple Pay, integrated into the iOS, calls into question PayPal’s value proposition that used to set it apart from others. PayPal grew its business through arbitrage. PayPal met a very important need in 1999-2000 and beyond. Specifically, they provided security, trust, and convenience in online payments between parties that didn’t know/trust one another. They did this through arbitrage… riding the rails of ACH to bring “real-time” payments and acting as the trusted middleman between people (P2P auctions) and, eventually, consumers and merchants. Later, their value prop included convenience since you didn’t have to input your card details (which resonated particularly in the mobile UI in the beginning of mobile commerce times.)
Apple now has a more convenient, more secure service which works seamlessly within the iOS itself. They have 800+ million iTunes accounts which are auto-enrolled with the phone upgrade. Any in-app experience, I believe, is going to work better, faster, more secure than any other’s within the iPhone experience. Unless Apple mucks this up terribly (they rarely do, except Apple Maps), ApplePay flow will likely trump PayPal’s in a heartbeat. And if you maintain that PayPal has a significant online presence, you’re correct. However, PayPal’s growth market is mobile (and mobile retail.) Apple has outflanked PayPal in their largest growing market. Over time, as PayPal becomes less relevant in mobile, it will also become less relevant in its current core business, online. Remember: share of mind and share of wallet matter in payments.
2. Apple drives mobile consumer behavior, not PayPal. Back when I was at PayPal in 2007 & 2008, the mobile business was just a toddler who was learning its legs, we had grandiose ideas around retail/NFC and how we would grow our business in this space. This was pre-iPhone. We, that first team making foray into mobile payments, learned a lot along the way. One big takeaway was that PayPal couldn’t drive new consumer behavior on the mobile phone. Although text-to-buy and text-to-give were innovative services, few consumers used them. People barely used text messaging at the time, let alone learning a new payment method on this type of interface. Just because the technology worked, didn’t mean you could shove it successfully into the market. Sadly, this lesson went out the door as employee turnover continued in the mobile business which led to the same mistakes, including launching mobile number password/PIN at the retailer… a behavior few would adopt since it flew in the face of every other learned consumer behavior (bar codes, tapping phone, etc.) that others were building. The rest of the ecosystem (and consumer behavior) had to evolve… And it wasn’t until iPhone Apps that PayPal Mobile adoption rates began to grow. Apple set the consumer behavior, and everyone else had to then run their service on top of that behavior. If I were Apple, I’d make sure my consumer experience on ApplePay far surpassed anything else anyone could do on my device.
3. Apple is the ONLY company that can achieve merchant adoption through consumer demand. Wait, what?! I have maintained for the past 9 years that mobile payments in the US is solving a consumer need that doesn’t exist. In fact, mobile payments/offers/loyalty really meet the merchant’s needs… to use it as leverage to drive down transaction fees and develop a stronger 1:1 relationship with the consumer (to drive sales.) So, Apple, being consumer-focused… how could they drive consumer adoption where the need doesn’t exist and how could they possibly drive merchant adoption?
One thing that Apple has proven is that they break all the rules we believe about consumer demand/technology/services. For that reason, I believe they will drive consumers to demand mobile payments and actually drive merchants to adopt because of that consumer demand. Apple Pay will be a “must have” in the future. Apple solves the chicken and egg dilemma through consumer-centric approach in a way no other company can. While many say that Apple is not meeting merchant needs and won’t be able to achieve success accordingly, I say, are Visa and MC more merchant-centric with their fees? Those who drive sales win the hearts and minds of merchants. Pure and simple. (Which is why mobile content providers paid 50% to MNOs for so long…)
PayPal’s approach has been to undercut MC and Visa fees to drive merchant adoption. My guess on Apple’s approach… prove that merchants will lose sales. Guess which one merchants care about more?
4. Apple has befriended the Banks (for the most part) while PayPal has alienated them. Ecosystem matters. PayPal is now “going it alone” with no friends with the big banks and associations, no friends with the MNOs (which are irrelevant now anyway), and no mobile OS control. In a world where ubiquity matters, having partners/friends that are ubiquitous in open loop helps. Because Apple doesn’t process the payment but just passes on the payload, they don’t have to grow a new business around risk analysis, customer service, etc. while also befriending everyone already in the payments value chain (even though they charge issuers $ bps on every transaction, something no one else has been able to get away with.)
Bold statements on PayPal’s strategic options
1. The enemy of my enemy is my friend: Google, meet PayPal. PayPal, meet Google. Shake and make up. Time to speed date.
2. Should eBay spin out PayPal: Really? Is this even a question anymore? While execs were busy debating if/when PayPal should be spun out, Apple has been planting the seeds for 3 years to eat your lunch. Time to move fast before your most important asset loses significant value in the next 5 years.
More thoughts to come later…