PayPal will soon be ubiquitous in U.S. retail stores, but just being there may not be enough.
online payment service will take a giant step beyond its Internet roots
on April 19, when a partnership with Discover Financial Services
officially kicks in. The deal means that, by the end of this year,
PayPal will be accepted as a payment option in roughly 2 million retail
stores that already take Discover credit cards.
For parent eBay
Inc, PayPal's expansion is crucial. The 13-year-old payment service
accounts for about 40 percent of eBay's revenue and its growth is
slowing. A foothold in physical payments, a $10 trillion market roughly
10 times the size of online transactions, could power longer-term
But a nagging question hangs over PayPal's push to
checkout counters: how can it convince consumers to try its new payment
method when swiping a credit or debit card is so easy?
need to be convinced they need a single digital wallet or card that
links to all their other cards," said Rick Oglesby, a payments industry
analyst at Aite Group, which provides research to financial services
clients. "That's a huge mindset shift and the average consumer wonders
why they would need it."
PayPal has been testing its physical
payments service at Home Depot Inc stores since early 2012. At the
checkout counter, shoppers can use PayPal by typing in a mobile phone
number and a four-digit PIN that has to be set up online beforehand.
They can also use a PayPal card that links to their account.
uphill battle becomes clear from interviews with employees at the Home
Depot store in San Carlos, California, one of the first to test the new
service. Cashiers there said very few customers chose to use PayPal -
and some who did soon gave up because they found keying in a bunch of
numbers was not as convenient as swiping a credit card.
"I ask at
my local Home Depot and I get the same response - not many people have
used it," said Brian Kilcourse of RSR Research, a consulting firm
focused on retail technology. "Unless there are specific benefits that
consumers can touch and feel, they're unlikely to adopt something new."
Kingsborough, the PayPal executive overseeing the offline push, said
the company will soon be releasing an updated smartphone app that makes
it easier for consumers to enroll in the program. PayPal will also be
sending out new PayPal cards to users who still prefer to swipe.
said he expects the cards to be used a lot at first, but they will be
slowly replaced by the app as more stores set up mobile payments and
shoppers get comfortable using their smartphones to make purchases.
average credit card user uses the card 18 to 20 times a week. For us to
get to those kinds of levels will take time," he said in an interview.
"But by Christmas PayPal will start to be a more prevalent way to pay."
PayPal's offline initiative is in part a response to stiffening competition in the payments market.
a mobile payments start-up headed by Twitter co-founder Jack Dorsey, is
used by more than 300,000 merchants and has struck a partnership with
Starbucks. Credit card giants Visa Inc and MasterCard Inc are working on
their own digital wallets. These companies declined to comment on
When people pay with PayPal, the purchases are
often funded by credit cards. That means PayPal pays huge amounts of
fees to Visa and MasterCard, making it a valuable partner. However, as
PayPal expands into physical stores it will be more of a rival because
it can forge closer ties to consumers and distance them from the credit
card networks and card issuers.
Morgan Stanley analyst Scott
Devitt told investors on Thursday that he was not increasing his PayPal
estimates because of this new business. In his best-case scenario,
Devitt estimates the initiative could boost the value of eBay by $5 a
share, assuming about 5 percent of PayPal U.S. customers would complete
about half of their offline transactions via the service.
"The road to merchant ubiquity is clear; consumer adoption is less so," Devitt wrote in a research note.
ebay shares were trading at $57.94, up 64 cents or 1.12 percent. Devitt's price target for the shares remained $62.
originally caught on online because it offered users an easy way to pay
for goods without having to type in personal information, like credit
card numbers and addresses.
In the physical world, this advantage
no longer applies. That forces PayPal to attract customers through a mix
of financial incentives and small fixes for what it calls "consumer
pain points," or irksome shopping experiences.
For example, Home
Depot and PayPal have run several promotions in recent months, offering
$5, $10 or $25 rewards to users who spend a certain amount in-store with
PayPal. One such promotion was expected to last two weeks but proved so
popular that it lasted only 30 minutes before the budgeted reward money
ran out, Kingsborough said.
Home Depot is also working with
PayPal to improve customer service. One possible solution would help
contractors track the money they give plumbers and other specialists to
buy equipment for a project.
At Jamba Juice, customers can use
PayPal smartphone apps to order and pay for smoothies, then pick them up
from a dedicated line. PayPal ran a similar test with McDonald's in
France last year.
The new smartphone app will also let diners
order and pay without waiters approaching their table. And another
solution PayPal is testing allows users at stadium events to order and
pay for food and drinks from their seats.
Retailers are interested
in working with PayPal because it may give them leverage to negotiate
better terms with the likes of Visa and MasterCard. PayPal is also
offering to share more valuable customer data with merchants.
said he hopes to turn PayPal into a kind of digital Swiss Army knife:
"It solves so many of your problems that you're willing to carry it."
Jury is out
remains to be seen if these tactics will win over enough customers to
give PayPal a significant physical footprint. Wall Street is largely
optimistic - shares of eBay are up about 75 percent since mid-2011, when
PayPal revealed its offline plans.
Home Depot Treasurer Dwaine
Kimmet said he had low expectations about the initial use of PayPal in
its stores and the experience so far has confirmed such caution. But
when PayPal is more widely available in other stores and enrollment gets
easier, adoption should increase, he said.
"The real killer app
comes when PayPal rolls all the incremental functionality around the
transaction and the shopping experience," Kimmet told Reuters.
Center, the world's largest musical instruments retailer, began to
accept PayPal at its stores on October 15 last year and says the service
still accounts for less than 1 percent of in-store payments. But that
number is growing, said Wes Muddle, vice president of finance at Guitar
Although a February promotion was not successful in
boosting PayPal usage, Guitar Center is not giving up because it
believes the partnership would help the retailer know its customers and
market better to them over the long term.
"Would we have preferred
the promotion move the needle more? Yes," he said. "There's no silver
bullet for switching people from credit cards to PayPal. It will just
take some time."
© Thomson Reuters 2013