The kids just aren’t into Paypal
Online payment system struggles to stay relevant as mobile users turn to competitors’ applications
NEW YORK — Mobile payments are having a heyday. Apple Pay has been splashed across the news and 20-somethings are paying for taxis with their smartphones. Yet one stalwart risks being left out of the conversation: PayPal.
The key to mobile payments is ease of use — wave a smartphone or tap a button to transfer funds. No need to hit the ATM for cash or write a cheque and wait for it to be deposited. The less the customer has to think about it, the better, which is why companies like Stripe Inc., and potentially Apple Inc.’s new technology to pay with the swipe of a smartphone, are taking off.
That’s part of the reason PayPal is getting spun off from eBay Inc., giving the business more flexibility to innovate and become the method of choice to replace your wallet. Once known as the groundbreaking start-up founded by the likes of Peter Thiel, Elon Musk and Max Levchin before it was purchased by eBay in 2002, PayPal is now facing new competitors from Square Inc. to Apple Pay, which will be introduced in the U.S. this month.
“If you’re below 30, PayPal’s not relevant,” Gene Munster, an analyst at Piper Jaffray Cos., said in an interview. “With consumer awareness, Apple is out there overnight. That’s a piece PayPal is desperately struggling with.”
A key ingredient will be changing the perception among younger, smartphone-tethered customers like Arielle Gurin, a 22-year-old student at the University of Maryland, who says PayPal is “outdated already.”
Tostay relevant over the next five years, (PayPal) have a tough road ahead of them.
GENE MUNSTER
ANALYST
“I know you have to have it for like eBay, or you can use it for Amazon,” she said. “But I feel like it’s not big anymore.”
While the web-payments pioneer has more than 152 million active registered accounts, the de facto focus for payments has become the smartphone, a market that PayPal had already tried to break into without much success. The company had the Beacon checkout device for retailers and restaurants that triggered a customer’s PayPal app on their phone, but people just weren’t using it — so much so that former CEO David Marcus had said that 2014 was the year for campaigning to lure consumers.
About a quarter of PayPal’s active users in the U.S. are 18 to 35 years old, said Chris Morse, a spokesman for the company. That’s more than researcher Forrester’s estimate that 18 per cent of online adults fall in that age range, Morse said.
In-store payments via smartphone is a revenue opportunity worth fighting for, even if that means reversing course after vowing earlier this year to keep eBay and PayPal together. The mobile payments market is potentially huge, with EMarketer projecting it to total $118 billion in the U.S. by 2018, up from $3.5 billion this year.
Marcus, who had helped turn around PayPal by boosting active accounts more than 30 per cent to almost 150 million during his tenure, left in June for Facebook Inc. It was an exit that eBay CEO John Donahoe called “unexpected.” Dan Schulman, an executive from American Express Co., is joining PayPal and will take over as CEO after the split.
Now, the separation of the companies next year may help PayPal keep up with the pace of innovation and competitiveness in the mobile payments industry, eBay said in a statement.
An independent PayPal would have more latitude to forge alliances with retailers and other financial firms as Google Inc. and Apple seek to turn their products — Google Wallet and Apple Pay — into tools for digital payments.
Gaining a foothold in mobile payments will pose a challenge, given the control Google and Apple already have over smartphone operating systems, Ben Schachter, an analyst at Macquarie Securities USA Inc., said in a note. Square Inc., started by Twitter Inc. co-founder Jack Dorsey, has made headway in signing up many small merchants to use the company’s card reader and a smartphone or tablet to process payments.
“To stay relevant over the next five years, they have a tough road ahead of them,” Munster said of PayPal.
Apple accelerated its move into mobile payments with partnerships — aligning with financial companies like Citigroup Inc. and American Express, as well as merchants such as McDonald’s Corp. and Whole Foods Market Inc. Instead of working with PayPal on the development of its payments system, Apple struck a deal with Stripe. To make a payment, a person swipes an iPhone at the checkout counter and confirms the transaction by using the fingerprint scanner on their iPhone. The advantage it has over PayPal is that the payments system is integrated directly into the iPhone 6 and iPhone 6 Plus.
Another place PayPal could turn to for inspiration is inhouse. Venmo, a peer-to-peer payments start-up, was added to the fold when eBay bought Venmo’s parent company, Braintree Payment Solutions LLC, last year. Venmo has inundated millennials’ smartphones, letting users download a mobile-payment app that can connect to bank and credit-card accounts, enabling them to pass funds between friends with just a few clicks on their phone.
Gurin, the student in Maryland, says she tries to persuade everyone she knows to use Venmo because of its convenience for passing money between friends, say for a shared restaurant bill. When it comes to checking out at a store, Gurin says it’s hard to top the convenience of her credit card.
“Everything’s about saving time,” she said. “If there’s something that can shave off seconds then I can see that happening.”