PayPal under attack.. Not just Facebook…

eBay shares were down 3% on news that Facebook has launched a new payment service (see article). Facebook came out later the next day to emphasize it was a small test and it has a “great relationship” with Paypal (see Businessweek article).

Paypal is a cluster unto itself (see Battle of the Cloud 5). The negative “cluster” connotation (ie heard with respect to Vietnam) seems to stick well with Paypal’s current US prospects in several segments.  Last week we heard of Facebook’s payment pilot.. the future of which presents a just one of the many real threats to Paypal’s “core” eCommerce (off eBay) volume.Network Clusters

The nature of payments is changing… and I’ve stated often: the stength of networks is their resilience and resistance to change; they were formed around an defined value proposition where participants were aligned… The  strategic threat for Paypal is that the nature of competition is changing as advertisers and channels couple payments with other services (social, community, advertising, …) to deliver a better COMMERCE experience through insight into customer data.  Merchants gain CUSTOMERS… For example, both Google (instant buy) and Facebook payment will offer merchants an API that allows them to pull consumer information into the checkout page. This means a greatly improved checkout experience, improved ad targeting, improved lead attribution, improved consumer analytics, improved mobile conversion, and of course much more data for Google and Facebook. The MNOs also have a service in place with Payfone, (to launch in next month or so.. see blog).

The entities most capable of delivering on mobile payments (in order of likely success)

#1 Touch the consumer BEFORE the purchase (ability to add value and couple w/ advertising)

  • Channels: Google, Facebook, and Amazon

#2 Have a direct consumer “mobile relationship”, with payment history, and can authenticate/manage Fraud

  • MNOs (Payfone), Braintree/Venmo

#3 Have a physical POS relationship (or part of existing POS network)

  • Retailers, Visa (, Mastercard (Masterpass), Amex/Serve (Payfone)

Online merchants are asking themselves where do my customers come from? how can I improve customer experience? customer conversions? Reduce cost of payments. The answers all point to very poor PayPal’s prospects. Paypal does NOT bring customers to the merchant, they can add no value to merchants beyond Autofill, a task much better suited to channels that already have authenticated the consumer before they enter the merchant’s virtual store.

Look at Google’s Instant Buy, Google’s delivers one click mobile buying AND financial savings to the online merchant in EVERY transaction with a  160bps (non Durbin regulated debit) taking a LOSS on EVERY transaction. Paypal’s cost of funds is around 80-110bps, and average merchant cost is over 240bps.

eBay’s 2012 10-k reports that $13B of TPV was assigned to marketplace mobile Commerce (page 5). On page 7 we see

In 2012, PayPal’s net total payment volume, or net TPV, for transactions using mobile devices reached nearly $14 billion, up from approximately $4 billion in 2011. PayPal’s mobile products are designed to deliver an end-to-end mobile shopping experience in a safe and secure environment. PayPal’s mobile checkout solutions offer a convenient and easy way for merchants to accept payments from mobile devices, and for consumers to pay, through a mobile-optimized user experience

This leads us to assume just $1B of “mobile payments” was off eBay commerce related.  In other words, all “mobile payment” growth from eBay participants finishing transactions on mobile/iPad.

Paypal’s core is in improving the eCommerce checkout experience, and will NOT extend into mobile as mobile participants are better able to leverage their channel positions, consumer insight and existing services to better deliver both a merchant and consumer value proposition. Beyond mobile.. what are Paypal’s prospects?eBay 2Q13


Paypal is going absolutely no where with POS payments. For example, I had two separate industry experts tell me that FirstData has refused to route any Discover/Paypal traffic (see my May 13 Blog).  Paypal’s approach to this network roadblock is to partner with processors (like Vantive) and offer a spiff (say $500k) to switch from FD to Vantive.  Can you imagine the laughter.. I’m going to switch from FirstData to accept a Paypal payment product that is more expensive than anything other than a premium Visa credit card? Why?? exactly what is the consumer adoption. It all makes no sense at all… Thus, I hear internally that Don Kingsborough’s continued POS push may be short lived (product and person?).  Given Home depots experience of 5 transactions per WEEK, it would seem obvious.


This is Paypal’s core.  How do consumers find products online (see Forbes Article). With more product searches initiated on Amazon than Google, what if Amazon is well positioned for both: Retail/aggregator/reseller/distributor role AND the payments/advertising role.

eCommerce is very, very LUMPY, with eBay/GSI, Visa/CYBS, Amazon accounting for over 60% of Sales in US. In Japan, Amazon and Rakuten have similar shares, with similar concentrations in other markets.  An obvious investor question is to ask: what is PayPal’s penetration is within these other “networks”?  for example, within CYBS merchants, what have been PayPal wins within last 2 years.

Paypal has won here historically because of its ability to manage fraud and deliver great consumer experience.. it was a consumer facing value proposition. It will now be under attack as the same “channel” dynamic described for mobile above takes shape.  Google, Facebook and Amazon will change the nature of “payments” competition. No longer is it about experience and cost… payments is just part of a long commerce process. Channels are much better positioned to bring consumers to retailers (consumer’s search, select and shopping online). Payments is the last (easiest) part of this cycle.

Analysts (such as Morgan Stanley) are keen on Paypal’s chances as they survey merchants likely to use Paypal’s new services. This research is backward looking, as merchants don’t understand what new services will do for their business, and new value propositions are not yet in market. Paypal won market adoption because of its ability to make commerce easier (consumer) AND deliver benefit to Merchant. It is no longer cost competitive in EITHER as other entrants can offer service at BREAK EVEN costs to support their overall PLATFORM business.

Investor Impact

PayPal Competitors will:

  • Drive reduction in off e-bay take rate.
  • Introduce new P2P products
  • Take lead in orchestrating commerce
  • Destroy Paypal’s funding mix advantage through use of debit

Paypal generates 64% gross margins from online transactions. PayPal’s blended cost of funds is 104bps, with fraud costs of 30 bps. For total cost of funds = 134 bps.  2Q13 Take rate was 379bps, of which cross border was 22% (250bps fee for cross border).  Standard Merchant fees are published and tiered (See pricing), with average domestic of approximately 300bps.

Google’s merchant pricing for InstantBuy currently brings pricing down to 160bps, with Facebook, Amazon and MNOs/Payfone capable of matching.paypal take rate 3

2012 Off eBay payments revenue was $5,146 (on $97.2B TPV), which includes both remittance and commerce volume. I don’t have good numbers on breakout here, so lets assume Commerce represents 80% of off eBay payments revenue = $4B , with US taking approximately 50% ($2B).

Revenue at risk is US eCommerce revenue * (competitor take rate/current take rate ) =

$2B * 160/300 = $1.07B  ( 7.6 % of total 2012 revenue of 14,072MM)

Google has also announced a rollout of a Gmail P2P money transfer service, as will Facebook.. In my view Paypal’s entire eCommerce revenue is at risk.. with their only advantage (DDA integration/cost of funds) lost because of new Debit pricing of $0.07 cents.  This is not just a US thing, or a mobile thing, or a POS thing.. this is EVERYTHING.  They have no competitive differentiator… and are not positioned well to compete in ORCHESTRATING COMMERCE.

in 3Q13 we will see at least 3 major eCommerce initiatives launch which will impact Paypal

#1 Google InstantBuy (keep your processor and save on every transaction)

#2 ATT/Verizon Payfone

#3 Visa/Mastercard

Networks are also changing the rules to make Paypal’s life more difficult. Example is Mastercard’s 35 bps staged digital wallet fee which ONLY impacted Paypal.

I’m short on eBay…. the reasons are above.

16 thoughts on “PayPal under attack.. Not just Facebook…

  1. Very convincing; I too have a hard time seeing how PayPal plays in the new integrated commerce/payments world. Maybe being bought by eBay was a bad idea; it seems to be limiting their ability to serve as a platform for banks, retailers, or telcos.

  2. This is a great article

    Lots of insight Wendy MacKinnon Keith

    CEO & Founder

    +1 (416) 994 4771


    From: FinVentures Reply-To: FinVentures Date: Monday, 19 August, 2013 10:40 AM To: Wendy MacKinnon Keith Subject: [New post] PayPal under attack.. from Facebook? tomnoyes posted: “eBay shares were down 3% on news that Facebook has launched a new payment service (see article). Facebook came out later the next day to emphasize it was a small test and it has a “great relationship” with Paypal (see Businessweek article). Paypal is a”

  3. how would the equation change if Paypal bought Whatsapp. This is the type of social/payments integration combination that is spreading like wildfire across Asia and will be the future of mcommerce….
    Paypal has the ecomm payments trust from consumers which is key, they are just missing the social.

    • Paypal must find a partner that touches the customer BEFORE they buy…. Enabling communication, sharing is a key element in many shopping scenarios.. If there was a focus it could work.. but Paypal’s problem is lack of focus on anything.. payment capability and fraud management are no longer unique.

      • Could it be such that this is where eBay comes in to save PayPal? eBay is looking less like a marketplace these days and more like a commerce enabler. More, the GSI Commerce capabilities and their merchant relationships are strategic assets that could help eBay/PayPal evolve to become more of a an important commerce enabler and merchant partner as digital/physical commerce blurs.

      • Certainly a double edged sword for POS payments, given Retailers view Amazon as enemy number 1. eBay has reputation view on sellers.. but not much on products, which is why consumers don’t start their product search on eBay. Changing consumer behavior is a 10 yr effort… from an eCommerce perspective, as Payments move into the OS.. Paypal doesn’t have one.. Amazon, Apple, Google, Samsung, MSFT all have an OS.. If eBay follows and AMZN like strategy to enable “aggregation” and product distribution, they enhance retail competition.. if they focus on POS.. they have no device.

  4. Pingback: Headline News from - August 20, 2013 | Ideal Payment Solutions.comIdeal Payment

  5. A few thoughts:
    – wholeheartedly agree that payment has to be seen as part of bigger commerce transaction. If you watch what broader ebay has been doing (Red Laser, eBay Now, GSI, Milo, PayPal Here, etc etc.) you realize they are also on the same page.
    – have yet to see very many compelling example of “big data”, “advertising insights” or the like adding enough value to justify subsidizing interchange. At best some niche implementations such as LevelUp.
    – GOOG and AMZN have tried for years to compete with PayPal an have a fraction of acceptance.
    – In fact FB, AAPL and have practically no merchant acceptance. Since merchants have to be signed up one at a time (unless you go to a DFS workaround or NFC takes off) they all will need many years to have even minimal acceptance.
    – I would check again re GOOG merchant pricing – it is not 160bp on any meaningful portion of payments they accept.
    – eBay has consistently told us the PayPal offline is still in testing and pilot. They have not even released the mobile wallet yet. We may be a quarter or two behind plan, but once they really go after this they will get more than 5 tx at the HD. Pay attention to the partners they are piecing together – ADS, coinstar, NCR Radiant, Micros, MoneyGram,TSS Netspend, etc. these partners are precisely the ones that can make a comprehensive commerce vision possible. they are lapping everybody else before the race has even started.

    • agree on competitor acceptance.. and on big data.. not on relative strength however
      – “Amazon” processes $61B (2012 sales) on cards stored with them. Paypal’s total 2012 TPV of $144.9 includes remittance volume.. So Amazon is certainly in the same class as Paypal.
      – Apple’s $156B in sales are not broken down by channel. However they are also in the same class as Paypal in managing online payments.
      – Visa. Although has poor adoption, CYBS had $5.1B in billable transactions.. certainly small compared to either of above.

      With respect to Google instant buy I am correct. If you use the Google API, the card that is provided to you is a bancorp (TBBK) prepaid card.. which will cost 160bps. It is the card which “wraps” any other cards you have in wallet. Instant buy operates in a completely different model than google checkout. Google is NOT the processor, or gateway.. they are the “Autofill”.. and are providing a payment instrument that is a “token” for what you actually have with them.

      • You are counting overall volumes for GOOG, AAPL, and V. Those are not relevant for a payment tool that other third party retailers would want to use. If anything, their might is a reason for retailers not to accept a payment type from such a formidable competitor/adversary.

      • Fair comment on Apple. However Amazon hosts content, manages payment processing and distribution for 100s of companies. Don’t see difference beyond the technology used to host multiple retailers, vs retailers going into Amazon’s store to sell. Particularly if you include eBay’s GSI.

        I completely agree on your last comment. Amazon is competitor #1. How is eBay’s marketplace different?.. It certainly does not attract mainline retailers into its store, but from a content perspective it does compete with physical retailers. As a retailer, why would you want to give eBay data on your customers?

      • eBay does not sell anything and therefor never uses seller info against them. Which is part of the reason an impressive number of retailers have recently opened up stores on eBay Marketplace: Underarmour, Sony, Coach, American Eagle and even Apple for its refurbished merchandise.

  6. Pingback: Who do you Trust? | FinVentures

    • I would remind Arnab that debit interchange is a COST to PayPal and any further reduction would be a windfall, just like the previous reduction was. Also PayPal has 110 million users and millions of merchants including 2/3 of top 100 in the US. Adding unique assets such as milo, red laser, GSI and deals with acquirers, discover, ADS and all the POS providers actually gives it quite a bit of advantage in payments on and offline, IMHO.

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