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Summary:

Updated: PayPal opening up its payment processing API to developers, hoping to unleash new apps that use its electronic payment service, sounds somewhat anti-climactic. After all, most of the other brand-name web companies that emerged in the late 90s — including PayPal’s parent, eBay — have […]

EC-buttonUpdated: PayPal opening up its payment processing API to developers, hoping to unleash new apps that use its electronic payment service, sounds somewhat anti-climactic. After all, most of the other brand-name web companies that emerged in the late 90s — including PayPal’s parent, eBay — have been doing that for years.

But the strategy puts PayPal at an important crossroads: One path leads to PayPal being just one of many e-payment companies vying for attention as online commerce evolves; the other gives PayPal what may be its last serious shot at unseating the credit card companies. What direction PayPal takes isn’t really up to the company — rather it will come down to the apps that developers build using the company’s technology, and how common they become.

Back in 2002, when eBay bought PayPal for $1.5 billion, the startup looked poised to depose credit cards and checks as payment methods of choice. But as is often the case where money is concerned, there were complications. Frauds and phishers scared away some users, others were put off by poor customer service. Untangling regulations set before the Internet era slowed things down further.

But the biggest barriers were the credit card companies and their bank members –- PayPal needed the cooperation of the very institutions it was trying to compete against. So for years, PayPal was focused on eBay’s e-commerce platform; it wasn’t until eBay’s purchase of BillMeNow BillMeLater that PayPal was finally able to build deeper relationships with sites like Walmart.com. It’s now used by 44 of the top 100 retail sites.

More recently, two trends have gotten underway, both of which stand to benefit PayPal. First, consumer appetites have turned against using credit cards. Not only are people more averse to debt, many banks are raising their annual fees even for cardholders with good credit. Second, online payments are on the verge of a dramatic evolution thanks to the proliferation of mobile devices as well as social sites like Facebook. It’s not just that these changes are creating an app economy, it’s that any economic engine needs oil to run smoothly, and e-payments are that oil.

The tricky part for PayPal is that it’s not the only one trying to benefit from these trends. Google has made its Checkout available on mobile devices. Nokia’s purchase of a stake in Obopay is helping it develop Nokia Money, another mobile payment system. Amazon’s Flexible Payment System, built on its payments infrastructure, is another daunting rival, as would any offering from Apple that was integrated into iTunes.

To outrun those competitors, PayPal needs to win over more consumers with a payment system that is reliable, intuitively simple and secure. Over the years, PayPal has gained some ground, but still has work to do. More importantly, it needs to win the trust of developers. It’s their creativity — and their sense of how the web is changing consumer behavior — that will reshape the way money is transferred online. Its Paypal X Innovate developers conference next month could be a deciding moment in winning that trust.

PayPal may have been slow to open up its API, but the company’s development has always been careful and complicated. And because the future of online payments itself an open question, it has a rare chance to expand its role. Whether it succeeds or simply remains an also-ran in the sector, however, is up to the web’s community of developers.

Updated: There were two errors in the PayPal post. We wrote that Nokia bought Obopay, but instead they bought a stake in the mobile payments start-up. Also, we incorrectly referred to BillMeLater as BillMeNow. The errors are regretted and have been fixed.

  1. hmm… Kevin: i really don’t think PayPal’s primary battle is with cc companies. more likely, it’s with Amazon, Google, Apple, & Facebook — for the title of mainstream consumer online payment service.

    in the past, we worried about Amazon (rightfully so… they’ve executed very well) and then Google Checkout (initially scared the shit out of us, perhaps now not so much). more recently, Apple now looks like an interesting option, and starting soon Facebook as well. both are now rising as large aggregators of consumer financial payment services — initially for their own services, but then later for 3rd parties.

    [disclosure: i used to work at PayPal from 2001-2004 where i started & ran the PayPal Developer Network program]

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    1. Dave,

      Thanks for your thoughts. I agree Apple and the other companies are a bigger threat right now, but PayPal does have an edge over many of them by letting you bypass credit card accounts altogether. I for one look forward to the day I won’t need any credit card account. My own impression, based on conversations I’ve had with eBay executives and investors, was that in the past credit cards were more of a competitor.

      Kevin

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  2. My understanding was that Nokia invested in Obopay and has a partnership with Obopay, but did not acquire the company. Do you have a link for that?

    I think it is also important to point out that Mastercard, Visa, and Discover all went public in the last few years, and AMEX became a depository institution (aka bank). On the merchant side, FirstData went private (acquired by KKR for ~$30B).

    Will PayPal ever become a bank in the US? Will PayPal ever offer more competitive pricing for processing fees?

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    1. coldbrew,

      Nokia bought a stake in Obopay in March, not the company. Thanks for catching the error, I’ll make sure it’s fixed in the story. As for your comments on censorship, I’m not sure what you’re referring to.

      Kevin

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      1. My reference to censorship was regarding the message, “Your comment is awaiting moderation” that appeared after making my comment. Are you unaware this is how the system works on the site for which you write?

        While I understand this may be helpful for individuals making a first-time comment on the site, it is a nuisance and an insult for those of us that are returning and, obviously, not spammers. I believe this is a simple concept to understand.

        It may be believed within your organization that readers of this blog participate as a privilege. If that is the case, please let me, and others, know so we can make informed decisions on whether to ever visit the site. My understanding is that blogs are a two-way conversation, if that isn’t the stance taken by GigaOm I’ll just put your site in my hosts file and be done with it (as I have with that rag at RWW). The tech community needs folks with backbones, not the ‘kudos krowd’ that is so prevalent.

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  3. I have lost almost $1000 dollars to Paypal because of scammers. Despite giving Paypal overwhelming evidence that the dispute should be resolved in my favour I’ve still not received a penny back.

    The problem is a lot of my transactions must take place through Paypal as at the moment there is no alternative which is used so widely for small everyday transactions.

    Walter

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  4. Really? No response to the idea that Obopay wasn’t acquired, but funded?

    McClure seems lost in conflicts (as always), so no wonder. Are you still reporting Nokia owns all of Obopay? If so, great fact-checking.

    You expect respect from this how?

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  5. Awesome! Every comment I make needs moderation? I don’t need to comment here or visit. In case you were wondering about who needs who, I’ll just comment on TC, and if they continue to moderate so heavily, they’ll lose too. RWW is a complete joke b/c they can’f handle corrections or criticism. Does GO need the same lack of transparency? We’ll make our own press, if you all can’t handle it. It isn’t the press that’s being empowered by tech. I welcome the challenge of censorship. Your move.

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  6. Screen caps taken, censorship documented. I am truly surprised at such conduct. i suppose I have more material now, so I shouldn’t complain. It’s just sad.

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  7. PP’s battle is to get consumers to *not* use cc’s – they make nothing from those transactions, since they’re kicking back the fees to Visa, et al. Competition with other payment gateways is meaningless, as is developer use of their API’s. They need people to use bank accounts for funding.

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  8. It’s called “BillMeLater”, it was acquired after Paypal had closed most of those Top 100 ecommerce sites and it has just been a drag and distraction for Paypal.

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    1. jd,

      You’re right on BillMeLater. Two sloppy errors in one post is embarrassing, and I apologize to all of GigaOm readers, who should expect better.

      Comments by eBay executives in last week’s conference call suggested that BillMeLater contributed to the new top 100 sites.

      Kevin

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  9. The payment systems and technology they use isn’t going to be that much more different than what most developers are used to these days, nearly everyone in this business knows php and mysql, a developer is going to be more inclined to create his own online payment system.

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