Can These Startups Beat Paypal?

28 Comments

Despite the acceptance of credit cards and services like PayPal, the issue of getting money from one person to another online still offers opportunities for innovation. Venture firms are continuing to fund startups that hope to offer better ways to pay online, while the growth of Software as a Service in the enterprise has led to a need for new tools in corporate billing management. Further out, buying items over a mobile phone presents a multibillion-dollar opportunity — if someone can make it easy.

Despite the early-mover advantage PayPal has, and the presence of rival offerings from Internet giant Google, there are plenty of retailers who only accept credit cards for online purchases. That eliminates their ability to sell to those without credit and those concerned with security online. There are a few ways rival online payment services can find success against PayPal, wrote Jim Friedland, an analyst at Cowan & Co. earlier this week, citing a few examples: providing a neutral independent platform (PayPal is owned by web retailer eBay), extending credit to shoppers, and offering lower transaction fees.

And startups are still searching for other opportunities online. Just last week online bill pay startup eBillMe raised $12 million from Canaan Partners and New Celtic Ventures. The company offers vendors an alternative to credit cards by allowing shoppers to receive a bill at their online banking portal. This allows shoppers to avoid putting their personal information on the merchant’s site and allows for a cash, rather than credit, transaction.

But online sales are no longer limited to the PC. U.S. consumers are starting to use their mobile phones to make purchases, and this could be a growing market in the years to come. But there are challenges ahead. Bigger players such as PayPal and credit card companies already offer mobile-payment products, and the current U.S. market for mobile-pay services is still small.

Only 1.5 percent of U.S. consumers have ever used their mobile phones to make a payment, but almost 50 percent are aware that they can do so, according to a survey released this week. The research, commissioned by financial firm Mercatus, predicts that with better services and customer education the percentage of people who will make payments from their mobile phones is likely to grow in five years to 15 percent among those ages 18-30.

The growing use of smartphones and shopping sites optimized for mobiles require payment options that are easier than keying in a 16-digit credit card number. Startups such as angel-backed Billing Revolution and Zong, which launched earlier this month after raising more than $12 million in venture capital, are tackling the problem of buying on your mobile phone. Zong sends purchase information to carriers, who then bill the subscriber for their purchases, and Billing Revolution offers a mobile credit card processing platform. In April, Obopay scored $20 million for its money-transfer-via-mobile efforts.

While the opportunity in mobile is still just cresting the horizon, enterprise customers provide an immediate opportunity for startups seeking to streamline transactions. In March, two startups offering an online billing platform for companies delivering Software-as-a-Service (SaaS) products raised money. Zuora brought in $6.5 million in first round funding led by Benchmark Capital for its platform. Rival Vindicia announced a $5.6 million round led by DCM and Leader Ventures.

These companies aim to make it easier for SaaS vendors to track and bill all of their customers. They also help customers track and manage multiple software services they might be buying — a task akin to managing household bills from tens or even hundreds of service providers. Tim McAdam, a general partner with Trinity Ventures, says these sorts of billing platforms and ways to track payments still represent a big category and no one has mastered it yet.

With everyone searching for ways to make money online that don’t revolve around advertising, offering seamless but secure online payments will go a long way in enabling alternative business models.

This article also appeared on BusinessWeek.com

28 Comments

Audrey Burne

Here’s a simple method. Take it nice and easy. If things peaks too soon, your emotions may never have time to get caught up to the relationship. Let it happen at the right pace.

CAS

Funny, I see these comments, especially those who say “PayPal will be passed up and I have a company who can do it,” and think to myself…sure buddy. If you only knew what goes into payments. CC regs, ACH regs, Govt reg bodies, law enforcement bodies, customer disputes, chargebacks, pfishing, fraud, money laundering, OFAC, SAR’s, culture, etc etc etc. I see people saying “I have an extra $10 million in 2nd round funding” and I think…what do you think you’re going to do with only $10 mill? Naivity will be your downfall. It’s a task more complicated than you can possibly imagine.

Anne

Can anyone advice me on a differant online payment company other then Paypal. I live in Ireland

A.

James

I would say that Payoneer.com will be the next big thing on Internet transactions. It doesnt discrimanate against countries (though they should introduce checks against money laundering), and the transaction fees are ridiculously low…

Very attractive for those outside the US

Bohoooo Western U

Matt O'Donnell

The online payments market is still in it’s infancy. The scale and success of PayPal is only a very small part of the overall market demand for payment solutions. I work with many banking groups and specific help banks re-claim the eCommerce transaction space for low value payments, and I have to say that there are many innovators in the market all challenging the conventional wisdom and business process, and in my opinion, many will not only beat eWallet models like Paypal, but others will pass them by and own much of the market. The head of a regional asian bank told me that in his view regulation was all that has kept banks in existence. Now they are challenged to deliver, and will find ways. So there will be successors, and many of them.

Michael

I had a look at the Cards Off site but it is in French and I can’t find a translator tool on their site!! Looks interesting but who knows@!@!!

jean

have a look at CARDS OFF, a french public company (NYSE EURONEXT ML OFF).
CARDS OFF as developped a very safe solution to secure the transactions on the web, from the order to the delivery of goods, including the payment.
You never put your personal datas on the web: no use of credit cards, no need to give your name, e-mail, adress etc…
They garantee the payment as soon as the delivery has been done, and of course, if not, the custumer gets his money back.
No commission paid by the website.
The business model is very interesting and enables the websites to increase their profits.
CARDS OFF was selected as a demopit company at TECHCRUNCH50 this year.
http://www.cardsoff.com
Have a look quickly!!

Mike Bradley

Clearly there are wanting alternatives to PayPal and Visa/MC/Amex cards (see the aforementioned reference to BillMeLater in this thread as proof positive). Though I’m not that familiar with eBillMe’s business model, any payment option which enables SOME consumers to NOT have to use their credit cards will have some attraction. That being said, it needs to have all the usual checks ticked off; convenient, easy to use, secure, and non intrusive.

And by the way, merchants are ALWAYS willing to consider payment types which are cheaper than the processing fees they currently pay on credit cards. Just don’t expect adoption overnight.

Jestep

I have to also say No. I would even go so far to say that many of the listed services will eventually be available through paypal.

Given what currently exists, Paypal cannot be beaten. Paypal has established themselves as a major player in the payments industry, to a point that they can’t be toppled any easier than Visa or MasterCard.

Google’s failure in the payments business can be attributed to trying to push a merchant driven system rather than something that consumers want and need. Until something new exists that consumers want, Paypal will not be challenged, period!

Dean Procter

Some start-ups can do it easily.
We are working on a global mobile payments system which provides in-store, internet, B2B and P2P payments via mobile. Securely!
It works on every mobile and every network. Merchants only need a mobile or internet access to enjoy much lower fees and costs. No readers or data security issues for the merchants.
Customers can pay by debit, credit or stored value.
The cost of our global mobile transaction network to cover every country? $400M TOPS.
Imagine what we could do with the sort of money the big boys are wasting.
We are a privately owned and funded company with no affiliations with any other business – completely neutral (although we do have some ex-merchant bankers and financial network experts on the team).
The transactions are just the icing on the cake – the broadcast media interactivity we can provide will revolutionize the advertising industry and lead to more transactions both on and off the net. Push and behavioral marketing is a stinking fish and will soon be abandoned by all but the most foolhardy.
Google will never succeed in the transaction space – they are just too much into the push and spyware game. Paypal only survives because of ebay trying to force their users to embrace it. Not going too well so far and thier share price is getting halfway down to where it belongs.
It’s early days in the payments space, most of our competitors are still in the stone age without a clue. As for NFC – it’s history along with cards.

Avinash

eBillme and other online billing companies should offer other advantages over credit cards:
a) Offer advantage over credit cards : Customer Purchase prices should be lower by say 2-3% (credit cards can charge 2-3% of purchase price as fees, to merchant) for consumer, and merchant will also thus get lower revenues (which they do anyway, while using credit card too). This is similar to a “cash back rebate”, but it is upfront in saving consumers money, and would be a VERY BIG PLUS, and customer base will grow exponentially.
b) Help provide cheaper alternatives to customers: Since customer purchase information will be recorded at online billing company, such online billing company can provide a platform for outside financial planners to provide either manual recommendations for alternative/better services, or automated ads, based on consumer purchase history, etc. for example, if a consumer has bought items regularly via AT&T service provider, Cable companies can provide ads there on their cheaper services, and vice-versa. Or if I am paying rent at place XYZ, ads can show better rental/apartment options in close-by neighboring localities.

Published at http://people20.blogspot.com/2008/09/ebillme-business-model-enhancements.html

Steve Klebe

It is not about beating PayPal, it is about finding an underserved niche and exploiting it. I have followed the evolution of BillMeLater since its inception and they are a classic example of how to do it. It isn’t every easy and most will fail, but it is possible and that is what keeps the ideas and money flowing.

JJ Koppel

Remember that there are billions of prepaid mobile subs in the world. Those accounts will one day be extended into a payments app.

Ken Williams

@foobar, i guess you’re right, the US is the center of the world and we all have a lot of credit, so much we are causing a global credit melt down. And, the rest of the world will never go online, even though the fastest growing markets are in Asia and Africa. Good points stud, incumbents always win and the world never changes.

Foobar

“That eliminates their ability to sell to those without credit and those concerned with security online.”

Um, who doesn’t have a credit card today AND uses the internets?

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