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 (s 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 (s goog) has made its Checkout available on mobile devices. Nokia’s (s nok) purchase of a stake in Obopay is helping it develop Nokia Money, another mobile payment system. Amazon’s (s amzn) Flexible Payment System, built on its payments infrastructure, is another daunting rival, as would any offering from Apple (s aapl) 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.