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How PayPal could (finally) thrive in mobile payments

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The emerging space of mobile payments serves as an undeniable backdrop for eBay’s impending divorce from PayPal, as more than a few analysts and tech reporters have noted. An independent PayPal could focus more intently on innovative mobile payments solutions, it could acquire key companies as it expands its offerings, and – as Re/code noted – it would be able to issue its own stock to help hire and retain the best employees. And once it is no longer a subsidiary of eBay it should have more flexibility to form partnerships with other retailers and financial companies.

PayPal was an early entrant to the U.S. mobile payments market, and just a year ago a Forbes piece predicted it would “win the mobile payments race.” The business had already locked up major partners such as Home Depot, Jamba Juice and JC Penney, and it eschewed NFC in favor of QR codes and other technologies that were accessible by a majority of smartphones in the market. And it was an early backer of Bluetooth-based beacons, which may eventually emerge as the technology of choice for both proximity mobile payments and indoor location-based marketing campaigns.

If Apple leads the way…

But while PayPal said this week that it expects to process 1 billion mobile transactions this year, it clearly has failed to gain any real traction in phone-based payments at the retail counter. (To be fair, no one aside from Starbucks is succeeding in proximity mobile payments in the U.S., which is why Apple is widely considered to be PayPal’s biggest competitor in the space despite the fact that Apple Pay won’t launch until later this month.) I wrote a few months ago that Apple has emerged as the most likely player to finally move the needle in mobile payments in the U.S., and PayPal’s recent decision to partner with Samsung on the Galaxy S5 fingerprint scanner reportedly “led Apple to cut PayPal out of the Apple Pay process entirely.”

If Apple Pay is a runaway success, it will finally throw open the door for competing systems that can support Android-based handsets, which still account for the majority of smartphones in the U.S. For PayPal to capitalize, it will need to make these crucial moves:

  • Build widespread support for NFC. Google Wallet, the carrier-backed Softcard (formerly Isis) and other NFC-based systems have been utter flops in the U.S. for several reasons, and PayPal was wise to build its offering on more accessible technologies. But Apple Pay is certain to give NFC a big boost at the retail counter and in the minds of consumers. PayPal will need to capitalize by fully integrating the technology in its system.
  • Bring value to the transaction. Starbucks’ success in mobile payments shows that consumers are willing to use their phones to pay when it brings additional value in the form of loyalty programs and other discounts, and Apple has clearly taken a page from Starbucks’ playbook with its Passbook app. PayPal must do the same by giving consumers legitimate reasons to reach for their phones at the retail counter rather than credit cards or cash.
  • Educate consumers and retailers. U.S. consumers are still largely unaware that options like Google Wallet, PayPal or Softcard even exist, and retail staffers all too often don’t know how to help use them. Apple is sure to market its offering aggressively, which will raise the overall level of mobile payments systems, but PayPal must do more to explain how smartphone owners can use its system – and why they should in the first place.
  • Play the privacy and security card. Privacy has become a crucial selling point for Apple in its battle against Google, as CEO Tim Cook indicated in a recent letter to its customers, and security is an ever-growing concern for consumers in the wake of recent hacks at Home Depot and Target. PayPal should focus on these issues to differentiate its offering from Google Wallet, the retailer-backed CurrentC and other competing systems.

The market for proximity mobile payments is still fraught with peril, of course, and it’s entirely possible Apple Pay will spin its wheels like so many earlier efforts. If Apple succeeds, though, it will likely pave the way for another mobile payments provider that focuses primarily on Android-based handsets. And PayPal could benefit in a very big way.