The Rise of PayPal as a Major Payments Player

No place in financial services is transformation and innovation more apparent than in the world of payments, where the convergence of mobile and new data-driven business models have the potential to completely disrupt both the consumer and merchant experience.

The recently concluded Money2020 illustrated that there is no shortage of payments players vying for attention,  but no firm seems to be as aggressive as the new PayPal, which continues to roll out new innovations impacting the payments ecosystem.

While some of the 'innovation' at PayPal may not seem new or disruptive (such as the use of QR codes), the ability to quickly build scale by using the existing payments infrastructure may be the key to PayPal's success. The company hopes to transform its reputation as a means of exchanging cash over the Internet into the default payment system for many everyday transactions.

At stake for PayPal is control of a mobile-payment market that is expected to grow more than three-fold from this year’s $235 billion over the next four years, according to researcher Gartner. PayPal faces a host of competitors, including Google Wallet, Square, Lemon and Stripe (and potentially Amazon and Apple).

Brian Roemmele, researcher and business advisor says of a recent PayPal announcement, "The true innovation that PayPal has achieved is really quite invisible and perhaps even boring to technologists. No iOS devices or android devices deployed at the merchant locations. No new add-ons needed, just the a boring laser bar code scanner that every single major retail store already has."

It is clear that PayPal is moving fast to become a ubiquitous option at retail merchants, introducing products for both the consumer and the retailer. In fact, there have been so many changes recently, it may be difficult to keep up.

To that end, I am providing a brief overview of what has occurred over only the past couple months and what the future may hold.

New PayPal Mobile App

In early September, Paypal introduced an updated version of the PayPal mobile app for both iOS and Android, turning it into much more of a mobile wallet. Maintaining all of the old features, the new app added tools to facilitate shopping and paying for goods online at the physical POS.

The app features five clearly labeled sections on the home page, with the major sources of innovation residing within the new Shop tab and Bill Me Later integration. Within the Shop screen, you can find nearby merchants that accept PayPal. Once you check in at a merchant (using your PIN), you can download any special offers from the store and can complete the transaction simply by saying "I'm paying with PayPal". Since the merchant will have your PayPal photo on their POS device or phone, funds can be transferred without needing to pull out your phone a second time.

Leveraging the app's location-based capabilities, there is the ability to push coupons based on a consumers specific location and even allow for ordering and paying for a meal within the app.

As for payments, PayPal is providing the option to pay directly from a bank account, from a PayPal balance or to use a credit card on file within the app. It's also expanded the 'Bill Me Later' function, providing credit for large purchases within the app. 

PayPal Beacon: No Tap, Swipe or Signature

One of the biggest challenges for PayPal over the years is expanding their online merchant capabilities to the physical point of sale, making it easier to use PayPal than swiping a credit card. As any payments player knows, simplifying the payments process is made even more difficult with today's merchant technology and the entrenched consumer payment behaviors.

PayPal hopes the introduction of Beacon may be the answer to this challenge. Beacon uses Bluetooth Low Energy, otherwise known as BLE to enable phones and merchant POS systems to communicate with each other seamlessly, without opening an app, without GPS turned on and even without a clear phone signal. In other words, hands-free payments.

All a merchant needs to do is plug a PayPal Beacon device into a power outlet in their store. Once the Beacon is plugged in, they will be ready to offer a highly personalized shopping experience (including personalized coupons or even offers based on the consumer's location within the store).

Consumers control the stores they will want to check in to, those they want to get prompted to confirm payment for, and stores they will want to enable a complete hands-free experience for. In the latter case, simply walking in a store will trigger a vibration or sound to confirm a successful check in. After checking in, a photo will appear on the screen of the Point-of-Sale system so the shopper can be greeted by name. Paying only requires a verbal confirmation.

In addition, PayPal is giving developers access to the PayPal mobile in-store API to create experiences such as being able to self-checkout on a mobile phone or automatically placing a customer’s usual order as soon as they walk through the door.

David Marcus, president of PayPal says that PayPal has been showing the device to retailers, large and small, and they “love it.” Part of the reason, he says, is that not only does it help them connect and potentially bring in customers, but it also integrates seamlessly with their existing point of sale systems. “I want to create an operating system for the retail environment,” he said.

It’s interesting to note that in iOS 7, Apple is debuting iBeacon, which could provide similar services for apps. But VP of PayPal global product, Hill Ferguson, maintains that the Apple version does not extend to Android, and that Beacon will work for any smartphone.

Piloting of Beacon is slated for Q4 2013, with rollout planned next year.

PayPal Working Capital

To help drive sales volume from the merchant perspective, PayPal introduced PayPal Working Capital in late September as a way to offer a simplified financing alternative to their customers. Initially offered to about 90,000 of it's business partners, potential loans from $1,000 to $20,000 will be underwritten based on PayPal sales history, with no credit check needed.

One unique aspect of the program is that PayPal said merchants could receive funds in a matter of minutes and that repayment would be based on a fixed percentage of sales generated with no minimum payments (if no sales are made on a particular day, no payment is required). In addition, rather than charging interest for the loan, PayPal will charge a fixed fee. The faster the payback period, the smaller the upfront fee. It is felt that this transparent fee structure will be welcome to retailers. 

"In talking to merchants, a lot of them are very capital constrained," says Brian Grech, who is in charge of risk management for small-business products at PayPal. "In a lot of cases, their next best option would be a personal credit card or a very high-priced merchant cash advance and we expect to displace those overwhelmingly with our new loan product."

Since PayPal cannot legally make loans directly to merchants, it is collaborating with the Salt Lake City, Utah-based lender WebBank.

PayPal Acquires Baintree

On the heels of announcing PayPal Working Capital, PayPal finalized the acquisition of Baintree, moving even more aggressively into mobile payments. In a very short time, Braintree leveraged a mobile-first mentality to build impressive mobile payment solutions that handle transactions in 130 currencies in more than 40 countries.

In addition to gaining an impressive list of clients such as Airbnb, OpenTable, Uber, and TaskRabbit, PayPal also acquires the very popular Venmo app, which lets users pay for free using their mobile device.

While Baintree will operate as an independent unit within PayPal, it is believed the superior application programming interfaces of Baintree will help PayPal work better with developers going forward. 

PayPal Payment Code

As part of the global Money2020 event in Las Vegas last week, PayPal continued their string of major announcements by introducing Payment Code, which will use QR codes and a PINs to verify in-store smartphone transactions over merchants' existing POS equipment. While initially seeming 'old school', this introduction leverages existing equipment and employee training while improving the experience for both the consumer and merchant.

Initially, PayPal is partnering with Discover and their 7 million retail locations to introduce this technology. To make an in-store payment, customers would first check in using the PayPal app. Once the app knows the customer’s location, it determines what kind of equipment the store has. 

If the merchant has a barcode scanner, a QR code will pop up on the phone screen. The customer then simply runs that code under the scanner finalizing the transaction. If the merchant only has a PIN pad, the app will supply a randomly generated four digit PIN, which the customer types into the terminal to verify the payment. (Note: This process is virtually the same as being used by Starbucks)

While the Payment Code does make the checkout process smoother, with easy access to all funding sources in one simple place (the customer's phone), the real benefit is that it will allow consumers to automatically redeem any special offers, gift cards, merchant rewards programs or other forms of payment that might be saved in their PayPal wallet in one quick transaction.

As with many of the innovations PayPal has introduced over the past several weeks, Payment Code is expected to roll out in Q1 of next year.

Amazon Challenges PayPal

Not to be left behind, Amazon responded to the recent wave of PayPal introductions and innovations by announcing a new service that will let customers of other online merchants pay for purchases using their Amazon credentials.

Login and Pay with Amazon takes advantage of Amazon's 215 million active customers and helps participating merchants make sales easier by allowing customers to access their account information safely and securely with a single login.

The new offering expands on the existing Amazon Payments program that lets customers pay with Amazon at check-out. The new log-in system ties merchants even further into Amazon's platform, including fraud protection from Amazon at no extra fee. Merchants get more information on customers, while the customers can buy without entering their address and card information on multiple sites over and over again.

Some merchants may be reluctant to work with Amazon because the company is a major retail industry rival, however.

Amazon will collect $2.9 percent plus $0.30 per transaction for transactions of $10 or more, and all fees are assessed on a per-transaction basis - always based on a percentage of the total amount. Login and Pay with Amazon will work on tablet, mobile, and desktop devices, the company said. Gogo, which provides in-flight wifi, already uses Amazon's basic payments service, but is planning to add the new service.

PayPal Penetration Challenges

Despite all of the innovation described above, PayPal is still an emerging mobile payment service provider, without the market size of penetration of the more popular credit card companies.

To alleviate this challenge, PayPal has worked hard to sign partnership agreements with consumer credit (Discover), money transfer (MoneyGram) and POS hardware and software providers (NCR, MICROS, etc.). By leveraging these partnerships, PayPal has expanded merchant coverage from just 18,000 in 2012 to close to 10 million locations expected by 2015.

"In 2013, Discover helped PayPal grow from the 250,000 retailers who accepted PayPal in store earlier this year to more than 2 million by the end of 2013," said Don Kingsborough, vice president of retail services at PayPal.

PayPal + Apple?

On October 11th, 2013, former Apple CEO John Scully mentions in passing during a BBC interview some ideas he suggests for Apple.  John referred to the logic of Apple acquiring larger companies with the huge amounts of cash they hold in reserves. In particular, John mentioned the idea that Apple acquire eBay for the single purpose if integrating PayPal into the iPhone.

"Apple's never been an acquirer of big companies before, and when you look at Passbook, the iPhone5S and fingerprint recognition - What would it mean if Apple went out and bought eBay? And they had PayPal, and integrated that?"

If you buy into the logic that Apple wants to be a facilitator for payments and not a merchant account supplier nor a payment card issuer, this idea may make sense. Combined, Apple and eBay would have over 760 million active payment cards on file, with some overlap.

So, maybe we will see a day when PayPal is part of Apple . . . or Discover.

I've definitely seen crazier ideas become reality over the years.

Additional Resources

 The Future of POS: Point of Sale Evolution and Its Impacts - PayPal White Paper (September 2013)

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9 Ways Marketing Can Help Acquire New Mobile Banking Customers

At a time when battle lines are being drawn in both the mobile banking and payments space, it is more important than ever to encourage customers to use the mobile channel.

According to research conducted by Fiserv Inc., organizations that actively market mobile banking have experienced an average adoption rate that is twice as high as institutions that did not promote the service.

So, how can financial marketers use the multiple communication channels at their disposal to promote channel migration? How do we encourage both the sign-up and utilization of the mobile channel that can help reduce costs and potentially generate revenue (see 'Monetizing Mobile Banking', Oct. 15, 2012). Below are eight ways institutions I am familiar with are promoting mobile banking.

• ATMs: One of the best ways I have seen mobile banking promoted was by Fifth Third Bank. Not only did they encourage sign-up for mobile banking on the ATM screen as many banks do, but they also included a QR code at the bottom of their transaction receipt. The use of a QR code appeals to the more advanced smartphone user while being a perfect way to electronically link to the appropriate app. The customer may decide to scan the code immediately or do so later when they reference the receipt to balance their account.

• Account Statements: Another very inexpensive, yet effective method of promoting mobile banking using QR codes in on customer statements or on the envelopes of standard customer communication. Chase bank does this very effectively, automatically directing customers to the correct app store for their device. In addition, statement inserts are a low-cost way to reinforce statement messages or branch promotions as done by SunTrust.

• Branch Communication: There are obviously many ways to promote the download of a mobile banking app in a branch as well as many ways to offer incentives to either the customer and/or branch employees for the completion of a download. The benefit of any branch-based promotion is the ability to have dialogue with the customer around the advantages of using mobile banking as well as providing a great opportunity to answer any questions or address any concerns the customer may have. Since customers almost always have their phone with them when visiting a branch, this is another channel where QR codes can be very effective, especially on brach POS materials and transaction receipts.
• Email: An email campaign is a great way to target online banking customers or customers doing a large number of balance inquiries monthly. Some banks are even targeting customers who use the branch extensively for check deposits, promoting the remote deposit capture function of mobile banking. The key with any email campaign, however, is providing a direct linkage to either the mobile banking location on your web site or to the mobile banking application itself.

• Web Banner: Using banner advertising as well as adding pop-up banners when customers are viewing your web site using their mobile device is a highly effective targeting technique that can promote your mobile banking application. With banners, various tests can be done at a relatively low cost, with learnings applied to more expensive channels such as direct mail. As with most other electronic and digital marketing, it is important to provide a link to either a mobile banking landing page or to the appropriate mobile banking app. Recently, most banner ads focus on the benefits of mobile check deposit as done by Citi below.

• Direct Mail: With the vast expansion of smartphone ownership and the potential economic and competitive benefits of mobile banking migration, several banks are using direct mail as part of a multichannel strategy to increase mobile banking penetration and usage. While more costly than many of the channels above, the lift from adding targeted direct mail to the marketing mix has offset the higher costs of this channel, increasing the net volume of qualified users faster than direct mail or electronic channels alone.

• Social Media: Don't forget fans and followers when you are building a mobile banking marketing strategy. Avid social network users are some of the most prolific smartphone users, making them a great target audience for the benefits of mobile banking. Make sure your Facebook and other social pages are optimized for mobile viewing and they include easy links to your mobile banking application jump pages or the correct app store.

• Traditional Media: While not used as extensively as other channels, traditional print advertisements are still used to reinforce the benefits of banking via the mobile channel. Usually focussing on mobile check deposit, mobile rewards programs or new applications such as an ATM finder, this channel is an effective way to display market leadership in mobile banking.

• SMS Text: More and more financial institutions are beginning to ask for mobile phone numbers as part of the new account opening process to enable better communication with customers. If you have SMS permission, this channel can be effective when used with an incentive for mobile banking sign-up along with a direct link to the download page in the app store. While this channel needs to be used judiciously, there is also the ability to integrate the message with your bank's rewards program offer of points or discounts on merchandise.

Integrate Mobile Banking Message Now

A recent Juniper Research report entitled 'Mobile Banking: Handset and Tablet Market Strategies 2013-2017', finds that mobile banking is expected to grow at a compound annual rate of 18 percent to eventually reach one billion consumers in the next five years. This growth is being supported by many of the major banks increasing their investment in the mobile channel and by significant promotion of mobile banking through various media. As a result, it is more important than ever for every financial institution to grab their share of the mobile banking pie before it is too late.

According to Steve Shaw, vice president of Strategic Marketing, Digital Channels and Electronic Payments for Fiserv, "The focus of marketing mobile banking should be on educating the customers. If customers understand how they can benefit from the service and how to get started, the convenience will compel them to extend the relationship with their financial institution through their favorite devices."

As you acquire new mobile banking customers, it is also easier to extend the collection of insight from the customer such as their email address (if you don't already have a current address) and even their Facebook page or Twitter handle. The more data you have, the easier it will be to expand communication through additional channels. This can also be done at the point of sale as branch personnel are signing customers up for mobile banking.

Are there any other successful ways to market mobile banking that I missed? Are you using all of the channels possible to migrate transactions and inquiries to your customer's mobile devices? 

Let me know.

2 Word Secret to Front Line Sales … or … 5 Steps to Sales Success

The Moment of Truth

A customer enters your branch … they stop, and scan the lobby, taking note of the décor and atmosphere. They then stride up to an available teller and say…

“I’d like some information on your checking accounts.”

This is the moment of truth!

Nearly every marketing effort ends with your front line staff. Whether it’s a walk-in customer or traffic generated by highly-targeted marketing, your front line staff define the success of your bank or credit union.

At MarketMatch, we’ve shopped, literally, dozens of banks and credit unions from around the country and we’ve seen every possible response to “The Moment of Truth” and I have a theory…

You can study all the psychology, sociology and sales training material available, but front line success comes down to two simple words:

Meaningful Conversation

Your goal, as the marketing professional/trainer/market share acquirer/attrition reducer/cheerleader is to help your front line staff have meaningful conversations and follow 5 simple steps:

1. Ask questions
2. Listen … REALLY listen
3. Hear the hidden financial needs
4. Transition those needs into product recommendations
5. Explain how the product benefits will help the situation

Here are some items to consider:

Tools

Provide your team with easy to complete forms that guide them through meaningful questions about the customer’s family, job, hobbies, other bank accounts, goals for their banking relationship, what do they like/not like about their old accounts, etc. These questions will generate all the meaningful conversation your sales team can handle.

Training

Don’t assume that your team can hear needs and tie them to product. Role-play and provide weekly “Meaningful Conversation” examples. Pick a conversation topic, mach-up some realistic customer quotes, spell out the hidden need and follow-up with products and benefits to address the need.

Programs

Consider programs that will help to focus conversations. I’m a huge fan of a Life Stage approach. Click here for more life stage information.

Experiential Conversation

“I understand that we have an easy to use online banking,” is not as strong as, “I use our online banking and it’s amazing!”

Or what about the power of, “Congratulations on your new baby! When my first child was born…”

There are 3 areas where your staff can share experiential conversations: 1) Personal product use – does your team use your products? 2) Personal experience – what happened in their personal lives that relates to the customer’s story? How did the bank help? 3) Case Histories. Use phrases like, “I once had a customer who went through that, here’s how we helped…” Your team changes lives everyday, share case histories among your staff so each has more stories to tell.

Take care,

Eric

Segment Your Customer Base For Reg E Communications

The recent changes to Reg. E, impacting how financial institutions can levy fees for overdrafts caused by one time debit card or ATM transaction, have created a period of both challenge and opportunity for financial institutions. Due to the almost certain negative impact on a bank’s fee revenue and potential customer confusion about this new regulation, it is important to be able to effectively and efficiently implement these new requirements, maximizing account holder opt-in responses while providing a positive customer experience.

In this month's ABA Bank Marketing Magazine, Robert Giltner from Velocity Solutions suggests that financial institutions should start their communications process with a mass mail and email campaign to all customers explaining the new regulation. While I agree that all customers should be provided a clear understanding of their options, I don't agree that an all encompassing direct mailing should be done from a cost perspective.

Every customer should not be treated the same. Research shows that while most customers do not like the fees associated with overdrafts, there is a percentage that rely on overdraft coverage to meet current expenses or avoid embarrassment caused by inadequate record-keeping. To achieve the highest possible opt-in response at the lowest possible cost, I believe a segmented and integrated communications process should be used, leveraging multiple communication and response channels and focusing resources where they will have the greatest impact.

Instead of treating all account holders the same, most financial institutions I have talked to will be communicating most aggressively to the 10-15% of the customers who have the highest incidence of overdrafts, connecting with those households that the FDIC found to be the highest users (and fee generators) in their 2008 Study of Bank Overdraft Programs.

Some firms are even trying to determine which owner on an account is responsible for the majority of the overdrafts. By using all available communication channels (direct mail, statement inserts, email, POS, phone, and branch level communication), banks are hoping to communicate the benefits of opting-in to the customer, thereby minimizing the fee income impact of the regulation while improving the customer experience. The majority of the customers who do not overdraft their accounts will be more efficiently reached using a series of statement inserts, statement messages, branch level POS, ATM messaging, email, etc as opposed to postal mail.

I believe the most difficult challenge may be after the regulation takes effect in August, when customers who were not frequent overdrafters experience their first rejected ATM transaction or debit card purchase.