How does PayPal Wallet work?
My focus is to review the two implementations of the digital wallet PayPal is currently developing/implementing for off-line shopping and how the company's acquisitions will help enrich the experience. This means not discussing other PayPal efforts in the mobile space such as PayPal Here. PayPal Wallet on PayPal Rails
- This is the implementation of PayPal Wallet that is currently available to be used at Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank.
1) It is a cloud-based digital wallet that you can access at the merchant's point-of-sale by entering your phone number + password or swiping your PayPal card + password. The phone number and the card are just different ways of entering the token that identifies a wallet in the cloud (there is a unique link between an ID and a wallet). The password is the way to authenticate the user.
In fact, the cloud-based digital wallet I am talking about is the same PayPal account that many of us are accustomed to using for certain online transactions. Allowing users to access it at the point-of-sale is a 'natural' extension of its traditional functionality, although it requires new technology and new partnerships to implement.
2) Off-line transactions, just like on-line transactions, travel on 'PayPal's rails' and are also processed by PayPal. Changes in the software running in the point-of-sale devices and in the middleware that connects the merchant with its processor, along with back-end integration with the merchant systems, is what allows acceptance of phone number + password and the direct connection between the merchant and PayPal.
PayPal's agreements with hardware manufacturers - such as Verifone
- and middleware providers - such as AJB
- have made this system possible.
3) PayPal is the merchant of record for all transactions. In fact, in the 'Account Activity Summary' (step number six in the app sequence provided at the end of this post) the user can see all the steps the payment process goes through. First, it is instantly authorized by the issuer of the card linked to the account. Hours later (as part of a batch process), there is first a cash transfer from the card issuer to a PayPal account and then a cash payment from the PayPal account to the merchant account.
The graph below illustrates this process - in a very simplified manner - using the example of MasterCard as being the preferred method of payment.
4) It is not an NFC-based solution. PayPal is developing a truly digital wallet, not a mobile wallet. As such, the company wants to enable users to pay without using any device (as is the case with phone number + password), which precludes it from utilizing NFC technology.
One could easily argue that swiping a PayPal card breaks this paradigm but, most likely, allowing for this method of payment is just part of the educational process. The company's first priority is to teach consumers to think about PayPal when paying at the store, swiping is what most people are comfortable with doing.
Another reason that may be behind the issuance of the cards is that only the most advanced POSs can support the upgrades required to accept phone number + password as method of entry. The changes required to accept the card are simpler.
Below are pictures of the PayPal card.
5) The phone plays a limited role (please refer to the bottom of this article for a description of the steps required to make a payment using PayPal). When checking out at a store, the consumer is interacting directly with the POS. It is only after the transaction has taken place that the user will receive notifications on her phone regarding transaction status. She will also be able to see a form of electronic receipt with full information on the merchant, amount paid (broken down by retail price, sales tax and other expenses such as handling, shipping or insurance) and item description.
6) The wallet can house loyalty / reward cards and coupons. These benefits will be used automatically at POS.
Although the on-line account has been revamped for users of PayPal's off-line services, no options are yet available to set preferred method of payment based on merchant or amount.PayPal Wallet on Discover Rails
- This implementation of the wallet is enabled by the PayPal / Discover agreement
made public on August 22nd of this year. Let's focus on the differences:
1) This deal enables PayPal to ride Discover rails once the system goes live (spring 2013), thus no new hardware or software is required for merchants to accept PayPal's card. Loyalty, gift, coupons and offers will be easily displayed and redeemed through the wallet.
PayPal will continue to process the transactions.
2) PayPal will issue payment cards to its more than 50 million active users in the U.S as soon as the deal goes live. The new card will have a Discover Issuer Identification Number, or IIN, a code that identifies the card holder, and will allow users to buy from the merchants that are part of Discover's network. All that the user needs to do is swipe the card at the existing check-out machine and enter a four digit PIN.
3) PayPal will charge merchants when users pay with the new cards, and, in turn, will pay Discover for access to its network, on a per-transaction basis. PayPal will define charges based on merchant type and will probably also negotiate special deals with certain merchants.
4) This deal places PayPal in the same league as the issuing banks in terms of its ability to issue a card that is accepted over an open-loop network.
5) This solution, which only works with a PayPal card, completely violates the digital wallet paradigm we discussed above by not giving the choice of using a phone number instead of the wallet. Again, PayPal's vision is a digital wallet but its first priority is to win share-of-mind in off-line payments. The solution is clunky but it is a first step. Additional iterations may provide much more utility.
Once again, the graph below illustrates this process - in a very simplified manner - using the example of MasterCard as being the preferred method of payment.
Note: What is in it for Discover? The company should pick up additional transaction volume as result of this deal while allowing the card network to fully participate in this new growing payments ecosystem.How does Google Wallet 2.0 'stack up' against the criteria listed at the beginning of this series (click here to review the list)?
The intention is to 'rate' the solutions as they exist today. In most cases, the wallets I am reviewing are flexible platforms that, with the right partnerships and infrastructure in place, can provide a very enriching shopping and payment experience. But that is all in the future. As promising as they may sound, I am comparing them against each other as they stand today.
For this reason, this table only includes PayPal Wallet on PayPal Rails, considering the locations where it is currently available (Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank). Hopefully, I will update my review in 2Q2013 after PayPal Wallet on Discover Rails launches or earlier as the number of features and relailers increase.
Reliability and Transaction Speed
It is as reliable as the well proven and tested on-line solution. It is also a lot faster than the on-line solution, to the point that, as far as I can see, there is no noticeable difference in transaction processing speed compared to a traditional card.Security
From a transactional perspective: The security level when swiping the card is actually higher to the security achieved with a traditional mag-stripe card because it uses swipe + pin rather than swipe + signature. Unfortunately, there is quite a bit of concern around entering phone number + pin given that a) a person's number is often a relatively 'public' piece of information and b) the more information you have to enter on the key pad, the more difficult is to protect yourself from eavesdropping. In any case, there is no dynamic authentication mechanism embedded in the process.
From a storage perspective (i.e. keeping payment credentials safe): The fact that all credentials are in the cloud and that you need to use an ID + password to log into your account (whether on-line or on your mobile) makes the solution very safe.
In addition, it is the first non-banking payments mobile service that I have signed up for where you can feel they take 'know your customer' requirements extremely seriously. Before allowing me to open an account, I needed to upload photos of my driver license, my social security card and a utility bill. Inconvenient but important.Ease of Use
The fact that the wallet must be managed on-line is a disadvantage. The mobile app allows you to send/request money to/from another consumer, to find local businesses that accept PayPal and check in with them and to view your transactions. Any changes you may wish to make to your payment methods (include a card, change preferences...) needs to be done from their website. Wallet Functionality
It is good from the perspective that you can include all types of credit/debit cards, bank accounts, loyalty/gift cards, coupons... The experience could be improved in three ways: 1) Although it is in the roadmap, at the moment, you cannot set payment rules based on merchant or size of purchase; 2) The user cannot override the preferred method of payment at the POS (via the POS or the mobile app) and not everyone is granted the 'grace period'; 3) Issuer presence is kept at a minimum (totally absent from the mobile app and only in the form of digits, no branding, on-line), making PayPal a relatively unfriendly channel for banks that are struggling to keep customer's share of mind.Acceptance
It is only available at a handful of stores (Abercrombie & Fitch, Abercrombie Kids, Hollister California, The Home Depot and Jos. A. Bank), none of them day-to-day retailers.Device Availability
The app is available for iOS-, Android-, BlackBerry- and Microsoft-enabled devices. Valud-add Apps
Although PayPal (or eBay) has acquired a large number of companies that can bring a lot of value to the wallet (Where
...), none of them are yet integrated in the wallet. Although X.commerce, a development plaform, launched over 9 months ago, it is difficult to find value-add apps built on the wallet.Food for Thought
I believe that we all agree that the consumer needs to be educated about mobile and digital payment options. For this reason, I was surprised not to see any posters explaining about PayPal as a payment option at the till or even brochure on the topic. Talking to one of the cashiers (Thank you Mary! You know who you are) I found out that PayPal employees had visited the shop the day PayPal launched at Home Depot but that they had not visited the store since (at least, as far as she knew). Cashiers had been given fliers and brochures that first day but they had not been replenished after they ran out. Is PayPal not providing and requesting Best Buy to share this material or is Best Buy refusing to do so?
PayPal's current strength is on P2P transactions because it allows consumers (as well as small- and medium-size retailers) to accept cards with minimal hassle. How is Visa's plan to bring P2P payments to U.S. account holders
going to affect PayPal?
Will startups like WePay
, with increased ease of integration and reduced merchant fees
, gain enough momentum to affect PayPal's (or Google Checkout, for that matter) business model?The PayPal Wallet in Action
This are the steps I followed to pay at the self checkout at a Santa Clara Home Depot.
1) A soft button gives me the option to pay with PayPal
2) Once I choose PayPal, I am asked to confirm amount
3) Next I am given the option to swipe or enter phone number
4) I enter my passcode and the transaction is processed
This is what I 'saw' happening in my PayPal App.
1) Summary of transactions before my visit to Home Depot
4) Transaction status right after payment at checkout counter
2) I received two txts - One from PayPal and one from the cc linked to my account
5) Status changed to 'Completed' hours later
3) Summary of transactions after my visit to Home Depot
6) Full list of 'Activity', including 'Authorization', 'Transfer' and 'Payment'
How does Google Wallet 2.0 work?
In a nutshell:
1) All payments will be made using a Pre-Paid Virtual MasterCard (VMC) issued by BanCorp Bank
that, in turn, is linked to the user's preferred credit/debit card. All credentials for this VMC will be stored in the phone's Secure Element (SE), all other card credentials will be stored in the cloud. No need for Google to negotiate with issuers / networks to include them in the SE, as was the case with the first Google Wallet (GW) iteration.
Note: At the moment, there is one notable exception to this rule: Citi MasterCard, Google's first - and still only - banking partner. Citi MasterCard credentials are stored in the SE.
2) Google is acting as 'merchant of record'
. The merchant will authorize/settle transactions with Google - paying fees based on the use of a present pre-paid debit card. The VMC credentials will be sent via the MasterCard network to the issuing bank (BanCorp Bank
). In turn, and in real-time, BanCorp will map the VMC to the user's preferred method of payment and will seek authorization with the card issuer - paying standard fees related to the chosen card, probably as Card Not Present (CNP). Basically, the VMC is used by Google/BanCorp as a directory entry to link to the user's 'actual' card. These are two back-to-back processes.
The graph below illustrates this process - in a very simplified manner - using the example of AmEx as being the preferred method of payment.
Note: Citi MasterCard cards will not be processed directly by Citi, without the intermediation of BanCorp given that they are also present in the SE.
Note: Although AmEx has not approved Google to include its cards in GW, a user can link his/her AmEx card to GW
3) The payment process may be a bit slower due to the need to perform these back-to-back processes. Google is probably making a loss with each payment given the difference between the fees they are charging to the merchant and the fees issuers are charging them.
4) Google/BanCorp have now full access to all payment information, making it extremely easy for them to work with merchants to develop loyalty programs and with consumers to organize their spending. I believe issuers still receive all (or most) of the transactional information and can apply rewards and protection programs to the transactions, although Google makes it very clear that it is up to the issuer to decide how to treat these transactions and whether or not rewards and protections apply.
5) GW can be implemented using an NFC-enabled phone but also just a plastic card (with mag stripe, contact or contactless technology) or even an NFC sticker. These alternative options would provide a much poorer experience and less security but they may be a way to get consumers comfortable with using Google as a payment method (this is precisely what PayPal is trying to do through their partnership with Discover). In any case, each transaction could always be instantly recorded in the cloud and immediately sent to the user's phone.
6) You can store a number of payment methods in your GW account but only have one linked to the VMC at any given time, meaning that you cannot change the card you are using to pay at the till. This seems to be a bit limiting... But it could easily be changed to, either have a set of rules to determine which card to use based on merchant and payment amount or to be able to choose the specific card you want to use at the till.
7) Google's approach for the 2.0 version of its wallet differs greatly from the approach it took when it developed the first version. At the same time, this approach seems to resemble that of PayPal - although with a different implementation - or, another way of seeing it, Google CheckOut with NFC capability.How does Google Wallet 2.0 'stack up' against the criteria listed at the beginning of this series (click here to review the list)?
Reliability, Transaction Speed and Security
It is an NFC-based solution, connecting the merchant (or Google, as the merchant of record) to the banks through the traditional processors and card networks. This means the highest standards in reliability, speed and security. Because in this case we have two back-to-back transactions (between the merchant and BanCorp and then between BanCorp and the actual issuer), speed may suffer but I am assuming not enough to make it noticeable. Ease of Use
Again, as an NFC solution, use at point of sale is extremely simple - just tap-and-go. The interface is also simple and intuitive enough.Wallet Functionality
From a functionality perspective, it seems to be a bit limited. This could be easily changed but, at the moment, only one card can be linked to the VMC. This means that, although you may have all your cards stored with Google, you can only use one at the store. You need to log into your account online to change your preferred method of payment.
Also, given the limited involvement banks currently have with this solution, it is difficult for them to use the wallet to create a more direct link with their customers. Acceptance
There is a limited number of NFC-enabled POS in the U.S. A much lower number than in Europe or other geographies. This will change in April 2013, once acquirer processors and sub-processor service providers will be required to support merchant acceptance of EMV chip transactions by Visa
and all other card networks. This mandate will greatly accelerate migration of POS to provide support to, at a minimum, EMV contact cards and, in most cases, EMV contactless and NFC-enabled devices. Device Availability
At the moment, GW only works on a few devices on Sprint's network. This is an extremely limiting factor. Given that GW requires an NFC-enabled phone with access to its SE, there may be a long road to travel to good device availability.Value-add Apps
In theory, GW can support all types of value-add apps to enrich the user's experience and make the wallet truly valuable. Unfortunately, at the moment, there are no (or very few) apps available.Food for Thought
Considering that PayPal, Visa and MasterCard (among others) are already also providing, or plan to provide, other payment services such as P2P or remittances (we will discuss these capabilities in detail when reviewing each solution), shouldn't Google also take a stance in those areas?
Edit (08/30/2012) - It hasn't even been a week since I posted this blog and I already need to make an update! Google has spoken about the possibility of including P2P payments in its GW
Why did Google acquire Motorola Mobility? There is no shortage of hypothesis and opinions being published and discussed but, as we all know, it will take some time to fully understand the risks and opportunities that Google will face and enjoy as result of this move.
One reason everybody seems to agree on is the large patent portfolio that will now belong to Google. This is clearly stated in Larry Page’s blog post
on the acquisition as it will “enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies”. Motorola’s Mobile Devices business segment has a total of 14,600 granted and 6,700 pending patents
, including patents related to 2G, 3G, 4G, H.264, MPEG-4, 802.11, OMA and NFC. The Home business segment has 1,900 granted and 1,300 pending patents.
Having said this, as FOSS Patent
points out, these patents may not be enough to win the on-going all-out patent war between Google and its rivals. Both Apple and Microsoft are in the middle of legal battles with Motorola and, it would seem, they have the upper hand.
So, does this mean it is not really about patents? Not so fast… As Om Malik reports
, Microsoft was also negotiating to buy Motorola’s patent portfolio and that Google’s negotiations kicked up five weeks ago, shortly after they lost the bid for Nortel’s patent portfolio. The negotiations have gone very fast with Google CEO Larry Page and Motorola CEO Sanjay Jha talking directly and only involving a handful of executives – it seems that Android co-founder Andy Rubin was brought into the talks only very recently. Something made Google react quickly and, it could very well be, a combination of Microsoft’s interest and their loss of Nortel’s patent portfolio.
In any case, the acquisition gives Google the opportunity to be ‘playful’ in a number of new businesses into which they had not reach before.
One of those new business opportunities may be connected TV and using Motorola’s home solutions – automation, set-top box and broadband gear business – as a platform to jump into the home space and take part in the convergence of broadband and data. This is right in line with Larry Page highlighting that Google has acquired Motorola not only because of its strength in Android smart-phones and devices, but also for being a “market leader in the home devices and video solutions business”
.Motorola could help Google improve the less-than-stellar results it has achieved with Google TV
. Motorola manufactures a large percentage of the set-top boxes in the US and, even if not successful, Google TV has some good features and the products of the two companies could be integrated. This is a very profitable business and together they could make it even more profitable.
Another, possibly great, business opportunity is for Google to become the new Apple, integrating hardware and software to create a unique experience for its customers. Granted, it will be difficult for the software company to fully integrate the hardware giant – not in the least because Google will see the size of its work-force double – but the combination of the two corporate cultures could still bring out the best of both. At the very least, why not use Motorola as a test-bed for its latest-and-greatest releases, for the acceptance of ‘straight-up’ Android interface and for the use of specific form-factors? At the end of the day, Google has already treated device makers differently
, with some getting ‘private branches’ of the code in advance. Maybe the idea of an artificial Chinese Wall put up inside Google is not realistic.
This would seem to go against what Google’s initial PR release and all its further public comments where they have clearly stated that Android will continue to be an open system and that they will continue with full support of all of their OEM partners
. And this would seem to make sense. Google allotted plenty of time during its latest (8) I/O conference to discuss the future of Android and it included Android-powered car consoles, refrigerators, dish-washers, clock radios and, basically, everything that had an LCD screen. Therefore, why limit themselves to a single manufacturer? Android needs to increase its mindshare as quickly as possible and to generate loyalty, this may be best done through multiple OEMs.
All in all, it is clear that we don’t yet know why ‘Googorola’ was born or what it will achieve but, for sure, it will be an interesting ride for all of us and it will, it has, challenge many current assumptions as to what the industry will look like in 5 to 10 years.
'Android is not free. Android has a patent fee. You do have to license patents.
' stated Microsoft CEO Steve Ballmer in an interview last year with The Wall Street Journal
. A fee paid to Microsoft, not Google, mind you.
If Samsung is made to pay this fee in the near future, as Microsoft is trying to do, it will be the end of Android as a free OS. If to this we add the fact that both Microsoft and HP are now offering their own rival mobile OSes backed by a vast array of patent protection, some of Android's OEM partners may begin to think twice about their firm Android commitments. Android as a free mobile OS that rivals iOS in terms of functionality is an unbelievable proposition. But Android as an OS that requires you to pay Microsoft for each unit shipped is less so.
Google's last great chance to save Android in this regard may have been the Nortel patent purse with over 6,000 patents spanning LTE, wireless video, Wi-Fi and Internet search innovations. Unfortunately, the search giant lost the rights to those patents in a bidding war against its rivals.
The bidding was an long and exciting game where, after 19 rounds, Rockstar (Apple, RIM, EMC, Ericsson, Sony and Microsoft) paid $4.5 billion for the patents leaving Ranger (Google and Intel) out of the game. Apple reportedly paid $2 billion
for 'outright ownership' of the set of LTE
patents, RIM and Ericsson paid $1.1 billion together for a license to the portfolio. In addition, RIM will receive Canadian tax breaks for shouldering some of Nortel's operating losses and could potentially break even on the deal. Lastly, storage maker EMC is said to have negotiated a side deal for exclusive ownership of a small set of patents.
Legal experts have noted that Apple, with close to $70 billion in cash reserves, could have purchased the patents on its own and may have chosen to partner with others in order to diminish the chances of the deal being blocked over anti-trust concerns
. Granted, Google, which itself holds around £37 billion in liquid assets, could also have bought the portfolio and still be left with almost 80% of its cash intact. Then, if these patents are really this important for Android's survival, why not shed the cash and place itself way ahead of all the competition? Furthermore, with Intel - and its also very deep pockets - as partner-in-crime, why did they not go all out for the bid?
One interesting reason has been voiced by Bodgam Dimitru, a BlackBerry enthusiast and proud Canadian: Google will buy Research in Motion
. Dimitru goes as far as to detail 10 'logical reasons' why this acquisition makes sense. Perhaps the most interesting ones:
1) Mobile Patents: Not only would Google get RIM's patents, it would also get Google into the Nortel patent acquisition that we have been speaking about in the above paragraphs and for much less than the full price...
2) QNX: The foundation of the new BlackBerry Tablet OS and future QNX-based BlackBerry 'superphones' is literally a drop-in replacement for the Android's Linux Kernel thanks to its POSIX compliance. Key benefits include improved stability, better security and ease of rolling out new hardware.
3) Enterprise: In a world where Google owns RIM and there's a QNX kernel on Android, targeting enterprise clients becomes viable for Android.
4) Carrier Relationships: RIM has done a great job over the years at expanding its footprint around the globe by building great partnerships with carriers, which would only help Google expand across all markets.
5) Existing Commitment to Android: RIM has already announced support for Android apps on the BlackBerry PlayBook and future QNX-based BlackBerry smartphones, which clearly shows that Android on BlackBerry is already doable.
Granted, none of this will happen if RIM can turn things around but, if worse comes to worse, this acquisition could open a brand new world of opportunities for both companies.
Despite of how inconvenient, cumbersome and archaic our banking system may be, many of us might find it difficult to move it away from the long-established and respectable institutions that we 'trust' today - even if we have seen how easily some of those institutions could crumble and collapse.
However there are a number of new startups that are trying to entice users to do exactly that. A few of them, are coming up with truly innovative approaches that may very well, capture the hearts and minds of many people and give users enough comfort and transparency to entrust these start-ups with their money. Three such examples
, among many others, are:
1) Think Finance with their Elastic
web-based bank account replacement that targets, as their CEO, Ken Rees puts it: '... the underbanked and unbanked - the estimated 60 million people who are not well served by traditional banks'
, who is targeting the approximately 30 million small business owners in the US that don't have a merchant account or credit card terminal. With only 6 million businesses in the US accepting credit card payments, there is a large untapped market they are ready to serve.
, a start-up still in stealth mode who wants to offer 'banking on-line' as opposed to the traditional 'on-line banking'. BankSimple has not yet launched but it is already making quite a splash
with over 30,000 people having signed up to be part of the beta launch and over 50,000 ready to open accounts with them as soon as the business is fully up-and-running.
What exactly is BankSimple?
1) BankSimple is not a bank. It will partner with smaller banks who will hold the federally insured accounts.
2) What BankSimple will do is provide an on-line interface that allows users to combine all their credit, savings, checking and termed accounts into one banking card
3) They will help you manage your money with their predictive money management model (part of their secret sauce
). While users only need to concern themselves with a single account, there are actually checking, savings and credit accounts tied to that one login. Those will function behind-the-scenes with Banksimple automatically managing funds and transferring money between the accounts to ensure that the most money is yielding the most interest at any given time.
4) Because their focus is mobile design and usability (the first thing the company did was design its mobile interface
), it allows you to do everything with just a few thumbs movements while on the move. For example
, it will provide real-time updates on spending via the web and through Android and iOS apps; they will help combat fraud by providing instant alert on purchases and by checking if a user's location matches the location of the transaction to monitor for fraud; they will allow you to deposit a check by taking its picture with your mobile device and to make quick and easy transfers to your Facebook and Twitter friends. And they promise Zappo's style customer service so, if you run into any problems, there will be a expert at the other end of the line to help you out.
5) Finally they promise no fees. Their full revenue is based on taking a percentage of the interchange fees (these are fees that businesses pay to credit card companies to process transactions) and net interest margins.
This sounds like true customer-centric business and operational models. Obviously, we still need to wait for it to launch to see if they do deliver on all fronts but, at the very least, I would say they have the right idea. Perhaps one question mark is around their banking partners. They plan to partner with about 15 institutions
. These will have to be smaller banks with no retail presence (similar to the ING Direct model) and with no aspirations of building brand awareness since everything will be branded BankSimple. These banks will need to integrate their systems and products with and cede full control to BankSimple. What banks will they have as partners? Will they be robust even if small and not well-known? For sure they will be FDIC insured but nobody wants to test federal insurance... I trust they will overcome this hurdle - in fact, my understanding is that they already have these partnerships in place - and be able to offer to us the great banking experience that we all deserve and very few of us get!
We all understand that banks could be doing all this themselves but, with their focus on ROI and the use of proven technologies and methodologies, have chosen not to do it. Will they wake up in time to avoid damaging customer migration?