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 Ingenico - 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, RedLaser, Zong, Milo, Card.io...), 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.

This is what I 'saw' happening in my PayPal App.

From TechCrunch by Sarah Perez:  DrChrono, a startup focused on bringing medical records and more to the iPhone and iPad, is announcing a big update today which introduces mobile payment feature to its platform, as well as a new way for physicians and patients to access their health insurance information from mobile devices.  Continued.

Trish’s Comment:  Ever since the Health Information Technology for Economic and Clinical Health Act (HITECH Act), enacted as part of the American Recovery and Reinvestment Act of 2009, was signed into law to promote the adoption and meaningful use of Health Information Technology (HIT), HIT firms have experienced significant growth.

Particularly, this has been the case for Electronic Health Record (EHR) Companies thanks to the EHR Incentive Programs, which specifies that each physician within a practice can qualify for $44,000 in Medicare Incentives or $63,750 in Medicaid Incentives for adopting a Certified EHR. 

This is the main reason behind the explosive growth experienced by innovative small startups in this area, such as DrChrono and Practice Fusion.  What is DrChrono and why has it caught my attention?

DrChrono is a freemium SaaS solution for doctors that is built on top of Apple’s iOS platform.  It offers an online service and iPad app that doctors can use to schedule patient appointments, write or dictate notes via audio, take pictures, write prescriptions, enable reminders, access lab results or input health records.  It is experiencing strong growth going from 5,000 users during the summer of 2011, to 15,000 at the beginning of 2012 to around 23,000 this month.   The best way to get a feel for DrChrono is to review the following short video.

It has caught my attention for four main reasons:

• Michael Nusimow, DrChrono’s CEO, says:  ‘We’re a non-health care company in health care …  A tech company looking for tech solutions.’  And thus, when defining their business and revenue models, they studied and analyzed other tech companies.  Although they are a big data company, they, at least so far, have not gone down the same path as PatientsLikeMe where aggregate patient information is used – and sold – to look for trends in drug performance, disease evolution or geographical distribution.  This is the revenue model favored by other EHR companies such as Practice Fusion.  
  
  In the case of DrChrono, it has chosen a freemium model, with many features offered for free while others, such as speech-to-text, medical billing and insurance checks, are available as in-app purchases.  And it seems that its users are behaving much like users of other freemium-based technology companies, such as DropBox or Evernote, regarding the split between free and paid customers.  

• Although the company launched its product on the iPad first, it initially had plans to port their software to other platforms, most notably Android.  As of late, it has decided to focus 100% on iPad and other Apple products, betting its future in the iPad being the best suited for doctor’s use.  This is a bold bet!
  

• As far as I know, it is the first EHR company to include Square-based mobile payments into its processing flow – directly connected to its billing system.  It makes perfect sense since DrChrono is targeting the smaller scale doctors’ practices (up to ten doctors), where traditional POS systems can prove to be an expensive solution. 
  
  According to Nusimow, it not only makes sense but it is also something doctors really want to use because it is ‘something sexy …  It makes them feel modern’.  Well, no harm in that!

• Finally, it keeps adding very innovative features, the latest being real-time medical insurance checks, available through an iPad app for the very first time.  It allows doctors to easily find out details of a patients’ current coverage and provides patients with details regarding co-pay, deductibles and procedures covered.
  
  DrChrono is a platform and, as such, the possibilities for new features and solutions to be added are limited only by imagination.

DrChrono has already raised over $4 million from the likes of Yuri Milner, Matt Cutts, Paul Buchheit and Charles River Ventures.  It is sure to continue to raise interest as it adds new features and services.  I will keep you updated!

Boku may not be very well known to the general public but it is quickly becoming a force to reckon with in the world of mobile payments as it moves from on-line payments of digital goods to both on-line and off-line payments of physical goods.  Through this expansion, it is now targeting a much larger market - $9 trillion dollars used globally at the point of sale, compared to the $350 billion spent on-line.  It is also entering the Mobile Wallet Wars against giants such as Google and PayPal. 

Let’s start by reviewing Boku’s key services, starting with the company’s bread-and-butter offering and moving to its latest launch:

Mobile Direct Billing via Premium SMS service – It provides payment services for digital goods on-line in 66 countries, and over 4 billion customers, including US (AT&T, Verizon, Sprint and T-Mobile), UK (Vodafone UK), Germany (Deutsche Telekom) and France (Bouygues Telecom and SFR)

This is a convenient and widely accepted method of payment for digital goods but not for physical goods for two main reasons:

• High charges imposed by the telcos – from 30% to 50% of the price.  
• Only basic fraud protection and customer service offered due to limitations inherent to the Premium SMS service. 

These are the steps that need to be taken when paying with Boku via Premium SMS service:

• The customer selects an item to purchase from her favorite website – for example, an invisibility cape for an on-line game or a ring-tone.
• She then selects Boku as payment option in the checkout page.
• She enters her mobile number when requested.
• Shortly after, she will receive an SMS requesting that she confirms the purchase by replying to the SMS sender with a ‘Y’.
• Her cell phone bill is then charged with the price of the invisibility cape or the ring-tone.
• In the background, without her knowing it, her mobile carrier will keep between 30% and 50% of the amount she has been charged, with the payment intermediary (in this case Boku) taking a small percentage and the rest going to the content provider (i.e. seller of the cape or ring-tone).

Mobile Direct Billing via direct integration with carriers’ back-end and payment systems – Payment companies providing this service are fully integrated with the carrier’s back-end and billing system, providing tighter security, better fraud protection, full customer service and even rebates.   In addition, carriers’ costs for this service is much lower and are thus open to negotiating lower fees with payment companies (for example, around 15% in the US and even as low as 5% to 7% in South Korea).  Together, all these factors make this payment method suitable for on-line purchases of physical goods.

Boku has been actively working with telecom companies in the US and Europe to develop this type of tight integration and offer this service.  At the moment, it is trialing the solution with Vodafone in the UK but has not been successful with the US carriers, all of which have signed agreements with BillToMobile (US subsidiary of Danal Corp. headquartered in South Korea).  The current plan in the US is to offer the service by using BillToMobile as gateway to the carriers while it continues to negotiate with with the Big Four to develop its own solution.

These are the steps that need to be taken when paying with Boku via direct integration:

• The customer selects an item to purchase from her favorite website – for example, a pair of earrings.
• She then selects Boku as payment option in the checkout page.
• She enters her mobile number along with some sort of additional identifier when requested.  This additional identifier could be, for example, a pre-defined passcode or her zip code (this will be defined by the carrier).
• Shortly after, she will receive an SMS with a one-time passcode that she will need to enter in the checkout page.
• Her cell phone bill is then charged with the price of the earrings.
• In the background, without her knowing it, her mobile carrier will keep around 15% of the amount she has been charged, with the payment intermediary (in this case Boku) still taking a small percentage and the rest going to the retailer.

Boku Accounts – It is a safe and secure prepaid account – provided by MasterCard – that can be accessed via an NFC-enabled mobile (sticker or chip) or physical card and that is issued directly by a carrier or bank (i.e. white-label solution).  It can be used at any retail store that takes MasterCard and / or is PayWave enabled.  The fact that a physical card is part of the solution demonstrates Boku’s determination to overcome the limitation inherent to NFC, just like PayPal is doing.  Also, just as with PayPal, customers can access their account on-line or via the app to setup transaction and budgetary alerts and to review promotions and offers from their favorite merchants at the most appropriate times.

This new service has been launched and will be promoted using $35 million in fresh VC funding received from New Enterprise Associates and Telefonica Digital (the growth arm of Telefonica) as well as from existing investors bringing Boku’s total to $75 since its launch in 2009. 

Backing from the world’s third largest carrier lends credibility to the product and the benefits it brings to the carriers and even the banks:  Boku is providing them with technology to increase the value they bring to their customers instead of trying to disintermediate them. 

All of this activity, particularly the launch of Boku Accounts,  has helped the company attract some very senior and seasoned talent from PayPal (Martin Buhl, now head of Boku’s German office), Visa (Jon Prideaux, Exec VP for Visa, now Senior Exec) and Barclaycard (Stuart Neal, MD of International Development for Barclay card, now Senior VP of Biz Dev).  Perfect complement for the knowledgable founders Mark Britto, Erich Ringewald and Ron Hirson.

Does Boku’s expansion and its high-flying talent make it a good acquisition target (http://www.privco.com/research/featured-acquisition-target-mobile-payment-service-provider-boku)?  Let’s review the points we have made above:

• Good set of services across on-line and off-line for digital and physical goods.  
• Reputable founders with additional senior talent joining from major players, bringing additional knowledge and credibility.
• Well funded with good partnerships in place.
• Scalable infrastructure that will be strengthened with this infusion of money.

PayPal already acquired Zong, a direct competitor of Boku, in July 2011.  Could Boku fit within Google or Apple’s strategy?

From Tech Crunch by Leo Chen:  ‘Death of brick-and-mortar retail’ – Andrew Chen recently recommended a video to me, which inspired this post. It’s a keynote by Ron Johnson, the CEO of JC Penney and the man behind Apple’s retail revolution. In the video, Johnson spoke about the history of the department store and why JC Penney has fallen behind.  Continued. 

Trish’s Comment: I highly recommend that you watch the video mentioned in this article.  Johnson was formally VP of Retail Operations at Apple, the man behind the company’s retail revolution and is now JCP’s new CEO.  Johnson unveils the retail chain’s new strategy, which includes radical changes to Product, Place, Presentation, Price, Promotion and Personality.  The goal is to make JCP your favorite store.  Not the biggest or the fanciest, ‘just’ your favorite. 

Johnson discussed a number of interesting initiatives, some of them fairly risky, all of them innovative.  I was pleasantly surprised by JCP’s willingness to challenge the status quo but what I was not expecting was:

1. A complete focus on the retail store experience while only mentioning in passing on-line and mobile channels as matching the in-store themes.
   
   
2. Strong focus on paper, direct mail and TV advertising while hardly discussing on-line / mobile marketing initiatives.  He did specifically state that he would not discuss all on-going or planned initiatives at JCP since they wanted to keep some close to the vest.  

Is the integration of off-line and on-line channels and experiences one of the initiatives he wants to keep under wraps for the moment?

I certainly hope so since apparel and accessories are the fastest growing ecommerce category.  And it is not only traditional retailers that are improving the on-line and mobile experiences to accelerate there growth, but also social sites, such as Pinterest, that seem to be particularly well poised to help build momentum.

In spite of the limited discussion around on-line and mobile by Johnson, some of the changes he is implementing in his stores seem to mirror some of the key on-line trends used by social sites.  For example here is a comparison of a couple of JCP’s in-store initiatives with how Pinterest organizes its materials:

1. Johnson spoke many times about providing curated content to its customers.  Really understanding what the customer wants and making sure it is available at the store in the form of new products / fashion as well as in the form of relevant value-added services.  For this, Johnson has created Town Square – An area in the center of the floor offering complimentary services to customers as well as promotions such as free hot dogs and ice cream.
   
   This is the same approach taken by Pinterest which tries to curate the content to show you the pins most likely to be of interest and encourages pinners to provide additional interesting material / information related to the pin.
   
   They both want to help you discover new beautiful or useful products personalized to you.  
   
   
2. Pinterest offers ‘departments’, such as Art, My Life or Pets.  Within each department you can decide to follow specific pinners, each of which will have a different personality, a special style that will speak to you. 
   
   JCP, being a department store, has always been organized into departments.  It now wants to develop very specialized micro-stores – between 80 and 100 in the next 3 years, such as Liz Claiborne, Martha Stewart, Nanette Lepore and Betsey Johnson – within each department with different and clearly defined personalities that will speak to you and you will want to follow closely.

In the video Johnson discusses both the major changes in pricing and also  JCP's 'Fair and Square Pricing' including ‘Every Day Prices’, ‘Best Price Friday’ and ‘Month-Long Values’.  This pricing strategy is blamed as the main cause for JCP’s disastrous earnings report in mid-May where the company posted a $163 million loss and a 20% fall in sales in 1Q.  This pricing initiative and, even more importantly, the way it was communicated to customers is worth covering in a separate post.