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'
One of the most controversial fees within the four-party card system is the interchange fee. In the next few paragraphs we will review what interchange fees are, why they are in place and ways in which they may evolve in the future.
Card Network Fees and Interchange Flow over a Four-Party System
The figure below illustrates a typical transaction over a four-party system.
Note to Illustration: There are other fees charged by the acquirer, issuer and network that are paid on a regular basis (monthly or yearly) not included in this illustration and not discussed in this blog.
Edit (06.10.2012) - Note II to Illustration: Interchange fees flow from the Acquirer to the Issuer through the Network, without the Network keeping any part of it.
Focusing on the fees involved in every payment card transaction:
1) Interchange fee: Interchange flows from the acquiring bank to the issuing bank on purchase transactions and is entirely covered by the merchant (main element of the merchant discount fee). Interchange is applied on a transaction-by-transaction bases and depends on many variables including the purchase amount, card type and merchant type.
The rationale for this fee rests on the concept that the merchant (and the acquiring bank) benefits from the use of the card; meanwhile the card issuer incurs costs in making this use possible. With interchange, the merchant, as the beneficiary of the service, compensates the issuer for the costs and expenses it incurs to generate this benefit.
2) Switch (or assessment) fee: Fees paid by the acquirer and issuer to the network on each transaction. These fees will cover the real-time authorization and the end-of-day (or batch) clearing/settlement of the transaction.
3) Card usage fee: In some cases consumers pay fees in card transactions to receive rewards.
4) Merchant discount fee: Acquirers typically quote prices to merchants based on 'interchange plus' pricing. This means that interchange fees, along with card network switch fees, are passed through to the merchant with the acquirer's additional fees priced on top. Interchange fees can account for over 80% of the merchant discount fee.
Why is Interchange controversial?
Although the arguments are complex, some of the key points to consider are:
1) Interchange are non-negotiable fees paid by the acquirer to the issuer and set by the network. Fees will vary based on a number of factors including type and size of merchant, size of purchase and type of card (refer to the graph below). The fact that the fees are defined and enforced by a third-party raises pricing concerns.
2) Once a merchant agrees to accept cards from a certain network, it will need to accept all cards (honor-all-cards rule) and cannot surcharge (no-surcharge rule).
This means the merchant will need to cover all levels of interchange fees (i.e. fees associated with premium and standard credit cards and also signature and PIN debit cards) and will not be able to use surcharge to modify customer behavior by directing them towards cheaper (and more efficient) methods of payment.
Edit (06/10/2012): This rule has been softened in recent years in some states across the US and some countries across the world (such as The Netherlands and Australia). It is interesting to note that, in most countries where the rule has changed, few merchants have taken the opportunity to apply surcharges in an attempt to influence customer behavior. It may be that customers’ expectations with regards to card usage are so ingrained that retailers fear a backslash. For example, if faced with higher prices at a store to use, for example, a MasterCard card, will the consumer just use a different card (if he does indeed have another card)? Will he look for it at another store? How many impulse purchases will be lost? There may be too many unknowns for retailers to feel comfortable with experimentation, particularly within the current economic environment.
3) Although interchange is independent of the issuer, it is meant to help issuer costs and expenses associated with the provision of the service that are difficult to measure and that will be different for each issuer. Examples of the costs / expenses it is meant to cover:
a. Cost of guarantee - Payment to the merchant is guaranteed.
b. Cost of funds - The merchant receives payment before the issuer does.
c. Operating expenses.
d. Marketing: Main costs relate to reward programs.
4) Interchange should also be in-line with the benefit the merchant receives from the use of the cards (i.e. increased number of transactions and ticket size), which is also difficult to measure.
5) The network competition for issuance leads to rising, rather than falling, interchange prices.
Although for a network to be successful it needs to have consumers and merchants on board, it views the consumers as the key drivers in network expansion. For this reason, it values issuers, with their distribution capabilities, as its key customers.
With interchange, the network’s customers (the issuing banks that decide which network to use) receive the price that the network sets. That is, the network's customer is paid, rather than pays, for the service.
In order to attract more issuers, the network will raise interchange fees, so that banks can develop more attractive card programs. This will immediately increase the cost for merchants.
Next week we will cover possible policy interventions for the payment cards industry to solve the issues surrounding interchange fees. The list of options we will discuss include actions taken and / or discussed by authorities around the world.
1) 'Payments Systems in the U.S. - A Guide for the Payments Professional' by C. Coye Benson and Scott Loftesness. Glenbrook Payment Essentials.
2) 'Finance and Economics Discussion Series. Division of Research & Statistics and Monetary Affairs. Federal Reserve Board, Washington, D.C. - Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues' by Robin A. Prager, Mark D. Manuszak, Elizabeth K. Kiser and Ron Borzekowski.
3) 'Theory of Credit Card Networks: A Survey of the Literature' by Sujit Chakravorti from the Federal Reserve Bank of Chicago.
4) 'Working Paper 03-10. An Introduction to the Economics of Payment card Networks' by Robert M. Hunt from the Federal Reserve Bank of Philadelphia.
MasterCard, is developing some new exciting concepts that, although are not yet available in the marketplace, give us an idea of how MasterCard sees the future of mobile payments and of the role they want to play within the ecosystem. Let's look at some of those concepts:
* Xbox Kinetic prototype
: The idea is to allow consumers to purchase a product on TV by, for example, waving your hands at an icon in the corner of the screen. Another example, being able to pull up shopping menus at any time using body language such as putting your hand into your mouth in an 'I'm hungry' gesture.
Although this is only a prototype and it is clear that agreements with TV manufacturers, broadcasters and retailers are required to launch this service, it is a great example of how easy and seamless technology may allow payments to be in the future.
* QR codes
: QR Codes have become a societal norm within the last several years. Yet, there is untapped potential in the TV world. For example, imagine watching the Home Shopping Network, or just a random commercial, with a QR code in the corner that allows you to order the product being shown (perhaps at a discount) from your phone. Yet, instead of scanning the QR code and being taken to HSN's or the product's website, there is an app - QkR - that processes the entire transaction through your phone, stores it and saves the receipt. Again, just as with the Kinetic prototype, scaryingly easy to shop.
* Audio cues
: Another way to seamlessly shop while comfortably resting in your favorite armchair is to have your phone listen to the TV to have it pick out any high-frequency codes that an advertiser has embedded into the product. An example showed at MasterCard Labs was of NFL products during a football game. Of the concepts that MasterCard Labs has developed, this one may be the most far-fetched since broadcasters might need to alter their signal to make it work. Not to mention the change in smartphone audio functionality to register this signal.
* Pre-paid wristbands
: VIP guests to the 2011 Isle of Wight Festival
, held in June, had the opportunity to pay for their purchases with UK's first ever MasterCard PayPass prepaid contactless wristbands. The feedback received from the users was extremely positive, to the point that the wristbands were the preferred method of payment. Respondents to a survey said that this solutions was quicker (96%) and easier to use (98%) than credit or debit cards, while a resounding 100% said they’d want to use the PayPass prepaid wristbands again to pay at other festivals, concerts and sporting events.
In addition to this deployment, MasterCard also put terminals in some public areas for faster card payments and integrated them with the main gate access points, to demonstrate another aspect of its technological innovation: access control. All together, a success for MasterCard in showcasing the benefits of their technology in a real-world setting.
MasterCard's effort to develop mobile technology is not new but, unfortunately, some of the efforts it has launched in the past have not been as successful as they would have hoped. Again, let's discuss two of those examples:
* Mobile Payments Gateway
: MasterCard's Gateway is a turnkey mobile payment processing platform that allows issuers, acquirers, merchants and mobile network operators to provide customized mobile solutions in developing payments markets by tapping into the MasterCard Worldwide Network, a globally integrated network. As a result, banked and unbanked mobile consumers gain access to a wide range of MasterCard Mobile payments solutions, which provide greater payment convenience and security over cash - using their mobile phone to make purchases, send and receive money between family and friends, transfer funds between accounts, pay bills, deposit funds such as payroll or social benefits, top up mobile airtime, load value to prepaid accounts, get cash from ATMs, and keep track of their balances and activities with mobile alerts.
MasterCard launched this turnkey solution a few years back but, at the moment, only has one customer live on the platform - in Brazil since 2009, the partnership that includes Itau Unibanco, Redecard and mobile network operator Vivo. Just recently, a new opportunity has developed in the Indonesian market
, although whether or not this will develop into an actual deployment in Indonesia and beyond is still not clear.
: This product is MasterCard's response to PayPal for mobile. The service is relatively similar to that of PayPal with the solution offering peer-to-peer transfers after registering and entering a MasterCard card number to be associated to the transactions
. The user will create an ID and password to access his account and will only be able to exchange funds with other MobileSend users.
Although the service is fast, secure, relatively inexpensive and available via mobile browser, app or text message, it has not gained widespread popularity, probably, in part, because both users - sender and receiver - need to have a MasterCard credit / debit card.
Nevertheless, the company has learned from these two initiatives and is sure to continue building upon them. The hiring of Mung-Ki Woo as Group Executive for Mobile
, which took place earlier this year, is a sign that things will continue to move in the right direction for MasterCard in this area. Woo is helping the company further clarify its mission and vision for the mobile future. What will the story be 12 months from now?
MasterCard approach to mobile commerce and payments seems to be a bit different from the approach taken by Visa
and American Express
. There are fewer partnerships, at least in the US, and for the moment, no relevant acquisitions.
For starters, there isn't a 'MasterCard Wallet' in the US although the company is involved in two major initiatives:
- Google Wallet: They were the first to partner with Google - at the moment, only two cards are accepted in Google Wallet: Citi MasterCard and Google's prepaid card - and this partnership continues to be the main company focus. Participating in the testing process and then in the national rollout has allowed them to learn a few things around mobile commerce, NFC and consumer adoption such as the need to have a good locator service and an audio confirmation of the correct download and deployment of the app. Small things that greatly contribute to consumer experience and, thus, to adoption.
Their position as single provider will soon change as Discover, Visa and American Express will also be available in the next release of Google Wallet - planned for later this year. But this is not an issue for MasterCard, in fact, the company understands and supports this development since they also believe that in order for an e-wallet to become widely adopted, it needs to be convenient and actually improve upon our current physical wallets. Having several e-wallets would reduce the value to the consumer and limit adoption.
- ISIS: Isis is a joint venture in the United States of AT&T, Verizon Wireless and T-Mobile USA, the top three telecommunications operators, and the credit card companies Vis, MasterCard, Discover and American Express The approach taken by ISIS is fundamentally different to that of Google: The carriers that are part of Isis will charge banks / credit cards for the network and cell phone space used for mobile payments. Not only the corresponding data charges – as Sprint does in the Google Wallet solution – but additional, or alternative, fees. MasterCard, like the other credit card companies, has opted to back both approaches since, from their perspective, the choice should be left to the consumer and they want to be part of whatever solution their customers favour.
The fact that Isis will not launch its first trial until the first half of 2012 - it will take place in Salk Lake City, Utah, and Austin, Texas - will allow MasterCard to apply the knowledge acquired while working with Google to make this deployment easier and smoother for themselves.
Outside of the US, MasterCard has been involved in a number of initiatives in markets as diverse as Canada, the UK, Turkey and India. Some of these initiatives have been large-scale trials that may not yet have developed into full-fledge commercial products - for example in Canada or India - while some other - the most notable case being the UK - are now services available at a national level. Let's look in more detail at a few of these initiatives:
- India - Partnership with Vodafone and Citibank: This was the first large-scale trial launched in India. It started in June 2009, reaching over 3,000 customers and involving the 250 retailers that accepted PayPass for the 6-month duration of the trial. Over 43,000 transactions were recorded (an average of 14 transactions per user). Considering that there was a financial incentive to use the mobile payment application over 12 times, it could seem that the main reason for usage was financial benefit rather than convenience or interest for the technology. However, it is also true that users that participated in the trial and that also had Citi card, steeped up the use of the latter ones with retailers that did not have PayPass. Possibly proving that, easier methods of payment will be well received in developing markets even though adoption may be slow and need to include education and incentives.
Possibly, this first foray into mobile payments in India gave MasterCard a good platform from where to jump into other opportunities within emerging markets such as the two that are presented below.
- Kenya and across Africa - Partnership with Airtel: In partnership with Standard Chartered and Airtel - Airtel Wallet and Airtel Mobile Money, Mastercard is launching a service that allows on-line purchases from your mobile phone using a 24-digit number uniquely assigned to a customer for a specific transaction. The purpose, once again, is to empower the large number of mobile users across Africa to purchase goods more easily.
There are also other opportunities that, although have not yet crystallized, could turn out to be great wins for MasterCard including possible deployment of MasterCard Mobile Payment Gateway in Indonesia
- the company already has the blessing of the Central Bank but needs to get banks and telcos on board - and testing of in-flight contactless technology
- with cards and NFC technology to achieve real-time online card authorization and reduce fraud.
Clearly Mastercard is working hard to further promote and leverage PayPass, its contactless payments system, which is already widely used across the world. It is only reasonable to assume that the company will use this infrastructure to move ahead with NFC as the next wave of contactless payments.
Next week we will discuss some of the other initiatives where Mastercard is involved, focusing on their R&D activities around the QkR app, motion with Xbox, sound and QRs in ads.