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.

TED Talk at University of Essex by David Birch (May 2012):  Birch is a director of Consult Hyperion, an IT management consultancy that specialises in electronic transactions. Described by the Oxford Internet Institute as "one of Britain's most acute observers of the internet and social networks", in The Telegraph as "one of the world's leading experts on digital money" and by the Centre for the Study of Financial Innovation as "one of the most user-friendly of the UK's uber-techies". He is a media commentator on electronic business issues and has appeared on BBC television and radio, Sky and other channels around the world.

Trish's Comment:  My focus in the last couple of weeks has been to compare some of best known digital payment systems currently available or under development in the US - Google Wallet, PayPal, Square and V.me among others.  It is exciting to see that we are clearly moving away from mobile payments to digital payments - a much broader and 'liberating' concept - and that they all explicitly identify digital banking and digital commerce as key capabilities to be included in the wallet, albeit at a later stage.  But the wallets, given their (mostly) open architecture and their ability to communicate with the outside world (for example, via NFC), can be much more.  In fact, they can be almost anything.  

And it was while pondering about the endless possibilities of the wallet that I came across David Birch's video on Dr. Who's Psychic Paper.  For those of you not familiar with Dr. Who, it is a British science fiction television program produced by the BBC in the 1960s.  The main character, The Doctor (or Dr. Who) is a time traveling, humanoid alien with two hearts that explores the universe in his TARDIS (Time And Relative Dimension In Space) ship, which has the shape of a blue British police box (a long gone sight in British streets).  Or, as Birch describes him, he is the 'greatest living scientist in England and a beacon of true and enlightenment to all of us'.

Whatever description you chose, his Psychic Paper is exactly what a digital wallet should aspire to be:  A means to show the exact elements of your identity that are required at any given time.  Nothing more and nothing else.  So, what does a bartender need to know about you?  That you are over 18 and that you are not bared from the bar.  What does a retailer need to know?  Your PIN (in an encrypted form).  And the bouncer at a party?  Your invite.  Or even further, what do you need to know before letting a stranger with a Comcast uniform into your home?  That she is indeed the Comcast employee scheduled to come at 3 pm.  

Well, there is only one difference between the Psychic Paper and the wallet.  The Psychic Paper will show whatever you want it to show.  That is, it will show the bartender that you are over 18 regardless of your actual age or the bouncer an invite even if you have not been invited.  The wallet will only show that you are over 18 or your invite if in fact you are over 18 and you have an invitation.  

Of course, as Birch points out, everybody would need to have their own Psychic Paper and everybody would need to be able to read the relevant bits during each interaction.  It would need to be a convenient utility supported by a ubiquitous infrastructure.  It does sound like a job for NFC-enabled (or other type of proximity communication technology) phones and devices.  Something that we always carry with us, that we would quickly miss if it was lost, that could be easily protected from unauthorized access (via a pin or with some other recognition technology).

Thank you David Birch for painting a clear picture of what a digital wallet should aspire to be!

From the Financial Times by Elaine Moore:  Mobile phones will take over from plastic cards and cash as the principal method of payment before the end of the decade, according to new industry forecasts.  But payment providers admit that concerns about the security of cashless transactions – heightened by this week’s software failure at RBS – may deter consumers for some time.  Continued.

Trish’s Comment:  Many companies have launched mobile payments initiatives ahead of London 2012 wanting to take advantage of the great showcasing and testing opportunities The Games provide.  Moore lists some of them:  Visa’s partnerships with Samsung promoting contactless cards and NFC-based mobile payments, Barclay’s PayTag – a payment tag that sticks to the back of your phone and allows payments of up to £15 - and Pingit – an app that allows you to send money to others using their cell number – and O2 Wallet.  Other interesting ones are PayPal’s inStore – it is being trialed at the Auroria Fashions Group stores and it allows you to pay using a barcode that uniquely identifies your PayPal account – and QuickTap – payment app launched by BarclayCard in collaboration with Orange for NFC-enabled phones.

Now that we are well into the second week of the London 2012 Games, the question is:  Have all these initiatives been able to leverage the Olympics as expected?  Have they gathered the attention and generated the hype that they may have been hoping for?

In my opinion, the answer is yes for Visa and its partnership with Samsung and no for the rest of them, at least not in the very short term.  The focus is on what is happening in the Olympic venues, where Visa – as a key sponsor of London 2012, as of all Olympic Games in the last 25 years – has the exclusive rights to provide payments services.  This leaves everybody else pretty much out of the game for these two weeks.

So, how are Visa and Samsung faring?  Have they managed to make the best of this opportunity?

The answer may be yes from an ‘educational’ perspective.  They have grabbed the opportunity to educate the public about contactless and mobile payments and clearly tied both to the speed and performance of the athletes.  The commercial titled ‘Usain Bolt vs. London’ is a great example of this:  It shows all three ways of paying with Visa – swipe (well, its European version with chip & pin), contactless using a card and contactless using a phone.  All working fast and helping you keep life flowing.

Samsung, as part of the partnership, launched a special version of its revolutionary Galaxy S3 smart phone to tie in with London 2012.  Each and every athlete was given one of these NFC-enabled phones sporting the Visa payWave app.  This allows the Olympiads to easily make payments around the Olympic Village and all around London. 

This very same phone became available to the general public to be purchased exclusively at the Carphone Warehouse from August 1st.  No numbers are yet available but, in all likelihood, this special edition will be extremely popular in the UK and will completely sell out.  This could be an important development for the mobile payments industry.  

In order to help users become more familiar with NFC technology, Samsung has partnered with the Holiday Inn in Stratford City (where the Olympic Park is located) to use the handset during the Olympics as keycards to the rooms, control lighting, change TV channels and act as an in-room phone extension.  

Being a key sponsor of London 2012 and the exclusive provider of payments services throughout all Olympic Venues seems to be paying out for Visa.  According to Visa itself, international visitors to London spent nearly $700 million on their Visa accounts during the opening week (July 23rd to 29th) with the top spenders being Visa account holders from the US, Japan, France, Italy and Australia.  

Unfortunately this sponsorship has also brought some troubles for Visa.  The biggest, and most publicized, issue took place on Sunday, July 31st, as tens of thousands of fans attended soccer games taking place in iconic Wembley Stadium.  Due to issues with the local IT system, debit and credit cards could not be accepted as payment.  At the same time, because most of the cash machines at Wembley had been removed – they were powered by Link and not Visa – access to cash was extremely difficult.  The long queues that formed in front the ATMs and then the refreshment stands were hot-beds for strong criticism of Visa, even if, as the company has repeatedly explained, the fault lays with the local IT Team as Visa’s network was up-and-running at all times. 

From my perspective, it doesn’t matter whose fault it is.  What matters is the learning we can take from it:  Payments is such a vital activity that we cannot leave it to a single provider or accept just having a single method available.  There needs to be two or more payment alternatives available at all times.  Systems fail but life - and the transactions that fuel it - must go on!

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?