Quick Thoughts: The PayPal Rabbit is not Slowing Down for the Tortoises

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–          Ebay’s deal for Braintree fills a hole for PayPal, giving it a well-regarded one-touch payments API solution for apps that has been adopted by trend setters Uber, AirBnB and Open Table.

–          Braintree also enables “auto-fill” of payment information for web sites, in competition with Google, and is already in partnership with Facebook to trial the capability.

–          PayPal greatly enriches Braintree with credit info on 140M qualified consumers, thousands of merchant relationships, international reach, risk analysis skills and negotiating scale

–          Ebay is moving fast to leverage its first mover advantage, and offer a truly integrated e-payments solution on-line and in-person before Google, Apple or Amazon can get started.

Google, Apple and Amazon have a lot of advantages versus Ebay’s PayPal in the market for electronic payments. Google and Apple can integrate wallet functionality directly into their OS platforms, auto-filling credit card information and offering one-click payment buttons for transactions from Android and iOS devices and from their Chrome and Safari browsers. Google can take it a step further and offer payment buttons integrated into web advertising, from emails, within Google+ and on its maps. Amazon is only the largest e-commerce platform on earth, with hundreds of millions of accounts with happy consumers and tens of thousands of merchant partners in its marketplace, most of whom already rely on Amazon for on-line payment processing.

So whither PayPal, which does not have a ubiquitous cloud franchise, like Google Search, does not have a tightly controlled eco-system of its own, like Apple’s iOS, and does not have the awesome scale economies of its e-commerce rival Amazon? On the credit side of its ledger, PayPal can point to two specific advantages that may be just enough to let it win the payments race against such formidable competitors. Number one – PayPal thought of it first. Ebay bought on-line payments pioneer PayPal for $1.5B way back when in 2002, with the brand already established as a secure way to handle transactions between unfamiliar parties on the internet. This was a natural for Ebay’s on-line auction business, and as the company increasingly extended into fronting on-line sales for established merchants, PayPal was brought along as the favored payments mechanism, allowing customers to fund their purchases via stored credit cards or direct bank transfers. Along the way, Ebay learned a lot about credit risk and consumer purchasing behavior, but ultimately, it failed to invest to bring PayPal along as new ideas about using mobile device technology to bridge on-line payments into the realm of brick-and-mortar retail began to percolate.

By 2011, PayPal had become almost hopelessly bogged down, as would-be competitors launched initiatives like Google Wallet and Amazon Checkout, enticing on-line consumers and merchants with streamlined checkout, and in Google’s case, payments with a smartphone at the point-of sale. However, in 2011, Ebay acquired a payments startup called Zong, bringing in its founder David Marcus, who was given responsibility for PayPal’s mobile device initiatives. By all accounts, Marcus shook up the sleepy culture that threatened to resign PayPal to irrelevance and by mid-2012, he was given control of the whole payments business. This brings us to PayPal’s second advantage in the fight for the future of payments, and one that would have been laughable just 30 months ago. PayPal is now nimble and aggressive.

Along those lines, Ebay just announced the $800M acquisition of fledgling e-payments platform Braintree. Braintree offers a solution for one-click payments from merchant apps and for secure payments auto-fill for e-commerce forms on the Internet. No doubt that PayPal has been working on the same functionality on its own platform, as have Google and Amazon and other start-ups like Square, but Braintree got there with a solution a smidge earlier and signed up showcase accounts like Uber, AirBnB and Open Table, and is well into a trial run to provide auto-fill capability for Facebook. Without dithering, Ebay stepped up and made the deal, leapfrogging to the front of the “one-click API and auto-fill” business.

PayPal enriches Braintree as well. It has e-wallets with payment information for 140M consumers, facilitating the task of signing end-users into the new service. It has increasingly strong relationships with tens of thousands of individual merchants, to whom it can pitch the Braintree platform. PayPal is active in 193 countries, processes transactions in 26 different currencies, and derives nearly half of its revenues from outside the US, while Braintree is a domestic-only service today. PayPal was the pioneer in pre-funded wallets and has years of experience in assessing transaction risks, skill sets that will be considerable assets in extending Braintree’s customer base. Finally, with $145B in annual transaction volumes growing at better than 20% YoY, a credible ACH funding program, and a budding credit partnership with Discover, PayPal has considerably more leverage than Braintree to negotiate deals with the credit card industry in the face of the dreaded “card not present” premium fee structure.

Meanwhile, the rest of the mobile payments players are proceeding at a relatively leisurely pace. Starbucks and Duncan Donuts aside, most retailers lack the mobile apps and cloud savvy to move on electronic payments on their own. The card industry, and the wireless carriers, have committed to an NFC based approach that offers limited utility to consumers and merchants and that does not enable bridging to mobile apps or on-line commerce in the way that PayPal/Braintree will. Google, Apple and Amazon have considerable assets with which to compete, but none of them have articulated a comprehensive approach to payments to rival PayPal, much less deliver it to the market. So in the meantime, PayPal has to make hay while the sun shines, and hope that the skills and customers that it builds will be sufficient to keep it at the forefront once the big guys get their acts together. The Braintree deal is a big step in the right direction.

For our full research notes, please visit our published research site.

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