PayPal/Discover's Retailer Problem:Too Much Data?
When PayPal on Wednesday (Aug. 22) announced a deal with Discover for it to deliver far more in-store payments—something that PayPal said could eventually place it into millions of stores and requires no POS hardware or software changes—it did something beyond fulfilling the industry's RDA for caveats. It positioned itself in front of three serious obstacles: getting consumers to change their behaviors; convincing lots of acquirers—many of which have alternative allegiances—to permit it; and getting retailers comfortable with an awful lot more data-sharing than they're used to.
That kind of data-sharing is exactly what many of the retail treasury sorts behind the MCX retail mobile payment alliance have feared. How much valuable data will retailers get from this deal as opposed to how much data will PayPal—which also works with retailers' rivals—get and be able to share?
"Whatever the retailer is passing over the lines today, in this initial phase, we'll get that data. We believe the data is that of the retailers, and we would not use that information to share with other retailers," said Don Kingsborough, PayPal's VP of Retail and Prepaid Products. "But, at the same time, when you combine it with our online and mobile information, it becomes very powerful information that we can use—with the retailers--to help build strong relationships with the consumer and to see the consumer in different ways. [It] gives us insights that will [enable PayPal] to make the kinds of offers" that will "be highly relevant to them."
The core of the deal is that, starting around April 2013, PayPal will be able to ride the Discover network if consumers use a PayPal card. This magstripe card is neither a credit nor a debit card, but a token that delivers the transaction to the PayPal wallet cloud. The shopper can then use the PayPal mobile app to decide how the purchase will be tendered, whether through Visa, MasterCard, American Express, Discover or PayPal.
On the plus side, it seems clear that PayPal customers—as long as they have requested and received the PayPal card—will be able to make purchases by April of next year at many retailers. The question is how quickly PayPal can get anywhere near the 7 million figure it touted on Wednesday.
Discover also acts as an acquirer for about 1,500 large retailers, so PayPal expects those stores to be ready very quickly, said Don Kingsborough, PayPal's VP of Retail and Prepaid Products.
From there, it's a matter of building the numbers step-by-step.
After Discover's direct acquirer stores, there are some 135 acquirers which are already working closely with the Discover network, Kingsborough said. Beyond that, it's a matter of offering acquirers a cut of the action and trying to get as many on board as possible.
"You do have to get acquirers to cooperate with you," he said. "And we've been on a path, and will continue to be on a path, of getting full cooperation from all of the acquirers. We do need to get acquirers to help us do this."
Another part of this phased rollout is the user experience. The process will start with the PayPal magstripe cards, but the intent is to eventually move to a Home Depot-like PayPal in-store payment approach, where neither the card nor a phone is required. Merely keying in the mobile phone number and a 4-digit PIN is all that's required, which raises a lot of security questions, in addition to "who pays for any resultant fraud" questions.
"The first phase will be issuing a card. Adding mobile and online as part of it [also will be] in the initial phase. And then there will be phases where it's our belief that some of these newer technologies that we have talked about—like PayPal Here—will start to evolve and the card will become less important," Kingsborough said. "But initially, card will be a default, so that you can integrate into the lives of consumers. You have to be where the consumer wants to shop. That's what gets adoption. So issuing a card enables that integration into their lives, and then that gives you the opportunity for these other new technologies to get integrated into their lives as you announce them."
Ease of integration is always a concern, and PayPal makes a good case that—once it can get the acquirer's blessing—just about no changes to POS hardware or software will be needed, as long as that retailer can ride over the Discover network. "The way in which we're launching this, there's virtually little that the acquirers or the merchants have to do to accept PayPal," Kingsborough said.
Making it easy for retailers to accept it is good, and making it profitable for acquirers to—at the very least—not interfere is also good. But getting shoppers to use it? That's the trick. Kingsborough spoke of in-store signage and the ability for retailers to offer incentives, if they want to. The key incentive seems to be that shoppers could use the PayPal wallet, which doesn't seem meaningfully different than the digital wallets from Google, ISIS, MCX or various other players, including Apple's initially payment-less wallet.
For all the industry attention about digital wallets, consumers have been decidedly apathetic. Someone along the payment chain needs to give consumers a real reason to try these wallets, such as deep discounts for all wallet purchases for the first 30 days. But who will fund such a move? That's easy. Ask retailers, and they'll say PayPal. Ask PayPal, and it will say the retailers and, perhaps, the acquirers. Ask Visa and MasterCard, and they'll quickly start talking about the weather.