Internet Changes Everything: Payments Archives

The Evolution and Regulation of the Payments System (Australia)

RBA: Speech-The Evolution and Regulation of the Payments System

Philip Lowe
Assistant Governor (Financial System)
Address to Payments System Conference 2006
Melbourne Business School
Melbourne - 14 March 2006
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I would like to begin by thanking the Melbourne Business School for organising this conference. For far too long, discussions about payment systems typically took place behind closed doors and were largely the preserve of specialists in financial institutions. As this conference shows us, this is no longer the case, with payment systems posing challenging issues not just for the specialists, but also for academics and those involved in public policy. This more open discussion is surely in the interests of the community at large.

Today, I would like to address the issue of how the payments system evolves over time. As we all know, the system in 2006 looks quite different from that in 1996 and, no doubt, will look quite different again in 2016. But how well do we understand these changes and the forces driving them? And what role is there for regulation in shaping how things evolve?

The Big and Small Pictures

I think the big picture is clear to everybody – that is, the shift from cash and cheque payments to electronic payments (Graph 1). While we do not have data on the number, or value, of cash transactions, we do know that the average number of cheques written per person in Australia has halved since the mid 1990s. Conversely, the average number of credit and debit card payments per person has more than doubled, as has the number of direct debits and credits.
Graph 1
Graph 1: Payments per Capita

Similar trends are also evident in other countries, although Australia stands out in a number of dimensions. First, Australia is in a relatively small group of countries in which cheques are still used frequently, although amongst these countries, the decline in cheque writing in Australia has been relatively large. The second is that many Australians make less use of direct debits, and to some extent, debit cards than do people in many other countries. And the third is that use of credit cards in Australia has grown quite quickly, to the point where credit card usage is now quite high compared to that in most other countries.

Payments: An International Comparison

(number of payments per capita)
	Cheques		Direct Debit		Debit Card		Credit Card
	1997	2004	1997	2004	1997	2004	1997	2004

Australia	53	27	6	19	24	53	17	56
Canada	58	43	11	18	35	88	32	55
France	82	66	24	41	n/a	n/a	n/a	n/a
Germany	9	1	66	75	3	23	4	4
The Netherlands	4	0	41	65	31	77	n/a	n/a
United Kingdom	52	35	27	43	26	62	18	29
United States	239*	119	5	20	15	n/a	56	66

* 1995 data Source: RBA, APCA, BIS

Source: RBA, APCA, BIS

While the trends clearly differ across countries, the shift towards electronic payments is undeniably global. It is driven by advances in technology and the lower cost of electronic payments, as well as the additional convenience that they can offer to consumers and businesses. It is fair to say that few people are in any doubt this shift will continue for many years to come.

However, while the big picture is pretty clear, there is much less certainty about how various individual methods of electronic payment are likely to evolve – which methods will be the winners and which will be the losers. In preparing for this conference, I was reminded of the difficulty of making predictions by a 1979 report prepared by payment system experts under the auspices of the Australian Bankers' Association. This report concluded that ‘… Bankcard has a great start and it is difficult to see how a competitive credit card system could now displace it as the major card system in Australia (p 44)'. As you will no doubt be aware, last month Bankcard announced it was shutting down. The same report, in assessing the potential for an EFTPOS-like system, concluded ‘The size of Australia and the relatively small population would make a nation-wide point of sale system difficult to establish and cost justify (p 40)'. Today, the EFTPOS system is a key part of the payments landscape.

These, of course, are not the only examples of where things have turned out quite differently from what was expected. For much of the past decade or so – including at the time of the Wallis Inquiry – there have been numerous claims that smart cards or electronic purses were about to replace cash for many payments. Yet, while there have been some advances, relatively little has happened. On the other hand, use of the internet for banking has grown by much more than many thought likely in the mid 1990s.

Today, we hear a lot about mobile payments, contactless cards, the use of biometrics, and new ways to make person-to-person payments.1 No doubt some of these ideas will succeed, while others will fall by the wayside. It is simply very difficult for those in the industry, let alone regulators, to predict which products will ultimately find appeal with users and providers of payment services.

In contrast to the difficulty we have in making predictions about particular products, we do have a reasonable handle on the factors that are likely to shape the evolution of the overall system. Developments in technology are clearly important, as is the willingness of consumers to adopt new technologies. Experience has also taught us that relative prices and costs are critical, as are the arrangements under which new firms enter the market. In addition, experience suggests that the way collective decisions are made is also important.

Others at this conference are clearly better placed than I am to talk about the possibilities new technologies offer, so I would like to confine myself to the other issues I mentioned: relative prices and costs, access arrangements, and the importance of collective decision making. As you are no doubt aware, these all are issues the Reserve Bank has taken a close interest in.
Relative Prices

The first issue is relative prices and costs, since this issue has played a major role in the reform process so far. At the risk of stating the obvious, I will begin with the observations that, in many situations, consumers have a variety of payment methods from which to choose, and that price is one of the factors that undoubtedly influences that choice. The introduction of charges for writing cheques, for example, played an important role in the decline in the use of cheques in the late 1990s. Similarly, the rapid growth in credit card spending over this same period partly reflects the introduction of reward points, which lowered the effective price to consumers of transactions on a credit card. There are many other examples as well, although finding robust econometric estimates of the relevant elasticities has proven difficult due to lack of data and the fact that payment patterns often change only slowly over time.

Given the Reserve Bank's legislative responsibility to promote the efficiency of the overall payments system, an obvious question is whether the structure of relative prices is promoting the efficient evolution of the system. When we looked at this issue a number of years ago, we came to the view that they were not, with the most notable distortion being the very low (often negative) price that many cardholders faced for making a credit card transaction.

Of particular concern was that for many consumers, EFTPOS transactions were more expensive than were credit card transactions, despite the EFTPOS system having lower resource costs. When we looked at how this apparently paradoxical pricing had emerged, it was clear that the structure of interchange fees and restrictions imposed on merchants by the credit card schemes played a major role. After it became apparent that there was little prospect of these issues being addressed voluntarily, the Bank introduced a standard, establishing a cap on the interchange fees in the Bankcard, MasterCard and Visa systems, with the result that interchange fees have fallen from around 0.95 per cent of the transaction value, to around 0.55 per cent. The Bank also required the removal of the no-surcharge rule, allowing merchants to pass on the cost of accepting credit cards to those using credit cards. It has also been considering for some time the introduction of standards capping interchange fees in the EFTPOS and scheme-based debit card systems.

Overall, the reform process to date has promoted more soundly based competition in the Australian payments system. The subsidies paid to many credit card users have been reduced, as reward points have been cut and some surcharging has occurred. The decline in interchange fees has also reduced merchants' costs, and we have no doubt that this is flowing through into lower prices of goods and services than would otherwise have been the case. Lower interchange fees have also seen a re-orientation of competition in the credit card market. With less interchange revenue available, issuers are now competing for cardholders by lowering interest rates, rather than through reward points.

Not surprisingly, not everybody is happy with these changes, with at least three arguments having been made against the Bank's focus on relative prices and costs. These arguments can be briefly summarised as follows:

1. that interchange fees are subject to the same competitive pressures as other prices in the economy, and thus cannot be distorting relative prices of various payment methods;
2. that economic theory provides no basis for the Bank's regulatory intervention; and
3. that the Bank itself has created distortions in relative prices by giving American Express (and Diners Club) an advantage over Visa and MasterCard.

I would like to briefly address each of these.
Interchange Fees and Competition

The first of these arguments – that interchange fees are like any other price and subject to the normal forces of competition – is the easiest to respond to. In the case of each of the four-party credit card schemes, interchange fees have historically been set collectively by the members of the scheme. And, if anything, competition between these schemes creates upward – not downward – pressure on these fees. A scheme with a higher interchange fee paid to issuers is able to pay larger subsidies to cardholders, which in turn encourages use of that scheme. At least up to some limit, merchants appear unable to resist the high merchant service fees that result, being caught in a form of prisoners' dilemma. The clearest example of this perverse form of competition is the tit-for-tat increases in MasterCard's and Visa's interchange fees in the United States over the past decade.2 There, interchange fees have increased much more quickly than the general level of prices, despite significant reductions in telecommunications and other processing costs.

Even when interchange fees are bilaterally negotiated, as they are in the Australian EFTPOS system, the competitive dynamics are such that, once established, the fees are very difficult to change. Not surprisingly then, the bilateral interchange fees in the EFTPOS system have been fixed for many years, despite significant changes in costs and demand conditions.

All of this experience means that, whatever one thinks about the merits of interchange fees, it seems very difficult to argue that they are subject to the same competitive dynamics as other prices in the economy.
Theory

The second argument – that the Bank's focus on relative costs and prices is not supported by economic theory – raises more complex issues. Those who make this argument note that the theory of payment systems is still being developed and provides little guidance as to what constitutes an efficient configuration of interchange fees when there are multiple payment systems. By implication, this view holds that the Bank can have little confidence its interventions are welfare enhancing.3

Now it is undoubtedly true that the theory of two-sided markets and interchange fees is still evolving and realistic models are still being developed.4 Moreover, most of the theory that has emerged so far relates to a single payment system; only in the past couple of years have academics started tackling the question of how interchange fees should be configured when there are competing payment methods, each with different resource costs and benefits. At the risk of oversimplifying things, as the literature currently stands it suggests that, amongst a myriad of possibilities, it may be optimal for one payment system to be priced more attractively to cardholders than another, despite that payment system having higher total resource costs. There are a number of reasons for this, but they basically relate to the argument that there are network effects, some of which generate externalities, and that these network effects and externalities differ across payment systems. Measuring these various externalities is extremely difficult and, to my knowledge, no one has yet come up with empirical estimates that one can have confidence in and that can be used for policy work.

The issue is then largely one of judgment. In particular, to the extent that any externalities exist, are they such that in an efficient payments system, credit cards should be offered to cardholders at a significantly lower per-transaction price than EFTPOS, despite credit card payments having a higher total resource cost? No doubt, one could write down a notional set of demand and supply conditions in which such a deviation from normal price-cost relationships was optimal. However, our judgment has been that the externalities are unlikely to be so large or so different across payment systems as to justify such divergent pricing.

This judgment seems to have been borne out by subsequent developments. In particular, when interchange fees were cut, some said that the credit card market in Australia would go into a ‘death spiral'. In less emotive language, the argument was that the network effects were such that a reduction in the subsidy to cardholders would undermine credit card usage, leading to reduced merchant acceptance, which, in turn, would further reduce usage and thus merchant acceptance etc, etc, etc.

This clearly has not happened. While growth in credit card spending has slowed (Graph 2), presumably at least in part due to the altered price signals, merchant acceptance of credit cards has shown no signs of falling off and the credit card market remains vibrant. One plausible interpretation of this experience is that the previous level of interchange fees was considerably higher than could be justified in terms of the positive network effects they generated. While clearly the additional subsidy to cardholders that was made possible by the interchange fee did increase credit card use, it appears this additional usage was not necessary to induce widespread merchant acceptance, and was simply distorting cardholder decisions.
Graph 2
Graph 2: Value of Transactions

While I am on this general issue of theory, I would like to repeat a point I have made elsewhere: and that is, the Bank's use of cost-based standards does not reflect a view that, conceptually, interchange fees should necessarily be set with an eye to costs on just one side of the market. We adopted a cost-based approach for two very practical reasons. The first is that it is a transparent way of moving to a lower level of interchange fees, and was one that had been used by some card schemes to set these fees in at least some countries. The second is that under our legislation we cannot just set a particular interchange fee, but rather are required to impose a ‘standard', and a cost-based approach meets the legal test of a standard. The real issue though is not what costs should or should not be included in any particular standard, but rather, what is the appropriate configuration of interchange fees across the various payment systems.
American Express and Diners Club

The third argument about relative prices is a much more practical one: that is, the Bank's regulations have given an advantage to American Express and Diners Club. In particular, it is argued that, as a result of the Bank's reforms, American Express is able to offer its cardholders more reward points than issuers of MasterCard and Visa cards, and that this has encouraged the growth of American Express at the expense of the other schemes.

Before I respond to this argument, it is worth setting out the basic facts as to what has happened to market shares and merchant service fees.

Since the reforms came into effect there has been a small increase in the combined market share of American Express and Diners Club, including the transactions on bank-issued cards (Graph 3). In terms of the value of transactions, their combined market share has increased from around 14½ per cent in 2003, to around 16½ per cent today; most of this increase took place around the time that two banks began issuing American Express cards. A similar pattern is evident in the share of the number of transactions. It is worth noting that the issuing of American Express cards by banks is not a uniquely Australian phenomenon, but is one that is seen globally; American Express now has similar arrangements with nearly 100 banks around the world.

In terms of merchant service fees, the average fee charged by American Express has been under downward pressure since the reforms, although it has not fallen by as much as that in the MasterCard and Visa schemes (Graph 4). In the December quarter 2005, the average fee was 2.3 per cent. This is around ¼ of a percentage point lower than in November 2003, although the effective decline over this period is larger than this, given that in some cases American Express has given increased marketing payments to some merchants. In comparison, the average merchant service fee on MasterCard and Visa transactions has fallen by around 0.45 of a percentage point over the same period.
Graph 3
Graph 3: Market Shares of Card Schemes

Graph 4
Graph 4: Average Merchant Service Fee

In understanding why the regulatory response to MasterCard and Visa has differed from that to American Express and Diners Club, it is important to recognise the different structures and economics of the various schemes. In the MasterCard and Visa systems, different banks are typically on the acquiring and issuing sides of each transaction, with an interchange payment being made between the banks. In contrast, in the American Express and Diners Club systems there is simply no interchange fee paid on the vast bulk of transactions: American Express and Diners Club both act as the acquirer and the issuer. The exception to this, of course, is the bank-issued American Express cards, where American Express makes interchange-like payments to its partner banks.5

These arrangements with banks raise the obvious question of ‘shouldn't the payments to the issuing banks be regulated in the same fashion as the interchange fees in the other schemes?' As you know, we decided last year that the answer was no. This was for two interrelated reasons.

First, we judged that regulating payments to the partner banks would have little effect on American Express's merchant service fees. While these arrangements look similar to the traditional four-party schemes, one important difference remains – that is, American Express is still the sole acquirer of its own transactions. This lack of competition for acquiring American Express transactions means that if regulation required American Express to make smaller payments to its partner banks, there would be very little direct pressure on it to lower its merchant fees. This stands in stark contrast to what happened when interchange fees were cut in the other schemes. There, strong competition on the acquiring side of the market meant that the lower interchange fees flowed through very quickly into lower merchant fees. The same simply would not have happened in the American Express scheme.

The second reason is that it is unlikely that the banks' incentive to issue American Express cards would have been affected by the Reserve Bank requiring American Express to lower its interchange payments to its partner banks. Given the nature of the contracts between American Express and the issuing banks, lower interchange payments could have been offset with other forms of marketing and product support payments. In principle, this issue could have been addressed by regulating the totality of payments to the issuing banks, including marketing payments. In turn, no doubt there would have been calls by some for similar regulation of MasterCard and Visa. Our view, and I think one that is widely shared, is that such extensive regulation is not in the public interest.

So rather than regulating the payments for the sake of regulating, we have tried to tailor the response to the economics of the particular schemes. Ultimately, the capacity of American Express (or its partner banks) to offer relatively generous rewards stems, not from interchange fees, but from its ability to charge merchants a relatively high fee for transactions on its cards. Given this, the Bank has been keen to see that bargaining between merchants and these schemes is not distorted by restrictions imposed on merchants. It therefore sought and obtained American Express's agreement to remove its no-surcharge and anti-steering rules and to have its combined market share with Diners Club published.

As a result of the changes, merchants now have more options and better information. To the extent that they are prepared to use these options, the average merchant service fee in the American Express scheme will continue to fall. It should also continue to come under pressure as merchants question whether they get value for money for the increased margin they now pay on American Express transactions. Ultimately, it is this process of downward pressure on merchant fees – not the regulation of payments to partner banks – that will determine the reward points that American Express cards can offer, whether issued by American Express itself or by its partner banks.

Given the different structures of the schemes, any argument that American Express should be regulated in the same way as MasterCard and Visa is tantamount to the argument that interchange fees should not be regulated. The only way in which uniform regulation could have been applied would have been for the Bank to do no more than require the removal of the no-surcharge rule. While such an approach had the appeal of regulatory neutrality, we judged that, by itself, it would be unlikely to establish more appropriate price signals to cardholders within a reasonable time, particularly given the considerable customer resistance to being charged for credit cards. The approach that has been adopted is delivering significant net benefits – benefits that would have been foregone had the regulatory response been limited to just the removal of the no-surcharge rule.

None of this means that we are not monitoring the competitive landscape very closely. We expect that competition will lead to a further decline in American Express's average merchant service fee, and in time, this will be reflected in the structure of the products that are offered. If this were not to happen, and the beneficial effects of the reforms were to be eroded materially, we would need to look again at whether other options were in the public interest.
Entry

So much for relative prices. I would now like to turn to the issue of access arrangements.

In many parts of the financial system it has been the new entrants that have been the major catalyst for change and increased competition – home loans and on-line deposit accounts are perhaps the best examples. The new entrants typically have either new technology, and/or lower costs, and have not needed to worry about cannibalising the profits from existing customers.

Given the important role new entrants can play, the Bank has been concerned for some time that access arrangements to parts of the payments system were unduly restrictive. Our approach has been to try to work with industry to develop alternative arrangements that are fair both to the existing firms and new entrants. In the case of the credit card system, a regulatory solution was eventually required. In contrast, in the EFTPOS system, an industry solution has been found, although the Bank is proposing to place a cap on the price that an existing player can charge to provide a direct connection. The Bank has also indicated that it would also like to see access to the ATM system addressed.

The Bank's various discussions about access have highlighted the complications that can arise in payment systems built around physical bilateral linkages and bilateral business arrangements. In the case of Australia , this includes the EFTPOS, ATM and direct credit/debit systems. Two issues in particular have been raised.

The first is the potential for existing players to block the entry of a new participant. If a potential entrant is not able to establish direct physical connections or business relationships with existing direct participants, it might find itself at a material competitive disadvantage, making viable entry difficult. One solution is for transparent and objective criteria to be established as to who has the right to join these systems – in effect removing the right of veto of existing participants. This is the approach that has been taken in some overseas systems built around bilateral contracts, and it is one that APCA has recently been considering for the direct entry system in Australia.

The second concern relates to the additional costs that can arise when new participants wish to establish bilateral connections. The Bank's intervention in the EFTPOS system has been criticised by some on the grounds that, by making it easier for new entrants, there will be a proliferation of bilateral linkages, at considerable cost to the incumbents. This is a difficult issue. One response might be to restrict the number of participants with direct linkages, and thus potentially reduce total costs – although perhaps at the risk of less competition. Another would be to establish alternative access arrangements under which there would be a single point of physical access, rather than requiring new participants to establish multiple physical connections (this of course, could be consistent with bilateral business contracts or something more centralised). Not surprisingly, this is the general approach taken in a number of overseas payment systems in which there are many players. It is also one that APCA has been considering for the EFTPOS and ATM systems as it looks at possibilities for updating the communications packages and hardware platforms upon which these systems operate.

To date, the Bank's intervention on access has taken the current physical and business structure as a given. However, we would encourage the industry to give serious thought to whether, over time, we could move to an alternative and perhaps more efficient set of arrangements.
Collective Decisions

This brings me to my third point – that is, the role that the arrangements for making collective decisions can play in the evolution of the system.

At the heart of all electronic payment systems is a secure messaging system. A collective agreement as to the nature and specifications of these messaging systems is often required. Further, as technology evolves, updating the existing messaging systems through collective decisions about rules and standards, and investment in infrastructure, is sometimes necessary. I hasten to add though that, in many parts of the payments system, collective decision-making is not required, and would be an anathema to efficiency. In most parts of the payments system, competition serves us well.

Where decisions do need to be made collectively, co-ordination problems can arise. Institutions have different investment cycles, different strategic interests, and can have concerns that the collective investment in infrastructure may yield little competitive advantage, since all competing institutions will be adopting the same new infrastructure.

Last year the Reserve Bank raised the question of whether co-ordination was more difficult in Australia by virtue of the bilateral nature of a number of our payment systems and their governance arrangements.6 Since then we have had further discussions with many users and providers of payment systems and, not surprisingly, a wide range of views has been expressed. While these discussions are ongoing, I would like to share a couple of observations so far.

The first is that while most people think Australia's payments system serves its various users reasonably well, there is a sense that we are starting to fall behind international best practice in some areas. Two examples – both relating to the structure and capability of the messaging system – have been referred to a number of times. The first is the limited nature of the messaging format in the direct entry system. This format was designed primarily for high-volume recurring payments like salaries, and has been unchanged since the 1970s. A number of businesses have noted that it is inadequate for many modern business-to-business transactions, which require a considerable amount of information to accompany the payment. The second is the limited options for making online payments. Currently, if you want to buy goods and services over the internet you have little option other than to use your credit card or signature debit card. Many businesses, and I dare say consumers, would like to be able to have an online EFTPOS-like payment option as well. In a number of other countries this option is now available.

The second general observation from our discussions is that, while we may be starting to slip behind in some areas, there is actually quite a lot of innovation going on – there are plenty of people with ideas and new products being developed. However, some of this innovation reflects a desire to find ways around the limitations of the current messaging structures. For example, given the difficulties of sending remittance data with payment instructions, a number of products have been developed to send such data separately, but in a way that can ultimately be reconciled with the payment.

In summary, these discussions confirm that there is merit in examining further whether co-ordination issues are impeding the efficiency of the Australian payments system. I might note that over recent months it has been argued by some that by simply raising this issue, the Bank has already had a dampening effect on investment by creating uncertainty over whether the infrastructure might be appropriated by a central payment system or become stranded if duplicate infrastructure was established centrally. I must say that I find this response more than a little surprising. Let me make it clear that the Reserve Bank has no intention of appropriating investment, or requiring duplicated technology. Further, we are not saying that the particular solutions being adopted overseas should necessarily be adopted here, or that more centralisation is required. What we have done is to point to some of the implications of the current system and suggested that there is merit in taking another look at whether there might be a better way of doing things in the future. I am encouraged to see that there have at least been some tentative steps in this direction recently.
Conclusion

Let me conclude by trying to draw the various threads together.

The trend towards electronic means of payment is likely to continue, although it is difficult to predict exactly what forms of electronic payment we might be using in a decade's time.

Exactly how the system evolves will depend, amongst other things, on the price signals that various users of the system face, on the extent to which potential entrants can participate in the market, and on decisions about the basic messaging architecture.

The structure of payment systems means that there are reasons that, compared to other markets, one might have less confidence that the system, left to itself, will evolve in a way that promotes economic efficiency. Relative prices can be distorted by interchange fees, barriers to entry can limit competition, and co-ordination problems can arise. None of these factors, of course, mean that regulation is necessarily required. Indeed, as was envisaged by the Government when it established the Payments System Board, the Reserve Bank has a strong preference for industry solutions.

The Bank's interventions to date have been about creating an environment in which competition in the Australian payments system works in a way that promotes the evolution of the system in an efficient manner. The reforms have meant that price signals are less distorted than they were previously, access has been liberalised, and restrictions on merchants have been removed. While more may still need to be done, these reforms mean that we can be more confident than previously that whatever outcomes the market delivers, they will be in the collective interests of all users of the payments system.

Thank you.
References

Australian Bankers' Association (1979), ‘Future Payment Systems', A Study of Payment Systems in Australia and Possible Direction of Development in the Next Decade.

EFMA/Edgar, Dunn & Company (2005), ‘Technology-driven Growth Opportunities in the Payments Industry: An International Survey of Retail Banks', EFMA/Edgar, Dunn & Co. Report, September.

Evans, D.S. and R. Schmalensee (2005), ‘The Economics of Interchange Fees and their Regulation: An Overview', in ‘Interchange Fees in Credit & Debit Card Industries: What Role for Public Authorities?', Federal Reserve Bank of Kansas City, Kansas City, pp 73–120.

Guthrie, G. and J. Wright (2006), ‘Competing Payment Schemes', Victoria University of Wellington and National University of Singapore.

Lowe, P.W. (2005), ‘Innovation and Governance of Payment Systems', Address to Banktech.05 Conference, Sydney, Reserve Bank of Australia Bulletin, October, pp 46–51.

Macfarlane, I.J. (2005), ‘Gresham's Law of Payments' , Address to AIBF Industry Forum, Sydney, Reserve Bank of Australia Bulletin, April, pp 8–13.
Rochet, J-C. and J. Tirole (2005), ‘Two-Sided Markets: A Progress Report', University of Toulouse.
Footnotes

1. For a recent survey see EFMA/Edgar, Dunn & Company (2005). (back to text)
2. See Macfarlane (2005) for details. (back to text)
3. See, for example, Evans and Schmalensee (2005). (back to text)
4. For recent reviews see Evans and Schmalensee (2005), Guthrie and Wright (2006), and Rochet and Tirole (2005). (back to text)
5. Diners Club also has a marketing arrangement with one bank, although under that arrangement Diners Club remains the card issuer. (back to text)
6. See Lowe (2005). (back to text)

March 20, 2006 at 10:08 AM in Payments | Permalink | TrackBack (6) | Top of page | Blog Home

Pay bills by text message? PayPal going mobile

Third Screen: PayPal goes mobile - Mar. 6, 2006

The online payment service may be preparing to launch a service that would let people pay for items by texting from their cell phones.
Business 2.0 Magazine
By Patrick Baltatzis, Business 2.0 magazine reporter
March 6, 2006: 12:50 PM EST

SAN FRANCISCO (Business 2.0) - PayPal is getting back to its mobile roots.

Back in 1999, when the company first launched as a tiny startup, it had designed software to beam money between handhelds and cell phones. It rapidly abandoned that plan when it found that buyers and sellers on eBay (Research) preferred to use a Web-based version of its payment service to settle auctions.

Now, in a push to expand its business outside eBay, which bought PayPal in 2002, PayPal is aggressively hiring to staff up a new mobile-payments service. It already has some talent in-house – for example, Mathias Entenmann, who is one of Paypal's top executives and heads PayPal's international operations, is a German entrepreneur who previously ran Paybox Solutions, a European mobile-payments company.

Postings on job boards characterize the mobile-payments business unit as a "startup" within PayPal. Job postings currently include openings for a senior manager and product manager of the new mobile business.

Why the hiring push?

PayPal has long had ambitions to expand beyond e-commerce to process real-world transactions. Text-message payments could appeal to mom-and-pop shops that can't afford expensive merchant accounts needed to process credit cards. Fees for smaller merchants can run as high as 9 percent of a transaction, while PayPal's top out at 2.9 percent. On-the-go payments might also prove useful at yard sales, street fairs, and other informal marketplaces.

"PayPal needs to be out there" with a mobile service, says Dan Schatt, an analyst with Celent, a Boston-based research firm that specializes in analysis of the payments market. He points out that what he calls the "mobile economy" -- transactions carried out on cell phones -- grew to $2 billion in 2005.

"It's reasonable to think that PayPal will be offering mobile payment services through mobile devices and text messages to its customers," says Schatt. "It's a logical extension to what they do, and they're well-positioned to do it. They've got a secure and trusted payment system which will make it possible to pay on the go."

Schatt predicts PayPal could launch its mobile-payments service anywhere between now and June.

PayPal's biggest opportunity for mobile payments may lie abroad. While its e-mail payments work well in markets where PC penetration is high, it's not as useful in developing countries, where computers are not yet widely adopted. In India and China, for example, cell-phone usage far exceeds computer usage.

While PayPal has looked into mobile payments before without launching a product, the time may now be right for PayPal to get into the business. Competitive threats are looming, with Google's recent foray into the payments business and the launch of TextPayMe, a Redmond, Wash., firm started by a couple of ex-Microsoft (Research) employees.

TextPayMe lets consumers use text messages to pay each other instantly. TextPayMe's pitch is eerily similar to PayPal's seven-year-old marketing plan: Encourage consumers to pay each other electronically, charge nothing for the service, and offer a sign-up bonus for referring new customers -- a key to PayPal's fast signup of millions of users. (PayPal later began charging when payments were received.)

The process for sending a payment with TextPayMe is simple: Users text an amount and the recipient's cell-phone number to TextPayMe, which then sends a text message to the recipient. To collect the money, the recipient later visits TextPayMe's website to register bank-account details. It's not unlike how PayPal's e-mail payments work today.

TextPayMe is targeting more informal transactions than PayPal's e-commerce niche -- for example, instantly settling a restaurant bill among friends rather than splitting it among multiple credit cards. But it also suggests using its service to pay people for goods purchased on classifieds websites like Craigslist, a market that eBay sees as both a threat to its current auction business and an opportunity to expand its business. Today, many Craigslist transactions are settled in person by check or cash. (eBay owns 25 percent of Craigslist, and has started its own international classifieds website, Kijiji.)

"PayPal has done a great job online," says Phil Yuen, TextPayMe's 25-year-old CEO. "We feel there's more to be done in the real world, where the Internet is not involved."

Unfortunately for TextPayMe, PayPal appears to see the same opportunity. Top of page

March 6, 2006 at 07:19 PM in Payments | Permalink | TrackBack (2) | Top of page | Blog Home

Where’s the Vision for Banks in Payments?

Banking Strategies Blog : Where’s the Vision for Banks in Payments?

BY KENNETH CLINE

The Clearing House’s Rick Leander calls for senior bank management to set aside vested interests and show leadership in driving how payments should evolve.

| SYNOPSIS | Rick Leander, chief strategy officer at The Clearing House, credits the industry for its operational work in laying the foundation for a digitized payment system. But he faults the industry for not developing a common vision of the future of payments. Leander urges top executives to become involved in laying out a vision, which should include a swifter transition from paper to electronic processing. He also pushes for an effort to reduce infrastructure in the payments business — in both telecommunications networks and industry groups — to help alleviate the expense burden on institutions.

Checks may be on their way out, but their departure is likely to be prolonged. And in the meantime, bankers will be deciding what technologies and systems will be needed to span the paper and electronic eras. Where should individual banks and the industry as a whole place their investment bets?

One person tasked with answering that question is Rick Leander, chief strategy officer at The Clearing House Payments Co. LLC, New York City, the nation’s largest private sector payments clearing facility. Leander, who’s had a long career in payments (see box, pg. 35), was brought into the Clearing House in 2004 to lead its Strategic Payments Forum. The forum’s aim is to craft payments strategy for member banks and the industry as a whole.

In a recent interview, Leander repeatedly stressed the need for the industry to put aside its competitive differences and decide on a common endgame. “We’ve got to find a forum to drive a shared vision for how payments should evolve,” he said.

One obstacle to such a shared vision is differing opinions on the role of check imaging. Should it be seen as a technology that can prolong the life of the paper check — and thus preserve bank revenues? Or is it just a transition phase, to be passed through quickly, on the way to an all-electronic future?

Leander leans to the latter. “We need a strategic orientation that looks across the payments silos and provides the framework to move from paper to electronic as quickly and cost-effectively as possible,” he said, adding that senior executives need to take a leadership role in this process.

Leander also believes that providers need to reduce overlapping infrastructure in the payments space, both in terms of telecommunications networks and industry groups.

Q How should the banking industry think about check imaging?

LEANDER: The banking industry has two choices. We can view image as a way to protect the check, because we’ve all got a vested stake in it, or we can recognize that all-electronic is a better environment and that image is part of the transition.

If you view image as our last chance to defend paper, you end up driving down a particular path. But if you take the view that check image is a critical transition into an electronic environment, then your attitudes and behaviors change dramatically. You quit thinking of all the other services as competing forces. Instead, you start looking at opportunities to rationalize the processing infrastructure, rules and governance, and legal and regulatory issues.

It’s important that banks think of check image as a transition to an all-electronic world, with the full understanding that the transition is likely to be long rather than short. And when I say transition, I mean transition on many fronts. It’s not just how the banks need to transition their infrastructure, but it’s also how consumers, corporate customers and government customers need to transition as well.

Q What’s your best guess on how long?

LEANDER: My guess is that certainly for the life span of most business people, there will be a certain number of checks. By the time our children are getting ready to retire, we will have seen the last of the paper checks.

One of the reasons this will take so long is that we don’t have good alternatives to checks in the payments space. For example, I’m not going to give a prepaid gift card to the gardener who shows up twice a year to do some work at my house. So I write him a check.

Q How should individual banks work toward this future payments environment?

LEANDER: There are three things banks need to do. First, they need to think holistically across their payments business and make decisions based on their impact on the entire enterprise. Second, they need to show leadership and look for opportunities to drive consolidation in the various payment infrastructures. Third, they need to look aggressively for ways to cooperate in areas that are, or should be, non-competitive.

Then, at an industry level, we have to clearly stake out a vision and an endgame. This hasn’t happened already because it’s really difficult and made even more problematic because many people have a vested interest in defending one payment type over another. We’ve got to find a forum to drive a shared vision for how payments should evolve.

Q Like some sort of organization or industry group?

LEANDER: Yes. For example, ECCHO has been doing good work in creating a vision of what the standards or rules should look like and working with organizations to build consensus. That’s an important step. But you run the risk of people saying, “Now that we have the standards and rules, let’s let the market work it out.”

In fact, there are times when you need to drive the market in certain directions. It’s incumbent on the financial institutions to figure out how you put these pieces together strategically. That probably means you can’t do it at the operating level. It’s going to have to be done at a very senior, strategic level — where people look holistically, extract the emotion from the equation and say, “This is the best endgame, and we’re going to work aggressively to make that happen.”

Aggressively might be a 10- to 30-year time frame — but the time frame is not the problem today. Lack of a clear vision of the endgame is the problem.

Q Would that strategic level be the payment councils at individual institutions?

LEANDER: Many of the bank payment councils are beginning to jell. We need to let these councils mature to the point where they’re actually driving policy. They need to be in a position not just to persuade, but also to move strategy and action within their banks on important payment issues.

We are making progress within the institutions as well, but thinking about complex payment issues holistically is new. It’s going to take a while.

Q Do you see a clear split in opinion at the operational level, at least, of those fiercely attached to check processing and those who want to rush on to digital?

LEANDER: Clearly, there is still competition within organizations among the various payment channels.

Product managers, to a large degree, have historically been product advocates within their institutions. This promotes decisions based on the product manager’s current frame of reference or priority. Then someone else steps in, takes a look at the broader picture and says, “How could we have made that decision?” Well, we allowed it to happen because the person making that decision had a vested interest in perpetuating that product.

Until both the banks and the industry recognize that we need these decisions to be made in a broader context, we’ll continue to run into this problem. I’ve been part of industry-level conversations where “us versus them” is still very apparent — and unproductive. You sit down with some groups and the attitude is, “Those people are infringing on my turf.”

Q So things can’t be left to the operational folks?

LEANDER: The operations and product people have done spectacular work, but they have done it within their product or functional context.

I’m suggesting we need a fundamental shift in thinking. We need a strategic orientation that looks across the payments silos and provides the framework to move from paper to electronic as quickly and cost-effectively as possible. We can’t have the ACH product manager or the check product manager suddenly waking up one day and saying, “You know what, I’m no longer going to worry about what goes on just within my product area; I’m going to think broadly.” They’ll be fine until their next review and then they’ll be gone.

Q Should the CEOs be responsible for changing the context?

LEANDER: The CEOs can’t change everyone’s individual context. What they can do, either directly or by empowering somebody, is highlight the fact that technologies, products and services all have tradeoffs. We no longer make decisions without understanding the tradeoffs; we must make decisions based on the most appropriate combined set of outcomes. CEOs need to ensure that their organizations have a process for making those decisions in that context.

In some other areas, banks already do this. Risk and fraud managers take a holistic view of the issue. The broader payments business needs to do the same.

Q How does Accounts Receivable Conversion (ARC) play into the decisions about image?

LEANDER: With electronic checks, the ACH in general and ARC in particular, there’s good news and bad news.

The good news is that ARC has removed all doubt about whether the market will accept a more efficient way to clear checks. Everybody who can is running for ARC. Whether ARC is an appropriate use of the ACH system is beside the point. People were looking for electronic alternatives, the industry opened one up, and the demand is there.

Now the bad news: The check world is still debating how and when to move to image. But the market is not waiting; it’s moving quickly to check conversion. I’d suggest the best group to push digitization is people in the check world. Who knows checks better than check people? They know the laws, the regulations and the customers. As an industry, we learned that as we converted paper checks to e-checks in the ACH system, we weren’t well prepared. We’ve had customer service issues, market impacts and unintended consequences.

So the message is that you’d better get on with the imaging model because we’ve clearly proven there’s an appetite for digitizing the check processes. The check people are in the best position to understand the landscape and challenges.

Q What kinds of operations or infrastructure needs to be consolidated in the payments industry?

LEANDER: Let’s talk about the paper world, where there are still check clearing houses all around the country. The objective is to consolidate to keep unit costs manageable while check volumes decline. My organization, The Clearing House, has been very successful in consolidating regional check operations. We now operate in six of the 10 largest cities in the U.S. Our check processing operations now cover about 50% of the U.S. population; we’re really second only to the Fed.

We think there are more opportunities to integrate the settlement process on a national level.

Q Despite this consolidation, the regulatory and expense burden in payments continues to increase. What can individual banks do about that?

LEANDER: The payments revenue stream for most banks is critically important, as well as the key relationship driver. Regulatory burdens have increased significantly over the last few years and there is little to suggest it will get better anytime soon. There are a number of areas within the payment infrastructures of banks where costs could be reduced.

First, banks should be vocal about not supporting multiple infrastructures behind the scenes. Big banks and small banks incur significant expense dealing with complex, conflicting and overlapping infrastructures in the payments world. As owners of those infrastructures, the banks are in a great position to improve this.

For example, the number of telecommunications networks that support payments and payment-related information is just astronomical. Banks need to begin to find a way to rationalize this infrastructure and simplify the way we deal with one another.

Second, it’s not just the infrastructure that creates cost complexity. Several large institutions that sit around our table at The Clearing House have actually calculated what it costs them to stay involved in all the industry groups, from NACHA to BITS to ECCHO to ANSII, etc. The numbers are staggering. It’s lots of people and lots of money and lots of time.

Increasingly, even large institutions acknowledge that we just can’t deal with this anymore; we need a simplified process.

Banks really need to show leadership here. Asking the infrastructure providers to figure this out and to consolidate is not realistic — unless their boards get active and lead. Until the banks get together and decide their position on a particular topic, the infrastructure providers won’t do it.

Q But a lot of politics gets involved in the decision of who gets consolidated ...

LEANDER: Sure. Our bias has always been to assume that everything has to be competitive — without realizing that we can cooperate in certain areas between payment infrastructures. We need to be much smarter and pragmatic about where we can cooperate.

A good example is payments fraud. In different channels such as checks, ACH and credit card, we don’t share information across channels. The card association’s rules actually prohibit them from sharing information. The merchant side of a bank that refuses a business because of its bad history in the card network is usually prohibited from sharing that information with their ACH counterpart in the bank. The reason is, we’ve treated fraud reduction as a competitive issue.

But if you’re a bank CEO, do you care whether the losses came out of your card pocket or your ACH pocket? It’s all fraud.

Mr. Cline is senior editor of Banking Strategies.

March 2, 2006 at 01:42 PM in Payments | Permalink | TrackBack (3) | Top of page | Blog Home

Pay It Forward

Bank Systems & Technology : Pay It Forward

The financial services industry is slowly beginning to realize that the payments business, once relegated to the back office, instead should have a place front and center during strategic planning.
By Patrick K. Barron, First Vice President and COO, Federal Reserve Bank of Atlanta
Bank Systems & Technology
February 27, 2006

Q: You've commented that banks should run payments as a business. Can you elaborate?

Barron: Banks can no longer approach the payments system as an afterthought. It's not that banks have totally neglected payments, but I'm trying to get banks to recognize how fundamentally important the payments system is to every other line of business within the organization, and why it needs a strategy in and of itself. The payments side can be the Achilles heel of the bank, precluding the organization from being successful. Look at the fee income that most major financial institutions earn from their payments systems and you'll see that this amount matches a lot of other revenue buckets. Every organization out there ultimately will rely on the payments systems in some way, shape or form to carry out their business. The payments side of the organization needs to have a critical role in developing the overall strategy for the bank.

Q: Does that mean financial institutions should name a "payments czar"?

Barron: I don't care what the title is—payments czar, executive vice president or whatever. But this person should sit at the executive table and have the authority to represent that huge and critically important function of the organization. They need to make strategic plans for the organization rather than be relegated to a support function that carries out the decisions made by others in the organization. Some institutions have gone as far as to name a payments czar, but they are in the minority.

Q: How would you respond to the assertion that the financial services industry is unable, or perhaps unwilling, to make the leap to fully electronic processes?

Barron: That's a fair assessment. Banks are struggling with whether to get on the Check 21 bandwagon or to follow the ACH [automated clearing house] model. Most organizations, whether they like it or not, are going to have to support both models as we transition from paper to electronics. You are always going to have checks flowing into your organization, so you want to position yourself to convert those to electronics because you can collect them a lot faster and alleviate fraud. At the same time, ACH offers a lot of options, so it makes sense to adopt that model as well.

Right now, we are in a transition period. I really had thought more banks would be taking items electronically by now, but I'm not totally disappointed. We are making substantial progress as an industry, and, eventually, we will see more and more organizations exchanging image files rather than printing IRDs [image replacement documents]. In fact, some small banks have converted their entire operation to electronic. The larger banks have plans to convert, but are struggling to integrate the back-room applications needed to support that transition.

Still, Check 21 works great. During a peak day, we have about 2.7 million items representing about $14.8 billion flowing through the Fed on the Check 21 side.

Q: Will banks rely on the Fed for image exchange?

Barron: Whether they bypass the Fed or not isn't the issue. What's most important to me is that we have the most efficient, effective and sound payments system we can. We can accomplish that with direct exchange, ACH and other electronic alternatives that take us out of the old, traditional paper processing business.

Q: Why is it taking so long for large banks to convert their back offices to fully electronic processing?

Barron: When Check 21 was passed, we all thought that banks would be able to take advantage of the act within 12 months to 18 months. But most of us in the industry underestimated the complexity and the costs of converting our back-office operations from a love of paper checks to electronics. For example, integration with stop payment files and other files is complex and hampers a very rapid transition from paper-based checks to electronic payments.

Due to costs, banks are forced to manage this transition through incremental steps rather than converting the entire back office all at once. The back office can ask for millions of dollars to convert everything to electronics, but because they are not able to provide management with the revenue to offset those costs, other areas—such as lending and deposits—that can show revenues are awarded the budget dollars.

Q: Have you been surprised by the interest in remote deposit capture as a result of the adoption of Check 21?

Barron: Remote deposit capture is wonderful and a good example of what can happen when legislation is passed and creative minds come to play. We all thought that ATMs would be converted to remote capture devices, but I don't think any of us thought down to the level of the professional or retail office and how they may be impacted by Check 21. You can see how the effects of remote deposit capture will magnify over a period of years. This service could provide a more rapid transition from paper to electronics, but probably not in the sense we thought it would.

Q: Are there new applications on the horizon that will build upon the ACH infrastructure that financial institutions should be aware of?

Barron: ACH has stayed on the sidelines, but has been doing a superb job, growing at a rate of 21.1 percent in 2004 and 17.2 percent in 2005, according to NACHA. If everything goes well, NACHA will pass a rule later this year that will enable retail establishments to convert checks to images in the back office rather than having to do the conversion at the point of sale. This makes conversion a much smoother process and will facilitate an even more rapid adoption of ACH.

Q: Are there differences between what is happening in the U.S. payments systems versus what is occurring internationally?

Barron: Not really. I'm urging other countries to skip the step of printing IRDs and instead legislate that the image is the legal representation of the document. This will facilitate a more rapid adoption of Check 21 in those countries because converting back to paper is very expensive, manually labor-intensive and prone to errors. However, I don't want to appear that I'm not concerned about consumer rights. Consumers have the right to request that the check be printed as a paper document.

Q: When will the industry achieve straight-through processing and/or an enterprisewide view of payments?

Barron: I see a point in time, perhaps five years from now, when a lot of financial services organizations will be on a proverbial cliff—paper volumes will decrease so rapidly that institutions will be at a disadvantage if they don't have electronic systems in place. They will need to build them or outsource that function.

Q: What has been your greatest career achievement?

Barron: I'm most proud of the way the Federal Reserve and the team of individuals I work with responded following the events of 9/11, and our ability to work with the financial industry and keep the payments system flowing. And again, during the recent hurricanes, the Fed and its employees throughout the U.S. worked together with the industry to ensure that our financial systems were up and running to support the banks and meet their needs. That's what I consider our organization's finest hours. --Lisa Valentine

March 1, 2006 at 06:52 PM in Payments | Permalink | TrackBack (2) | Top of page | Blog Home

Theory re Gbuy - from Mark Holton (2005)

Mark Holton's Weblog :: Holtsblog: Google and FireFox SPECULATION ON "GBUY" EXTENSION

THEORY: It is my speculation and theory that Google is working with the FireFox experts to create a "Killer Extension". (replacing the Killer App) Now, what extension could Google charge a small fee for or a small % fee for that would make it ubiquitous and worth their while to pursue? A company with this wide of a scope doesn't look for niche applications, they look to change the world. What does Google do best -- search for text, products, and services, right? Perhaps they could team with FireFox and create a killer extension that had functionality similar to EBAY but was on everyone's browser? I'll coin the term "GBUY" to go along with their recent GMAIL naming convention. Since Google already dominates search, they could then continue leverage their search position to dominate the commerce through which many internet items were purchased. GBUY could provide a service to not only consumers, but also vendors making it easier to setup and transact all type of business over the web. They already have AdWords which accepts payments from Vendors on a per-click basis, and they already have AdSense which delivers payments to millions of website owners. The payment infrastructure is essentially there, and as everyone knows, the search dominance and capabilities continue to expand (see Google TV, Google Images, Froogle, et al).

February 8, 2006 at 08:49 AM in Payments | Permalink | TrackBack (16) | Top of page | Blog Home

PayPal Prepares For a Challenge from Google

WSJ.com - PayPal Prepares For a Challenge From Google

By MYLENE MANGALINDAN
Staff Reporter of THE WALL STREET JOURNAL
February 6, 2006; Page B1

When Jeff Jordan learned last May that Web-search leader Google Inc. was building its own Internet-payment service, he reacted swiftly.

Mr. Jordan, who is president of eBay Inc.'s PayPal online-payments unit, immediately asked employees to unearth information about the Google service. Soon, PayPal employees were monitoring blogs, news reports and other data for information about Google's progress in payments. PayPal staffers even gleaned details about Google's plans during regular calls to customers who were eager to dish about how Google had reached out to them.

"It's a very legitimate competitive threat," says Mr. Jordan, 47 years old. "It's hard not to pay attention to what Google is doing."

While Google Chief Executive Eric Schmidt confirmed in press accounts that the company was building a payment service, Mr. Schmidt also denied it would directly compete with PayPal. Mr. Schmidt said Google didn't intend to offer a "person-to-person, stored-value payments system," which many people consider a description of PayPal's service.

Mr. Jordan says he and his team immediately "dissected the wording" of Google's statements. He says he doesn't believe Mr. Schmidt. In the past, Mr. Jordan says, Mr. Schmidt had denied Google would roll out a payments service, only to take it back later. "We took [the comments Mr. Schmidt made] as 'Thou doth protest too much,' " says Mr. Jordan.

Long the Internet's leading online-payments service, PayPal has a 24% market share of U.S. online payments, according to financial-institution consulting firm Celent LLC. PayPal, founded in 1998, boasts 96 million accounts with consumers who want to send payments online without revealing their credit-card or banking information to vendors. To use the service, customers simply set up an account with their credit-card or bank-account details, fill out a payment amount and the email address of the recipient, and send the payment via the Internet to PayPal. If the recipient doesn't have an account, he simply opens one in order to collect the payment. The service gained traction on eBay and proved to be more popular than an in-house payment system it had been using.

For eBay, which acquired the online-payment business in October 2002, PayPal has been a big asset. The unit has helped accelerate trading on eBay's auction sites in the U.S., Germany and the United Kingdom. Most recently, PayPal generated 23% of eBay's total $1.3 billion quarterly revenue. And PayPal's revenue is growing steadily: It was up 48% to $304.4 million in the fourth quarter compared with a year earlier.

But PayPal must now contend with Google. The Mountain View, Calif., Web-search giant, which has terrified Silicon Valley with its ability to quickly create new consumer products and services, is developing a rival service called GBuy. For the last nine months, Google has recruited online retailers to test GBuy, according to one person briefed on the service. GBuy will feature an icon posted alongside the paid-search ads of merchants, which Google hopes will tempt consumers to click on the ads, says this person. GBuy will also let consumers store their credit-card information on Google.

Google said that it has acknowledged publicly on many occasions that it is working on payment products. The company also said it already processes online payments for ad services, as well as fees from consumers who use features such as Google Store and Google Earth. It declined to comment on any pending products.

The Google challenge comes amid PayPal's push to win new business. In June, the San Jose, Calif., business introduced new software and tools so smaller merchants could process PayPal transactions on their own Web sites. Its sales force has been recruiting big-name merchants such as Dell Inc. and Sharper Image Corp. to accept PayPal as an option on their Web stores. Late last year, PayPal purchased VeriSign Inc.'s online-payments-technology unit for $370 million to help build ties to hundreds of new merchants.

Throughout this effort, Mr. Jordan -- who is often mentioned by colleagues and recruiters as a possible successor to eBay Chief Executive Meg Whitman -- has led the charge. A graduate of Amherst College and Stanford University's business school, he spent eight years at Walt Disney Co. At Disney, where he once worked with Ms. Whitman, he managed strategic planning for the consumer-products division and was chief financial officer for Disney Store Worldwide. Ms. Whitman recruited him to join eBay in 1999. He was appointed PayPal president in late 2004.

An avid mountain biker, Mr. Jordan begins his workday at around 5 a.m. at the eBay gym, perched atop a stationary bicycle while tapping away on his BlackBerry. If he makes it home by 7 p.m. in time to have dinner with his kids, he considers himself lucky. People who know Mr. Jordan say he is extremely competitive and detail-oriented -- so much so that he monitors message boards to gauge customer complaints, often firing off messages to employees asking for fixes.

Mr. Jordan has been marshalling his forces for a possible battle with Google. He and his team have run through competitive scenarios to assess the risks PayPal might face with a Google service, an exercise the company also runs through with other rivals.

Mr. Jordan also accelerated the development of some products to stretch PayPal's lead in online payments and increased product-development spending by as much as fourfold in some areas. Though he declined to go into details, the company is working on tools to attract new merchants to use PayPal as an option on their Web stores. These new tools will be released later this year.

Attracting new merchants is important for PayPal because it needs to expand beyond its core eBay users to keep generating more revenue. Sixty-nine percent of PayPal's fourth-quarter revenue came from eBay-related transactions. Last year, PayPal developed software that lets merchants accept payments by phone, fax or mail order and to process those through PayPal. It also helped speed the payment process so shipping and billing information is sent from PayPal to the merchant more quickly.

It has been challenging for PayPal to sign up many new online retailers, however. Sucharita Mulpuru, an analyst at Forrester Research, says some retailers are leery of associating themselves with a brand that is so closely intertwined with eBay's online-flea-market roots. In part because of that heritage, PayPal "doesn't feel like a sophisticated financial system like a Visa or MasterCard" to many retailers, says Ms. Mulpuru.

PayPal executives acknowledge they need to broaden the appeal of their service. Stephanie Tilenius, a PayPal vice president, says the company's sales force is working hard to show merchants how it can help lower their payment expenses and capitalize on its Internet-savvy consumer audience.

Still, some of PayPal's recent moves have paid off. The company generated $8.1 billion in payment volume through its system in the fourth quarter, up 45% from a year earlier. It produced $2.5 billion in payment volume in the fourth quarter, a 56% increase from a year earlier, from its merchant-services program. PayPal declined to disclose how many new merchants it has added to its service.

One new merchant PayPal recently signed up was White Mountain Insurance Group Ltd.'s Esurance Inc., an online auto insurer based in San Francisco. Before it had PayPal, Esurance accepted payments through credit cards, debit cards and electronic checks. By integrating PayPal into its Web site, it expanded its payment choices, making it "more efficient" for consumers, says John Swigart, an Esurance managing director. "Now we don't have to deal with waiting for checks in the mail, getting checks lost or waiting for invoices."

PayPal isn't Esurance's least expensive payment option or its most popular, but it is growing, Mr. Swigart adds. PayPal is "signing up hundreds of thousands of consumers a week," he says. "As they find ways to raise awareness among their customer base that PayPal is a usable and effective option for customers to use to pay for things online, I think they'll find a lot of success."

Write to Mylene Mangalindan at mylene.mangalindan@wsj.com

February 8, 2006 at 08:47 AM in Payments | Permalink | TrackBack (4) | Top of page | Blog Home

PayPal Turns On Red Alert for Incoming Google's "GBuy"

DailyTech - PayPal Turns On Red Alert for Incoming Google's "GBuy"

Tuan Nguyen - February 7, 2006 3:48 AM
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Google's GBuy online payment system has its crosshairs directly on PayPal; eBay closely watches

Much like Microsoft and Windows, Google's platform is the Web. Not that Google owns the Web, but it's presence cannot be denied nor defined. In fact, Google's global usage has become so popular lately that Google has made countless enemies in what seems like an overnight event.

The latest company to be on high alert from a Google threat is PayPal, one of the world's most popular online payment and peer-to-peer transaction services. PayPal, which has been operating for over 7 years, has enjoyed phenomenal growth in business with very few rivalries. Its services were so widely used that eBay purchased PayPal in 2002. Most eBay users now even state in their online terms of sales that they will only accept payments via PayPal.

This is where Google has just the right mix to be able to challenge PayPal. Google has search, it has ads, it has presence, it has Froogle. In fact, it has all the necessary ingredients to pose such a big threat to PayPal that Jeff Jordan, PayPal's president, requested PayPal and eBay employees to monitor and watch for any news of Google's development of a service it calls GBuy.

What has Google's competitor's worried is the fact that once GBuy launches, it is entirely possible to put in a search query for a product you're looking for, press search, and have Google deliver the results -- traditional by current standards. But unlike what's available today, it is easy for Google to put an option to pay for the item you're looking for immediately, if you have a GMail account. No vendor would have to ever see your credit card information. All payments are done seamlessly. Vendors already advertise heavily on Google. It only makes sense that you can pay for product you see in the ad.

Currently, Google is a much bigger brand name than PayPal. In fact, Google ranks as one of the top recognized brand name in the world. PayPal on the other hand, is finding that signing on new merchants is slightly difficult. This is because many people view PayPal's brand to be much weaker than that of Visa or MasterCard. According to the Wall Street Journal:

Sucharita Mulpuru, an analyst at Forrester Research, says some retailers are leery of associating themselves with a brand that is so closely intertwined with eBay's online-flea-market roots. In part because of that heritage, PayPal "doesn't feel like a sophisticated financial system like a Visa or MasterCard" to many retailers, says Ms. Mulpuru.

Having a platform has become a key strategic leverage for many companies. Microsoft, Intel, NVIDIA, and now AMD all know this. Right now, it is possible for Google to setup a "platform" in which all of its services operate in a coherent manner that will allow any Google users -- search, GMail, or otherwise -- to quickly and immediately pay for purchases.

Google's brand is strong. Users around the globe trust the brand and the service. Google also has a huge potential in tapping the growing Internet-aware population of China. For merchants already doing business with Google or are looking to develop new net business, Google's user base is clearly becoming the biggest potential pool of customers in the world.

February 7, 2006 at 08:08 PM in Payments | Permalink | TrackBack (6) | Top of page | Blog Home