Friday, October 21, 2011

Is PayPal Card Friend or Foe?

Value in mobile ecosystem
In a complicated ecosystem such as retail payments, no legacy contestant can be completely sure that other new participants in the broader ecosystem are complementary or disruptive.

PayPal, already a payment system for e-commerce transactions, has made no secret lately of its ambitions to move into the world of brick-and-mortar commerce. 

And PayPal might worry card issuers more than Google for a couple of reasons. First, Google clearly wants to build a business around advertising. PayPal wants to grow a transaction fee business, even as it works with traditional card issuers. 

Traditional payments typically involve a merchant, acquirer, issuer, and a consumer in the visible parts of the business. But essential roles also are played by the payment network provider as well. 

The roles of merchants and consumers are obvious. "Acquirers" are responsible for aggregating merchants  and enabling merchants to process payments. 

"Issuers" create payment devices for consumers to use (credit and debit cards, for example) and process the transfer of funds from consumer accounts to merchants. 

In the case of credit and debit cards and other electronic forms of payment, a payment network provider, such as Visa or MasterCard, resides between acquirers and issuers to facilitate the transfer of information and funds. 

The mobile payments business adds other potential participants as well, such as handset suppliers, mobile service providers and application providers that create "wallet" systems. That also means other functions such as daily deals services, loyalty program services, local advertising and other functions likely will be part of the ecosystem as well. 

You might argue that PayPal, up this point, has acted as a payment network of sorts, even though it works with existing clearing networks and card issuers. What does not seem completely clear is what it might mean now that PayPal has decided its "wallet" functions will take the form of a plastic card.  

The PayPal Card is a magnetic-striped plastic card that will become available to its base of 100 million active users some time in the first half of 2012.
The unembossed card, which account holders will have to apply for, will carry the PayPal logo on its face, but will bear no other identifying information—no name, no account number. 
Transactions on the card will be protected by a PIN. PayPal will also introduce at the same time a companion payment product it calls “Empty Hands,” a system that will let account holders pay the point of sale by entering a phone number and a PIN.
The card is intended to let users access the funding sources they have stored in their accounts, or digital wallets. These can include credit and debit cards, but also loyalty points, prepaid and gift cards, and demand-deposit accounts. 

Although it looks like a familiar payment card, its magnetic stripe stores encrypted data that lets consumers access a variety of accounts through PayPal. The card will not carry the customer's name or an account number but only the PayPal logo.

Keep in mind that The PayPal card might be viewed merely as an extension of wallet functions PayPal has had for a decade or more, experts say. For example, PayPal has had a MasterCard-branded credit and debit card for years. In that sense, PayPal already has been an issuer in its own right. 

But some in the banking industry will see a threat. "It is another step in PayPal's march to disintermediate" the traditional card companies, says Andy Schmidt, research director for commercial banking and payments at TowerGroup.

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