The Economist : PayPal vs. Google’s Checkout

Friday, May 4, 2007

PayPal was founded in 1998 as a way of moving money between Palm Pilots. It soon became a popular way to pay for goods on eBay.  So successful was it that in 2002 the auction site ditched its own payments service, Billpoint, and paid $1.5 billion to bring PayPal under its wing.  It now boasts 143m accounts, double the number it had two years ago…..This growth has turned PayPal into the star of the eBay stable.  In the first quarter its net revenues rose by 31%, much faster than those of the core auction business, to $439m.  PayPal now accounts for a full quarter of group sales.  But as eBay comes to rely more on PayPal, PayPal is trying to diversify away from eBay.  In the past year, “off eBay” volume has climbed from 33% to 39% of the total.  Having achieved “critical mass” through its ties to eBay, the job for PayPal now is to persuade more online retailers to accept it as a form of payment, says Rajiv Dutta, PayPal’s president.  “We have more account holders than American Express, yet the vast majority of e-commerce sites don’t offer us,” he says.  One problem is the time involved in adding a PayPal checkout function to a retailer’s site.  So the company has brought the code-writing part of the work down from weeks to days.  Having signed up millions of small e-tailers through eBay, it is now trying to win over more large ones.  Mr Dutta says one selling point is PayPal’s low fraud rates, which are around a third of the norm for online merchants.  Its latest security initiative is a digital key fob, linked to customers’ accounts, whose security code changes every 30 seconds.  This is proving popular, helped by PayPal’s willingness to sell it below cost.  But safety is nothing without convenience, hence the rush to roll out services on new platforms, such as fund transfers via Skype, eBay’s web-telephony arm (launched in March) and mobile phones (in beta testing).  The firm has also come up with a clever, secure way to use PayPal on websites that do not have a “Pay with PayPal” button: a “virtual debit card” that pulls money from the user’s PayPal account using a 16-digit number, which changes with each transaction.  Such ingenuities show that the only limit to PayPal’s growth is the scope of its vision, says Mr Dutta. 

However, there is another threat: Google’s small but potentially powerful Checkout service, which was launched last summer…..Crucially, Google is prepared to run Checkout at break-even, or even at a loss, because it sees the service as a useful way to bring more advertisers to its all-important AdWords business, which charges retailers for search-related “keyword” ads.  Checkout has already signed up a quarter of the top 500 online retailers, largely thanks to its offer of free payments processing until 2008.  Once the promotion ends, every dollar a merchant spends advertising with Google will entitle it to $10-worth of free processing.  “The way we think about Checkout is not as a standalone business, but as a driver of the Google network,” says Ben Ling, Checkout’s boss.  This willingness to subsidise—investment is running at over $30m a quarter—makes Checkout a potentially formidable foe.  Gwenn Bézard of Aite Group, a consultancy, thinks PayPal will eventually suffer if Google continues to throw money at its payments service, because many consumers will want to use one or the other system, but not both…..But not everything is going Google’s way.  A survey in January found that only 18% of Checkout users rated their experience as good or very good, compared with 44% for PayPal.  And Checkout’s share of payments on some big sites, such as Toys “R” Us and Sports Authority, has been falling since the holiday season ended, despite inducements to retailers (estimated at over $20m) to make its “badge” more prominent.  It may have to increase its bribes in order to gain traction.  Furthermore, Checkout may itself face threats as it grows.  At this year’s Davos pow-wow, Bill Gates said Microsoft was thinking about a move into online micropayments.  And then there are the established card consortiums.  To the extent that PayPal and Checkout help to move cash and cheque purchases online, where they are subject to transaction fees, Visa and MasterCard welcome them.  But they also worry about being cut out of the process as the payments upstarts become the “interface” with which more online shoppers deal directly.  With combined annual volumes of over $6 trillion, the card companies could put up quite a fight…..

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