A Battle at the Checkout

PayPal dominates electronic payments, but Google's growing checkout service may prove a vigorous challenger.

In his celebrated book, “The PayPal Wars”, Eric Jackson described how in its early years the internet firm had to battle crotchety regulators, identity thieves, volatile markets, scrappy rivals and even scheming Mafiosi. It has since gone on to become the undisputed master of online-payments processing. Now, however, to stay on top, it must leap from being merely big to ubiquitous. And it will have to do so while fending off new competitors — especially Google.

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. Already international — 35m of the accounts are in Europe, 15m of those in Britain alone — it is striving to become truly global. Next week it is expected to announce that the number of countries in which PayPal transfers can be made has risen to 190 from 103.

This growth has turned PayPal into the star of the eBay stable. In the first quarter its net revenues rose by 31 percent, 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 percent to 39 percent 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.

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