Mobile World Congress: PayPal One of Many M-commerce Players 321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com INITIAL REPORT March 8, 2012 Companies: AAPL, AMZN, AXP, EBAY, EPA:ING, ETR:SAP, GOOG, HBC, LON:BARC/BCS, LON:BGO, LON:MONI, LON:TDE/TEF, LON:VOD/VOD, MA, PAY, STD, V, WFC, WU 1 David Franklin, [email protected], 415.364.3780 Summary of Findings eBay Inc.‘s (EBAY) PayPal is a mobile commerce, or m-commerce, leader with many competitive strengths. However, mobile payment adoption is in its infancy, and the market is too fragmented to determine if a PayPal mobile payment app will be widely accepted. Near-field communication, or NFC, mobile payment platforms are expected to become a major part of the landscape within the next three years. Ease of use, strong data-capture capabilities, and instant communication options will propel the technology‘s use. In addition, 120 million NFC-enabled smartphones are expected to be launched worldwide by the end of 2012. The lack of legacy financial systems in underdeveloped countries will hasten the adoption of mobile payment systems outside of the United States. PayPal is expected to meet with resistance in these regions unless it partners with local service providers. Competition in the mobile payment industry is plentiful. Small companies and start-ups dominated the Feb. 27–March 1 Mobile World Congress. No clear frontrunner yet exists, and all legacy financial companies including banks, payment processors, mobile carriers, and credit card providers are trying to sort out where they fit in the emerging mobile payment world. Companies expected to benefit from mobile payment adoption include but are not limited to PayPal, Google Inc.‘s (GOOG) Google Wallet, Apple Inc. (AAPL) and possibly Facebook Inc. White-label mobile payment solutions were discussed by three primary sources and in secondary sources. Retailers and banks are interested in branding their own mobile payment solutions. PayPal to Become M-commerce Standard NFC to Be Extensively Used in 3 Years Mobile Payment/ Money Exhibitors Mobile Payment/ Money Presenters Attendees Interested in Mobile Payments Research Question: Is a PayPal account a standard option in mobile payment applications, and what are the chances for widespread adoption of PayPal’s mobile payment solutions? Silo Summaries 1) MOBILE PAYMENT/MONEY EXHIBITORS Seven of 12 sources said PayPal is in a strong position to compete in the m-commerce market, which is still in its infancy. However, PayPal is unlikely to become a standard option in competitors‘ payment programs. Non-U.S. markets with limited banking or financial infrastructure likely will develop first and will be difficult for companies like PayPal and Google to penetrate. No one platform is expected to become a standard in any market, but the NFC platform will be adopted during the next three years as credit card companies push merchants to use the technology for better security. An emerging trend is for white-label mobile payment solutions. Retailers do not want to lose control of their customers or customer data and are interested in their own branded solution. 2) MOBILE PAYMENT/MONEY PRESENTERS These two sources said PayPal is part of the mobile payment landscape but only as one of many technologies. Both sources expect large retailers to develop their own mobile payment systems so they can own the customer data. One source also expects PayPal to become a button on payment apps produced by banks and big retailers. The other source is platform- agnostic and expects multiple technologies to coexist in the mobile payment industry. NFC is a convenient solution for consumers, who will drive its adoption by using NFC-enabled phones once available at the end of this year. Adoption of mobile payment apps also is on the verge of ramping up. 3) ATTENDEES WITH INTEREST IN MOBILE PAYMENT These two sources said PayPal is a strong contender in the mobile payment industry. However, one source said his company chose to work with Paythru because it is a small, responsive company. The other source said PayPal is no longer innovative and is advancing its technology through acquisitions. Both sources said mobile payments‘ main value for retailers will be in added services, such as data capture, real-time promotions and special pricing for consumers. NFC adoption will widen in the next two to three years as more NFC-enabled smartphones are sold.
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Mobile World Congress: PayPal One of Many M-commerce Players
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Background
The use of mobile financial transaction apps on smartphones and tablets for banking, shopping and point-of-sale (POS)
checkout continues to grow. Meanwhile, the competition for consumers, merchants, banking partners and credit card
companies is starting to heat up between PayPal (currently leading in e-commerce and piloting its mobile wallet solutions at
two national retailers), Google Wallet (which was introduced in late 2010), and Isis (the mobile payment joint venture
launched in 2011 by AT&T Inc./T, Verizon Communications Inc./VZ, and T-Mobile, owned by Deutsche Telekom AG/ETR:DTE).
CURRENT RESEARCH While attending the Mobile World Congress (MWC) in Barcelona, Blueshift assessed PayPal‘s mobile wallet opportunities and
the adoption rate of its m-commerce solutions. Additionally, we set out to determine if PayPal would be automatically included
as a payment option in competitors‘ m-commerce products and if PayPal‘s leadership position in online financial transactions
would provide a competitive edge among consumers and merchants. We employed our pattern mining approach to establish
sources in four independent silos:
1) Mobile payment/money exhibitors at MWC (12)
2) Mobile payment/money presenters at MWC (2)
3) MWC attendees interested in mobile payment/money/banking (2)
4) Secondary sources (5)
We interviewed 16 primary sources and included five of the most relevant secondary sources focused on the mobile payment
industry and the mobile payment exhibitors and announcement made at the Mobile World Congress.
Silos
1) MOBILE PAYMENT/MONEY EXHIBITORS AT MWC Seven of 12 sources said PayPal is in a strong position to compete in the m-commerce market, which is still in its infancy.
However, PayPal is unlikely to become a standard option in competitors‘ payment programs. Non-U.S. markets with limited
banking or financial infrastructure likely will develop first and will be difficult for companies like PayPal and Google to
penetrate. No one platform is expected to become a standard in any market, but the NFC platform will be adopted during the
next three years as credit card companies push merchants to use the technology for better security. An emerging trend is for
white-label mobile payment solutions. Retailers do not want to lose control of their customers or customer data and are
interested in their own branded solution.
Russell Sheffield, Director of Innovation and Development for Paythru
PayPal‘s leading e-commerce solutions will make it a strong mobile payment competitor. However, its payment holds
policy will slow merchant adoption and open the doors to competitors like Paythru that pay merchants immediately.
Paythru signed up 13 Turkish banks that previously had been approached by
PayPal. Paythru will not include PayPal in any part of its platform. The massive
infrastructure investment for NFC is an impediment to its adoption. Mr.
Sheffield said Paythru offers everything NFC does but without the infrastructure
investment. Retailers prefer brand-agnostic, white-label platforms that allow
them to keep their consumers. PayPal also faces regulatory risks in emerging
markets. South Africa now prohibits the use of debit cards online because of
increased fraud, which removed 95% of the population from e-commerce.
―The leader now is PayPal. Their moat is hard to leap. Google Wallet
has a serious challenge on their hands. But they‘re going at mobile
payments differently, building apps and using NFC.‖
―PayPal is a competitor, so we won‘t put their APIs on our platform.
Sometimes clients ask us about putting PayPal on our platform. Yes,
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2) MOBILE PAYMENT/MONEY PRESENTERS AT MWC These two sources said PayPal is part of the mobile payment landscape but only as one of many technologies. Both sources
expect large retailers to develop their own mobile payment systems so they can own the customer data. One source also
expects PayPal to become a button on payment apps produced by banks and big retailers. The other source is platform-
agnostic and expects multiple technologies to coexist in the mobile payment industry. NFC is a convenient solution for
consumers, who will drive its adoption by using NFC-enabled phones once available at the end of this year. Adoption of mobile
payment apps also is on the verge of ramping up.
Chief operating officer for a mobile valued-added service/CRM platform designer and provider
A mobile wallet such as PayPal will become part of a retailer‘s own platform, which it will create to harness the customer
data. This source does not favor NFC over QR (quick-response) coding or PayPal over Google Wallet. He expects a near-
term usage increase in mobile payments.
―We‘re ‗agnostic‘ on PayPal and Google Wallet. We want to ensure a holistic capability with the consumer. The
brand will be predominant—the wallet‘s platform with a [brand‘s] wrapper. … The big retailers will develop their
own high-quality interactive platforms. If the brand is strong enough,
I‘m quite happy to interact with it as long as the experience is smooth
for me. We‘ve seen a surge in the growth of couponing capabilities
under one umbrella. That‘ll be integrated into loyalty schemes. The
retailer will take over the relationship and the redemption in store after
the acquisition transaction, not PayPal or Google Wallet.‖
―Retailers‘ marketing groups are rapidly waking up to mobile‘s
potential. We‘re on the cusp of mobile going mainstream, a tipping
point. Person-to-person payments fit very well with the felt moral
obligation to pay friends quickly—settling up a restaurant bill, for
example.‖ ―Multiple technologies will coexist. … Consumers and retailers aren‘t
fussy about technology. The device manufacturers are already
combining multiple technologies, and prices of devices are
plummeting.‖
―The more progressive retailers know they have to open up their POS
terminals to other capabilities. … Otherwise, they‘d be dead if they used 10-year-old software. There are plug-
and-play phone and imaging scanners, so the upgrade to NFC could be plug-and-play.‖
―NFC … can help channel the consumer to the brick-and-mortar merchant‘s website. Retailers come at it from
different angles. Some come at it from ‗I‘ve got a loyalty program and want to mobilize it.‘ There‘s no standard
proposition.‖ ―For loyalty schemes to succeed, they require an alignment between marketing, IT, operations and finance.‖
Neil Garner, CEO of innovation and development for Proxama
Neither PayPal nor Google Wallet will own the mobile payment market, which itself will be stymied by carriers‘ and
handset manufacturers‘ omission of the user experience. Companies that best understand mobile commerce include
Boku Inc. (now in alliance with MasterCard), Paythru and Barclays PLC‘s (LON:BARC/BCS) Barclaycard. Poorly situated
mobile payment providers include Banco Santander S.A. (STD), HSBC Holdings PLC (HBC), regional banks, and savings
and loans. Processors like First Data and Total System Services Inc. (TSS) stand to lose the most in this market. PayPal is
avoiding NFC because of the infrastructure investment and because NFC would turn PayPal into just another button
among many. PayPal is from the digital world, and successful m-commerce requires an easy-to-use bridge between the
digital and physical worlds. Convenience for the consumer will drive NFC adoption and will be set in motion by the global
launch of 120 million NFC-enabled phones by the end of 2012.
―PayPal is not going to own this new ecosystem. Google Wallet will do some elements of the ecosystem.
Ultimately, the consumer is who everybody is forgetting about. Everybody is worried about the brand on top of
the wallet instead of giving the benefit to the consumer and letting the consumer drive the choice. That is
equally true of PayPal, Google Wallet and Isis. The key thing that NFC enables is not having to choose an app on
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―I think PayPal is saying they don‘t believe in NFC because they have to
do a lot of physical world investment and it would be an enormous shift
since they‘re in the digital world. I still think the existing mobile
technology is very cumbersome for consumers to use. In the physical
world, speed is of the essence. With NFC-enabled checkout anywhere,
PayPal would be just another button on the checkout page. The other
key to NFC is that you‘ll have your cards in your phone, so why use
PayPal?‖
―What frustrates me most about technology is how hard it is to use. QR
is too complex and hard to use. NFC is clear and simple; touch it and it
works.‖
―In 2015–2016 NFC will be standard on smartphones. Big industry
takes a long time.‖
―Paythru gets it; they understand consumer choice. The companies
spending the time connecting the dots are who will win. Monitise
[PLC/LON:MONI] gets it. Boku is good. Bango [PLC/LON:BGO] in the UK does content billing; they did a deal with
Facebook. They … focus on the consumer need and pull together the platform capability and simplify it.‖
―The people who don‘t get it are the network operators and the handset manufacturers. That‘s the big part of
the problem.‖
―The card issuers have the liability system in place, and it‘s exactly replicable for mobile wallets. There are new
rules about what you can do, but ultimately you need the [liability] backstop. Barclaycard really knows what
they‘re doing. HSBC is incompetent at this and slow. Santander Bank is slow.‖
―The building societies don‘t get it. Regional banks will be slow. The processors like First Data are very slow.
They see it as just one more thing they can outsource. The banks won‘t get the benefit with the very limited
offering from processors, and their offering is closed and proprietary. … The card businesses understand cards
but not mobile. … The opportunity lies with who knows how to bridge the gap.‖
―The most essential thing is whom consumers trust and whom do you call when things go wrong. You can‘t
underestimate the card issuers and the banks. PayPal, Google Wallet and Amazon are trying to drive this from
the cloud, and the physical world is different. In Europe it‘s different from the States because the chip cards are
more secure than the magstripe cards.‖
3) MWC ATTENDEES INTERESTED IN MOBILE PAYMENTS/MONEY/BANKING These two sources said PayPal is a strong contender in the mobile payment industry. However, one source said his company
chose to work with Paythru because it is a small, responsive company. The other source said PayPal is no longer innovative
and is advancing its technology through acquisitions. Both sources said mobile payments‘ main value for retailers will be in
added services, such as data capture, real-time promotions and special pricing for consumers. NFC adoption will widen in the
next two to three years as more NFC-enabled smartphones are sold.
Nigel Poad, director of PlusEngine a real-time marketing, loyalty and transaction
platform
This source said PayPal would be the best mobile wallet for his service if Paythru
did not exist, but he opted for Paythru because of its size and adaptability.
PayPal‘s leading e-commerce position will not necessarily translate into the m-
commerce environment. Also, PayPal‘s 21-day hold on eBay sellers‘ funds is
―absolute nonsense.‖ Mobile wallets will ramp up quickly in the next two to three
years, and will show its actual value in creating real-time promotions for
consumers and data capture for retailers. However, consumers are beginning to
question data collection. Also, many people do not want to frequently log into a
phone with a PIN, which could slow NFC adoption.
―We don‘t believe there‘s anybody in this space that understands the
real opportunities. PayPal must be technology-agnostic. PayPal would
―Financial technology provider FIS launched its new mobile wallet this week. The cloud-based solution not only
gives consumers the ability to use their smartphones to make POS purchases and shop online, but the white
label solution can also be built directly into retailers‘ and financial institutions‘ existing mobile applications,
according to the announcement.‖
―FIS is partnering with mobile payment company Paydiant on the solution.‖
―‗We strongly believe that many financial institutions and retailers are not comfortable ceding their brand equity,
customer relationships and transaction data to new entrants in the payments ecosystem,‘ [Paydiant co-founder
Chris] Gardner said in the announcement. ‗We are thrilled to team with industry leader FIS, who shares our
customer-centric viewpoint.‘‖
Next Steps
Blueshift will continue to monitor PayPal‘s mobile payment deployments. In particular, we will assess any competitive
strengths or weaknesses that emerge as PayPal rolls out payment platforms in 2,000 Home Depot stores this March. We also
will research the inclusion of NFC chips in smartphones and the related effects on the mobile payment marketplace. Finally,
we will monitor major retailers‘ efforts to creating their own mobile payment applications or their decisions to use a white-
label offering from one of the many start-ups in the mobile payment industry.
Additional research by Lester Golden
The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities
and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not
own securities in any of the aforementioned companies.
OTA Financial Group LP has a membership interest in Blueshift Research LLC. OTA LLC, an SEC registered broker dealer subsidiary of OTA Financial Group LP, has both
market making and proprietary trading operations on several exchanges and alternative trading systems. The affiliated companies of the OTA Financial Group LP, including
OTA LLC, its principals, employees or clients may have an interest in the securities discussed herein, in securities of other issuers in other industries, may provide bids and
offers of the subject companies and may act as principal in connection with such transactions. Craig Gordon, the founder of Blueshift, has an investment in OTA Financial
upon, in whole or in part, without Blueshift‘s written consent. The information herein is not intended to be a complete analysis of every material fact in respect to any
company or industry discussed. Blueshift Research is a trademarks owned by Blueshift Research LLC.