PayPal’s cashless utopia: Built on eBay’s back

November 9, 2010, 7:54 PM UTC

PayPal is working hard to become the gold standard for online payments, chasing down Google and fending off the competition. Meantime, being the apple of eBay’s eye, and its subsidiary, hasn’t hurt either.

By Dan Mitchell, contributor

PayPal Headquarters
Image via Wikipedia

This week, PayPal is hosting an event in New York called “Cashless Utopia.” PayPal’s aim is to usher us in to this utopia by establishing itself as the standard mechanism by which we pay for everything – online, on mobile devices, and even in the physical world.

The “utopia” will surely come, eventually, though referring to it that way seems a bit hyperbolic. Whether or not PayPal will be the Thomas More (or the Todd Rundgren) of this new world is still unclear, but in the past few years, it has made incredible strides.

PayPal, in fact, is on track to eclipse what for now is often called the “core” business of its parent company eBay (EBAY) – auctions. And over the past couple of weeks, it has solidified its position on several fronts — transactions on mobile devices, within Facebook, via micropayments, and for point-of-sale (i.e., “real world”) purchases.

After eBay announced its third quarter results last month, Business Insider’s Henry Blodget declared that while eBay’s auction business is “dead in the water,” PayPal “is rocking.”

“Dead in the water” is a bit much – eBay’s auction business is maturing, its revenue growth slowing – but “rocking” seems about right for PayPal, at least for the time being. Over the past year, eBay’s online-payments business, which includes Bill Me Later as well as PayPal, grew from 30 percent of the company’s total revenues to 37 percent, or $838 million. That was an increase of 21.8 percent over the third quarter of ’09. Last year, eBay CEO John Donahoe predicted that annual payments revenues would double in by 2011 from their 2008 levels, to about $4.5 billion. The company has stuck to that prediction.

It’s always risky to project from current trends, but that growth could push eBay’s payments business past its those of the company’s Marketplace division (which includes auctions, ticket seller StubHub, and other businesses.) At which point, the “core” business of eBay would be payments. That’s why – even while auctions are, if not “dead in the water,” at least struggling against the current — eBay’s stock has more than doubled over the past two years.

But it is risky to project from current trends, and that’s especially true right now in the payments business. Mobile payments represent the biggest area of growth for both the industry as a whole and for PayPal. But for now, that business is a “mess,” as Gwenn Bezard of Aite Group put it (he also called the market a “science project.”) MasterCard and Visa are both assembling systems for mobile payments.

Bloomberg News reported in August that a consortium of telecom companies and banks is working on its own scheme. At the same time, upstarts like Boku, Obopay, and Zong are encroaching on the field. Google Checkout (GOOG) still exists, though some observers predict that it might not last long. There are well-founded rumors that PayPal will become the default payments method for Android apps on Google phones (PayPal wouldn’t comment). If so, that would be an indication that Google itself is looking past its own payments service.

But for all the competition in the still-nascent mobile market, the biggest competitor could turn out to be “a startup above a garage in Palo Alto that nobody’s heard of,” says Anuj Nayar, PayPal’s director of communications. That, incidentally, is exactly how PayPal started (actually it was a merger of two Palo Alto startups, Confinity and

Still, PayPal has done much to solidify its position, and for now, it still has name-recognition on its side.

Last month, PayPal announced that it had teamed up with Bling Nation on a system for “contactless” point-of-sale purchases. The initiative involves VeriFone Systems, whose point-of-sale infrastructure is widespread. The system is in beta, but consultant Peter Quadango told the trade publication PaymentsSource that it is “only a matter of time before we start seeing a PayPal acceptance sticker on the windows of many brick-and-mortar merchants.”

Well, maybe. PayPal’s stance is that the term “brick-and-mortar” is fast becoming obsolete. “The difference between online and offline is starting to erode,” Nayar said. PayPal’s apps for Apple’s mobile devices and for Android allow users to find merchants that accept PayPal, and then pay for their purchases electronically. Are these online payments, or “real world” payments?

The company in October also announced what is being called a “micropayments” service for digital goods. What constitutes a micropayment is the subject of often-heated debate; some say it comprises only transactions of less than a penny. In this case, for “digital goods” costing less than $12, such as video clips, and online games, PayPal charges 5 cents plus 5 percent of the transaction cost. Like mobile payments, this is a growing business. The main thing is to make it as easy and inexpensive as possible for users. PayPal says it allows purchase and download with just a couple of clicks. It’s also considerably cheaper than its old system, where a $1 purchase would cost an additional 33 cents. Now it will cost a dime.

The Financial Times newspaper has signed on with the service, allowing readers to download an article for $1.58. That’s pretty pricey (depending on the article), but costs could drift downward if more publications jump in—hardly a given, considering how reticent publishers have been to charge for news. For games, video, and software, however, it’s a no-brainer.

The company also joined with Facebook to enable members to buy Facebook credits, which are used in online games. Depending on how games and other Facebook apps evolve, the arrangement could prove to be very lucrative for PayPal.

Taken together, these initiatives make PayPal at least as likely as anyone else to lead the payments pack. For now, though, the company is still heavily reliant on a business that’s stuck in neutral: 40% of PayPal’s payment volume still comes from eBay auctions.