Commentary

PayPal's Solution To The Credit Card Non-Problem Is...'Nothing'

Well at least PayPal starts its pitch for the new Beacon hands-free mobile payment solution by recognizing the problem with most m-payment predecessors; they solve for a problem that doesn't exist. For all of the high expectations around tapping payment terminals to make a transaction via NFC, it still seems more cumbersome than using the trusty credit card.

"No one wakes up in the morning and thinks, ‘I wish someone invented something better than swiping a card to pay. I hate it'," quips PayPal President David Marcus in a post announcing PayPal Beacon. This USB device uses Bluetooth LE in a store to recognize customers who are using the PayPal app. Once recognized, the user shows up on the integrated merchant payment system with the customer's photo for identification purposes. All the customer has to do is confirm payment verbally. Marcus says that swiping a credit card is not really a problem waiting to be solved, so the only way to improve on the method of payment “would be to do nothing.” In this vision, even the smartphone tap represents retail friction that can be smoothed.

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This “hands-free” mobile payment method does solve for some technical weaknesses in other approaches, he says in the post. PayPal explored using geofencing on the cellular network and local WiFi, GPS, etc., but planting a Bluetooth LE device in the store to automatically check in customers who elected the option proved to be the easiest and most reliable method. The Beacon can tie into most common in-store point-of-sale platforms, the company says. It can also automate special offers and highly personalized deals. Their argument is that they wanted a solution that did not suffer the imprecision of GPS or the unreliability of indoor cellular reception and that did not require an app to be open in order to be recognized. Thus, Bluetooth.

PayPal touts the new system as a way to transform the in-store experience. Customers receive a vibration or audio cue when entering the store that they have been checked in, and the clerk can address them by name. The system can also be used to recognize takeout customers as they enter to pick up an order. It will also allow self-checkout, auto-filling repeat orders for regular customers and other new kinds of relationships between merchant and customer.

The system will be widely available in early 2014. PayPal is opening up the platform and an API to developers in advance of the launch and will start piloting projects in Q4. PayPal has set up a page where developers can submit ideas for leveraging the Beacon or to apply for a chance to be a pilot partner.

PayPal is promising that security and privacy will be primary concerns. Consumers can control which stores can and can't recognize their presence, and they can even control the level of interactions and confirmations required by each store. They also promise the device cannot track their movements within the store. Its only function is to recognize that you are there in order to trigger a process at the POS.

Of course, by acknowledging that credit cards are not a problem waiting to be solved, PayPal's Beacon pitch unwittingly seems like a trivial improvement. If “nothing” is the only way to improve on a credit card swipe then the distance between the two payment methods must be very small indeed. Hard as PayPal tries in its videos promoting the Beacon to make it seem like a convenience for consumers, it still feels as if m-payments are struggling hard to make the case to both consumer and merchant.

Of course, Starbucks has shown that even an incremental convenience can have some power to drive adoption of m-payments. They are hands down the best example of moving people to mobilized payment platforms. But the case is specific. It involves a niche of brand loyalists who usually are engaged in a daily ritual where that small convenience does add up to something. And this may be the path that m-payments will take.

Remember that the modern credit card was really an evolution from the “charge card” of the first half of the 20th century. These proprietary store credit cards made sense for the store loyalist who was first able to see and appreciate the efficiency and value these cards could bring. Diners Club in the late 1940s and 1950s extended the principle to a category of merchants in travel and entertainment. It made sense within the context of expense accounts and record keeping for business. American Express soon followed with a similar niche card. But it wasn't until the 1960s that genuine credit cards (deferred payments), bank intermediaries, and wide applicability across merchant categories began to emerge. The case for credit cards had been made in miniature and within niches among smaller populations. It all started with people first seeing the value in a new payment mechanism when it was attached to a ritual of their own -- their regular interactions with a specific store or a category of purchases. That is where the regularity of their purchasing helped them feel the convenience and trust the merchant.

I wonder if something like that credit card history is playing out again in mobile payments. Value demonstrates itself first in the niches, with certain types of purchasing, merchants and user relationships. Only then does it generalize across categories. Yes, m-payments come to market with a massive credit card infrastructure that has already been rationalized to consumers. But charge cards too had to prove their worth, because for decades they never had a chance at usurping the cash infrastructure that seemed so sensible and easy. At first the change surely felt incremental and viable in only specific circumstances. So too, mobile payments will prove their incremental convenience when the small improvement they may represent is enlarged by the frequency of their use for habitual purchasing. After Starbucks, what is next when it comes to frequent, routine purchasing with familiar and trusted merchants. Grocery stores? Drug stores?

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