Banking innovation: Paying with PayPal at the PoS PayPal's mobile payment service for smart phone users in selected shops as a first step towards the end of the primacy of cash and cards?

After several years of rumors, PayPal was the first major player to venture a field test of mobile payments at the end of 2013. Although only offered in a few shops in Berlin for the time being, the industry is closely observing this approach as PayPal has developed from an additional service limited to ebay into a major player in online commerce in the past few years and now already holds a market share of approximately 30%.

First of all, the services offered stand out by their easy setup. You only have to open a PayPal account (something many web-savvy users will already have). Then you have to install the app on your smart phone and add a photo of you to the account.

Making payments works without any problems in spite of some teething troubles. In the app, you check in at the shop and, at the same time, agree to make a payment. You place your order and the shop clerk identifies the person ordering by means of the photo displayed on the POS system. Then the clerk states the amount to be paid which, in turn, you confirm orally. Shortly afterwards, you receive an e-mail or push message on your smart phone, depending on the settings of the PayPal account.

Figure 1: Selecting a shop and agreeing to payments

Perspective of established players

How dangerous is this new payment method from the perspective of well-established banks? Does it have the potential to disrupt existing offline payment habits similarly to online payments?
For a start, obstacles of a technical nature at least hamper the scalability of the payment method: It remains to be seen how the system works in closed buildings with poor mobile phone reception and whether it is reasonable to expect that shop clerks will identify the right customer when several persons are checked in. Another open issue relates to disputes because the customer does not agree to pay the specific amount in question in writing. These open questions can certainly be answered and solved and, now that the mere conceptual phase has ended, the field test will provide essential experiences and findings.

After all, customer benefits can be recognized: Using a smart phone, i.e. an object that you usually have on you, for paying has a certain appeal given that the PayPal app makes a subjectively positive impression with regard to both appearance and clarity. The biggest advantage that should not be neglected is the fact that many people already have a PayPal account so that the “hurdle” for trying out this payment method should be relatively low. For vendors, too, this payment channel probably is attractive because it gives them a simpler and more detailed overview of the habits of their customers. It makes it easier for them to address regulars by name and submitting more tailored offers.

Well-established payment service providers should intensively observe this step and further ones made by the US giant in the mobile payment market if they do not wish to be relegated to the role of providers of payment processing services in the medium term. Decisive factors will be closeness to final customers and the attractiveness of the services offered as it is exactly this interface that is targeted by PayPal and other payment service providers.

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Laura Pfannemüller

Senior Manager Office Berlin

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